Edgar Filing: SERVICE CORPORATION INTERNATIONAL

e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-6402-1

SERVICE CORPORATION INTERNATIONAL

(Exact name of registrant as specified in its charter)


Texas (State or other jurisdiction of incorporation or organization)		74-1488375 (I. R. S. employer identification number)

1929 Allen Parkway, Houston, Texas (Address of principal executive offices)		77019 (Zip code)

713-522-5141
(Registrant’s telephone number, including area code)

None
(Former name, former address, or former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). YES o NO þ

The number of shares outstanding of the registrant’s common stock as of August 1, 2008 was 257,162,143 (net of treasury shares).

SERVICE CORPORATION INTERNATIONAL

INDEX


	Page

Glossary		3
Part I. Financial Information		4
Item 1. Financial Statements		4
Unaudited Condensed Consolidated Statement of Operations — Three and Six Months Ended June 30, 2008 and 2007		4
Unaudited Condensed Consolidated Balance Sheet — June 30, 2008 and December 31, 2007		5
Unaudited Condensed Consolidated Statement of Cash Flows — Six Months Ended June 30, 2008 and 2007		6
Unaudited Condensed Consolidated Statement of Stockholders’ Equity — Six Months Ended June 30, 2008		7
Notes to Unaudited Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
The Company		29
Strategies for Growth		30
Financial Condition, Liquidity, and Capital Resources		30
Results of Operations — Three Months Ended June 30, 2008 and 2007		33
Results of Operations — Six Months Ended June 30, 2008 and 2007		36
Critical Accounting Policies		40
Cautionary Statement on Forward-Looking Statements		40
Item 3. Quantitative and Qualitative Disclosures About Market Risk		41
Item 4. Controls and Procedures		41
Part II. Other Information		43
Item 1. Legal Proceedings		43
Item 1A. Risk Factors		43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 4. Submission of Matters to a Vote of Security Holders		44
Item 5. Other Information		44
Item 6. Exhibits		44
Signature		45

GLOSSARY

The following terms are common to the deathcare industry, are used throughout this report, and have the following meanings:

Atneed — Funeral and cemetery arrangements after the death has occurred.

Burial Vaults — A reinforced outer burial container intended to protect the casket against the weight of the earth.

Cremation — The reduction of human remains to bone fragments by intense heat.

General Agency (GA) Revenues — Commissions paid to the General Agency (GA) for life insurance policies or annuities sold to preneed customers for the purpose of funding funeral arrangements. The commission rate paid is determined based on the product type sold, the length of payment terms, and the age of the insured/annuitant.

Interment — The burial or final placement of human remains in the ground.

Lawn Crypt — An outer burial receptacle constructed of concrete and reinforced steel, which is usually pre-installed in predetermined designated areas.

Marker — A method of identifying the remains in a particular burial space, crypt, or niche. Permanent burial markers are usually made of bronze, granite, or stone.

Maturity — At the time of death. This is the point at which preneed contracts are converted to atneed contracts.

Mausoleum — An above ground structure that is designed to house caskets and cremation urns.

Cemetery Perpetual Care or Endowment Care Fund — A trust fund used for the maintenance and upkeep of burial spaces within a cemetery in perpetuity.

Preneed — Purchase of products and services prior to use.

Preneed Backlog — Future revenues from unfulfilled preneed funeral and cemetery contractual arrangements.

Production — Sales of preneed funeral and preneed or atneed cemetery contracts.

As used herein, “SCI”, “Company”, “we”, “our”, and “us” refer to Service Corporation International and companies owned directly or indirectly by Service Corporation International, unless the context requires otherwise.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SERVICE CORPORATION INTERNATIONAL

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)


	Three months ended						Six months ended
	June 30,						June 30,
	2008			2007			2008			2007
Revenues	$	548,782		$	565,492		$	1,122,233		$	1,173,047
Costs and expenses		(441,422	)		(462,253	)		(877,276	)		(928,825	)

Gross profit		107,360			103,239			244,957			244,222
General and administrative expenses		(21,658	)		(30,159	)		(46,733	)		(65,387	)
(Loss) gain on divestitures and impairment charges, net		(3,858	)		9,743			(15,904	)		2,063
Other operating income, net		1,691			—			585			—

Operating income		83,535			82,823			182,905			180,898
Interest expense		(33,311	)		(36,165	)		(67,380	)		(73,762	)
Loss on early extinguishment of debt		—			(12,122	)		—			(14,480	)
Equity in earnings of unconsolidated subsidiaries		—			5,559			—			6,270
Other income, net		1,945			1,755			3,117			1,138

Income from continuing operations before income taxes		52,169			41,850			118,642			100,064
Provision for income taxes		(20,395	)		(28,941	)		(45,364	)		(52,438	)

Income from continuing operations		31,774			12,909			73,278			47,626
(Loss) income from discontinued operations (net of income tax (benefit) provision of $(195), $1,223, $(195), and $1,960, respectively)		(377	)		2,209			(362	)		5,134

Net income	$	31,397		$	15,118		$	72,916		$	52,760

Basic earnings per share:
Income from continuing operations	$	.12		$	.04		$	.28		$	.16
Income from discontinued operations, net of tax		—			.01			—			.02

Net income	$	.12		$	.05		$	.28		$	.18

Diluted earnings per share:
Income from continuing operations	$	.12		$	.04		$	.28		$	.16
Income from discontinued operations, net of tax		—			.01			—			.02

Net income	$	.12		$	.05		$	.28		$	.18

Basic weighted average number of shares		259,034			290,577			259,919			291,941

Diluted weighted average number of shares		262,575			296,124			263,712			297,480

Dividends declared per share	$	.04		$	.03		$	.08		$	.06

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In thousands, except share amounts)


	June 30, 2008			December 31, 2007
Assets
Current assets:
Cash and cash equivalents	$	104,700		$	168,594
Receivables, net		90,936			113,793
Inventories		33,008			36,203
Deferred tax asset		73,182			73,182
Current assets held for sale		1,805			2,294
Other		27,480			27,261

Total current assets		331,111			421,327

Preneed funeral receivables and trust investments		1,398,503			1,434,403
Preneed cemetery receivables and trust investments		1,407,287			1,428,057
Cemetery property, at cost		1,458,945			1,451,666
Property and equipment, net		1,559,090			1,569,534
Non-current assets held for sale		120,999			122,626
Goodwill		1,227,624			1,198,153
Deferred charges and other assets		441,141			400,734
Cemetery perpetual care trust investments		863,284			905,744

	$	8,807,984		$	8,932,244

Liabilities & Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	294,707		$	343,392
Current maturities of long-term debt		51,289			36,594
Current liabilities held for sale		201			149
Income taxes		262			46,305

Total current liabilities		346,459			426,440

Long-term debt		1,828,511			1,820,106
Deferred preneed funeral revenues		579,476			526,668
Deferred preneed cemetery revenues		765,275			753,876
Deferred income taxes		147,776			140,623
Non-current liabilities held for sale		89,654			91,928
Other liabilities		388,605			383,642
Non-controlling interest in funeral and cemetery trusts		2,334,152			2,390,288
Non-controlling interest in cemetery perpetual care trusts		871,667			906,590
Commitments and contingencies (Note 15)
Stockholders’ equity:
Common stock, $1 per share par value, 500,000,000 shares authorized, 257,164,644 and 262,858,169 issued and outstanding (net of 8,896,829 and 1,961,300 treasury shares, at par)		257,165			262,858
Capital in excess of par value		1,814,724			1,874,600
Accumulated deficit		(750,923	)		(797,965	)
Accumulated other comprehensive income		135,443			152,590

Total stockholders’ equity		1,456,409			1,492,083

	$	8,807,984		$	8,932,244

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)


	Six months ended
	June 30,
	2008			2007
Cash flows from operating activities:
Net income	$	72,916		$	52,760
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (income) from discontinued operations, net of tax		362			(5,134	)
Loss on early extinguishment of debt		—			14,480
Premiums paid on early extinguishment of debt		—			(11,368	)
Depreciation and amortization		68,008			73,799
Amortization of cemetery property		16,526			17,800
Amortization of loan costs		1,863			3,617
Provision for doubtful accounts		3,915			6,688
Provision for deferred income taxes		28,079			38,024
Loss (gain) on divestitures and impairment charges, net		15,904			(2,063	)
Share-based compensation		5,256			5,980
Excess tax benefits from share-based awards		(2,170	)		(4,123	)
Equity in earnings of unconsolidated subsidiaries		—			(6,270	)
Change in assets and liabilities, net of effects from acquisitions and divestitures:
Decrease (increase) in receivables		6,484			(5,222	)
Increase in other assets		(10,069	)		(12,196	)
Decrease in payables and other liabilities		(128,320	)		(40,626	)
Effect of preneed funeral production and maturities:
Decrease in preneed funeral receivables and trust investments		15,098			19,866
Increase in deferred preneed funeral revenue		20,836			18,656
Decrease in funeral non-controlling interest		(24,640	)		(25,518	)
Effect of cemetery production and deliveries:
Decrease in preneed cemetery receivables and trust investments		24,206			30,452
Increase in deferred preneed cemetery revenue		20,421			24,218
Decrease in cemetery non-controlling interest		(17,578	)		(19,215	)
Other		(585	)		(329	)

Net cash provided by operating activities from continuing operations		116,512			174,276
Net cash provided by operating activities from discontinued operations		—			17,279

Net cash provided by operating activities		116,512			191,555
Cash flows from investing activities:
Capital expenditures		(68,035	)		(65,392	)
Proceeds from divestitures and sales of property and equipment		12,831			214,494
Acquisitions		(7,871	)		(212	)
Net deposits of restricted funds and other		(21,477	)		(238	)

Net cash (used in) provided by investing activities from continuing operations		(84,552	)		148,652
Net cash provided by (used in) investing activities from discontinued operations		858			(8,546	)

Net cash (used in) provided by investing activities		(83,694	)		140,106
Cash flows from financing activities:
Proceeds from the issuance of long-term debt		72,000			398,996
Debt issuance costs		—			(6,443	)
Payments of debt		(54,367	)		(2,152	)
Principal payments on capital leases		(12,013	)		(13,807	)
Early extinguishment of debt		—			(422,641	)
Purchase of Company common stock		(79,470	)		(103,598	)
Proceeds from exercise of stock options		3,596			13,189
Excess tax benefits from share-based awards		2,170			4,123
Payments of dividends		(20,879	)		(17,645	)
Bank overdrafts and other		(6,714	)		2,211

Net cash used in financing activities from continuing operations		(95,677	)		(147,767	)
Net cash used in financing activities from discontinued operations		—			(2,113	)

Net cash used in financing activities		(95,677	)		(149,880	)
Effect of foreign currency on cash and cash equivalents		(1,035	)		1,124

Net (decrease) increase in cash and cash equivalents		(63,894	)		182,905
Cash and cash equivalents at beginning of period		168,594			39,880

Cash and cash equivalents at end of period	$	104,700		$	222,785

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands)


															Accumulated
						Treasury			Capital in						other
	Outstanding			Common		stock, par			excess of			Accumulated			comprehensive
	shares			stock		value			par value			deficit			income			Total
Balance at December 31, 2007		262,858		$	264,819	$	(1,961	)	$	1,874,600		$	(797,965	)	$	152,590		$	1,492,083
Cumulative effect of accounting change													(3,265	)					(3,265	)
Net income													72,916						72,916
Dividends declared on common stock ($.08 per share)										(20,581	)								(20,581	)
Other comprehensive loss																(17,147	)		(17,147	)
Employee share-based compensation earned										4,548									4,548
Stock option exercises		950			950					2,646									3,596
Restricted stock awards, net of forfeitures and other		363			293		70			346									709
Tax benefit related to share-based awards										3,020									3,020
Purchase of Company stock		(7,006	)				(7,006	)		(49,855	)		(22,609	)					(79,470	)

Balance at June 30, 2008		257,165		$	266,062	$	(8,897	)	$	1,814,724		$	(750,923	)	$	135,443		$	1,456,409

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

1. Nature of Operations

We are a provider of deathcare products and services, with a network of funeral service locations and cemeteries primarily operating in the United States and Canada. Our operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and related businesses.

Funeral service locations provide professional services relating to funerals and cremations, including the use of funeral facilities and motor vehicles and preparation and embalming services. Funeral related merchandise, including caskets, burial vaults, cremation receptacles, flowers, and other ancillary products and services, is sold at funeral service locations. Cemeteries provide cemetery property interment rights, including mausoleum spaces, lots, and lawn crypts, and sell cemetery related merchandise and services, including stone and bronze memorials, markers, casket and cremation memorialization products, merchandise installations, and burial openings and closings. We also sell preneed funeral and cemetery products and services whereby a customer contractually agrees to the terms of certain products and services to be provided in the future.

We divested 70% of Kenyon International Emergency Services (Kenyon), a company that specializes in providing disaster management services in mass fatality incidents, in the fourth quarter of 2007. Kenyon’s results are included in our funeral operations segment through the date of the sale. As part of the Alderwoods transaction, we acquired an insurance business that we sold in the third quarter of 2007. The operations of this business through the date of sale are presented as discontinued operations in our condensed consolidated statement of operations.

2. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

Our condensed consolidated financial statements include the accounts of Service Corporation International and all wholly-owned subsidiaries. These financial statements also include the accounts of the funeral trusts, cemetery merchandise and services trusts, and cemetery perpetual care trusts in which we have a variable interest and are the primary beneficiary. The interim condensed consolidated financial statements are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments, which management considers necessary for a fair presentation of the results for these periods. These condensed consolidated financial statements have been prepared in a manner consistent with the accounting policies described in our annual report on Form 10-K for the year ended December 31, 2007, unless otherwise disclosed herein, and should be read in conjunction therewith. The accompanying year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period.

Reclassifications and Prior Period Items

Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, financial condition, or cash flows.

In connection with our ongoing efforts to remediate our previously reported material weaknesses and other internal control deficiencies, we recorded several immaterial adjustments related to prior accounting periods during the three months ended June 30, 2008. These adjustments were not quantitatively or qualitatively material to our condensed consolidated financial statements for the three or six months ended June 30, 2008, nor were such items quantitatively or qualitatively material to any of our prior annual or quarterly financial statements. The net impact of these adjustments was an increase to our pre-tax income in the amount of $3.4 million for the three months ended June 30, 2008. These adjustments had no impact on our consolidated or segment gross profit for the three months ended June 30, 2008.

Use of Estimates in the Preparation of Financial Statements

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions as described in our Form 10-K for the year ended December 31, 2007. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. As a result, actual results could differ from these estimates.

3. Recently Issued Accounting Standards

Determination of the Useful Life of Intangible Assets

In April 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position Statement of Financial Accounting Standards (SFAS) No. 142-3, “Determination of the Useful Life of Intangible Assets” (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets” and requires enhanced related disclosures. FSP 142-3 must be applied prospectively to all intangible assets acquired as of and subsequent to fiscal years beginning after December 15, 2008. We are currently evaluating the impact of adopting FSP 142-3 on our consolidated financial statements.

Derivative Instruments and Hedging Activities

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — An Amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 amends and expands the disclosures required by SFAS 133 to provide an enhanced understanding of the reasons an entity engages in derivate instruments and hedging activities. It also requires disclosures about how such items are accounted for under SFAS 133 and how they impact the entity’s financial statements. The provisions of SFAS 161 are effective for us beginning January 1, 2009. The adoption of this statement is not expected to have a material impact on our consolidated financial statements.

Business Combinations

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141(R)), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired (including goodwill), the liabilities assumed and any non-controlling interest in the acquiree. SFAS 141(R) also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of SFAS 141(R) are effective for us for business combinations for which the acquisition date is on or after January 1, 2009, with the exception of certain income tax effects related to our prior business combinations, which will be accounted for pursuant to the provisions of SFAS 141(R). The impact of adopting SFAS 141(R) will be dependent on future business combinations, if any, that we may pursue after its effective date.

Non-controlling Interests

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (SFAS 160), which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as an unconsolidated investment, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. The provisions of SFAS 160 are effective for us on January 1, 2009. We are currently evaluating the impact of adopting SFAS 160 on our consolidated financial statements.

Split-Dollar Life Insurance Agreements

In March 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) on Issue No. 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10). EITF 06-10 provides guidance for determining the liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of a collateral assignment agreement. We adopted the provisions of EITF 06-10 effective January 1, 2008. As a result of our adoption, we recorded a $3.3 million cumulative-effect adjustment which increased our Accumulated deficit as of January 1, 2008.

Fair Value Option

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 permits entities to choose to measure various financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The fair value option may be elected on an instrument-by-instrument basis, as long as it is applied to the instrument in its entirety. The election is irrevocable, unless an event specified in SFAS 159 occurs that results in a new election date. We adopted the provisions of SFAS 159 effective January 1, 2008. The adoption of SFAS 159 had no impact on our consolidated financial statements as we elected not to measure any additional financial instruments at fair value as of the date of adoption.

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). The statement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value, and expands disclosures about instruments measured at fair value. SFAS 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

	•		Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;

	•		Level 2 — inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;

	•		Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.

An asset’s or liability’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-1. “Application of FASB Statement No. 157 to FASB Statement 13 and Other Accounting Pronouncements that Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (FSP 157-1) and FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-1 amends SFAS 157 to exclude SFAS No. 13, ” Accounting for Leases” and its related accounting pronouncements that address leasing transactions. FSP 157-2 provides a one-year deferral of the effective date of SFAS 157 for non-financial assets and liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In accordance with FSP 157-2, we adopted the provisions of SFAS 157 for our financial assets and liabilities that are measured on a recurring basis at fair value, effective January 1, 2008. These financial assets include the investments of our funeral, cemetery, and cemetery perpetual care trusts. For additional disclosures required by SFAS 157 for these assets, see Notes 4 through 6 to our condensed consolidated financial statements.

The provisions of SFAS 157 have not been applied to our non-financial assets and liabilities. The major categories of assets and liabilities that are subject to non-recurring fair value measurement, for which we have not yet applied the provisions of SFAS 157, are as follows: reporting units measured at fair value in the first step of a goodwill impairment test under SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142); indefinite-lived intangible assets measured at fair value for impairment assessment under SFAS 142; non-financial assets measured at fair value for an impairment assessment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and non-financial assets and liabilities initially measured at fair value in a business combination under SFAS No. 141, “Business Combinations”.

4. Preneed Funeral Activities

Preneed funeral receivables and trust investments, net of allowance for cancellation, represent trust investments, including investment earnings, and customer receivables, net of unearned finance charges, related to unperformed, price-guaranteed preneed funeral contracts. When we, as the primary beneficiary, receive payments from the customer, we deposit the amount required by law into the trust and reclassify the corresponding amount from Deferred preneed funeral revenues into Non-controlling interest in funeral and cemetery trusts. Amounts are withdrawn from the trusts after the contract obligations are performed. We deposited $23.9 million and $27.4 million into and withdrew $31.6 million and $39.2 million from the trusts during the three months ended June 30, 2008 and 2007, respectively. We deposited $44.8 million and $45.4 million into and withdrew $70.5 million and $74.2 million from the trusts during the six months ended June 30, 2008 and 2007, respectively. Cash flows from preneed funeral contracts are presented as operating cash flows in our condensed consolidated statement of cash flows.

The components of Preneed funeral receivables and trust investments in our condensed consolidated balance sheet at June 30, 2008 and December 31, 2007 are as follows:


	June 30, 2008			December 31, 2007
	(In thousands)
Trust investments, at market	$	830,783		$	848,195
Cash and cash equivalents		150,952			194,728
Insurance-backed fixed income securities		214,986			201,258
Receivables from customers		236,684			225,905
Unearned finance charge		(6,219	)		(5,961	)

		1,427,186			1,464,125
Allowance for cancellation		(28,683	)		(29,722	)

Preneed funeral receivables and trust investments	$	1,398,503		$	1,434,403

The cost and market values associated with funeral trust investments recorded at fair market value at June 30, 2008 and December 31, 2007 are detailed below. Cost reflects the investment (net of redemptions) of control holders in common trust funds, mutual funds, and private equity investments. Fair market value represents the value of the underlying securities and cash held by the common trust funds, mutual funds at published values, and the estimated market value of private equity investments (including debt as well as the estimated fair value related to the contract holder’s equity in majority-owned real estate investments). The fair market value of such funeral trust investments, in the aggregate, was 95% and 101% of the related cost basis of such investments as of June 30, 2008 and December 31, 2007, respectively.


	June 30, 2008
			Unrealized		Unrealized			Fair market
	Cost		gains		losses			value
			(In thousands)
Fixed income securities:
U.S. Treasury	$	54,096	$	439	$	(3,365	)	$	51,170
Foreign government		99,347		539		(503	)		99,383
Corporate		21,938		118		(402	)		21,654
Mortgage-backed		18,315		172		(1,299	)		17,188
Asset-backed		20		—		—			20
Equity securities:
Preferred stock		1,354		11		(103	)		1,262
Common stock		363,168		7,635		(26,619	)		344,184
Mutual funds:
Equity		125,127		1,413		(9,872	)		116,668
Fixed income		147,096		2,150		(8,468	)		140,778
Private equity and other		53,439		2,244		(8,603	)		47,080

Trust investments	$	883,900	$	14,721	$	(59,234	)	$	839,387

Less: Assets associated with businesses held for sale									(8,604	)

								$	830,783


	December 31, 2007
			Unrealized		Unrealized			Fair market
	Cost		gains		losses			value
			(In thousands)
Fixed income securities:
U.S. Treasury	$	79,430	$	630	$	(378	)	$	79,682
Foreign government		60,330		344		(440	)		60,234
Corporate		14,937		206		(233	)		14,910
Mortgage-backed		2,670		53		(17	)		2,706
Asset-backed		33		—		—			33
Equity securities:
Preferred stock		1,581		36		(23	)		1,594
Common stock		378,628		12,415		(6,131	)		384,912
Mutual funds:
Equity		127,606		3,991		(2,246	)		129,351
Fixed income		140,857		3,005		(1,612	)		142,250
Private equity and other		43,820		2,815		(5,297	)		41,338

Trust investments	$	849,892	$	23,495	$	(16,377	)	$	857,010

Less: Assets associated with businesses held for sale									(8,815	)

								$	848,195

Where quoted prices are available in an active market, securities held by the common trust funds and mutual funds are classified as Level 1 investments pursuant to the three-level valuation hierarchy provided in SFAS 157. Our investments classified as Level 1 securities include common stock and mutual funds.

Where quoted market prices are not available for the specific security, then fair values are estimated by using either quoted prices of securities with similar characteristics or a fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, rating, and tax exempt status. These securities are United States (U.S.) Treasury, foreign government, corporate, mortgage-backed and asset-backed fixed income securities, and preferred stock equity securities, all of which are classified within Level 2 of the SFAS 157 valuation hierarchy.

The valuation of private equity and other investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. The fair value of these investments is estimated based on the market value of the underlying real estate and private equity investments. The underlying real estate value is determined using the most recent available appraisals. Private equity investments are valued using market appraisals or a discounted cash flow methodology depending on the nature of the underlying assets. The appraisals assess value based on a combination of replacement cost, comparative sales analysis, and discounted cash flow analysis. As a result of the adoption of SFAS 157 in the first quarter of 2008, we recorded a $3.5 million decrease in the fair value of our private equity investments held by the funeral trusts to reflect time-based restrictions on the exit from the investments. Such private equity and other investments are included within Level 3 of the SFAS 157 valuation hierarchy.

The inputs into the fair value of our market-based funeral trust investments are categorized as follows:

June 30, 2008

Quoted

Significant

market prices

other

Significant

in active

observable

unobservable

Fair market

markets (Level 1)

inputs (Level 2)

inputs (Level 3)

value

(In thousands)

Trust investments

601,630

190,677

47,080

839,387

The change in market-based funeral trust investments with significant unobservable inputs (Level 3) is as follows (in thousands):


Fair market value, January 1, 2008	$	37,865
Total realized and unrealized gains included in other comprehensive income (a)		9,249
Purchases, sales, contributions, and distributions, net		(34	)

Fair market value, June 30, 2008	$	47,080


(a)		All gains (losses) recognized in other comprehensive income for funeral trust investments are attributable to non-controlling interest holders and are offset by a corresponding increase (decrease) in Non-controlling interest in funeral and cemetery trusts. See Note 7 to the condensed consolidated financial statements for further information related to our non-controlling interest in funeral trust investments.

Maturity dates of the fixed income securities included in trust investments, at market, range from 2008 to 2038. Maturities of fixed income securities included in trust investments, at market, at June 30, 2008 are estimated as follows:


	Market
	(In thousands)
Due in one year or less	$	71,772
Due in one to five years		50,693
Due in five to ten years		40,243
Thereafter		26,707

	$	189,415

During the three months ended June 30, 2008, purchases and sales of available-for-sale securities included in trust investments were $55.1 million and $134.1 million, respectively. These sale transactions resulted in $9.5 million and $11.9 million of realized gains and realized losses, respectively, for the three months ended June 30, 2008. During the three months ended June 30, 2007, purchases and sales of available-for-sale securities included in trust investments were $84.5 million and $127.5 million, respectively. These sale transactions resulted in $23.3 million and $5.7 million of realized gains and realized losses, respectively, for the three months ended June 30, 2007.

During the six months ended June 30, 2008, purchases and sales of available-for-sale securities included in trust investments were $190.4 million and $234.8 million, respectively. These sale transactions resulted in $30.3 million and $26.9 million of realized gains and realized losses, respectively, for the six months ended June 30, 2008. During the six months ended June 30, 2007, purchases and sales of available-for-sale securities included in trust investments were $311.9 million and $195.5 million, respectively. These sale transactions resulted in $32.8 million and $12.1 million of realized gains and realized losses, respectively, for the six months ended June 30, 2007.

Earnings from all trust investments are recognized in current funeral revenues when a service is performed, merchandise is delivered, or upon cancellation of the funeral contract. Only the amount we are entitled to retain is recognized when a contract is cancelled. Recognized earnings (realized and unrealized) related to these trust investments were $9.9 million and $10.8 million for the three months ended June 30, 2008 and 2007, respectively. Recognized earnings (realized and unrealized) related to these trust investments were $21.1 million and $22.1 million for the six months ended June 30, 2008 and 2007, respectively.

We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges, if any, as a result of this assessment are recognized as investment losses and offset by interest income related to non-controlling interest in funeral trust investments in Other income, net in our condensed consolidated statement of operations. As a result of our most recent review at June 30, 2008, we recorded no impairment charges. As a result of our reviews during 2007, we recorded a $3.5 million impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain private equity and other investments. See Note 7 to the condensed consolidated financial statements for further information related to our non-controlling interest in funeral trust investments.

5. Preneed Cemetery Activities

Preneed cemetery receivables and trust investments, net of allowance for cancellation, represent trust investments, including investment earnings, and customer receivables, net of unearned finance charges, for contracts sold in advance of when the property interment rights, merchandise, or services are needed. When we, as the primary beneficiary, receive payments from the customer, we

deposit the amount required by law into the trust and reclassify the corresponding amount from Deferred preneed cemetery revenues, and record the amount into Non-controlling interest in funeral and cemetery trusts. Amounts are withdrawn from the trusts when the contract obligations are performed. We deposited $30.0 million and $30.6 million into and withdrew $41.5 million and $44.2 million from the trusts during the three months ended June 30, 2008 and 2007, respectively. We deposited $55.3 million and $59.2 million into and withdrew $72.7 million and $81.2 million from the trusts during the six months ended June 30, 2008 and 2007, respectively. Cash flows from preneed cemetery contracts are presented as operating cash flows in our condensed consolidated statement of cash flows.

The components of Preneed cemetery receivables and trust investments in the condensed consolidated balance sheet at June 30, 2008 and December 31, 2007 are as follows:


	June 30, 2008			December 31, 2007
	(In thousands)
Trust investments, at market	$	982,863		$	759,215
Cash and cash equivalents		155,667			399,301
Receivables from customers		350,406			351,409
Unearned finance charges		(48,780	)		(47,527	)

		1,440,156			1,462,398
Allowance for cancellation		(32,869	)		(34,341	)

Preneed cemetery receivables and trust investments	$	1,407,287		$	1,428,057

The cost and market values associated with the cemetery merchandise and service trust investments recorded at fair market value at June 30, 2008 and December 31, 2007 are detailed below. Cost reflects the investment (net of redemptions) of control holders in common trust funds, mutual funds, and private equity investments. Fair market value represents the value of the underlying securities and cash held by the common trust funds, mutual funds at published values, and the estimated market value of private equity investments (including debt as well as the estimated fair value related to the contract holder’s equity in majority-owned real estate investments). The fair market value of such cemetery trust investments, in the aggregate, was 97% and 104% of the related cost basis of such investments as of June 30, 2008 and December 31, 2007, respectively.


	June 30, 2008
			Unrealized		Unrealized			Fair market
	Cost		gains		losses			value
			(In thousands)
Fixed income securities:
U.S. Treasury	$	46,049	$	426	$	(1,892	)	$	44,583
Foreign government		15,375		247		(87	)		15,535
Corporate		17,207		161		(293	)		17,075
Mortgage-backed		14,275		133		(587	)		13,821
Equity securities:
Preferred stock		2,627		24		(108	)		2,543
Common stock		508,467		6,996		(22,079	)		493,384
Mutual funds:
Equity		259,433		5,169		(13,248	)		251,354
Fixed income		182,162		4,152		(6,539	)		179,775
Private equity and other		27,623		1,286		(4,654	)		24,255

Trust investments	$	1,073,218	$	18,594	$	(49,487	)	$	1,042,325

Less: Assets associated with businesses held for sale									(59,462	)

								$	982,863


	December 31, 2007
			Unrealized		Unrealized			Fair market
	Cost		gains		losses			value
			(In thousands)
Fixed income securities:
U.S. Treasury	$	19,371	$	899	$	(205	)	$	20,065
Foreign government		14,016		296		—			14,312
Corporate		17,297		452		(90	)		17,659
Equity securities:
Preferred stock		2,979		144		(33	)		3,090
Common stock		402,028		20,923		(5,956	)		416,995
Mutual funds:
Equity		182,214		12,905		(2,861	)		192,258
Fixed income		126,728		5,535		(1,185	)		131,078
Private equity and other		26,124		2,103		(3,493	)		24,734

Trust investments	$	790,757	$	43,257	$	(13,823	)	$	820,191

Less: Assets associated with businesses held for sale									(60,976	)

								$	759,215

Where quoted market prices are not available for the specific security, then fair values are estimated by using either quoted prices of securities with similar characteristics or a fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, rating, and tax exempt status. These securities are U.S. Treasury, foreign government, corporate, mortgage-backed and asset-backed fixed income securities, and preferred stock equity securities, all of which are classified within Level 2 of the SFAS 157 valuation hierarchy.

The valuation of private equity and other investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. The fair value of these investments is estimated based on the market value of the underlying real estate and private equity investments. The underlying real estate value is determined using the most recent appraisals. Our private equity investments are valued using market appraisals or a discounted cash flow methodology depending on the nature of the underlying assets. The appraisals assess value based on a combination of replacement cost, comparative sales analysis, and discounted cash flow analysis. As a result of the adoption of SFAS 157 in the first quarter of 2008, we recorded a $2.9 million decrease in the fair value of our private equity investments held by the cemetery merchandise and service trusts to reflect time-based restrictions on the exit from the investments. Such private equity and other investments are included within Level 3 of the SFAS 157 valuation hierarchy.

The inputs into the fair value of our market-based cemetery trust investments are categorized as follows:

June 30, 2008

Quoted

market prices

Significant

in active

other observable

unobservable inputs

Fair market

markets (Level 1)

inputs (Level 2)

(Level 3)

value

(In thousands)

Trust investments

924,513

93,557

24,255

1,042,325

The change in market-based cemetery trust investments with significant unobservable inputs (Level 3) is as follows (in thousands):


Fair market value, January 1, 2008	$	21,809
Total realized and unrealized gains included in other comprehensive income (a)		3,711
Purchases, sales, contributions, and distributions, net		(1,265	)

Fair market value, June 30, 2008	$	24,255


(a)		All gains (losses) recognized in other comprehensive income for cemetery trust investments are attributable to non-controlling interest holders and are offset by a corresponding increase (decrease) in Non-controlling interest in funeral and cemetery trusts. See Note 7 to the condensed consolidated financial statements for further information related to our non-controlling interest in cemetery trust investments.

Maturity dates of the fixed income securities range from 2008 to 2038. Maturities of fixed income securities at June 30, 2008 are estimated as follows:


	Market
	(In thousands)
Due in one year or less	$	1,929
Due in one to five years		32,925
Due in five to ten years		27,925
Thereafter		28,235

	$	91,014

During the three months ended June 30, 2008, purchases and sales of available-for-sale securities included in trust investments were $69.4 million and $143.0 million, respectively. These sale transactions resulted in $11.9 million and $13.3 million of realized gains and realized losses, respectively, for the three months ended June 30, 2008. During the three months ended June 30, 2007, purchases and sales of available-for-sale securities included in trust investments were $112.7 million and $94.8 million, respectively. These sale transactions resulted in $23.0 million and $5.5 million of realized gains and realized losses, respectively, for the three months ended June 30, 2007.

During the six months ended June 30, 2008, purchases and sales of available-for-sale securities included in trust investments were $634.7 million and $247.3 million, respectively. These sale transactions resulted in $23.4 million and $29.8 million of realized gains and realized losses, respectively, for the six months ended June 30, 2008. During the six months ended June 30, 2007, purchases and sales of available-for-sale securities included in trust investments were $357.0 million and $203.6 million, respectively. These sale transactions resulted in $36.3 million and $12.4 million of realized gains and realized losses, respectively, for the six months ended June 30, 2007.

Earnings from all trust investments are recognized in current cemetery revenues when the service is performed, the merchandise is delivered, or upon cancellation of the cemetery contract. Only the amount we are entitled to retain is recognized when a contract is cancelled. Recognized earnings (realized and unrealized) related to these trust investments were $5.1 million and $5.2 million for the three months ended June 30, 2008 and 2007, respectively. Recognized earnings (realized and unrealized) related to these trust investments were $9.6 million and $9.8 million for the six months ended June 30, 2008 and 2007, respectively.

We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges, if any, as a result of this assessment are recognized as investment losses and offset by interest income related to non-controlling interest in cemetery trust investments in Other income, net in our condensed consolidated statement of operations. As a result of our most recent review at June 30, 2008, we recorded no impairment charges. As a result of our reviews during 2007, we recorded a $3.2 million impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain private equity and other investments. See Note 7 to the condensed consolidated financial statements for further information related to our non-controlling interest in cemetery trust investments.

6. Cemetery Perpetual Care Trusts

We are required by state or provincial law to pay into cemetery perpetual care trusts a portion of the proceeds from the sale of cemetery property interment rights. As the primary beneficiary of the trusts, we consolidate the cemetery perpetual care trust investments with a corresponding amount recorded as Non-controlling interest in cemetery perpetual care trusts. We deposited $6.1 million and $10.5 million into the trusts and withdrew $9.3 million and $10.3 million from the trusts during the three months ended June 30, 2008 and 2007, respectively. We deposited $11.9 million and $14.6 million into the trusts and withdrew $14.5 million and $18.7 million from the trusts during the six months ended June 30, 2008 and 2007, respectively. Cash flows from cemetery perpetual care contracts are presented as operating cash flows in our condensed consolidated statement of cash flows.

The components of Cemetery perpetual care trust investments in the condensed consolidated balance sheet at June 30, 2008 and December 31, 2007 are as follows:


	June 30, 2008		December 31, 2007
	(In thousands)
Trust investments, at market	$	791,686	$	817,228
Cash and cash equivalents		71,598		88,516

Cemetery perpetual care trust investments	$	863,284	$	905,744

The cost and market values associated with market-based trust investments held in cemetery perpetual care trusts recorded at fair market value at June 30, 2008 and December 31, 2007 are detailed below. Cost reflects the investment (net of redemptions) of control holders in common trust funds, mutual funds, and private equity investments. Fair market value represents the value of the underlying securities and cash held by the common trust funds, mutual funds at published values, and the estimated market value of private equity investments (including debt as well as the estimated fair value related to the contract holder’s equity in majority-owned real estate

investments). The fair market value of such cemetery perpetual care trust investments, in the aggregate, was 94% and 100% of the related cost basis of such investments as of June 30, 2008 and December 31, 2007, respectively.


	June 30, 2008
			Unrealized		Unrealized			Fair market
	Cost		gains		losses			value
			(In thousands)
Fixed income securities:
U.S. Treasury	$	5,313	$	762	$	(252	)	$	5,823
Foreign government		24,568		370		(152	)		24,786
Corporate		41,916		154		(1,919	)		40,151
Mortgage-backed		3,889		7		(265	)		3,631
Equity securities:
Preferred stock		5,166		2		(381	)		4,787
Common stock		120,031		3,171		(8,695	)		114,507
Mutual funds:
Equity		52,535		154		(4,203	)		48,486
Fixed income		572,506		254		(40,157	)		532,603
Private equity and other		35,937		1,862		(4,480	)		33,319

Cemetery perpetual care trust investments	$	861,861	$	6,736	$	(60,504	)	$	808,093

Less: Assets associated with businesses held for sale									(16,407	)

								$	791,686


	December 31, 2007
			Unrealized		Unrealized			Fair market
	Cost		gains		losses			value
			(In thousands)
Fixed income securities:
U.S. Treasury	$	2,647	$	703	$	(1	)	$	3,349
Foreign government		25,065		789		(13	)		25,841
Corporate		42,437		225		(555	)		42,107
Mortgage-backed		348		7		—			355
Equity securities:
Preferred stock		2,403		13		(58	)		2,358
Common stock		128,815		3,501		(2,840	)		129,476
Mutual funds:
Equity		44,221		1,208		(1,003	)		44,426
Fixed income		555,509		3,256		(10,714	)		548,051
Private equity and other		34,894		3,145		(542	)		37,497

Cemetery perpetual care trust investments	$	836,339	$	12,847	$	(15,726	)	$	833,460

Less: Assets associated with businesses held for sale									(16,232	)

								$	817,228

Where quoted market prices are not available for the specific security, then fair values are estimated by using either quoted prices of securities with similar characteristics or a fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, rating, and tax exempt status. Examples of such securities are U.S. Treasury, foreign government, corporate, mortgage-backed and asset-backed fixed income securities, and preferred stock equity securities, all of which are classified within Level 2 of the SFAS 157 valuation hierarchy.

The valuation of private equity and other investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. The fair value of these investments is estimated based on the market value of the underlying real estate and private equity investments. The underlying real estate value is determined using the most recent appraisals. Our private equity investments are valued using market appraisals or a discounted cash flow methodology depending on the nature of the underlying assets. The appraisals assess value based on a combination of replacement cost, comparative sales analysis, and discounted cash flow analysis. As a result of the adoption of SFAS 157 in the first quarter of 2008, we

recorded a $4.9 million decrease in the fair value of our private equity investments held by the cemetery perpetual care trusts to reflect time-based restrictions on the exit from the investments. Such private equity and other investments are included within Level 3 of the SFAS 157 valuation hierarchy.

The inputs into the fair value of our market-based cemetery perpetual care trust investments are categorized as follows:

June 30, 2008

Quoted

market prices

Significant

in active

other observable

unobservable inputs

Fair market

markets (Level 1)

inputs (Level 2)

(Level 3)

value

(In thousands)

Trust investments

695,596

79,178

33,319

808,093

The change in market-based cemetery perpetual care trust investments with significant unobservable inputs (Level 3) is as follows (in thousands):


Fair market value, January 1, 2008	$	32,644
Total realized and unrealized gains included in other comprehensive income (a)		5,101
Purchases, sales, contributions, and distributions, net		(4,426	)

Fair market value, June 30, 2008	$	33,319

(a)

All gains (losses) recognized in other comprehensive income for cemetery perpetual care trust investments are attributable to non-controlling interest holders and are offset by a corresponding increase (decrease) in Non-controlling interest in cemetery perpetual care trusts. See Note 7 to the condensed consolidated financial statements for further information related to our non-controlling interest in cemetery perpetual care trust investments.

Maturity dates of the fixed income securities range from 2008 to 2038. Maturities of fixed income securities at June 30, 2008 are estimated as follows:


	Market
	(In thousands)
Due in one year or less	$	2,704
Due in one to five years		38,976
Due in five to ten years		13,465
Thereafter		19,246

	$	74,391

During the three months ended June 30, 2008, purchases and sales of available-for-sale securities in the cemetery perpetual care trusts were $58.3 million and $64.5 million, respectively. These sale transactions resulted in $0.9 million and $0.6 million of realized gains and realized losses, respectively. During the three months ended June 30, 2007, purchases and sales of available-for-sale securities in the cemetery perpetual care trusts were $58.6 million and $51.7 million, respectively. These sales transactions resulted in $18.9 million and $5.0 million of realized gains and realized losses, respectively.

During the six months ended June 30, 2008, purchases and sales of available-for-sale securities in the cemetery perpetual care trusts were $117.1 million and $125.9 million, respectively. These sale transactions resulted in $10.4 million and $13.6 million of realized gains and realized losses, respectively. During the six months ended June 30, 2007, purchases and sales of available-for-sale securities in the cemetery perpetual care trusts were $227.3 million and $94.1 million, respectively. These sales transactions resulted in $24.4 million and $6.2 million of realized gains and realized losses, respectively.

Distributable earnings from these cemetery perpetual care trust investments are recognized in current cemetery revenues to the extent we incur qualifying cemetery maintenance costs. Recognized earnings related to these cemetery perpetual care trust investments were $10.2 million and $13.0 million for the three months ended June 30, 2008 and 2007, respectively. Recognized earnings related to these cemetery perpetual care trust investments were $20.0 million and $25.3 million for the six months ended June 30, 2008 and 2007, respectively.

cemetery perpetual care trust investments in Other income, net in our condensed consolidated statement of operations. As a result of our most recent review at June 30, 2008, we recorded no impairment charges. As a result of our reviews during 2007, we recorded a $1.2 million impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain private equity and other investments. See Note 7 to the condensed consolidated financial statements for further information related to our non-controlling interest in cemetery perpetual care trust investments.

7. Non-Controlling Interest in Funeral and Cemetery Trusts and in Cemetery Perpetual Care Trusts

We consolidate in our balance sheet the merchandise and service trusts associated with our preneed funeral and cemetery activities in accordance with FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities (revised December 2003 — an interpretation of ARB No. 51” (FIN 46R). Although FIN 46R requires the consolidation of the merchandise and service trusts, it does not change the legal relationships among the trusts, us, or our customers. The customers are the legal beneficiaries of these merchandise and service trusts, and therefore, their interests in these trusts represent a non-controlling interest in subsidiaries.

The components of Non-controlling interest in funeral and cemetery trusts and Non-controlling interest in cemetery perpetual care trusts in our condensed consolidated balance sheet at June 30, 2008 and December 31, 2007 are detailed below.


		June 30, 2008								June 30, 2008
		Preneed		Preneed						Cemetery
		funeral		cemetery			Total			perpetual care
	(In thousands)
Trust investments, at market value		$	830,783	$	982,863		$	1,813,646		$	791,686
Cash and cash equivalents			150,952		155,667			306,619			71,598
Insurance-backed fixed income securities			214,986		—			214,986			—
Accrued trust operating asset (payable), deferred taxes, and other			1,452		(2,551	)		(1,099	)		8,383

Non-controlling interest		$	1,198,173	$	1,135,979		$	2,334,152		$	871,667


		December 31, 2007									December 31, 2007
		Preneed			Preneed						Cemetery
		funeral			cemetery			Total			perpetual care
	(In thousands)
Trust investments, at market value		$	848,195		$	759,215		$	1,607,410		$	817,228
Cash and cash equivalents			194,728			399,301			594,029			88,516
Insurance-backed fixed income securities			201,258			—			201,258			—
Accrued trust operating payables, deferred taxes, and other			(3,737	)		(8,672	)		(12,409	)		846

Non-controlling interest		$	1,240,444		$	1,149,844		$	2,390,288		$	906,590

Other Income, Net

The components of Other income, net in our condensed consolidated statement of operations for the three and six months ended June 30, 2008 and 2007 are detailed below. See Notes 4 through 6 to the condensed consolidated financial statements for further discussion of the amounts related to the funeral, cemetery, and cemetery perpetual care trusts.


	Three months ended June 30, 2008
							Cemetery
	Funeral			Cemetery			perpetual
	trusts			trusts			care trusts			Other, net		Total
							(In thousands)
Realized gains	$	9,510		$	11,959		$	865		$	—	$	22,334
Realized losses		(11,892	)		(13,320	)		(638	)		—		(25,850	)
Interest, dividend, and other ordinary income		14,902			12,502			9,990			—		37,394
Trust expenses and income taxes		(4,408	)		(10,972	)		(2,386	)		—		(17,766	)

Net trust investment income		8,112			169			7,831			—		16,112
Interest expense related to non-controlling interest in funeral and cemetery trust investments		(8,112	)		(169	)		—			—		(8,281	)
Interest expense related to non-controlling interest in cemetery perpetual care trust investments		—			—			(7,831	)		—		(7,831	)

Total non-controlling expense		(8,112	)		(169	)		(7,831	)		—		(16,112	)
Other income, net		—			—			—			1,945		1,945

Total other income, net	$	—		$	—		$	—		$	1,945	$	1,945


	Six months ended June 30, 2008
							Cemetery
	Funeral			Cemetery			perpetual
	trusts			trusts			care trusts			Other, net		Total
							(In thousands)
Realized gains	$	30,309		$	23,414		$	10,352		$	—	$	64,075
Realized losses (1)		(26,890	)		(29,811	)		(13,631	)		—		(70,332	)
Interest, dividend, and other ordinary income		20,287			16,738			18,376			—		55,401
Trust expenses and income taxes		(9,071	)		(15,394	)		(2,922	)		—		(27,387	)

Net trust investment income (losses)		14,635			(5,053	)		12,175			—		21,757
Interest (expense) income related to non-controlling interest in funeral and cemetery trust investments		(14,635	)		5,053			—			—		(9,582	)
Interest expense related to non-controlling interest in cemetery perpetual care trust investments		—			—			(12,175	)		—		(12,175	)

Total non-controlling interest (expense) income		(14,635	)		5,053			(12,175	)		—		(21,757	)
Other income, net		—			—			—			3,117		3,117

Total other income, net	$	—		$	—		$	—		$	3,117	$	3,117


	Three months ended June 30, 2007
							Cemetery
	Funeral			Cemetery			perpetual
	trusts			trusts			care trusts			Other, net		Total
							(In thousands)
Realized gains	$	23,236		$	23,043		$	18,924		$	—	$	65,203
Realized losses (1)		(9,226	)		(8,766	)		(6,162	)		—		(24,154	)
Interest, dividend, and other ordinary income		6,540			7,085			12,371			—		25,996
Trust expenses and income taxes		(2,331	)		(4,869	)		(1,393	)		—		(8,593	)

Net trust investment income		18,219			16,493			23,740			—		58,452
Interest expense related to non-controlling interest in funeral and cemetery trust investments		(18,219	)		(16,493	)		—			—		(34,712	)
Interest expense related to non-controlling interest in cemetery perpetual care trust investments		—			—			(23,740	)		—		(23,740	)

Total non-controlling interest expense		(18,219	)		(16,493	)		(23,740	)		—		(58,452	)
Other income, net		—			—			—			1,755		1,755

Total other income, net	$	—		$	—		$	—		$	1,755	$	1,755


	Six months ended June 30, 2007
							Cemetery
	Funeral			Cemetery			perpetual
	trusts			trusts			care trusts			Other, net		Total
							(In thousands)
Realized gains	$	32,751		$	36,337		$	24,432		$	—	$	93,520
Realized losses (1)		(15,637	)		(15,619	)		(7,383	)		—		(38,639	)
Interest, dividend, and other ordinary income		11,651			14,693			22,319			—		48,663
Trust expenses and income taxes		(5,379	)		(8,391	)		(2,387	)		—		(16,157	)

Net trust investment income		23,386			27,020			36,981			—		87,387
Interest expense related to non-controlling interest in funeral and cemetery trust investments		(23,386	)		(27,020	)		—			—		(50,406	)
Interest expense related to non-controlling interest in cemetery perpetual care trust investments		—			—			(36,981	)		—		(36,981	)

Total non-controlling interest expense		(23,386	)		(27,020	)		(36,981	)		—		(87,387	)
Other expense, net		—			—			—			1,138		1,138

Total other income, net	$	—		$	—		$	—		$	1,138	$	1,138

(1) Realized losses include impairment charges for other-than-temporary declines in fair value of $3.5 million for funeral trusts, $3.2 million for cemetery trusts, and $1.2 million for cemetery perpetual care trusts. See Notes 4 through 6 for additional information.

8. Income Taxes

Income tax expense during interim periods is based on the estimated annual effective income tax rate plus any discrete items which are recorded in the period that the specific item occurs. Discrete items include such events as accrual true-ups to tax returns, tax audit settlements, and other infrequently occurring or unusual events occurring in a given quarter. For the three months ended June 30, 2008, income tax expense was approximately 39% of pre-tax income and for the six months ended June 30, 2008, income tax expense was approximately 38% of pretax income. Variances in our estimated annual effective tax rate from the 35% federal statutory rate primarily result from the effect of discrete adjustments, state and Canadian income taxes and estimated permanent differences. Specific items which affected income tax expense for the six months ended June 30, 2008 included a return to accrual adjustment on our 2007 Canadian income tax returns which were filed during the second -quarter, accrued interest on contingent tax liabilities recorded under FIN 48, and permanent differences between the book basis and tax basis of asset dispositions.

At June 30, 2008 we had approximately $148 million of gross unrecognized tax benefits. If all unrecognized benefits were recognized, approximately $41 million would impact our effective tax rate in future periods. Both of the amounts have increased over the corresponding amount that existed at December 31, 2007 as a result of accrual of interest and penalties associated with our unrecognized tax benefits noted above.

We file numerous US federal, state and foreign income tax returns. A number of years may elapse before particular tax matters, for which we have unrecognized tax benefits, are audited and finally settled. In the United States, the Internal Revenue Service has recently completed its field work for tax years 1999 through 2002 and is currently auditing tax years 2003 through 2005. Various state and foreign jurisdictions are auditing years through 2005. It is reasonably possible that one or more of the multi-jurisdictional audits will be settled by December 31, 2008 and if favorably resolved could result in a significant reduction in the amount of our unrecognized tax benefits.

9. Debt

Debt as of June 30, 2008 and December 31, 2007 was as follows:


	June 30, 2008			December 31, 2007
	(In thousands)
6.5% notes due March 2008	$	—		$	45,209
7.7% notes due April 2009		28,731			28,731
7.875% debentures due February 2013		55,627			55,627
7.375% senior notes due October 2014		250,000			250,000
6.75% notes due April 2015		200,000			200,000
6.75% notes due April 2016		250,000			250,000
7.0% notes due June 2017		300,000			300,000
7.625% senior notes due October 2018		250,000			250,000
7.5% notes due April 2027		200,000			200,000
Revolving credit facility due November 2011		45,000			—
Series B senior notes due November 2011		150,000			150,000
Convertible debentures, maturities through 2013, fixed interest rates at 5.00% conversion prices from $13.02 to $50.00 per share		4,175			4,175
Obligations under capital leases		112,574			112,507
Mortgage notes and other debt, maturities through 2050		38,631			15,742
Unamortized pricing discounts and other		(4,938	)		(5,291	)

Total debt	$	1,879,800		$	1,856,700
Less current maturities		(51,289	)		(36,594	)

Total long-term debt	$	1,828,511		$	1,820,106

Current maturities of debt at June 30, 2008 were comprised primarily of capital leases and our 7.7% Notes due April 2009. Our consolidated debt had a weighted average interest rate of 6.77% at June 30, 2008 and 7.09% at December 31, 2007. Approximately 86% and 89% of our total debt had a fixed interest rate at June 30, 2008 and December 31, 2007, respectively.

Revolving Credit Facility

Our revolving credit facility matures in November 2011 and provides a total lending commitment of $300.0 million, including a sublimit of $175.0 million for letters of credit. In March 2008, we utilized $45.0 million of the credit facility to repay our 6.5% notes due March 2008. As of June 30, 2008, we have also used the credit facility to support $53.7 million of letters of credit. The credit facility provides us with flexibility for working capital, if needed, and is guaranteed by our domestic subsidiaries. The subsidiary guaranty is a guaranty of payment of the outstanding amount of the total lending commitment. It covers the term of the credit facility, including extensions, and totaled a maximum potential amount of $98.7 million at June 30, 2008. The credit facility contains certain financial covenants, including a minimum interest coverage ratio, a maximum leverage ratio, maximum capital expenditure limitations, and certain cash distribution and share repurchase restrictions. We also pay a quarterly fee on the unused commitment, which ranges from 0.25% to 0.50%.

Debt Issuances and Additions

During the six months ended June 30, 2008, we entered into loan agreements with financial institutions totaling $31.0 million. The proceeds, which are included in mortgage notes and other debt, were used for deposits related to certain transportation vehicles.

In the three months ended June 30, 2007, we completed a private offering of $400.0 million aggregate principal unsecured senior notes, consisting of $200.0 million aggregate principal amount of 6.75% Senior Notes due 2015 and $200.0 million aggregate principal amount of 7.50% Senior notes due 2027. We are entitled to redeem the notes at any time by paying a make-whole premium. The notes are subject to the provisions of our Senior Indenture dated as of February 1, 1993, as amended, which includes covenants limiting, among other things, the creation of liens securing the indebtedness and certain sale-leaseback transactions. We used the net proceeds from the offering to fund the closing of the tender offers for our 6.50% Notes due 2008 and 7.70% Notes due 2009 as further discussed below and for general corporate purposes.

Debt Extinguishments and Reductions

In the three months ended March 31, 2008, we repaid $45.2 million aggregate principal amount of our 6.50% notes due March 2008. There was no gain or loss recognized as a result of this repayment.

In the three months ended March 31, 2007, we repaid $100.0 million aggregate principal amount of our term loan. As a result of this transaction, we recognized a loss of $2.4 million recorded in Loss on early extinguishment of debt, net in our condensed consolidated statement of operations, which represents the write-off of unamortized deferred loan costs of $1.7 million and a $0.7 million premium to early extinguish the debt.

In the three months ended June 30, 2007, we purchased $149.8 million aggregate principal amount of our 6.50% Notes due 2008 and $173.8 million aggregate principal amount of our 7.70% Notes due 2009 in a tender offer. In connection with the repurchase of the notes, we recognized a Loss on early extinguishment of debt of approximately $12.1 million, which represents the write-off of unamortized deferred loan costs of $0.4 million, a $1.0 million loss on a related interest rate hedge, and $10.7 million in premiums paid to extinguish the debt.

Capital Leases

In the six months ended June 30, 2008 and 2007, we acquired $14.3 million and $23.9 million, respectively, of transportation vehicles and other assets using capital leases.

10. Retirement Plans

The components of net periodic pension plan benefit cost for the three and six months ended June 30 were as follows:


	Three months ended					Six months ended
	June 30,					June 30,
	2008		2007			2008		2007
	(In thousands)					(In thousands)
Interest cost on projected benefit obligation	$	422	$	2,083		$	785	$	4,166
Actual return on plan assets		—		(909	)		—		(1,935	)
Amortization of prior service cost		—		46			—		92

	$	422	$	1,220		$	785	$	2,323

11. Share-Based Compensation

Stock Benefit Plans

We utilize the Black-Scholes valuation model for estimating the fair value of our stock options. This model allows the use of a range of assumptions related to volatility, the risk-free interest rate, the expected life, and the dividend yield. The fair values of our stock options are calculated using the following weighted average assumptions for the six months ended June 30, 2008:


	Six months ended
Assumptions	June 30, 2008
Dividend yield		1.3	%
Expected volatility		45.9	%
Risk-free interest rate		2.9	%
Expected holding period	5.7 years

Stock Options

The following table sets forth stock option activity for the six months ended June 30, 2008:


				Weighted-average
	Options			exercise price
Outstanding at December 31, 2007		13,568,445		$	6.25
Granted		1,422,600			11.59
Exercised		(947,202	)		3.79
Expired		(7,263	)		29.82

Outstanding at June 30, 2008		14,036,580		$	6.95

Exercisable at June 30, 2008		10,631,099		$	5.71

As of June 30, 2008, the unrecognized compensation expense related to stock options of $11.3 million is expected to be recognized over a weighted average period of 2.2 years.

Restricted Shares

Restricted share activity for the six months ended June 30, 2008 was as follows:


				Weighted-average
	Restricted			grant-date
	shares			fair value
Nonvested restricted shares at December 31, 2007		674,576		$	9.04
Granted		290,000			11.61
Vested		(362,134	)		8.36

Nonvested restricted shares at June 30, 2008		602,442		$	10.69

12. Stockholders’ Equity

Our components of Accumulated other comprehensive income are as follows:


	Foreign						Accumulated
	currency			Unrealized			other
	translation			gains and			comprehensive
	adjustment			losses			income
				(in thousands)
Balance at December 31, 2007	$	152,590		$	—		$	152,590
Activity in 2008		(17,147	)		—			(17,147	)
Decrease in net unrealized gains associated with available-for-sale securities of the trusts		—			(142,954	)		(142,954	)
Reclassification of unrealized loss activity attributable to the non-controlling interest holders		—			142,954			142,954

Balance at June 30, 2008	$	135,443		$	—		$	135,443

The assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. The U.S. dollar amount that arises from such translation, as well as exchange gains and losses on intercompany balances of a long-term investment nature, are included in the cumulative currency translation adjustments in Accumulated other comprehensive income. Income taxes are generally not provided on foreign currency translation adjustments. Included in the decrease in net unrealized gains associated with available-for-sale securities of the trusts and offset in the reclassification of unrealized loss activity attributable to the non-controlling interest holders are $9.9 million of unrealized losses attributable to the initial adoption of SFAS 157. See Note 4-6 for further discussion.

The components of comprehensive income are as follows for the three and six months ended June 30, 2008 and 2007:


	Three months ended				Six months ended
	June 30,				June 30,
	2008		2007		2008			2007
	(In thousands)				(In thousands)
Comprehensive income:
Net income	$	31,397	$	15,118	$	72,916		$	52,760
Other comprehensive income (loss)		4,959		37,190		(17,147	)		41,596

Comprehensive income	$	36,356	$	52,308	$	55,769		$	94,356

Cash Dividends

On May 14, 2008, our Board of Directors approved a cash dividend of $.04 per common share. At June 30, 2008, this dividend totaling $10.3 million was recorded in Accounts payable and accrued liabilities and Capital in excess of par value in the condensed consolidated balance sheet. This dividend was paid on July 31, 2008.

Share Repurchase Program

Subject to market conditions, normal trading restrictions, and limitations in our debt covenants, we may make purchases in the open market or through privately negotiated transactions under our stock repurchase program. In the six months ended June 30, 2008, we repurchased 7.0 million shares of common stock at an aggregate cost of $79.5 million and an average cost per share of $11.34. After these purchases, the remaining dollar value of shares authorized to be purchased under the share repurchase program was approximately $66.1 million at June 30, 2008.

13. Segment Reporting

Our operations are both product based and geographically based, and the reportable operating segments presented below include our funeral and cemetery operations. Our geographic areas include United States and Foreign.

Foreign operations consists of our operations in Canada and Germany. We conduct both funeral and cemetery operations in the United States and Canada and funeral operations in Germany.

Our reportable segment information is as follows:


					Reportable
	Funeral		Cemetery		segments
			(In thousands)
Three months ended June 30,
Revenues from external customers:
2008	$	363,262	$	185,520	$	548,782
2007	$	375,852	$	189,640	$	565,492
Gross profit:
2008	$	72,372	$	34,988	$	107,360
2007	$	70,490	$	32,749	$	103,239
Six months ended June 30,
Revenues from external customers:
2008	$	768,841	$	353,392	$	1,122,233
2007	$	798,696	$	374,351	$	1,173,047
Gross profit:
2008	$	180,919	$	64,038	$	244,957
2007	$	172,735	$	71,487	$	244,222

The following table reconciles gross profit from reportable segments to our consolidated income from continuing operations before income taxes:


	Three months ended						Six months ended
	June 30,						June 30,
	2008			2007			2008			2007
	(In thousands)						(In thousands)
Gross profit from reportable segments	$	107,360		$	103,239		$	244,957		$	244,222
General and administrative expenses		(21,658	)		(30,159	)		(46,733	)		(65,387	)
(Loss) gain on divestitures and impairment charges, net		(3,858	)		9,743			(15,904	)		2,063
Other operating income, net		1,691			—			585			—

Operating income		83,535			82,823			182,905			180,898
Interest expense		(33,311	)		(36,165	)		(67,380	)		(73,762	)
Loss on early extinguishment of debt		—			(12,122	)		—			(14,480	)
Equity in earnings of unconsolidated subsidiaries		—			5,559			—			6,270
Other income, net		1,945			1,755			3,117			1,138

Income from continuing operations before income taxes	$	52,169		$	41,850		$	118,642		$	100,064

Our geographic area information is as follows:


	United
	States			Foreign			Total
				(In thousands)
Three months ended June 30,
Revenues from external customers:
2008	$	492,297		$	56,485		$	548,782
2007	$	519,596		$	45,896		$	565,492
(Loss) gain on divestitures and impairment charges, net:
2008	$	(3,333	)	$	(525	)	$	(3,858	)
2007	$	10,279		$	(536	)	$	9,743
Operating income:
2008	$	70,649		$	12,886		$	83,535
2007	$	81,400		$	1,423		$	82,823
Six months ended June 30,
Revenues from external customers:
2008	$	1,011,344		$	110,889		$	1,122,233
2007	$	1,080,888		$	92,159		$	1,173,047
(Loss) gain on divestitures and impairment charges, net:
2008	$	(12,871	)	$	(3,033	)	$	(15,904	)
2007	$	2,576		$	(513	)	$	2,063
Operating income:
2008	$	160,378		$	22,527		$	182,905
2007	$	175,610		$	5,288		$	180,898

14. Supplementary Information

The detail of certain income statement accounts as presented in the condensed consolidated statement of operations is as follows for the three and six months ended June 30:


	Three months ended				Six months ended
	June 30,				June 30,
	2008		2007		2008		2007
	(In thousands)				(In thousands)
Merchandise revenues:
Funeral	$	118,312	$	127,164	$	252,533	$	273,898
Cemetery		129,021		128,810		237,453		248,262

Total merchandise revenues		247,333		255,974		489,986		522,160
Services revenues:
Funeral		229,542		236,197		489,052		502,157
Cemetery		47,862		52,703		98,912		109,462

Total services revenues		277,404		288,900		587,964		611,619

Other revenues		24,045		20,618		44,283		39,268

Total revenues	$	548,782	$	565,492	$	1,122,233	$	1,173,047

Merchandise costs and expenses:
Funeral	$	61,239	$	64,278	$	129,902	$	135,930
Cemetery		58,321		55,357		104,697		102,021

Total cost of merchandise		119,560		119,635		234,599		237,951
Services costs and expenses:
Funeral		113,538		122,335		225,616		241,241
Cemetery		28,170		29,348		55,349		57,184

Total cost of services		141,708		151,683		280,965		298,425

Overhead and other expenses		180,154		190,935		361,712		392,449

Total costs and expenses	$	441,422	$	462,253	$	877,276	$	928,825

15. Commitments and Contingencies

Representations and Warranties

As of June 30, 2008, we have contingent obligations of $36.1 million (of which $26.6 million is reflected in our condensed consolidated financial statements as a liability) resulting from our previous international asset sales and joint venture transactions. In some cases, we have agreed to guarantee certain representations and warranties made in such divestiture transactions with letters of credit or interest-bearing cash investments. We have interest-bearing cash investments of $25.6 million included in Deferred charges and other assets collateralizing certain of these contingent obligations. We believe it is remote that we will ultimately be required to fund third-party claims against these representations and warranties in excess of the carrying value of our recorded liability.

In 2004, we disposed of our funeral operations in France to a newly formed, third-party company. As a result of this sale, we recognized certain Euro-denominated contractual obligations related to representations, warranties, and other indemnifications. The remaining obligation related to these indemnifications is as follows:


		Maximum potential	Carrying
		amount of future	value as of
	Time limit	payments	June 30, 2008
			(In thousands)
Litigation provision	Until entire resolution of (i) the relevant claims or (ii) settlement of the claim by the purchaser at the request of the vendor	(1)		15,117
VAT taxes	One month after expiration of the statutory period of limitations	(1)		5,688
Other	Until entire resolution of (i) the relevant claims or (ii) settlement of the claim by the purchaser at the request of the vendor	(1)		4,266

Total				$ 25,071
Less: Deductible of majority equity owner				(2,471	)

				$ 22,600


(1)		The potential maximum exposure for these three items combined is €60 million or $94.8 million at June 30, 2008.

During the six months ended June 30, 2008, we released certain value-added tax (VAT) indemnifications and tax reserve liabilities related to our former French operations as a result of the expiration of the statutory period of limitations. In addition, we applied certain litigation and other claims against the deductible of the majority owner, and we increased the recorded amount of certain other litigation reserves. These transactions, which after consideration of related foreign currency translation effects resulted in a $1.0 million reduction of our carrying value of the obligation, were recorded in (Loss) gain on divestitures and impairment charges, net in the three and six months ended June 30, 2008.

Litigation

We are a party to various litigation matters, investigations, and proceedings. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable outcome. We intend to defend ourselves in the lawsuits described herein; however, if we determine that an unfavorable outcome is probable and can be reasonably estimated, we establish accruals we deem appropriate. We hold certain insurance policies that may reduce cash outflows with respect to an adverse outcome of certain of these litigation matters. We accrue such insurance recoveries when they become probable of being paid and can be reasonably estimated.

Conley Investment Counsel v. Service Corporation International, et al.; Civil Action 04-MD-1609; In the United States District Court for the Southern District of Texas, Houston Division, a consolidation of three cases that were filed in 2003 and 2004 (“2003 Securities Lawsuit”). The 2003 Securities Lawsuit names as defendants SCI and several of SCI’s current and former executive officers or directors. It is a purported class action alleging that the defendants failed to disclose the unlawful treatment of human remains and gravesites at two cemeteries in Fort Lauderdale and West Palm Beach, Florida. No discovery has occurred, and we cannot quantify our ultimate liability, if any, for the payment of damages.

Burial Practices Claims. We are named as a defendant in various lawsuits alleging improper burial practices at certain of our cemetery locations. These lawsuits include the Valls and Garcia lawsuits described in the following paragraphs.

Maria Valls, Pedro Valls and Roberto Valls, on behalf of themselves and all other similarly situated v. SCI Funeral Services of Florida, Inc. d/b/a Memorial Plan a/k/a Flagler Memorial Park, John Does and Jane Does; Case No. 23693CA08; In the Circuit Court of the 11th Judicial Circuit in Miami-Dade County, Florida (“Valls Lawsuit”). The Valls Lawsuit was filed December 5, 2005, and named a subsidiary of SCI as a defendant. The plaintiffs allege the defendants improperly handled remains, did not keep adequate records of interments, and engaged in various other improprieties in connection with the operation of the cemetery. Although the plaintiffs seek to certify as a class all family members of persons buried at the cemetery, the court has dismissed plaintiffs’ class action allegations with prejudice. Plaintiffs appeal the ruling. The plaintiffs are seeking monetary damages and injunctive relief and have reserved the right to seek leave from the court to claim punitive damages. We cannot quantify our ultimate liability, if any, for the payment of any damages.

Reyvis Garcia, Alicia Garcia, et al. v. Alderwoods Group, Inc., Osiris Holding of Florida, Inc, a Florida corporation, d/b/a Graceland Memorial Park South, f/k/a Paradise Memorial Gardens, Inc., et al. was filed in December 2004, in the Circuit Court of the Eleventh Judicial Circuit in Miami-Dade County, Florida, Case No.: 04-25646 CA 32. The Garcias are the son and sister of the decedent, Eloisa Garcia, who was buried at Graceland Memorial Park South in March 1986, when the cemetery was owned by Paradise Memorial Gardens, Inc. Initially, the suit sought damages on the individual claims of the Garcias relating to the burial of Eloisa Garcia. The Garcias claimed that due to poor record keeping, maps, and the fact that the family could not afford to purchase a marker for the grave, the burial location of the decedent could not be readily located. Subsequently, the decedent’s grave was located and verified. In July 2006, plaintiffs amended their complaint, seeking to certify a class of all persons buried at this cemetery whose burial sites cannot be located. Plaintiffs subsequently filed amended class action complaints and added additional named plaintiffs. The plaintiffs are seeking unspecified monetary damages, as well as equitable and injunctive relief. No class has been certified in this matter. We cannot quantify our ultimate liability, if any, for the payment of any damages.

Funeral Regulations Lawsuits. We are named as a defendant in various lawsuits alleging violations of federal and state funeral related regulations and/or statutes, including the Baudino and Sanchez lawsuits described in the following paragraphs.

Mary Louise Baudino, et al. v. Service Corporation International, et al. was filed in November 2004 in Los Angeles County Superior Court; Case No. BC324007 (“Baudino Lawsuit”). The Baudino Lawsuit was initially filed as a putative nationwide class action brought on behalf of all persons, entities, and organizations who purchased funeral services from SCI. Plaintiffs allege that funeral related regulations and/or statutes (“Rules”) required us to disclose our markups on all items obtained from third parties in connection with funeral service contracts and that the failure to make certain disclosures of markups resulted in breach of contract and other legal claims. The plaintiffs seek to recover an unspecified amount of monetary damages as well as attorneys’ fees, costs, and interest. We deny all of the claims and deny that the plaintiffs have standing to sue for violations of the Rules. On September 15, 2006, the trial court granted our motion for summary judgment on the merits. Plaintiffs are appealing the summary judgment ruling.

Richard Sanchez et al. v. Alderwoods Group, Inc. et al. was filed in February 2005 in the Superior Court of the State of California, for the County of Los Angeles, Central District; Case No. BC328962. Plaintiffs seek to certify a nationwide class on behalf of all consumers who purchased funeral goods and services from Alderwoods. Plaintiffs allege in essence that the Federal Trade Commission’s Funeral Rule requires Alderwoods to disclose its markups on all items obtained from third parties in connection with funeral service contracts. Plaintiffs allege further that Alderwoods has failed to make such disclosures. Plaintiffs seek to recover an unspecified amount of monetary damages, attorney’s fees, costs, and unspecified “injunctive and declaratory relief.” This case is substantially similar to the Baudino Lawsuit, and we expect that the outcome of this case will be governed by the law applied in the Baudino Lawsuit.

Antitrust Claims. We are named as a defendant in two related class action antitrust cases filed in 2005. The first case is Cause No. 4:05-CV-03394; Funeral Consumers Alliance, Inc. v. Service Corporation International, et al.; In the United States District Court for the Southern District of Texas — Houston (“Funeral Consumers Case”). This is a purported class action on behalf of casket consumers throughout the United States alleging that we and several other companies involved in the funeral industry violated federal antitrust laws and state consumer laws by engaging in various anti-competitive conduct associated with the sale of caskets.

The second case is Cause No. 4:05-CV-03399; Pioneer Valley Casket, et al. v. Service Corporation International, et al.; In the United States District Court for the Southern District of Texas — Houston Division (“Pioneer Valley Case”). This lawsuit makes the same allegations as the Funeral Consumers Case and is also brought against several other companies involved in the funeral industry. Unlike the Funeral Consumers Case, the Pioneer Valley Case is a purported class action on behalf of all independent casket distributors that are in the business or were in the business any time between July 18, 2001 to the present.

The Funeral Consumers Case and the Pioneer Valley Case seek injunctions, monetary damages, and treble damages. The plaintiffs in the Funeral Consumers Case filed an expert report indicating that the damages sought from all defendants range from approximately $950 million to $1.5 billion, before trebling. Additionally, the plaintiffs in the Pioneer Valley Case filed an expert report indicating that the damages sought from all defendants would be approximately $99 million, before trebling. We deny that we engaged in anticompetitive practices related to our casket sales and intend to vigorously contest these claims and plaintiffs’ damages reports. In both cases, we have filed reports of our experts which vigorously dispute the validity of the plaintiffs’ damages theories and calculations. We cannot quantify our ultimate liability, if any, for the payment of damages.

In addition to the Funeral Consumers Case and the Pioneer Valley Case, we received Civil Investigative Demands, dated August 2005 and February 2006, from the Attorney General of Maryland on behalf of itself and other state attorneys general, who have commenced an investigation of alleged anticompetitive practices in the funeral industry. We have also received similar Civil Investigative Demands from the Attorneys General of Florida and Connecticut.

Wage and Hour Claims. We are named a defendant in various lawsuits alleging violations of federal and state laws regulating wage and hour overtime pay, including the lawsuits described in the following paragraphs.

Prise, et al., v. Alderwoods Group, Inc., and Service Corporation International; Cause No. 06-164; In the United States District Court for the Western District of Pennsylvania (the “Wage and Hour Lawsuit”). The Wage and Hour Lawsuit was filed by two former Alderwoods (Pennsylvania), Inc., employees in December 2006 and purports to have been brought under the Fair Labor Standards Act (“FLSA”) on behalf of all Alderwoods and SCI-affiliated employees who performed work for which they were not fully compensated, including work for which overtime pay was owed. The court has conditionally certified a class of claims as to certain job positions for Alderwoods employees.

Plaintiffs allege causes of action for violations of the FLSA, failure to maintain proper records, breach of contract, violations of state wage and hour laws, unjust enrichment, fraud and deceit, quantum meruit, negligent misrepresentation, and negligence. Plaintiffs seek injunctive relief, unpaid wages, liquidated, compensatory, consequential and punitive damages, attorneys’ fees and costs, and pre- and post-judgment interest. We cannot quantify our ultimate liability, if any, in this lawsuit.

Bryant, et al. v. Alderwoods Group, Inc., Service Corporation International, et al.; Case No. 3:07-CV-5696-SI; In the U.S. District Court for the Northern District of California. This lawsuit was filed on November 8, 2007 against SCI and various subsidiaries and individuals. It is related to the Wage and Hour Lawsuit, raising similar claims and brought by the same attorneys. This lawsuit has been transferred to the U.S. District Court for the Western District of Pennsylvania and is now Case No. 08-CV-00891-JFC. We cannot quantify our ultimate liability, if any, in this lawsuit.

Bryant, et al. v. Service Corporation International, et al.; Case No. RG-07359593; and Helm, et al. v. AWGI & SCI ; Case No. RG-07359602; In the Superior Court of the State of California, County of Almeda. These cases were filed on December 5, 2007 by counsel for plaintiffs in the Wage and Hour Lawsuit. These cases assert state law claims like those previously dismissed in the Wage and Hour Lawsuit. These cases were removed to federal court in the U.S. District Court for the Northern District of California, San Francisco/Oakland Division. The Bryant case is now Case No. 3:08-CV-01190-SI and the Helm case is now Case No. 3:08-CV-01184-SI. We cannot quantify our ultimate liability, if any, in this lawsuit.

Stickle, et al. v. Service Corporation International, et al.; Case No. 08-CV-83; In the U.S. District Court for Arizona, Phoenix Division. Counsel for plaintiffs in the Wage and Hour Lawsuit filed this case on January 17, 2008, against SCI and various related entities and individuals asserting FLSA and other ancillary claims based on the alleged failure to pay for overtime. Plaintiffs seek the same class notice to SCI and related entities that were rejected by the Court in the Wage and Hour Lawsuit. We cannot quantify our ultimate liability, if any, in this lawsuit.

Ordaz, et al. v. Rose Hills Mortuary, L.P., et al.; Case No. BC386500; In the Superior Court of the State of California, for the County of Los Angeles. This case was filed on February 28, 2008 as a purported class action against our Rose Hills location asserting claims based on various violations of California law relating to the payment of wages and work hours.

The ultimate outcome of the matters described above cannot be determined at this time. We intend to aggressively defend all of the above lawsuits; however, an adverse decision in one or more of such matters could have a material adverse effect on us, our financial condition, results of operations, and cash flows.

16. Earnings Per Share

Basic earnings per common share (EPS) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common shares that then shared in our earnings.

A reconciliation of the numerators and denominators of the basic and diluted EPS computations is presented below:


	Three months ended					Six months ended
	June 30,					June 30,
	2008			2007		2008			2007
	(In thousands, except per					(In thousands, except per
	share amounts)					share amounts)
Income from continuing operations (numerator):
Income from continuing operations — basic	$	31,774		$	12,909	$	73,278		$	47,626
After tax interest on convertible debt		13			—		25			—

Income from continuing operations — diluted	$	31,787		$	12,909	$	73,303		$	47,626

(Loss) income from discontinued operations, net of tax (numerator)	$	(377	)	$	2,209	$	(362	)	$	5,134
Net income (numerator):
Net income — basic	$	31,397		$	15,118	$	72,916		$	52,760
After tax interest on convertible debt		13			—		25			—

Net income — diluted	$	31,410		$	15,118	$	72,941		$	52,760

Denominator:
Weighted average shares — basic		259,034			290,577		259,919			291,941
Stock options		3,356			5,361		3,543			5,318
Restricted stock		64			186		129			221
Convertible debt		121			—		121			—

Weighted average shares — diluted		262,575			296,124		263,712			297,480

Income from continuing operations per share:
Basic	$	.12		$	.04	$	.28		$	.16
Diluted	$	.12		$	.04	$	.28		$	.16

Income from discontinued operations per share, net of tax:
Basic	$	—		$	.01	$	—		$	.02
Diluted	$	—		$	.01	$	—		$	.02

Net income per share:
Basic	$	.12		$	.05	$	.28		$	.18
Diluted	$	.12		$	.05	$	.28		$	.18

The computation of diluted EPS excludes outstanding stock options and convertible debt in certain periods in which the inclusion of such options and debt would be antidilutive in the periods presented. Total options and convertible debentures not currently included in the computation of dilutive EPS are as follows (in shares):


	Three months ended				Six months ended
	June 30,				June 30,
	2008		2007		2008		2007
	(In thousands)				(In thousands)
Antidilutive options		3,526		1,622		1,544		1,559
Antidilutive convertible debentures		52		307		52		312

Total common stock equivalents excluded from computation		3,578		1,929		1,596		1,871

17. Divestiture-Related Activities

As divestitures occur in the normal course of business, gains or losses on the sale of such businesses are recognized in the income statement line item (Loss) gain on divestitures and impairment charges, net, including adjustments to contingent obligations and other estimated amounts which are recognized in periods subsequent to the period of divestment.

(Loss) gain on divestitures and impairment charges, net consists of the following for the three and six months ended June 30:


	Three months ended						Six months ended
	June 30,						June 30,
	2008			2007			2008			2007
	(In thousands)						(In thousands)
Gain (loss) on divestitures, net	$	604		$	28,851		$	(8,471	)	$	21,206
Impairment losses		(4,462	)		(19,108	)		(7,433	)		(19,143	)

	$	(3,858	)	$	9,743		$	(15,904	)	$	2,063

Assets Held for Sale

We have committed to a plan to sell certain operating properties. As a result, these properties have been classified as assets held for sale in our June 30, 2008 and December 31, 2007 condensed consolidated balance sheets.

Net assets held for sale were as follows:


	June 30, 2008		December 31, 2007
	(In thousands)
Assets:
Current assets	$	1,805	$	2,294
Preneed funeral receivables and trust investments		9,624		9,944
Preneed cemetery receivables and trust investments		62,872		64,751
Cemetery property		7,639		9,341
Property and equipment, at cost		12,454		9,968
Deferred charges and other assets		12,003		12,390
Cemetery perpetual care trust investments		16,407		16,232

Total assets		122,804		124,920

Liabilities:
Accounts payable and accrued liabilities		201		149
Deferred preneed funeral revenues		7,913		8,388
Deferred preneed cemetery revenues		65,190		67,141
Other liabilities		144		167
Non-controlling interest in cemetery perpetual care trusts		16,407		16,232

Total liabilities		89,855		92,077

Net assets held for sale	$	32,949	$	32,843

Discontinued Operations

As part of the Alderwoods transaction, we acquired an insurance subsidiary that we sold in the third quarter of 2007. Accordingly, the operations of this entity are classified as discontinued operations for the three and six months ended June 30, 2007. In addition, in the second quarter of 2008, we settled an outstanding contingency related to the 2005 divestiture of our operations in Argentina. The loss related to this transaction is included in discontinued operations for the three and six months ended June 30, 2008.

The results of our discontinued operations for the three and six months ended June 30, 2008 and 2007 were as follows:


	Three months ended						Six months ended
	June 30,						June 30,
	2008			2007			2008			2007
	(In thousands)						(In thousands)
Revenues	$	—		$	17,162		$	—		$	42,626
Costs and other expenses		—			(14,646	)		—			(36,448	)
Other income		—			916			—			916
Loss on divestitures and impairment charges, net		(572	)		—			(557	)		—

(Loss) income from discontinued operations before income taxes		(572	)		3,432			(557	)		7,094
Benefit (provision) for income taxes		195			(1,223	)		195			(1,960	)

(Loss) income from discontinued operations	$	(377	)	$	2,209		$	(362	)	$	5,134

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company

We are North America’s leading provider of deathcare products and services, with a network of funeral homes and cemeteries unequalled in geographic scale and reach. At June 30, 2008, we operated 1,328 funeral service locations and 379 cemeteries (including 209 combination locations) in North America, which are geographically diversified across 43 states, eight Canadian provinces, the District of Columbia, and Puerto Rico. Our funeral segment also includes the operations of 12 funeral homes in Germany that we intend to exit when economic values and conditions are conducive to a sale. As part of the Alderwoods Group, Inc.

(Alderwoods) transaction in the fourth quarter of 2006, we acquired Mayflower National Life Insurance Company (Mayflower), an insurance business that we sold in July 2007. The operations of this business through the date of sale are presented as discontinued operations in our condensed consolidated statement of operations.

We currently have approximately $66.1 million authorized to repurchase our common stock. Our financial stability is further enhanced by our $6.8 billion backlog of future revenues from both trust and insurance funded sales at June 30, 2008, which is the result of preneed funeral and cemetery sales. We believe we have the financial strength and flexibility to reward shareholders through dividends while maintaining a prudent capital structure and pursuing new opportunities for profitable growth.

Strategies for Growth

We are confident about our competitive position, our financial strength, and our ability to further our principal strategies to generate profitable growth over the long-term. These strategies are as follows:

•		Target our customer;

•		Drive operating discipline and leverage our scale; and

•		Manage and grow the footprint.

For additional information on these strategies, see our Annual Report on Form 10-K for the year ended December 31, 2007.

Financial Condition, Liquidity and Capital Resources

Capital Allocation Considerations

We rely on cash flow from operations as a significant source of liquidity. In addition, we have approximately $201.3 million in borrowing capacity under our 5-year, $300.0 million revolving credit facility. We believe these sources of liquidity can be supplemented by our ability to access the capital markets for additional debt or equity securities. As of June 30, 2008, we were in compliance with all of our debt covenants.

At June 30, 2008, our current liabilities exceeded our current assets by $15.3 million. We believe our future operating cash flows and available capacity under our credit facility will be adequate to meet our working capital requirements.

Cash Flow

We believe our ability to generate strong operating cash flow is one of our fundamental financial strengths and provides us with substantial flexibility in meeting operating and investing needs. Highlights of cash flow for the six months ended June 30, 2008 and 2007 are as follows:

Operating Activities — Net cash provided by operating activities in the first half of 2008 was $116.5 million compared to $191.6 million in the first half of 2007. Included in the first half of 2008 is a federal tax payment of $90.0 million related to gains on the sale of our equity investment in French operations and other divestitures in late 2007 and $3.3 million of Alderwoods transition costs. Included in the first half of 2007 is $11.4 million of premiums paid on early extinguishment of debt and $19.5 million of Alderwoods transition costs. Net cash provided by operating activities also decreased $12.6 million, or 5.7%, due largely to our sale of Mayflower Insurance Company, which contributed $17.3 million of operating cash from discontinued operations in the first half of 2007.

Investing Activities — Net cash provided by investing activities decreased $223.8 million in the first half of 2008 compared to the first half of 2007 primarily due to a $201.7 million decrease in proceeds from the sales of businesses in North America and a $21.2 million increase in deposits of restricted funds. In the first half of 2007, we received $214.2 million in proceeds from the sales of businesses in North America driven by the sale of properties in accordance with our consent decree with the FTC.

Financing Activities — Net cash used in financing activities decreased $54.2 million in the first half of 2008 compared to the same period in 2007 as a $372.2 million decrease in debt payments and a $24.1 million decrease in purchases of the Company’s common stock were partially offset by a $320.6 million decrease in proceeds from the issuance of long-term debt and a $9.6 million reduction in proceeds from the exercise of stock options. Payments of debt in 2008 included a $45.2 million repayment of our 6.5% notes due

March 2008, $9.2 million in other scheduled debt payments, and $12.0 million in payments on capital leases. Payments of debt of $438.6 million in 2007 were due to the acceptance of the tenders of $149.8 million of our 6.50% senior notes due 2008 and $173.8 million of our 7.70% senior notes due 2009, a $100.0 million repayment of our term loan, $2.2 million in scheduled debt payments, and $13.8 million in payments on capital leases.

Financial Assurances

In support of our operations, we have entered into arrangements with certain surety companies whereby such companies agree to issue surety bonds on our behalf as financial assurance and/or as required by existing state and local regulations. The surety bonds are used for various business purposes; however, the majority of the surety bonds issued and outstanding have been used to support our preneed funeral and cemetery sales activities that are not backed by trust investments. The obligations underlying these surety bonds are recorded on the condensed consolidated balance sheet as Deferred preneed funeral revenues and Deferred preneed cemetery revenues. The breakdown of surety bonds between funeral and cemetery preneed arrangements, as well as surety bonds for other activities, is described below.


	June 30, 2008		December 31, 2007
	(Dollars in millions)
Preneed funeral	$	129.9	$	134.9
Preneed cemetery:
Merchandise and services		136.3		148.0
Pre-construction		4.0		6.4

Bonds supporting preneed funeral and cemetery obligations		270.2		289.3

Bonds supporting preneed business permits		5.1		5.4
Other bonds		17.0		8.4

Total surety bonds outstanding	$	292.3	$	303.1

When selling preneed funeral and cemetery contracts, we may post surety bonds where allowed by state law. We post the surety bonds in lieu of trusting a certain amount of funds received from the customer. The amount of the bond posted is generally determined by the total amount of the preneed contract that would otherwise be required to be trusted, in accordance with applicable state law. For the three months ended June 30, 2008 and 2007, we had $7.9 million and $10.2 million, respectively, of cash receipts attributable to bonded sales. For the six months ended June 30, 2008 and 2007, we had $15.8 million and $20.6 million, respectively, of cash receipts attributable to bonded sales. These amounts do not consider reductions associated with taxes, obtaining costs, or other costs.

Surety bond premiums are paid annually and are automatically renewable until maturity of the underlying preneed contracts, unless we are given prior notice of cancellation. Except for cemetery pre-construction bonds (which are irrevocable), the surety companies generally have the right to cancel the surety bonds at any time with appropriate notice. In the event a surety company was to cancel the surety bond, we are required to obtain replacement surety assurance from another surety company or fund a trust for an amount generally less than the posted bond amount. Management does not expect that we will be required to fund material future amounts related to these surety bonds because of lack of surety capacity.

Preneed Funeral and Cemetery Activities and Backlog of Contracts

In addition to selling our products and services to client families at the time of need, we sell price-guaranteed preneed funeral and cemetery contracts, which provide for future funeral or cemetery services and merchandise. Since preneed funeral and cemetery services or merchandise will not be provided until sometime in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed funeral and cemetery contracts be paid into merchandise and service trusts until the merchandise is delivered or the service is performed. In certain situations, as described above, where permitted by state or provincial laws, we post a surety bond as financial assurance for a certain amount of the preneed funeral or cemetery contract in lieu of placing funds into trust accounts. Our backlog of funeral and cemetery contracts shown below represents the total amount of future revenues we have under contract at June 30, 2008 and December 31, 2007.

The tables below detail our North America results of preneed funeral and cemetery production and maturities, excluding insurance contracts, for the three and six months ended June 30, 2008 and 2007.


	North America
	Three months ended				Six months ended
	June 30,				June 30,
	2008		2007		2008		2007
	(Dollars in millions)				(Dollars in millions)
Funeral:
Preneed trust-funded (including bonded):
Sales production	$	40.5	$	37.3	$	78.4	$	74.8

Sales production (number of contracts)		8,464		8,048		15,973		16,147

Maturities	$	51.7	$	47.3	$	108.2	$	103.4

Maturities (number of contracts)		11,651		11,274		23,940		25,281

Cemetery:
Sales production:
Preneed	$	110.5	$	111.3	$	200.5	$	203.5
Atneed		63.4		69.8		131.2		144.6

Total sales production	$	173.9	$	181.1	$	331.7	$	348.1

Sales production deferred to backlog:
Preneed	$	46.2	$	49.7	$	80.8	$	91.7
Atneed		48.8		52.4		99.9		109.0

Total sales production deferred to backlog	$	95.0	$	102.1	$	180.7	$	200.7

Revenue recognized from backlog:
Preneed	$	37.4	$	38.5	$	89.2	$	80.3
Atneed		52.8		52.8		101.5		104.9

Total revenue recognized from backlog	$	90.2	$	91.3	$	190.7	$	185.2

Insurance-Funded Preneed Funeral Contracts: Where permitted by state or provincial law, customers may arrange their preneed funeral contract by purchasing a life insurance or annuity policy from third-party insurance companies, for which we earn a commission as general sales agent for the insurance company. The policy amount of the insurance contract between the customer and the third-party insurance company generally equals the amount of the preneed funeral contract. We do not reflect the unfulfilled insurance-funded preneed funeral contract amounts in our condensed consolidated balance sheet.

The table below details the North America results of insurance-funded preneed funeral production and maturities for the three and six months ended June 30, 2008 and 2007, and the number of contracts associated with those transactions.


	North America
	Three months ended				Six months ended
	June 30,				June 30,
	2008		2007		2008		2007
	(Dollars in millions)				(Dollars in millions)
Preneed funeral insurance-funded (1):
Sales production	$	81.6	$	68.8	$	150.4	$	149.5

Sales production (number of contracts)		13,610		11,737		25,203		26,342

General agency revenue	$	14.7	$	12.0	$	26.2	$	21.7

Maturities	$	58.9	$	61.7	$	126.7	$	129.6

Maturities (number of contracts)		11,329		12,236		24,941		28,060


(1)		Amounts are not included in the unaudited condensed consolidated balance sheet.

North America Backlog of Preneed Funeral and Cemetery Contracts: The following table reflects our North America backlog of trust-funded deferred preneed funeral and cemetery contract revenues including amounts related to Non-controlling interest in funeral and cemetery trusts at June 30, 2008 and December 31, 2007. Additionally, the table reflects our North America backlog of unfulfilled insurance-funded contracts (which is not included in our condensed consolidated balance sheet) at June 30, 2008 and December 31, 2007. The backlog amounts presented are reduced by an amount that we believe will cancel before maturity based on historical experience.

The table also reflects our North America preneed funeral and cemetery receivables and trust investments (market and cost bases) associated with the backlog of deferred preneed funeral and cemetery contract revenues, net of the estimated cancellation allowance. We believe that the table below is meaningful because it sets forth the aggregate amount of future revenues we expect to recognize as a result of preneed sales, as well as the amount of assets associated with those revenues. Because the future revenues exceed the asset amounts, future revenues will exceed the cash distributions actually received from the associated trusts.


	North America
	June 30, 2008				December 31, 2007
	Market		Cost		Market		Cost
			(Dollars in billions)
Backlog of trust-funded deferred preneed funeral revenues	$	1.64	$	1.68	$	1.63	$	1.63
Backlog of insurance-funded preneed funeral revenues	$	3.32	$	3.32	$	3.36	$	3.36

Total backlog of preneed funeral revenues	$	4.96	$	5.00	$	4.99	$	4.99

Assets associated with backlog of trust-funded deferred preneed funeral revenues, net of estimated allowance for cancellation	$	1.29	$	1.33	$	1.32	$	1.31
Insurance policies associated with insurance-funded deferred preneed funeral revenues, net of estimated allowance for cancellation	$	3.32	$	3.32	$	3.36	$	3.36

Total assets associated with backlog of preneed funeral revenues	$	4.61	$	4.65	$	4.68	$	4.67

Backlog of deferred cemetery revenues	$	1.83	$	1.86	$	1.78	$	1.75

Assets associated with backlog of deferred cemetery revenues, net of estimated allowance for cancellation	$	1.25	$	1.28	$	1.27	$	1.25

The difference between the backlog and asset amounts represents the contracts for which we have posted surety bonds as financial assurance in lieu of trusting, the amounts collected from customers that were not required to be deposited into trust, and allowable cash distributions from trust assets. The table also reflects the amounts expected to be received from insurance companies through the assignment of policy proceeds related to insurance-funded funeral contracts.

Results of Operations — Three Months Ended June 30, 2008 and 2007

Management Summary

Key highlights in the second quarter of 2008 were as follows:

	•		Revenues decreased $16.7 million, or 3.0%, as a result of significant divestiture activity throughout 2007 which included the sale of approximately 400 locations that generated more than $400 million of proceeds; and

	•		despite a difficult economic environment, comparable average revenue per funeral service increased 4.4%. Comparable funeral services performed decreased 2.6%.

Results of Operations

In the second quarter of 2008, we reported net income of $31.4 million ($.12 per diluted share) compared to net income in the second quarter of 2007 of $15.2 million ($.05 per diluted share). These results were impacted by the following items:

	•		a net after-tax loss on asset sales of $4.6 million in the second quarter of 2008 versus a net after-tax loss of $9.7 million in the second quarter of 2007;

	•		an after-tax loss from the early extinguishment of debt of $7.0 million in the second quarter of 2007;

	•		after-tax expenses related to our acquisition and integration of Alderwoods of $2.7 million in the second quarter of 2007; and

	•		after-tax loss from discontinued operations of $0.4 million in the second quarter of 2008 versus after-tax income from discontinued operations of $2.2 million in the second quarter of 2007.

Consolidated Versus Comparable Results

The table below reconciles our consolidated GAAP results to our comparable, or “same store,” results for the three months ended June 30, 2008 and 2007. We define comparable operations (or same store operations) as those funeral and cemetery locations that were owned for the entire period beginning January 1, 2007 and ending June 30, 2008. The following tables present operating results for funeral and cemetery locations that were owned by us during this period. As implied by our definition of comparable operations, these results include results from the properties that we acquired in the Alderwoods transaction.


			Less:
			results associated		Less:
			with acquisition/		results associated
Three months ended June 30, 2008	Consolidated		new construction		with divestitures			Comparable
			(Dollars in millions)
North America
Funeral revenue	$	361.4	$	0.5	$	1.0		$	359.9
Cemetery revenue		185.5		—		0.3			185.2

		546.9		0.5		1.3			545.1
Germany
Funeral revenue		1.9		—		—			1.9

Total revenues	$	548.8	$	0.5	$	1.3		$	547.0

North America
Funeral gross profits	$	72.3	$	0.1	$	(0.7	)	$	72.9
Cemetery gross profits		35.0		—		—			35.0

		107.3		0.1		(0.7	)		107.9
Germany
Funeral gross profits		0.1		—		—			0.1

Total gross profits	$	107.4	$	0.1	$	(0.7	)	$	108.0


				Less:
				results associated
Three months ended June 30, 2007	Consolidated			with divestitures			Comparable
	(Dollars in millions)
North America
Funeral revenue	$	374.3		$	22.9		$	351.4
Cemetery revenue		189.6			10.7			178.9

		563.9			33.6			530.3
Germany
Funeral revenue		1.6			—			1.6

Total revenues	$	565.5		$	33.6		$	531.9

North America
Funeral gross profits	$	70.5		$	(2.8	)	$	73.3
Cemetery gross profits		32.8			0.7			32.1

		103.3			(2.1	)		105.4
Germany
Funeral gross profits		(0.1	)		—			(0.1	)

Total gross profits	$	103.2		$	(2.1	)	$	105.3

The following table provides the data necessary to calculate our consolidated average revenue per funeral service for the three months ended June 30, 2008 and 2007. We calculate average revenue per funeral service by dividing consolidated funeral revenue, excluding General Agency (GA) revenues and certain other revenues in order to avoid distorting our averages of normal funeral services revenue, by the number of funeral services performed during the period.


	Three months ended June 30,
	2008		2007
	(Dollars in millions, except average
	revenue per funeral service)
Consolidated funeral revenue	$	363.3	$	375.9
Less: consolidated GA and other revenues		17.3		15.6

Adjusted consolidated funeral revenue	$	346.0	$	360.3

Consolidated funeral services performed		67,962		74,585
Consolidated average revenue per funeral service	$	5,091	$	4,831

The following table provides the data necessary to calculate our comparable average revenue per funeral service for the three months ended June 30, 2008 and 2007. We calculate average revenue per funeral service by dividing comparable funeral revenue, excluding comparable GA revenues and certain other revenues in order to avoid distorting our averages of normal funeral services revenue, by the comparable number of funeral services performed during the period.


	Three months ended June 30,
	2008		2007
	(Dollars in millions, except average
	revenue per funeral service)
Comparable funeral revenue	$	361.8	$	353.0
Less: comparable GA and other revenues		17.1		13.7

Adjusted comparable funeral revenue	$	344.7	$	339.3

Comparable funeral services performed		67,816		69,661
Comparable average revenue per funeral service	$	5,083	$	4,871

Funeral Results

Funeral Revenue

Consolidated revenues from funeral operations were $363.3 million in the three months ended June 30, 2008 compared to $375.9 million in the same period of 2007. This decrease is primarily due to the divestiture of non-strategic assets throughout 2007, which resulted in a decrease of $22.9 million of revenue in the second quarter of 2008, partially offset by a 5.4% increase in average revenue per funeral service. Comparable funeral revenues increased $8.8 million, or 2.5%, compared to the second quarter of 2007 driven by a 4.4% increase in the average revenue per funeral service and a $3.4 million increase in general agency revenues due to a 20.3% increase in preneed funeral insurance production over the same period in 2007.

Funeral Services Performed

Our consolidated funeral services performed decreased 6,623, or 8.9%, in the second quarter of 2008 compared to the same period in 2007. This decrease was primarily due to our planned 2007 divestiture of non-strategic assets, which contributed an incremental 4,846 funeral services in the second quarter of 2007. Our comparable funeral services performed decreased 1,845, or 2.6%, primarily due to the implementation of our strategic pricing initiative at former Alderwoods locations discussed below. Our comparable cremation rate of 42.0% in the three months ended June 30, 2008 increased from the 40.7% rate for the same period in 2007.

Average Revenue Per Funeral

Our consolidated average revenue per funeral service increased $260, or 5.4%, in the three months ended June 30, 2008 over the same period of 2007 and our comparable average revenue per funeral service increased 4.4%, or $212 per funeral service. These increases reflect the continued benefits from our strategic pricing initiative, which was implemented at former Alderwoods locations throughout 2007. Pursuant to this strategy, we have realigned our pricing focus away from products to service offerings, reflecting our competitive advantage and concentrating on services that our customers believe add the most value. This strategy has resulted in a decline in highly discounted, low-service cremation funeral services, but has continued to generate significant improvements in average revenue per funeral service and increased profitability.

Funeral Gross Profit

Consolidated funeral gross profit increased $2.0 million in the second quarter of 2008 compared to the second quarter of 2007 as the decreased revenue levels discussed above were more than offset by variable cost decreases, primarily in merchandise and salary expenses. The consolidated gross margin percentage increased to 19.9% from 18.7%. Gross profit from our comparable funeral locations decreased $0.2 million, or 0.3%, as the increase in revenue described above was more than offset by higher selling costs resulting from increased preneed funeral production, investments in new marketing initiatives, and a $1.8 million increase in energy-related costs in the second quarter of 2008.

Cemetery Results

Cemetery Revenue

Consolidated revenues from our cemetery operations decreased $4.1 million, or 2.2%, in the second quarter of 2008 compared to the second quarter of 2007. This decrease was due to a $10.4 million decline in revenue from the divestiture of non-strategic assets that was partially offset by an increase in comparable cemetery revenues. Our comparable cemetery revenues of $185.2 million in the second quarter of 2008 increased $6.3 million, or 3.5%, compared to the same period of 2007. This increase is due to increased cemetery sales production and higher property and merchandise recognition rates. These increases were partially offset by a decline in new cemetery property construction revenue as several large non-recurring construction projects were completed in 2007, as well as $2.3 million less in cemetery perpetual care trust fund income.

Cemetery Gross Profits

Consolidated cemetery gross profit increased $2.2 million, or 6.7%, in the second quarter of 2008 compared to the second quarter of 2007 and our comparable cemetery gross profit increased $2.9 million, or 9.0%. Our comparable cemetery gross margin percentage was 18.9% compared to 17.9% in the same period of 2007. We experienced a $4.0 million reduction in administrative and overhead costs as synergies from the Alderwoods acquisition were realized. These margin improvements were offset by increased maintenance costs, including higher energy-related costs and increased commissions due to strong production.

Other Financial Statement Items

General and Administrative Expenses

General and administrative expenses were $21.7 million in the second quarter of 2008 compared to $30.2 million in the second quarter of 2007. The $8.5 million decrease is primarily due to $5.6 million of one-time transition and other expenses related to the acquisition of Alderwoods incurred in the second quarter of 2007, as well as a $2.9 million decrease in employee compensation-related expense.

(Loss) Gain on Divestitures and Impairment Charges, Net

We recognized a $3.9 million net pretax loss in the second quarter of 2008 versus a $9.7 million net pretax gain in the second quarter of 2007 from impairments and asset divestitures primarily associated with non-strategic funeral and cemetery businesses in the United States and Canada.

Interest Expense

Interest expense decreased to $33.3 million in the second quarter of 2008, compared to $36.2 million in the second quarter of 2007 as a result of the repayment of $100.0 million of our term loan in the second quarter of 2007 and $50.0 million of our Series A Senior Notes in the fourth quarter of 2007.

Weighted Average Shares

The diluted weighted average number of shares outstanding was 262.6 million in the second quarter of 2008, compared to 296.1 million in the second quarter of 2007, reflecting share repurchases under our Board-approved share repurchase program.

Results of Operations — Six Months Ended June 30, 2008 and 2007

Management Summary

Key highlights in the first half of 2008 were as follows:

•

Revenues decreased $50.8 million, or 4.3%, as a result of significant divestiture activity throughout 2007 which included the sale of approximately 400 locations that generated more than $400 million of proceeds; and

•

Despite a difficult economic environment, comparable average revenue per funeral service increased 4.9%; comparable funeral services performed decreased 1.8%.

Results of Operations

In the first half of 2008, we reported net income of $72.9 million ($.28 per diluted share) compared to net income in the first half of 2007 of $52.8 million ($.18 per diluted share). These results were impacted by the following items:

	•		a net after-tax loss on asset sales of $14.2 million in the first half of 2008 versus a net after-tax loss of $18.3 million in the first half of 2007;

	•		an after-tax loss from the early extinguishment of debt of $8.4 million in the first half of 2007;

	•		after-tax expenses related to our acquisition and integration of Alderwoods of $0.7 million in the first half of 2008 and $9.7 million in the first half of 2007; and

	•		after-tax loss from discontinued operations of $0.4 million in the first half of 2008 versus after-tax income from discontinued operations of $5.1 million in the first half of 2007.

Consolidated Versus Comparable Results

The table below reconciles our consolidated GAAP results to our comparable, or “same store,” results for the six months ended June 30, 2008 and 2007.


			Less:
			results associated		Less:
			with acquisition/		results associated
Six months ended June 30, 2008	Consolidated		new construction		with divestitures			Comparable
	(Dollars in millions)
North America
Funeral revenue	$	765.0	$	0.7	$	2.5		$	761.8
Cemetery revenue		353.4		0.1		0.8			352.5

		1,118.4		0.8		3.3			1,114.3

Germany
Funeral revenue		3.8		—		—			3.8

Total revenues	$	1,122.2	$	0.8	$	3.3		$	1,118.1

North America
Funeral gross profits	$	180.7	$	—	$	(1.2	)	$	181.9
Cemetery gross profits		64.0		—		(0.1	)		64.1

		244.7		—		(1.3	)		246.0

Germany
Funeral gross profits		0.3		—		—			0.3

Total gross profits	$	245.0	$	—	$	(1.3	)	$	246.3


			Less:
			results associated
Six months ended June 30, 2007	Consolidated		with divestitures		Comparable
	(Dollars in millions)
North America
Funeral revenue	$	795.6	$	60.9	$	734.7
Cemetery revenue		374.3		23.7		350.6

		1,169.9		84.6		1,085.3

Germany
Funeral revenue		3.1		—		3.1

Total revenues	$	1,173.0	$	84.6	$	1,088.4

North America
Funeral gross profits	$	172.7	$	5.1	$	167.6
Cemetery gross profits		71.5		0.9		70.6

		244.2		6.0		238.2
Germany
Funeral gross profits		—		—		—

Total gross profits	$	244.2	$	6.0	$	238.2

The following table provides the data necessary to calculate our consolidated average revenue per funeral service for the six months ended June 30, 2008 and 2007. We calculate average revenue per funeral service by dividing consolidated funeral revenue, excluding GA revenues and certain other revenues in order to avoid distorting our averages of normal funeral services revenue, by the number of funeral services performed during the period.


	Six months ended June 30,
	2008		2007
	(Dollars in millions, except average
	revenue per funeral service)
Consolidated funeral revenue	$	768.8	$	798.7
Less: Consolidated GA and other revenues		31.1		28.6

Adjusted consolidated funeral revenue	$	737.7	$	770.1

Consolidated funeral services performed		145,348		160,672
Consolidated average revenue per funeral service	$	5,075	$	4,793

The following table provides the data necessary to calculate our comparable average revenue per funeral service for the six months ended June 30, 2008 and 2007. We calculate average revenue per funeral service by dividing comparable funeral revenue, excluding comparable GA revenues and certain other revenues in order to avoid distorting our averages of normal funeral services revenue, by the comparable number of funeral services performed during the period.


	Six months ended June 30,
	2008		2007
	(Dollars in millions, except average
	revenue per funeral service)
Comparable funeral revenue	$	765.6	$	737.8
Less: Comparable GA and other revenues		31.0		24.6

Adjusted comparable funeral revenue	$	734.6	$	713.2

Comparable funeral services performed		144,844		147,439
Comparable average revenue per funeral service	$	5,072	$	4,837

Funeral Results

Funeral Revenue

Consolidated revenues from funeral operations were $768.8 million in the six months ended June 30, 2008 compared to $798.7 million in the same period of 2007. This decrease is primarily due to the divestiture of non-strategic assets throughout 2007, which resulted in a decrease of $60.9 million of revenue in the first half of 2008, partially offset by a 5.9% increase in average revenue per funeral service. Comparable funeral revenues increased $27.8 million, or 3.8%, compared to the first half of 2007, driven by a 4.9% increase in the comparable average revenue per funeral service, and a $6.4 million increase in GA revenue due to increased preneed funeral production which more than offset a 1.8% decline in the number of funeral services performed.

Funeral Services Performed

Our consolidated funeral services performed decreased 15,324, or 9.5%, in the first half of 2008 compared to the same period in 2007. This decrease was primarily due to our planned 2007 divestiture of non-strategic assets, which contributed an incremental 12,841 funeral services in the first half of 2007. Our comparable funeral services performed decreased 2,595, or 1.8%, due to the implementation of our strategic pricing initiative at former Alderwoods locations discussed below. Our comparable cremation rate of 41.3% in the six months ended June 30, 2008 increased from the 41.0% rate for the same period in 2007.

Average Revenue Per Funeral

Our consolidated average revenue per funeral service increased $282, or 5.9%, in the six months ended June 30, 2008 over the same period of 2007 and our comparable average revenue per funeral service increased 4.9%, or $235 per funeral service. These increases reflect the continued benefits from our strategic pricing initiative, which was implemented at former Alderwoods locations throughout 2007. Pursuant to this strategy, we have realigned our pricing focus away from our products to our service offerings, reflecting our competitive advantage and concentrating on services that our customers believe add the most value. This strategy has resulted in a decline in highly discounted, low-service cremation funeral services. These initiatives, although reducing our funeral services volume, have generated improvements in average revenue per funeral service and more profitability.

Funeral Gross Profit

Consolidated funeral gross profit increased $8.3 million in the first half of 2008 compared to the first half of 2007 despite the divestiture of non-strategic assets that contributed an incremental $5.1 million of gross profit in the first half of 2007 compared to the first half of 2008. The consolidated gross margin percentage increased to 23.5% from 21.6%. Gross profit from our comparable funeral locations increased $14.6 million, or 8.7%, primarily as a result of the increase in revenue described above, partially offset by higher selling costs resulting from increased preneed funeral production, investments in new marketing initiatives, due to the previously discussed preneed production, and a $2.6 million increase in energy-related costs.

Cemetery Results

Cemetery Revenue

Consolidated revenues from our cemetery operations decreased $20.9 million, or 5.6%, in the first half of 2008 compared to the first half of 2007. This decrease was due to a $23.7 million decline in revenue from the divestiture of non-strategic assets that was partially offset by an increase in comparable cemetery revenues. Our comparable cemetery revenues of $352.5 million in the first half of 2008 increased $1.9 million, or 0.5%, compared to the same period of 2007. This increase was due to an increase in merchandise revenue partially offset by a $1.1 million decrease in cemetery property revenue. This decline in property revenue was driven by $10.8 million recognized in the first half of 2007 from the completion of one-time construction projects primarily at our Rose Hills cemetery which were not repeated in the first half of 2008.

Cemetery Gross Profits

Consolidated cemetery gross profit decreased $7.5 million, or 10.5%, in the first half of 2008 compared to the first half of 2007 and our comparable cemetery gross profit decreased $6.5 million, or 9.2%. Our comparable cemetery gross margin percentage was 18.2% compared to 20.1% in the same period of 2007. The lower margin percentage is driven by the $10.8 million of decreased cemetery property construction revenue, which typically generates comparatively higher margins. We experienced a $7.8 million reduction in administrative and overhead costs as synergies from the Alderwoods acquisition were realized. These decreases were more than offset by increased maintenance costs led by higher energy-related costs and increased commissions due to strong preneed sales.

Other Financial Statement Items

General and Administrative Expenses

General and administrative expenses were $46.7 million in the first half of 2008 compared to $65.4 million in the first half of 2007. The $18.7 million decrease is primarily due to $16.9 million of one-time transition and other expenses related to the acquisition of Alderwoods incurred in the first half of 2007, as well as a decrease in employee benefit expense.

(Loss) gain on Divestitures and Impairment Charges, Net

We recognized a $15.9 million net pretax loss in the first half of 2008 versus a $2.1 million net pretax gain in the first half of 2007 from impairments and asset divestitures primarily associated with non-strategic funeral and cemetery businesses in the United States and Canada.

Interest Expense

Interest expense decreased to $67.4 million in the first half of 2008, compared to $73.8 million in the first half of 2007 as a result of the repayment of $100 million of our term loan in the first half of 2007 and $50 million of our Series A Senior Notes in the fourth quarter of 2007.

Weighted Average Shares

The diluted weighted average number of shares outstanding was 263.7 million in the first half of 2008, compared to 297.5 million in the first half of 2007, reflecting share repurchases under our Board-approved share repurchase program.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Except as described below, our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.

Fair Value Measurements

We measure the available-for-sale securities held by our funeral, cemetery merchandise and service, and cemetery perpetual care trusts at fair value on a recurring basis. Changes in unrealized gains and/or losses related to these securities are reflected in other comprehensive income and offset by the non-controlling interest in those unrealized gains and/or losses; therefore these gains and/or losses have no impact on our condensed consolidated statement of operations. Certain of these securities have been classified in Level 3 of the SFAS 157 hierarchy due to significant management judgment required as a result of the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of the securities. These securities represent 3.9% of the total $2.7 billion in securities measured at fair value on a recurring basis as of June 30, 2008.

No other significant changes to our accounting policies have occurred subsequent to December 31, 2007, except as described below within Recent Accounting Pronouncements and Accounting Changes.

Recent Accounting Pronouncements and Accounting Changes

For discussion of recent accounting pronouncements and accounting changes, see Part I, Item 1. Financial Statements, Note 3.

Cautionary Statement on Forward-Looking Statements

The statements in this Form 10-Q that are not historical facts are forward-looking statements made in reliance on the “safe harbor” protections provided under the Private Securities Litigation Reform Act of 1995. These statements may be accompanied by words such as “believe,” “estimate,” “project,” “expect,” “anticipate,” or “predict,” that convey the uncertainty of future events or outcomes. These statements are based on assumptions that we believe are reasonable; however, many important factors could cause our actual results in the future to differ materially from the forward-looking statements made herein and in any other documents or oral presentations made by us, or on our behalf. Important factors, which could cause actual results to differ materially from those in forward-looking statements include, among others, the following:

•		Changes in general economic conditions, both domestically and internationally, impacting financial markets (e.g., marketable security values, access to capital markets, as well as currency and interest rate fluctuations) that could negatively affect us, particularly, but not limited to, levels of trust fund income, interest expense, and negative currency translation effects.

•		Changes in operating conditions such as supply disruptions and labor disputes.

•		Our inability to achieve the level of cost savings, productivity improvements or earnings growth anticipated by management, whether due to significant increases in energy costs (e.g., electricity, natural gas and fuel oil), costs of other materials, employee-related costs or other factors.

•		Inability to complete acquisitions, divestitures or strategic alliances as planned or to realize expected synergies and strategic benefits.

•		The outcomes of pending lawsuits, proceedings, and claims against us and the possibility that insurance coverage is deemed not to apply to these matters or that an insurance carrier is unable to pay any covered amounts to us.

•		Allegations regarding compliance with laws, regulations, industry standards, and customs regarding burial procedures and practices.

•		The amounts payable by us with respect to our outstanding legal matters exceed our established reserves.

•		The outcome of pending Internal Revenue Service audits. We maintain accruals for tax liabilities which relate to uncertain tax matters. If these tax matters are unfavorably resolved, we will make any required payments to tax authorities. If these tax matters are favorably resolved, the accruals maintained by us will no longer be required, and these amounts will be reversed through the tax provision at the time of resolution.

•		Our ability to manage changes in consumer demand and/or pricing for our products and services due to several factors, such as changes in numbers of deaths, cremation rates, competitive pressures, and local economic conditions.

•		Changes in domestic and international political and/or regulatory environments in which we operate, including potential changes in tax, accounting, and trusting policies.

•		Changes in credit relationships impacting the availability of credit and the general availability of credit in the marketplace.

•		Our ability to successfully access surety and insurance markets at a reasonable cost.

•		Our ability to successfully leverage our substantial purchasing power with certain of our vendors.

•		The effectiveness of our internal control over financial reporting, and our ability to certify the effectiveness of the internal controls and to obtain an unqualified attestation report of our auditors regarding the effectiveness of our internal control over financial reporting.

•		The possibility that our credit agreement and privately placed debt securities may prevent us from engaging in certain transactions.

•		Our ability to buy our common stock under our share repurchase programs which could be impacted by, among others, restrictive covenants in our bank agreements, unfavorable market conditions, the market price of our common stock, the nature of other investment opportunities presented to us from time to time, and the availability of funds necessary to continue purchasing common stock.

For further information on these and other risks and uncertainties, see our Securities and Exchange Commission filings, including our 2007 Annual Report on Form 10-K. Copies of this document as well as other SEC filings can be obtained from our website at www.sci-corp.com. We assume no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by us, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in our exposure to market risk during the most recently completed fiscal quarter.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Management is responsible for establishing and maintaining effective disclosure controls and procedures. As of June 30, 2008, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (“SEC”) reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time period specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In light of the material weaknesses described below, these officers have concluded that our disclosure controls and procedures were not effective as of June 30, 2008. To address the material weaknesses described below, we performed additional analyses and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. These additional analyses and procedures included, among other things: (i) expansion of our normal quarter-end closing and testing

procedures, (ii) assignment of a dedicated team of personnel to review all account reconciliations, including reconciliations performed by our outsourced accounting functions, and (iii) deployment of significant in-house and external resources to complete our income tax provision and various account reconciliations, ensure posting of all transactions, and perform a detailed review and comprehensive analysis of account balances and reconciliations. Based on the additional analyses and procedures performed, management has determined that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, result of operations, and cash flows for the periods presented.

Material Weaknesses in Internal Control over Financial Reporting and Status of Remediation Efforts

As reported in our Form 10-K as of December 31, 2007 we did not maintain effective internal control over financial reporting as of December 31, 2007 as a result of material weaknesses in (a) accounting for income taxes and (b) account reconciliations. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

In response to the identified material weaknesses, our management, with oversight from the Company’s Audit Committee, has dedicated significant resources, including retaining third-party consultants, to enhance the Company’s internal control over financial reporting and remediate the identified material weaknesses. However, these material weaknesses continue to exist as of June 30, 2008.

Accounting for Income Taxes:

Our management has implemented the following remediation steps related to our internal control over the calculation of the Company’s income tax provision and related balance sheet accounts:

	•		Hired an experienced Managing Director in the first quarter of 2008 to lead the Company’s tax department, with responsibility for direction and oversight of all income tax and other tax functions.

	•		Revised the tax department's organizational structure to ensure that the department is staffed with an adequate mix of qualified personnel.

	•		Hired experienced tax professionals in all tax director and manager level positions.

Our management is continuing to implement the following remediation steps:

	•		The completion of a comprehensive income tax accounting training program for tax and certain finance personnel (scheduled to occur in the third quarter of 2008).

	•		The evaluation of existing roles and responsibilities within the tax function to ensure they are staffed by appropriate personnel.

	•		The enhancement of standardized documentation and processes related to the income tax provision area, including the review and approval of related journal entries by experienced tax and finance personnel.

	•		The evaluation of various software solutions to replace manual processes and spreadsheets used to compute and manage the income tax provision.

Account Reconciliations:

Our management has implemented the following remediation steps related to our internal control over the timely completion and review of account reconciliations:

•

Created a monitoring function within the Company’s Controller’s organization to review all key account reconciliations.

•

Engaged a third-party advisor to assist our internal subject matter experts in performing an effectiveness review of certain financial processes and related controls, and to make recommendations to management regarding the Company’s organizational structure, control processes control environment.

Our management is continuing to implement the following remediation steps:

	•		The provision of training, including continuing professional education regarding the impact and importance of business conduct and internal controls, to all employees involved in the account reconciliations process.

	•		The hiring of additional in-house resources and an ongoing commitment to evaluate existing roles and responsibilities within the accounting and finance function, to ensure they are staffed by competent and experienced personnel.

	•		The hiring of an experienced supervisor to oversee the account reconciliations remediation process and to monitor the related functions post-remediation.

	•		The continued refinement of certain entity-level monitoring controls, first implemented in the third quarter of 2007 to gain visibility into material issues within business functions, in order to achieve the level of precision and operating effectiveness desired by our management.

	•		The creation, implementation, and training of new policies relating to account reconciliations and account write-offs, along with the development of standardized templates to ensure consistency.

The remaining steps outlined above are part of our overall plan to remediate the identified material weaknesses by no later than December 31, 2008. We expect to fully implement these remediation measures and test their operating effectiveness during the second half of 2008.

Changes in Internal Control over Financial Reporting

Significant changes to our internal control over financial reporting were principally related to our remediation efforts described above.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding legal proceedings is set forth in Note 15 to the unaudited condensed consolidated financial statements in Item 1 of Part I of this Form 10-Q, which information is hereby incorporated by reference herein.

Item 1A. Risk Factors

There have been no material changes in our Risk Factors as set forth in Item 1A of our Form 10-K for the fiscal year ended December 31, 2007 except as described below.

Our ability to execute our business plan depends on many factors, many of which are beyond our control.

In addition to the matters discussed in the Form 10-K under this risk factor, we feel that the following additional matters could affect the execution of our business plan.

•

Changes in operating conditions, such as supply disruptions and labor disputes, could negatively impact our operations.

•

Our inability to achieve the levels of cost savings, productivity improvements, or earnings growth anticipated by management could affect our financial performance. For example, higher energy costs, including gasoline and natural gas, have increased our costs and negatively impacted our margins. Higher commodity prices for copper, bronze and other raw materials have increased costs associated with some of our cemetery products.

•

Our inability to complete acquisitions, divestitures, or strategic alliances as planned or to realize expected synergies and strategic benefits could impact our financial performance.

Failure to execute any or all of our strategic plan could have a material adverse effect on our financial condition, results of operations, or cash flows.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On April 30, 2008, we issued 609 deferred common stock equivalents, or units, pursuant to provisions regarding dividends under the Amended and Restated Director Fee Plan to four non-employee directors. We did not receive any monetary consideration for the issuances. These issuances were unregistered because they did not constitute a “sale” within the meaning of Section 2(3) of the Securities Act of 1933, as amended.

As of June 30, 2008, the aggregate purchases pursuant to our share repurchase program totaled $947.9 million. As of June 30, 2008, the remaining dollar value of shares that may yet be purchased under our share repurchase program was approximately $66.1 million. Pursuant to the program, we repurchased shares of our common stock during the first half of 2008 as set forth in the table below.


					Total number of
					shares purchased as		Dollar value of shares that
	Total number of		Average price		part of publicly		may yet be purchased under
Period	shares purchased		paid per share		announced programs		the programs
April 1, 2008 — April 30, 2008		73,800		10.33		73,800		108,230,346
May 1, 2008 — May 31, 2008		900,000		11.05		900,000		98,289,486
June 1, 2008 — June 30, 2008		3,021,129		10.65		3,021,129		66,128,544

		3,994,929				3,994,929

Item 4. Submission of Matters to a Vote of Security Holders

On May 14, 2008, we held our annual meeting of shareholders and elected four directors. The shares voting on the director nominees were cast as follows:


Nominee	Votes for		Abstentions or votes withheld
Thomas L. Ryan		225,718,632		2,023,825
Malcolm Gillis		216,556,871		11,185,586
Clifton H. Morris, Jr.		215,970,558		11,771,899
W. Blair Waltrip		225,603,568		2,138,889

In addition, the shareholders approved the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2008. The share voting were cast as follows:


Votes for	Votes against	Abstentions or votes withheld	Broker non-votes
225,839,143	1,693,361	209,953	0

Item 5. Other Information

On July 28, 2008, our preferred share purchase rights plan expired by its terms.

Item 6. Exhibits


	12.1			Ratio of earnings to fixed charges for the three and six months ended June 30, 2008 and 2007.

	31.1			Certification of Thomas L. Ryan as Chief Executive Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2			Certification of Eric D. Tanzberger as Principal Financial Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1			Certification of Periodic Financial Reports by Thomas L. Ryan as Chief Executive Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2			Certification of Periodic Financial Reports by Eric D. Tanzberger as Principal Financial Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.

Undertaking

We hereby undertake, pursuant to Regulation S-K, Item 601(b), paragraph (4) (iii), to furnish to the U.S. Securities and Exchange Commission, upon request, all constituent instruments defining the rights of holders of our long-term debt not filed herewith for the reason that the total amount of securities authorized under any of such instruments does not exceed 10 percent of our total consolidated assets.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


August 8, 2008	SERVICE CORPORATION INTERNATIONAL
	By:	/s/ Jeffrey I. Beason
		Jeffrey I. Beason
		Vice President and Corporate Controller (Chief Accounting Officer)

Index to Exhibits


12.1		Ratio of earnings to fixed charges for the three and six months ended June 30, 2008 and 2007.

31.1		Certification of Thomas L. Ryan as Chief Executive Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Eric D. Tanzberger as Principal Financial Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Periodic Financial Reports by Thomas L. Ryan as Chief Executive Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Periodic Financial Reports by Eric D. Tanzberger as Principal Financial Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.