RESULTS OF OPERATIONS
H&R Block provides tax services, banking services and business and consulting services. Our Tax Services segment provides income tax return preparation services, electronic filing services and other services and products related to income tax return preparation to the general public primarily in the United States, Canada and Australia. Our Business Services segment consists of RSM McGladrey, Inc. (RSM), a national accounting, tax and business consulting firm primarily serving mid-sized businesses. Our Consumer Financial Services segment offers retail banking through H&R Block Bank (HRB Bank).
On August 12, 2008, we announced the signing of a definitive agreement to sell H&R Block Financial Advisors, Inc. (HRBFA) to Ameriprise Financial, Inc. (Ameriprise), and completed the disposition of this business effective November 1, 2008. At October 31, 2008, we met the criteria requiring us to present the results of operations of HRBFA and its direct corporate parent as discontinued operations, and the related assets and liabilities as held for sale in the condensed consolidated financial statements. All periods presented have been reclassified to reflect our discontinued operations. See additional discussion in note 15 to our condensed consolidated financial statements.

TAX SERVICES
This segment primarily consists of our income tax preparation businesses -
retail, online and software. Additionally, this segment includes commercial tax
businesses, which provide tax preparation software to CPAs and other tax
preparers.



Tax Services - Operating Results                                                                                    (in 000s)

                                              Three Months Ended October 31,                     Six Months Ended October 31,
                                             2008                       2007                      2008                   2007

Service revenues:
Tax preparation fees              $        56,907            $        49,463           $        86,339            $    74,387
Other services                             32,501                     31,578                    71,284                 68,927

                                           89,408                     81,041                   157,623                143,314
Royalties                                   5,299                      4,919                     8,983                  7,761
Other                                       4,397                      4,844                     7,763                  9,592

Total revenues                             99,104                     90,804                   174,369                160,667

Cost of services:
Compensation and benefits                  63,684                     61,473                   107,881                107,613
Occupancy                                  80,937                     80,108                   160,287                155,068
Depreciation                                8,186                      8,450                    16,205                 16,610
Other                                      45,398                     46,302                    93,075                101,467

                                          198,205                    196,333                   377,448                380,758
Cost of other revenues,
selling, general and
administrative                             85,464                     93,620                   145,409                151,347

Total expenses                            283,669                    289,953                   522,857                532,105

Pretax loss                       $      (184,565 )          $      (199,149 )         $      (348,488 )          $  (371,438 )

Three months ended October 31, 2008 compared to October 31, 2007 Tax Services' revenues increased $8.3 million, or 9.1%, for the three months ended October 31, 2008 compared to the prior year. Tax preparation fees increased $7.4 million, or 15.0% primarily due to an increase of 12.4% in our U.S. retail clients served in company-owned offices and favorable results in Australia. Approximately half of the increase in U.S. retail clients served was due to Economic Stimulus Act filers. Favorable results in Australia were primarily due to an increase in clients served and changes in foreign currency exchange rates.
Total expenses decreased $6.3 million, or 2.2%, for the three months ended October 31, 2008. Cost of other revenues, selling, general and administrative expenses decreased $8.2 million, or 8.7%, primarily as a result of

an $11.3 million reduction in bad debt expense on refund anticipation loans (RALs) compared to the prior year. This decline was due to prior year changes initiated by the Internal Revenue Service's (IRS) taxpayer fraud detection system and penalty collection practices, which resulted in a larger number of refund claims denied during the prior year. This decrease was partially offset by other cost increases.
The pretax loss for the three months ended October 31, 2008 was $184.6 million, compared to a loss of $199.1 million in the prior year.

Six months ended October 31, 2008 compared to October 31, 2007 Tax Services' revenues increased $13.7 million, or 8.5%, for the six months ended October 31, 2008 compared to the prior year. Tax preparation fees increased $12.0 million, or 16.1% primarily due to an increase of 13.3% in our U.S. retail clients served in company-owned offices and favorable results in Australia. Approximately half of the increase in U.S. retail clients served was due to Economic Stimulus Act filers.
Total expenses decreased $9.2 million, or 1.7%, for the six months ended October 31, 2008. Cost of services decreased $3.3 million, or 0.9%, from the prior year, as lower supplies expenses were partially offset by higher occupancy expenses. Other cost of services decreased $8.4 million, or 8.3%, primarily as a result of a $6.0 million decrease in supplies expenses as our tax training schools move to more computer-based training. Occupancy expenses increased $5.2 million, or 3.4%, primarily as a result of higher rent expenses due to a 1.6% increase in company-owned offices under lease and a 2.3% increase in the average rent.
Cost of other revenues, selling, general and administrative expenses decreased $5.9 million, or 3.9%, primarily as a result of an $11.3 million reduction in RAL bad debt expense compared to the prior year, partially offset by other cost increases.
The pretax loss for the six months ended October 31, 2008 was $348.5 million, compared to a loss of $371.4 million in the prior year.

BUSINESS SERVICES
This segment offers accounting, tax and consulting services to middle-market companies.

Business Services - Operating Statistics

                                          Three Months Ended October 31,                   Six Months Ended October 31,
                                             2008                   2007                     2008                  2007

Accounting, tax and
consulting:
Chargeable hours                        1,192,307              1,273,112                2,155,851             2,312,302
Chargeable hours per
person                                        319                    325                      603                   599
Net billed rate per hour         $            150           $        147          $           146           $       146
Average margin per person        $         24,981           $     29,824          $        43,588           $    49,049

Business Services - Operating Results                                                                                     (in 000s)

                                                 Three Months Ended October 31,                        Six Months Ended October 31,
                                               2008                        2007                     2008                       2007

Tax services                        $       110,569             $       104,654           $      186,870            $       179,826
Business consulting                          73,121                      63,803                  126,757                    116,092
Accounting services                          13,421                      14,760                   26,381                     29,685
Capital markets                               4,965                      13,213                   10,783                     23,947
Leased employee revenue                          32                      10,125                       50                     21,496
Reimbursed expenses                           4,330                       4,719                    8,535                     10,567
Other                                        26,607                      27,774                   48,320                     50,258

Total revenues                              233,045                     239,048                  407,696                    431,871

Cost of revenues:
Compensation and benefits                   138,103                     142,640                  242,042                    257,295
Occupancy                                    20,934                      17,814                   39,594                     35,676
Other                                        15,155                      24,909                   30,321                     43,557

                                            174,192                     185,363                  311,957                    336,528
Amortization of intangible
assets                                        3,350                       3,574                    6,769                      7,200
Selling, general and
administrative                               42,422                      38,330                   76,184                     78,268

Total expenses                              219,964                     227,267                  394,910                    421,996

Pretax income                       $        13,081             $        11,781           $       12,786            $         9,875

Three months ended October 31, 2008 compared to October 31, 2007 Business Services' revenues for the three months ended October 31, 2008 declined $6.0 million, or 2.5% from the prior year.
Tax revenues increased $5.9 million due to increases in net billed rate per hour and productivity. Business consulting revenues increased $9.3 million primarily due to a large one time financial institutions engagement. Capital markets revenues decreased $8.2 million, primarily due to a fewer number of transactions closed in the current year as well as a 21.9% decrease in revenue per transaction.
Leased employee revenue decreased $10.1 million primarily due to a change in organizational structure between the businesses we acquired from American Express Tax and Business Services, Inc. (AmexTBS) and the attest firms that, while not affiliates of our company, also serve our clients. Employees we previously leased to the attest firms were transferred to the separate attest practices in the prior fiscal year. As a result, we no longer record the revenues and expenses associated with leasing these employees. Total expenses decreased $7.3 million, or 3.2%, from the prior year. Compensation and benefits and other cost of revenues decreased primarily due to the change in organizational structure with AmexTBS as discussed above. Selling, general and administrative expenses increased $4.1 million primarily due to higher legal fees and insurance expenses.
Pretax income for the three months ended October 31, 2008 was $13.1 million compared to $11.8 million in the prior year.

Six months ended October 31, 2008 compared to October 31, 2007 Business Services' revenues for the six months ended October 31, 2008 declined $24.2 million, or 5.6% from the prior year.
Tax revenues increased $7.0 million due to increases in net billed rate per hour and productivity. Business consulting revenues increased $10.7 million primarily due to a large one time financial institutions engagement. Capital markets revenues decreased $13.2 million, primarily due to a fewer number of transactions closed in the current year as well as a 36.0% decrease in revenue per transaction.
Leased employee revenue decreased $21.4 million primarily due to a change in organizational structure between the businesses we acquired from AmexTBS, as discussed above.
Total expenses decreased $27.1 million, or 6.4%, from the prior year. Compensation and benefits and other cost of revenues decreased primarily due to the change in organizational structure with AmexTBS as discussed above. Selling, general and administrative expenses decreased $2.1 million primarily as a result of our cost reduction program.

Pretax income for the six months ended October 31, 2008 was $12.8 million compared to $9.9 million in the prior year.

CONSUMER FINANCIAL SERVICES
This segment is engaged in providing retail banking offerings to Tax Services
clients through HRB Bank. HRB Bank offers traditional banking services including
prepaid debit card accounts, checking and savings accounts, individual
retirement accounts and certificates of deposit. This segment previously
included HRBFA, which has been presented as a discontinued operation in the
accompanying condensed consolidated financial statements.



Consumer Financial Services - Operating Statistics                                                    (dollars in 000s)

                                        Three Months Ended October 31,                     Six Months Ended October 31,
                                         2008                     2007                      2008                   2007

Efficiency ratio (1)                      61%                      38%                       76%                    38%
Annualized net
interest margin (2)                     3.27%                    2.48%                     3.42%                  2.30%
Annualized pretax
return on average
assets (3)                            (7.05)%                  (1.38)%                   (6.15)%                  0.06%
Total assets                 $      1,179,467             $  1,179,453           $     1,179,467            $ 1,179,453
Mortgage loans held
for investment:
Loan loss reserve as
a % of mortgage
loans                                   7.27%                    1.40%                     7.27%                  1.40%
Delinquency rate                       11.65%                    1.96%                    11.65%                  1.96%

(1) Defined as non-interest expense divided by revenue net of interest expense.
See "Reconciliation of Non-GAAP Financial Information" at the end of Part I, Item 2.
(2) Defined as annualized net interest revenue divided by average bank earning assets. See "Reconciliation of Non-GAAP Financial Information" at the end of

Consumer Financial Services - Operating Results                                                                           (in 000s)

                                                 Three Months Ended October 31,                        Six Months Ended October 31,
                                               2008                        2007                     2008                       2007

Interest income:
Mortgage loans                           $   12,098              $       20,451           $       25,363            $        42,942
Other                                         1,008                         887                    2,274                      2,032

                                             13,106                      21,338                   27,637                     44,974

Interest expense:
Deposits                                      3,884                      12,221                    7,927                     26,464
FHLB advances                                 1,327                       1,470                    2,655                      3,360

                                              5,211                      13,691                   10,582                     29,824

Net interest income                           7,895                       7,647                   17,055                     15,150
Provision for loan loss reserves            (23,092 )                    (9,842 )                (38,083 )                  (11,926 )
Other                                         3,729                       1,784                    8,148                      5,330

Total revenues (1)                          (11,468 )                      (411 )                (12,880 )                    8,554

Non-interest expenses                         7,161                       3,998                   19,866                      8,121

Pretax income (loss)                     $  (18,629 )            $       (4,409 )         $      (32,746 )          $           433

(1) Total revenues, less provision for loan loss reserves on mortgage loans held for investment and interest expense.

Three months ended October 31, 2008 compared to October 31, 2007 Consumer Financial Services' revenues, net of interest expense and provision for loan loss reserves, for the three months ended October 31, 2008 decreased $11.1 million over the prior year.

Net interest income was essentially flat compared to the prior year. Interest expense and interest income are both declining due to lower interest rates and lower average balances in the corresponding liability or asset. Interest income is also declining due to an increase in non-accrual loans from $2.8 million at October 31, 2007 to $150.8 million at October 31, 2008. The following table summarizes the key drivers of net interest income:

                                                                                                      (dollars in 000s)
                                               Average Balance                               Average Rate Earned (Paid)
Three Months Ended October 31,              2008                  2007                       2008                  2007

Loans                                  $ 905,161           $ 1,194,567                 5 .56%                   6 .85%
Investments                              114,726                65,318                 1 .81%                   5 .41%

Deposits                                 775,925               964,809                (1 .99)%                 (5 .03)%




Our non-performing assets consist of the following:

                                                              (in 000s)
                                               October 31,    April 30,
               Balance at                             2008         2008

               Impaired loans                $     150,802   $  128,941
               Real estate owned(1)                 53,203          350

               Total non-performing assets   $     204,005   $  129,291

(1) Includes loans accounted for as in-substance foreclosures of $39.7 million at October 31, 2008.

Detail of our mortgage loans held for investment and the related allowance at October 31, 2008 and April 30, 2008 is as follows:

                                                                                                    (dollars in 000s)
                                               Outstanding          Loan Loss          % 30-Days
                                         Principal Balance          Allowance           Past Due         Average FICO

As of October 31, 2008:
Purchased from former affiliates:
Option One                             $           562,403        $    60,408              16.72 %                655
H&R Block Mortgage                                  48,455                806               4.62 %                690

                                                   610,858             61,214              15.76 %                658
Purchased from third-parties                       258,193              2,438               1.70 %                726

                                       $           869,051        $    63,652              11.65 %                678

As of April 30, 2008:
Purchased from former affiliates:
Option One                             $           683,889        $    43,769              17.53 %                664
H&R Block Mortgage                                  50,769                411               3.00 %                696

                                                   734,658             44,180              16.30 %                666
Purchased from third-parties                       269,982              1,221               1.90 %                726

                                       $         1,004,640        $    45,401              11.71 %                682

Mortgage loans held for investment include loans originated by our former mortgage loan affiliates, Option One and H&R Block Mortgage (HRBMC), and purchased by HRB Bank totaling $610.9 million, or approximately 70% of the total loan portfolio at October 31, 2008. Loans originated by and purchased from Option One have characteristics which are representative of Alt-A loans - loans to customers who have credit ratings above sub-prime, but may not conform to government-sponsored standards. As such, we have experienced higher rates of delinquency and have greater exposure to loss with respect to this segment of our loan portfolio. Cumulative losses on our original loan portfolio purchased from Option One, including losses on loans now classified as other real estate, totaled approximately 13% at October 31, 2008. Our remaining loan portfolio, which was purchased from HRBMC and third-parties totaled $48.3 million and $258.2 million, respectively, and is characteristic of a prime loan portfolio and we believe subject to a lower loss exposure.
We recorded a provision for loan losses on our mortgage loans held for investment of $23.1 million during the current quarter, compared to $9.8 million in the prior year. Our loan loss provision increased primarily as a result of abrupt and steep declines in residential home prices, particularly in certain states where we have a higher concentration of loans. Our allowance for loan losses as a percent of mortgage loans was 7.27%, or

$63.7 million, at October 31, 2008, compared to 4.49%, or $45.4 million, at April 30, 2008. This allowance represents our best estimate of credit losses inherent in the loan portfolio as of the balance sheet dates.
In estimating our loan loss allowance, we stratify the loan portfolio based on our view of risk associated with various elements of the pool and assign estimated loss rates based on those risks. Loss rates are based primarily on historical experience and our assessment of economic and market conditions. Loss rates consider both the rate at which loans will become delinquent (frequency) and the amount of loss that will ultimately be realized upon occurrence of a liquidation of collateral (severity). At October 31, 2008 and April 30, 2008 our weighted average frequency assumption was approximately 15% and 14%, respectively, and included a frequency assumption of 21% relating to the Option One segment of our portfolio. Our weighted average severity assumption increased to 37.5% at October 31, 2008 from 22% at April 30, 2008, due to declining collateral values during the current year.
Residential real estate markets are experiencing significant declines in property values and mortgage default rates are increasing. If adverse market trends continue, including trends within our portfolio specifically, we may be required to record additional loan loss provisions, and those losses may be significant.
Non-interest expenses increased $3.2 million, or 79.2%, from the prior year, primarily due to increased allocations of corporate shared services. The pretax loss for the three months ended October 31, 2008 was $18.6 million compared to prior year loss of $4.4 million.

Six months ended October 31, 2008 compared to October 31, 2007 Consumer Financial Services' revenues, net of interest expense and provision for loan loss reserves, for the six months ended October 31, 2008 decreased $21.4 million over the prior year.
Net interest income increased $1.9 million from the prior year as a $17.6 million decline in interest income on mortgage loans held for investment was offset by an $18.5 million decline in interest expense on deposits. The following table summarizes the key drivers of net interest income:

                                                                            (dollars in 000s)
                                     Average Balance            Average Rate Earned (Paid)
 Six Months Ended October 31,        2008            2007               2008             2007

 Loans                          $ 943,209     $ 1,266,719              5.38%           6.78%
 Investments                       96,941          75,249              2.14%           5.38%
 Deposits                         706,102       1,034,852            (2.23)%          (5.07)%

We recorded a provision for loan losses on our mortgage loans held for investment of $38.1 million during the current year, compared to $11.9 million in the prior year. Our loan loss provision increased primarily as a result of declining residential home prices, as well as increasing delinquencies occurring in our portfolio.
Non-interest expenses increased $11.7 million, or 144.6%, from the prior year, primarily due to an impairment charge of $5.9 million recorded on our real estate owned and increased allocations of corporate shared services. The pretax loss for the six months ended October 31, 2008 was $32.7 million compared to prior year income of $0.4 million.

Mortgage Loans Held for Investment and Related Assets

State Concentrations
Concentrations of loans to borrowers located in a single state may result in increased exposure to loss as a result of changes in real estate values and underlying economic or market conditions related to a particular

geographical location. The table below presents outstanding loans by certain state concentrations for our mortgage loans held for investment portfolio:

                                                                                    (dollars in 000s)
               Loans Purchased          Loans Purchased                     Percent       Delinquency
               From Affiliates       From Third-Parties         Total      of Total              Rate

. . .