H&R Block Inc, slammed over the past year by exposure to risky mortgages, on Tuesday reported a bigger-than-expected quarterly loss after shutting down its Option One Mortgage subprime lender, sending its shares down nearly 7 percent.

The No. 1 U.S. tax preparer said the results for the second quarter that ended October 31 were preliminary as it had to delay the official release of its financial report after hiring a new accounting firm, Deloitte & Touche LLP, late in the period.

The company also said fiscal 2008 earnings would come in toward the lower end of its previous outlook of $1.35 to $1.45 per share from continuing operations because of higher borrowing costs.

Executives said they were working on realigning the cost structure at what will be a smaller company without Option One. During the first two quarters of fiscal 2008, H&R Block burned through nearly $535 million, according to a preliminary cash flow statement. So far, net cash used in operating activities has been $942.1 million.

The past month has been a tumultuous one for the Kansas City, Missouri-based company. Mark Ernst resigned as chairman and chief executive in late November. Richard C. Breeden, who leads an investment fund that is a major investor, was elected chairman after pushing for sweeping changes.

Then on December 4, H&R Block said a deal for Cerberus Capital Management to buy Option One had collapsed, leading to the shutdown of the subprime lender. Escalating subprime mortgage defaults throughout the United States have torn up a lending industry that relaxed standards to expand the market of making loans to people with weak credit.

Preliminary results show H&R Block's second-quarter net loss from continuing operations widening to $136.1 million, or 42 cents a share, from $121 million, or 38 cents a share, a year earlier. On that basis, analysts on average were expecting a loss of 35 cents a share, according to Reuters Estimates.

The company said it typically lost money in its fiscal first and second quarters because of the seasonality of its tax and business services.

Including discontinued operations, H&R Block expects its second-quarter net loss to widen to $502.3 million, or $1.55 per share, from $156.5 million, or 49 cents per share.

The results include a loss of $366.2 million, or $1.13 per share, from discontinued operations. Much of that consists of a $252 million net loss on the sale of $3 billion in whole mortgage loans by the company or related mortgage trusts.

While we incurred a painful loss in exiting these positions, we determined to take our lumps and move forward, Breeden said in a statement.

In trading before the market opened, H&R Block shares were down 6.8 percent at $18.60. At Monday's close, the stock had fallen 13 percent this year.

The company's shares and reputation have been battered as a 10-year foray into mortgages backfired and ultimately resulted in the ouster of Ernst.

As part of shuttering Option One, H&R Block said last week that it would cease making loans and fire more than 600 people after an April deal to sell the unit to Cerberus CBS.UL fell apart.

Meanwhile, H&R Block said second-quarter revenue from continuing operations rose 10 percent to $434.8 million. But surging operating costs more than offset that gain.

For fiscal 2007, H&R Block and its subsidiaries reported $4 billion in revenue and $374.3 million in net income from continuing operations.

(Reporting by Tim McLaughlin and Chris Reiter in New York and Jennifer Robin Raj in Bangalore; Editing by Lisa Von Ahn)

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