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. This segment also offers The H&R Block Prepaid Emerald MasterCard® and Emerald Advance lines of credit through H&R Block Bank (HRB Bank), which was previously reported in our Consumer Financial Services segment. Our Business Services segment consists of RSM McGladrey, Inc. (RSM), a national accounting, tax and business consulting firm primarily serving mid-sized businesses. Corporate operating losses include interest income from U.S. passive investments, interest expense on borrowings, net interest margin and gains or losses relating to mortgage loans held for investment, real estate owned, residual interests in securitizations and other corporate expenses, principally related to finance, legal and other support departments. All periods presented reflect our new segment reporting structure.
Recent Events. RSM and McGladrey & Pullen LLP (M&P), an independent registered public accounting firm, collaborate to provide accounting, tax and consulting services to clients under an alternative practice structure. RSM and M&P also share in certain common overhead costs through an administrative services agreement. These services are provided by, and coordinated through, RSM, for which RSM receives a management fee. On July 21, 2009, M&P provided 210 days notice of its intent to terminate the administrative services agreement. The effect of the notice will be to terminate the alternative practice structure on February 16, 2010, unless revoked or modified prior to that time. RSM and M&P are engaged in arbitration to determine several of their rights and responsibilities under their contractual obligations to each other. An arbitration hearing is scheduled for November 2009. RSM and M&P are also engaged in negotiations to determine if there are mutually agreeable changes to the current arrangements that would allow our collaboration to continue. There are no assurances as to the outcome.

TAX SERVICES
This segment primarily consists of our income tax preparation businesses -
retail, online and software. Additionally, this segment includes the product
offerings and activities of HRB Bank that primarily support the tax network, our
participations in refund anticipation loans, and our commercial tax businesses,
which provide tax preparation software to CPAs and other tax preparers.



            Tax Services - Operating Results                     (in 000s)

            Three Months Ended July 31,                2009           2008

            Tax preparation fees                 $   33,625     $   29,432
            Fees from Peace of Mind guarantees       27,913         27,241
            Fees from Emerald Card activities        11,691         10,893
            Royalties                                 3,607          3,684
            Other                                    11,127         10,450

            Total revenues                           87,963         81,700

            Compensation and benefits:
            Field wages                              39,379         39,819
            Corporate wages                          29,880         28,810
            Benefits and other compensation          21,316         13,903

                                                     90,575         82,532
            Occupancy and equipment                  87,920         86,056
            Depreciation and amortization            22,316         17,110
            Marketing and advertising                 6,839          5,544
            Other                                    52,287         54,115

            Total expenses                          259,937        245,357

            Pretax loss                          $ (171,974 )   $ (163,657 )

Three months ended July 31, 2009 compared to July 31, 2008 Tax Services' revenues increased $6.3 million, or 7.7%, for the three months ended July 31, 2009 compared to the prior year. Tax preparation fees increased $4.2 million, or 14.2%, primarily due to favorable results in our Australian tax operations.
Total expenses increased $14.6 million, or 5.9%, for the three months ended July 31, 2009. Approximately $9 million of this increase was the result of the November 2008 acquisition of our last major independent franchise operator, which includes approximately $2 million of amortization due to higher intangible asset balances and additional pre-season expenses. Benefits and other compensation increased $7.4 million, or 53.3%, primarily as a result of severance costs and related payroll taxes in the current year. The pretax loss for the three months ended July 31, 2009 and 2008 was $172.0 million and $163.7 million, respectively.

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



             Business Services - Operating Results              (in 000s)

             Three Months Ended July 31,              2009           2008

             Tax services                        $  77,584     $   76,301
             Business consulting                    61,921         53,508
             Accounting services                    11,529         12,960
             Capital markets                         1,517          5,818
             Reimbursed expenses                     4,149          4,205
             Other                                  20,918         21,859

             Total revenues                        177,618        174,651

             Compensation and benefits             134,380        122,908
             Occupancy                              19,449         19,834
             Amortization of intangible assets       2,965          3,419
             Other                                  19,503         28,785

             Total expenses                        176,297        174,946

             Pretax income (loss)                $   1,321     $     (295 )

Three months ended July 31, 2009 compared to July 31, 2008 Business Services' revenues for the three months ended July 31, 2009 increased $3.0 million, or 1.7% from the prior year. Revenues from core tax, consulting and accounting services increased $8.3 million, or 5.8%, over the prior year primarily due to revenues from consulting engagements related to financial institutions.
Capital markets revenues decreased $4.3 million, or 73.9%, primarily due to a 72.7% decline in the number of transactions closed in the current year due to the continued weak economic conditions. Given the continued limited availability of financing for acquisitions in the middle-market, our capital markets revenues may continue to fall below our expectations, which could lead us to consider impairment of the $29.3 million carrying value of goodwill related to our capital markets business.
Total expenses increased $1.4 million, or 0.8%, from the prior year. Compensation and benefits increased $11.5 million, or 9.3%, primarily due to increases in managing director compensation and outside contractor costs related to consulting engagements. Other expenses decreased $9.3 million primarily as a result of our cost reduction program.
Pretax income for the three months ended July 31, 2009 was $1.3 million compared to a loss of $0.3 million in the prior year.

CORPORATE, ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS Corporate operating losses include interest income from U.S. passive investments, interest expense on borrowings, net interest margin and gains or losses relating to mortgage loans held for investment, real estate

owned, residual interests in securitizations and other corporate expenses, principally related to finance, legal and other support departments.

          Corporate - Operating Results                            (in 000s)

          Three Months Ended July 31,                    2009           2008

          Interest income:
          Mortgage loans held for investment, net   $   7,896     $   13,265
          Other investments                               824          1,094

                                                        8,720         14,359
          Other                                         1,204          1,199

          Total revenues                                9,924         15,558

          Interest expense:
          Borrowings - HRB Bank                         2,011          5,125
          Borrowings - Corporate                       17,647         17,617

                                                       19,658         22,742
          Provision for loan losses                    13,600         14,991
          Compensation and benefits                    13,301         12,748
          Other                                         3,585         14,095

          Total expenses                               50,144         64,576

          Pretax loss                               $ (40,220 )   $  (49,018 )

Three months ended July 31, 2009 compared to July 31, 2008 Interest income earned on mortgage loans held for investment decreased $5.4 million from the prior year, primarily as a result of declining rates and non-performing loans. Other expenses declined $10.5 million due to impairments of residual interests totaling $5.0 million recorded in the prior year, coupled with a $4.2 million decline in impairments of real estate owned.

Income Taxes
Our effective tax rate for continuing operations was 38.1% and 39.7% for the three months ended July 31, 2009 and 2008, respectively. Our effective tax rate declined from the prior year due to non-deductible losses from investments in company-owned life insurance assets recorded in the first fiscal quarter of last year. We expect our effective tax rate for full fiscal year 2010 to be approximately 40%.

Mortgage Loans Held for Investment
Mortgage loans held for investment include loans originated by our affiliate, Sand Canyon Corporation (SCC), and purchased by HRB Bank totaling $514.3 million, or approximately 65% of the total loan portfolio at July 31, 2009. We have experienced higher rates of delinquency and have greater exposure to loss with respect to this segment of our loan portfolio. Our remaining loan portfolio totaled $278.9 million and is characteristic of a prime loan portfolio, and we believe subject to a lower loss exposure.
Detail of our mortgage loans held for investment and the related allowance at July 31, 2009 and April 30, 2009 is as follows:

                                   Outstanding       Loan Loss                %30+Days
                             Principal Balance       Allowance                Past Due

   As of July 31, 2009:
   Purchased from SCC      $           514,267     $    85,644                   32.55 %
   All other                           278,859           6,047                    6.94 %

                           $           793,126     $    91,691                   23.67 %

   As of April 30, 2009:
   Purchased from SCC      $           531,233     $    78,067                   28.74 %
   All other                           290,604           6,006                    4.44 %

                           $           821,837     $    84,073                   20.23 %

We recorded a provision for loan losses of $13.6 million during the current quarter, compared to $15.0 million in the prior year. Our allowance for loan losses as a percent of mortgage loans was 11.56%, or $91.7 million, at July 31, 2009, compared to 10.23%, or $84.1 million, at April 30, 2009. This allowance represents our best estimate of credit losses inherent in the loan portfolio as of the balance sheet dates.
Our non-performing assets consist of the following:

          As of                           July 31, 2009       April 30, 2009

          Impaired loans:
          60 - 89 days                  $        14,519     $         21,415
          90+ days, non-accrual                 148,603              121,685
          TDR loans, accrual                     90,275               60,044
          TDR loans, non-accrual                 71,295              100,697

                                                324,692              303,841
          Real estate owned(1)                   42,741               44,533

          Total non-performing assets   $       367,433     $        348,374

(1) Includes loans accounted for as in-substance foreclosures of $23.5 million and $27.4 million at July 31, 2009 and April 30, 2009, respectively.

FINANCIAL CONDITION
These comments should be read in conjunction with the condensed consolidated balance sheets and condensed consolidated statements of cash flows found on pages 1 and 3, respectively.
CAPITAL RESOURCES AND LIQUIDITY - Our sources of capital include cash from operations, issuances of common stock and debt. We use capital primarily to fund working capital, pay dividends, repurchase treasury shares and acquire businesses. Our operations are highly seasonal and therefore generally require the use of cash to fund operating losses during the period May through mid-January.
Given the likely availability of a number of liquidity options discussed herein, including borrowing capacity under our unsecured committed lines of credit (CLOCs), we believe, that in the absence of any unexpected developments, our existing sources of capital at July 31, 2009 are sufficient to meet our operating needs.
CASH FROM OPERATING ACTIVITIES - Cash used by operations totaled $454.6 million for the first three months of fiscal year 2010, compared with $364.9 million for the same period last year. The increase was primarily due to increases in income tax payments made during the quarter.
CASH FROM INVESTING ACTIVITIES - Cash provided by investing activities totaled $15.4 million for the first three months of fiscal year 2010, compared to $16.1 million for the same period last year.
Mortgage Loans Held for Investment. We received net payments of $19.3 million and $31.6 million on our mortgage loans held for investment for the first three months of fiscal years 2010 and 2009, respectively. Cash payments declined due primarily due to non-performing loans and continued run-off of our portfolio. Purchases of Property and Equipment. Total cash paid for property and equipment was $8.8 million and $14.6 million for the first three months of fiscal years 2010 and 2009, respectively.
CASH FROM FINANCING ACTIVITIES - Cash used in financing activities totaled $216.2 million for the first three months of fiscal year 2010, compared to $70.6 million for the same period last year.
Customer Banking Deposits. Customer banking deposits used cash of $143.2 million for the three months ended July 31, 2009 compared to $8.8 million in the prior year, due to declines in prepaid debit card deposits.
Dividends. We have consistently paid quarterly dividends. Dividends paid totaled $50.3 million and $46.8 million for the three months ended July 31, 2009 and 2008, respectively.
Issuances of Common Stock. Proceeds from the issuance of common stock resulting from stock compensation plans totaled $6.7 million and $28.5 million for the three months ended July 31, 2009 and 2008, respectively. This decline is due to a reduction in stock option exercises and the related tax benefits.

BORROWINGS
At July 31, 2009, we maintained $2.0 billion in revolving credit facilities to support commercial paper issuance and for general corporate purposes. These CLOCs, and outstanding borrowings thereunder, have a maturity date of August 2010 and an annual facility fee in a range of six to fifteen basis points per annum, based on our

credit ratings. We had no balance outstanding as of July 31, 2009. The CLOCs, among other things, require we maintain at least $650.0 million of net worth on the last day of any fiscal quarter. We had net worth of $1.2 billion at July 31, 2009.
Aurora Bank, FSB (Aurora), formerly known as Lehman Brothers Bank, FSB, is a participating lender in our $2.0 billion CLOCs, with a $50.0 million credit commitment. In September 2008, Aurora's parent company declared bankruptcy. Since then, Aurora has not honored any funding requests under these facilities, thereby effectively reducing our available liquidity under our CLOCs to $1.95 billion. We do not expect this change to have a material impact on our liquidity.
There have been no material changes in our borrowings or debt ratings from those reported at April 30, 2009 in our Annual Report on Form 10-K.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
There have been no material changes in our contractual obligations and commercial commitments from those reported at April 30, 2009 in our Annual Report on Form 10-K.

REGULATORY ENVIRONMENT
There have been no material changes in our regulatory environment from those reported at April 30, 2009 in our Annual Report on Form 10-K.

FORWARD-LOOKING INFORMATION
This report and other documents filed with the Securities and Exchange Commission (SEC) may contain forward-looking statements. In addition, our senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "will," "would," "should," "could" or "may." Forward-looking statements provide management's current expectations or predictions of future conditions, events or results. They may include projections of revenues, income, earnings per share, capital expenditures, dividends, liquidity, capital structure or other financial items, descriptions of management's plans or objectives for future operations, products or services, or descriptions of assumptions underlying any of the above. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. These statements speak only as of the date made and management does not undertake to update them to reflect changes or events occurring after that date except as required by federal securities laws.