Our year-over-year earnings gain was magnified by the effects of our early adoption of Statement of Financial Accounting Standards (SFAS) Nos. 141 and 142, which eliminated the amortization of goodwill and certain other intangible assets as of May 1, 2001. The effect of this change in accounting standards improved the year-over-year comparison by $47.9 million, or 26 cents per diluted share.

Excluding this effect, in fiscal 2002 we:

• Increased net earnings 32 percent.
• Increased net earnings per diluted share 30 percent.

	"It's a win-win situation when we help a company grow and increase its value as a business."
	Conni Ward | director of Business Valuation/Litigation Services, RSM McGladrey | Kansas City, Mo.| associate since 1998

U.S. tax continues to perform well. Our U.S. tax business served 18.6 million clients, an increase of 2.7 percent. In company-owned offices, we had a 71.3 percent client retention rate and a 5.5 percent increase in new business. Consistent with our marketing strategy, new clients were from somewhat higher income households. We increased our share of the overall tax services market, with some of ourstrongest growth coming from the Latino community as a result of our marketing campaigns and focus on this client segment.

We saw the best retention rate gains among our higher income client segments, where we expect our financial advice and services will further strengthen client loyalty. At the same time, we lost more lower-income clients than we expected, reminding us that if we don’t meet all of our clients’ needs, our competitors will.

Our advertising campaign met its objectives for incremental client growth; generally, our growth was strongest in cities where we advertised most heavily. More than 175,000 clients accepted our “Double Check Challenge” offer to check a past year’s return, at no charge, for missed credits and deductions. Amended returns from new clients increased 46 percent compared to the prior year.

This year, our e-solutions services won numerous awards and accolades. We’re proud of our top-quality TaxCut® software and online services. And our e-solutions are supported by the expertise of our tax professionals who are ready to assist clients online, by phone or by e-mail. While we achieved 6.6 percent growth in software units and a 70 percent increase in our online tax services, overall growth in the do-it-yourself market slowed considerably this year. We expect that the years of rapid growth in these services are mostly behind us.

Our objective for coming years is to improve our client retention rate while maintaining new client growth. It is more costly to acquire new clients than to expand relationships with clients we already know. That’s why we are focused on increasing the value that frontline tax professionals deliver to clients and on adding appropriate financial advice and services. We also expect the long-term growth trend in the paid tax services market to continue, due to the increasing complexity of the tax laws.

International tax positioned for improvements. The international tax business performed well against the priorities we established for fiscal 2002, accomplishing key strategic objectives: improving our operating margins and restructuring the business in the United Kingdom. Canadian management made improvements that brought operating margins closer to expected levels for this size of operation.

We’re optimistic that our business in the United Kingdom is positioned for a turn-around as a result of the changes we’re making, which will improve reported results for the overall international segment.

Investment services weak in a difficult environment. Fiscal 2002 was a challenging year for H&R Block Financial Advisors, Inc. (HRBFA) and for the investment industry in general. HRBFA saw significant declines in margin balances and equity trading, reflecting broader market shifts, recession, steep declines in equity values, and a drop in investor confidence following the tragedies of September 11. The business did not meet our expectations, reporting a pretax loss of $54.9 million. This loss would have been $17.9 million greater without the positive effect of our early adoption of SFAS 141 and 142.

Despite these disappointing results, the business made progress in serving the investment and savings needs of our tax clients. We expanded our Express IRA program and launched our fee-based Wealth Management Account. At the end of the year, we had nearly 3,300 Wealth Management accounts (at an average of more than $150,000 in assets per account) with more than $500 million in total assets.

We continue to invest in new product development and to maintain marginally profitable offices as we align the business with the opportunity to provide financial advice and services to H&R Block’s tax clients. We are transitioning HRBFA from a transaction-based, commission- driven brokerage business to a fee-based, financial advisory service. While we don’t expect HRBFA to make a profit in the coming fiscal year, we remain optimistic that it will play a significant role in our future success as our clients’ tax and financial partner.

Mortgage performance is impressive. Our mortgage operations reported outstanding results. The business reported pretax earnings of $339.4 million, a 123.9 percent increase over the prior year (excluding the positive effect of the change in accounting standards). Full-year revenues rose 76.7 percent to $734.9 million. Option One Mortgage Corp. is a well-managed business that’s demonstrating its ability to perform well, regardless of the interest rate environment.

The profitability of Option One’s wholesale mortgage unit increased to $274.6 million, due to increased revenues and a decrease in the average cost of loan origination. Option One’s mortgage servicing portfolio grew 30.5 percent from $18.2 billion to $23.8 billion at the end of the year.

H&R Block Mortgage Corp. was profitable in every quarter, which is a milestone for our retail mortgage operation, an indicator that our financial partner strategy is beginning to succeed.