H&R Block Reports Fiscal First Quarter Results; Revenues Grow 26 Percent; Earnings Improve 23 Percent

"We've started the year with a strong first quarter, highlightedby double-digit revenue increases in all business segments," said MarkA. Ernst, chairman and chief executive officer. "Even with ourcontinuing investment in new tax offices, we saw an improvement overthe loss posted last year."

Highlights in the quarter include:

-- Continuing expansion of H&R Block's tax office network;

-- A 60 percent increase in mortgage loan origination;

-- A 16 percent growth in revenues for RSM McGladrey and its related businesses; and

-- A 27 percent increase in revenues and a 63 percent reduction in pretax loss within Investment Services.

Tax Services

First quarter revenues for Tax Services increased 13 percent to$57.2 million from $50.4 million. The business segment reported apretax loss of $144.5 million, 28 percent greater than a $112.6million loss posted last year, due primarily to the addition of taxoffices during the past year and ongoing efforts to further expand thecompany's tax office network.

"We are aggressively expanding our retail office network forlong-term growth," Ernst explained. "We opened more than 1,200 newcompany-owned and franchised retail locations last year and areplanning 500 to 700 more offices this tax season. Adding officesprovides clients with even greater convenience and allows us to servethem more quickly and efficiently. While there are upfront costs toachieve these benefits, we carefully plan and control our spending andare meeting projections for both investment in offices and businessgrowth."

Mortgage Services

H&R Block's mortgage business reported a 23 percent increase infirst quarter pretax income to $134.5 million from $109 million lastyear. Revenues advanced 33 percent to $360.4 million from $272 millionin last year's first quarter.

Loan origination volume reached an all-time high of $10.9 billionin the first quarter. This was 60 percent greater than $6.8 billion ayear ago and 17 percent ahead of the 2005 fiscal fourth quarter.

"In an aggressive competitive environment, our mortgage businessis gaining market share through the superior quality of service ourorganization delivers," Ernst said. "Lower cost of origination issomewhat mitigating what is a very competitive pricing environment."

Loan origination costs declined 28 basis points to 1.94 percentversus 2.22 percent last year.

Total gain on sales for Mortgage Services was $236.4 million forthe current year quarter, 29 percent higher than $183.4 million lastyear. The increase is due primarily to growth in loan originations andhigher gains from interest rate hedging activities, partially offsetby market pricing pressures.

Option One's mortgage servicing business increased its servicingportfolio at the end of the quarter 43 percent to $70.5 billion versus$49.4 billion a year ago.

Overall, the segment's residual interests performed as expected,as the effect of lower than previously modeled credit losses wasmostly offset by higher interest rates. Consequently, the companyrealized a net write-up to residuals of $12.9 million in the firstquarter, which was recorded in other comprehensive income, net ofdeferred taxes. Offsetting these write-ups, the company realized $12.4million in write-downs, which was recorded as a reduction in gains onsales of mortgage assets on the income statement.

Business Services

Business Services improved its first quarter revenues by 16percent to $126.8 million, up from $109.1 million last year. Thepretax loss in the segment improved by 33 percent to $6.8 millionversus $10 million last year. The business is highly seasonal andtypically loses money outside the third and fourth quarters.

"This is the eighth straight quarter of double-digit revenuegrowth versus prior year for RSM McGladrey and its relatedbusinesses," Ernst said. "Such outstanding growth, both in the coreand the non-traditional areas of our business, demonstrates thestrength of our market position and execution on the opportunity thatexists."

"The pending combination of the American Express Tax & BusinessServices division with RSM McGladrey offers a tremendous newopportunity for growth," Ernst continued. "The acquisition will createthe nation's largest tax, accounting and business services firmdedicated to serving mid-sized companies. We'll offer added valuethrough the scale, depth and scope of resources focused on clientneeds."

On Aug. 1 the company announced a definitive agreement to acquirethe American Express Tax & Business Services division, and theacquisition is expected to close at the end of September.

Investment Services

Revenues for Investment Services in the first quarter increased 27percent to $68 million from $53.6 million in the prior year period.The 2006 first quarter pretax loss of $7.6 million was 63 percentbetter than the loss of $20.3 million last year. Included in thepretax loss is $9.2 million of intangible amortization.

"The opportunity that we saw for significantly improvedperformance from Investment Services is beginning to become reality,"Ernst said. "While there's still work ahead to achieve better businesspositioning and performance, we're showing real progress in aligningcosts with revenues, raising productivity and forging partnershipswith our U.S. tax professionals. We are optimistic that significantperformance improvement will continue this year."

Fiscal 2006 Outlook

For fiscal year 2006, the company affirmed its prior expectationof earnings per share in the range of $2.12 to $2.32.

"First quarter results are consistent with the guidance we set inJune for our financial performance this year," Ernst said. "Where weultimately fall within our $2.12 to $2.32 range will be a function ofdevelopments within the mortgage business, the broader competitiveenvironment we face there and the outcome of actions we currently haveunder way."

Other

Reported results take into account a two-for-one split of thecompany's stock, which was paid in the form of a 100 percent stockdistribution on Aug. 22, 2005, to shareholders of record at the closeof business Aug. 1, 2005. During the first quarter, the companyreacquired 5 million shares (split-adjusted) of its common stock at anaverage purchase price of $28.42 per share.

The company noted that its financial information also reflects arestatement (announced in June) of results for 2003 to 2005, whichincluded adjusting last year's first quarter loss to $36.7 million, or11 cents per share, from the originally reported $44.1 million, or 13cents a share. The restatement has been detailed previously in thecompany's Form 8-K and 10-K filings.

Conference Call

The company will host a conference call for analysts andinstitutional investors at 5:00 p.m. EDT (4:00 p.m. CDT) Sept. 1.Ernst and Jeff Yabuki, executive vice president and chief operatingofficer; Bill Trubeck, executive vice president and chief financialofficer; and Bob Dubrish, president and chief executive officer ofOption One Mortgage Corp., will discuss the quarter's results andfuture expectations, as well as respond to analyst questions. Toaccess the call, please dial the number approximately five to 10minutes prior to the scheduled starting time:
U.S./Canada: 888-425-2715 Access Code: 7773652
International: 706-679-8257 Access Code: 7773652

The call will be webcast in a listen-only format for the media andpublic. The link to the webcast can be obtained at www.hrblock.com.Supplemental slides will be available in connection with the webcast,or can be accessed directly on H&R Block's Investor Relations websiteat www.hrblock.com/about/investor following market close.

A replay of the call will be available beginning at 7:00 p.m. EDTSept. 1 until midnight EDT Sept. 8, by dialing 800-642-1687(U.S./Canada) or 706-645-9291 (International). The replay access codeis 7773652. A replay of the webcast will also be available on thecompany's web site at www.hrblock.com through Sept. 30.

Except for historical information contained herein, the mattersset forth in this press release are forward-looking statements basedupon current information and expectations. Such statements speak onlyas of the date on which they are made, are not guarantees of futureperformance, and involve certain risks, uncertainties and assumptionsthat could cause actual results to differ materially from what isexpressed, implied or forecast in such forward-looking statements.

Such differences could be caused by a number of factors,including, but not limited to: the uncertainty that the company willachieve or exceed its revenue, earnings, and earnings-per-share growthgoals or expectations for fiscal year 2006; the uncertainty of thecompany's ability to purchase shares of its common stock pursuant tothe board's authorization; the uncertainty of the effect of any sharerepurchases upon the company and its shareholders; changes in interestrates; changes in economic, political or regulatory environments;changes in competition; litigation involving the company and itssubsidiaries; and risks described from time to time in reports andregistration statements filed by H&R Block Inc. and its subsidiarieswith the Securities and Exchange Commission. Readers should take thesefactors into account in evaluating such forward-looking statements.

About H&R Block

Celebrating its 50th anniversary in 2005, H&R Block is the world'slargest tax services provider, having served more than 400 millionclients since 1955. The sixth largest retailer in the world, H&R Blockhas more than 12,000 locations serving taxpayers primarily in theUnited States, Canada and Australia.

H&R Block's subsidiaries deliver tax services and financialadvice, investment and mortgage services, and business accounting andconsulting services. H&R Block Financial Advisors Inc. offersinvestment services and securities products. With approximately 1,000financial advisors serving clients at approximately 250 locations, H&RBlock Financial Advisors is a member NYSE, SIPC, a registeredbroker-dealer and investment advisor. H&R Block Inc. is not aregistered broker-dealer and is not an investment advisor. H&R BlockMortgage Corp. offers a full range of retail mortgage services. OptionOne Mortgage Corp. provides mortgage services and offers wholesalemortgages through large financial institutions and a network of 24,000independent mortgage brokers. RSM McGladrey Business Services Inc. andits subsidiaries serve mid-sized businesses and their owners with tax,accounting and business consulting services, as well as personalwealth management services. H&R Block Small Business Resources is anew business currently operating in 14 U.S. cities that serves thetax, financial and business needs of small business owners. H&R BlockSmall Business Resources is not a licensed CPA firm. For moreinformation about the company, visit our Online Press Center atwww.hrblock.com/presscenter.
H&R BLOCK
KEY OPERATING RESULTS
Amounts in thousands, except per share data

Three months ended July 31,
Revenues Income (loss)
------------------- ---------------------
2005 2004 2005 2004
----------------------------------------------------------------------
Restated Restated
--------- ----------

Tax Services $57,191 $50,447 $(144,506) $(112,646)
Mortgage Services 360,438 271,973 134,468 109,025
Business Services 126,846 109,102 (6,765) (10,045)
Investment Services 67,983 53,581 (7,552) (20,343)
Corporate 2,535 1,448 (21,514) (24,791)
------------------- ---------------------
$614,993 $486,551 (45,869) (58,800)
===================
Income tax benefit (17,545) (22,058)
---------------------
Net loss $(28,324) $(36,742)
=====================

Basic and diluted loss per share $(0.09) $(0.11)
=====================

Basic and diluted shares outstanding 330,714 337,270


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Financial statement amounts reflect the restatement of results for the
three months ended July 31, 2004, as detailed previously in our Form
10-K/A filed for the year ended April 30, 2005.

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 have been adjusted to reflect the retroactive effect of the
stock split.

Basic earnings per share is based on the weighted average number of
shares outstanding. The dilutive effect of potential common shares is
included in diluted earnings per share except in those periods with a
loss.

Certain reclassifications have been made to prior year amounts to
conform to the current period presentation. These reclassifications
had no effect on the results of operations or stockholders' equity as
previously reported.
----------------------------------------------------------------------
H&R BLOCK
CONDENSED CONSOLIDATED BALANCE SHEETS
Preliminary and unaudited, amounts in thousands, except share data

July 31, April 30,
2005 2005
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $632,801 $1,100,213
Cash and cash equivalents - restricted 416,981 516,909
Marketable securities - trading 77,085 11,790
Receivables from customers, brokers, dealers
and clearing organizations, net 585,214 590,226
Receivables, net 404,501 418,788
Prepaid expenses and other current assets 473,831 432,708
----------- -----------
Total current assets 2,590,413 3,070,634
----------- -----------


Residual interests in securitizations -
available-for-sale 193,207 205,936
Beneficial interest in Trusts - trading 185,539 215,367
Mortgage servicing rights 188,708 166,614
Property and equipment, net 328,684 330,150
Intangible assets, net 232,242 247,092
Goodwill, net 1,018,632 1,015,947
Other assets 279,756 287,543
----------- -----------
Total assets $5,017,181 $5,539,283
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $25,854 $25,545
Accounts payable to customers, brokers and
dealers 871,715 950,684
Accounts payable, accrued expenses and other 497,215 564,749
Accrued salaries, wages and payroll taxes 161,661 318,644
Accrued income taxes 346,568 349,298
----------- -----------
Total current liabilities 1,903,013 2,208,920
----------- -----------

Long-term debt 923,145 923,073
Other noncurrent liabilities 368,028 430,919
----------- -----------
Total liabilities 3,194,186 3,562,912
----------- -----------

Stockholders' equity:
Common stock, no par, stated value $.01 per
share 4,359 4,359
Additional paid-in capital 601,348 598,388
Accumulated other comprehensive income 63,731 68,718
Retained earnings 3,123,924 3,188,785
Less cost of 106,780,588 and 104,649,850
shares of common stock in treasury (1,970,367) (1,883,879)
----------- -----------
Total stockholders' equity 1,822,995 1,976,371
----------- -----------
Total liabilities and stockholders' equity $5,017,181 $5,539,283
=========== ===========
H&R BLOCK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Preliminary and unaudited, amounts in thousands

Three months ended
July 31,
---------------------
2005 2004
---------- ----------
Restated
----------
Cash flows from operating activities:
Net loss $(28,324) $(36,742)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 44,085 38,908
Accretion of residual interests in
securitizations (30,777) (28,677)
Impairment of residual interests in
securitizations 12,415 2,609
Additions to trading securities -
residual interests in securitizations (101,002) -
Proceeds from net interest margin
transactions 40,371 -
Additions to mortgage servicing rights (49,306) (28,493)
Amortization and impairment of
mortgage servicing rights 27,212 18,334
Net change in beneficial interest in
Trusts 29,828 (1,433)
Other net changes in working capital,
net of acquisitions (255,017) (479,838)
---------- ----------
Net cash used in operating activities (310,515) (515,332)
---------- ----------

Cash flows from investing activities:
Cash received from residual interests in
securitizations 24,031 38,826
Purchases of property and equipment, net (30,330) (22,714)
Payments made for business acquisitions,
net of cash acquired (3,452) (806)
Other, net 7,935 8,300
---------- ----------
Net cash provided by (used in)
investing activities (1,816) 23,606
---------- ----------

Cash flows from financing activities:
Repayments of commercial paper - (314,836)
Proceeds from issuance of commercial paper - 419,700
Dividends paid (36,537) (33,636)
Acquisition of treasury shares (131,642) (347,395)
Proceeds from issuance of common stock 32,318 12,375
Other, net (19,220) (127)
---------- ----------
Net cash used in financing activities (155,081) (263,919)
---------- ----------

Net decrease in cash and cash equivalents (467,412) (755,645)
Cash and cash equivalents at beginning of the
period 1,100,213 1,072,745
---------- ----------
Cash and cash equivalents at end of the period $632,801 $317,100
========== ==========

Supplementary cash flow data:
Income taxes paid $35,278 $183,383
Interest paid 13,830 12,545
H&R BLOCK
CONDENSED CONSOLIDATED INCOME STATEMENTS
Preliminary and unaudited, amounts in thousands, except per share data

Three months ended
July 31,
-------------------
2005 2004
--------- ---------
Restated
---------
Revenues:
Service revenues $315,128 $248,588
Other revenues:
Gains on sales of mortgage assets, net 236,431 183,360
Interest income 49,253 39,720
Product and other revenues 14,181 14,883
--------- ---------
614,993 486,551
--------- ---------

Operating expenses:
Cost of service revenues 343,218 291,012
Other, selling, general and administrative 312,609 238,554
--------- ---------
655,827 529,566
--------- ---------

Operating loss (40,834) (43,015)
Interest expense 12,435 17,793
Other income, net 7,400 2,008
--------- ---------

Loss before taxes (45,869) (58,800)
Income tax benefit (17,545) (22,058)
--------- ---------

Net loss $(28,324) $(36,742)
========= =========

Basic and diluted loss per share $(0.09) $(0.11)
========= =========

Basic and diluted shares outstanding 330,714 337,270
H&R BLOCK
SELECTED OPERATING DATA
Unaudited


Mortgage Services Three months ended
---------------------------------------------------
7/31/2005 7/31/2004 % change 4/30/2005 % change
----------------------------------------------------------------------

Volume of loans
originated
(thousands):
Wholesale (non-
prime) $9,537,227 $5,981,104 59.5% $8,090,274 17.9%

Retail: Non-
prime 950,806 620,126 53.3% 807,269 17.8%
Prime 399,596 215,287 85.6% 380,946 4.9%
--------- --------- ----- --------- -----
1,350,402 835,413 61.6% 1,188,215 13.6%
--------- --------- ----- --------- -----

Total $10,887,629 $6,816,517 59.7% $9,278,489 17.3%
========== ========= ===== ========= =====

Loan
character-
istics:
Average loan
size
(thousands) $165 $155 6.5% $158 4.4%
Weighted
average
interest
rate (WAC)(1) 7.52% 7.21% 0.31% 7.45% 0.07%
Weighted average
FICO score(1) 623 609 618

Loan sales
(thousands) $10,843,006 $6,744,056 60.8% $9,322,150 16.3%
=========== ========== ===== ========== =====

Servicing
portfolio:
Number of
loans
serviced 451,310 344,659 30.9% 435,290 3.7%
Servicing
portfolio
(billions) $70.5 $49.4 42.7% $68.0 3.7%
----------------------------------------------------------------------
(1) Represents non-prime production only.



Investment Services Three months ended
---------------------------------------------------
7/31/2005 7/31/2004 % change 4/30/2005 % change
----------------------------------------------------------------------

Customer
trades(2) 226,378 205,948 9.9% 241,327 -6.2%
Customer daily
average trades 3,593 3,269 9.9% 3,892 -7.7%
Average revenue
per trade(3) $126.71 $119.71 5.8% $127.73 -0.8%

Customer
accounts:(4)
Traditional
brokerage 431,046 454,147 -5.1% 431,749 -0.2%
Express IRAs 379,432 337,583 12.4% 380,539 -0.3%
--------- --------- ---------
810,478 791,730 2.4% 812,288 -0.2%
========= ========= =========

Ending balance of
assets under
administration
(billions) $30.0 $26.6 12.8% $27.8 7.9%
Average assets per
traditional
brokerage account $68,870 $58,128 18.5% $63,755 8.0%

Average customer
margin balances
(millions) $573 $598 -4.2% $603 -5.0%
Average payables
to customers
(millions) $841 $1,012 -16.9% $936 -10.1%
Advisors 985 997 -1.2% 1,010 -2.5%
----------------------------------------------------------------------
(2) Includes only trades on which revenues are earned ("revenue
trades"). Revenues, defined as trading revenues, are earned on both
transactional and annuitized trades.
(3) Calculated as trading revenues divided by revenue trades.
(4) Includes only accounts with a positive period-end balance.