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

^{(Mark One)}


[X]		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: April 30, 2006


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to

Commission File Number: 1-6089

H&R Block, Inc.

(Exact name of registrant as specified in its charter)


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

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)

Securities registered pursuant to Section 12(b) of the Act:


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

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, without par value

(Title of Class)

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

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes No ü

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

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

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 ü Accelerated filer Non-accelerated filer

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

The aggregate market value of the registrant’s Common Stock (all voting stock) held by non-affiliates of the registrant, computed by reference to the price at which the stock was sold on October 31, 2005, was $8,049,475,793.

Number of shares of registrant’s Common Stock, without par value, outstanding on May 31, 2006: 321,925,770.

INTRODUCTION AND FORWARD LOOKING STATEMENTS

Specified portions of our proxy statement, which will be filed in July 2006, are listed as “incorporated by reference” in response to certain items. Our proxy statement will be printed within our Annual Report and mailed to shareholders in July 2006 and will also be available on our website at www.hrblock.com.

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

PART I

ITEM 1. BUSINESS

GENERAL DEVELOPMENT OF BUSINESS –

H&R Block is a diversified company with subsidiaries providing tax, investment, mortgage and business services and products. Our Tax Services segment provides income tax return preparation and other services and products related to tax return preparation to the general public in the United States, and in Canada, Australia and the United Kingdom. We also offer investment services and securities products 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 (Option One) and H&R Block Mortgage Corporation (HRBMC). RSM McGladrey Business Services, Inc. (RSM) is a national accounting, tax and business consulting firm primarily serving mid-sized businesses.

H&R BLOCK’S MISSION –

“To help our clients achieve their financial

objectives by serving as their tax

and financial partner.”

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

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

RECENT DEVELOPMENTS – In March 2006, the Office of Thrift Supervision (OTS) approved the charter of the H&R Block Bank. The bank will commence operations on May 1, 2006. In fiscal year 2007, we will realign certain segments of our business to reflect a new management reporting structure.

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, and 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 pertained 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, for the fiscal years ended April 30, 2005 and 2004, and the related fiscal quarters.

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.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS –
See discussion below and in Item 8, note 19 to our consolidated financial statements.

DESCRIPTION OF BUSINESS –

TAX SERVICES

GENERAL – Our Tax Services segment is primarily engaged in providing tax return preparation and related services and products in the United States and its territories, Canada, Australia and the United Kingdom. Revenues include fees earned for services performed at company-owned retail tax offices, royalties from franchise retail tax offices, sales of Peace of Mind (POM) guarantees, sales of tax preparation and other software, fees from online tax preparation, and participation in refund anticipation loans (RALs). Segment revenues constituted 50.3% of our consolidated revenues for fiscal year 2006, 53.4% for 2005, and 51.6% for 2004.

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

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

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

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

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

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

PEACE OF MIND GUARANTEE – The POM guarantee is offered to U.S. clients, whereby we (1) represent our clients if audited by the IRS, and (2) assume the cost, subject to certain limits, of additional taxes owed by a client resulting from errors attributable to one of our tax professionals’ work. The POM program has a per client cumulative limit of $5,000 in additional taxes assessed with respect to the federal, state and local tax returns we prepared for the taxable year covered by the program.

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

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

EXPRESS IRAs – Individual retirement accounts (Express IRAs), invested in FDIC-insured money market accounts, are offered to U.S. clients as a tax-advantaged retirement savings tool. HRBFA acts as custodian on the accounts, with the funds being invested at insured depository institutions paying competitive money market interest rates.

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

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

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

ONLINE TAX PREPARATION – We offer a comprehensive range of tax services and products, from tax advice to complete professional and do-it-yourself tax return preparation and electronic filing, through our website at www.hrblock.com and www.taxcut.com. These websites allow clients to prepare their federal and state income tax returns using the TaxCut Online

Tax Program, access tax tips, advice and tax-related news and use calculators for tax planning.

Beginning with the fiscal year 2003 tax season, we participated in the Free File Alliance (FFA). This alliance was created by the tax return preparation industry and the IRS, and allows qualified filers to prepare and file their federal return online at no charge. We feel that this program provides a valuable public service and increases our visibility with new clients, while also providing an opportunity to offer our state return preparation services to these new clients at our regular prices.

CASHBACK PROGRAM – We offer a refund discount (CashBack) program to our customers in Canada. Canadian law specifies the procedures we must follow in conducting the program. In accordance with current Canadian regulations, if a customer’s tax return indicates the customer is entitled to a tax refund, we issue a check to the client. The client assigns to us the full amount of the tax refund to be issued by the Canada Revenue Agency (CRA) and the refund check is then sent by the CRA directly to us. In accordance with the law, the discount is deemed to include both the tax return preparation fee and the fee for tax refund discounting. This program is financed by short-term borrowings. The number of returns discounted under the CashBack program in fiscal year 2006 was approximately 653,000, compared to 581,000 in 2005 and 552,000 in 2004. See discussion of the Canadian tax season extension under “Seasonality of Business.”

CLIENTS SERVED – We, together with our franchisees, served approximately 21.9 million clients worldwide during fiscal year 2006, compared to 21.4 million in 2005 and 21.6 million in 2004. See discussion of the Canadian tax season extension under “Seasonality of Business.” We served 19.5 million clients in the U.S. during fiscal year 2006, compared to 19.1 million in 2005 and 19.3 million in 2004. “Clients served” includes taxpayers for whom we prepared income tax returns in offices, federal software units sold, online completed and paid federal returns, paid state returns when no federal return was purchased, and taxpayers for whom we provided only paid electronic filing services. Our U.S. clients served constituted 15.7% of an IRS estimate of total individual income tax returns filed as of April 30, 2006, compared to 15.6% in 2005 and 15.7% in 2004.

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



April 30,	2006	2005	2004

U.S. OFFICES —
Company-owned offices	6,387	5,811	5,172
Company-owned shared locations ⁽¹⁾	1,473	1,296	996

Total company-owned offices	7,860	7,107	6,168


Franchise offices	3,703	3,528	3,418
Franchise shared locations ⁽¹⁾	602	526	323

Total franchise offices	4,305	4,054	3,741

	12,165	11,161	9,909

INTERNATIONAL OFFICES —
Canada	1,011	912	891
Australia	362	378	378
Other	10	10	7

	1,383	1,300	1,276


⁽¹⁾		Shared locations include offices located within Wal-Mart, Sears or other third-party businesses.

Offices in shared locations include 1,138 offices operated in Wal-Mart stores and 793 offices in Sears stores operated as “H&R Block at Sears.” The Wal-Mart agreement expires in May 2007, and the Sears license agreement expires in July 2007, both subject to termination rights.

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

From time to time, we have acquired the territories of existing franchisees and other tax return preparation businesses, and will continue to do so if future conditions warrant and satisfactory terms can be negotiated. During fiscal year 2004, we paid $243.2 million to acquire the operations of ten of our former major franchisees.

RAL PARTICIPATIONS – Since July 1996, we have been a party to agreements with HSBC and its predecessors to participate in RALs provided by a lending bank to H&R Block tax clients. The 1996 agreement was amended and restated in January 2003 and again in June 2003. In the June 2003 agreement, we obtained the right to purchase a 49.9% participation interest in RALs obtained through company-owned and regular franchise offices and a 25% interest in RALs obtained through major franchise offices. The current agreement continues through June 2006. During fiscal year 2006, we signed a new agreement with HSBC in which we obtained the right to

purchase a 49.9% participation interest in all RALs obtained through our retail offices. We received a signing bonus from HSBC during the current year in connection with this agreement, which was primarily recorded as deferred revenue at April 30, 2006. The new agreement will be in effect from July 2006 through June 2011. Our purchases of the participation interests are financed through short-term borrowings, and we bear all of the credit risk associated with our interests in the RALs. Revenue from our participation is calculated as the rate of participation multiplied by the fee paid by the borrower to the lending bank. Our RAL participation revenue was $177.9 million, $182.8 million and $168.4 million in fiscal years 2006, 2005 and 2004, respectively.

SEASONALITY OF BUSINESS – Because most of our clients file their tax returns during the period from January through April of each year, substantially all of our revenues from income tax return preparation and related services and products are received during this period. As a result, our tax segment generally operates at a loss through the first eight months of the fiscal year. Historically, these losses primarily reflect wages of year-round personnel, training of tax professionals, rental and furnishing of retail tax offices, and other costs and expenses relating to preparation for the upcoming tax season. Additionally, the tax business is affected by economic conditions and unemployment rates. Peak revenues occur during the applicable tax season, as follows:


United States and Canada		January – April
Australia		July – October

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

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

Our digital tax solutions businesses compete with a number of companies. Intuit, Inc. is the dominant supplier of tax preparation software and is also our primary competitor in the online tax preparation market. There are many smaller competitors in the online market, as well as free state-sponsored online filing programs. Price and marketing competition for tax preparation services increased in fiscal years 2006 and 2005.

GOVERNMENT REGULATION – Primary efforts toward the regulation of U.S. commercial tax return preparers have historically been made at the federal level. Federal legislation requires income tax return preparers to, among other things, set forth their signatures and identification numbers on all tax returns prepared by them, and retain all tax returns prepared for three years. Federal laws also subject income tax return preparers to accuracy-related penalties in connection with the preparation of income tax returns. Preparers may be prohibited from further acting as income tax return preparers if they continuously and repeatedly engage in specified misconduct. With certain exceptions, the Internal Revenue Code also prohibits the use or disclosure by income tax return preparers of certain income tax return information without the prior written consent of the taxpayer. In addition, the Gramm-Leach-Bliley Act and Federal Trade Commission regulations adopted thereunder require income tax preparers to adopt and disclose consumer privacy policies, and provide consumers a reasonable opportunity to “opt-out” of having personal information disclosed to unaffiliated third parties for marketing purposes. Some states have adopted or proposed strict “opt-in” requirements in connection with use or disclosure of consumer information.

We believe the federal legislation regulating commercial tax return preparers and consumer privacy has not had and will not have a material adverse effect on the operations of H&R Block. In addition, no present state statutes of this nature have had a material adverse effect on our business. We cannot, however, predict what the effect may be of the enactment of new statutes or adoption of new regulations.

The federal government regulates the electronic filing of income tax returns in part by requiring individuals and businesses to be accepted into the electronic filing program. Once accepted, electronic filers must comply with all publications and notices of the IRS applicable to electronic filing, provide certain

information to the taxpayer, comply with advertising standards for electronic filers, and be subjected to possible monitoring by the IRS, penalties for disclosure or use of income tax return preparation and other preparer penalties, and suspension from the electronic filing program. States that have adopted electronic filing programs for state income tax returns have also enacted laws regulating electronic filers and the advertising and offering of electronic filing services.

Federal statutes and regulations also regulate an electronic filer’s involvement in RALs. Electronic filers must clearly explain the RAL is a loan and not a substitute for or a quicker way of receiving an income tax refund. Federal laws place restrictions on the fees an electronic filer may charge in connection with RALs. In addition, some states and localities have enacted laws and adopted regulations for RAL facilitators and/or the advertising of RALs. There are also many states that have statutes regulating, through licensing and other requirements, the activities of brokering loans, providing credit services and offering “credit repair” services to consumers for a fee (Loan Activity Statutes). We believe the procedures under which we facilitate RALs are structured so our activities are not included within the scope of the activities regulated by these Loan Activity Statutes. There can be no assurances, however, that states with these Loan Activity Statutes will not contend successfully that these statutes apply to the RAL business and that we will need to become licensed under the Loan Activity Statutes, otherwise comply with statutory requirements, or modify procedures so that the Loan Activity Statutes are inapplicable.

Many states have statutes requiring the licensing of persons offering contracts of insurance. We have received from certain state insurance regulators inquiries about our POM guarantee program and the applicability of the state insurance statutes. In states where the inquiries are closed, the regulators affirmed our position that the POM guarantee is not a contract of insurance and is therefore not subject to state insurance licensing laws. In the few states where inquiries are pending, we believe there are no insurance laws under which the POM guarantee constitutes a contract of insurance. There can be no assurances, however, that the product, or other similar products we may offer in the future, will not be scrutinized as potential insurance products and held to be subject to various insurance laws and regulations.

Many of our income tax courses are regulated and licensed in select states. Failure to obtain a tax school license could limit our ability to develop interest in tax preparation as a career or obtain qualified tax professionals.

We believe the federal, state and local laws and legislation regulating electronic filing, RALs and the facilitation of RALs, loan brokers, credit services, credit repair services, insurance products, and proprietary schools have not, and will not in the future, have a material adverse effect on our operations. We cannot predict, however, what the effect may be of the enactment of new statutes or the adoption of new regulations pertaining to these matters.

As noted above under “Owned and Franchised Offices,” many of the income tax return preparation offices operating in the U.S. under the name “H&R Block” are operated by franchisees. Certain aspects of the franchisor/franchisee relationship have been the subject of regulation by the Federal Trade Commission and by various states. The extent of regulation varies, but relates primarily to disclosures to be made in connection with the grant of franchises and limitations on termination by the franchisor under the franchise agreement. To date, no such regulation has materially affected our business. We cannot predict, however, the effect of applicable statutes or regulations that may be enacted or adopted in the future.

We also seek to determine the applicability of all government and self-regulatory organization statutes, ordinances, rules and regulations in the international countries in which we operate (collectively, Foreign Laws) and to comply with these Foreign Laws. We cannot predict what effect the enactment of future Foreign Laws, changes in interpretations of existing Foreign Laws, or the results of future regulator inquiries regarding the applicability of Foreign Laws may have on our segments, any particular subsidiary, or our consolidated financial statements.

Statutes and regulations relating to income tax return preparers, electronic filing, franchising and other areas affecting the income tax business also exist in other countries in which we operate. In addition, the Canadian government regulates the refund-discounting program in Canada. These laws have not materially affected our international operations.

See discussion in “Risk Factors” for additional information.

MORTGAGE SERVICES

GENERAL – Our Mortgage Services segment originates mortgage loans, services non-prime mortgage loans and sells and securitizes mortgage loans and residual interests in the U.S. Revenues primarily consist of gains from sales and securitizations of mortgage assets, accretion on residual interests and servicing fee income. Segment revenues constituted 25.6% of our consolidated revenues for fiscal year 2006 and 28.2% for 2005 and 31.2% for 2004.

We originate both non-prime and prime mortgage loans. Non-prime mortgages are those that may not be offered through

government-sponsored loan agencies and typically involve borrowers with limited income documentation, high levels of consumer debt or past credit problems. Even though these borrowers have credit problems, they also tend to have equity in their property that will be used to secure the loan. Prime mortgages are those that may be offered through government sponsored loan agencies. We conduct business through four channels:

•		Option One’s wholesale origination channel works with independent brokers throughout the U.S. to fund non-prime mortgage loans through a national branch network. Wholesale originations represent the majority of Option One’s total loan production.
•		HRBMC originates residential mortgage loans directly to retail consumers.
•		Option One’s national accounts channel forms partnerships with financial institutions, including national and regional banks, to allow them to offer non-prime loans.
•		Option One’s bulk acquisitions channel specializes in the purchase of performing non-prime mortgage loan pools.

Option One is headquartered in Irvine, California and operates in 48 states by serving 49,000 mortgage broker locations and through its network of 35 wholesale loan production branches and eight retail production offices.

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

In the current year, we terminated approximately 1,200 employees and closed some of our branch offices through a restructuring. This resulted in a pretax charge of $12.6 million. See additional discussion of our restructuring charge in Item 8, note 16 to the consolidated financial statements.

LOAN ORIGINATION – We originated $40.8 billion, $31.0 billion and $23.3 billion in mortgage loans during fiscal years 2006, 2005 and 2004, respectively. Information regarding our non-prime loan originations is as follows:



Year Ended April 30,	2006	2005		2004


Loan type:
2-year ARM	43.9%	61.6	%	63.4	%
3-year ARM	1.9%	4.0	%	5.2	%
Fixed 1^st	12.7%	17.7	%	28.7	%
Fixed 2^nd	4.9%	3.8	%	1.6	%
Interest only 1^st	21.1%	12.6	%	0.7	%
40-Year	13.4%	0.0	%	0.0	%
Other	2.2%	0.3	%	0.4	%
Percentage of fixed-rate mortgages	20.0%	22.1	%	30.4	%
Percentage of adjustable-rate mortgages	80.0%	77.9	%	69.6	%
Percentage of first mortgage loans owner-occupied	91.7%	92.6	%	92.9	%
Loan purpose:
Cash-out refinance	60.2%	63.5	%	67.1	%
Purchase	35.0%	30.8	%	26.0	%
Rate or term refinance	4.8%	5.7	%	6.9	%

WHOLESALE. Wholesale loan originations involve an independent broker who assists the borrower in completing the loan application, which includes securing information regarding their assets, liabilities, income, credit history, employment history and personal information. We require a credit report on each applicant from an industry-recognized credit reporting company. In evaluating an applicant’s credit history, we use credit bureau risk scores, generally known as a FICO score, which is a statistical ranking of likely future credit performance developed by Fair, Isaac & Company and provided by the three national credit data repositories. Qualified independent appraisers are required to appraise mortgaged properties used to secure mortgage loans. The broker then identifies a lender who offers a loan product best suited to the borrower’s financial needs. No one broker currently originates more than 0.7% of our total non-prime production.

Upon receipt of an application from a broker, a credit report and an appraisal report, one of our branch offices processes and underwrites the loan. Our underwriting guidelines require mortgage loans be underwritten in a standardized procedure that complies with federal and state laws and regulations. The guidelines are primarily intended to assess the value of the mortgaged property, evaluate the adequacy of the property as collateral for the mortgage loan, and assess the creditworthiness

of the related borrower. The underwriting process may include an automated underwriting decision system as a tool to assist in the assessment of the creditworthiness of the borrower. Based upon this assessment, we advise the broker whether the loan application meets our underwriting guidelines and product description by issuing a loan approval or denial. In some cases, we issue a “conditional approval,” which requires the submission of additional information or clarification. The mortgage loans are underwritten with a view toward resale in the secondary market.

RETAIL. HRBMC originates our retail mortgage loans. In fiscal year 2006, 69% of our retail originations were non-prime and 31% were prime, compared to 75% and 25%, respectively, in 2005. During fiscal year 2006, approximately 20% of HRBMC’s loans were made to existing H&R Block clients compared to 35% in 2005.

The application and approval process in our retail locations is similar to those described above under “Wholesale.”

SALE AND SECURITIZATION OF LOANS – Substantially all non-prime mortgage loans are sold daily to qualifying special purpose entities (Trusts). See discussion of our loan sale and securitization process in Item 7, under “Off-Balance Sheet Financing Arrangements.” At April 30, 2006, Option One held $407.5 million in loans for transfer to the H&R Block Bank when it commences operations in May 2006. These loans have been classified as held for investment on our consolidated balance sheet.

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

SERVICING – Loan servicing involves collecting and remitting mortgage loan payments, making required advances, accounting for principal and interest, holding escrow for payment of taxes and insurance and contacting delinquent borrowers. We receive loan-servicing fees monthly over the life of the mortgage loans. We only service non-prime mortgage loans. At the end of fiscal year 2006, we serviced 441,981 loans totaling $73.4 billion, compared to 435,290 loans totaling $68.0 billion at April 30, 2005 and 324,364 loans totaling $45.3 billion at April 30, 2004.

The following table summarizes our servicing portfolio by origin and includes related mortgage servicing rights (MSRs) as of April 30, 2006 and the rate we earned on each type of servicing during fiscal year 2006:

(dollars in 000s)

Type of Servicing

Principal Balance

MSR Balance

Rate Earned

Originated

62,813,849

272,472

0. 38

Sub-servicing

10,471,509

0. 18

Purchased

96,719

0. 50

Total

73,382,077

272,472

0. 38

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

GEOGRAPHIC DISTRIBUTION – The following table details the percent of non-prime loan origination volume and our loan origination branches by state, excluding our Retail channel, for fiscal years 2006 and 2005:


	2006					2005
	Percent of			Number of		Percent of			Number of
State	Volume			Branches		Volume			Branches

California		24.5	%		6		21.8	%		8
Florida		10.7	%		3		7.2	%		4
New York		9.1	%		2		11.5	%		2
Massachusetts		6.7	%		2		8.4	%		2
New Jersey		5.1	%		1		5.3	%		3
Other		43.9	%		20		45.8	%		23

COMPETITIVE CONDITIONS – Both the non-prime and prime sectors of the residential mortgage loan market are highly competitive. The principal methods of competition are price, service and product differentiation. There are a substantial number of companies competing in the residential loan market, including mortgage banking companies, commercial banks, savings associations, credit unions and other financial institutions. There are also numerous companies competing in the business of servicing non-prime loans. No one firm is a dominant supplier of non-prime and prime mortgage loans or a

dominant servicer of non-prime loans. Inside B&C Lending ranked Option One as the number seven originator, based on market share as of March 31, 2006, and the number three servicer, based on servicing volume as of March 31, 2006, of non-prime loans in the industry.

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

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

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

Under environmental legislation and case law applicable in certain states, it is possible that liability for environmental hazards in respect of real property may be imposed on a holder of a deed to the property, which may impair the underlying collateral.

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

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

Certain state laws restrict or prohibit prepayment penalties on mortgage loans, and we relied on the federal Alternative Mortgage Transactions Parity Act (Parity Act) and related rules issued in the past by the OTS to preempt state limitations on prepayment penalties. In September 2003, the OTS released a new rule that reduced the scope of the Parity Act preemption effective July 1, 2004 and, as a result, we can no longer rely on the Parity Act to preempt state restrictions on prepayment penalties. The elimination of this federal preemption requires compliance with state restrictions on prepayment penalties. These restrictions prohibit us from charging any prepayment penalty in six states and restrict the amount or duration of prepayment penalties that we may impose in an additional eleven states. This places us at a competitive disadvantage relative to financial institutions that continue to enjoy federal preemption of such state restrictions. Such institutions can charge prepayment penalties without regard to state restrictions and, as a result, may be able to offer loans with interest rate and loan fee structures that are more attractive than the interest rate and loan fee structures that we are able to offer.

See discussion in “Risk Factors” for additional information.

BUSINESS SERVICES
GENERAL – Our Business Services segment offers middle-market companies accounting, tax and business consulting services. We have continued to expand the services we offer our clients by adding wealth management, retirement resources, payroll services, corporate finance and financial process outsourcing. Segment revenues constituted 18.0% of our consolidated revenues for fiscal year 2006, 13.0% for 2005 and 11.8% for 2004.

This segment consists primarily of RSM McGladrey, Inc., which provides accounting, tax, and business consulting services from 125 offices in 26 states and offers services in 18 of the top 25 U.S. markets.

Services are also provided through the following businesses:

	•		RSM McGladrey Retirement Resources administers retirement plans, helps clients design the best plan for their needs, and provides retirement plan investment advice, year-end compliance, tax reporting and consulting.
	•		RSM EquiCo, Inc. is an investment banking firm specializing in business valuations, acquisitions and divestitures for private middle-market businesses.
	•		RSM McGladrey Employer Services, Inc. is a provider of payroll and benefits administration services to middle-market businesses.
	•		RSM McGladrey Financial Process Outsourcing, Inc. is a provider of accounting, reporting, payroll and bill paying services to distributors/franchisors and their population of retailers/franchisees.
	•		PDI Global, Inc. provides marketing, communications and visibility programs, tax and financial planning guides, and marketing and management consulting services to accountants, consultants, lawyers, banks, insurers, and other financial service providers.

From time to time, we have acquired businesses, and will continue to do so if future conditions warrant and satisfactory terms can be negotiated. During fiscal year 2006, we paid $190.7 million to acquire all the outstanding common stock of American Express Tax and Business Services, Inc., which has been merged into RSM McGladrey, Inc.

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

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

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

GOVERNMENT REGULATION – Many of the same federal and state regulations relating to tax preparers and the information concerning tax reform discussed above in the “Government Regulation” section of “Tax Services” apply to the Business Services segment as well. However, accountants are not subject to the same prohibition on the use or disclosure of certain income tax return information as tax professionals. Accounting firms are also subject to state and federal regulations governing accountants, auditors and financial planners. Various legislative and regulatory proposals have been made relating to auditor independence and accounting oversight, among others. Some of these proposals, if adopted, could have an impact on our operations. We believe current state and federal regulations and known legislative and regulatory proposals do not and will not have a material adverse effect on our operations, but we cannot predict what the effect of future legislation, regulations and proposals may be.

Auditor independence rules of the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) apply to the Attest Firms as public accounting firms. In applying its auditor independence rules, the SEC views us and the Attest Firms as a single entity and requires that the SEC independence rules for the Attest Firms apply to RSM McGladrey and that we be independent of any SEC audit client of the Attest Firms. The SEC regards any financial interest or prohibited business relationship we have with a client of the Attest Firms as a financial interest or prohibited business relationship between the Attest Firms and the client for purposes of applying its auditor independence rules.

We and the Attest Firms have jointly developed and implemented policies, procedures and controls designed to ensure

the Attest Firms’ independence and integrity as an audit firm in compliance with applicable SEC regulations and professional responsibilities. These policies, procedures and controls are designed to monitor and prevent violations of applicable independence rules and include, among other things, (1) informing our officers, directors and other members of senior management concerning auditor independence matters, (2) procedures for monitoring securities ownership, (3) communicating with SEC audit clients regarding the SEC’s interpretation and application of relevant independence rules and guidelines, and (4) requiring RSM employees to comply with the Attest Firms’ independence and relationship policies (including the Attest Firms’ independence compliance questionnaire procedures). We believe these policies, procedures and controls are adequate, although there can be no assurances they will result in compliance with applicable independence rules and requirements. Any noncompliance could cause the Attest Firms to lose the ability to perform audits for firms subject to regulation by the SEC.

See discussion in “Risk Factors” for additional information.

INVESTMENT SERVICES
GENERAL – Our Investment Services segment provides advice-based brokerage services and investment planning through HRBFA to our clients in the U.S. Services offered to our customers include traditional brokerage services, as well as annuities, insurance, fee-based accounts, online account access, equity research and focus lists, model portfolios, asset allocation strategies, and other investment tools and information. Segment revenues constituted 5.9% of our consolidated revenues for fiscal year 2006, and 5.4% of our consolidated revenues for fiscal years 2005 and 2004.

HRBFA is a registered broker-dealer with the SEC and is a member of the New York Stock Exchange (NYSE), other national securities exchanges, Securities Investor Protection Corporation (SIPC), and the National Association of Securities Dealers, Inc. (NASD). HRBFA is also a registered investment advisor.

The integration of investment advice with our tax client base allows us to leverage an already established relationship. In the past three years, new service offerings have allowed us to shift our focus from a transaction-based client relationship to a more advice-based focus.

FINANCIAL SERVICES OFFERINGS – We offer a full range of financial services, including investment planning, college savings products, flexible brokerage accounts with cash management features, professionally managed accounts and a comprehensive line of insurance annuity products.

As previously discussed in “Tax Services,” we offer our tax clients the opportunity to open an Express IRA through HRBFA as a part of the tax return preparation process. Clients opened approximately 67,000 Express IRAs during tax season 2006, approximately 106,500 in 2005 and approximately 145,400 in 2004.

We act as a dealer in fixed income securities including corporate and municipal bonds, various U.S. Government and U.S. Government Agency securities and certificates of deposit.

CUSTOMER ACTIVITY – Customer trades in fiscal year 2006 totaled approximately 1.0 million, compared to approximately 0.9 million in 2005 and approximately 1.0 million in 2004. Average revenue per trade was $119.11 in fiscal year 2006, compared to $123.33 in 2005 and $119.36 in 2004. We had 418,162 traditional brokerage accounts at April 30, 2006, compared to 431,749 at 2005 and 463,736 at 2004. Assets under administration totaled $31.8 billion, $27.8 billion and $26.7 billion at April 30, 2006, 2005 and 2004, respectively.

FINANCIAL ADVISORS – Key to our future success are retaining and recruiting productive financial advisors. One of our key initiatives in fiscal year 2006 was to build revenues by attracting and retaining productive advisors.

During fiscal years 2006, 2005 and 2004, we added 193, 258 and 255 advisors, respectively. These additions were offset by attrition of 257, 233 and 230 advisors, respectively. Our overall retention rate for fiscal year 2006 was approximately 75%, essentially flat with the prior year. The retention rate for our higher-producing advisors was approximately 87%, down from 92% in 2005. Advisor productivity by recruitment class is as follows:

(in 000s)


	Revenue		Total Production
	Per Advisor		Revenues

FISCAL YEAR 2006 —
Pre-2004 class	$	250	$	137,212
2004 recruits		157		19,579
2005 recruits		109		19,942
2006 recruits		111		13,741

FISCAL YEAR 2005 —
Pre-2003 class	$	230	$	121,342
2003 recruits		114		16,416
2004 recruits		98		19,941
2005 recruits		65		8,203

FISCAL YEAR 2004 —
Pre-2003 class	$	216	$	135,128
2003 recruits		84		17,717
2004 recruits		61		7,664

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

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

As of April 30, 2006, our Preferred Partner Program had 9,552 active tax partners, of which 705 were licensed. We had 6,442 active tax partners, of which 686 were licensed at the end of fiscal year 2005. As a result of this initiative, we added more than 17,000 new customer accounts and assets totaling $764.3 million during fiscal year 2006. We expect to continue to increase the number of tax partners in the coming year.

INTEGRATED ONLINE SERVICES – We have an online investment center on our website at www.hrblock.com. Online users have the opportunity to open accounts, obtain research, create investment plans, buy and sell securities, and view the status of their accounts.

OFFICE LOCATIONS – HRBFA is authorized to do business as a broker-dealer in all 50 states, the District of Columbia and Puerto Rico. At the end of fiscal year 2006, we operated 219 branch offices, compared to approximately 257 offices in 2005 and 358 in 2004. The reduced number of branch offices is primarily due to the evolution of our tax-partnering program, in which financial advisors are located in retail tax offices, and the consolidation of smaller branches. At April 30, 2006, we had 73 offices co-located with retail tax and mortgage offices. We believe the existence of these locations contributes to our growth and client satisfaction.

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

Discount brokerage firms and online-only financial services providers compete vigorously with HRBFA with respect to commission charges. Some full-commission brokerage firms also offer greater product breadth, discounted commissions and more robust online services to selected retail brokerage customers. Additionally, some competitors in both the full-commission and discount brokerage industries have substantially increased their spending on advertising and direct solicitation of customers.

Competition in the online trading business has become similarly intense as recent expansion and customer acceptance of conducting financial transactions online has attracted new brokerage firms to the market.

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

SEASONALITY OF BUSINESS – The Investment Services segment does not, as a whole, experience significant seasonal fluctuations. The securities business is cyclical, however, and directly affected by national and global economic and political conditions, trends in business and finance and changes in the conditions of the securities markets in which our clients invest, as well as fluctuating interest rates.

GOVERNMENT REGULATION – The securities industry is subject to extensive regulation, including registration of our offices and personnel, sales methods, the acceptance and execution of customer orders, the handling of customer funds and securities, trading practices, capital structure, record keeping policies and practices, margin lending, execution and settlement of transactions, the conduct of directors, officers and employees, and the supervision of employees. The various governmental authorities and industry self-regulatory organizations that have supervisory and regulatory jurisdiction over us generally have broad enforcement powers to censure, fine, issue cease-and-desist orders or suspend or expel a broker-dealer or any of its officers or employees who violate applicable laws or regulations.

The SEC is the federal agency responsible for the administration of the federal securities laws. The SEC has delegated much of the regulation of broker-dealers to self-regulatory organizations, principally the NASD, Municipal

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

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

EMPLOYEES –
We have approximately 16,000 regular full-time employees. The highest number of persons we employed during the fiscal year ended April 30, 2006, including seasonal employees, was approximately 134,500.

AVAILABILITY OF REPORTS AND OTHER INFORMATION –
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed with or furnished to the SEC are available, free of charge, through our website at www.hrblock.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.

Copies of the following corporate governance documents are posted on our website: (1) The Amended and Restated Articles of Incorporation of H&R Block, Inc., (2) The Amended and Restated Bylaws of H&R Block, Inc., (3) The H&R Block, Inc. Corporate Governance Guidelines, (4) the H&R Block, Inc. Code of Business Ethics and Conduct, (5) the H&R Block, Inc. Audit Committee Charter, (6) the H&R Block, Inc. Governance and Nominating Committee Charter, and (7) the H&R Block, Inc. Compensation Committee Charter. If you would like a printed copy of any of these corporate governance documents, please send your request to the Office of the Secretary, H&R Block, Inc., 4400 Main Street, Kansas City, Missouri 64111.

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

ITEM 1A. RISK FACTORS
In this report, and from time to time throughout the year, we share our expectations for the Company’s future performance. The following explains the critical risk factors impacting our business and reasons actual results may differ from our expectations. This discussion does not intend to be a comprehensive list and there may be other risks and factors that may have an effect on our business.

LIQUIDITY AND CAPITAL – We use capital primarily to fund working capital requirements, pay dividends, repurchase shares of our common stock and acquire businesses. We are dependent on the use of our off-balance sheet arrangements to fund our daily non-prime originations and the secondary market to securitize and sell mortgage loans and residual interests. See Item 7, under “Off-Balance Sheet Financing Arrangements.” We are also dependent on commercial paper issuances and/or bank lines to fund RAL participations and seasonal working capital needs. A disruption in such markets could adversely affect our access to these funds. To meet our future financing needs, we may issue additional debt or equity securities.

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

PRIVACY OF CLIENT INFORMATION – We manage highly sensitive client information in all of our operating segments, which is regulated by law. Problems with the safeguarding and proper use of this information could result in regulatory actions and negative publicity, which could adversely affect our reputation and results of operations.

INTERNAL CONTROL CERTIFICATION – We have documented and tested our internal control procedures in accordance with various SEC rules governing Section 404 of the Sarbanes-Oxley Act (SOX 404). SOX 404 requires us to assess the effectiveness of our internal controls over financial reporting annually, and obtain an opinion on the effectiveness of this internal control from our Independent Registered Public Accounting Firm. We may

encounter problems or delays in completing the review and evaluation, the implementation of improvements and the receipt of an attestation from our independent auditors. Additionally, management’s assessment of our internal controls over financial reporting may identify deficiencies that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Should we, or our independent auditors, determine in future periods that we have a material weaknesses in our internal controls over financial reporting, our results of operations or financial condition may be adversely affected and the price of our common stock may decline.

OPERATIONAL RISK – There is a risk of loss resulting from inadequate or failed processes or systems, theft or fraud. These can occur in many forms including, among others, errors, business interruptions, inappropriate behavior of or misconduct by our employees or those contracted to perform services for us, and vendors that do not perform in accordance with their contractual agreements. These events can potentially result in financial losses or other damages. We rely on internal and external information and technological systems to manage our operations and are exposed to risk of loss resulting from breaches in the security, or other failures of these systems. Replacement of our major operational systems could have a significant impact on our ability to conduct our core business operations and increase our risk of loss resulting from disruptions of normal operating processes and procedures that may occur during the implementation of new information and transaction systems.

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

REFUND ANTICIPATION LOANS – Changes in government regulation related to RALs could adversely affect our ability to offer RALs or our ability to purchase participation interests. Changes in IRS practices could adversely affect our ability to use the IRS debt indicator to limit our bad debt exposure. Changes in any of these, as well as possible litigation related to RALs, may adversely affect our results of operations. See discussion of RAL litigation in Item 3, “Legal Proceedings.”

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

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

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

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

COUNTERPARTY CREDIT RISK – Derivative instruments involve counterparty credit risk, which is the risk that a counterparty may fail to perform on its contractual obligations. We manage this risk through the use of a policy that includes

credit standard guidelines, counterparty diversification, monitoring of counterparty financial condition, use of master netting agreements with counterparties, and exposure limits based on counterparty credit, exposure amount and management risk tolerance. The policy is reviewed on an annual basis and as conditions warrant. See Item 7A, under “Mortgage Services,” and Item 8, note 8 to our consolidated financial statements for discussion of our derivative instruments.

REAL ESTATE MARKET – Our residual interests and beneficial interest in Trusts are secured by mortgage loans, which are in turn secured by residential real estate. Any material decline in real estate values would likely result in higher delinquencies, defaults and foreclosures. Additionally, a significant portion of the mortgage loans we originate or service is secured by properties in California. A decline in the economy or the residential real estate market values, or the occurrence of a natural disaster not covered by standard homeowners’ insurance policies, such as an earthquake, hurricane or wildfire, could decrease the value of mortgaged properties in California. Any sustained period of increased delinquencies, foreclosures or losses could harm our ability to originate and sell loans, the prices we receive on our loans, or the values of our mortgage servicing rights and residual interests in securitizations, which could adversely affect our financial condition and results of operations.

BUSINESS SERVICES
ALTERNATIVE PRACTICE STRUCTURE WITH ATTEST FIRMS – Our relationship with the Attest Firms requires us to comply with applicable regulations regarding the practice of public accounting and auditor independence rules and requirements. In addition, our relationship with the Attest Firms closely links our RSM McGladrey brand with the Attest Firms. If the Attest Firms were to encounter regulatory or independence issues resulting from their relationship with us or if significant litigation arose involving the Attest Firms or their services which implicated RSM McGladrey, our brand reputation and our ability to realize the mutual benefits of our relationship, such as the ability to attract and retain quality professionals, could be impaired.

INTEGRATION OF AMERICAN EXPRESS TAX AND BUSINESS SERVICES – The integration of American Express Tax and Business Services is proceeding according to plan. While we expect a successful integration, there is the potential that it could be delayed or otherwise impacted, which could adversely affect our financial condition and results of operations.

INVESTMENT SERVICES
REGULATORY ENVIRONMENT – The broker-dealer industry continues to come under increased scrutiny by federal and state regulators and self-regulatory organizations and, as a result, more focus has been placed on compliance issues. If we do not comply with these regulations, it could result in regulatory actions and negative publicity, which could adversely affect our results of operations and our ability to recruit and retain qualified advisors. Negative public opinion about our industry could damage our reputation even if we are in compliance with such regulations.

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES
We own our corporate headquarters, which is located in Kansas City, Missouri. We have leased additional office space for corporate, Tax Services and Investment Services personnel, as necessary, in Kansas City, Missouri.

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

Option One’s executive offices are located in leased offices in Irvine, California. Option One also leases offices for its loan origination and servicing centers and branch office operations

throughout the U.S. HRBMC is headquartered in leased offices in Irvine, California. HRBMC also leases offices for its loan origination centers and branch office operations throughout the U.S.

The executive offices of HRBFA are located in leased offices in Detroit, Michigan. Branch offices are operated throughout the U.S., in a combination of leased and owned facilities.

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

We began construction of new corporate headquarters during fiscal year 2005, which will allow us to consolidate the majority of our Kansas City-based personnel into one facility. The new building will be located in downtown Kansas City, Missouri and we expect it to be completed in fiscal year 2007.

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

ITEM 3. LEGAL PROCEEDINGS
The information below should be read in conjunction with the information included in Item 8, note 17 to our consolidated financial statements.

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

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

On December 21, 2005, we entered into a settlement agreement regarding four RAL Cases entitled Deadra D. Cummins, et al. v. H&R Block, Inc. et al.; Mitchell v. H&R Block, Inc. et al.; Green v. H&R Block, Inc. et al.; and Becker v. H&R Block, Inc. (the “Cummins Settlement Agreement”). Pursuant to the Cummins Settlement Agreement, we will contribute a total of up to $62.5 million in cash for purposes of making payments to the settlement class, paying all attorneys’ fees and costs to class counsel and covering service awards to the representative plaintiffs. In addition, we paid costs for providing notice of the settlement to settlement class members. We recorded an additional reserve of $50.7 million related to this settlement in fiscal year 2006 to fully reserve for the settlement amount.

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

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

Lynne A. Carnegie, et al. v. Household International, Inc., H&R Block, Inc., et al., (formerly Joel E. Zawikowski, et al. v. Beneficial National Bank, H&R Block, Inc., Block Financial Corporation, et al.) Case No. 98 C 2178, United States District Court for the Northern District of Illinois, Eastern Division, instituted on April 18, 1998. This case is stayed and will be resolved as part of the Carnegie Settlement Agreement.

Deadra D. Cummins, et al. v. H&R Block, Inc., et al., Case No. 03-C-134 in the Circuit Court of Kanawha County, West Virginia, instituted on January 22, 2003. The court approved the terms of the Cummins Settlement Agreement at a hearing held on June 8, 2006, and the settlement will become final upon the expiration of the period for objectors to appeal the court’s approval.

Joyce Green, et al. v. H&R Block, Inc., Block Financial Corporation, et al., Case No. 97195023, in the Circuit Court for Baltimore City, Maryland, instituted on July 14, 1997; Levon and Geral Mitchell, et al. v. H&R Block, Inc. and Ruth Wren, Case No. CV-95-2067, in the Circuit Court of Mobile County, Alabama, instituted on June 13, 1995; and Lynn Becker v. H&R Block, Inc., Case No. CV-2004-03-1680 in the Court of Common Pleas, Summit County, Ohio, Instituted on April 15, 2004. These cases are stayed and will be resolved as part of the Cummins Settlement Agreement.

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

The People of California v. H&R Block, Inc., H&R Block Services, Inc., H&R Block Enterprises, Inc., H&R Block Tax Services, Inc., Block Financial Corporation, HRB Royalty, Inc. and Does 1 through 50, Case No. C 06 2058 SC, in the United States District Court for the Northern District of California, instituted on February 15, 2006 (alleging, among other things, untrue, misleading or deceptive statements in marketing RALs and unfair competition with respect to debt collection activities; seeks equitable relief, civil penalties and restitution). The case was removed to federal court on March 17, 2006, and a motion was filed to add HSBC as a necessary party to the case. The California attorney general is seeking to remand the case to state court.

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

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

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

EXPRESS IRA LITIGATION – On March 15, 2006, the New York Attorney General filed a lawsuit in the Supreme Court of the State of New York, County of New York entitled The People of New York v. H&R Block, Inc. and H&R Block Financial Advisors, Inc. The complaint alleges fraudulent business practices, deceptive acts and practices, common law fraud and breach of fiduciary duty with respect to the Express IRA product. The complaint seeks equitable relief, disgorgement of profits, damages and restitution, civil penalties and punitive damages. A number of civil actions were subsequently filed against us concerning the matter. We intend to defend these cases vigorously, but there are no assurances as to their outcome.

SECURITIES AND SHAREHOLDER DERIVATIVE LITIGATION – Over a period of several weeks beginning on March 16, 2006, eight shareholder derivative actions were initiated against certain of the Company’s current and former directors and officers (two of which were subsequently dismissed voluntarily by the plaintiffs). These cases were purportedly brought on behalf of the Company, which is named as a “nominal defendant.” These cases generally involve allegations of breach of fiduciary duty, abuse of control, gross mismanagement, waste and unjust enrichment pertaining to (i) the Company’s restatement of financial results due to errors in determining the Company’s state effective income tax rate and (ii) certain of the Company’s products and other business activities. We intend to defend these cases vigorously, but there are no assurances as to their outcome. The shareholder derivative cases that currently have not been dismissed are Hibbard v. H&R Block, Inc., et al., in the United States District Court for the Western District of Missouri, Case No. 5:06-cv-06059-RED (instituted on May 16, 2006); Gottlieb v. H&R Block, et al., in the Circuit Court of Jackson County, Missouri, Case No. 0616-CV-14109 (instituted on June 5, 2006); Lebowitz v. H&R Block, et al.,, in the Circuit Court of Jackson County, Missouri, Case No. 0616-CV-14124 (instituted on June 5, 2006); Staehr v. H&R Block, Inc., et al., in the United States District Court for the Western District of Missouri, Case No. 4:06-cv-00284-GAF (instituted on April 5, 2006); Momentum Partners v. H&R Block, et al., in the United States District Court for the Western District of Missouri, Case No. 06-cv-00465-SWH (instituted on June 8, 2006); and Iron Workers Local 16 Pension Fund v. H&R Block, et al., in the United States District Court for the Western District of Missouri, Case No. 06-cv-00466-ODS (instituted on June 8, 2006).

In addition to the shareholder derivative actions, five putative class actions alleging violations of certain securities laws were filed beginning in March 2006 (two of which were subsequently dismissed by the plaintiffs). These actions allege, among other things, deceptive, material and misleading financial statements, failure to prepare financial statements in accordance with generally accepted accounting principles and concealment of the potential for lawsuits stemming from the allegedly fraudulent nature of the Company’s operations. The actions seek unspecified damages and equitable relief. We intend to defend these cases vigorously, but there are no assurances as to their outcome. The cases that have not been dismissed are Nettie v. H&R Block, Inc. and Mark A. Ernst in the United States District Court in the Western District of Missouri, Case No. 06-0235-CV-W-ODS (instituted on March 17, 2006); Winters v. H&R Block, Inc., et al., in the United States District Court in the Western District of Missouri, Case No. 04:06-CV-00243-NKL (instituted on March 20, 2006); New Jersey Carpenters Pension Fund v. H&R Block, Inc., et al., in the United States District Court in the Southern District of New York, Case No. 06-CV-2204-KMK (instituted on March 21, 2006); and Kadagian v. H&R Block, Inc., et al., in the United States District Court in the Southern District of New York, Case No. 06-CV-2306-KMK (instituted on March 24, 2006).

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

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

We have from time to time been party to claims and lawsuits not discussed herein arising out of our business operations. These claims and lawsuits include actions by state attorneys general, individual plaintiffs, and cases in which plaintiffs seek to represent a class of similarly situated customers. The amounts claimed in these claims and lawsuits are substantial in some instances, and the ultimate liability with respect to such litigation and claims is difficult to predict. Some of these claims and lawsuits pertain to RALs, the electronic filing of customers’ income tax returns, the POM guarantee program and our Express IRA program. We believe we have meritorious defenses to each of these claims, and we are defending or intend to defend them vigorously, although there is no assurance as to their outcome.

In addition to the aforementioned types of cases, we are parties to claims and lawsuits that we consider to be ordinary, routine litigation incidental to our business, including claims and lawsuits (Other Claims) concerning investment products, the preparation of customers’ income tax returns, the fees

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

No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2006.

PART II


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

H&R Block’s common stock is traded principally on the NYSE and is also traded on the Pacific Exchange. The information called for by this item with respect to H&R Block’s common stock appears in Item 8, note 20 to our consolidated financial statements. The remaining information called for by this item relating to “Securities Authorized for Issuance under Equity Compensation Plans” is reported in Item 8, note 12 to our consolidated financial statements. On June 15, 2006, there were 24,935 shareholders of record and the closing stock price on the NYSE was $23.50 per share.

A summary of our purchases of H&R Block common stock during the fourth quarter of fiscal year 2006 is as follows:

(shares in 000s)

Average

Total Number of Shares

Maximum Number of

Total Number of

Price Paid

Purchased as Part of Publicly

Shares that May Be Purchased

Shares Purchased⁽²⁾

per Share

Announced Plans or Programs ⁽¹⁾

Under the Plans or Programs ⁽¹⁾

February 1 – February 28

24.09

10,494

March 1 – March 31

25.17

10,494

April 1 – April 30

22.05

10,494


⁽¹⁾		On June 9, 2004, our Board of Directors approved the repurchase of 15 million shares of H&R Block common stock. This authorization has no expiration date.

⁽²⁾		All shares were purchased in connection with funding employee income tax withholding obligations arising upon the exercise of stock options or the lapse of restrictions on restricted shares.

ITEM 6. SELECTED FINANCIAL DATA
We derived the selected consolidated financial data presented below as of and for each of the five years in the period ended April 30, 2006 from our consolidated financial statements. The data set forth below should be read in conjunction with Item 7 and our consolidated financial statements in Item 8.

(in 000s, except per share amounts)


April 30,		2006		2005		2004		2003		2002

Revenues	$	4,872,801	$	4,420,019	$	4,247,880	$	3,731,126	$	3,311,943
Net income before change in accounting principle		490,408		623,910		700,452		477,615		441,287
Net income		490,408		623,910		694,093		477,615		441,287
Basic earnings per share:
Net income before change in accounting principle	$	1.49	$	1.88	$	1.98	$	1.33	$	1.21
Net income		1.49		1.88		1.96		1.33		1.21
Diluted earnings per share:
Net income before change in accounting principle	$	1.47	$	1.85	$	1.94	$	1.30	$	1.17
Net income		1.47		1.85		1.92		1.30		1.17
Total assets	$	5,989,135	$	5,538,056	$	5,233,827	$	4,666,502	$	4,396,731
Long-term debt		417,539		923,073		545,811		822,302		868,387
Dividends per share	$	0.49	$	0.43	$	0.39	$	0.35	$	0.32

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are a diversified company with subsidiaries delivering tax, investment, mortgage and business services and products. We are the only major company offering a full range of software, online and in-office tax preparation solutions, combined with personalized financial advice concerning retirement savings, home ownership and other opportunities to help clients build a better financial future.

Our key strategic priorities can be summarized as follows:

•

Tax Services – expand access to our services through improved distribution of our digital offerings and expanding our network of retail offices, continue to improve the quality of service we provide to our clients.

•

Mortgage Services – sustain market share while focusing on our cost structure to lower our cost of origination, distinguish our service quality, minimize risk and volatility in performance and optimize value from secondary markets.

•		Business Services — continue expansion of our national accounting, tax and consulting business, complete the integration of our American Express Tax and Business Services acquisition, build and manage brand awareness, build differentiated and value-driven services and improve our client service culture.

•		Investment Services — attract and retain productive advisors, serve the broad consumer market through advisory relationships, integrate the Tax Services client base into this segment and work to align the segment’s cost structure with its revenues.

On February 22, 2006, we determined it was appropriate to restate our previously issued consolidated financial statements, including financial statements for the three and six months ended July 31, 2005 and October 31, 2005, respectively, and financial statements for the fiscal years ended April 30, 2005 and 2004 and all related interim periods. We arrived at this conclusion during the course of our closing process for the quarter ended January 31, 2006. All prior year periods presented reflect the impact of the restatement described above.

(in 000s, except per share amounts)

Consolidated Results of Operations


Year ended April 30,		2006			2005			2004

REVENUES –
Tax Services	$	2,451,806		$	2,358,293		$	2,191,177
Mortgage Services		1,247,138			1,246,018			1,323,709
Business Services		877,259			573,316			499,210
Investment Services		287,955			239,244			229,470
Corporate		8,643			3,148			4,314

	$	4,872,801		$	4,420,019		$	4,247,880

PRETAX INCOME (LOSS) –
Tax Services	$	589,766		$	663,518		$	638,493
Mortgage Services		321,616			496,093			688,523
Business Services		53,378			29,871			19,312
Investment Services		(32,835	)		(75,370	)		(75,614	)
Corporate		(104,532	)		(96,397	)		(107,739	)

		827,393			1,017,715			1,162,975
Income taxes		336,985			393,805			462,523

Net income before change in accounting principle		490,408			623,910			700,452
Cumulative effect of change in accounting principle		-			-			(6,359	)

Net income	$	490,408		$	623,910		$	694,093

Basic earnings per share	$	1.49		$	1.88		$	1.96
Diluted earnings per share		1.47			1.85			1.92

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

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

GAINS ON SALES OF MORTGAGE ASSETS – We sell substantially all of the non-prime mortgage loans we originate to the Trusts, which are qualifying special purpose entities (QSPEs), with servicing rights generally retained. Prime mortgage loans are sold in loan sales, servicing released, to third-party buyers. Gains on sales of mortgage assets are recognized when control of the assets is surrendered (when loans are sold to the Trusts) and are based on the difference between cash proceeds and the allocated cost of the assets sold, including any guarantees or recourse obligations. Other components of gain on sales of mortgage loans include gains or losses on derivatives, loan sale repurchase reserves and direct origination and acquisition expenses.

We determine the allocated cost of assets sold based on the relative fair values of cash proceeds, MSRs, any guarantee or recourse liabilities to be recorded at the date of sale and the beneficial interest in Trusts, which represents our residual interest in the ultimate expected outcome from the disposition of the loans by the Trusts. The relative fair value of the MSRs and the beneficial interest in Trust is determined using discounted cash flow models, which require various management assumptions, limited by the ultimate expected outcome from the disposition of the loans by the Trusts (see discussion below in “Valuation of Residual Interests” and “Valuation of Mortgage Servicing Rights”). The following is an example of a hypothetical gain on sale calculation:


	(in 000s)

Acquisition cost of underlying mortgage loans	$	1,000,000
Fair values:
Net proceeds	$	995,000
Beneficial interest in Trusts		20,000
MSRs		7,000

	$	1,022,000


Computation of gain on sale:
Net proceeds	$	995,000
Less allocated cost ($995,000 / $1,022,000 x $1,000,000)		973,581

Recorded gain on sale	$	21,419

Recorded beneficial interest in Trusts ($20,000 / $1,022,000 x $1,000,000)	$	19,570

Recorded value of MSRs ($7,000 / $1,022,000 x $1,000,000)	$	6,849

Variations in the assumptions we use affect the estimated fair values and the reported gains on sales. Gains on sales of mortgage loans totaled $575.4 million, $772.1 million and $915.6 million for fiscal years 2006, 2005 and 2004, respectively.

See discussion in “Off-Balance Sheet Financing Arrangements” related to the disposition of the loans by the Trusts and subsequent securitization by the Company.

VALUATION OF RESIDUAL INTERESTS – We use discounted cash flow models to determine the estimated fair values of our residual interests. We develop our assumptions for expected credit losses, prepayment speeds, discount rates and interest rates based on historical experience and third-party market sources. Variations in our assumptions could materially affect the estimated fair values, which may require us to record impairments or unrealized gains. In addition, variations will also affect the amount of residual interest accretion recorded on a monthly basis. Available-for-sale (AFS) residual interests valued at $159.1 million and $205.9 million were recorded as of April 30, 2006 and 2005, respectively. We recorded $35.3 million in net write-ups in other comprehensive income and $34.1 million in impairments in the income statement related to these residual interests during fiscal year 2006 as actual performance differed from our assumptions. See Item 8, note 1 to our consolidated financial statements for our methodology used in valuing residual interests. See Item 8, note 5 to our consolidated financial statements for current assumptions and a sensitivity analysis of those assumptions. See Item 7A for sensitivity analysis related to interest rates.

VALUATION OF MORTGAGE SERVICING RIGHTS – MSRs are carried at the lower of cost or fair value. We use discounted cash flow models to determine the estimated fair values of our MSRs. Fair values take into account the historical prepayment activity of the related loans and our estimates of the remaining future cash flows to be generated through servicing the underlying mortgage loans. Variations in our assumptions could materially affect the estimated fair values, which may require us to record impairments.

Prepayment speeds are somewhat correlated with the movement of market interest rates. As market interest rates decline there is a corresponding increase in actual and expected borrower prepayments as customers refinance existing mortgages under more favorable interest rate terms. This in turn reduces the anticipated cash flows associated with servicing resulting in a potential reduction, or impairment, to the fair value of the capitalized MSR. Prepayment rates are estimated based on historical experience and third-party market sources. Many non-prime loans have a prepayment penalty in place for the first two to three years, which has the effect of making prepayment speeds more predictable, regardless of market interest rate movements. If actual prepayment rates prove to be higher than the estimate made by management, impairment of the MSRs could occur.

MSRs valued at $272.5 million and $166.6 million were recorded as of April 30, 2006 and 2005, respectively. See Item 8, note 1 to our consolidated financial statements for our methodology used in stratifying and valuing MSRs. See Item 8, note 5 to our consolidated financial statements for current assumptions and a sensitivity analysis of those assumptions.

VALUATION OF GOODWILL – Our goodwill impairment analysis is based on a discounted cash flow approach and market comparables, when available. This analysis, at the reporting unit level, requires significant management judgment with respect to revenue and expense forecasts, anticipated changes in working capital, and the selection and application of an appropriate discount rate. Changes in the projections or assumptions could materially affect fair values. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could effect our conclusions regarding the existence or amount of potential impairment.

Our goodwill balance was $1.1 billion as of April 30, 2006 and $1.0 billion as of April 30, 2005. No goodwill impairments were identified during fiscal years 2006, 2005 or 2004.

LITIGATION – Our policy is to routinely assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after thoughtful analysis of each known issue and an analysis of historical experience in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” and related pronouncements. Therefore, we have recorded reserves related to certain legal matters for which we believe it is probable that a loss has been incurred and the range of such loss can be estimated. With respect to other matters, we have concluded that

a loss is only reasonably possible or remote and, therefore, no liability is recorded.

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

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

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

OTHER SIGNIFICANT ACCOUNTING POLICIES – Other significant accounting policies, not involving the same level of judgment of uncertainty as those discussed above, are nevertheless important to an understanding of the financial statements. These policies may require judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by accounting standard setters and regulators. Although specific conclusions reached by these standard setters may cause a material change in our accounting policies, outcomes cannot be predicted with confidence. Also see Item 8, note 1 to our consolidated financial statements, which discusses accounting policies we have selected when there are acceptable alternatives, and new or proposed accounting standards that may affect our financial reporting in the future.

RESULTS OF OPERATIONS –
Our business is divided into four reportable segments: Tax Services, Mortgage Services, Business Services and Investment Services.

TAX SERVICES
This segment primarily consists of our income tax preparation businesses — retail, online and software. This segment includes our tax operations in the United States, Canada, Australia and the United Kingdom.



Tax Services – Operating Statistics	(in 000s, except average fee)

Year Ended April 30,	2006		2005⁽¹⁾		2004⁽¹⁾

CLIENTS SERVED –
United States:
Company-owned operations		10,359		10,608		10,627
Franchise operations		5,373		5,428		5,460

		15,732		16,036		16,087
Digital tax solutions ⁽²⁾		3,721		3,017		3,234

		19,453		19,053		19,321
International ⁽³⁾		2,459		2,333		2,253

		21,912		21,386		21,574

GROSS AVERAGE FEE PER CLIENT SERVED ⁽⁴⁾ –
Company-owned operations	$	169.58	$	158.19	$	146.34
Franchise operations		143.52		135.98		127.91

	$	160.68	$	150.67	$	140.09

NET AVERAGE FEE PER CLIENT SERVED ⁽⁵⁾ –
Company-owned operations	$	162.91	$	153.53	$	142.51
RALs⁽⁶⁾ –
Company-owned operations		2,542		2,667		2,713
Franchise operations		1,487		1,499		1,508

		4,029		4,166		4,221


⁽¹⁾		Company-owned and franchise data for fiscal years 2005 and 2004 have not been restated for franchise acquisitions.

⁽²⁾		Includes TaxCut federal units sold, online completed and paid federal returns, and state returns and e-filings only when no payment was made for a federal return.

⁽³⁾		In the current year, the end of the Canadian tax season was extended from April 30 to May 1, 2006. Clients served in our international operations in fiscal year 2006 includes approximately 41,400 returns in both company-owned and franchise offices which were accepted by the client on May 1, 2006. The revenues related to these returns will be recognized in fiscal year 2007. In the prior year, the end of the Canadian tax season was extended to May 2, 2005. Clients served in our international operations in fiscal year 2005 includes approximately 47,500 returns which were accepted by the client on May 1 and 2, 2005. The revenues related to these returns were recognized in fiscal year 2006.

⁽⁴⁾		Calculated as gross tax preparation and related fees divided by clients served (U.S. only).

⁽⁵⁾		Calculated as gross tax preparation and related fees, less discounts and coupons, divided by clients served (U.S. only).

⁽⁶⁾		Data is for tax season (January 1 – April 30) only.



Tax Services – Financial Results					(in 000s)

Year Ended April 30,	2006		2005		2004

Service revenues:
Tax preparation and related fees	$	1,793,325	$	1,718,867	$	1,589,439
Other services		204,968		193,163		172,517

		1,998,293		1,912,030		1,761,956
Royalties		207,728		197,551		184,882
RAL participation fees		177,852		182,784		168,375
Other		67,933		65,928		75,964

Total revenues		2,451,806		2,358,293		2,191,177

Cost of services:
Compensation and benefits		765,868		726,654		672,066
Occupancy		317,030		281,772		255,516
Supplies		52,894		47,703		40,792
Depreciation and amortization		44,846		54,579		48,808
Bad debt		31,927		33,046		27,328
Allocated shared services and other		102,711		103,560		92,137

		1,315,276		1,247,314		1,136,647
Provision for RAL litigation		70,200		-		-
Other, selling, general and administrative		476,564		447,461		416,037

Total expenses		1,862,040		1,694,775		1,552,684

Pretax income	$	589,766	$	663,518	$	638,493

FISCAL 2006 COMPARED TO FISCAL 2005 – Tax Services’ revenues increased $93.5 million, or 4.0%, compared to the prior year. We opened more than 750 new offices, 550 of which were part of the expansion of our company-owned retail distribution network. This expansion contributed incremental revenues of $36.4 million and pretax losses of $8.5 million in fiscal year 2006.

Tax preparation and related fees from our retail offices increased $74.5 million, or 4.3%, for fiscal year 2006. This increase is primarily due to an increase of 6.1% in the net average fee per U.S. client served, partially offset by a decrease of 2.3% in U.S. clients served in company-owned offices. The decrease in clients served was partially due to a number of technology problems that severely hurt the start of our filing season coupled with increased competition due to competitors’ refund lending products. Our international operations contributed $18.1 million to the increase, resulting from a 5.4% increase in clients served.

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

Royalty revenue increased $10.2 million, or 5.2%, due to a 5.5% increase in the gross average fee slightly offset by a 1.0% decline in clients served in franchise offices.

Revenues earned during fiscal year 2006 in connection with RAL participations decreased $4.9 million, or 2.7%, from fiscal year 2005. This decrease is primarily due to a decrease in the number of RALs, which resulted from increased competition for clients in the early months of the tax season.

Total expenses increased $167.3 million, or 9.9%, primarily due to $70.2 million of legal reserves and related litigation fees recorded in the current year. During the current year we entered into two settlement agreements. The first was a settlement agreement regarding four separate RAL cases covering 22 states. We also entered into a settlement agreement with the plaintiffs in another RAL case. See additional discussion below and in Item 8, note 17 to the consolidated financial statements.

Cost of services for the current year increased $68.0 million, or 5.4%, from the prior year. Our real estate expansion efforts have contributed to a total increase of $43.5 million across all cost of services categories. Compensation and benefits increased $39.2 million, or 5.4%, primarily due to an increase in staff needed for our new offices and the addition of costs related to our small business initiatives in the current year. Occupancy expenses increased $35.3 million, or 12.5%, primarily as a result of higher rent expenses, due to a 9.5% increase in company-owned offices under lease and a 7.3% increase in the average rent. Depreciation declined $9.7 million, or 17.8%, primarily due to decreased capital expenditures compared to the prior year.

Other, selling, general and administrative expenses increased $29.1 million, or 6.5%, primarily due to a $31.5 million increase in corporate shared services, $20.7 million of which was related to our marketing efforts. We also incurred $7.5 million in additional corporate wages and $7.1 million in additional legal costs in the current year. During the fourth quarter of fiscal year 2006, we revised our estimate for the provision for bad debt related to our participation interests in RALs. This change decreased our provision for bad debt $18.0 million during the fourth quarter of the current fiscal year. See additional discussion in Item 8, note 1 to the consolidated financial statements.

The pretax income for fiscal year 2006 decreased $73.8 million, or 11.1%, from 2005, primarily due to the impact of the current year RAL litigation.

FISCAL 2005 COMPARED TO FISCAL 2004 – Tax Services’ revenues increased $167.1 million, or 7.6%, compared to fiscal year 2004. In the U.S., we opened a net 1,252 new offices, 609 of which were part of the expansion of our company-owned retail distribution network. This expansion contributed incremental revenues of $24.9 million and pretax losses of $18.9 million in fiscal year 2005.

Tax preparation and related fees increased $129.4 million, or 8.1%. This increase is primarily due to a 7.7% increase in the net average fee per U.S. client served, resulting from increases in our pricing and the complexity of returns prepared. Clients served in our U.S. company-owned offices declined 0.2% from fiscal year 2004.

Revenue from our digital business increased 7.9%, primarily due to price increases, partially offset by a 6.7% decrease in clients served.

Other service revenues increased $20.6 million, or 12.0%, primarily as a result of additional revenues associated with RACs and Express IRAs.

Royalty revenues increased $12.7 million, or 6.9%, primarily due to a 6.3% increase in the gross average fee per client served at our franchise offices.

Revenues earned during fiscal year 2005 in connection with RAL participations increased $14.4 million, or 8.6%, over fiscal year 2004. This increase is primarily due to an increase in the dollar amount of loans in which we purchased participation interests, resulting from an increase in the fee charged by the lender, an increase in our clients’ average refund size and the maximum loan amount allowed by the lender.

Cost of services for fiscal year 2005 increased $110.7 million, or 9.7%, over the prior year. Compensation and benefits increased $54.6 million primarily due to increased revenues and an increase in the number of tax professionals and support staff needed in new office locations. Stock-based compensation related to our seasonal associates also increased $4.1 million. Occupancy expenses increased $26.3 million, or 10.3%, as a result of an 11.4% increase in U.S. company-owned offices under lease, which also drove increases in depreciation and amortization and supply costs. Of the total increase in occupancy expenses, $10.7 million was due to our real estate expansion. Other cost of services increased $11.4 million primarily due to additional expenses associated with our POM guarantee and Express IRAs.

Other, selling, general and administrative expenses increased $31.4 million over fiscal year 2004 primarily due to increased spending related to an $18.8 million increase in allocations from support departments and additional legal expenses of $10.2 million.

Pretax income of $663.5 million for fiscal year 2005 represents a 3.9% increase from the prior year. The segment’s operating margin declined 100 basis points to 28.1% in fiscal year 2005.

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

We are named as a defendant in one other class-action lawsuit and one state attorney general lawsuit alleging that we engaged in wrongdoing with respect to the RAL program. We believe we have strong defenses to the other lawsuits and will vigorously defend our position. Nevertheless, the amounts claimed in these lawsuits are, in some instances, very substantial, and there can be no assurances as to their ultimate outcome, or as to their impact on our financial statements. See additional discussion of RAL Litigation in Item 8, note 17 to the consolidated financial statements and in Part I, Item 3, “Legal Proceedings.”

MORTGAGE SERVICES
This segment is primarily engaged in the origination of non-prime mortgage loans through an independent broker network, the origination of non-prime and 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)

Year Ended April 30,	2006			2005			2004

VOLUME OF LOANS ORIGINATED –
Wholesale (non-prime)	$	36,028,794		$	26,977,810		$	20,150,992
Retail:Non-prime		3,260,071			3,005,168			1,846,674
Prime		1,490,898			1,018,746			1,258,347

	$	40,779,763		$	31,001,724		$	23,256,013

NON-PRIME LOAN CHARACTERISTICS –
Weighted average FICO score		622			614			608
Weighted average interest rate for borrowers (WAC)		7.87	%		7.36	%		7.39	%
Weighted average loan-to-value		80.6	%		78.9	%		78.7	%
Percentage with prepayment penalty		72.4	%		70.8	%		73.7	%
ORIGINATION MARGIN (% OF ORIGINATION VOLUME)⁽¹⁾ –
Loan sale premium		1.42	%		2.77	%		4.21	%
Residual cash flows from beneficial interest in Trusts		0.51	%		0.63	%		0.72	%
Gain (loss) on derivatives		0.35	%		0.15	%		(0.05	%)
Loan sale repurchase reserves		(0.18	%)		(0.13	%)		(0.20	%)
Retained MSRs		0.61	%		0.44	%		0.36	%

		2.71	%		3.86	%		5.04	%
Cost of acquisition		(0.37	%)		(0.54	%)		(0.50	%)
Direct origination expenses		(0.58	%)		(0.68	%)		(0.65	%)

Net gain on sale – gross margin ⁽²⁾		1.76	%		2.64	%		3.89	%
Other revenues		(0.02	%)		0.03	%		0.01	%
Other cost of origination		(1.33	%)		(1.55	%)		(1.68	%)

Net margin		0.41	%		1.12	%		2.22	%

Total cost of origination		1.91	%		2.23	%		2.33	%
Total cost of origination and acquisition		2.28	%		2.77	%		2.83	%
LOAN DELIVERY –
Loan sales	$	40,272,225		$	30,975,523		$	23,234,935
Execution price ⁽³⁾		1.58	%		3.01	%		4.09	%



Mortgage Services – Financial Results							(in 000s)

Year Ended April 30,	2006			2005			2004

Components of gains on sales:
Gain on mortgage loans	$	575,402		$	772,061		$	915,628
Gain (loss) on derivatives		141,223			46,853			(11,957	)
Gain on sales of AFS residual interests		31,463			15,396			40,689
Impairment of AFS residual interests		(34,107	)		(12,235	)		(26,063	)

		713,981			822,075			918,297

Interest income:
Accretion-residual interests		114,346			137,610			186,466
Other		18,722			11,850			5,064

		133,068			149,460			191,530

Loan-servicing revenue		398,992			273,056			211,710
Other		1,097			1,427			2,172

Total revenues		1,247,138			1,246,018			1,323,709

Cost of services		296,710			221,148			193,383
Cost of other revenues:
Compensation and benefits		293,781			239,997			206,238
Occupancy		45,116			37,336			28,418
Other		105,494			78,769			55,265

		444,391			356,102			289,921

Selling, general and administrative		184,421			172,675			151,882

Total expenses		925,522			749,925			635,186

Pretax income	$	321,616		$	496,093		$	688,523


⁽¹⁾		See “Reconciliation of Non-GAAP Financial Information” at the end of Item 7. Fiscal year 2006 excludes the impact of a restructuring charge.

⁽²⁾		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.

⁽³⁾		Defined as total premium received divided by total balance of loans delivered to third-party investors or securitization vehicles (excluding mortgage servicing rights and the effect of loan origination expenses).

FISCAL 2006 COMPARED TO FISCAL 2005 – Mortgage Services’ revenues were essentially flat compared to the prior year, with higher loan servicing revenues and gains on derivatives offset by lower margins on mortgage loans sold and lower accretion.

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

(dollars in 000s)


Year Ended April 30,	2006			2005

Application process:
Total number of applications		369,210			335,203
Number of sales associates ⁽¹⁾		2,814			3,526
Closing ratio ⁽²⁾		60.3	%		58.3	%
Originations:
Total number of originations		222,749			195,392
WAC		7.87	%		7.36	%
Average loan size (all loans)	$	183		$	159
Total originations	$	40,779,763		$	31,001,724
Direct origination and acquisition expenses, net	$	387,911		$	378,674
Revenue (loan value):
Net gain on sale – gross margin ⁽³⁾		1.76	%		2.64	%


⁽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.

Despite a 31.5% increase in loan origination volume, gains on sales of mortgage loans decreased $196.7 million, primarily as a result of moderating demand by loan buyers and rising two-year swap rates. Market interest rates, based on the two-year swap, increased from an average of 3.32% last year to 4.63% in the current year. However, our WAC increased only 51 basis points, up to 7.87% from 7.36% in the prior year. Due to competitive market conditions, we were unable to align our WAC with increases in market rates. As such, our loan sale premium declined 135 basis points, to 1.42% from 2.77% last year. In the current year, we also increased our loss reserves $11.6 million above our normal loss accrual, primarily related to repurchase activity related to early payment defaults, which reduced gains on sales of mortgage loans. The mortgage industry has seen an increase in early payment defaults over the past few months, and we have taken steps in reaction to our loss exposure.

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

To mitigate the risk of short-term changes in market interest rates related to our loan originations and beneficial interest in Trusts, we use various derivative financial instruments. During the current year, we recorded a net $141.2 million in gains, compared to $46.9 million in the prior year, related to our interest rate swaps and other derivative instruments. This increase was primarily due to rising short-term interest rates and an increase in the average notional amount of swap arrangements to $8.4 billion in the current year, compared to $2.4 billion in fiscal year 2005. See Item 8, note 8 to the consolidated financial statements.

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

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

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

(dollars in 000s)


Year Ended April 30,	2006			2005

Average servicing portfolio:
With related MSRs	$	56,521,595		$	41,021,448
Without related MSRs		19,106,863			13,838,769

	$	75,628,458		$	54,860,217

Ending servicing portfolio:
With related MSRs	$	62,910,568		$	47,543,982
Without related MSRs		10,471,509			20,450,482

	$	73,382,077		$	67,994,464

Number of loans serviced		441,981			435,290
Average delinquency rate		5.16	%		4.85	%
Weighted average FICO score		621			618
Weighted average interest rate (WAC) of portfolio		7.58	%		7.46	%
Weighted average rate earned		0.38	%		0.36	%
Carrying value of MSRs	$	272,472		$	166,614

Loan servicing revenues increased $125.9 million, or 46.1%, compared to the prior year. The increase reflects a higher loan servicing portfolio resulting from our loan origination growth. The average servicing portfolio for the year increased $20.8 billion, or 37.9%, to $75.6 billion, even with lower volumes in our sub-servicing business. The weighted average rate earned on our entire servicing portfolio was 38 basis points for fiscal year 2006, compared to 36 basis points in the prior year.

Total expenses for the current year increased $175.6 million, or 23.4%, from the prior year. Cost of services increased $75.6 million, or 34.2%, mainly as a result of a higher average servicing portfolio during the current year and increased amortization of MSRs.

Cost of other revenues increased $88.3 million over fiscal year 2005, and includes a $12.6 million restructuring charge associated with the closing of some of our branch offices. See additional discussion of the restructuring charge in Item 8, note 16 to the consolidated financial statements. Compensation and benefits increased $53.8 million primarily due to an increase in the average number of sales associates during the year to support higher loan volumes and the resulting increase in origination-based incentives, coupled with $6.7 million in severance charges recorded as part of the restructuring. Occupancy expenses increased $7.8 million primarily due to $5.9 million in lease termination costs recorded as part of the restructuring. Other expenses increased $26.7 million primarily as a result of $20.1 million in additional interest expense related to mortgage loans held on our balance sheet and $5.0 million of additional depreciation and amortization of our newly implemented origination and servicing software.

Selling, general and administrative expenses increased $11.7 million primarily due to $15.3 million in additional marketing expenses, $5.1 million in additional occupancy costs and $3.2 million in higher allocated shared services. These increases were partially offset by a $15.7 million decline in compensation and benefits resulting from reductions in administrative and corporate headcount and lower bonus accruals.

Pretax income decreased $174.5 million, or 35.2%, for fiscal year 2006.

FISCAL 2005 COMPARED TO FISCAL 2004 – Mortgage Services’ revenues decreased $77.7 million, or 5.9%, compared to fiscal year 2004. Revenues decreased primarily as a result of a decline in gains on sales of mortgage loans.

Although origination volumes increased 33.3% over fiscal year 2004, gains on sales of mortgage loans declined $143.6 million as a result of increased price competition and poorer execution in the secondary market. As a result, our net margin declined to 1.12% from 2.22% in fiscal year 2004.

The average market interest rate for a 2-year swap increased to 3.32% in fiscal year 2005 from 1.97% in 2004, while our WAC decreased to 7.36% from 7.39% for the same periods. Because our WAC did not increase as quickly as market rates, our gross margin declined 125 basis points from fiscal year 2004. During fiscal year 2005, we recorded $46.9 million in net gains, compared to a net loss of $12.0 million in 2004, related to derivative instruments.

In fiscal year 2005, we completed a sale of available-for-sale residual interests and recorded a gain of $15.4 million. We recorded a gain of $40.7 million in the prior year on similar transactions.

Impairments of available-for-sale residual interests in securitizations of $12.2 million were recognized during fiscal year 2005 compared with $26.1 million in the prior year. The impairments in fiscal year 2004 were due primarily to loan performance of older residuals and changes in assumptions to more closely align with the economic and interest rate environment.

Total accretion of residual interests decreased $48.9 million from fiscal year 2004. This decrease is primarily due to the sale of previously securitized residual interests during fiscal year 2004, which eliminated future accretion on those residual interests.

During fiscal year 2005, our available-for-sale residual interests continued to perform better than expected compared

to internal valuation models. We recorded favorable pretax mark-to-market adjustments, which increased the fair value of these residual interests $154.3 million during fiscal year 2005. These adjustments were recorded, net of write-downs of $58.3 million and deferred taxes of $36.6 million, in other comprehensive income and will be accreted into income throughout the remaining life of these residual interests.

Loan-servicing revenues increased $61.3 million, or 29.0%, over fiscal year 2004. The increase reflects a higher average loan-servicing portfolio. The average servicing portfolio for fiscal year 2005 increased 42.4%.

Cost of services increased $27.8 million, or 14.4%, as a result of a higher average servicing portfolio, particularly loans with MSRs, which also resulted in an increase in MSR amortization.

Cost of other revenues increased $66.2 million, or 22.8%, over fiscal year 2004. Compensation and benefits increased $33.8 million as a result of a 25.4% increase in the number of employees, reflecting resources needed to support higher loan production volumes.

Selling, general and administrative expenses increased $20.8 million, or 13.7%, due to $12.1 million in increased retail marketing expenses and $7.4 million in additional consulting expenses.

Pretax income for fiscal year 2005 decreased $192.4 million, or 27.9%, from fiscal year 2004.

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

Business Services — Operating Statistics



Year Ended April 30,	2006		2005		2004

ACCOUNTING, TAX AND BUSINESS CONSULTING -
Chargeable hours (000s)		4,357		2,898		2,598
Chargeable hours per person		1,385		1,430		1,414
Net billed rate per hour	$	141	$	133	$	124
Average margin per person	$	114,755	$	112,573	$	102,496



Business Services — Financial Results						(in 000s)

Year Ended April 30,	2006		2005		2004

Service revenues:
Accounting, tax and consulting	$	690,817	$	412,473	$	353,750
Capital markets		59,553		67,922		73,860
Payroll, benefits and retirement services		36,605		27,331		21,172
Other services		52,501		31,170		19,390

		839,476		538,896		468,172
Other		37,783		34,420		31,038

Total revenues		877,259		573,316		499,210

Cost of services:
Compensation and benefits		471,619		310,950		256,640
Occupancy		56,870		24,699		20,498
Other		65,386		36,672		33,080

		593,875		372,321		310,218
Selling, general and administrative		230,006		171,124		169,680

Total expenses		823,881		543,445		479,898

Pretax income	$	53,378	$	29,871	$	19,312

FISCAL 2006 COMPARED TO FISCAL 2005 – Business Services’ revenues for fiscal year 2006 increased $303.9 million, or 53.0%, from the prior year. This increase was primarily due to the acquisition of American Express Tax and Business Services, Inc., which increased accounting, tax and consulting revenues $251.3 million. The remaining $27.1 million increase in tax, accounting and consulting revenues was primarily driven by increases in the net billed rate per hour and chargeable hours.

Capital markets revenues declined $8.4 million due to a 36.0% decline in the number of business valuation projects. Payroll, benefits and retirement services revenues increased $9.3 million primarily due to acquisitions completed during the third and fourth quarters of fiscal year 2005. Other service revenues increased $21.3 million as a result of acquisitions completed in the fourth quarter of fiscal year 2005 in our financial process outsourcing business and growth in wealth management services.

Total expenses increased $280.4 million, or 51.6%, for fiscal year 2006 compared to the prior year. Cost of services increased $221.6 million, primarily due to a $160.7 million increase in compensation and benefits. Compensation and benefits increased $136.0 million due to the American Express Tax and Business Services, Inc. acquisition. In addition, baseline increases in the number of personnel and the average wage per employee, driven by marketplace competition for professional staff, also contributed to the increase. Occupancy expenses increased $32.2 million and other cost of services increased $28.7 million primarily due to acquisitions.

Selling, general and administrative expenses increased $58.9 million primarily due to acquisitions and additional costs associated with our business development initiatives.

Pretax income for the year ended April 30, 2006 was $53.4 million, compared to pretax income of $29.9 million in the prior year.

FISCAL 2005 COMPARED TO FISCAL 2004 – Business Services’ revenues for fiscal year 2005 increased $74.1 million, or 14.8%, from the prior year. This increase was primarily due to a $58.7 million increase in accounting, tax and consulting revenues resulting from an 11.5% increase in chargeable hours and a 7.3% increase in the net billed rate per hour. The increase in chargeable hours is primarily due to strong demand for our tax and accounting services as well as our consulting and risk management services. This demand stems from the current business environment and the emphasis placed on the accounting industry.

Capital markets revenues declined $5.9 million as a result of an 11.2% decrease in the number of business valuation projects. Payroll, benefits and retirement services revenues increased as a result of three acquisitions completed during the last half of fiscal year 2005.

Other service revenues increased $11.8 million due to the acquisition of our financial process outsourcing business in the second quarter of fiscal year 2004, coupled with overall growth in this business. Increases in reimbursable expenses and contractor revenues also contributed to higher revenues.

Cost of services increased $62.1 million, or 20.0%, for fiscal year 2005 compared to the prior year. Compensation and benefits related to our services increased $54.3 million, primarily as a result of increases in the number of personnel and the average wage per employee. The increase in the average wage is being driven by marketplace competition for professional staff. Higher expenses are also attributable to investments we are making in early-stage businesses within this segment.

Pretax income for the year ended April 30, 2005 was $29.9 million compared to $19.3 million in fiscal year 2004.

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 emphasis from a transaction-based client relationship to a more advice-based focus.

Investment Services – Operating Statistics


Year Ended April 30,	2006		2005		2004

Customer trades ⁽¹⁾		974,625		885,796		1,004,235
Customer daily average trades		3,883		3,529		3,923
Average revenue per trade ⁽²⁾	$	119.11	$	123.33	$	119.36
Customer accounts: ⁽³⁾
Traditional brokerage		418,162		431,749		463,736
Express IRAs		442,157		380,539		366,040

		860,319		812,288		829,776

Ending balance of assets under administration (billions)	$	31.8	$	27.8	$	26.7
Average assets per traditional brokerage account	$	75,222	$	63,755	$	57,204
Average margin balances (millions)	$	539	$	597	$	545
Average customer payables balances (millions)	$	782	$	975	$	984
Number of advisors		958		1,010		1,009
Included in the numbers above are the following relating to fee-based accounts:
Customer household accounts		9,224		7,668		6,964
Average revenue per account	$	2,535	$	2,301	$	1,572
Ending balance of assets under administration (millions)	$	2,526	$	1,975	$	1,494
Average assets per active account	$	274,981	$	260,238	$	214,537


		⁽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.


Investment Services – Financial Results		(in 000s)


Year Ended April 30,	2006			2005			2004

Service revenues:
Transactional revenue	$	91,143		$	88,516		$	99,559
Annuitized revenue		99,331			77,386			60,950

Production revenue		190,474			165,902			160,509
Other services		32,256			29,206			35,619

		222,730			195,108			196,128

Margin interest revenue		60,795			43,698			33,408
Less: interest expense		(6,643	)		(3,114	)		(1,358	)

Net interest revenue		54,152			40,584			32,050

Other		4,430			438			(66	)

Total revenues ⁽¹⁾		281,312			236,130			228,112

Cost of services:
Compensation and benefits		135,256			116,552			108,956
Occupancy		21,050			22,178			21,571
Other		21,132			19,555			24,091

		177,438			158,285			154,618
Selling, general and administrative		136,709			153,215			149,108

Total expenses		314,147			311,500			303,726

Pretax loss	$	(32,835	)	$	(75,370	)	$	(75,614	)


⁽¹⁾		Total revenues, less interest expense.

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

Total production revenue increased $24.6 million, or 14.8%, over the prior year. Transactional revenue, which is based on sales of individual securities, increased $2.6 million, or 3.0%, from the prior year due primarily to a 6.1% increase in transactional trading volume, partially offset by a 2.4% decrease in average revenue per transactional trade. Annuitized revenue, which is based on sales of various fee-based products, increased $21.9 million, or 28.4%, due to increased sales of annuities and insurance, wealth management accounts, mutual funds, and unit investment trusts (UITs). The shift in revenues from transactional to annuitized demonstrates our continued move toward an advice-based focus.

Annualized productivity averaged approximately $194,000 per advisor during the current year compared to $166,000 in the prior year. Increased productivity was due to higher production levels across all recruiting classes. Minimum production standards put into place during the fourth quarter of fiscal year 2005 resulted in 111 advisors increasing their production. These standards also resulted in 152 low-producing advisors leaving the company. We expect average advisor productivity to continue increasing as we enforce minimum production standards, provide additional training to advisors and increase productivity levels of newly recruited advisors.

Margin interest revenue increased $17.1 million, or 39.1%, from the prior year, as a result of higher interest rates earned, partially offset by a decline in average margin balances.

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

Selling, general and administrative expenses decreased $16.5 million, or 10.8%, primarily due to a $4.8 million decline in legal expenses, due in part to a favorable arbitration outcome. Current year results also improved due to reduced back-office headcount relating to cost containment efforts and gains on the disposition of certain assets during the year. These decreases were partially offset by increased bonus accruals associated with the segment’s improved performance.

The pretax loss for Investment Services for the year ended April 30, 2006 was $32.8 million compared to the prior year loss of $75.4 million.

FISCAL 2005 COMPARED TO FISCAL 2004 – Investment Services’ revenues, net of interest expense, for fiscal year 2005 increased $8.0 million, or 3.5%. The increase is primarily due to higher margin interest revenue.

Production revenue increased $5.4 million, or 3.4% over fiscal year 2004. Transactional revenue decreased $11.0 million, or 11.1%, from the prior year due primarily to an 18.7% decline in transactional trading volume. This decline was partially offset by an increase in the average revenue per trade. Annuitized revenue increased $16.4 million, or 27.0%, due to increased sales of annuities, mutual funds and our fee-based wealth management accounts. Annuitized revenues represent 46.6% of total production revenues for fiscal year 2005, compared to 38.0% in the prior year. Advisor productivity averaged approximately $166,000 in fiscal year 2005, essentially flat compared to the prior year.

Other service revenue declined $6.4 million, or 18.0%, from fiscal year 2004 due to fewer fixed income underwriting offerings and Express IRA revenues now being recorded as part of Tax Services.

Margin interest revenue increased $10.3 million, or 30.8%, from fiscal year 2004, which is primarily a result of higher interest rates earned, coupled with a 9.5% increase in average margin balances. Margin balances have increased from an average of $545.0 million in fiscal year 2004 to $597.0 million in fiscal year 2005.

Cost of services increased $3.7 million, or 2.4%, primarily due to $7.6 million of additional compensation and benefits resulting from a higher average commission rate than fiscal year 2004 and other financial incentives for attracting new advisors. This increase was partially offset by declines in depreciation and other expenses.

Selling, general and administrative expenses increased $4.1 million, or 2.8%, over fiscal year 2004 primarily as the result of $6.8 million in additional legal expenses, partially offset by gains of $4.6 million on the disposition of certain assets.

The pretax loss for Investment Services for fiscal year 2005 was $75.4 million compared to a loss of $75.6 million in the prior year.

CORPORATE
Corporate support departments, which provide services to our operating segments 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. Financial results for our captive insurance, franchise financing and banking subsidiaries are also included below, as was our small business initiatives subsidiary in fiscal year 2004.


Corporate – Financial Results		(in 000s)


Year Ended April 30,	2006			2005			2004

Operating revenues	$	22,279		$	13,592		$	12,532
Eliminations		(13,636	)		(10,444	)		(8,218	)

Total revenues		8,643			3,148			4,314

Corporate expenses:
Interest expense		67,630			72,701			69,300
Other		65,484			51,262			50,476

		133,114			123,963			119,776

Support departments:
Marketing		137,065			117,303			110,507
Information technology		116,990			107,306			110,569
Finance		49,719			34,498			33,829
Other		122,232			107,562			78,593

		426,006			366,669			333,498

Allocation of shared services		(425,589	)		(366,742	)		(336,639	)
Other income, net		20,356			24,345			4,582

Pretax loss	$	(104,532	)	$	(96,397	)	$	(107,739	)

FISCAL 2006 COMPARED TO FISCAL 2005 – Corporate expenses increased $9.2 million primarily due to a $14.2 million increase in other expenses, offset by a $5.1 million decline in interest expense. Other expenses increased due to higher finance and information technology department expenses.

Our consolidated interest expense, both operating and non-operating, totaled $103.8 million for fiscal year 2006, an increase of $15.9 million over the prior year. Of the $103.8 million in total interest, $49.1 million related to debt incurred on previous acquisitions, with the remaining $54.7 million related to our operations recorded directly in our operating segments.

Marketing department expenses increased $19.8 million, or 16.8%, due primarily to an increase in digital advertising efforts. Information technology department expenses increased $9.7 million primarily due to higher compensation and benefits associated with higher headcount. Finance department expenses increased $15.2 million, primarily due to additional consulting expenses and increases in compensation expenses. Other support department expenses increased $14.7 million primarily due to increases in stock-based compensation expenses and legal department expenses, partially offset by a decrease in supply department expenses.

Other income declined $4.0 million primarily as a result of $17.3 million in legal recoveries we received during the prior year, partially offset by other gains recorded in the current year.

The pretax loss was $104.5 million, compared with last year’s loss of $96.4 million.

Our effective tax rate for the year increased to 40.7% compared to 38.7% in the prior year. This increase is due to higher deferred tax valuation allowances and increases in reserves for uncertain tax positions.

FISCAL 2005 COMPARED TO FISCAL 2004 – Corporate expenses increased $4.2 million primarily due to higher interest expense, resulting from higher interest rates and higher average debt balances.

Marketing department expenses increased $6.8 million, or 6.1%, primarily due to additional marketing efforts in fiscal year 2005. Other support department expenses increased $29.0 million, primarily due to $15.1 million of additional stock-based compensation expenses, increases in the cost of employee insurance and supplies.

Other income increased $19.8 million primarily as a result of $17.3 million in legal recoveries.

The pretax loss was $96.4 million, compared with a loss of $107.7 million in fiscal year 2004.

Our effective income tax rate for fiscal year 2005 decreased to 38.7% compared to 39.8% in fiscal year 2004. The decrease is due to tax benefits realized on net operating loss carryforwards.

FINANCIAL CONDITION -

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, pay dividends, repurchase shares of our common stock and acquire businesses.

CASH FROM OPERATIONS – Operating cash flows totaled $585.7 million, $513.8 million and $852.5 million in fiscal years 2006, 2005 and 2004, respectively. Operating cash flows in fiscal year 2006 increased from fiscal year 2005 primarily due to lower income tax payments, which totaled $270.5 million this year, compared to $437.4 million in fiscal year 2005, partially offset by higher MSR balances and increased mortgage loans held for sale.

ISSUANCES OF COMMON STOCK – We issue shares of our common stock in accordance with our stock-based compensation plans out of our treasury shares. Proceeds from the issuance of common stock totaled $108.5 million, $136.1 million and $120.0 million in fiscal years 2006, 2005 and 2004, respectively.

DEBT – On October 26, 2004, we issued $400.0 million of 5.125% Senior Notes under our shelf registration statements. The proceeds from the notes were used to repay our $250.0 million in 6³/4% Senior Notes, which were due on November 1, 2004. The remaining proceeds were used for working capital, capital expenditures, repayment of other debt and other general corporate purposes.

DIVIDENDS – We have consistently paid quarterly dividends. Dividends paid totaled $160.0 million, $143.0 million and $138.4 million in fiscal years 2006, 2005 and 2004, respectively.

SHARE REPURCHASES – On June 9, 2004, our Board of Directors approved an authorization to repurchase 15 million shares. This authorization is in addition to the authorization of 20 million shares on June 11, 2003. During fiscal year 2006, we repurchased 9.0 million shares pursuant to these authorizations at an aggregate price of $254.2 million or an average price of $28.18 per share. There were 10.5 million shares remaining under the 2004 authorization at the end of fiscal year 2006.

We plan to continue to purchase shares on the open market in accordance with the existing authorizations, subject to various factors including the price of the stock, our ability to maintain liquidity and financial flexibility, securities laws restrictions, targeted capital levels and other investment opportunities available.

ACQUISITIONS – From time to time we acquire businesses that are viewed to be a good strategic fit to our organization. Total cash paid for acquisitions was $212.5 million, $37.6 million and $280.9 million during fiscal years 2006, 2005 and 2004, respectively. Acquisitions during fiscal year 2006 included American Express Tax and Business Services, Inc. Cash paid in fiscal year 2006 related to the acquisition of this business totaled $190.7 million. Significant acquisitions during fiscal year 2004 were the former major franchise territories we now operate as company-owned. Cash paid in fiscal year 2004 related to the acquisition of these territories totaled $243.2 million.

RESTRICTED CASH – We hold certain cash balances that are restricted as to use. Cash and cash equivalents - restricted totaled $394.1 million at fiscal year end. Investment Services held $369.0 million of this total segregated in a special reserve account for the exclusive benefit of customers pursuant to Rule 15c3-3 of the Securities Exchange Act of 1934. Restricted cash of $16.4 million at April 30, 2006 held by Business Services is related to funds held to pay payroll and related taxes on behalf of its customers. Restricted cash held by Mortgage Services totaled $8.4 million at April 30, 2006 for outstanding commitments to fund mortgage loans.

FISCAL YEAR 2007 OUTLOOK – We began construction on a new corporate headquarters facility during fiscal year 2005. Estimated remaining construction costs to be incurred during fiscal year 2007 of $63.9 million will be financed from operating cash flows.

Our Board of Directors approved an increase of the quarterly cash dividend from 12.5 cents to 13.5 cents per share, an 8.0% increase, effective with the quarterly dividend payment on October 2, 2006 to shareholders of record on September 11, 2006. On June 7, 2006, our Board also approved an additional authorization to repurchase 20.0 million shares.

We plan to refinance our $500.0 million in Senior Notes, which are due in April 2007.

The initial capital contribution for the H&R Block Bank will be $160.0 million, which we transferred on May 1, 2006, with an additional $10.0 million capital contribution planned during fiscal year 2007. H&R Block Bank is required to maintain a minimum leverage capital to total asset ratio of 12% during its first three years of operations.

A condensed consolidating statement of cash flows by segment for the fiscal year ended April 30, 2006 follows. Generally, interest is not charged on intercompany activities between segments. Detailed consolidated statements of cash flows are located in Item 8.

(in 000s)

Mortgage

Business

Investment

Consolidated

Tax Services

Services

Corporate

H&R Block

FISCAL YEAR 2006 –

Cash provided by (used in):

Operations

596,025

(123,903

)

31,258

24,894

57,412

585,686

Investing

(62,797

)

(309,302

)

(221,122

)

12,615

(107,899

)

(688,505

)

Financing

14,173

(23,611

)

14,538

(308,136

)

(303,036

)

Net intercompany

(527,564

)

422,418

233,744

(13,470

)

(115,128

)

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 generated $596.0 million in operating cash flows primarily related to net income, as cash is generally collected from clients at the time services are rendered. We also received a signing bonus from HSBC during the current year in connection with our new RAL participation agreement, which was recorded as deferred revenue at April 30, 2006.

Since July 1996, we have been a party to agreements with HSBC and its predecessors to participate in RALs provided by a lending bank to H&R Block tax clients. During fiscal year 2006, we signed a new agreement with HSBC under which HSBC and its designated bank will provide funding of all RALs offered through June 2011. If HSBC and its designated bank do not continue to provide funding for RALs, we could seek other RAL lenders to continue offering RALs to our clients or consider alternative funding strategies. We believe that a number of suitable lenders would be available to replace HSBC should the need arise.

We also believe that the RAL program is productive for the Company and a useful service for our customers. The RAL program is regularly reviewed both from a business perspective and to ensure compliance with applicable state and federal laws. It is our intention to continue to offer the RAL program in the foreseeable future.

Loss of the RAL program could adversely affect our operating results. In addition to the loss of revenues and income directly attributable to the RAL program, the inability to offer RALs could indirectly result in the loss of retail tax clients and associated tax preparation revenues, unless we were able to take mitigating actions. Total revenues related to the RAL program (including revenues from participation interests) were $179.3 million for the year ended April 30, 2006, representing 3.7% of consolidated revenues and contributed $106.5 million to the segment’s pretax results. Revenues related to the RAL program totaled $182.6 million for the year ended April 30, 2005, representing 4.1% of consolidated revenues and contributed $101.3 million to the segment’s pretax results.

Our international operations are generally self-funded. Cash balances are held in Canada, Australia and the United Kingdom independently in local currencies. H&R Block Canada, Inc. (Block Canada) has a commercial paper program for up to $225.0 million (Canadian). At April 30, 2006, there was no commercial paper outstanding. The peak borrowing during fiscal year 2006 was $133.0 million (Canadian).

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 mature. Mortgage Services used $123.9 million in cash from operating activities primarily due to higher MSR balances and mortgage loans held for sale. This segment also used $309.3 million in cash from investing activities primarily related to loans originated for transfer to the H&R Block Bank, partially offset by cash received from the maturity and sales of available-for-sale residual interests. We regularly sell loans as a source of liquidity. Loan sales in fiscal year 2006 were $40.3 billion compared with $31.0 billion in fiscal year 2005. Additionally, Block Financial Corporation (BFC) provides a line of credit of at least $150 million for working capital needs. At the end of fiscal year 2006 there was $372.6 million outstanding on this facility.

WAREHOUSE FUNDING. See discussion of our non-prime warehouse facilities below in “Off-Balance Sheet Financing Arrangements.”

To finance our prime mortgage loan originations, we use a 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 April 30, 2006 and 2005, the balance outstanding under this facility was $1.6 million and $4.4 million, respectively, and is included in accounts payable, accrued expenses and other current liabilities on the consolidated balance sheets.

We believe the sources of liquidity available to the Mortgage Services segment are sufficient for its needs. Risks to the stability of these sources include, but are not limited to, adverse changes in the perception of the non-prime industry, adverse changes in the regulation of non-prime lending, changes in the rating criteria of non-prime lending by third-party rating agencies and, to a lesser degree, reduction in the availability of third parties who provide credit enhancement. Past performance of the securitizations will also impact the segment’s future participation in these markets. The off-balance sheet warehouse facilities used by the Trusts are subject to annual renewal, each at a different time during the year, and any of the above events could lead to difficulty in renewing the lines. These risks are mitigated by a staggering of the renewal dates related to these warehouse lines and through the use of multiple lending institutions to secure these lines.

BUSINESS SERVICES – Business Services funding requirements are largely related to receivables for completed work and “work in process.” We provide funding in the normal course of business sufficient to cover these working capital needs. Business Services also has future obligations and commitments, which are summarized in the tables below under “Contractual Obligations and Commercial Commitments.”

This segment generated $31.3 million in operating cash flows primarily related to net income. Additionally, Business Services used $221.1 million in investing activities primarily related to the acquisition of American Express Tax and Business Services, Inc. and contingent payments on prior acquisitions, and $23.6 million in financing activities as a result of payments on acquisition debt.

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

HRBFA is required to maintain minimum net capital as defined under Rule 15c3-1 of the Securities Exchange Act of 1934 and complies with the alternative capital requirement, which requires a broker-dealer to maintain net capital equal to the greater of $1,000,000 or 2% of the combined aggregate debit balances arising from customer transactions. The net capital rule also provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than the greater of 5% of combined aggregate debit items or 120% of the minimum required net capital. At the end of fiscal year 2006, HRBFA’s net capital of $121.7 million, which was 22.9% of aggregate debit items, exceeded its minimum required net capital of $10.6 million by $111.1 million. During fiscal year 2006, H&R Block Financial Corporation, HRBFA’s direct corporate parent, contributed $5.0 million of additional capital to HRBFA. During fiscal year 2005, we contributed additional capital of $27.0 million. HRBFA was in excess of the minimum net capital requirement during fiscal years 2006 and 2005, but we may continue to contribute additional capital in the future.

In fiscal year 2006, Investment Services provided $24.9 million from its operating activities primarily due to improved performance.

To manage short-term liquidity, BFC provides HRBFA a $300 million unsecured credit facility. At the end of fiscal year 2006 there was no outstanding balance on this facility.

HRBFA has a secured letter of credit with an unaffiliated financial institution with a credit limit of $50.0 million. There were no borrowings on this letter of credit during fiscal years 2006 or 2005 and no outstanding balance at April 30, 2006 or 2005.

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.

Securities borrowed and securities loaned transactions are generally reported as collateralized financings. These transactions require us to deposit cash and/or collateral with the counterparty. Securities loaned consist of customers’ securities purchased on margin. We receive cash collateral approximately equal to the value of the securities loaned. The amount of cash collateral is adjusted, as required, for market fluctuations in the value of the securities loaned. Interest rates paid on the cash collateral fluctuate as short-term interest rates change.

To satisfy the margin deposit requirement of client option transactions with the Options Clearing Corporation (OCC), HRBFA pledges customers’ margined securities. Pledged securities at the end of fiscal year 2006 totaled $53.0 million, an excess of $9.9 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
We are party to various transactions with an off-balance sheet component, including loan commitments and QSPEs, or Trusts.

We have commitments to fund mortgage loans of $4.0 billion and $4.2 billion at April 30, 2006 and 2005, respectively, which are subject to conditions and loan contract verification. There is no commitment on the part of the borrower to close on the mortgage loan at this stage of the lending process and external market forces impact the probability of these loan commitments being closed. Therefore, total commitments outstanding do not necessarily represent future cash requirements. If the loan commitments are exercised, they will be funded as described below.

Our relationships with the Trusts serve to reduce our capital investment in our non-prime mortgage operations. These arrangements are primarily used to sell mortgage loans, but a portion may also be used to sell servicing advances and finance residual interests. Additionally, these arrangements have freed up cash and short-term borrowing capacity, improved liquidity and flexibility, and reduced balance sheet risk, while providing stability and access to liquidity in the secondary market for mortgage loans.

Substantially all non-prime mortgage loans we originate are sold daily to the Trusts. The Trusts purchase the loans from us using nine committed warehouse facilities, arranged by us, totaling $14.5 billion. These facilities are subject to various Option One performance triggers, limits and financial covenants, including tangible net worth and leverage ratios and may be subject to margin calls. In addition, these facilities contain cross-default features in which a default in one facility would trigger a default under the other facilities as well. These various facilities bear interest at one-month LIBOR plus 50 to 400 basis points and expire on various dates during the year. In addition, some of the facilities provide for the payment of minimum usage fees. Additional uncommitted facilities of $1.5 billion bring total capacity to $16.0 billion.

When we sell loans to the Trusts, we remove the mortgage loans from our balance sheet and record the gain on the sale, cash, MSRs, recourse reserves and a beneficial interest in Trusts, which represents our residual interest in the ultimate expected outcome from the disposition of the loans by the Trusts. Our beneficial interest in Trusts totaled $188.0 million and $215.4 million at April 30, 2006 and 2005, respectively.

Subsequently, the Trusts, in response to the exercise of a put option by the third-party beneficial interest holders, either sell the loans directly to third-party investors or back to us to pool the loans for securitization. The decision to complete a loan sale or a securitization is dependent on market conditions.

For fiscal year 2006, the final disposition of loans sold by the Trusts was 77% loan sales and 23% securitizations. For fiscal year 2005, the final disposition of loans sold by the Trusts was 92% loan sales and 8% securitizations. The higher percentage of loan sale transactions versus securitizations is due to more favorable pricing in the loan sale market and also results in cash being received earlier. Additionally, loan sales do not add residual interests to our balance sheet, and therefore, we do not retain balance sheet risk.

If the Trusts sell the mortgage loans in a loan sale, we receive cash for our beneficial interest in Trusts. In a securitization transaction, the Trusts transfer the loans and the corresponding right to receive all payments on the loans to our consolidated special purpose entity, after which we transfer our beneficial interest in Trusts and the loans to a securitization trust. The securitization trust meets the definition of a QSPE and is therefore not consolidated. The securitization trust issues bonds, which are supported by the cash flows from the pooled loans, to third-party investors. We retain an interest in the loans in the form of a trading residual interest and, therefore, usually assume the first risk of loss for credit losses in the loan pool. As the cash flows of the underlying loans and market conditions change, the value of our trading residual interests may also change, resulting in potential write-ups or impairment of these residual interests.

At the settlement of each securitization, we record cash received and our residual interests. Additionally, we reverse the beneficial interest in Trusts. The resulting residual interests are classified as trading securities. See Item 8, note 1 to our consolidated financial statements for our methodology used in valuing our residual interests.

To accelerate the cash receipts from our residual interests, we securitize the majority of our trading residual interests in net interest margin (NIM) transactions. In a NIM transaction, the trading residual interests are transferred to another QSPE (NIM trust), which then issues bonds to third-party investors. The proceeds from the bonds are returned to us as payment for the trading residual interests. The bonds are secured by these pooled residual interests and are obligations of the NIM trust. We retain a subordinated interest in the NIM trust, and receive cash flows on our residual interest generally after the NIM bonds issued to the third-party investors are paid in full.

At the settlement of each NIM transaction, we remove the trading residual interests sold from our consolidated balance sheet and record the cash received and the new residual interest

retained. These new residual interests are classified as available-for-sale securities.

Available-for-sale residual interests retained from NIM securitizations may also be sold in a subsequent securitization or sale transaction.

In connection with the sale of mortgage loans, we provide certain representations and warranties allowing the purchaser the option of returning the purchased loans to us under certain conditions. We may recognize losses as a result of the repurchase of loans under these arrangements. We maintain reserves for the repurchase of loans based on historical trends. See Item 8, note 16 to our consolidated financial statements.

Loans totaling $7.8 billion and $6.7 billion were held by the Trusts as of April 30, 2006 and 2005, respectively, and were not recorded on our consolidated balance sheets. In August 2005, the Financial Accounting Standards Board (FASB) issued an exposure draft which amends Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This 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. The final standard for this exposure draft is scheduled to be issued in the first quarter of calendar year 2007.

COMMERCIAL PAPER ISSUANCE
We participate in the U.S. and Canadian commercial paper (CP) markets to meet daily cash needs. CP is issued by BFC and Block Canada, wholly-owned subsidiaries of the Company. The following chart provides the debt ratings for BFC as of April 30, 2006:

Short-term

Long-term

Outlook

Fitch

Negative

Moody’s

Stable

S&P

BBB+

Stable

DBRS

R-1 (low)

Stable

The following chart provides the debt ratings for Block Canada as of April 30, 2006:

Short-term

Long-term

Outlook

DBRS

R-1 (low)

Stable

We use capital primarily to fund working capital requirements, pay dividends, repurchase our shares and acquire businesses. Commercial paper borrowings peaked at $2.3 billion in February 2006 related to funding of our participation interests in RALs. No CP was outstanding at April 30, 2006 or 2005.

U.S. CP issuances are supported by $2.0 billion in unsecured committed lines of credit (CLOCs), which mature in August 2010 and have an annual facility fee of eight and one-half basis points per annum. These lines are subject to various affirmative and negative covenants, including a minimum net worth covenant.

We obtained an additional $900.0 million line of credit for the period of January 3 to February 24, 2006 to back-up peak commercial paper issuance or use as an alternate source of funding for RAL participations. This line is subject to various covenants, substantially similar to the primary CLOCs.

These facilities were undrawn at April 30, 2006. There are no rating contingencies under the CLOCs.

The Canadian issuances are supported by a credit facility provided by one bank in an amount not to exceed $225.0 million (Canadian). The Canadian CLOC is subject to annual renewal in December 2006. This CLOC was undrawn at April 30, 2006.

We believe the CP market to be stable. Risks to the stability of our CP market participation would be a short-term rating downgrade, adverse changes in our financial performance, non-renewal or termination of the CLOCs, adverse publicity and operational risk within the CP market. We believe if any of these events were to occur, the CLOCs, to the extent available, could be used for an orderly exit from the CP market, though at a higher cost to us. Additionally, we could turn to other sources of liquidity, including cash, debt issuance and asset sales or securitizations.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

A summary of our obligations to make future payments as of April 30, 2006 is as follows:

(in 000s)

Total

Less Than 1 Year

1 - 3 Years

4 - 5 Years

After 5 Years

Debt

897,426

499,425

398,001

Long-term obligation to government

183,937

107,849

74,692

1,396

Retirement obligation assumed

14,264

2,426

4,176

3,196

4,466

Acquisition payments

13,895

7,210

6,458

136

Capital lease obligation

13,209

357

860

1,043

10,949

Operating leases

856,816

269,890

371,984

157,123

57,819

Total contractual cash obligations

1,979,547

887,157

458,170

162,849

471,371

In October 2004, we issued $400.0 million of 5.125% Senior Notes, due 2014. The Senior Notes are not redeemable by the bondholders prior to maturity. The net proceeds of this transaction were used to repay the $250.0 million in 6³/4% Senior Notes, which were due November 1, 2004. The remaining proceeds were used for working capital, capital expenditures, repayment of other debt and other general corporate purposes.

In April 2000, we issued $500.0 million of 8¹/2% Senior Notes, due 2007. The Senior Notes are not redeemable prior to maturity. The net proceeds of this transaction were used to repay a portion of the short-term borrowings that initially funded the acquisition of OLDE Financial Corporation. We plan to refinance these Senior Notes when they come due.

As of April 30, 2006, we had $850.0 million remaining under our shelf registration for additional debt issuances. As a result of our failure to file our Form 10-Q for the fiscal quarter ended January 31, 2006 by the SEC’s prescribed due date, we will be unable to issue any debt securities under this shelf registration statement until April 2007.

Future payments related to acquisitions and capital lease obligations are included in long-term debt on our consolidated balance sheets.

In connection with our acquisition of the non-attest assets of M&P in August 1999, we assumed certain retirement liabilities related to M&P’s partners. We make payments in varying amounts on a monthly basis, which are included in other noncurrent liabilities.

Operating leases, although requiring future cash payments, are not included in our consolidated balance sheets.

A summary of our commitments as of April 30, 2006, which may or may not require future payments, expire as follows:

(in 000s)

Total

Less Than 1 Year

1 - 3 Years

4 - 5 Years

After 5 Years

Commitments to fund mortgage loans

4,032,045

Commitments to sell mortgage loans

3,052,688

Franchise Equity Lines of Credit

75,909

18,860

29,958

27,091

Commitment to fund M&P

75,000

Construction of new building

63,887

Pledged securities

53,026

Other commercial commitments

31,282

8,209

19,888

3,185

Total commercial commitments

7,383,837

7,303,715

49,846

30,276

See discussion of commitments in Item 8, note 16 to our consolidated financial statements.

REGULATORY ENVIRONMENT
The U.S., various state, local, provincial and foreign governments and some self-regulatory organizations have enacted statutes and ordinances, and/or adopted rules and regulations, regulating aspects of our business. These aspects include, but are not limited to, commercial income tax return preparers, income tax courses, the electronic filing of income tax returns, the facilitation of RALs, loan originations and assistance in loan originations, mortgage lending, privacy, consumer protection, franchising, sales methods, brokers, broker-dealers and various aspects of securities transactions, financial planners, investment advisors, accountants and the accounting practice. We seek to determine the applicability of such statutes, ordinances, rules and regulations (collectively, “Laws”) and comply with those Laws.

From time to time in the ordinary course of business, we receive inquiries from governmental and self-regulatory agencies regarding the applicability of Laws to our services and products.

In response to past inquiries, we have agreed to comply with such Laws, convinced the authorities that such Laws were not applicable or that compliance already exists, and/or modified our activities in the applicable jurisdiction to avoid the application of all or certain parts of such Laws. We believe that the past resolution of such inquiries and our ongoing compliance with Laws have not had a material adverse effect on our consolidated financial statements. We cannot predict what effect future Laws, changes in interpretations of existing Laws, or the results of future regulator inquiries with respect to the applicability of Laws may have on our consolidated financial statements. See additional discussion of legal matters in Item 3, “Legal Proceedings” and Item 8, note 17 to our consolidated financial statements.

NEW ACCOUNTING PRONOUNCEMENTS
See Item 8, note 1 to our consolidated financial statements for a discussion of recently issued accounting pronouncements.

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)

Year Ended April 30,	2006			2005			2004

Total Mortgage Services expenses	$	925,522		$	749,925		$	635,186
Add: Expenses netted against gain on sale revenues		387,911			378,304			267,780
Less:
Cost of services		296,710			221,148			193,383
Cost of acquisition		150,981			169,621			114,707
Allocated support departments		26,176			24,161			21,124
Other		62,500			20,323			31,378

Total cost of origination	$	777,066		$	692,976		$	542,374

Divided by origination volume	$	40,779,763		$	31,001,724		$	23,256,013
Cost of origination margin		1.91	%		2.23	%		2.33	%

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

GENERAL
INTEREST RATE RISK – We have a formal investment policy to help minimize the market risk exposure of our cash equivalents and available-for-sale securities, which are primarily affected by credit quality and movements in interest rates. These guidelines focus on managing liquidity and preserving principal and earnings. Most of our interest rate-sensitive assets and liabilities are managed at the subsidiary level.

Our cash equivalents are primarily held for liquidity purposes and are comprised of high quality, short-term investments, including qualified money market funds. As of April 30, 2006, our non-restricted cash and cash equivalents had an average maturity of less than three months with an average credit quality of AAA. With such a short maturity, our portfolio’s market value is relatively insensitive to interest rate changes. We hold investments in fixed income securities at our captive insurance subsidiary. See the table below for sensitivities to changes in interest rates. See additional discussion of interest rate risk included below in Mortgage Services and Investment Services.

At April 30, 2006, no commercial paper was outstanding. For fiscal year 2006, the average issuance term was 33 days and the average outstanding balance was $558.4 million. As commercial paper and bank borrowings are seasonal, interest rate risk typically increases through our third fiscal quarter and declines to zero by fiscal year-end. See Item 7, “Financial Condition” for additional information.

Our current portion of long-term debt and long-term debt at April 30, 2006 consists primarily of fixed-rate Senior Notes; therefore, a change in interest rates would have no impact on consolidated pretax earnings. See Item 8, note 9 to our consolidated financial statements.

EQUITY PRICE RISK – We have exposure to the equity markets in several ways. The largest exposure, though relatively small, is through our deferred compensation plans. Within the deferred compensation plans we have mismatches in asset and liability amounts and investment choices (both fixed-income and equity). At April 30, 2006 and 2005, the impact of a 10% market value change in the combined equity assets held by our deferred compensation plans and other equity investments would be approximately $11.6 million and $9.3 million, respectively, assuming no offset for the liabilities.

TAX SERVICES
FOREIGN EXCHANGE RATE RISK – Our operations in international markets are exposed to movements in currency exchange rates. The currencies involved are the Canadian dollar, the Australian dollar and the British pound. We translate revenues and expenses related to these operations at the average of exchange rates in effect during the period. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates prevailing at the end of the year. Translation adjustments are recorded as a separate component of other comprehensive income in stockholders’ equity. Translation of financial results into U.S. dollars does not presently materially affect, and has not historically materially affected, our consolidated financial results, although such changes do affect the year-to-year comparability of the operating results in U.S. dollars of our international businesses. We estimate a 10% change in foreign exchange rates by itself would impact consolidated pretax income in fiscal years 2006 and 2005 by approximately $2.1 million and $1.3 million, respectively, and cash balances at April 30, 2006 and 2005 by $6.1 million and $4.7 million, respectively.

MORTGAGE SERVICES
INTEREST RATE RISK – NON-PRIME ORIGINATIONS – Interest rate changes impact the value of the loans underlying our beneficial interest in Trusts, on our balance sheet or in our origination pipeline, as well as residual interests in securitizations and MSRs.

As a result of loan sales to the Trusts, we remove the mortgage loans from our balance sheet and record the gain on sale, cash, MSRs, recourse reserves and a beneficial interest in Trusts, which represents our residual interest in the ultimate expected outcome from the disposition of the loans by the Trusts. See Item 7, “Off-Balance Sheet Financing Arrangements.” At April 30, 2006, there were $7.8 billion of loans held in the Trusts and the value of our beneficial interest in Trusts was $188.0 million. At April 30, 2006, we had $236.4 million of mortgage loans held for sale and $407.5 million of mortgage loans held for investment on our balance sheet. Changes in interest rates and other market factors may result in a change in value of our beneficial interest in Trusts, mortgage loans held for sale and mortgage loans held for investment.

We are exposed to interest rate risk associated with commitments to fund approved loan applications of $4.0 billion, subject to conditions and loan contract verification. In addition, we have interest rate risk related to $1.0 billion in new loan applications which have not yet been approved, and $3.0 billion of applications which we expect to receive prior to our next anticipated change in rates charged to borrowers. Of these amounts, we estimate only $5.1 billion will likely be originated.

We use forward loan sale commitments, interest rate swaps and put options on Eurodollar futures to reduce our interest rate risk associated with non-prime loans. Forward loan sale commitments represent an obligation to sell a non-prime loan at a specific price in the future and increase in value as rates rise and decrease as rates fall. At April 30, 2006, there were $3.1 billion in forward loan sale commitments, and most of them give us the option to under- or over-deliver by five to ten percent. Forward loan sale commitments lock in the execution price on the loans that will be ultimately delivered into a loan sale. At April 30, 2006, we recorded an asset of $2.0 million reflecting the fair value of these instruments.

Interest rate swaps represent an agreement to exchange interest rate payments, whereby we pay a fixed rate and receive a floating rate. Put options on Eurodollar futures represent the right to sell a Eurodollar futures contract at a specified price in the future. These swap and put option contracts increase in value as rates rise and decrease in value as rates fall. At April 30, 2006, the interest rate swaps and put options provided interest risk coverage of $9.9 billion. At April 30, 2006, we had assets recorded at fair values of $8.8 million and $3.3 million on our balance sheet related to interest rate swaps and put options, respectively.

See table below for sensitivities to changes in interest rates.

INTEREST RATE RISK – PRIME ORIGINATIONS – At April 30, 2006, we had commitments to fund prime mortgage loans totaling $83.2 million. We regularly enter into rate-lock commitments with our customers to fund prime mortgage loans within specified periods of time. The fair value of rate-lock 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. At April 30, 2006, we recorded a liability at a fair value of $0.3 million related to rate-lock commitments.

We sell short FNMA, FHLMC and GNMA mortgage-backed securities to reduce the risk related to our prime 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. At April 30, 2006 we recorded an asset of $0.8 million related to these instruments.

To finance our prime originations, we use a warehouse facility with capacity up to $25 million, which bears interest at one-month LIBOR plus 140 to 200 basis points. As of April 30, 2006, the balance outstanding under this facility was $1.6 million.

DELIVERY RISK – We have exposure to delivery risk in our non-prime origination operations, which regularly enter into forward loan sale commitments prior to loans being originated. It is possible that we will be unable to originate the loans or that the loans originated will not meet the required characteristics of the forward loan sale commitments. Several remedies are available, although use of the remedies could reduce the execution price or the effectiveness of the forward loan sale commitment in reducing interest rate risk.

RESIDUAL INTERESTS – Relative to modeled assumptions, an increase or decrease in interest rates would impact the value of our residual interests and could affect accretion income related to our residual interests. Residual interests bear the interest rate risk embedded within the securitization due to an initial fixed-rate period on the loans versus a floating-rate funding cost. Residual interests also bear the on-going risk that the floating interest rate earned after the fixed period on the mortgage loans is different from the floating interest rate on the bonds sold in the securitization.

We enter into interest rate caps and 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. The caps and swaps 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 and the floating rate used in swaps are based on LIBOR. At April 30, 2006 we had no assets or liabilities recorded related to interest rate caps.

See table below for sensitivities to changes in interest rates for residual interests, caps and swaps. See Item 8, note 5 to the consolidated financial statements for additional analysis of interest rate risk and other financial risks impacting residual interests.

It is our policy to use derivative instruments only for the purpose of offsetting or reducing the risk of loss associated with a defined or quantified exposure.

MORTGAGE SERVICING RIGHTS – Declining interest rates may cause increased refinancing activity, which reduces the life of the loans underlying the residual interests and MSRs, thereby generally reducing their fair value. The fair value of MSRs generally increases in a rising rate environment, although MSRs are recorded at the lower of cost or market value. Reductions in the fair value of these assets impact earnings through impairment charges. See Item 8, note 5 to our consolidated financial statements for further sensitivity analysis of other MSR valuation assumptions.

INVESTMENT SERVICES
INTEREST RATE RISK – HRBFA holds interest bearing receivables from customers, brokers, dealers and clearing organizations, which consist primarily of amounts due on margin transactions and are generally short-term in nature. We fund these short-term assets with short-term variable rate liabilities from customers, brokers and dealers, including stock loan activity. Although there may be differences in the timing of the re-pricing related to these assets and liabilities, we believe we are not significantly exposed to interest rate risk in this area. As a result, any change in interest rates would not materially impact our consolidated earnings.

Our fixed-income trading portfolio is affected by changes in market rates and prices. The risk is the loss of income arising from adverse changes in the value of the trading portfolio. We value the trading portfolio at quoted market prices and the market value of our trading portfolio at April 30, 2006 was approximately $16.1 million, net of $0.5 million in securities sold short. See table below for sensitivities to changes in interest rates. With respect to our fixed-income securities portfolio, we manage our market price risk exposure by limiting concentration risk, maintaining minimum credit quality and limiting inventory to anticipated retail demand and current market conditions.

The sensitivities of certain financial instruments to changes in interest rates as of April 30, 2006 and 2005 are presented below. The following table represents hypothetical instantaneous and sustained parallel shifts in interest rates and should not be relied on as an indicator of future expected results.

(in 000s)

Carrying Value at

Basis Point Change

April 30, 2006

-300

-200

-100

-50

+50

+100

+200

+300

Mortgage loans held for investment

407,538

16,285

10,885

5,485

2,785

(2,672

)

(5,301

)

(9,592

)

(15,020

)

Mortgage loans held for sale

236,399

9,253

6,113

3,057

1,528

(1,549

)

(3,146

)

(6,356

)

(8,866

)

Beneficial interest in Trusts – trading

188,014

298,013

199,029

100,039

50,542

(51,789

)

(103,365

)

(189,389

)

(270,970

)

Residual interests in securitizations – available-for-sale

159,058

32,692

13,543

4,795

2,503

(4,181

)

(8,798

)

(17,931

)

(21,232

)

Fixed income – trading (net)

15,609

4,323

2,617

1,174

509

(751

)

(1,359

)

(2,368

)

(3,274

)

Interest rate swaps

8,831

(523,639

)

(344,606

)

(170,090

)

(84,500

)

83,466

165,791

327,397

484,929

Investments at captive insurance subsidiary

8,508

1,260

814

395

195

(189

)

(372

)

(723

)

(1,054

)

Put options on Eurodollar futures

3,282

347

1,183

8,549

15,671

31,539

47,955

Forward loan sale commitments

1,961

(158,345

)

(105,563

)

(52,782

)

(26,391

)

26,391

52,782

105,563

158,345


	Carrying Value at		Basis Point Change
	April 30, 2005		-200		-100		-50		+50			+100			+200			+300

Residual interests in securitizations – available-for-sale	$	205,936	$	84,845	$	30,417	$	13,637	$	(13,520	)	$	(28,174	)	$	(51,466	)	$	(75,296	)
Interest rate caps		12,458		-


	Introduction and Forward Looking Statements	2

	PART I
Item 1.	Business
	General Development of Business	2
	Description of the Business	3
	Service Marks, Trademarks and Patents	14
	Employees	14
	Availability of Reports and Other Information	14
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	16
Item 2.	Properties	16
Item 3.	Legal Proceedings	17
Item 4.	Submission of Matters to a Vote of Security Holders	21

	PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6.	Selected Financial Data	21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 8.	Financial Statements and Supplementary Data	44
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	80
Item 9A.	Controls and Procedures	80
Item 9B.	Other Information	81

	PART III
Item 10.	Directors and Executive Officers of the Registrant	81
Item 11.	Executive Compensation	83
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	83
Item 13.	Certain Relationships and Related Transactions	83
Item 14.	Principal Accounting Fees and Services	84

	PART IV
Item 15.	Exhibits and Financial Statement Schedules	84

	Signatures	85
	Exhibit Index	86