More than 43 percent of all H&R Block Mortgage’s retail loan originations in fiscal 2002 were for H&R Block tax clients. Our tax clients obtained mortgages totaling $650 million, a 68 percent increase over last year. And we made important improvements in the infrastructure of our retail operations to support future growth of the business and to better align it with our tax and financial advisor networks.

Business services expands to serve clients better. Our strategy for the RSM McGladrey brand complements that of our H&R Block-branded businesses. RSM McGladrey, Inc. has strong client relationships, primarily as the accountant to mid-sized, privately held companies. We are expanding RSM McGladrey’s client relationships to include a broader range of financial advice and business consulting services to better meet the needs of mid-sized business owners.

	"H&R Block clients enjoy personal attention not generally found in a brokerage firm."
	Tim Targett | tax professional financial advisor, tax professional loan assistant | Bellows Falls, Vt. | franchisee since 1997

RSM McGladrey’s core accounting, tax and consulting services — 73 percent of its business — reported a slight decline in fiscal 2002. Revenues increased 6 percent from new acquisitions and 3 percent from new tax consulting products and an increase in wealth management fees. This year’s earnings improvement was due to the change in accounting standards, which reduced expenses by $19.3 million.

Economic recession and the effects of the September 11 tragedies adversely affected the business as clients reduced their consulting budgets. However, during the year, we made progress in the transformation of RSM McGladrey from an accounting firm to a company with a broader range of consulting and financial services. In December 2001, we acquired a controlling interest in MyBenefitSource, Inc., a payroll processing company, and acquired EquiCo Resources, LLC, a valuation, merger and acquisition consulting firm. These acquisitions will enable us to offer our middle-market clients payroll and benefit services and to advise and assist business owners when they want to sell their business. Although these acquisitions reported pretax losses of $6.7 million in fiscal 2002, they are expected to strengthen RSM McGladrey’s ability to meet a wider range of clients’ needs in the future.

Shareholders enjoy gains in 2002. The economic and business environment has changed considerably in the past several years. Although we have been affected by these changes, as have other companies, we are gratified by the steady progress we’ve made in refining the clarity of our mission and strategy and in moving ahead to achieve our long-term objectives. The past year, in particular, has been very rewarding for shareholders, and H&R Block has begun to receive public recognition for its results.

However, our aspirations don’t end with our past accomplishments. We have a unique opportunity to serve our clients with a business model that doesn’t lend itself to simple comparisons with an obvious group of peer companies. We remain focused on meeting short-term goals while working toward our long-term aspirations.

Our associates are committed to clients. For many years, H&R Block associates have earned the trust of their clients. Their commitment to put clients’ interests first is a long-standing H&R Block tradition. This tradition is a primary factor in our financial success in fiscal 2002, as well as a solid foundation that we can build upon for the future.

We see evidence of this passion for client service in our annual Associate Satisfaction Survey, which shows a level of commitment to our mission and strategy that is far higher than industry norms. More than 85 percent of our 10,000 year-round associates in the United States and Canada took the survey, which in itself is an indicator of a highly engaged workforce. We continue to have very high retention among our 62,000 U.S. tax professionals, a key indicator of their commitment to clients and their career dedication as H&R Block tax professionals.

Our associates further demonstrated their deep commitment to helping other people in their response to the tragedies of September 11, when they gave their time and money to help the relief efforts. Our collective gift of $1.1 million was among the first major corporate contributions to the September 11th Fund. And later we created a Web site to share our professional expertise on tax and financial matters with everyone who was directly affected by the September 11 tragedies, not only our clients.

In closing, we want to take this opportunity to say thank you to retired board member Bob Davis, whose insight and guidance over the past 20 years were invaluable to the company’s growth and success.

And while this is a joint letter, the president and CEO wishes to pause to recognize Chairman Frank Salizzoni. Frank has announced that he will retire from the board after our annual shareholders meeting. Frank has been a member of the H&R Block board of directors since 1988 and became CEO during a very challenging time for the company. His major accomplishments — separating CompuServe, developing the compelling strategy that the company is pursuing, and building the company’s management team with a new generation of leaders — will be a legacy that will serve shareholders and clients for years to come. And Frank’s example as a leader will live on with the many people who have had the good fortune to have worked with him.

You’ll have a better understanding of what this company is about after reading through our Annual Report, where you’ll see some real-life examples of how our associates serve their clients. H&R Block’s commitment is always “client first.”

We understand the responsibility we assume when we offer our clients financial advice. Our growth in the future will depend on how well we execute that strategy.

Now we’re ready to take the next steps in our journey of helping our clients achieve their financial objectives. We see a bright future, working together with clients as their tax and financial partner.

Mark A. Ernst President and Chief Executive Officer		Frank L. Salizzoni Chairman of the Board