H&R Block (HRB) 10-Q/A 2006 Q1 Quarterly report (amended)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

FORM 10-Q/A

Amendment No. 1

(Mark One)

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

For the quarterly period ended July 31, 2005

OR

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

For the transition period from _________to _________

Commission file number 1-6089

H&R BLOCK

H&R Block, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

Yesþ Noo

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

Large accelerated filer Yesþ      Accelerated filer Yeso       Non-accelerated filer Noo

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

Yeso Noþ

The number of shares outstanding of the registrant’s Common Stock, without par value, at the close of business on August 31, 2005 was 324,650,475 shares.

H&R BLOCK

Form 10-Q/A for the Period Ended July 31, 2005

Table of Contents

	Page
PART I Financial Information
Item 1. Condensed Consolidated Balance Sheets July 31, 2005 (Restated) and April 30, 2005 (Restated)		1
Condensed Consolidated Statements of Income and Comprehensive Income Three Months Ended July 31, 2005 (Restated) and 2004 (Restated)		2
Condensed Consolidated Statements of Cash Flows Three Months Ended July 31, 2005 (Restated) and 2004 (Restated)		3
Notes to Condensed Consolidated Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 4. Controls and Procedures		32
PART II Other Information
Item 6. Exhibits		33
SIGNATURES		35
Certification by CEO Pursuant to Section 302
Certification by CFO Pursuant to Section 302
Certification by CEO Furnished Pursuant to 18 U.S.C. 1350
Certification by CFO Furnished Pursuant to 18 U.S.C. 1350

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A (“Form 10-Q/A”) to the company’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2005, initially filed with the Securities and Exchange Commission on September 8, 2005, is being filed to reflect restatements of our consolidated balance sheets at July 31, 2005 and April 30, 2005, consolidated statements of income and comprehensive income for the three months ended July 31, 2005 and 2004, and of cash flows for the three months ended July 31, 2005 and 2004, and the notes related thereto. See detail discussion of the restatements in Item 1, note 2 to the condensed consolidated financial statements.

     On February 22, 2006, the Company’s management and the Audit Committee of the Board of Directors concluded to restate previously issued consolidated financial statements for the fiscal quarters ended October 31, 2005 and July 31, 2005, the fiscal years ended April 30, 2005 and 2004 and the related fiscal quarters. The Company arrived at this conclusion during the course of its closing process for the quarter ended January 31, 2006.

     The restatement pertains primarily to errors in determining the Company’s state effective income tax rate, including errors in identifying changes in state apportionment, expiring state net operating losses and related factors.

H&R BLOCK

CONDENSED CONSOLIDATED BALANCE SHEETS

	(in 000s, except share amounts)
	Restated			Restated
	July 31, 2005			April 30, 2005
	(Unaudited)
ASSETS
Cash and cash equivalents	$	632,801		$	1,100,213
Cash and cash equivalents – restricted		416,981			516,909
Marketable securities – trading		77,085			11,790
Receivables from customers, brokers, dealers and clearing organizations, net		585,214			590,226
Receivables, less allowance for doubtful accounts of $46,752 and $38,879		404,501			418,788
Prepaid expenses and other current assets		473,831			432,708
Total current assets		2,590,413			3,070,634
Residual interests in securitizations – available-for-sale		193,207			205,936
Beneficial interest in Trusts – trading		185,539			215,367
Mortgage servicing rights		188,708			166,614
Property and equipment, at cost less accumulated depreciation and amortization of $677,989 and $658,425		328,684			330,150
Intangible assets, net		232,242			247,092
Goodwill, net		1,018,632			1,015,947
Other assets		278,529			286,316
Total assets	$	5,015,954		$	5,538,056
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Current portion of long-term debt	$	25,854		$	25,545
Accounts payable to customers, brokers and dealers		871,715			950,684
Accounts payable, accrued expenses and other current liabilities		497,215			564,749
Accrued salaries, wages and payroll taxes		161,661			318,644
Accrued income taxes		372,114			375,174
Total current liabilities		1,928,559			2,234,796
Long-term debt		923,145			923,073
Other noncurrent liabilites		368,028			430,919
Total liabilities		3,219,732			3,588,788
Stockholders’ equity:
Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, 435,890,796 shares issued at July 31, 2005 and April 30, 2005		4,359			4,359
Additional paid-in capital		601,348			598,388
Accumulated other comprehensive income		63,731			68,718
Retained earnings		3,097,151			3,161,682
Less cost of 106,780,588 and 104,649,850 shares of common stock in treasury		(1,970,367	)		(1,883,879	)
Total stockholders’ equity		1,796,222			1,949,268
Total liabilities and stockholders’ equity	$	5,015,954		$	5,538,056

See Notes to Condensed Consolidated Financial Statements

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H&R BLOCK

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	(Unaudited, amounts in 000s,
	except per share amounts)
	Restated			Restated
Three months ended July 31,	2005			2004
Revenues:
Service revenues	$	315,128		$	248,588
Other revenues:
Gains on sales of mortgage assets, net		236,431			183,360
Interest income		49,253			39,720
Product and other revenues		14,181			14,883
		614,993			486,551
Operating expenses:
Cost of services		343,218			290,975
Cost of other revenues		123,357			78,395
Selling, general and administrative		189,252			160,196
		655,827			529,566
Operating loss		(40,834	)		(43,015	)
Interest expense		12,435			17,793
Other income, net		7,400			2,008
Loss before taxes		(45,869	)		(58,800	)
Income tax benefit		(17,875	)		(22,846	)
Net loss	$	(27,994	)	$	(35,954	)
Basic and diluted loss per share	$	(0.08	)	$	(0.11	)
Basic and diluted shares		330,714			337,270
Dividends per share	$	0.11		$	0.10
Comprehensive income (loss):
Net loss	$	(27,994	)	$	(35,954	)
Change in unrealized gain on available-for-sale securities, net		(5,811	)		21,470
Change in foreign currency translation adjustments		824			(330	)
Comprehensive income (loss)	$	(32,981	)	$	(14,814	)

See Notes to Condensed Consolidated Financial Statements

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H&R BLOCK

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited, amounts in 000s)
	Restated			Restated
Three months ended July 31,	2005			2004
Cash flows from operating activities:
Net loss	$	(27,994	)	$	(35,954	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		44,085			38,908
Accretion of residual interests in securitizations		(30,777	)		(28,677	)
Impairments of residual interests in securitizations		12,415			2,609
Additions to trading securities – residual interests in securitizations		(101,002	)		—
Proceeds from net interest margin transactions, net		40,371			—
Additions to mortgage servicing rights		(49,306	)		(28,493	)
Amortization and impairment of mortgage servicing rights		27,212			18,334
Net change in beneficial interest in Trusts		29,828			(1,433	)
Other, net of acquisitions		(255,347	)		(480,626	)
Net cash used in operating activities		(310,515	)		(515,332	)
Cash flows from investing activities:
Cash received from residual interests in securitizations		24,031			38,826
Purchases of property and equipment, net		(30,330	)		(22,714	)
Payments made for business acquisitions, net of cash acquired		(3,452	)		(806	)
Other, net		7,935			8,300
Net cash provided by (used in) investing activities		(1,816	)		23,606
Cash flows from financing activities:
Repayments of commercial paper		—			(314,836	)
Proceeds from issuance of commercial paper		—			419,700
Dividends paid		(36,537	)		(33,636	)
Acquisition of treasury shares		(131,642	)		(347,395	)
Proceeds from issuance of common stock		32,318			12,375
Other, net		(19,220	)		(127	)
Net cash used in financing activities		(155,081	)		(263,919	)
Net decrease in cash and cash equivalents		(467,412	)		(755,645	)
Cash and cash equivalents at beginning of the period		1,100,213			1,072,745
Cash and cash equivalents at end of the period	$	632,801		$	317,100

See Notes to Condensed Consolidated Financial Statements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

1.

Basis of Presentation

The condensed consolidated balance sheet as of July 31, 2005, the condensed consolidated statements of income and comprehensive income for the three months ended July 31, 2005 and 2004, and the condensed consolidated statements of cash flows for the three months ended July 31, 2005 and 2004 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 July 31, 2005 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 reclassifications have been made to prior year amounts to conform to the current year presentation. These reclassifications had no effect on our results of operations or stockholders’ equity as previously reported. Adjustments related to the restatements of previously issued financial statements are detailed in note 2.

     On June 8, 2005, our Board of Directors declared a two-for-one stock split of the Company’s Common Stock in the form of a 100% stock distribution, effective August 22, 2005, to shareholders of record as of the close of business on August 1, 2005. All share and per share amounts in this document have been adjusted to reflect the retroactive effect of the stock split.

     Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our April 30, 2005 Annual Report to Shareholders on Form 10-K/A.

     Operating revenues of the Tax Services and Business Services segments are seasonal in nature with peak revenues occurring in the months of January through April. Therefore, results for interim periods are not indicative of results to be expected for the full year.

     We file our federal and state income tax returns on a calendar year basis. The condensed consolidated income statements reflect the effective tax rates expected to be applicable for the respective full fiscal years.

2.	Restatements of Previously Issued Financial Statements
	(A) On February 22, 2006, management and the Audit Committee of the Board of Directors concluded to restate previously issued consolidated financial statements for the fiscal quarters ended October 31, 2005 and July 31, 2005, the fiscal years ended April 30, 2005 and 2004 and the related fiscal quarters. We arrived at this conclusion during the course of our closing process for the quarter ended January 31, 2006. This restatement pertains primarily to errors in determining the Company’s state effective income tax rate, including errors in identifying changes in state apportionment, expiring state net operating losses and related factors. These errors resulted in an understatement of income tax benefit (net of federal income tax benefit) of $0.3 million and $0.8 million for the three months ended July 31, 2005 and 2004, respectively, an overstatement of deferred income tax assets of $1.2 million as of July 31, 2005 and April 30, 2005, and an understatement of accrued income taxes of $25.5 million and $25.9 million as of July 31, 2005 and April 30, 2005, respectively. The effect of the above adjustments on the condensed consolidated financial statements is set forth in “2C” below.
	(B) On June 7, 2005, management and the Audit Committee of the Board of Directors determined that restatement of our previously issued consolidated financial statements, including financial statements for the three months ended July 31, 2004 was appropriate as a result of the errors noted below. All amounts listed are pretax, unless otherwise noted.

§ An error in calculating the gain on sale of residual interests in fiscal year 2003. This error was corrected by deferring a portion of the gain on sale of residual interests as of the transaction date in fiscal year 2003 and recognizing revenue from the sale as interest income from accretion of residual interests in subsequent periods. Interest income from accretion increased $3.0 million for the three months ended July 31, 2004. This correction also decreased impairments of residual

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	interests $0.8 million and increased comprehensive income $2.4 million for the three months ended July 31, 2004.
§	An error in the calculation of an incentive compensation accrual at our Mortgage Services segment as of April 30, 2004. This error resulted in an overstatement of compensation expense for the three months ended July 31, 2004 of $12.1 million.
§	An error in accounting for leased properties related to rent holidays and mandatory rent escalation in our Tax Services, Mortgage Services and Investment Services segments. Rent expense was understated for the three months ended July 31, 2004 by $0.2 million.
§	An error from the capitalization of certain branch office costs at our Investment Services segment, which should have been expensed as incurred. This error resulted in an understatement of occupancy expenses and an overstatement of depreciation expense and capital expenditures, resulting in a net understatement of operating expenses of $0.1 million for the three months ended July 31, 2004.
§	Errors related to accounting for acquisitions at our Business Services and Investment Services segments, the largest of which was the acquisition of OLDE in fiscal year 2000. Amortization of customer relationships was understated by $1.8 million and the provision for income taxes was overstated by approximately $3.7 million for the three months ended July 31, 2004.
The effect of the above adjustments on the condensed consolidated financial statements is set forth in “2C” below.

(C) Notes 4, 5, 7, 11, and 13 have been restated to reflect the above described adjustments.

     The following is a summary of the impact of the restatement described in “2A” above on our condensed consolidated balance sheet as of July 31, 2005:

	(in 000s, except per share amounts)
	As Previously
	Reported(1)		Adjustments(2)			Restated
Other assets	$	279,756	$	(1,227	)	$	278,529
Total assets		5,017,181		(1,227	)		5,015,954
Accrued income taxes		346,568		25,546			372,114
Total current liabilities		1,903,013		25,546			1,928,559
Total liabilities		3,194,186		25,546			3,219,732
Retained earnings		3,123,924		(26,773	)		3,097,151
Total stockholders’ equity		1,822,995		(26,773	)		1,796,222
Total liabilities and stockholders’ equity		5,017,181		(1,227	)		5,015,954

(1)	As reported in our Form 10-Q filed on September 8, 2005 for the three months ended July 31, 2005.
(2)	Adjusted to reflect the restatement described in “2A” above.

     The following is a summary of the impact of the restatement described in “2A” above on our condensed consolidated statement of income and comprehensive income for the three months ended July 31, 2005:

	As Previously
	Reported(1)			Adjustments(2)			Restated
Income tax benefit	$	(17,545	)	$	(330	)	$	(17,875	)
Net loss		(28,324	)		330			(27,994	)
Basic and diluted loss per share	$	(0.09	)	$	0.01		$	(0.08	)
Comprehensive income (loss)	$	(33,311	)	$	330		$	(32,981	)

(1)	As reported in our Form 10-Q filed on September 8, 2005 for the three months ended July 31, 2005.
(2)	Adjusted to reflect the restatement described in “2A” above.

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     The following is a summary of the impact of the restatements on our condensed consolidated statement of income and comprehensive income for the three months ended July 31, 2004:

	As Previously						As Previously
	Reported(1)			Adjustments(2)			Restated(3)			Adjustments(4)			Restated
Gain on sale of mortgage assets, net	$	182,534		$	826		$	183,360		$	—		$	183,360
Interest income		36,706			3,014			39,720			—			39,720
Total revenues		482,711			3,840			486,551			—			486,551
Total operating expenses		539,490			(9,924	)		529,566			—			529,566
Operating loss		(56,779	)		13,764			(43,015	)		—			(43,015	)
Loss before taxes		(72,564	)		13,764			(58,800	)		—			(58,800	)
Income tax benefit		(28,481	)		6,423			(22,058	)		(788	)		(22,846	)
Net loss		(44,083	)		7,341			(36,742	)		788			(35,954	)
Basic and diluted loss per share	$	(.13	)	$	0.02		$	(.11	)	$	—		$	(.11	)
Change in unrealized gain on marketable securities, net	$	23,843		$	(2,373	)	$	21,470		$	—		$	21,470
Comprehensive income (loss)		(20,570	)		4,968			(15,602	)		788			(14,814	)

(1)	As reported in our Form 10-Q filed on September 8, 2004 for the three months ended July 31, 2004. Amounts have been reclassified to conform to current year presentation. See discussion of reclassifications in note 1.
(2)	Adjusted to reflect the restatement described in “2B” above, as derived from the Company’s Form 10-K/A filed on August 5, 2005 for the fiscal year ended April 30, 2005.
(3)	As reported in our Form 10-Q filed on September 8, 2005 for the three months ended July 31, 2005.
(4)	Adjusted to reflect the restatement described in “2A” above.

     The following is a summary of the impact of the restatement described in “2A” above on our condensed consolidated statement of cash flows for the three months ended July 31, 2005:

	As Previously
	Reported(1)			Adjustments(2)			Restated
Net loss	$	(28,324	)	$	330		$	(27,994	)
Other, net of acquisitions		(255,017	)		(330	)		(255,347	)

(1)	As reported in our Form 10-Q filed on September 8, 2005 for the three months ended July 31, 2005.
(2)	Adjusted to reflect the restatement described in “2A” above.

     The following is a summary of the impact of the restatements on our condensed consolidated statement of cash flows for the three months ended July 31, 2004:

	(in 000s)
	As Previously						As Previously
Three months ended July 31, 2004	Reported(1)			Adjustments(2)			Restated(3)			Adjustments(4)			Restated
Net loss	$	(44,083	)	$	7,341		$	(36,742	)	$	788		$	(35,954	)
Depreciation and amortization		37,137			1,771			38,908			—			38,908
Accretion of residual interests in securitizations		(25,663	)		(3,014	)		(28,677	)		—			(28,677	)
Impairment of residual interests in securitizations		3,435			(826	)		2,609			—			2,609
Other, net of acquisitions		(474,367	)		(5,471	)		(479,838	)		(788	)		(480,626	)
Net cash provided by operating activities		(515,133	)		(199	)		(515,332	)		—			(515,332	)
Purchases of property and equipment, net		(22,913	)		199			(22,714	)		—			(22,714	)
Net cash provided by (used in) investing activities		23,407			199			23,606			—			23,606

(1)	As reported in our Form 10-Q filed on September 8, 2004 for the three months ended July 31, 2004. Amounts have been reclassified to conform to current year presentation. See discussion of reclassifications in note 1.
(2)	Adjusted to reflect the restatement described in “2B” above, as derived from the Company’s Form 10-K/A filed on August 5, 2005 for the fiscal year ended April 30, 2005.
(3)	As reported in our Form 10-Q filed on September 8, 2005 for the three months ended July 31, 2005.
(4)	Adjusted to reflect the restatement described in “2A” above.

     The restatements had no impact on our cash flows from financing activities as previously reported.

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3.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed using the weighted average shares outstanding during each period. The dilutive effect of potential common shares is included in diluted earnings (loss) per share except in those periods with a loss. 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 33.7 million shares and 37.0 million shares of stock for the three months ended July 31, 2005 and 2004, respectively, as the effect would be antidilutive due to the net loss recorded during the periods.

     The weighted average shares outstanding for the three months ended July 31, 2005 decreased to 330.7 million from 337.3 million last year, primarily due to our purchases of treasury shares. The effect of these purchases was partially offset by the issuance of treasury shares related to our stock-based compensation plans.

     During the three months ended July 31, 2005 and 2004, we issued 2.5 million shares and 1.2 million shares, respectively, of common stock pursuant to the exercise of stock options, employee stock purchases and awards of restricted shares, in accordance with our stock-based compensation plans.

     During the three months ended July 31, 2005, we acquired 4.6 million shares of our common stock, of which 4.4 million shares were purchased from third parties with the remaining shares swapped or surrendered to us, at an aggregate cost of $131.6 million. During the three months ended July 31, 2004, we acquired 14.9 million shares of our common stock, of which 14.8 million shares were purchased from third parties with the remaining shares swapped or surrendered to us, at an aggregate cost of $347.4 million.

4.	Mortgage Banking Activities
	Activity related to available-for-sale residual interests in securitizations consists of the following:

	(in 000s)
				Restated
Three months ended July 31,	2005			2004
Balance, beginning of period	$	205,936		$	210,973
Additions from net interest margin (NIM) transactions		2,109			—
Cash received		(24,031	)		(38,826	)
Accretion		30,777			28,677
Impairments of fair value		(11,875	)		(2,609	)
Other		(330	)		—
Changes in unrealized holding gains, net		(9,379	)		35,067
Balance, end of period	$	193,207		$	233,282

     We sold $10.8 billion and $6.7 billion of mortgage loans in whole loan sales to warehouse trusts (Trusts) or other buyers during the three months ended July 31, 2005 and 2004, respectively, with gains totaling $222.8 million and $185.3 million, respectively, recorded on these sales.

     Trading residual interests valued at $101.0 million were recorded in connection with the securitizations of mortgage loans during the three months ended July 31, 2005, with net cash proceeds of $40.4 million received in connection with NIM transactions. Total net additions to residual interests from net interest margin (NIM) transactions for the three months ended July 31, 2005 were $2.1 million. We did not complete any securitizations or NIM transactions during the three months ended July 31, 2004.

     At July 31, 2005, we had $58.0 million in residual interests classified as trading securities. These residual interests are the result of the initial securitization of mortgage loans and are expected to be securitized in a NIM transaction during our second quarter. Trading residuals are included in marketable securities — trading on the condensed consolidated balance sheet with mark-to-market adjustments and impairments included in gains on sales of mortgage assets on the condensed consolidated income statement. Such adjustments resulted in a gain of $3.5 million for the three months ended July 31, 2005. There were no such trading securities recorded as of April 30, 2005.

     Cash flows of $24.0 million and $38.8 million were received from the securitization trusts for the three months ended July 31, 2005 and 2004, respectively. Cash received on residual interests is included in investing activities in the condensed consolidated statements of cash flows.

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     Aggregate net unrealized gains on residual interests, which had not yet been accreted into income, totaled $105.9 million at July 31, 2005 and $115.4 million at April 30, 2005. These unrealized gains are recorded net of deferred taxes in other comprehensive income, and may be recognized in income in future periods either through accretion or upon further securitization or sale of the related residual interest.

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

	(in 000s)
Three months ended July 31,	2005			2004
Balance, beginning of period	$	166,614		$	113,821
Additions		49,306			28,493
Amortization		(26,892	)		(18,334	)
Impairment		(320	)		—
Balance, end of period	$	188,708		$	123,980

     Estimated amortization of MSRs for fiscal years 2006 through 2010 is $80.2 million, $67.6 million, $29.1 million, $9.4 million and $2.2 million, respectively.

     The key weighted average assumptions we used to estimate the cash flows and values of the residual interests initially recorded during the three months ended July 31, 2005 are as follows:

Three months ended	July 31, 2005
Estimated credit losses		2.70	%
Discount rate		21.57	%
Variable returns to third-party beneficial interest holders	LIBOR forward curve at closing

     The key weighted average assumptions we used to estimate the cash flows and values of the residual interests and MSRs at July 31, 2005 and April 30, 2005 are as follows:

	July 31, 2005			April 30, 2005
Estimated credit losses – residual interests		2.98	%		3.03	%
Discount rate – residual interests		19.31	%		21.01	%
Discount rate – MSRs		15.00	%		12.80	%
Variable returns to third-party beneficial interest holders	LIBOR forward curve at valuation date

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

	Prior to			Months Outstanding Without
	Penalty			Prepayment Penalty
	Expiration			Zero - 3			Remaining Life
Adjustable rate mortgage loans:
With prepayment penalties		30	%		70	%		43	%
Without prepayment penalties		36	%		53	%		41	%
Fixed rate mortgage loans:
With prepayment penalties		29	%		47	%		40	%

     For fixed rate mortgages without prepayment penalties, we use an average prepayment rate of 35% over the life of the loans. Prepayment rate is projected based on actual paydown including voluntary, involuntary and scheduled principal payments.

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     Expected static pool credit losses are as follows:

	Mortgage Loans Securitized in Fiscal Year
	Prior to 2002			2002			2003			2004			2005			2006
As of:
July 31, 2005		4.53	%		2.53	%		2.03	%		2.20	%		2.86	%		2.70	%
April 30, 2005		4.52	%		2.53	%		2.08	%		2.30	%		2.83	%		—
April 30, 2004		4.46	%		3.58	%		4.35	%		3.92	%		—			—

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

     At July 31, 2005, the sensitivities of the current fair value of the residual interests and MSRs to 10% and 20% adverse changes in the above key assumptions are as follows:

(dollars in 000s)
	Residential Mortgage Loans
	NIM			Beneficial Interest			Trading			Servicing
	Residuals			in Trusts			Residual			Asset
Carrying amount/fair value	$	193,207		$	185,539		$	57,982		$	188,708
Weighted average remaining life (in years)		1.3			2.3			2.0			1.2
Prepayments (including defaults):
Adverse 10% – $ impact on fair value	$	458		$	(9,933	)	$	(2,407	)	$	(26,926	)
Adverse 20% – $ impact on fair value		13,807			(15,078	)		2,540			(44,709	)
Credit losses:
Adverse 10% – $ impact on fair value	$	(36,108	)	$	(7,360	)	$	(1,743	)	Not applicable
Adverse 20% – $ impact on fair value		(64,062	)		(14,540	)		(3,435	)	Not applicable
Discount rate:
Adverse 10% – $ impact on fair value	$	(4,490	)	$	(4,629	)	$	(1,473	)	$	(2,634	)
Adverse 20% – $ impact on fair value		(8,734	)		(9,059	)		(2,870	)		(5,205	)
Variable interest rates (LIBOR forward curve):
Adverse 10% – $ impact on fair value	$	(11,240	)	$	(40,538	)	$	(2,211	)	Not applicable
Adverse 20% – $ impact on fair value		(23,873	)		(81,169	)		(4,962	)	Not applicable

     These sensitivities are hypothetical and should be used with caution. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also in this table, the effect of a variation of a particular assumption on the fair value is calculated without changing any other assumptions. It is likely that changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

     Mortgage loans that have been securitized at July 31, 2005 and April 30, 2005, past due sixty days or more and the related credit losses incurred are presented below:

(in 000s)
	Total Principal				Principal Amount of
	Amount of Loans				Loans 60 Days or				Credit Losses
	Outstanding				More Past Due				(net of recoveries)
	July 31,		April 30,		July 31,		April 30,		Three months ended
	2005		2005		2005		2005		July 31, 2005		April 30, 2005
Securitized mortgage loans	$	11,140,672	$	10,300,805	$	1,058,989	$	1,128,376	$	23,545	$	21,641
Mortgage loans in warehouse Trusts		6,759,723		6,742,387		—		—		—		—
Total loans	$	17,900,395	$	17,043,192	$	1,058,989	$	1,128,376	$	23,545	$	21,641

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5.	Goodwill and Intangible Assets
	Changes in the carrying amount of goodwill for the three months ended July 31, 2005 consist of the following:

(in 000s)
	April 30, 2005		Additions		Other			July 31, 2005
Tax Services	$	360,781	$	3,291	$	38		$	364,110
Mortgage Services		152,467		—		—			152,467
Business Services		328,745		81		(725	)		328,101
Investment Services		173,954		—		—			173,954
Total goodwill	$	1,015,947	$	3,372	$	(687	)	$	1,018,632

     We test goodwill for impairment annually at the beginning of our fourth quarter, or more frequently if events occur indicating it is more likely than not the fair value of a reporting unit’s net assets has been reduced below its carrying value. No such impairment or events indicating impairment were identified within any of our segments during the three months ended July 31, 2005. Our evaluation of impairment is dependent upon various assumptions, including assumptions regarding projected operating results and cash flows of reporting units. Actual results could differ materially from our projections and those differences could alter our conclusions regarding the fair value of a reporting unit and its goodwill.

     Intangible assets consist of the following:

(in 000s)
			July 31, 2005							April 30, 2005
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated
	Amount		Amortization			Net		Amount		Amortization			Net
Tax Services:
Customer relationships	$	23,717	$	(8,027	)	$	15,690	$	23,717	$	(7,207	)	$	16,510
Noncompete agreements		17,677		(13,074	)		4,603		17,677		(11,608	)		6,069
Business Services:
Customer relationships		130,707		(71,179	)		59,528		130,585		(68,433	)		62,152
Noncompete agreements		27,633		(11,876	)		15,757		27,796		(11,274	)		16,522
Trade name – amortizing		1,450		(1,013	)		437		1,450		(995	)		455
Trade name – non-amortizing		55,637		(4,868	)		50,769		55,637		(4,868	)		50,769
Investment Services:
Customer relationships		293,000		(207,542	)		85,458		293,000		(198,385	)		94,615
Total intangible assets	$	549,821	$	(317,579	)	$	232,242	$	549,862	$	(302,770	)	$	247,092

     Amortization of intangible assets for the three months ended July 31, 2005 and 2004 was $15.2 million and $15.1 million, respectively. Estimated amortization of intangible assets for fiscal years 2006 through 2010 is $60.6 million, $51.5 million, $34.4 million, $11.7 million and $9.8 million, respectively.

6.

Derivative Instruments

A summary of our derivative instruments as of July 31, 2005 and April 30, 2005, and gains or losses incurred during the three months ended July 31, 2005 and 2004 follows. We enter into derivative instruments to reduce risks relating to mortgage loans we originate and sell, and therefore all gains or losses are included in gains on sales of mortgage assets, net in the condensed consolidated income statements.

(in 000s)
							Gain (Loss) in the Three
	Asset (Liability) Balance at						Months Ended July 31,
	July 31, 2005			April 30, 2005			2005			2004
Interest rate swaps	$	19,661		$	(1,325	)	$	25,543		$	—
Interest rate caps		—			12,458			640			—
Rate-lock equivalents		(292	)		801			(1,093	)		1,484
Prime short sales		790			(805	)		996			(808	)
	$	20,159		$	11,129		$	26,086		$	676

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     We generally use interest rate swaps and forward loan sale commitments to reduce interest rate risk associated with non-prime loans. We generally enter into interest rate swap arrangements related to existing loan applications with rate-lock commitments and for rate-lock commitments we expect to make in the next 30 days. Interest rate swaps represent an agreement to exchange interest rate payments, effectively converting our fixed financing costs into a floating rate. These contracts increase in value as rates rise and decrease in value as rates fall.

     We generally enter into interest rate caps or swaps to mitigate interest rate risk associated with mortgage loans that will be securitized and residual interests that are classified as trading securities because they will be sold in a subsequent NIM transaction. These instruments enhance the marketability of the securitization and NIM transactions. An interest rate cap represents a right to receive cash if interest rates rise above a contractual strike rate, its value therefore increases as interest rates rise. The interest rate used in our interest rate caps is based on LIBOR.

     We enter into forward loan commitments to sell our non-prime mortgage loans to manage interest rate risk. Forward loan sale commitments for non-prime loans are not considered derivative instruments and therefore cannot be recorded in our financial statements. The notional value and the contract value of the forward commitments at July 31, 2005 were $3.9 billion. Most of our forward commitments give us the option to under- or over-deliver by five to ten percent.

     We, in the normal course of business, enter into commitments with our customers to fund both non-prime and prime mortgage loans for specified periods of time at “locked-in” interest rates. These derivative instruments represent commitments to fund loans (“rate-lock equivalents”). The fair value of non-prime loan commitments is calculated using a binomial option model, however we do not initially record an asset for non-prime commitments to fund loans. The fair value of prime loan commitments is calculated based on the current market pricing of short sales of FNMA, FHLMC and GNMA mortgage-backed securities and the coupon rates of the eligible loans.

     We sell short FNMA, FHLMC and GNMA mortgage-backed securities to reduce our risk related to our commitments to fund fixed-rate prime loans. The position on certain or all of the fixed-rate mortgage loans is closed approximately 10-15 days prior to standard Public Securities Association (PSA) settlement dates.

     None of our derivative instruments qualify for hedge accounting treatment as of July 31, 2005 or April 30, 2005.

7.

Stock-Based Compensation

Effective May 1, 2003, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), under the prospective transition method as described in Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Had compensation cost for all stock-based compensation plan grants been determined in accordance with the fair value accounting method prescribed under SFAS 123, our net loss and loss per share would have been as follows:

(in 000s, except per share amounts)
	Restated			Restated
Three months ended July 31,	2005			2004
Net loss as reported	$	(27,994	)	$	(35,954	)
Add: Stock-based compensation expense included in reported net loss, net of related tax effects		5,765			3,100
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects		(8,309	)		(5,781	)
Pro forma net loss	$	(30,538	)	$	(38,635	)
Basic and diluted loss per share:
As reported	$	(0.08	)	$	(0.11	)
Pro forma		(0.09	)		(0.11	)

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8.	Supplemental Cash Flow Information
	During the three months ended July 31, 2005, we paid $35.3 million and $13.8 million for income taxes and interest, respectively. During the three months ended July 31, 2004, we paid $183.4 million and $12.5 million for income taxes and interest, respectively.

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

(in 000s)
Three months ended July 31,	2005		2004
Residual interest mark-to-market	$	12,942	$	53,473
Additions to residual interests		2,109		—

5.

Commitments and Contingencies

We maintain two unsecured committed lines of credit (CLOCs) for working capital, to support our commercial paper program and for general corporate purposes. The two CLOCs are from a consortium of thirty-one banks. The first $1.0 billion CLOC is subject to annual renewal in August 2005, has a one-year term-out provision with a maturity date in August 2006. The second $1.0 billion CLOC has a maturity date of August 2009. These lines are subject to various affirmative and negative covenants, including a minimum net worth covenant. These CLOCs were undrawn at July 31, 2005. Subsequent to July 31, 2005, the first CLOC expired and was replaced with a new $1.0 billion CLOC, which expires in August 2010. Also subsequent to July 31, 2005, the second CLOC was extended, and now expires in August 2010.

     We offer guarantees under our Peace of Mind (POM) program to tax clients whereby we will assume the cost of additional taxes attributable to tax return preparation errors for which we are responsible. We defer all revenues and direct costs associated with these guarantees, recognizing these amounts over the term of the guarantee based upon historic and actual payment of claims. Changes in the deferred revenue liability are as follows:

(in 000s)
Three months ended July 31,	2005			2004
Balance, beginning of period	$	130,762		$	123,048
Amounts deferred for new guarantees issued		408			369
Revenue recognized on previous deferrals		(23,900	)		(22,613	)
Balance, end of period	$	107,270		$	100,804

     We have commitments to fund mortgage loans to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. The commitments to fund loans amounted to $4.7 billion and $3.9 billion at July 31, 2005 and April 30, 2005, respectively. External market forces impact the probability of commitments being exercised, and therefore, total commitments outstanding do not necessarily represent future cash requirements.

     We have entered into whole loan sale agreements with investors in the normal course of business, which include standard representations and warranties customary to the mortgage banking industry. Violations of these representations and warranties may require us to repurchase loans previously sold. A liability has been established related to the potential loss on repurchase of loans previously sold of $41.8 million and $41.2 million at July 31, 2005 and April 30, 2005, respectively, based on historical experience. Repurchased loans are normally sold in subsequent sale transactions.

     Option One Mortgage Corporation provides a guarantee up to a maximum amount equal to approximately 10% of the aggregate principal balance of mortgage loans held by the Trusts before ultimate disposition of the loans. This guarantee would be called upon in the event adequate proceeds were not available from the sale of the mortgage loans to satisfy the payment obligations of the Trusts. No losses have been sustained on this commitment since its inception. The total principal amount of Trust obligations outstanding as of July 31, 2005 and April 30, 2005 was $6.7 billion. The fair value of mortgage loans held by the Trusts as of July 31, 2005 and April 30, 2005 was $6.9 billion and $6.8 billion, respectively.

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     We have various contingent purchase price obligations in connection with prior acquisitions. In many cases, contingent payments to be made in connection with these acquisitions are not subject to a stated limit. We estimate the potential payments (undiscounted) total approximately $5.9 million and $5.1 million as of July 31, 2005 and April 30, 2005, respectively. Our estimate is based on current financial conditions. Should actual results differ materially from our assumptions, the potential payments will differ from the above estimate. Such payments, if and when paid, would be recorded as additional cost of the acquired business, generally goodwill.

     We have contractual commitments to fund certain franchises requesting draws on Franchise Equity Lines of Credit (FELCs). Our commitment to fund FELCs as of July 31, 2005 and April 30, 2005 totaled $71.6 million and $68.9 million, respectively. We have a receivable of $40.7 million and $39.0 million, which represents the amounts drawn on the FELCs, as of July 31, 2005 and April 30, 2005, respectively.

     We routinely enter into contracts that include embedded indemnifications that have characteristics similar to guarantees, including obligations to protect counter parties from losses arising from the following: (a) tax, legal and other risks related to the purchase or disposition of businesses; (b) penalties and interest assessed by Federal and state taxing authorities in connection with tax returns prepared for clients; (c) indemnification of our directors and officers; and (d) third-party claims relating to various arrangements in the normal course of business. Typically, there is no stated maximum payment related to these indemnifications, and the term of indemnities may vary and in many cases is limited only by the applicable statute of limitations. The likelihood of any claims being asserted against us and the ultimate liability related to any such claims, if any, is difficult to predict. While we cannot provide assurance that such claims will not be successfully asserted, we believe the fair value of these guarantees and indemnifications is not material as of July 31, 2005.

10.

Litigation Commitments and Contingencies

We have been involved in a number of class actions and putative class action cases since 1990 regarding our RAL programs. These cases are based on a variety of legal theories and allegations. These theories and allegations include, among others, that (i) we improperly did not disclose license fees we received from RAL lending banks for RALs they make to our clients, (ii) we owe and breached a fiduciary duty to our clients and (iii) the RAL program violates laws such as state credit service organization laws and the federal Racketeer Influenced and Corrupt Organizations (RICO) Act. Although we have successfully defended many RAL cases, we incurred a pretax expense of $43.5 million in fiscal year 2003 in connection with settling one RAL case. Several of the RAL cases are still pending and the amounts claimed in some of them are very substantial. The ultimate cost of this litigation could be substantial. We intend to continue defending the RAL cases vigorously, although there are no assurances as to their outcome.

     As discussed in our Form 8-K dated May 9, 2005, we initially recorded litigation reserves of approximately $38.0 million, after taxes, in connection with a proposed settlement ofLynne A. Carnegie, et al. v. Household International, Inc., H&R Block, Inc., et al., (formerly Joel E. Zawikowski, et al. v. Beneficial National Bank, H&R Block, Inc., Block Financial Corporation, et al.). In negotiating the proposed settlement and in determining the amount of consideration we were willing to pay under the proposed settlement, we ascribed significant value to the expanded class of plaintiffs to be covered by the proposed settlement and settlement terms that reduced the likelihood of future claims being made against us regarding our RAL programs. As a result of the May 26, 2005 court ruling to deny the settlement offer, we reversed our legal reserves to amounts representing our assessment of our probable loss.

     We are also parties to claims and lawsuits pertaining to our electronic tax return filing services and our POM guarantee program associated with income tax preparation services. These claims and lawsuits include actions by individual plaintiffs, as well as cases in which plaintiffs seek to represent a class of similarly situated customers. The amounts claimed in these claims and lawsuits are substantial in some instances, and the ultimate liability with respect to such litigation and claims is difficult to predict. We intend to continue defending these cases vigorously, although there are not assurances as to their outcome.

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

     It is our policy to accrue for amounts related to legal matters if it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Many of the various legal proceedings are covered in whole or in part by insurance. Any receivable for insurance recoveries is recorded separately from the corresponding litigation reserve, and only if recovery is determined to be probable. Receivables for insurance recoveries at July 31, 2005 were immaterial.

11.	Segment Information
	Information concerning our operations by reportable operating segment is as follows:

(in 000s)
				Restated
Three months ended July 31,	2005			2004
Revenues:
Tax Services	$	57,191		$	50,447
Mortgage Services		360,438			271,973
Business Services		126,846			109,102
Investment Services		67,983			53,581
Corporate		2,535			1,448
	$	614,993		$	486,551
Pretax income (loss):
Tax Services	$	(144,506	)	$	(112,646	)
Mortgage Services		134,468			109,025
Business Services		(6,765	)		(10,045	)
Investment Services		(7,552	)		(20,343	)
Corporate		(21,514	)		(24,791	)
Loss before taxes	$	(45,869	)	$	(58,800	)

12.	New Accounting Pronouncements
	Exposure Drafts – Amendments of SFAS 140
	In August 2005, the Financial Accounting Standards Board (FASB) issued three exposure drafts which amend Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The final standards are scheduled to be issued in the first quarter of calendar year 2006.

     The first exposure draft seeks to clarify the derecognition requirements for financial assets and the initial measurement of interests related to transferred financial assets that are held by a transferor. Our current off-balance sheet warehouse facilities (the Trusts) in our Mortgage Services segment would be required to be consolidated in our financial statements based on the provisions of the exposure draft. We will continue to monitor the status of the exposure draft and consider what changes, if any, could be made to the structure of the Trusts to continue to derecognize mortgage loans transferred to the Trusts. At July 31, 2005, the Trusts held loans totaling $6.7 billion, which we would be required to consolidate into our financial statements under the provisions of this exposure draft.

     The second exposure draft would require mortgage servicing rights to be initially valued at fair value. This provision would not have a material impact to our financial statements. In addition, this

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exposure draft would permit us to choose to continue to amortize mortgage servicing rights in proportion to and over the period of estimated net servicing income, as currently required under SFAS 140, or report mortgage servicing rights at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur. We have not yet determined how we would elect to account for mortgage servicing rights under this provision or the potential impact to the financial statements.

     The third exposure draft, among other things, would establish a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are free-standing derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. Alternatively, this exposure draft would permit fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. Our residual interests in securitizations typically have interests in derivative instruments embedded within the securitization trusts. We have not yet determined if these embedded derivatives meet the criteria for bifurcation as outlined in the exposure draft.

American Jobs Creation Act

In October 2004, the American Jobs Creation Act (the Act) was signed into law. The Act introduces a one-time deduction for dividends received from the repatriation of certain foreign earnings, provided certain criteria are met. We have begun our evaluation of the effects of the Act, but do not expect to be able to complete this evaluation until additional clarifying language on key elements of the Act is issued. As of July 31, 2005, we have not provided deferred taxes on foreign earnings because we intended to indefinitely reinvest such earnings outside the United States. Whether we will ultimately take advantage of this provision depends on our review of the Act and any additional guidance provided and we are therefore currently uncertain as to the impact, if any, this matter will have on our consolidated financial statements, and are unable to estimate the amount of earnings we may repatriate.

13.

Condensed Consolidating Financial Statements

Block Financial Corporation (BFC) is an indirect, wholly owned consolidated subsidiary of the Company. BFC is the Issuer and the Company is the Guarantor of the Senior Notes issued on October 21, 1997, April 13, 2000 and October 26, 2004. These condensed consolidating financial statements have been prepared using the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Company’s investment in subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholder’s equity and other intercompany balances and transactions.

Condensed Consolidating Income Statements	(in 000s)
Three months ended		H&R Block, Inc.			BFC		Other						Consolidated
July 31, 2005 (Restated)		(Guarantor)			(Issuer)		Subsidiaries			Elims			H&R Block
Total revenues		$	—		$	460,640	$	157,665		$	(3,312	)	$	614,993
Cost of service revenues			—			109,353		233,776			89			343,218
Cost of other revenues			—			120,900		2,457			—			123,357
Selling, general and administrative			—			91,188		101,465			(3,401	)		189,252
Total expenses			—			321,441		337,698			(3,312	)		655,827
Operating income (loss)			—			139,199		(180,033	)		—			(40,834	)
Interest expense			—			11,810		625			—			12,435
Other income, net			(45,869	)		—		7,400			45,869			7,400
Income (loss) before taxes			(45,869	)		127,389		(173,258	)		45,869			(45,869	)
Income taxes (benefit)			(17,875	)		49,682		(67,557	)		17,875			(17,875	)
Net income (loss)		$	(27,994	)	$	77,707	$	(105,701	)	$	27,994		$	(27,994	)

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Three months ended		H&R Block, Inc.		BFC		Other						Consolidated
July 31, 2004 (Restated)	(Guarantor)			(Issuer)		Subsidiaries			Elims			H&R Block
Total revenues	$	—		$	328,603	$	161,215		$	(3,267	)	$	486,551
Cost of services		—			93,265		197,664			46			290,975
Cost of other revenues		—			76,981		1,414			—			78,395
Selling, general and administrative		—			72,188		91,321			(3,313	)		160,196
Total expenses		—			242,434		290,399			(3,267	)		529,566
Operating income (loss)		—			86,169		(129,184	)		—			(43,015	)
Interest expense		—			16,802		991			—			17,793
Other income, net		(58,800	)		—		2,008			58,800			2,008
Income (loss) before taxes		(58,800	)		69,367		(128,167	)		58,800			(58,800	)
Income taxes (benefit)		(22,846	)		27,088		(49,934	)		22,846			(22,846	)
Net income (loss)	$	(35,954	)	$	42,279	$	(78,233	)	$	35,954		$	(35,954	)

Condensed Consolidating Balance Sheets	(in 000s)
			H&R Block, Inc.	BFC			Other						Consolidated
July 31, 2005 (Restated)		(Guarantor)		(Issuer)			Subsidiaries			Elims			H&R Block
Cash & cash equivalents		$	—	$	148,287		$	484,514		$	—		$	632,801
Cash & cash equivalents – restricted			—		403,171			13,810			—			416,981
Receivables from customers, brokers and dealers, net			—		585,214			—			—			585,214
Receivables, net			176		248,677			155,648			—			404,501
Intangible assets and goodwill, net			—		414,838			836,036			—			1,250,874
Investments in subsidiaries			4,814,169		215			506			(4,814,169	)		721
Other assets			—		1,458,040			266,660			162			1,724,862
Total assets		$	4,814,345	$	3,258,442		$	1,757,174		$	(4,814,007	)	$	5,015,954
Accts. payable to customers, brokers and dealers		$	—	$	871,715		$	—		$	—		$	871,715
Long-term debt			—		896,799			26,346			—			923,145
Other liabilities			2		525,312			899,558			—			1,424,872
Net intercompany advances			3,018,121		(639,321	)		(2,378,714	)		(86	)		—
Stockholders’ equity			1,796,222		1,603,937			3,209,984			(4,813,921	)		1,796,222
Total liabilities and stockholders’ equity		$	4,814,345	$	3,258,442		$	1,757,174		$	(4,814,007	)	$	5,015,954

		H&R Block, Inc.	BFC			Other						Consolidated
April 30, 2005 (Restated)	(Guarantor)		(Issuer)			Subsidiaries			Elims			H&R Block
Cash & cash equivalents	$	—	$	162,983		$	937,230		$	—		$	1,100,213
Cash & cash equivalents – restricted		—		488,761			28,148			—			516,909
Receivables from customers, brokers and dealers, net		—		590,226			—			—			590,226
Receivables, net		101		199,990			218,697			—			418,788
Intangible assets and goodwill, net		—		421,036			842,003			—			1,263,039
Investments in subsidiaries		4,851,680		210			449			(4,851,680	)		659
Other assets		—		1,407,082			241,532			(392	)		1,648,222
Total assets	$	4,851,781	$	3,270,288		$	2,268,059		$	(4,852,072	)	$	5,538,056
Accts. payable to customers, brokers and dealers	$	—	$	950,684		$	—		$	—		$	950,684
Long-term debt		—		896,591			26,482			—			923,073
Other liabilities		2		532,562			1,182,459			8			1,715,031
Net intercompany advances		2,902,511		(641,611	)		(2,262,818	)		1,918			—
Stockholders’ equity		1,949,268		1,532,062			3,321,936			(4,853,998	)		1,949,268
Total liabilities and stockholders’ equity	$	4,851,781	$	3,270,288		$	2,268,059		$	(4,852,072	)	$	5,538,056

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Condensed Consolidating Statements of Cash Flows	(in 000s)
Three months ended		H&R Block, Inc.			BFC			Other						Consolidated
July 31, 2005 (Restated)		(Guarantor)			(Issuer)			Subsidiaries			Elims			H&R Block
Net cash provided by (used in) operating activities:		$	15,721		$	(51,974	)	$	(274,262	)	$	—		$	(310,515	)
Cash flows from investing:
Cash received on residuals			—			24,031			—			—			24,031
Purchase property & equipment			—			(9,255	)		(21,075	)		—			(30,330	)
Payments for business acquisitions			—			(2,994	)		(458	)		—			(3,452	)
Net intercompany advances			120,140			—			—			(120,140	)		—
Other, net			—			330			7,605			—			7,935
Net cash provided by (used in) investing activities			120,140			12,112			(13,928	)		(120,140	)		(1,816	)
Cash flows from financing:
Dividends paid			(36,537	)		—			—			—			(36,537	)
Acquisition of treasury shares			(131,642	)		—			—			—			(131,642	)
Proceeds from common stock			32,318			—			—			—			32,318
Net intercompany advances			—			14,587			(134,727	)		120,140			—
Other, net			—			10,579			(29,799	)		—			(19,220	)
Net cash provided by (used in) financing activities			(135,861	)		25,166			(164,526	)		120,140			(155,081	)
Net decrease in cash			—			(14,696	)		(452,716	)		—			(467,412	)
Cash – beginning of period			—			162,983			937,230			—			1,100,213
Cash – end of period		$	—		$	148,287		$	484,514		$	—		$	632,801

Three months ended	H&R Block, Inc.			BFC			Other						Consolidated
July 31, 2004 (Restated)	(Guarantor)			(Issuer)			Subsidiaries			Elims			H&R Block
Net cash used in operating activities:	$	(8,544	)	$	(57,739	)	$	(449,049	)	$	—		$	(515,332	)
Cash flows from investing:
Cash received on residuals		—			38,826			—			—			38,826
Purchase property & equipment		—			(6,630	)		(16,084	)		—			(22,714	)
Net intercompany advances		377,200			—			—			(377,200	)		—
Other, net		—			1,273			6,221			—			7,494
Net cash provided by (used in) investing activities		377,200			33,469			(9,863	)		(377,200	)		23,606
Cash flows from financing:
Repayments of commercial paper		—			(314,836	)		—			—			(314,836	)
Proceeds from commercial paper		—			419,700			—			—			419,700
Dividends paid		(33,636	)		—			—			—			(33,636	)
Acquisition of treasury shares		(347,395	)		—			—			—			(347,395	)
Proceeds from common stock		12,375			—			—			—			12,375
Net intercompany advances		—			(24,361	)		(352,839	)		377,200			—
Other, net		—			—			(127	)		—			(127	)
Net cash provided by (used in) financing activities		(368,656	)		80,503			(352,966	)		377,200			(263,919	)
Net increase (decrease) in cash		—			56,233			(811,878	)		—			(755,645	)
Cash – beginning of period		—			133,188			939,557			—			1,072,745
Cash – end of period	$	—		$	189,421		$	127,679		$	—		$	317,100

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

RESULTS OF OPERATIONS

H&R Block is a diversified company delivering tax services and financial advice, investment and mortgage services, and business and consulting services. For 50 years, we have been developing relationships with millions of tax clients and our strategy is to expand on these relationships. Our Tax Services segment provides income tax return preparation services, electronic filing services and other services and products related to income tax return preparation to the general public in the United States, Canada, Australia and the United Kingdom. We also offer investment services through H&R Block Financial Advisors, Inc. (HRBFA). Our Mortgage Services segment offers a full range of home mortgage services through Option One Mortgage Corporation (OOMC) and H&R Block Mortgage Corporation (HRBMC). RSM McGladrey Business Services, Inc. (RSM) is a national accounting, tax and consulting firm primarily serving mid-sized businesses.

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

     Key to achieving our mission is the enhancement of client experiences through consistent delivery of valuable services and advice. Operating through multiple lines of business allows us to better meet the changing financial needs of our clients.

     The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects the restatements of previously issued financial statements, as discussed in note 2 to our condensed consolidated financial statements. The analysis that follows should be read in conjunction with the tables below and the condensed consolidated income statements found on page 2.

Consolidated H&R Block, Inc. – Operating Results (in 000s, except per share amounts)

	Restated			Restated
Three months ended July 31,	2005			2004
Revenues:
Tax Services	$	57,191		$	50,447
Mortgage Services		360,438			271,973
Business Services		126,846			109,102
Investment Services		67,983			53,581
Corporate		2,535			1,448
	$	614,993		$	486,551
Pretax income (loss):
Tax Services	$	(144,506	)	$	(112,646	)
Mortgage Services		134,468			109,025
Business Services		(6,765	)		(10,045	)
Investment Services		(7,552	)		(20,343	)
Corporate		(21,514	)		(24,791	)
		(45,869	)		(58,800	)
Income tax benefit		(17,875	)		(22,846	)
Net loss	$	(27,994	)	$	(35,954	)
Basic and diluted loss per share	$	(0.08	)	$	(0.11	)

OVERVIEW

A summary of our results compared to the prior year is as follows:

§	Diluted loss per share for the three months ended July 31, 2005 was $0.08 compared to $0.11 in the prior year.
§	Tax Services’ pretax loss totaled $144.5 million compared to $112.6 million in the prior year. The higher losses were primarily due to off-season costs related to offices added during fiscal year 2005, costs incurred for new offices to be opened in the coming tax season and costs associated with Small Business Resources (SBR).

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§	Mortgage Services’ revenues and pretax income increased $88.5 million and $25.4 million, respectively, compared to the prior year. These increases are due to a 59.7% increase in origination volumes, partially offset by a decline in our gross margin.
§	Business Services’ revenues increased $17.7 million for the three months ended July 31, 2005, primarily due to a higher number of chargeable hours and a higher billed rate per hour in our accounting, tax and consulting business. The pretax loss improved $3.3 million for the current quarter primarily due to revenue growth.
§	Investment Services’ pretax loss for the three months ended July 31, 2005 was $7.6 million, compared to $20.3 million and $14.5 million in the prior year and preceding quarter, respectively. This improvement is primarily due to our actions implemented during the fourth quarter of fiscal year 2005 to reduce costs and enhance advisor performance.

TAX SERVICES

This segment primarily consists of our income tax preparation businesses — retail, online and software.

Tax Services — Operating Results (in 000s)

				Restated
Three months ended July 31,	2005			2004
Service revenues:
Tax preparation and related fees	$	23,637		$	19,044
Online tax services		633			700
Other services		28,334			24,337
		52,604			44,081
Royalties		2,396			1,612
Software sales		1,193			1,383
RAL participation fees		271			164
Other		727			3,207
Total revenues		57,191			50,447
Cost of services:
Compensation and benefits		40,897			30,684
Occupancy		59,313			50,328
Depreciation		10,169			8,978
Other		37,192			31,228
		147,571			121,218
Cost of software sales		2,885			3,167
Selling, general and administrative		51,241			38,708
Total expenses		201,697			163,093
Pretax loss	$	(144,506	)	$	(112,646	)

Three months ended July 31, 2005 compared to July 31, 2004

Tax Services’ revenues increased $6.7 million, or 13.4%, for the three months ended July 31, 2005 compared to the prior year.

     Tax preparation and related fees increased $4.6 million, or 24.1%, for the current quarter. This increase is primarily due to an increase in the average fee per U.S. client served, coupled with an increase in U.S. clients served in offices. The average fee per U.S. client served increased 9.1% over last year, and U.S. clients served in company-owned offices increased 5.9%. Additionally, the extension of the Canadian tax season into the month of May resulted in a $1.7 million increase to our current quarter revenues.

     Other service revenues increased $4.0 million primarily as a result of additional revenues associated with Express IRAs and POM guarantees.

     Total expenses increased $38.6 million, or 23.7%. Cost of services for the three months ended July 31, 2005 increased $26.4 million, or 21.7%, from the prior year. Our real estate expansion efforts have contributed to a total increase of $7.3 million across all cost of services categories. Compensation and benefits increased $10.2 million primarily due to an increase in the number of off-season support staff needed for our new offices, the addition of SBR costs in the current year and related payroll taxes.

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Occupancy expenses increased $9.0 million, or 17.9%, primarily as a result of higher rent expenses, due to an 11.5% increase in company-owned offices under lease and a 6.0% increase in the average rent. Utilities and real estate taxes related to these new offices also contributed to the increase. Other cost of service expenses increased $6.0 million primarily due to $4.2 million of additional expenses associated with our POM program.

     Selling, general and administrative expenses increased $12.5 million over the prior year primarily due to a $5.5 million increase in legal expenses, $2.9 million in additional costs from corporate shared services and $1.7 million in additional consulting expenses.

     The pretax loss was $144.5 million for the three months ended July 31, 2005 compared to a prior year loss of $112.6 million.

     Due to the seasonal nature of this segment’s business, operating results for the three months ended July 31, 2005 are not comparable to the three months ended April 30, 2005 and are not indicative of the expected results for the entire fiscal year.

Fiscal 2006 outlook

Our fiscal year 2006 outlook for the Tax Services segment is unchanged from the discussion in our April 30, 2005 Form 10-K/A.

RAL Litigation

We have been named as a defendant in a number of lawsuits alleging that we engaged in wrongdoing with respect to the RAL program. We believe we have strong defenses to the various RAL cases and will vigorously defend our position. Nevertheless, the amounts claimed by the plaintiffs are, in some instances, very substantial, and there can be no assurances as to the ultimate outcome of the pending RAL cases, or as to the impact of the RAL cases on our financial statements. See additional discussion of RAL Litigation in note 10 to the condensed consolidated financial statements and in Part II, Item 1, “Legal Proceedings.”

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MORTGAGE SERVICES

This segment is primarily engaged in the origination of non-prime mortgage loans through an independent broker network, the origination of prime and non-prime mortgage loans through a retail office network, the sale and securitization of mortgage loans and residual interests, and the servicing of non-prime loans.

Mortgage Services — Operating Statistics	(dollars in 000s)
				Restated
Three months ended	July 31, 2005			July 31, 2004			April 30, 2005
Volume of loans originated:
Wholesale (non-prime)	$	9,537,227		$	5,981,104		$	8,090,274
Retail: Non-prime		950,806			620,126			807,269
Prime		399,596			215,287			380,946
	$	10,887,629		$	6,816,517		$	9,278,489
Loan characteristics:
Weighted average FICO score(1)		623			609			618
Weighted average interest rate for borrowers(1)		7.52	%		7.21	%		7.45	%
Weighted average loan-to-value(1)		81.1	%		78.0	%		79.6	%
Origination margin (% of origination volume):(2)
Loan sale premium		2.33	%		3.18	%		2.64	%
Residual cash flows from beneficial interest in Trusts		0.47	%		0.65	%		0.55	%
Gain on derivative instruments		0.24	%		0.01	%		0.19	%
Loan sale repurchase reserves		(0.15	%)		(0.17	%)		(0.08	%)
Retained mortgage servicing rights		0.45	%		0.42	%		0.46	%
		3.34	%		4.09	%		3.76	%
Cost of acquisition		(0.48	%)		(0.61	%)		(0.51	%)
Direct origination expenses		(0.57	%)		(0.75	%)		(0.60	%)
Net gain on sale — gross margin(3)		2.29	%		2.73	%		2.65	%
Other revenues		—	%		0.01	%		0.03	%
Other cost of origination		(1.37	%)		(1.47	%)		(1.54	%)
Net margin		0.92	%		1.27	%		1.14	%
Total cost of origination		1.94	%		2.22	%		2.14	%
Total cost of origination and acquisition		2.42	%		2.83	%		2.65	%
Loan delivery:
Loan sales	$	10,843,006		$	6,744,056		$	9,322,150
Execution price(4)		2.50	%		4.12	%		2.48	%

(1)	Represents non-prime production.
(2)	See “Reconciliation of Non-GAAP Financial Information” on page 32.
(3)	Defined as gain on sale of mortgage loans (including gain or loss on derivatives, mortgage servicing rights and net of direct origination and acquisition expenses) divided by origination volume.
(4)	Defined as total premium received divided by total balance of loans delivered to third-party investors or securitization vehicles (excluding mortgage servicing rights and the effect of loan origination expenses).

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Mortgage Services — Operating Results	(in 000s)
				Restated
Three months ended	July 31, 2005			July 31, 2004			April 30, 2005
Components of gains on sales:
Gain on mortgage loans	$	222,760		$	185,293		$	227,633
Gain on derivatives		26,086			676			18,027
Gain on sales of residual interests		—			—			15,396
Impairment of residual interests		(12,415	)		(2,609	)		(5,068	)
		236,431			183,360			255,988
Interest income:
Accretion — residual interests		30,777			28,677			41,363
Other interest income		2,768			1,440			3,902
		33,545			30,117			45,265
Loan servicing revenue		90,269			58,166			79,366
Other		193			330			222
Total revenues		360,438			271,973			380,841
Cost of services		64,392			49,861			61,590
Cost of other revenues:
Compensation and benefits		80,283			45,906			74,777
Occupancy		12,629			8,009			10,868
Other		22,878			18,280			20,729
		115,790			72,195			106,374
Selling, general and administrative		45,788			40,892			49,764
Total expenses		225,970			162,948			217,728
Pretax income	$	134,468		$	109,025		$	163,113

Three months ended July 31, 2005 compared to July 31, 2004

Mortgage Services’ revenues increased $88.5 million, or 32.5%, for the three months ended July 31, 2005 compared to the prior year. Revenues increased as a result of increased origination volumes, servicing revenue and gains on derivatives.

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

	(dollars in 000s)
Three months ended July 31,	2005			2004
Application process:
Total number of applications		109,929			74,492
Number of sales associates(1)		3,692			3,117
Closing ratio(2)		60.1	%		59.0	%
Originations:
Total number of originations		66,041			43,926
Weighted average interest rate for borrowers (WAC)		7.52	%		7.21	%
Average loan size	$	165		$	155
Total originations	$	10,887,629		$	6,816,517
Non-prime origination ratio		96.3	%		96.8	%
Direct origination and acquisition expenses, net	$	114,224		$	92,489
Revenue (loan value):
Net gain on sale — gross margin(3)		2.29	%		2.73	%

(1)	Includes all direct sales and back office sales support associates.
(2)	Percentage of loans funded divided by total applications in the period.
(3)	Defined as gain on sale of mortgage loans (including gain or loss on derivatives, mortgage servicing rights and net of direct origination and acquisition expenses) divided by origination volume.

     Gains on sales of mortgage loans increased $37.5 million, primarily as a result of increased origination volume, partially offset by a decline in our gross margin. Originations increased 59.7% over the prior year, due to increased productivity of our account executives and support staff, new product introductions, increased applications and a higher closing ratio. Market interest rates, based on the two-year swap, increased from an average of 3.03% last year to 4.06% in the current quarter. However, our WAC increased only 31 basis points, up to 7.52% from 7.21% in the prior year. Because

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our WAC was not more aligned with market rates, our gross margin declined 44 basis points, to 2.29% from 2.73% last year. To mitigate the risk of short-term changes in market interest rates, we use interest rate swaps and forward loan sale commitments. During the current quarter, we recorded a net $26.1 million in gains, compared to $0.7 million in the prior year, related to our various derivative instruments. See note 6 to the condensed consolidated financial statements. We also recorded a $4.0 million favorable mark-to-market adjustment for our residual interests classified as trading securities during the current quarter.

     During the first quarter of fiscal year 2006, our residual interests performed better than expected in our internal valuation models, with lower credit losses than originally modeled, partially offset by higher interest rates. We recorded favorable pretax mark-to-market adjustments, which increased the fair value of our residual interests $16.0 million during the quarter. These adjustments were recorded, net of write-downs of $3.0 million and deferred taxes of $4.9 million, in other comprehensive income and will be accreted into income throughout the remaining life of those residual interests. Offsetting these write-ups were impairments of $12.4 million, which were recorded in gains on sales of mortgage assets. Future changes in interest rates or other assumptions, based on market conditions or actual loan pool performance, could cause additional adjustments to the fair value of the residual interests and could cause changes to the accretion of these residual interests in future periods. Favorable mark-to-market adjustments on low original value residuals will generally not be accreted into revenues until the residual interest begins to cash flow.

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

(dollars in 000s)
Three months ended July 31,	2005			2004
Average servicing portfolio:
With related MSRs	$	49,635,474		$	37,524,221
Without related MSRs		20,070,745			10,012,639
	$	69,706,219		$	47,536,860
Number of loans serviced		451,310			344,659
Average delinquency rate		4.28	%		5.01	%
Weighted average FICO score		619			612
Value of MSRs	$	188,708		$	123,980

     Loan servicing revenues increased $32.1 million, or 55.2%, compared to the prior year. The increase reflects a higher loan servicing portfolio. The average servicing portfolio for the three months ended July 31, 2005 increased $22.2 billion, or 46.6%, to $69.7 billion.

     Total expenses for the three months ended July 31, 2005, increased $63.0 million, or 38.7%, over the prior year. Cost of services increased $14.5 million as a result of a higher average servicing portfolio during the current quarter. Cost of other revenues increased $43.6 million, primarily due to $34.4 million in increased compensation and benefits as a result of an 18.4% increase in sales associates, coupled with related increases in payroll taxes and origination-based incentives. Occupancy expenses increased $4.6 million, or 57.7%, primarily as a result of a 13.0% increase in branch offices. Other expenses increased $4.6 million primarily as a result of $2.3 million in additional costs for our annual sales meeting, coupled with increases in consulting and outsourced services.

     Selling, general and administrative expenses increased $4.9 million due to $7.6 million in additional retail marketing costs, partially offset by a $2.1 million decrease in consulting expenses.

     Pretax income increased $25.4 million to $134.5 million for the three months ended July 31, 2005.

Three months ended July 31, 2005 compared to April 30, 2005

Mortgage Services’ revenues decreased $20.4 million, or 5.4%, for the three months ended July 31, 2005, compared to the fourth quarter of fiscal year 2005. Revenues decreased primarily due to a $15.4 million gain on sale of previously securitized residual interests recorded in the fourth quarter.

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

(dollars in 000s)

Three months ended	July 31, 2005			April 30, 2005
Application process:
Total number of applications		109,929			103,202
Number of sales associates(1)		3,692			3,526
Closing ratio(2)		60.1	%		57.0	%
Originations:
Total number of originations		66,041			58,777
Weighted average interest rate for borrowers (WAC)		7.52	%		7.45	%
Average loan size	$	165		$	158
Total originations	$	10,887,629		$	9,278,489
Non-prime origination ratio		96.3	%		95.9	%
Direct origination and acquisition expenses, net	$	114,224		$	103,123
Revenue (loan value):
Net gain on sale — gross margin(3)		2.29	%		2.65	%

(1)	Includes all direct sales and back office sales support associates.
(2)	Percentage of loans funded divided by total applications in the period.
(3)	Defined as gain on sale of mortgage loans (including gain or loss on derivatives, mortgage servicing rights and net of direct origination and acquisition expenses) divided by origination volume.

     Gains on sales of mortgage loans decreased $4.9 million primarily as a result of increased price competition and poorer execution in the secondary market. Market interest rates have increased to 4.06% from 3.96% in the preceding quarter. However, our WAC increased 7 basis points, from 7.45% to 7.52%. To mitigate the risk of short-term changes in market interest rates, we use interest rate swaps and forward loan sale commitments. Primarily as a result of interest rate changes, during the current quarter, we recorded a net $26.1 million in gains, compared to $18.0 million in the fourth quarter, related to our various derivative instruments. Loan origination volumes increased 17.3% from the fourth quarter primarily due to increased productivity of our account executives and support staff. We also recorded a $4.0 million favorable mark-to-market adjustment for our residual interests classified as trading securities during the current quarter.

     Impairments of residual interests in securitizations of $12.4 million were recognized during the first quarter, compared to $5.1 million in the fourth quarter of fiscal year 2005. This was primarily due to a decline in value of older residuals based on loan performance.

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

(dollars in 000s)

Three months ended	July 31, 2005			April 30, 2005
Average servicing portfolio:
With related MSRs	$	49,635,474		$	45,493,695
Without related MSRs		20,070,745			17,540,643
	$	69,706,219		$	63,034,338
Number of loans serviced		451,310			435,290
Average delinquency rate		4.28	%		4.43	%
Weighted average FICO score		619			624
Value of MSRs	$	188,708		$	166,614

     Loan servicing revenues increased $10.9 million, or 13.7%, compared to the fourth quarter. The increase reflects a higher loan servicing portfolio. The average servicing portfolio for the three months ended July 31, 2005 increased $6.7 billion, or 10.6%.

     Total expenses increased $8.2 million compared to the fourth quarter. Cost of other revenues increased $9.4 million, primarily due to $5.5 million in increased compensation and benefits as a result of a 4.7% increase in sales associates, coupled with related increases in payroll taxes and origination-based incentives. Other expenses increased $2.1 million for the current quarter, primarily due to $3.5 million in additional costs for our annual sales meeting, partially offset by a $2.0 million decrease in consulting expenses.

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     Selling, general and administrative expenses decreased $4.0 million due to a decline of $3.9 million in incentive compensation resulting from lower profitability.

     Pretax income decreased $28.6 million, or 17.6%, for the three months ended July 31, 2005 compared to the preceding quarter.

Fiscal 2006 outlook

We continue to expect loan origination growth will exceed 20 percent over the previous year, however, we now expect our margins will continue to decline in the second quarter. We believe margins in the 90 to 115 basis point range are achievable for the third and fourth quarters, but expect full year margins will likely be at the low end or below the 90 to 115 basis point range.

BUSINESS SERVICES

This segment offers middle-market companies accounting, tax and consulting services, wealth management, retirement resources, payroll and benefits services, corporate finance and financial process outsourcing.

Business Services — Operating Statistics

Three months ended July 31,	2005		2004
Accounting, tax and consulting:
Chargeable hours		597,202		537,035
Chargeable hours per person		270		269
Net billed rate per hour	$	134	$	126
Average margin per person	$	17,321	$	16,327

Business Services — Operating Results (in 000s)

				Restated
Three months ended July 31,	2005			2004
Service revenues:
Accounting, tax and consulting	$	83,828		$	74,551
Capital markets		15,472			15,780
Payroll, benefits and retirement services		8,277			4,671
Other services		9,882			5,759
		117,459			100,761
Other		9,387			8,341
Total revenues		126,846			109,102
Cost of services:
Compensation and benefits		71,647			64,103
Occupancy		8,163			4,531
Other		10,810			11,806
		90,620			80,440
Selling, general and administrative		42,991			38,707
Total expenses		133,611			119,147
Pretax loss	$	(6,765	)	$	(10,045	)

Three months ended July 31, 2005 compared to July 31, 2004

Business Services’ revenues for the three months ended July 31, 2005 increased $17.7 million, or 16.3%, from the prior year. This increase was primarily due to a $9.3 million increase in accounting, tax and consulting revenues resulting from an 11.2% increase in chargeable hours and a 6.3% increase in the net billed rate per hour. The increase in chargeable hours is primarily due to favorable market conditions for all of our core services and strong demand for consulting and risk management services.

     Payroll, benefits and retirement services revenues increased $3.6 million, or 77.2%, primarily due to acquisitions completed during the third and fourth quarters of fiscal year 2005. Other service revenues increased $4.1 million as a result of growth in wealth management services and acquisitions completed in the fourth quarter of fiscal year 2005 in our financial process outsourcing business.

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     Total expenses increased $14.5 million, or 12.1%, for the three months ended July 31, 2005 compared to the prior year. Cost of services increased $10.2 million, primarily due to a $7.5 million increase in compensation and benefits. Acquisitions completed in the third and fourth quarters of fiscal year 2005 and increases in the number of personnel and the average wage per employee, which is being driven by marketplace competition for professional staff, were the primary drivers for this increase. Occupancy expenses increased $3.6 million, or 80.2%, due primarily to acquisitions completed in the third and fourth quarters of fiscal year 2005.

     Selling, general and administrative expenses increased $4.3 million primarily due to additional costs associated with our business development initiatives and acquisitions completed in the third and fourth quarters of fiscal year 2005.

     The pretax loss for the three months ended July 31, 2005 was $6.8 million compared to $10.0 million in the prior year.

     Due to the seasonal nature of this segment’s business, operating results for the three months ended July 31, 2005 are not comparable to the three months ended April 30, 2005 and are not indicative of the expected results for the entire fiscal year.

Fiscal 2006 outlook

Our fiscal year 2006 outlook for our Business Services segment is consistent with the discussion in our April 30, 2005 Form 10-K/A, except for the announcement to acquire American Express’ Tax and Business Services. On August 1, 2005 we announced a definitive agreement to acquire the American Express Tax & Business Services division. This acquisition is expected to close by the end of September, with operating results of the acquired business reported in this segment beginning October 1. Our early indication is that this acquisition will be accretive by two cents per diluted share in fiscal year 2006, after expected integration costs.

INVESTMENT SERVICES

This segment is primarily engaged in offering advice-based brokerage services and investment planning. Our integration of investment advice and new service offerings are allowing us to shift our focus from a transaction-based client relationship to a more advice-based focus.

Investment Services — Operating Statistics

Three months ended	July 31, 2005		July 31, 2004		April 30, 2005
Customer trades(1)		226,378		205,948		241,327
Customer daily average trades		3,593		3,269		3,892
Average revenue per trade(2)	$	126.71	$	119.71	$	127.73
Customer accounts:(3)
Traditional brokerage		431,046		454,147		431,749
Express IRAs		379,432		337,583		380,539
		810,478		791,730		812,288
Ending balance of assets under administration (billions)	$	30.0	$	26.6	$	27.8
Average assets per traditional brokerage account	$	68,870	$	58,132	$	63,755
Average margin balances (millions)	$	573	$	598	$	603
Average customer payable balances (millions)	$	841	$	1,012	$	936
Number of advisors		985		997		1,010
Included in the numbers above are the following relating to fee-based accounts:
Customer household accounts		7,985		7,688		7,668
Average revenue per account	$	2,235	$	1,848	$	2,841
Ending balance of assets under administration (millions)	$	2,126	$	1,547	$	1,975
Average assets per active account	$	266,222	$	201,198	$	260,238

(1)	Includes only trades on which revenues are earned (“revenue trades”). Revenues are earned on both transactional and annuitized trades.
(2)	Calculated as total trade revenues divided by revenue trades.
(3)	Includes only accounts with a positive balance.

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Investment Services — Operating Results (in 000s)

				Restated
Three months ended	July 31, 2005			July 31, 2004			April 30, 2005
Service revenue:
Transactional revenue	$	22,835		$	19,952		$	23,922
Annuitized revenue		22,271			18,533			23,272
Production revenue		45,106			38,485			47,194
Other service revenue		8,207			6,262			9,417
		53,313			44,747			56,611
Margin interest revenue		14,093			8,760			12,925
Less: interest expense		(1,254	)		(299	)		(1,184	)
Net interest revenue		12,839			8,461			11,741
Other		577			74			262
Total revenues(1)		66,729			53,282			68,614
Cost of services:
Compensation and benefits		30,535			28,848			31,644
Occupancy		5,165			5,789			5,668
Depreciation		1,034			1,064			1,015
Other		3,901			3,755			3,655
		40,635			39,456			41,982
Selling, general and administrative		33,646			34,169			41,120
Total expenses		74,281			73,625			83,102
Pretax loss	$	(7,552	)	$	(20,343	)	$	(14,488	)

⁽¹⁾ Total revenues, less interest expense.

Three months ended July 31, 2005 compared to July 31, 2004

Investment Services’ revenues, net of interest expense, for the three months ended July 31, 2005 increased $13.4 million, or 25.2%, over the prior year.

     Production revenue increased $6.6 million, or 17.2%, over the prior year. Transactional revenue, which is based on individual securities transactions, increased $2.9 million, or 14.4%, from the prior year due primarily to a 4.7% increase in transactional trading volume and a 10.6% increase in average revenue per transactional trade. Annuitized revenue, which is based on sales of mutual funds, insurance, fee based products and unit investment trusts, increased $3.7 million, or 20.2%, due to increased sales of mutual funds and annuities. Annualized productivity averaged approximately $180,000 per advisor during the current quarter compared to $155,000 per advisor in the prior year. Increased productivity was primarily due to minimum production standards we put into place during the fourth quarter of fiscal year 2005 which caused an increase in production per advisor across all advisor classes, with 164 advisors increasing their production. These standards also resulted in 74 low-producing advisors leaving the company and we expect this trend to continue throughout the remainder of the fiscal year.

     Margin interest revenue increased $5.3 million, or 60.9%, from the prior year, as a result of higher interest rates earned.

     Total expenses increased $0.7 million, or 0.9%. Cost of services increased $1.2 million, or 3.0%, primarily as a result of $1.7 million of additional compensation and benefits. This increase is primarily due to higher production revenues, partially offset by cost containment measures implemented in the fourth quarter of fiscal year 2005.

     The pretax loss for Investment Services for the first quarter of fiscal year 2006 was $7.6 million compared to the prior year loss of $20.3 million.

Three months ended July 31, 2005 compared to April 30, 2005

Investment Services’ revenues, net of interest expense, for the three months ended July 31, 2005 decreased $1.9 million, or 2.7% compared to the preceding quarter.

     Production revenue decreased $2.1 million, or 4.4%, over the preceding quarter. Transactional revenue decreased $1.1 million, or 4.5%, compared to the preceding quarter, primarily due to lower

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underwriting commissions. Annuitized revenues declined $1.0 million, or 4.3%, due to the timing in recognition of certain fee-based revenues.

     Margin interest revenue increased $1.2 million, or 9.0%, from the preceding quarter, which is primarily a result of higher interest rates earned, partially offset by lower margin balances.

     Total expenses decreased $8.8 million, or 10.6%. Cost of services decreased $1.3 million, or 3.2%, principally due to a $1.1 million decline in compensation and benefits, primarily resulting from lower production revenues.

     Selling, general and administrative expenses decreased $7.5 million, or 18.2%, primarily due to fourth quarter severance expenses, gains on the disposition of certain assets during the first quarter, reduced back-office headcount relating to cost containment efforts and a decline in legal expenses. These decreases were partially offset by increased bonuses associated with improved performance.

     The pretax loss for the Investment Services segment was $7.6 million, compared to a loss of $14.5 million in the fourth quarter of fiscal year 2005.

Fiscal 2006 outlook

Our fiscal year 2006 outlook for our Investment Services segment is unchanged from the discussion in our April 30, 2005 Form 10-K/A.

CORPORATE

This segment consists primarily of corporate support departments, which provide services to our operating segments. These support departments consist of marketing, information technology, facilities, human resources, executive, legal, finance, government relations and corporate communications. Support department costs are generally allocated to our operating segments. Our captive insurance and franchise financing subsidiaries are also included within this segment, as was our small business initiatives subsidiary in the first half of fiscal year 2005.

Corporate — Operating Results (in 000s)

				Restated
Three months ended July 31,	2005			2004
Operating revenues	$	5,006		$	4,433
Eliminations		(2,471	)		(2,985	)
Total revenues		2,535			1,448
Corporate expenses:
Interest expense		13,794			16,224
Other		17,462			11,166
		31,256			27,390
Shared services:
Information technology		26,452			25,178
Marketing		4,441			3,571
Finance		11,795			8,807
Other		20,889			20,229
		63,577			57,785
Allocation of shared services		(63,629	)		(57,804	)
Other income, net		7,155			1,132
Pretax loss	$	(21,514	)	$	(24,791	)

Three months ended July 31, 2005 compared to July 31, 2004

Corporate expenses increased $3.9 million primarily due an increase of $1.7 million in losses at our captive insurance subsidiary, $1.5 million in additional consulting, accounting and auditing expenses related to the restatement of our previously issued financial statements and $2.1 million in increased costs from finance shared services. These increases were partially offset by a decline of $2.4 million in interest expense.

     Finance department expenses increased $3.0 million, primarily due to $2.3 million of additional consulting expenses and increases in compensation expenses.

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     Other income increased $6.0 million primarily as a result of a $3.4 million gain recognized on the sale of an investment.

     The pretax loss was $21.5 million, compared with last year’s first quarter loss of $24.8 million.

     Due to the nature of this segment, the three months ended July 31, 2005 are not comparable to the three months ended April 30, 2005 and are not indicative of the expected results for the entire fiscal year.

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 & LIQUIDITY BY SEGMENT

Our sources of capital include cash from operations, issuances of common stock and debt. We use capital primarily to fund working capital requirements, pay dividends, repurchase our shares and acquire businesses.

     Cash From Operations.Cash used in operations totaled $310.5 million and $515.3 million for the three months ended July 31, 2005 and 2004, respectively. The decrease in cash used in operating activities is primarily due to a decline in income tax payments. Income tax payments totaled $35.3 million during the current year, a decrease of $148.1 million from the prior year. A change in a tax accounting method in the prior year resulted in the acceleration of taxable income within our Mortgage Services segment.

     Issuance of Common Stock.We issue shares of common stock, in accordance with our stock-based compensation plans, out of treasury shares. Proceeds from the issuance of common stock totaled $32.3 million and $12.4 million for the three months ended July 31, 2005 and 2004, respectively.

     Dividends.Dividends paid totaled $36.5 million and $33.6 million for the three months ended July 31, 2005 and 2004, respectively. On June 8, 2005, our Board of Directors declared a two-for-one stock split of the Company’s Common Stock in the form of a 100% stock distribution, effective August 22, 2005, to shareholders of record as of the close of business on August 1, 2005. All share and per share amounts in this document have been adjusted to reflect the retroactive effect of the stock split.

     Share Repurchases.On June 9, 2004, our Board of Directors approved an authorization to repurchase 15 million shares. During the three months ended July 31, 2005, we repurchased 2.2 million (pre-split) shares pursuant to these authorizations at an aggregate price of $126.1 million or an average price of $56.78 per share (pre-split). There are 12.9 million shares remaining under this authorization at July 31, 2005. We plan to continue to purchase shares on the open market in accordance with these authorizations, subject to various factors including the price of the stock, the availability of excess cash, our ability to maintain liquidity and financial flexibility, securities laws restrictions, targeted capital levels and other investment opportunities available.

     Restricted Cash.We hold certain cash balances that are restricted as to use. Cash and cash equivalents — restricted totaled $417.0 million at July 31, 2005 compared to $516.9 million at April 30, 2005. Investment Services held $388.0 million of this total segregated in a special reserve account for the exclusive benefit of customers. Restricted cash of $13.8 million at July 31, 2005 held by Business Services is related to funds held to pay payroll taxes on behalf of its customers. Restricted cash held by Mortgage Services totaled $15.2 million and is held for outstanding commitments to fund mortgage loans.

     Segment Cash Flows.A condensed consolidating statement of cash flows by segment for the three months ended July 31, 2005 follows. Generally, interest is not charged on intercompany activities between segments.

(in 000s)

	Tax			Mortgage			Business			Investment						Consolidated
	Services			Services			Services			Services			Corporate			H&R Block
Cash provided by (used in):
Operations	$	(224,218	)	$	(43,189	)	$	21,995		$	(11,274	)	$	(53,829	)	$	(310,515	)
Investing		(5,573	)		16,006			(7,821	)		3,410			(7,838	)		(1,816	)
Financing		(26,486	)		—			(2,497	)		10,579			(136,677	)		(155,081	)
Net intercompany		250,383			48,749			(11,263	)		1,386			(289,255	)		—

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

     Tax Services.Tax Services has historically been our largest provider of annual operating cash flows. The seasonal nature of Tax Services generally results in a large positive operating cash flow in the fourth quarter. Tax Services used $224.2 million in its current three-month operations to cover off-season costs and working capital requirements. This segment also used $26.5 million in financing activities, primarily related to book overdrafts.

     Mortgage Services.This segment primarily generates cash as a result of the sale and securitization of mortgage loans and residual interests, and as its residual interests begin to cash flow. Mortgage Services used $43.2 million in cash from operating activities primarily due to $58.0 million in trading residuals held at July 31, 2005 that had not yet been securitized in a NIM transaction. Cash flows from investing activities consist of $24.0 million in cash receipts on residual interests, partially offset by $8.3 million in capital expenditures.

     Gains on sales. Gains on sales of mortgage assets totaled $236.4 million, with the cash received primarily recorded as operating activities. The percentage of cash proceeds we receive from our capital market transactions, which are included within the gains on sales of mortgage assets, is reconciled below. The decline in the percentage of cash proceeds is due to the $58.0 million in trading residuals recorded at July 31, 2005, which we expect to securitize in a NIM transaction during our second quarter.

(in 000s)

				Restated
Three months ended July 31,	2005			2004
Cash proceeds:
Whole loans sold by the Trusts	$	154,802		$	218,064
Residual cash flows from beneficial interest in Trusts		58,790			40,378
Loans securitized		60,382			—
Derivative instruments		6,194			—
		280,168			258,442
Non-cash:
Retained mortgage servicing rights		49,306			28,493
Additions to balance sheet(1)		60,091			—
		109,397			28,493
Portion of gain on sale related to capital market transactions		389,565			286,935
Other items included in gain on sale:
Changes in beneficial interest in Trusts		(29,534	)		2,598
Impairments to fair value of residual interests		(12,415	)		(2,609	)
Net change in fair value of derivative instruments		19,892			676
Direct origination and acquisition expenses, net		(114,224	)		(92,489	)
Loan sale repurchase reserves		(16,853	)		(11,751	)
		(153,134	)		(103,575	)
Reported gains on sales of mortgage assets	$	236,431		$	183,360
Percent of gain on sale related to capital market transactions received as cash(2)		72	%		90	%

(1)	Includes residual interests and interest rate caps.
(2)	Cash proceeds divided by portion of gain on sale related to capital market transactions.

     Warehouse Funding. To finance our prime originations, we utilize an on-balance sheet warehouse facility with capacity up to $25 million. This annual facility bears interest at one-month LIBOR plus 140 to 200 basis points. As of July 31, 2005 and April 30, 2005 the balance outstanding under this facility was $10.3 million and $4.4 million, respectively.

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     To fund our non-prime originations, we utilize six off-balance sheet warehouse Trusts. The facilities used by the Trusts had a total capacity of $10.0 billion as of July 31, 2005. Amounts drawn on the facilities by the Trusts totaled $6.7 billion at July 31, 2005. See additional discussion below in “Off-Balance Sheet Financing Arrangements.”

     We believe the sources of liquidity available to the Mortgage Services segment are sufficient for its needs.

     Business Services.Business Services funding requirements are largely related to receivables for completed work and “work in process.” We provide funding sufficient to cover their working capital needs. This segment provided $22.0 million in operating cash flows during the first three months of the year. Business Services used $7.8 million in investing activities related to acquisitions and capital expenditures.

     Investment Services.Investment Services, through HRBFA, is subject to regulatory requirements intended to ensure the general financial soundness and liquidity of broker-dealers.

     At July 31, 2005, HRBFA’s net capital of $119.8 million, which was 19.1% of aggregate debit items, exceeded its minimum required net capital of $12.5 million by $107.3 million.

     In the first three months of fiscal year 2005, Investment Services used $11.3 million in its operating activities primarily due to working capital requirements, including the timing of cash deposits that are restricted for the benefit of customers. Cash provided by financing activities consists primarily of financing of book overdrafts.

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

     Pledged securities at July 31, 2005 totaled $55.5 million, an excess of $5.3 million over the margin requirement. Pledged securities at the end of fiscal year 2005 totaled $44.6 million, an excess of $7.9 million over the margin requirement.

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

OFF-BALANCE SHEET FINANCING ARRANGEMENTS

Substantially all non-prime mortgage loans we originate are sold daily to the Trusts. The Trusts purchase the loans from us utilizing six warehouse facilities that were arranged by us, bear interest at one-month LIBOR plus 45 to 400 basis points and expire on various dates during the year. In July 2005, the warehouse facilities were increased from $9.0 billion to $10.0 billion.

     In August 2005, the FASB issued three exposure drafts which amend Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” See discussion in note 12 to the condensed consolidated financial statements.

     There have been no other material changes in our off-balance sheet financing arrangements from those reported at April 30, 2005 in our Annual Report on Form 10-K/A.

COMMERCIAL PAPER ISSUANCE

We maintain two unsecured CLOCs, for working capital, to support our commercial paper program and for general corporate purposes. Subsequent to July 31, 2005, the first CLOC expired and was replaced with a new $1.0 billion CLOC, which expires in August 2010. Also subsequent to July 31, 2005, the second CLOC was extended, and now expires in August 2010.

     There have been no other material changes in our commercial paper program from those reported at April 30, 2005 in our Annual Report on Form 10-K/A.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

There have been no material changes in our contractual obligations and commercial commitments from those reported at April 30, 2005 in our Annual Report on Form 10-K/A.

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REGULATORY ENVIRONMENT

There have been no material changes in our regulatory environment from those reported at April 30, 2005 in our Annual Report on Form 10-K/A.

FORWARD-LOOKING INFORMATION

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

     There have been no material changes in our risk factors from those reported at April 30, 2005 in our Annual Report on Form 10-K/A.

RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION

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

Origination Margin (dollars in 000s)

				Restated
Three months ended	July 31, 2005			July 31, 2004			April 30, 2005
Total expenses	$	225,970		$	162,948		$	217,728
Add: Expenses netted against gain on sale revenues		114,222			92,489			103,123
Less:
Cost of services		64,392			49,861			61,590
Cost of acquisition		52,306			41,700			47,428
Allocated support departments		5,831			5,346			5,768
Other		6,255			7,200			7,528
	$	211,408		$	151,330		$	198,537
Divided by origination volume	$	10,887,629		$	6,816,517		$	9,278,489
Total cost of origination		1.94	%		2.22	%		2.14	%

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We have established disclosure controls and procedures (Disclosure Controls) to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed to ensure that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls were designed to provide reasonable assurance that the controls and procedures would meet their objectives. Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable assurance of achieving the designed control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of

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the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusions of two or more people, or by management override of the control. Because of the inherent limitations in a cost-effective, maturing control system, misstatements due to error or fraud may occur and not be detected.

     As of the end of the period covered by this Form 10-Q/A, we evaluated the effectiveness of the design and operation of our Disclosure Controls. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, and included consideration of the material weakness initially disclosed in our Annual Report on Form 10-K/A for the year ended April 30, 2005. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our Disclosure Controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q/A because of the material weakness described below.

     As disclosed initially in our Annual Report on Form 10-K/A for the year ended April 30, 2005, management identified a material weakness in our accounting for income taxes. Specifically, the Company did not maintain sufficient resources in the corporate tax function to accurately identify, evaluate and report, in a timely manner, non-routine and complex transactions. In addition, the Company had not completed the requisite historical analysis and related reconciliations to ensure tax balances were appropriately stated prior to the completion of the Company’s April 30, 2005 internal control activities.

     In February 2006, as a result of the ongoing controls and procedural work to remediate the material weakness in the Company’s internal controls over accounting for income taxes as of April 30, 2005, management discovered additional income tax errors which required the restatement of prior periods. In preparation for its revised 10-Q/A filing, management reviewed this disclosure and continues to believe it accurately describes the nature of the internal control deficiencies that contributed to the material weakness as of April 30, 2005.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

In order to remediate the aforementioned material weakness, management completed the requisite historical analysis including creation of the necessary tax basis balance sheets and current and deferred reconciliations required and related internal control testing to ensure propriety of all tax related financial statement account balances as of the Form 10-K/A filing date. The Company believes it established appropriate controls and procedures and created appropriate tax account analysis and support subsequent to April 30, 2005.

     In addition to implementing management’s action plan addressing items from the comprehensive evaluation, we will continue to monitor the improvements in the controls over accounting for income taxes to ensure remediation of the material weakness.

     Other than the changes outlined above, 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 6. EXHIBITS

10.1	Sale and Servicing Agreement dated as of June 1, 2005 among Option One Mortgage Corporation, Option One Loan Warehouse Corporation, Option One Owner Trust 2005-6 and Wells Fargo Bank, N.A., filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2005, file number 1-6089, is incorporated by reference.
10.2	Note Purchase Agreement dated as of June 1, 2005 among Option One Loan Warehouse Corporation, Option One Owner Trust 2005-6 and Lehman Brothers Bank, filed as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2005, file number 1-6089, is incorporated by reference.

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10.3	Indenture dated as of June 1, 2005 between Option One Owner Trust 2005-6 and Wells Fargo Bank, N.A., filed as Exhibit 10.3 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2005, file number 1-6089, is incorporated by reference.
10.4	Amendment Number 1 to Second Amended and Restated Sale and Servicing Agreement dated March 8, 2005 among Option One Mortgage Corporation, Option One Loan Warehouse Corporation, Option One Owner Trust 2001-2 and Wells Fargo Bank, N.A., filed as Exhibit 10.4 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2005, file number 1-6089, is incorporated by reference.
10.5	Amendment Number Five to Amended and Restated Note Purchase Agreement dated November 25, 2003 among Option One Loan Warehouse Corporation, Option One Owner Trust 2001-2 and Bank of America, N.A., filed as Exhibit 10.5 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2005, file number 1-6089, is incorporated by reference.
10.6	Amendment Number One to Second Amended and Restated Sale and Servicing Agreement dated as of April 29, 2005 among Option One Owner Trust 2001-1A, Option One Loan Warehouse Corporation, Option One Mortgage Corporation and Wells Fargo Bank N.A., filed as Exhibit 10.6 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2005, file number 1-6089, is incorporated by reference.
10.7	Amendment Number One to Second Amended and Restated Sale and Servicing Agreement dated as of April 29, 2005 among Option One Owner Trust 2001-1B, Option One Loan Warehouse Corporation, Option One Mortgage Corporation and Wells Fargo Bank N.A., filed as Exhibit 10.7 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2005, file number 1-6089, is incorporated by reference.
10.8	Description of Executive Officer Cash Compensation, filed as Exhibit 10.8 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2005, file number 1-6089, is incorporated 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.

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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.

Mark A. Ernst

Chairman of the Board, President

and Chief Executive Officer

March 31, 2006

William L. Trubeck

Executive Vice President and

Chief Financial Officer

March 31, 2006

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