UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~March 31,~~June 30, 2006


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: 1-11961

CARRIAGE SERVICES, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		76-0423828
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


3040 Post Oak Boulevard, Suite 300, Houston, TX		77056
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (713) 332-8400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or ~~15 (d)~~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. Yesþ Noo

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):
o

Large accelerated filerþo Accelerated fileroþ Non-Accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The number of shares of the Registrant’s Common Stock, $.01 par value per share, outstanding as of ~~May~~August 1, 2006 was ~~18,564,010.~~18,565,672.

CARRIAGE SERVICES, INC.

INDEX


	Page
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of December 31, 2005 and ~~March 31,~~June 30, 2006 (unaudited)		3

Consolidated Unaudited Statements of Operations for the Three Months ended ~~March 31,~~June 30, 2005 and 2006 and Six Months ended June 30, 2005 and 2006		4

Consolidated Unaudited Statements of Cash Flows for the ~~Three~~Six Months ended ~~March 31,~~June 30, 2005 and 2006		5

Condensed Notes to Consolidated Financial Statements (unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosures about Market Risk		2324

Item 4. Controls and Procedures		2324

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		2425

Item 1A. Risk Factors		2425

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		2425

Item 3. Defaults Upon Senior Securities		2425

Item 4. Submission of Matters to a Vote of Security Holders		2425

Item 5. Other Information		2426

Item 6. Exhibits		2426

Signatures		2527
Computation of Per Share Earnings
Certification ~~by Melvin C. Payne in satisfaction~~of Periodic Financial Reports of Section 302
Certification ~~by Joseph Saporito in satisfaction~~of Periodic Financial Reports of Section 302
Certification ~~by Melvin C. Payne and Joseph Saporito~~of Periodic Financial Reports of Section 906

~~-2-~~- 2 -

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CARRIAGE SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	December 31,			March 31,			December 31,			June 30,
	2005			2006			2005			2006
				(unaudited)						(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	7,949		$	5,204		$	7,949		$	5,208
Short term investments		16,908			19,198			16,908			25,979
Accounts receivable — trade, net of allowance for doubtful accounts of $937 in 2005 and $1,036 in 2006		13,412			13,696
Accounts receivable — trade, net of allowance for doubtful accounts of $937 in 2005 and $1,100 in 2006								13,412			12,876
Assets held for sale		—			20,301			—			20,123
Inventories and other current assets		12,883			12,200			12,883			11,701

Total current assets		51,152			70,599			51,152			75,887


Preneed assets		135,826			131,877			135,826			130,450
Property, plant and equipment, at cost, net of accumulated depreciation of $45,694 in 2005 and $44,514 in 2006		105,435			102,603
Property, plant and equipment, at cost, net of accumulated depreciation of $45,694 in 2005 and $46,156 in 2006								105,435			102,071
Cemetery property		62,905			56,312			62,905			56,485
Goodwill		157,358			151,184			157,358			151,184
Deferred charges and other non-current assets		25,608			25,943			25,608			25,221
Cemetery perpetual care trust investments		32,356			29,467			32,356			29,869

Total assets	$	570,640		$	567,985		$	570,640		$	571,167


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Current portion of senior long-term debt and capital leases obligations	$	2,074		$	2,021		$	2,074		$	2,023
Accounts payable and accrued liabilities		22,163			16,860			22,163			19,713
Liabilities associated with assets held for sale		—			8,155			—			8,172

Total current liabilities		24,237			27,036			24,237			29,908
Senior long-term debt, net of current portion		134,572			133,863			134,572			133,425
Convertible junior subordinated debenture due in 2029 to an affiliated trust		93,750			93,750			93,750			93,750
Obligations under capital leases, net of current portion		4,775			4,760			4,775			4,751
Deferred revenue		183,820			178,439			183,820			177,497

Total liabilities		441,154			437,848			441,154			439,331


Commitments and contingencies

Non-controlling interests in perpetual care trust investments		33,112			28,751			33,112			29,507
Non-controlling interests in perpetual care trust investments associated with assets held for sale		—			6,319			—			6,157
Stockholders’ equity:
Common Stock, $.01 par value; 80,000,000 shares authorized;18,458,000 and 18,515,000 shares issued and outstanding at December 31, 2005 and March 31, 2006, respectively		185			185
Common Stock, $.01 par value; 80,000,000 shares authorized;18,458,000 and 18,544,000 shares issued and outstanding at December 31, 2005 and June 30, 2006, respectively								185			185
Additional paid-in capital		190,502			190,778			190,502			190,954
Accumulated deficit		(92,921	)		(94,656	)		(92,921	)		(93,952	)
Deferred compensation		(1,392	)		(1,240	)		(1,392	)		(1,015	)

Total stockholders’ equity		96,374			95,067			96,374			96,172

Total liabilities and stockholders’ equity	$	570,640		$	567,985		$	570,640		$	571,167

The accompanying condensed notes are an integral part of these consolidated financial statements.

~~-3-~~- 3 -

CARRIAGE SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per share data)


	For the three months						For the three months						For the six months
	ended March 31,						ended June 30,						ended June 30,
	2005			2006			2005			2006			2005			2006
Revenues
Revenues, net
Funeral	$	31,240		$	31,664		$	27,967		$	28,659		$	59,207		$	60,323
Cemetery		9,741			10,054			9,411			9,182			19,152			19,236

		40,981			41,718
								37,378			37,841			78,359			79,559
Costs and expenses
Funeral		21,621			22,442			20,781			21,602			42,402			44,044
Cemetery		7,538			8,407			7,916			8,098			15,454			16,505

		29,159			30,849			28,697			29,700			57,856			60,549
Gross profit		11,822			10,869			8,681			8,141			20,503			19,010
General and administrative expenses		2,779			2,643			3,000			2,749			5,779			5,392
Goodwill impairment charge		—			907			—			—			—			907

Operating income		9,043			7,319			5,681			5,392			14,724			12,711
Interest expense		4,631			4,640			(4,683	)		(4,633	)		(9,314	)		(9,273	)
Additional interest and other costs of senior debt refinancing		6,693			—			(240	)		—			(6,933	)		—
Interest income and other		(58	)		(216	)		(447	)		347			(389	)		563

Total interest expense and other		11,266			4,424			(5,370	)		(4,286	)		(16,636	)		(8,710	)

Income (loss) from continuing operations before income taxes		(2,223	)		2,895			311			1,106			(1,912	)		4,001
(Provision) benefit for income taxes		845			(1,409	)		(122	)		(415	)		723			(1,824	)

Income (loss) from continuing operations		(1,378	)		1,486			189			691			(1,189	)		2,177
Discontinued operations
Operating income from discontinued operations		457			41
Gain on sales and (impairments) of discontinued operations		462			(5,195	)
Income tax (provision) benefit		(345	)		1,933

Income (loss) from discontinued operations		574			(3,221	)
Cumulative effect of change in accounting method, net of tax benefit benefit		(22,756	)		—
Income (loss) from discontinued operations, net of tax								43			12			617			(3,209	)
Cumulative effect of change in accounting method, net of tax benefit								—			—			(22,756	)		—

Net loss	$	(23,560	)	$	(1,735	)

Net income (loss)							$	232		$	703		$	(23,328	)	$	(1,032	)

Basic earnings (loss) per common share
Continuing operations	$	(0.08	)	$	0.08		$	0.01		$	0.04		$	(0.06	)	$	0.12
Discontinued operations		0.04			(0.17	)		—			—			0.03			(0.17	)
Cumulative effect of change in accounting method		(1.26	)		—			—			—			(1.26	)		—

Net loss	$	(1.30	)	$	(0.09	)

Net income (loss)							$	0.01		$	0.04		$	(1.29	)	$	(0.05	)

Diluted earnings (loss) per common share
Continuing operations	$	(0.08	)	$	0.08		$	0.01		$	0.04		$	(0.06	)	$	0.12
Discontinued operations		0.04			(0.17	)		—			—			0.03			(0.17	)
Cumulative effect of change in accounting method		(1.26	)		—			—			—			(1.26	)		—

Net loss	$	(1.30	)	$	(0.09	)

Net income (loss)							$	0.01		$	0.04		$	(1.29	)	$	(0.05	)

Weighted average number of common and common equivalent shares outstanding:
Basic		18,127			18,484			18,325			18,545			18,227			18,514

Diluted		18,127			18,874			18,826			18,902			18,227			18,888

The accompanying condensed notes are an integral part of these consolidated financial statements.

~~-4-~~- 4 -

CARRIAGE SERVICES, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS.

(unaudited and in thousands)


	For the three months
	ended March 31,						For the six months
	2005			2006			ended June 30,
	(Revised,						2005			2006
	See Note 1)						(Revised, Note 1)
Cash flows from operating activities:
Net Loss	$	(23,560	)	$	(1,735	)
Net loss							$	(23,328	)	$	(1,032	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
(Income) loss from discontinued operations								(617	)		3,209
Cumulative effect of the change in accounting method		22,756			—			22,756			—
Depreciation and amortization		2,310			2,297			4,362			4,536
Loan cost amortization		213			179			400			357
Provision for losses on accounts receivable		765			840			1,509			1,912
Impairment charge		—			907
Goodwill impairment charge								—			907
Net loss on sale of business assets								527			175
Stock-based compensation		181			238			354			467
(Income) loss from discontinued operations		(574	)		3,221
Loss on early extinguishment of debt		738			—			978			—
Deferred income taxes		(846	)		1,374
Deferred income taxes (benefit)								(723	)		1,824
Other		(118	)		175			—			(45	)

Changes in assets and liabilities, net of effects from acquisitions and dispositions
Accounts receivable		(2,616	)		(731	)		(1,315	)		(878	)
Inventories and other current assets		(886	)		(12	)		(747	)		516
Deferred charges and other		(60	)		(15	)		(664	)		(20	)
Preneed trust investments		(1,168	)		(2,615	)		(2,244	)		(2,601	)
Income tax (payments) refunds, net								—			(159	)
Accounts payable and accrued liabilities		(3,391	)		(5,272	)		(1,385	)		(2,254	)
Deferred preneed revenue		2,438			2,249			3,007			2,640
Deferred interest on convertible junior subordinated debenture		(10,345	)		—			(10,345	)		—

Net cash provided by (used in) operating activities of continuing operations		(14,163	)		1,100			(7,475	)		9,554
Net cash provided by operating activities of discontinued operations		296			81			563			51

Net cash provided by (used in) operating activities		(13,867	)		1,181			(6,912	)		9,605

Cash flows from investing activities:
Net proceeds from sales of businesses and other assets		—			65			182			65
Purchase of short term investments		(6,919	)		(13,790	)		(12,849	)		(35,625	)
Maturities of short term investments		—			11,501			—			26,554
Capital expenditures		(1,790	)		(1,110	)		(3,536	)		(2,471	)

Net cash used in investing activities of continuing operations		(8,709	)		(3,334	)		(16,203	)		(11,477	)
Net cash provided by investing activities of discontinued operations		510			—			498			3

Net cash used in investing activities		(8,199	)		(3,334	)		(15,705	)		(11,474	)

Cash flows from financing activities:
Net payments on bank line of credit		(25,600	)		—			(25,600	)		—
Payments on senior long-term debt and obligations under capital leases		(71,178	)		(777	)		(71,756	)		(1,202	)
Proceeds from the issuance of senior notes		130,000			—			130,000			—
Payment of financing costs		(4,175	)		—			(4,175	)		—
Proceeds from the exercise of stock options and employee stock purchase plan		192			156			590			319
Tax benefit from stock-based compensation expense		—			35			—			44

Net cash provided by (used in) financing activities of continuing operations		29,239			(586	)		29,059			(839	)
Net cash used in financing activities of discontinued operations		(10	)		(6	)		(38	)		(33	)

Net cash provided by (used in) financing activities		29,229			(592	)		29,021			(872	)


Net increase in cash and cash equivalents		7,163			(2,745	)
Net increase (decrease) in cash and cash equivalents								6,404			(2,741	)
Cash and cash equivalents at beginning of period		1,948			7,949			1,948			7,949

Cash and cash equivalents at end of period	$	9,111		$	5,204		$	8,352		$	5,208

The accompanying condensed notes are an integral part of these consolidated financial statements.

~~-5-~~- 5 -

CARRIAGE SERVICES, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) The Company

Carriage Services, Inc. (“Carriage” or the “Company”) is a leading provider of products and services in the death care industry in the United States. As of ~~March 31,~~June 30, 2006, the Company owned and operated 133 funeral homes in 28 states and 29 cemeteries in 12 states.

(b) Principles of Consolidation

The accompanying consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

We have revised the Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March 31,~~June 30, 2005 consistent with ~~March 31,~~June 30, 2006 to reconcile net cash provided by (used in) operating activities from net ~~income (loss)~~loss instead of net ~~income (loss)~~loss from continuing operations.

(d) Interim Condensed Disclosures

The information for the three and six month periods ended ~~March 31,~~June 30, 2005 and 2006 is unaudited, but in the opinion of management, reflects all adjustments which are normal, recurring and necessary for a fair presentation of financial position and results of operations for the interim periods. Certain information and footnote disclosures, normally included in annual financial statements, have been condensed or omitted. The accompanying consolidated financial statements have been prepared consistent with the accounting policies described in our annual report on Form 10-K for the year ended December 31, 2005, and should be read in conjunction therewith. Certain amounts in the consolidated financial statements for the period ended in 2005 in this report have been reclassified to conform to current year presentation.

(e) Cash Equivalents

The Company considers all investments purchased with an original maturity of three months or less at the time of purchase to be cash equivalents.

(f) Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and judgments that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Allowances from customer cancellations, refunds and bad debts are provided at the date the contract is executed. In addition, we monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. Our methodologies and the resulting estimates have been reliable in past periods. We do not expect to change the factors and assumptions used in calculating these reserves in the future.

(g) Stock Plans and Stock Compensation

The Company has stock-based employee compensation plans in the form of restricted stock, stock option and employee stock purchase plans. The Company accounts for stock-based compensation under Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“FAS No. 123R”). FAS No. 123R requires companies to recognize compensation expense in an amount equal to the fair value of the share-based payment issued to employees over the period of vesting. The fair value of share based ~~payment~~payments is determined using the Black-Scholes valuation model. FAS No. 123R applies to all transactions involving issuance of equity by a company in exchange for goods and services, including employee services. The Company adopted FAS No. 123R in the first quarter of 2006, using the modified prospective application method, which results in no restatement of the Company’s previously issued consolidated financial statements.

~~-6-~~- 6 -

Prior to 2006, the Company accounted for stock based compensation under APB No. 25 and provided the disclosures required under SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation —– Transition and Disclosure.”

(h) Accounting Changes and Error Corrections

The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting No. 154, “Accounting Changes and Error Corrections” (“FAS No. 154”). This statement is a replacement of Accounting Principles Board Opinion No. 20 and FAS No. 3. FAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle and error corrections. It establishes, unless impracticable and absence of explicit transition requirements, retrospective application as the required method of a change in accounting principle to the newly adopted accounting principle. Also, it establishes guidance for reporting corrections of errors as reporting errors involves adjustments to previously issued financial statements similar to those generally applicable to reporting accounting changes retrospectively.FAS No. 154 also provides guidance for determining and reporting a change when retrospective application is impracticable. FAS No. 154 is effective for accounting changes and corrections of errors made in the fiscal years beginning after December 15, 2005. The Company adopted the requirements beginning January 1, 2006, which had no affect on the Company’s presentation and disclosure.

(i) Accounting for Income Tax Uncertainties

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 31, 2006. We are currently evaluating what impact, if any, this statement will have on our financial statements.

2. CHANGE IN ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS

Prior to January 1, 2006, the Company accounted for employee stock-based awards under the intrinsic value method following the recognition and measurement principle of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised), Share-Based Payment (“SFAS 123R”), which requires, among other things, entities to recognize in the income statement the grant-date fair value of stock options and other stock-based awards over the service periods the awards are expected to vest.

Pursuant to the provisions of SFAS 123R, the Company applied the modified-prospective transition method. Under this method, the fair value provision of SFAS 123R is applied to new employee stock-based awards granted after December 31, 2005. Measurement and recognition of compensation cost for unvested awards at December 31, 2005, granted prior to the adoption of SFAS 123R, are recognized under the provisions of SFAS No 123, Accounting for Stock-Based Compensation (“SFAS 123”), after adjustments for estimated forfeiture. SFAS 123R no longer permits pro-forma disclosure for income statement periods after December 31, 2005 and compensation expense will be recognized for all stock-based awards based on grant-date fair value.

Carriage has two types of stock-based compensation plans for which the accounting is changed; stock options and an employee stock purchase plan (“ESPP”). Options to purchase Carriage common stock have typically been granted with an exercise price equal to the fair market value at the date of grant with vesting occurring annually over four years. Because of changes in the Company’s compensation philosophy, options have not been awarded to officers of the Company since 2003 and only a small percentage of the outstanding stock options are currently unvested. The ESPP allows employees, through payroll deductions, to purchase Carriage common stock at 85% of the value of the common stock on the quarterly purchase dates or the annual grant date, whichever is lower.

The fair value of the stock option awards and the ESPP awards are determined using the Black-Scholes valuation model, which is consistent with the valuation methods previously utilized for the awards in the footnote disclosures required under SFAS 123, as amended bySFAS No. 148,, Accounting for Stock-Based Compensation —– Transition and Disclosure. The Company recorded pretax stock-based compensation expense for the stock options and the ESPP totaling ~~$51,000~~$153,000 for the first ~~quarter~~six months of 2006. Had SFAS 123R been effective for the first ~~quarter~~six months of 2005, the Company would have recorded additional pretax stock-based compensation totaling ~~$78,000.~~$156,000.

~~-7-~~- 7 -

The application of SFAS 123R has the following effect on the three and six months ended ~~March 31,~~June 30, 2006 and 2005, respectively (in thousands).


	Three months ended								Three months ended
	March 31, 2006								June 30, 2006
						Results under							Results under
	As Reported			Effect of Change		Prior Method			As Reported		Effect of Change		Prior Method
Income from continuing operations before income taxes	$	2,895		$	51	$	2,946		$	1,106	$	101	$	1,207
Net loss available to common stockholders		(1,735	)		32		(1,703	)
Net income available to common stockholders										703		63		766

Net loss per share available to common stockholders:
Net income per share available to common stockholders:
Basic	$	(0.09	)	$	—	$	(0.09	)	$	0.04	$	—	$	0.04
Diluted		(0.09	)		—		(0.09	)		0.04		—		0.04


	Three months ended									Six months ended
	March 31, 2005									June 30, 2006
	As Reported			Effect of Change			Pro Forma								Results under
Loss from continuing operations before income taxes	$	(2,223	)	$	(78	)	$	(2,301	)
										As Reported			Effect of Change		Prior Method
Income from continuing operations before income taxes										$	4,001		$	153	$	4,154
Net loss available to common stockholders		(23,560	)		(49	)		(23,609	)		(1,032	)		96		(936	)

Net loss per share available to common stockholders:
Basic	$	(1.30	)	$	—		$	(1.30	)	$	(0.05	)	$	—	$	(0.05	)
Diluted		(1.30	)		—			(1.30	)		(0.05	)		—		(0.05	)


	Three months ended
	June 30, 2005
	As Reported		Effect of Change			Pro Forma
Income from continuing operations before income taxes	$	311	$	(78	)	$	233
Net income available to common stockholders		232		(49	)		183

Net income per share available to common stockholders:
Basic	$	0.01	$	—		$	0.01
Diluted		0.01		—			0.01


	Six months ended
	June 30, 2005
	As Reported			Effect of Change			Pro Forma
Loss from continuing operations before income taxes	$	(1,912	)	$	(156	)	$	(2,068	)
Net loss available to common stockholders		(23,328	)		(98	)		(23,426	)

Net loss per share available to common stockholders:
Basic	$	(1.29	)	$	(0.01	)	$	(1.30	)
Diluted		(1.29	)		(0.01	)		(1.30	)

- 8 -

The following summary reflects stock option activity and related information for the ~~quarter~~six months ending ~~March 31,~~June 30, 2006.


				Weighted-Average		Aggregate
	Shares			Exercise Price		Intrinsic Value					Weighted-Average		Aggregate
	(000)							Shares			Exercise Price		Intrinsic Value
								(in thousands)					(in thousands)
Outstanding at December 31, 2005		1,365		$	3.39				1,365		$	3.39
Granted		—		$	—				24		$	4.81
Exercised		(43	)	$	2.48				(57	)	$	2.72
Cancelled and expired		(8	)	$	6.26				(14	)	$	5.78

Outstanding at March 31, 2006		1,314		$	3.40	$	2,546
Outstanding at June 30, 2006									1,318		$	3.42	$	2,319

Exercisable at March 31, 2006		1,256		$	3.35	$	2,514
Exercisable at June 30, 2006									1,268		$	3.38	$	2,302

The total intrinsic value of options exercised was ~~$100,000~~$121,000 during the first ~~quarter~~six months of 2006 and ~~$55,000~~$420,000 during the first ~~quarter~~six months of 2005. As of ~~March 31,~~June 30, 2006, there was ~~$103,000~~$90,000 of unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options, which is expected to be recognized over a weighted average period of approximately ~~1.4~~1.3 years.

The following summary provides additional information about stock options that are outstanding and exercisable at ~~March 31,~~June 30, 2006 (shares in thousands).

Options Outstanding Options Exercisable
Weighted-Average
Actual Range
of Exercise
Prices Number Remaining Weighted- Number Remaining Weighted-
150% Outstanding Contractual Average Exercisable at Contractual Average
increment at 3/31/06 Life Exercise Price 3/31/06 Life Exercise Price
$1.19- 1.56 638 4.7 $ 1.48 638 4.7 $ 1.48
$2.06- 3.09 168 4.3 $ 2.89 167 4.3 $ 2.89
$3.12- 4.66 163 7.1 $ 4.17 111 7.1 $ 4.15
$4.77- 6.19 288 6.2 $ 5.04 283 6.2 $ 5.02
$13.25- 19.88 51 2.5 $ 15.12 51 2.5 $ 15.12
$21.00- 27.50 6 1.1 $ 21.18 6 1.1 $ 21.18

$1.19- 27.50 1,314 5.2 $ 3.40 1,256 5.2 $ 3.35


	Options Outstanding						Options Exercisable
Actual Range			Weighted-						Weighted-
of Exercise			Average						Average
Prices	Number		Remaining		Weighted-		Number		Remaining		Weighted-
150%	Outstanding		Contractual		Average		Exercisable at		Contractual		Average
increment	at 6/30/06		Life		Exercise Price		6/30/06		Life		Exercise Price
$ 1.19 - 1.56		636		4.5	$	1.49		636		4.5	$	1.49
$ 2.06 - 3.09		164		4.0	$	2.89		163		4.0	$	2.89
$ 3.12 - 4.66		153		6.9	$	4.18		108		6.7	$	4.14
$ 4.77 - 6.19		308		6.2	$	5.00		304		6.3	$	5.00
$13.25 - 19.88		51		2.3	$	15.14		51		2.3	$	15.14
$21.00 - 27.50		6		0.8	$	21.18		6		0.8	$	21.18

$ 1.19 - 27.50		1,318		5.0	$	3.42		1,268		4.9	$	3.38

~~-8-~~

The Company granted stock options covering 24,000 shares to the non-officer directors during the first six months of 2006 and during the first six months of 2005. The fair value of the options granted in 2006 totaled $59,000. No ~~stock~~additional options were granted in ~~the first quarter of 2006~~2005 or the first ~~quarter~~six months of ~~2005.~~2006. The fair values of stock options granted in 2005 and 2006 and the ESPP granted at the beginning of ~~2006~~2005 and ~~2005~~2006 were estimated using the following assumptions:


	2005			2006			Stock Options			ESPP
Assumptions:
2005 Assumptions:
Expected dividend yield		0	%		0	%		0	%		0	%
Expected volatility		50	%		58	%		50	%		50	%
Risk-free interest rate		3.00	%		4.25	%		3.00	%		3.00	%
Expected life (years)		.25, .50, .75, 1			.25, .50, .75, 1			5			.25, .50, .75, 1


	Stock Options			ESPP
2006 Assumptions:
Expected dividend yield		0	%		0	%
Expected volatility		58	%		58	%
Risk-free interest rate		4.25	%		4.25	%
Expected life (years)		5			.25, .50, .75, 1

The expected life of the ESPP grant represents the ~~four~~ calendar quarters from the grant date (January 1) to the purchase date (end of each quarter).

3. 2005 CHANGE IN ACCOUNTING FOR PRENEED SELLING COSTS

On June 30, 2005, the Company changed its method of accounting for deferred obtaining costs, which are preneed selling costs, incurred for the origination of prearranged funeral and cemetery service and merchandise sales contracts. Prior to this change, commissions and other costs that were related to the origination of prearranged funeral and cemetery service and merchandise sales were deferred and amortized with the objective of recognizing the selling costs in the same period that the related revenue is recognized. Under the prior accounting method, the commissions and other direct selling costs, which are current obligations that are paid and use operating cash flow, are not recognized currently in the income statement. The Company believes it is preferable to expense the current obligation for the commissions and other costs rather than defer these costs. The Company applied this change in accounting method effective January 1, 2005. Therefore, the Company’s results of operations for the three ~~months~~and six month periods ended ~~March 31,~~June 30, 2005 are reported on the basis of our changed method.

- 9 -

As of January 1, 2005, the Company recorded a cumulative effect of change in accounting method of $35.8 million pretax or $22.8 million after tax (net of income tax benefit of $13.0 million), or $1.26 per diluted share, which represents the cumulative balance of deferred preneed selling costs in the Company’s consolidated balance sheet.

4. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

At ~~March 31,~~June 30, 2006, a funeral home business and a combination funeral home and cemetery business were held for sale. The sale of these operations both of which were in small markets not strategic to our future plans ~~is expected to occur~~occurred during the ~~second quarter.~~third quarter of 2006 (Note 14). The carrying value of the assets of these businesses was reduced to management’s estimate of fair value less estimated costs to sell by recording impairment charges totaling ~~$5.2~~$5.4 million during 2006, a substantial portion of which related to specifically identified goodwill. We do not anticipate material future cash expenditures and gains or losses associated with the sale of these businesses.

At ~~March 31,~~June 30, 2006, assets and liabilities associated with the businesses held for sale in the accompanying balance sheet consisted of the following (in thousands):


			June 30,
	March 31, 2006		2006
Assets:
Current assets	$	326	$	298
Property, plant and equipment, net		1,794		1,769
Preneed receivables and trust investments		6,409		6,494
Cemetery property, net		6,453		6,337
Goodwill		113
Deferred charges and other assets		33		130
Cemetery perpetual care trust investments		5,173		5,095

Total	$	20,301	$	20,123


Liabilities:
Current liabilities		130		117
Deferred revenue		1,750		1,679
Non-controlling interests in funeral and cemetery trust investments		6,275		6,376

Total	$	8,155	$	8,172


Noncontrolling interests in perpetual care trust investments related to assets held for sale	$	6,319	$	6,157

~~-9-~~

The operating results of the businesses held for sale, as well as impairments and gains or losses on the disposal are presented in the discontinued operations section of the consolidated statements of operations, along with the income tax effect on a comparative basis. Likewise, the operating results, the impairment charges and gains or losses from businesses sold in the prior year have been similarly reported for comparability. Revenues and operating income for the businesses presented in the discontinued operations section are as follows (in thousands):


	For the three months				For the three months						For the six months
	ended March 31,				ended June 30,						ended June 30,
	2005		2006		2005			2006			2005			2006
Revenues, net	$	1,301	$	657	$	890		$	868		$	2,191		$	1,525
Operating Income	$	457	$	41


Operating income					$	63		$	250		$	520		$	291

Gain (losses) on sale and (impairments)						5			(230	)		467			(5,425	)

(Provision) benefit for income taxes						(25	)		(8	)		(370	)		1,925


Income (loss) from discontinued operations					$	43		$	12		$	617		$	(3,209	)

During January 2005, the Company closed on the sale of a funeral home business. The sale transaction generated net cash proceeds totaling $0.5 million and a gain of approximately $0.3 million. During May 2005, the Company ceased operations at a funeral home business when the lease on the property expired. The preneed contracts and other business assets were transferred to another company-owned funeral home in the area.

- 10 -

5. SHORT TERM INVESTMENTS

Short term investments are investments purchased with an original maturity of greater than three months at the time of purchase. Short term investments at ~~March 31,~~June 30, 2006 consisted of commercial paper with maturity dates that range from ~~April~~July 2006 to ~~July~~December 2006 at rates ranging from ~~4.16~~4.8 percent to ~~4.69~~5.4 percent per anum. Market values approximates cost.

6. PRENEED ASSETS

Preneed assets consist of the following:


	December 31,		March 31,		December 31,		June 30,
	2005		2006		2005		2006
Cemetery preneed receivables and trust investments	$	67,995	$	65,701	$	67,995	$	65,606
Funeral preneed receivables and trust investments		50,420		48,731		50,420		47,675
Receivable from funeral trusts		17,411		17,445		17,411		17,169

	$	135,826	$	131,877	$	135,826	$	130,450

Cemetery preneed receivables and trust investments

Cemetery preneed receivables and trust investments, net of allowance for cancellations, represent trust fund assets and customer receivables (net of unearned finance charges) for contracts sold in advance of when merchandise or services are needed. The components of Cemetery preneed receivables and trust investments in the consolidated balance sheet at December 31, 2005 and ~~March 31,~~June 30, 2006 are as follows (in thousands):


	December 31,			March 31,			December 31,			June 30,
	2005			2006			2005			2006
Trust investments	$	54,768		$	52,842		$	54,768		$	52,639
Receivables from customers		17,304			17,270			17,304			17,995
Unearned finance charges		(3,143	)		(3,187	)		(3,143	)		(3,429	)
Allowance for doubtful accounts		(934	)		(1,224	)		(934	)		(1,599	)

Cemetery preneed receivables and trust investments	$	67,995		$	65,701		$	67,995		$	65,606

Cemetery preneed receivables and trust investments are reduced by the trust investment earnings the Company has been allowed to withdraw prior to performance by the Company and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws. Preneed cemetery sales are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years. The interest rates generally range between 12 percent and 14 percent.

~~-10-~~- 11 -

The cost and market values associated with cemetery preneed trust investments at ~~March 31,~~June 30, 2006 are detailed below (in thousands). The Company believes the unrealized losses related to trust investments at ~~March 31,~~June 30, 2006 are primarily related to changes in market interest rates and equity values and are temporary in nature. Net unrealized gains ~~increased~~decreased $0.7 million for the ~~three~~six months ended ~~March 31,~~June 30, 2006, respectively.


			Unrealized		Unrealized
	Cost		Gains		Losses			Market					Unrealized		Unrealized
											Cost		Gains		Losses			Market
Cash and money market	$	4,181	$	—	$	—		$	4,181		$	1,893	$	—	$	—		$	1,893
Fixed income securities:
U.S. Agency obligations		4,849		—		(90	)		4,759			4,830		1		(112	)		4,719
State obligations		14,000		141		(297	)		13,844			14,849		108		(384	)		14,573
Corporate		3,321		27		(41	)		3,307			4,027		24		(73	)		3,978
Other		7		—		—			7			6		—		—			6

Common stock		11,299		844		(174	)		11,969			10,789		767		(275	)		11,281
Mutual funds:
Equity		5,544		745		—			6,289			11,260		668		(32	)		11,896
Fixed income		7,064		25		(19	)		7,070			4,010		40		(59	)		3,991
Other investments		1,078		106		—			1,184


	$	51,343	$	1,888	$	(621	)	$	52,610		$	51,664	$	1,608	$	(935	)	$	52,337


Accrued net investment income	$	232							232		$	302							302


Trust investments								$	52,842									$	52,639


Market value as a percentage of cost									102.9	%									101.9	%

Funeral preneed receivables and trust investments

Funeral preneed receivables and trust investments, net of allowance for cancellations, represent trust fund assets and customer receivables related to contracts sold in advance of when the services or merchandise is needed. Such contracts are secured by funds paid by the customer to the Company. Funeral preneed receivables and trust investments are reduced by the trust investment earnings the Company has been allowed to withdraw prior to performance by the Company and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws.

The components of Funeral preneed receivables and trust investments in the consolidated balance sheet at December 31, 2005 and ~~March 31,~~June 30, 2006 are as follows (in thousands):


	December 31,			March 31,			December 31,			June 30,
	2005			2006			2005			2006
Trust assets	$	47,678		$	45,892		$	47,678		$	45,257
Receivables from customers		8,709			8,616			8,709			8,149
Allowance for contract cancellations		(5,967	)		(5,777	)		(5,967	)		(5,731	)


Funeral preneed receivables and trust investments	$	50,420		$	48,731		$	50,420		$	47,675

~~-11-~~- 12 -

The cost and market values associated with funeral preneed trust investments at ~~March 31,~~June 30, 2006 are detailed below (in thousands). The Company believes the unrealized losses related to trust investments at ~~March 31,~~June 30, 2006 are primarily related to changes in market interest rates and equity values and are temporary in nature. Net unrealized gains increased ~~$0.1~~$0.2 million for the ~~three~~six months ended ~~March 31,~~June 30, 2006, respectively.


			Unrealized		Unrealized
	Cost		Gains		Losses			Market					Unrealized		Unrealized
											Cost		Gains		Losses			Market
Cash and money market	$	17,035	$	—	$	—		$	17,035		$	20,079	$	—	$	—		$	20,079
Fixed income securities:
U.S. Treasury		399		—		(11	)		388			399		—		(14	)		385
U.S. Agency obligations		1,759		60		(2	)		1,817
State obligations		1,239		14		(23	)		1,230			1,758		48		(3	)		1,803
Corporate		—		—		—			—			1,239		12		(38	)		1,213
Obligations and guarantees of U.S. government agencies		1,116		5		(26	)		1,095			1,165		1		(38	)		1,128

Common stock		2,605		395		(50	)		2,950			1,913		356		(43	)		2,226
Mutual funds:
Equity		5,849		894		(49	)		6,694			10,094		883		(6	)		10,971
Fixed income		15,003		57		(377	)		14,683			7,626		45		(219	)		7,452


Trust investments	$	45,005	$	1,425	$	(538	)	$	45,892		$	44,273	$	1,345	$	(361	)	$	45,257


Market value as a percentage of cost									102.0	%									102.2	%

Upon cancellation of a preneed funeral or cemetery contract, a customer is generally entitled to receive a refund of the corpus and some or all of the earnings held in trust. In certain jurisdictions, the Company is obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust including some or all investment income. As a result, when realized or unrealized losses of a trust result in the trust being under-funded, the Company assesses whether it is responsible for replenishing the corpus of the trust, in which case a loss provision would be recorded.

Receivable from Funeral Trusts

The receivable from funeral trusts at ~~March 31,~~June 30, 2006 represent assets in trusts which are controlled and operated by third parties in which the Company does not have a controlling financial interest (less than 50%) in the trust assets. The Company accounts for these investments at cost.

Trust Investment Security Transactions

Investment security transactions recorded in Other income in the Consolidated Statement of Operations for the three and six months ended ~~March 31,~~June 30, 2006 are as follows (in thousands).


	For the three months
	ended March 31,						For the three months						For the six months
	2005			2006			ended June 30,						Ended June 30,
							2005			2006			2005			2006
Investment income	$	804		$	1,237		$	322		$	(398	)	$	1,126		$	839
Realized gains		1,061			2,161			572			940			1,633			3,101
Realized losses		(163	)		(860	)		(286	)		(361	)		(449	)		(1,221	)
Expenses		(185	)		(304	)		(91	)		(508	)		(276	)		(812	)
Increase in non-controlling interests in trust investments		(1,517	)		(2,234	)		(517	)		327			(2,034	)		(1,907	)

	$	—		$	—		$	—		$	—		$	—		$	—

7. CONTRACTS SECURED BY INSURANCE

Certain preneed funeral contracts are secured by life insurance contracts. Generally, the proceeds of the life insurance policies have been assigned to the Company and will be paid upon the death of the insured. The proceeds will be used to satisfy the beneficiary’s obligations under the preneed contract for services and merchandise. The preneed funeral contracts secured by insurance which are not included in the Company’s consolidated balance sheet totaled ~~$162.5~~$170 million at ~~March 31,~~June 30, 2006.

~~-12-~~- 13 -

8. CEMETERY PERPETUAL CARE TRUST INVESTMENTS

The Company is required by state law to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. The cost and market values associated with the trust investments held in perpetual care trust funds at ~~March 31,~~June 30, 2006 are detailed below (in thousands). The Company believes the unrealized losses related to the trust investments ~~March 31,~~June 30, 2006 are primarily related to changes in market interest rates and equity values and are temporary in nature. Net unrealized gains ~~in creased $0.5~~decreased $0.2 million for the ~~three~~six months ended ~~March 31,~~June 30, 2006.


			Unrealized		Unrealized
	Cost		Gains		Losses			Market					Unrealized		Unrealized
											Cost		Gains		Losses			Market
Cash and money market	$	1,652	$	—	$	—		$	1,652		$	1,782	$	—	$	—		$	1,782
Fixed income securities:
U.S. Treasury		594		—		—			594			594		4		(10	)		588
U.S. Agency obligation		5,914		8		(143	)		5,779			5,619		3		(127	)		5,495
State obligations		48		—		—			48			609		—		(6	)		603
Corporate		1,870		41		(13	)		1,898			1,464		25		(18	)		1,471
Other		406		—		(13	)		393			391		—		(18	)		373
Common stock		9,527		923		(145	)		10,305			9,311		805		(207	)		9,909
Mutual funds:
Equity		4,106		490		(18	)		4,578			5,475		461		(40	)		5,896
Fixed income		3,890		43		(23	)		3,910			3,640		58		(35	)		3,663
Other assets		199		20		—			219


	$	28,206	$	1,525	$	(355	)	$	29,376		$	28,885	$	1,356	$	(461	)	$	29,780


Accrued net investment income	$	91							91		$	89							89


Trust investments								$	29,467									$	29,869


Market value as a percentage of cost									104.5	%									103.4	%

Non-controlling interests in cemetery perpetual care trusts represent the corpus of those trusts for which the Company is only entitled to receive the income. The components of ~~Non-controlling~~non-controlling interests in cemetery perpetual care trusts as of December 31, 2005 and ~~March 31,~~June 30, 2006 are as follows:


	December 31,			March 31,
	2005			2006			December 31,			June 30,
							2005			2006
Trust assets, at market value	$	32,356		$	29,467		$	32,356		$	29,869
Pending withdrawals of income		(719	)		(716	)		(719	)		(592	)
Debt due to a perpetual care trust		1,092			—			1,092			—
Pending deposits		383			—			383			230


Non-controlling interests	$	33,112		$	28,751		$	33,112		$	29,507


Non-controlling interests in assets held for sale	$	—		$	6,319		$	—		$	6,157

9. DEFERRED REVENUE

Deferred revenue consists of the following:


	December 31,		March 31,		December 31,		June 30,
	2005		2006		2005		2006

Deferred cemetery revenue	$	51,928	$	50,145
Deferred cemetery contracts revenue					$	51,928	$	50,778
Deferred preneed funeral contracts revenue		29,446		29,562		29,446		28,823
Non-controlling interests in funeral and cemetery trust investments		102,446		98,732		102,446		97,896

	$	183,820	$	178,439	$	183,820	$	177,497

~~-13-~~- 14 -

Non-controlling interests in funeral and cemetery preneed trusts represent deferred revenue related to assets held in the preneed trusts. The Company will recognize the revenue at the time the service is performed and merchandise is delivered. The components of Non-controlling interests in funeral and cemetery preneed trusts as of ~~March 31,~~June 30, 2006 are as follows:


	March 31, 2006
	Preneed		Preneed		Total		June 30, 2006
	Funeral		Cemetery		Preneed		Preneed		Preneed		Total
							Funeral		Cemetery		Preneed
Trust assets, at market value	$	45,892	$	52,842	$	98,732	$	45,257	$	52,639	$	97,896


Non-controlling interests	$	45,892	$	52,842	$	98,732	$	45,257	$	52,639	$	97,896


Non-controlling interests in assets held for sale	$	1,632	$	4,643	$	6,275

10. MAJOR SEGMENTS OF BUSINESS

Carriage conducts funeral and cemetery operations only in the United States. The following table presents revenue, pretax income from continuing operations and total assets by segment (in thousands):

Funeral Cemetery Corporate Consolidated
Revenues from continuing operations:
Three months ended March 31, 2006 $ 31,664 $ 10,054 $ — $ 41,718
Three months ended March 31, 2005 $ 31,240 $ 9,741 $ — $ 40,981

Income (loss) from continuing operations before income taxes:
Three months ended March 31, 2006 $ 9,054 $ 1,622 $ (7,781 ) $ 2,895
Three months ended March 31, 2005 $ 9,416 $ 2,176 $ (13,815 ) $ (2,223 )

Total assets:
March 31, 2006 $ 317,011 $ 193,499 $ 57,475 $ 567,985
December 31, 2005 $ 322,497 $ 189,684 $ 58,459 $ 570,640


	Funeral		Cemetery		Corporate			Consolidated
Revenues from continuing operations:
Six months ended June 30, 2006	$	60,323	$	19,236	$	—		$	79,559
Six months ended June 30, 2005	$	59,207	$	19,152	$	—		$	78,359

Income (loss) from continuing operations before income taxes:
Six months ended June 30, 2006	$	15,951	$	2,682	$	(14,632	)	$	4,001
Six months ended June 30, 2005	$	16,407	$	3,645	$	(21,964	)	$	(1,912	)

Total assets:
June 30, 2006	$	314,383	$	193,039	$	63,745		$	571,167
December 31, 2005	$	322,497	$	189,684	$	58,459		$	570,640

~~-14-~~

11. SUPPLEMENTAL DISCLOSURE OF STATEMENT OF OPERATIONS INFORMATION


	For the three months				For the three months				For the six months
	ended March 31,				ended June 30,				ended June 30,
	2005		2006		2005		2006		2005		2006
Revenues, net
Goods
Funeral	$	13,629	$	13,621	$	12,213	$	12,354	$	25,842	$	25,975
Cemetery		6,735		7,006	$	6,805	$	6,407	$	13,540	$	13,413

Total Goods	$	20,364	$	20,627	$	19,018	$	18,761	$	39,382	$	39,388

Services
Funeral	$	17,611	$	18,043	$	15,754	$	16,305	$	33,365	$	34,348
Cemetery		3,006		3,048	$	2,606	$	2,775	$	5,612	$	5,823

Total Services	$	20,617	$	21,091	$	18,360	$	19,080	$	38,977	$	40,171


Total Net Revenues	$	40,981	$	41,718	$	37,378	$	37,841	$	78,359	$	79,559


Cost of revenues
Goods
Funeral	$	12,083	$	12,280	$	11,377	$	11,945	$	23,461	$	24,224
Cemetery		5,156		6,054	$	5,672	$	5,708	$	10,819	$	11,761

Total Goods	$	17,239	$	18,334	$	17,049	$	17,653	$	34,280	$	35,985

Services
Funeral	$	9,538	$	10,162	$	9,404	$	9,657	$	18,941	$	19,820
Cemetery		2,382		2,353	$	2,244	$	2,390	$	4,635	$	4,744

Total Services	$	11,920	$	12,515	$	11,648	$	12,047	$	23,576	$	24,564


Total Cost of revenues	$	29,159	$	30,849	$	28,697	$	29,700	$	57,856	$	60,549

- 15 -

12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The following information is supplemental disclosure for the Consolidated Statement of Cash Flows (in thousands):


	For the three months ended
	March 31,					For the six months ended
	2005		2006			June 30,
						2005		2006
Cash paid for interest and financing costs	$	22,196	$	7,151		$	24,512	$	9,090

Cash paid for income taxes (state)	$	195	$	87		$	219	$	159

Restricted common stock issued to officers	$	1,337	$	—		$	1,337	$	—


Restricted cash investing and financing activities:

Proceeds from the sale of securities of the funeral and cemetery trusts	$	12,434	$	14,418		$	14,460	$	29,967

Purchase of available for sale securities of the funeral and cemetery trusts	$	20,440	$	10,579		$	13,408	$	28,216

Net deposits in trust accounts increasing noncontrolling interests	$	328	$	(7,573	)
Net deposits (withdrawals) in trust accounts increasing noncontrolling interests						$	3,943	$	(7,875	)

~~-15-~~

13. DEBT

In January 2005, the Company issued $130 million of 7.875 percent Senior Notes at par, due in 2015. The proceeds from these notes were used to refinance substantially all senior debt, bring current the cumulative deferred distributions on the convertible junior subordinated debenture and the TIDES, and for general corporate purposes. In March 2005, the Company paid the cumulative deferred distributions on the TIDES totaling $10.9 million. During April 2005, the Company entered into a $35 million senior secured revolving credit facility that matures in five years to replace the existing unsecured credit facility at that time. Borrowings under the new credit facility bear interest at prime or LIBOR options with the current LIBOR option set at LIBOR plus 300 basis points and is collateralized by all personal property and by funeral home real property in certain states. The facility is currently undrawn.

Carriage, the parent entity, has no independent assets or operations. All assets and operations are held and conducted by subsidiaries, each of which (except for Carriage Services Capital Trust which is a single purpose entity that holds our debentures issued in connection with our TIDES) have fully and unconditionally guaranteed our obligations under the Senior Notes. Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any subsidiary guarantor under the Senior Notes.

In connection with the senior debt refinancing, the Company made a required “make whole” payment of $6.0 million in the form of additional interest and recorded a charge to write off $0.7 million of unamortized loan costs (in aggregate $4.2 million after tax, or $0.23 per diluted share) during the first quarter of 2005. In connection with the new senior secured revolving credit facility, the Company recorded a charge to write off $0.2 million or $0.01 per diluted share of unamortized loan costs during the second quarter of 2005. These charges are included in the Consolidated Statement of Operations as additional interest and other costs of senior debt refinancing during the respective periods for 2005.

14. SUBSEQUENT EVENT

On July 25, 2006, Carriage Services, Inc. (the “Company”) completed the sale of a funeral home business and a combination funeral home and cemetery business in the state of Indiana. The Company received net cash proceeds of $6,488,362 as follows: (i) the sum of $7,454,724 in cash less (ii) the issuance of a note payable to the buyer in the amount of $966,362. In accordance with the bank credit facility, approximately $5.5 million of the net cash proceeds are pledged and restricted for use only as acquisitions or capital expenditures. The Company estimates that it will not recognize a gain or loss with respect to this transaction during the third quarter of 2006.

~~-16-~~- 16 -


Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF
	FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

In addition to historical information, this Quarterly Report contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include any projections of earnings, revenues, asset sales, acquisitions, cash balances and cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “project”, “forecast”, “plan”, “anticipate” and other similar words.

Cautionary Statements

We caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, our actual consolidated results and could cause our actual consolidated results in the future to differ materially from the goals and expectations expressed herein and in any other forward-looking statements made by or on behalf of us. For further information regarding risks associated with our business and the death care industry, see Item 1A —– Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2005.

Risks related to our business

(1) Marketing and sales activities by existing and new competitors could cause us to lose market share and lead to lower revenues and gross profit.

(2) Our ability to generate preneed sales depends on a number of factors, including sales incentives and local and general economic conditions.

(3) Price competition could also reduce our market share or cause us to reduce prices to retain or recapture market share, either of which could reduce revenues and margins.

(4) Our ability to execute our growth strategy is highly dependent upon our ability to successfully identify suitable acquisition candidates and negotiate transactions on favorable terms.

(5) Increased or unanticipated costs, such as insurance, taxes and new computer systems implementations, ~~and the cost of complying with Sarbanes-Oxley,~~ may have a negative impact on our earnings and cash flows.

(6) Improved performance in our funeral segment is highly dependent upon successful execution of our standards-based Being the Best operating model.

(7) Smaller businesses are typically dependent upon one or a few key employees for success.

(8) Earnings from and principal of trust funds and insurance contracts could be reduced by changes in financial markets and the mix of securities owned.

~~(8)~~(9) Covenant restrictions under our debt instruments may limit our flexibility in operating our business.

Risks related to the death care industry

(1) Declines in the number of deaths in our markets can cause a decrease in revenues. Changes in the number of deaths are not predictable from market to market or over the short term.

(2) The increasing number of cremations in the United States could cause revenues to decline because we could lose market share to firms specializing in cremations. In addition, direct cremations produce minimal revenues for cemetery operations and lower funeral revenues.

(3) If we are not able to respond effectively to changing consumer preferences, our market share, revenues and profitability could decrease.

- 17 -

(4) Because the funeral and cemetery businesses are high fixed-cost businesses, changes in revenues can have a disproportionately large effect on cash flow and profits.

~~-17-~~

(5) Changes or increases in, or failure to comply with, regulations applicable to our business could increase costs or decrease cash flows.

OVERVIEW

General

We operate two types of businesses: funeral homes, which account for approximately 75% of our revenues, and cemeteries, which account for approximately 25% of our revenues. Funeral homes are principally a service business that provide funeral services (burial and cremation) and sell related merchandise, such as caskets and urns. Cemeteries are primarily a sales business that sells interment rights (grave sites and mausoleums) and related merchandise such as markers and memorials. As of ~~March 31,~~June 30, 2006, we operated 133 funeral homes in 28 states and 29 cemeteries in 12 states within the United States. Substantially all administrative activities are conducted in our home office in Houston, Texas.

Factors affecting our funeral operating results include: demographic trends in terms of population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by packaging complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our at-need business to increase average revenues per contract. In simple terms, volume and price are the two variables that affect funeral revenues. The average revenue per contract is influenced by the mix of traditional and cremation services because our average cremation service revenue is approximately ~~38%~~40% of the average revenue earned from a traditional burial service. Funeral homes have a relatively fixed cost structure. Thus small changes in revenues, up or down, normally cause significant changes to our profitability.

We implemented several significant long-term initiatives in our funeral operations at the beginning of 2004 designed to improve operating and financial results by growing market share and increasing profitability. We introduced a more decentralized, entrepreneurial and local operating model that included operating and financial standards developed from our best funeral operations, along with an incentive compensation plan to reward business managers for successfully meeting or exceeding the standards. The operating model and standards, which we refer to as “Being the Best,” focus on the key drivers of a successful funeral operation, organized around three primary areas —– market share, people and operating and financial metrics. The model and standards are the measures by which we judge the success of each funeral business.

The cemetery operating results are affected by the size and success of our sales organization because approximately 55% of our cemetery revenues for the ~~three~~six months ended ~~March 31,~~June 30, 2006 relate to sales of grave sites and mausoleums and related merchandise and services before the time of need. We believe that changes in the level of consumer confidence (a measure of whether consumers will spend for discretionary items) also affects the amount of cemetery revenues. Approximately ~~11%~~10% of our cemetery revenues for the ~~three~~six months ended ~~March 31,~~June 30, 2006 are attributable to investment earnings on trust funds and finance charges on installment contracts. Changes in the capital markets and interest rates affect this component of our cemetery revenues. We ~~are implementing~~implemented operating and financial standards in our cemetery operations inat the beginning of 2006 similar to the funeral operations discussed above. The standards are organized around market share, people and operational and financial metrics to improve the long-term success of the cemeteries.

Financial Highlights

Net income from continuing operations for the three months ending ~~March 31,~~June 30, 2006 totaled ~~$1.5~~$0.7 million, equal to ~~$0.08~~$0.04 per diluted share as compared to net income from continuing operations of $0.2 million for the second quarter of 2005, or $0.1 per diluted share. During the second quarter of 2005 the Company incurred a loss on the sale of undeveloped land and costs in connection with refinancing the bank credit facility, which together totaled $0.8 million, equal to $0.03 per diluted share. Excluding the effect of those two items, diluted earnings for the second quarter of 2005 equaled $0.04 per share.

Net income from continuing operations for the first six months of 2006 totaled $2.2 million, equal to $0.12 per share as compared to net loss from continuing operations of ~~$1.4~~$1.2 million for the first ~~quarter~~six months of 2005, or ~~$0.08~~$(0.07) per diluted share. The variance between the two periods was primarily due to a make-whole payment during the first quarter of 2005 to the former debtholders in connection with the repayment of the previously outstanding senior debt. We repaid this senior debt and paid the make-whole payment with proceeds from our $130 million senior note offering, which closed in January 2005. The make-whole payment resulted in additional pre-tax interest of $6.0 million, along with a charge in the amount of ~~$0.7~~$0.9 million to write off the related unamortized loan costs, in total equal to ~~$0.23~~$0.24 per diluted share. ~~At the end of the first quarter of 2006,~~Additionally, we decided not to renew a building lease for a business in North California and recorded an impairment charge at the end of the first quarter of 2006 of $0.9 million, equal to $0.05 per diluted share, related to exiting that business. Excluding the effect of these items, diluted earnings per share from continuing operations for the ~~three~~six months ending ~~March 31,~~June 30, 2005 equaled ~~$0.15~~$0.17 compared to ~~$0.13~~$0.16 for the ~~three~~six months ended ~~March 31,~~June 30, 2006.

- 18 -

There are two areas that management is focusing its efforts to improve results: (1) The Central Region funeral operations which suffered a year over year decline in pretax profitability of $1.7 million, and (2) A cemetery in California, whose pretax earnings have declined by $1.0 million. The decline in profitability in these two areas is equivalent to $0.09 per diluted share for the six month period. We recently made changes in leadership over each of these areas to focus on the issues affecting profits, such as local management, receivable collections and marketshare losses. During July we combined our cemetery operations with our Eastern, Central and Western Regions, which further simplifies our operational structure along only geographic lines and places all of our businesses under the leadership of three Regional Partners. Support for funeral operations, cemetery operations and sales now reside in each of the Regions.

Loss from discontinued operations for the ~~three~~six months ending ~~March 31,~~June 30, 2006 totaled ~~$3.2~~$(3.2) million, equal to ~~$0.17~~$(0.17) per diluted share. On March 31, 2006, we entered into a plan to sell two businesses, both of which are in small markets not strategic to our future plans. We have recorded pre-tax impairment charges in 2006 of approximately ~~$5.2~~$5.4 million to write down the current book value to the estimated net proceeds. Income from discontinued operations for the ~~three~~six months ending ~~March 31,~~June 30, 2005 totaled $0.6 million, equal to ~~$0.04~~$0.03 per share, and consisted primarily of a gain on the sale of a funeral home business during the first quarter of 2005.

~~-18-~~

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate estimates and judgments, including those related to revenue recognition, realization of accounts receivable, intangible assets, property and equipment and deferred tax assets. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance the margins, operating income and net earnings as a percentage of revenues will be sustained consistently from year to year.

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements presented herewith, which have been prepared in accordance with U.S. generally accepted accounting principles. Our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2005. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Funeral and Cemetery Operations

We record the sales of funeral merchandise and services when the funeral service is performed. Sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions of Statement of Financial Accounting Standards (SFAS) No. 66, “Accounting for Sales of Real Estate.” This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the contract price related to the real estate. Costs related to the sales of interment rights, which include property and other costs related to cemetery development activities, are charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. Revenue from the sales of cemetery merchandise and services are recognized in the period in which the merchandise is delivered or the service is performed. Revenues to be recognized from the delivery of merchandise and performance of services related to contracts that were acquired in acquisitions are typically lower than those originated by the Company and are likely to exceed the cash collected from the contract and received from the trust at maturity.

Allowances for customer cancellations, refunds and bad debts are provided at the date that the contract is executed. In addition, we monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. When preneed funeral services and merchandise are funded through third-party insurance policies, we earn a commission from the sale of the policies. Insurance commissions are recognized as revenues when the commission is no longer subject to refund, which is usually one year after the policy is issued.

Preneed Selling Costs

On June 30, 2005, the Company changed its method of accounting for deferred obtaining costs, which are preneed selling costs ~~consist~~incurred, for the origination of prearranged funeral and cemetery service and merchandise sales contracts. Prior to this change, commissions and other direct selling costs related ~~costs of~~to originating preneed funeral and cemetery service and merchandise sales ~~contracts. Prior to 2005, these costs~~contracts were deferred and amortized ~~into funeral~~with the objective of recognizing the selling costs in the same period that the related revenue is recognized. Under the prior accounting method, the commissions and ~~cemetery~~other direct selling costs, which are current obligations are paid and ~~expenses over~~use operating cash flow, are not recognized currently in the ~~period we expect~~income statement. The Company believes it is preferable to ~~perform~~expense the ~~services or deliver the merchandise covered by the preneed contracts. The periods over which the costs were recognized were based on actuarial statistics~~current obligation for the ~~actual contracts we hold, provided by~~commissions and other costs rather than defer these costs. The Company also believes the new accounting method improves the comparability of its reported earnings because all of the public deathcare companies now apply this method.

- 19 -

The Company applied this change in accounting method effective January 1, 2005. As of January 1, 2005, the Company recorded a ~~third-party administrator. Beginning~~cumulative effect of change in ~~2005, we changed our~~accounting method of ~~accounting for~~$35.8 million pretax or $22.8 million after tax (net of income tax benefit of $13.0 million), or $1.26 per diluted share, which represents the cumulative balance of deferred preneed selling ~~costs. Preneed selling~~ costs in the Company’s consolidated balance sheet at the end of 2004. The Company’s results of operations are ~~now expensed as incurred.~~reported on the basis of our changed method for both periods presented.

Goodwill and Other Intangible Assets

The excess of the purchase price over the fair value of net identifiable assets acquired, as determined by management in transactions accounted for as purchases, is recorded as goodwill. Many of the acquired funeral homes have provided high quality service to families for generations. The resulting loyalty often represents a substantial portion of the value of a funeral business. Goodwill is typically not associated with or recorded for the cemetery businesses. In accordance with SFAS No. 142, we review the carrying value of goodwill at least annually on reporting units (aggregated geographically) to determine if facts and circumstances exist which would suggest that this intangible asset might be carried in excess of fair value. Fair value is determined by discounting the estimated future cash flows of the businesses in each reporting unit at the Company’s weighted average cost of capital less debt allocable to the reporting unit and by reference to recent sales transactions of similar businesses. The calculation of fair value can vary dramatically with changes in estimates of the number of future services performed, inflation in costs, and the Company’s cost of capital, which is impacted by long-term interest rates. If impairment is indicated, then an adjustment will be made to reduce the carrying amount of goodwill to fair value.

Income Taxes

The Company and its subsidiaries file a consolidated U.S. federal income tax return and separate income tax returns in the states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities, in accordance with SFAS 109, “Accounting for Income Taxes.” The Company records a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the

~~-19-~~

valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.

Stock Compensation Plans

The Company has stock-based employee compensation plans in the form of restricted stock, stock option and employee stock purchase plans. The Company accounts for stock-based compensation under Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“FAS No. 123R”). FAS No. 123R requires companies to recognize compensation expense in an amount equal to the fair value of the share-based payment issued to employees over the period of vesting. The fair value of share based payment is determined using the Black-Scholes valuation model. FAS No. 123R applies to all transactions involving issuance of equity by a company in exchange for goods and services, including employee services. The Company adopted FAS No. 123R in the first quarter of 2006, using the modified prospective application method, which results in no restatement of the Company’s previously issued annual consolidated financial statements. See Note 2 to the consolidated financial statements.

Prior to 2006 the Company accounted for stock based compensation under APB No. 25 and provided the disclosures required under SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation —– Transition and Disclosure.”

Impairment of Long-Lived Assets

Except as noted for Goodwill, the Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of the ~~net~~ asset may not be recoverable in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less estimated cost to sell. The revenues and expenses, as well as gains, losses and impairments, from those assets are reported in the discontinued operations section of the Consolidated Statement of Operations for all periods presented.

Preneed Funeral and Cemetery Trust Funds

The Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, as revised, (“FIN 46R”),“Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51.”This interpretation clarifies the circumstances in which certain entities that do not have equity investors with a controlling financial interest must be consolidated by its sponsor. The Company implemented FIN 46R as of March 31, 2004, which resulted, for financial reporting purposes, in the consolidation of the Company’s preneed and perpetual care trust funds. The investments of such trust funds have been reported at market value and the Company’s future obligations to deliver merchandise and services have been reported at estimated settlement amounts. The Company has also recognized the non-controlling financial interests of third parties in the trust funds. There was no cumulative effect of an accounting change recognized by the Company as a result of the implementation of FIN 46R. The implementation of FIN 46R affected certain accounts on the Company’s balance sheet

- 20 -

beginning March 31, 2004 as described below; however, it does not affect cash flow, net income or the manner in which we recognize and report revenues.

Although FIN 46R requires consolidation of preneed and perpetual care trusts, it does not change the legal relationships among the trusts, the Company and its customers. In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, the Company does not have a right to access the corpus in the perpetual care trusts. For these reasons, the Company has recognized non-controlling interests in our financial statements to reflect third party interests in these consolidated trust funds.

Both the preneed trusts and the cemetery perpetual care trusts hold investments in marketable securities which have been classified as available-for-sale. The investments are reported at fair value, with unrealized gains and losses allocated to Non-controlling interests in trust investment in the Company’s consolidated balance sheet. Unrealized gains and losses attributable to the Company, but that have not been earned through the performance of services or delivery of merchandise, are allocated to deferred revenues.

Also, ~~beginning March 31, 2004,~~in connection with the implementation of FIN 46R, the Company began recognizing income, gains and losses, of the preneed trusts and cemetery perpetual care trusts. The Company recognizes a corresponding expense equal to the recognized earnings of these trusts attributable to the non-controlling interest holders. When such earnings attributable to the Company have not been earned through the performance of services or delivery of merchandise, the Company will record such earnings as deferred revenue.

For preneed trusts, the Company recognizes as revenues amounts attributed to the non-controlling interest holders and the Company, including accumulated earnings, when the contracted services have been performed and merchandise delivered. For cemetery perpetual care trusts, the Company recognizes investment earnings in cemetery revenues when such earnings are realized and distributable. Such earnings are intended to defray cemetery maintenance costs incurred by the Company.

~~-20-~~

~~Preneed Selling Costs~~

On June 30, 2005, the Company changed its method of accounting for deferred obtaining costs, which are preneed selling costs incurred, for the origination of prearranged funeral and cemetery service and merchandise sales contracts. Prior to this change, commissions and other direct selling costs related to originating preneed funeral and cemetery service and merchandise sales contracts were deferred and amortized with the objective of recognizing the selling costs in the same period that the related revenue is recognized. Under the prior accounting method, the commissions and other direct selling costs, which are current obligations are paid and use operating cash flow, are not recognized currently in the income statement. The Company believes it is preferable to expense the current obligation for the commissions and other costs rather than defer these costs. The Company also believes the new accounting method will improve the comparability of its reported earnings. Because the three largest public deathcare companies now expense selling costs (two of which changed in 2005), investors and other users of the financial information will now be able to more easily compare our financial results to those deathcare companies.

The Company has applied this change in accounting method effective January 1, 2005. As of January 1, 2005, the Company recorded a cumulative effect of change in accounting method of $35.8 million pretax or $22.8 million after tax (net of income tax benefit of $13.0 million), or $1.26 per diluted share, which represents the cumulative balance of deferred preneed selling costs in the Company’s consolidated balance sheet. The Company’s results of operations are reported on the basis of our changed method for both periods presented.

RESULTS OF OPERATIONS

The following is a discussion of the Company’s results of operations for the three and six month periods ended ~~March 31,~~June 30, 2005 and 2006. Funeral homes and cemeteries owned and operated for the entirety of each period being compared are referred to as “same-store” or “existing operations.”

Funeral Home Segment. The following table sets forth certain information regarding the net revenues and gross profit of the Company from the funeral home operations for the three and six months ended ~~March 31,~~June 30, 2005 compared to the three and six months ended ~~March 31,~~June 30, 2006. ~~For purposes of our discussion, the revenue and gross profit of our businesses identified to be sold are included in the same-store classification up to the quarter prior to their sale.~~

Three months ended ~~March 31,~~June 30, 2005 compared to three months ended ~~March 31,~~June 30, 2006 (dollars in thousands):


	Three Months Ended
	March 31,					Change						Three Months Ended
	2005			2006		Amount			Percent			June 30,					Change
												2005			2006		Amount			Percent
Total same-store revenue	$	30,683		$	30,808	$	125			0.4	%	$	27,351		$	27,785	$	434			1.6	%
Acquired and closed		90			269		179			*			42			278		236				*
Preneed insurance commissions revenue		467			587		120			25.7	%		574			596		22			3.8	%

Revenues from continuing operations	$	31,240		$	31,664	$	424			1.4	%	$	27,967		$	28,659	$	692			2.5	%

Revenues from discontinued operations	$	596		$	467	$	(129	)		*		$	471		$	396	$	(75	)			*


Total same-store gross profit	$	9,154		$	8,564	$	(590	)		(6.4	)%	$	6,658		$	6,375	$	(283	)		(4.3	)%
Acquired and closed		(2	)		71		73			*			(46	)		86		132				*
Preneed insurance commissions revenue		467			587		120			25.7	%		574			596		22			3.8	%

Gross profit from continuing operations	$	9,619		$	9,222	$	(397	)		(4.1	)%	$	7,186		$	7,057	$	(129	)		(1.8	)%

Gross profit from discontinued operations	$	160		$	133	$	(27	)		*		$	82		$	99	$	17			*


*		not meaningful

~~-21-~~- 21 -

Six months ended June 30, 2005 compared to six months ended June 30, 2006 (dollars in thousands):


	Six Months Ended
	June 30,					Change
	2005			2006		Amount			Percent
Total same-store revenue	$	58,034		$	58,593	$	559			1.0	%
Acquired and closed		132			547		415				*
Preneed insurance commissions revenue		1,041			1,183		142			13.6	%

Revenues from continuing operations	$	59,207		$	60,323	$	1,116			1.9	%

Revenues from discontinued operations	$	1,068		$	863	$	(205	)			*


Total same-store gross profit	$	15,813		$	14,939	$	(874	)		(5.5	)%
Acquired and closed		(49	)		157		206				*
Preneed insurance commissions revenue		1,041			1,183		142			13.6	%

Gross profit from continuing operations	$	16,805		$	16,279	$	(526	)		(3.1	)%

Gross profit from discontinued operations	$	242		$	232	$	(10	)			*


*		not meaningful

Funeral same-store revenues for the three months ended ~~March 31,~~June 30, 2006 increased ~~$0.1~~$0.4 million, or ~~0.4~~1.6 percent, when compared to the three months ended ~~March 31,~~June 30, 2005 as we experienced a decrease of ~~3.6~~1.3 percent in the number of contracts and a increase of ~~4.0~~2.9 percent to ~~$5,116~~$5,174 in the average revenue per contract for those existing operations. Performance was strong in the Eastern Region, where the number of contracts increased 4.1 percent and the contract average increased 4.8 percent, and the Western Region, where the number of contracts increased 4.1 percent and the contract average increased 6.1 percent. However, the Central Region suffered a decline of 14.4 percent in the number of contracts and a slight increase of 0.3 percent in the contract average. Cremation services represented ~~33.3~~34.2 percent of the number of funeral services during the ~~first~~second quarter of 2006, an increase from ~~32.8~~32.5 percent in the ~~first~~second quarter of 2005. The average revenue for burial contracts increased ~~3.8~~3.7 percent to ~~$6,947,~~$7,038, and the average revenue for cremation contracts increased ~~10.0~~10.1 percent to ~~$2,634.~~$2,684. The Company has addressed the growing demand for cremation by training the funeral directors to present multiple merchandise and service options to families, resulting in choices that produce higher revenues. The Company also experienced an increase in cremations with services and a decline in direct cremations during the quarter, which also positively impacted the cremation average.

Total funeral same-store gross profit for the three months ended ~~March 31,~~June 30, 2006 decreased ~~$0.6~~$0.3 million from the comparable three months of 2005, and as a percentage of funeral same-store revenue, declined from ~~30.8~~24.3 percent to ~~29.1~~22.9 percent primarily because of increases in funeral operating expenses. Costs and expenses in the Central Region were not reduced in line with the lower revenues, resulting in a year over year decline in the Central Region of $1.1 million in pretax earnings equal to $0.04 per diluted share.

Funeral same-store revenues for the six months ended June 30, 2006 increased 1.0 percent when compared to the six months ended June 30, 2005, as we experienced a decrease of 2.4 percent in the number of contracts and an increase of 3.5 percent to $5,143 in the average revenue per contract for those existing operations. Cremation services represented 33.7 percent of the number of funeral services during the six months ended June 30, 2006 compared to 32.7 percent for the six months ended June 30, 2005. The average revenue for burial contracts increased 3.7 percent to $6,989, while the average revenue for cremation contracts increased 10.1 percent to $2,658.

Total funeral same-store gross profit for the six months ended June 30, 2006 decreased $0.9 million from the comparable six months of 2005, and as a percentage of funeral same-store revenue, decreased from 27.2 percent to 25.5 percent. The decline for the six month period was similarly due to the performance of the Central Region where pretax earnings were $1.7 million lower, equal to $0.06 per diluted share.

Cemetery Segment. The following table sets forth certain information regarding the net revenues and gross profit of the Company from the cemetery operations for the three and six months ended ~~March 31,~~June 30, 2005 compared to the three and six months ended June 30, 2006:

- 22 -

Three months ended June 30, 2005 compared to the three months ended ~~March 31, 2006:~~

~~Three months ended March 31, 2005 compared to the three months ended March 31,~~June 30, 2006 (dollars in thousands)


	Three Months Ended
	March 31,					Change						Three Months Ended
	2005		2006			Amount			Percent			June 30,					Change
												2005			2006		Amount			Percent
Revenues from continuing operations	$	9,741	$	10,054		$	313			3.2	%	$	9,411		$	9,182	$	(229	)		(2.4	)%

Revenues from discontinued operations	$	705	$	190		$	(515	)		*		$	419		$	472	$	53				*


Gross profit from continuing operations	$	2,203	$	1,647		$	(556	)		(25.2	)%	$	1,495		$	1,084	$	(411	)		(27.5	)%

Gross profit from discontinued operations	$	297	$	(92	)	$	(389	)		*		$	(19	)	$	151	$	170				*


*		not meaningful

Six months ended June 30, 2005 compared to the six months ended June 30, 2006 (dollars in thousands)

Six Months Ended
June 30, Change
2005 2006 Amount Percent
Revenues from continuing operations $ 19,152 $ 19,236 $ 84 0.4 %

Revenues from discontinued operations $ 1,123 $ 662 $ (461 ) *

Gross profit from continuing operations $ 3,698 $ 2,731 $ (967 ) (26.2 %)

Gross profit from discontinued operations $ 278 $ 59 $ (219 ) *


*		not meaningful

Cemetery revenues from continuing operations for the three months ended ~~March 31,~~June 30, 2006 ~~increased $0.3~~decreased $0.2 million, or ~~3.2%~~2.4%, compared to the three months ended ~~March 31,~~June 30, 2005. Atneed revenues and the related gross profit were comparable at approximately $3.6 million and $2.9 million, respectively for the two periods. Preneed property revenues increased $0.3 million, or 8.2%, primarily as a function of the 8.3% increase to $2,158 in the average value of interment rights sold during the quarter. Revenue from the delivery of preneed merchandise and services declined $0.5 million in comparing the two periods. Financial revenues (trust earnings and finance charges on installment contracts) totaled approximately $0.9 million for each of the two quarters.

Cemetery gross profit from continuing operations for the three months ended June 30, 2006 decreased $0.4 million from the comparable three months of 2005 and as a percentage of revenues decreased from 15.9 percent to 11.8 percent, approximately one-half of which was due to higher bad debts at one of our California cemeteries.

Cemetery revenues from continuing operations for the six months ended June 30, 2006 was approximately equal to that of the six months ended June 30, 2005. Preneed property revenues increased ~~$0.6~~$0.8 million primarily because we recognized $0.5 million from the completion of mausoleums in the ~~current year period.~~first quarter of 2006. The average value of interment rights sold during the ~~quarter~~first six months increased ~~5.0~~4.9 percent to ~~$3,029~~$2,100 while the number of interment rights sold declined ~~15.3~~11.0 percent. Financial revenues (trust earnings and finance charges on installment contracts) totaled approximately ~~$1.1~~$2.0 million; ~~$0.1~~a $0.3 million decline from the first ~~quarter~~six months of the prior year, primarily the result of lower gains recognized on trust fund investments.

Cemetery gross profit from continuing operations for the ~~three~~six months ended ~~March 31,~~June 30, 2006 decreased ~~$0.6~~$1.0 million from the comparable ~~three~~six months of 2005, and as a percentage of revenues decreased from ~~22.6~~19.3 percent to ~~16.4 percent.~~14.2 percent primarily due to the $1.0 million decline in profitability of a California cemetery. That particular cemetery experienced a decline of $0.7 million in preneed property sales, an increase in bad debts of $0.3 million and a decline of $0.3 million in atneed revenues. We have made changes in the leadership of that business to focus on correcting these sales and operational issues.

Other. General and administrative expenses, for the three and six months ended ~~March 31,~~June 30, 2006 decreased ~~$0.1~~$0.3 and $0.4 million or approximately ~~4.9~~8.4 and 6.7 percent, respectively, as compared to the same periods of 2005 primarily because the 2005 period included higher audit and professional fees related to our compliance with the internal control reporting requirements of Sarbanes-Oxley and upgrading systems and processes. The ~~three~~six months ended ~~March 31,~~June 30, 2006 is the first period that the Company recognized compensation expense related to its stock options and employee stock purchase plan. See Note 2 to the Consolidated Financial Statement. Included in general and administrative expenses is ~~$51,000~~$101,000 and $153,000 for the stock-based ~~compensation.~~compensation for the three and six month periods ended June 30, 2006, respectively.

- 23 -

The six months ended June 30, 2006 includes a goodwill impairment charge recorded during the first quarter of 2006 related to the Company’s decision to not renew the lease on a California funeral business and to close the business in the third quarter of 2006.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $5.2 million at ~~March 31,~~June 30, 2006, representing ana decrease of $2.7 million from December 31, 2005. Short-term investments totaled ~~$19.2~~$26.0 million at ~~March 31,~~June 30, 2006, compared to $16.9 million at year end 2005. For the ~~three~~six months ended ~~March 31,~~June 30, 2006, cash provided by operating activities was ~~$1.2~~$9.6 million as compared to cash used of ~~$13.9~~$6.9 million for the ~~three~~six months ended ~~March 31,~~June 30, 2005. ~~Cash used by~~The $16.5 million improvement in cash provided from operating activities ~~during~~is because the 2005 period included the $6.0 million make-whole payment and the payment of the previously deferred interest on the convertible junior subordinated debenture in the amount of $10.3 million. Year to date, capital expenditures total $2.5 million compared to $3.5 million in the prior year. For the year 2006 the capital expenditures are expected to total $6.5 million.

The Company’s senior debt at ~~March 31,~~June 30, 2006 totaled ~~$140.6~~$140.2 million and consisted of $130.0 million in Senior Notes, a $35 million revolving line of credit and ~~$10.6~~$10.2 million in acquisition indebtedness and capital lease obligations. The revolving line of credit is currently undrawn.

In April 2005, the Company entered into a $35 million senior secured revolving credit facility to replace the existing unsecured credit facility. Borrowings under the new credit facility bear interest at prime or LIBOR options with the current LIBOR option set at LIBOR plus 300 basis points, matures in ~~five years~~2010 and is collateralized by all personal property and funeral home real property in certain states. ~~The facility is currently undrawn.~~

~~-22-~~

In January 2005, the Company issued $130 million of 7.875 percent Senior Notes at par, due in 2015. The proceeds from these notes were used to refinance all then outstanding senior debt, including payments for accrued interest and make-whole payment, bring current the cumulative deferred distributions on the convertible junior subordinated debenture and the TIDES, and for general corporate purposes. The refinancing improved the Company’s liquidity because debt totaling approximately $96 million due in 2006 and 2008 was replaced by debt maturing in ten years.

The Company’s convertible junior subordinated debenture at ~~March 31,~~June 30, 2006 total $93.75 million in principal amount, are payable to the Company’s affiliate trust, Carriage Services Capital Trust, bear interest at 7 percent and mature in 2029. Substantially all the assets of the Trust consist of the convertible junior subordinated debenture of the Company. The Trust issued 1.875 million shares of convertible preferred term income deferrable equity securities (TIDES). The rights of the debenture are functionally equivalent to those of the TIDES.

The convertible junior subordinated debenture payable to the affiliated trust and the TIDES each contain a provision for the deferral of interest payments and distributions for up to 20 consecutive quarters. During the period in which distribution payments are deferred, distributions continue to accumulate at the 7 percent annual rate. Also, the deferred distributions themselves accumulate distributions at the annual rate of 7 ~~percent and are recorded as a liability.~~percent. During the deferral period, Carriage is prohibited from paying dividends on the common stock or repurchasing its common stock, subject to limited exceptions. The Company, in complying with the conditions of the existing credit facility, began deferring interest payments on the subordinated debenture payable to the Company’s affiliated trust beginning with the September 1, 2003 payment. In the first quarter of 2005, the Company paid $10.3 million to bring the cumulative deferred distributions on the TIDES current. The Company expects to continue paying the distributions as due.

The Company intends to use its cash and short-term investments, cash flow provided by operations (which is expected to total $11 to $12 million in 2006) and proceeds from the sale of businesses, to acquire funeral home and cemetery businesses. The Company also has the ability to draw on its revolving credit facility, subject to customary terms and conditions of the credit agreement, to finance acquisitions.

SEASONALITY

The Company’s business can be affected by seasonal fluctuations in the death rate. Generally, the rate is higher during the winter months because the incidences of deaths from influenza and pneumonia are higher during this period than other periods of the year.

INFLATION

Inflation has not had a significant impact on the results of operations of the Company.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Carriage is currently exposed to market risk primarily related to changes in interest rates related to the Company’s debt, decreases in interest rates related to the Company’s short-term investments and changes in the values of securities associated with the preneed and perpetual care trusts. For information regarding the Company’s exposure to certain market risks, see Item 7A. ~~“Quantitative~~

- 24 -

“Quantitative and Qualitative Market Risk Disclosure” in the Company’s 2005 annual report filed on Form 10-K for the year ended December 31, 2005. There have been no significant changes in the Company’s market risk from that disclosed in the Form 10-K for the year ended December 31, 2005.

Item 4. Controls and Procedures

In accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15, we carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of ~~March 31,~~June 30, 2006 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting that occurred during the ~~three~~six months ended ~~March 31,~~June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

~~-23-~~

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Carriage and our subsidiaries are parties to a number of legal proceedings that arise from time to time in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on the financial statements.

We carry insurance with coverage and coverage limits consistent with our assessment of risks in our business and of an acceptable level of financial exposure. Although there can be no assurance that such insurance will be sufficient to mitigate all damages, claims or contingencies, we believe that our insurance provides reasonable coverage for known asserted or unasserted claims. In the event the Company sustained a loss from a claim and the insurance carrier disputed coverage or coverage limits, the Company may record a charge in a different period than the recovery, if any, from the insurance carrier.

Item 1A. Risk Factors

There have been no material changes in ~~Carriage’s~~our risk factors from those disclosed in Item 1A of ~~its~~our Annual Report on Form 10-K for the year ended December 31, 2005.

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Issuance of Unregistered Securities

Carriage has a compensation policy for fees paid to its directors under which our directors may choose to receive director compensation fees either in the form of cash compensation or equity compensation based on the fair market value of our common stock based on the closing price published by the New York Stock Exchange on the date the fees are earned. The Company issued ~~3,003~~2,886 and ~~2,886~~3,003 shares of common stock to directors in lieu of payment in cash for their fees for the ~~first~~second quarter of 2005 and 2006, respectively, the value of which was charged to operations. The Company issued 13,174 and 9,912 shares of common stock to directors in lieu of payment in cash for their fees for the six months ended June 30, 2005 and 2006, respectively, the value of which was charged to operations. No underwriter was used in connection with this issuance. Carriage relied on the Section 4(2) exemption from the registration requirements of the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities

None

- 25 -

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

~~None.~~The Company’s 2006 annual meeting was held on May 25, 2006. The director nominees were elected, the 2006 Long-Term Incentive Plan was approved and the selection of KPMG LLP as Carriage’s independent public accountants for the year ending December 31, 2006 was ratified. The voting tabulation was as follows:

Number of Votes Number of Votes Number of Votes
Name of Nominee/Plan For Against Withheld
Melvin C. Payne 16,599,647 — 554,213

Joe R. Davis 16,611,613 — 542,247

Approval of the 2006 Long-Term Incentive Plan 10,392,073 676,427 6,085,360

Ratification of the selection of KPMG LLP 17,043,262 42,409 68,189

The terms of the following directors continue after the meeting as follows:


	Expiration of Term at
Director	Annual Shareholder’s Meeting
Vincent D. Foster		2007
Mark F. Wilson		2007
Ronald A. Erickson		2008

Item 5. Other Information

In connection with the Company’s annual meeting on May 25, 2006, the shareholders approved the 2006 Long-Term Incentive Plan (the “Plan”). The Plan provides 1,350,000 shares of Carriage Services, Inc. common stock that may be granted to employees and directors of the Company. Grants of common stock may be in the form of stock options, restricted stock, stock appreciation rights and performance awards. The Compensation Committee of the Board of Directors has exclusive responsibility and authority over the Plan. A copy of the Plan was filed as Appendix A to the Company’s 2006 Notice of Annual Meeting and Proxy Statement.

Except the preceding notice of the 2006 Long-Term Incentive Plan, for which notice is alternately permitted in this, the next Form 10-Q, the Company reported on Form 8-K during the quarter covered by this report all information required to be reported on such form.

Item 6. Exhibits


~~11.1~~	—	~~Computation of Per Share Earnings~~

~~31.1~~	—	~~Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002~~

~~31.2~~	—	~~Certification of Periodic Financial Reports by Joseph Saporito in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002~~

32	—	10.1 — 2006 Long-Term Incentive Plan. (Incorporated by reference to Appendix A to Carriage’s 2006 Definitive Proxy Statement (DEF 14A) filed with the Commission on April 18, 2006) (Commission file number 001-11961) 11.1 — Computation of Per Share Earnings 31.1 — Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002 31.2 — Certification of Periodic Financial Reports by Joseph Saporito in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002 32 — Certification of Periodic Financial Reports by Melvin C. Payne and Joseph Saporito in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350

~~-24-~~- 26 -

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.


		CARRIAGE SERVICES, INC.


August 9, 2006	/s/ Joseph Saporito

~~May 10, 2006~~Date	Joseph Saporito,		~~/s/ Joseph Saporito~~
	Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer)
~~Date~~		~~Joseph Saporito,~~ ~~Executive Vice President, Chief Financial Officer and~~ ~~Secretary (Principal Financial Officer)~~

~~-25-~~- 27 -

CARRIAGE SERVICES, INC.

INDEX OF EXHIBITS


10.1		2006 Long-Term Incentive Plan. (Incorporated by reference to Appendix A to Carriage’s 2006 Definitive Proxy Statement (DEF 14A) filed with the Commission on April 18, 2006) (Commission file number 001-11961)

11.1		Computation of Per Share Earnings

31.1		Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Periodic Financial Reports by Joseph Saporito in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification of Periodic Financial Reports by Melvin C. Payne and Joseph Saporito in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350

~~-26-~~- 28 -


	Number of Votes		Number of Votes		Number of Votes
Name of Nominee/Plan	For		Against		Withheld
Melvin C. Payne		16,599,647		—		554,213

Joe R. Davis		16,611,613		—		542,247

Approval of the 2006 Long-Term Incentive Plan		10,392,073		676,427		6,085,360

Ratification of the selection of KPMG LLP		17,043,262		42,409		68,189