SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q/A

(Amendment No. 1)


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

For the quarterly period ended March 31, ~~2005~~2006


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

For the transition period from to

Commission file number 1-6402-1


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

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

Explanatory Note:

The Company ~~has amended~~is amending its March 31, ~~2005~~2006 Form 10-Q filed May ~~16, 2005~~10, 2006 to restate its condensed consolidated statement of operations and consolidated statement of cash flows for the three months ended March 31, ~~2005~~2006 and ~~2004,~~2005, and its condensed consolidated balance sheet at March 31, ~~2005~~2006 and December 31, ~~2004.~~2005. Included in this amended Form ~~10-Q/A (Amendment No. 1)~~10-Q are certain adjustments to correct errors related to ~~(1)~~1) the miscalculation of the Company’s ~~recognition of income~~actuarially determined pension benefit obligation, 2) the accounting for certain leases related to ~~its preneed~~ funeral ~~and cemetery trust accounts, (2) preneed funeral trust income that was~~home properties which were previously ~~understated~~accounted for as ~~a result of a point-of-sale system error, (3) the computation of gains and losses on certain asset divestiture activities, including the write-off of certain covenant-not-to-compete agreements which~~operating leases, but should have been ~~recognized~~accounted for as capital leases, and 3) other out-of-period adjustments previously identified by the Company but deemed to be not material either individually or in the Company’s 2002 consolidated financial statements, and a loss on a property disposition recorded in April 2005 which should have been recognized in the Company’s first quarter 2005 condensed consolidated financial statements, and (4) the accrual of a dividend.aggregate. All applicable amounts relating to this restatement have been reflected in the condensed consolidated financial statements and disclosed in the notes to the condensed consolidated financial statements in this amended Form ~~10-Q/A (Amendment No. 1).~~10-Q. For a discussion of the individual restatement adjustments, see Item 1. Financial Statements-note two. Restatement of Financial Statements. Additionally, see Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

GLOSSARY

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

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

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

Cash Overrides — Funds received based on achieving certain dollar volume targets of life insurance policies.

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

General Agency (GA) Revenues — Commissions earned as the general agent for an insurance company on preneed funeral life insurance or annuity policies. These commissions are based on a percentage per contract sold, are dependent on the type of product sold and are recognized as funeral revenues when the insurance purchase transaction between the customer and third party insurance provider is completed.

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

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

Marker — A method of identifying the occupant of a particular grave or crypt. Permanent grave markers are usually of bronze or stone.

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

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

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

Preneed — Funeral and cemetery arrangements made prior to the time of death.

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

Production — Sales of preneed and/or atneed contracts.

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

SERVICE CORPORATION INTERNATIONAL

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

Three months ended
March 31,
2005 2004
(Restated) (Restated)
note 2 note 2
Revenues $ 454,871 $ 588,699
Costs and expenses 355,097 473,070

Gross profit 99,774 115,629

General and administrative expenses (19,716 ) (51,021 )
Gains and impairment (losses) on dispositions, net (5,741 ) 34,785

Operating income 74,317 99,393

Interest expense (24,656 ) (32,658 )
Loss on early extinguishment of debt (1,207 ) —
Other income, net 2,687 6,424

(23,176 ) (26,234 )

Income from continuing operations before income taxes and cumulative effects of accounting changes 51,141 73,159
Provision (benefit) for income taxes 17,899 (3,779 )

Income from continuing operations before cumulative effects of accounting changes 33,242 76,938
(Loss) income from discontinued operations (net of income tax provision of $594 and $141, respectively) (650 ) 754
Cumulative effects of accounting changes (net of income tax benefit of $117,428 and $20,983, respectively) (187,538 ) (47,556 )

Net (loss) income $ (154,946 ) $ 30,136

Basic earnings (loss) per share:
Income from continuing operations before cumulative effects of accounting changes $ .11 $ .25
(Loss) income from discontinued operations, net of tax — —
Cumulative effects of accounting changes, net of tax (.60 ) (.15 )

Net (loss) income $ (.49 ) $ .10

Diluted earnings (loss) per share:
Income from continuing operations before cumulative effects of accounting changes .10 .23
(Loss) income from discontinued operations, net of tax — —
Cumulative effects of accounting changes, net of tax (.59 ) (.13 )

Net (loss) income $ (.49 ) $ .10

Basic weighted average number of shares 313,490 303,018

Diluted weighted average number of shares 317,751 353,088

Dividends declared per share $ .025 $ —


	Three months ended
	March 31,
	2006			2005
	(Restated) note 2			(Restated) note 2

Revenues	$	441,798		$	447,442
Costs and expenses		(354,191	)		(349,642	)

Gross profit		87,607			97,800


General and administrative expenses		(22,007	)		(19,707	)
Gains (losses) on dispositions and impairment charges, net		(4,510	)		(5,741	)

Operating income		61,090			72,352

Interest expense		(26,728	)		(25,005	)
Loss on early extinguishment of debt		—			(1,207	)
Interest income		5,981			4,056
Other income (expense), net		2,414			(1,208	)

		(18,333	)		(23,364	)


Income from continuing operations before income taxes and cumulative effect of accounting change		42,757			48,988
Provision for income taxes		(15,776	)		(17,520	)

Income from continuing operations before cumulative effect of accounting change		26,981			31,468
(Loss) income from discontinued operations (net of income tax benefit (provision) of $35 and $(1,155), respectively)		(55	)		1,175
Cumulative effect of accounting change (net of income tax benefit of $117,428)		—			(187,538	)

Net income (loss)	$	26,926		$	(154,895	)

Basic earnings (loss) per share:
Income from continuing operations before cumulative effect of accounting change	$	.09		$	.10
Income from discontinued operations, net of tax		—			—
Cumulative effect of accounting change, net of tax		—			(.59	)

Net income (loss)	$	.09		$	(.49	)

Diluted earnings (loss) per share:
Income from continuing operations before cumulative effect of accounting change	$	.09		$	.10
Income from discontinued operations, net of tax		—			—
Cumulative effect of accounting change, net of tax		—			(.59	)

Net income (loss)	$	.09		$	(.49	)

Basic weighted average number of shares		294,308			313,490

Diluted weighted average number of shares		298,678			317,751

Dividends declared per share	$	.025		$	.025

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

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


							March 31,			December 31,
	March 31,			December 31,			2006			2005
	2005			2004
	(Restated)			(Restated)			(Restated) note 2			(Restated) note 2
	note 2			note 2
Assets
Current assets:
Cash and cash equivalents	$	320,493		$	287,785		$	490,408		$	446,782
Receivables, net		102,515			102,622			76,400			97,747
Inventories		85,761			81,526			67,256			68,327
Current assets of discontinued operations		—			11,085
Other		34,510			50,945			31,017			37,527

Total current assets		543,279			533,963			665,081			650,383

Preneed funeral receivables and trust investments		1,245,726			1,267,784			1,227,556			1,226,192
Preneed cemetery receivables and trust investments		1,362,276			1,399,778			1,307,832			1,288,515
Cemetery property, at cost		1,505,842			1,509,599			1,366,323			1,355,654
Property and equipment, at cost, net		966,627			970,547			1,043,073			950,174
Non-current assets of discontinued operations		—			4,367
Deferred charges and other assets		299,201			621,561			264,366			249,581
Goodwill		1,162,215			1,169,040			1,122,205			1,123,888
Cemetery perpetual care trust investments		706,585			729,048			697,871			700,382

Total assets	$	7,791,751		$	8,205,687
							$	7,694,307		$	7,544,769


Liabilities & Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	231,403		$	221,877		$	213,961		$	231,693
Current maturities of long-term debt		75,936			75,075			35,996			20,716
Current liabilities of discontinued operations		—			7,111
Income taxes		4,152			7,850			18,203			20,359

Total current liabilities		311,491			311,913			268,160			272,768

Long-term debt		1,172,139			1,178,885			1,271,857			1,186,485
Deferred preneed funeral revenues		500,943			498,571			535,489			535,384
Deferred preneed cemetery revenues		813,149			803,144			783,520			792,485
Deferred income taxes		191,204			276,572			157,481			138,677
Non-current liabilities of discontinued operations		—			58,225
Other liabilities		421,068			431,917			317,778			326,985
Non-controlling interest in funeral and cemetery trusts		2,042,933			2,092,881			2,060,380			2,015,811
Non-controlling interest in cemetery perpetual care trust investments								695,456			694,619

Commitments and contingencies (note 9)

Non-controlling interest in perpetual care trusts		685,716			704,912

Stockholders’ equity:
Common stock, $1 per share par value, 500,000,000 shares authorized, 310,009,494 and 323,225,352, issued and outstanding (net of 32,653,741 and 18,502,478 treasury shares, at par)		310,009			323,225
Common stock, $1 per share par value, 500,000,000 shares authorized, 295,454,597 and 294,808,872, issued and outstanding (net of 48,606,563 and 48,962,063 treasury shares, at par)								295,455			294,809
Capital in excess of par value		2,305,588			2,395,057			2,174,541			2,182,745
Unearned compensation		(5,251	)		(2,022	)		—			(3,593	)
Accumulated deficit		(984,190	)		(829,244	)		(935,979	)		(962,905	)
Accumulated other comprehensive income (loss)		26,952			(38,349	)
Accumulated other comprehensive income								70,169			70,499

Total stockholders’ equity		1,653,108			1,848,667			1,604,186			1,581,555

Total liabilities and stockholders’ equity	$	7,791,751		$	8,205,687
							$	7,694,307		$	7,544,769

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

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


	Three months ended
	March 31,						Three months ended
	2005			2004			March 31,
	(Restated)			(Restated)			2006			2005
	note 2			note 2			(Restated) note 2			(Restated) note 2
Cash flows from operating activities:
Net (loss) income	$	(154,946	)	$	30,136
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Net loss (income) from discontinued operations		650			(754	)
Net income (loss)							$	26,926		$	(154,895	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net loss (income) from discontinued operations, net of tax								55			(1,175	)
Loss on early extinguishment of debt		1,207			—			—			1,207
Cumulative effects of accounting changes, net of tax		187,538			47,556
Premiums paid on early extinguishment of debt								—			(542	)
Cumulative effect of accounting change, net of tax								—			187,538
Depreciation and amortization		21,089			36,327			25,091			20,645
Provision (benefit) for deferred income taxes		16,313			(5,019	)
(Gains) and impairment losses on dispositions, net		5,741			(34,785	)
Provision for doubtful accounts								2,356			2,347
Provision for deferred income taxes								13,555			16,064
(Gains) losses on dispositions and impairment charges, net								4,510			5,741
Share-based compensation								2,145			447
Other non-cash adjustments		(1,950	)		224			—			(1,950	)
Change in assets and liabilities, net of effects from acquisitions and dispositions:
(Increase) decrease in receivables		(5,548	)		7,172
Decrease (increase) in receivables								7,407			(8,835	)
Decrease in other assets		29,031			2,836			3,591			28,740
(Decrease) increase in payables and other liabilities		(6,322	)		5,667
Decrease in payables and other liabilities								(27,566	)		(5,532	)
Net effect of preneed funeral production and maturities		12,470			(11,078	)		3,833			12,470
Net effect of cemetery production and deliveries		22,475			4,635			18,365			23,289
Other		101			4,460			(54	)		102

Net cash provided by operating activities from continuing operations		127,849			87,377			80,214			125,661
Net cash (used in) provided by operating activities from discontinued operations		(241	)		1,267
Net cash provided by operating activities from discontinued operations								—			1,453

Net cash provided by operating activities		127,608			88,644			80,214			127,114
Cash flows from investing activities:
Capital expenditures		(20,613	)		(17,698	)		(19,049	)		(20,559	)
Proceeds from divestitures and sales of property and equipment		8,236			8,744			7,463			8,236
Proceeds and distributions from dispositions of businesses, net of cash retained		21,597			287,886
Indemnity payments related to the joint venture of French operations		(772	)		—
Net withdrawals (deposits) of restricted funds and other		6,961			(105,601	)
Proceeds from dispositions of foreign operations, net of cash retained								—			21,597
Proceeds from sale of investments								5,900			—
Acquisitions, net of cash acquired								(14,662	)		(5	)
Net (deposits) withdrawals of restricted funds and other								(3,353	)		6,194

Net cash provided by investing activities from continuing operations		15,409			173,331
Net cash (used in) provided by investing activities from continuing operations								(23,701	)		15,463
Net cash used in investing activities from discontinued operations		—			(39	)		—			(54	)

Net cash provided by investing activities		15,409			173,292
Net cash (used in) provided by investing activities								(23,701	)		15,409
Cash flows from financing activities:
Payments of debt		(1,974	)		(5,907	)		(1,182	)		(1,951	)
Early extinguishments of debt		(7,673	)		—
Principal payments on capital leases								(5,437	)		(71	)
Early extinguishment of debt								—			(7,131	)
Proceeds from exercise of stock options		3,904			3,294			1,219			3,904
Purchase of Company common stock		(103,570	)		—			—			(103,570	)
Payments of dividends								(7,371	)		—
Purchase of subsidiary stock		(844	)		—			—			(844	)

Net cash used in financing activities		(110,157	)		(2,613	)		(12,771	)		(109,663	)
Effect of foreign currency		(152	)		157			(116	)		(152	)

Net increase in cash and cash equivalents		32,708			259,480			43,626			32,708
Cash and cash equivalents at beginning of period		287,785			239,431			446,782			287,785

Cash and cash equivalents at end of period	$	320,493		$	498,911		$	490,408		$	320,493

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

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

Accumulated
Treasury Capital in other
Outstanding Common stock, par excess of Unearned Accumulated comprehensive
Shares stock value par value Compensation deficit (loss) income Total
(Restated) (Restated) (Restated) (Restated)
note 2 note 2 note 2 note 2
Balance at December 31, 2004 323,225 $ 341,727 $ (18,502 ) $ 2,395,057 $ (2,022 ) $ (829,244 ) $ (38,349 ) $ 1,848,667
Net loss (154,946 ) (154,946 )
Dividends on common stock ($.025 per share) (7,734 ) (7,734 )
Other comprehensive income:
Foreign currency translation (6,469 ) (6,469 )
Reclassification for translation adjustments realized in net loss 71,770 71,770

Total other comprehensive income 65,301

Tax benefit from stock option exercises 1,034 1,034
Stock option exercises and other 936 936 2,973 3,909
Restricted stock award 499 499 3,177 (3,676 ) —
Restricted stock amortization 447 447
Purchase of Company common stock (14,651 ) (14,651 ) (88,919 ) (103,570 )

Balance at March 31, 2005 310,009 $ 342,663 $ (32,654 ) $ 2,305,588 $ (5,251 ) $ (984,190 ) $ 26,952 $ 1,653,108


																	Accumulated
					Treasury			Capital in									other
	Outstanding		Common		stock, par			excess of			Unearned			Accumulated			comprehensive
	Shares		stock		value			par value			Compensation			deficit			income
														(Restated) note 2
Balance at December 31, 2005		294,809	$	343,771	$	(48,962	)	$	2,182,745		$	(3,593	)	$	(962,905	)	$	70,499
Net income															26,926
Dividends declared on common stock ($.025 per share)									(7,329	)
Total other comprehensive income																		(330	)
Share based compensation earned									2,145
Reclassification of unearned compensation for restricted stock									(3,593	)		3,593
Stock option exercises and other		290		290					929
Restricted stock award		356				356			(356	)

Balance at March 31, 2006		295,455	$	344,061	$	(48,606	)	$	2,174,541		$	—		$	(935,979	)	$	70,169

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

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

1. Nature of Operations

Service Corporation International (SCI or the Company) ~~owns~~is a provider of deathcare products and ~~operates~~services, with a network of funeral service locations and cemeteries ~~worldwide.~~primarily operating in the United States and Canada. The Company also ~~has~~owns a ~~minority~~25 percent equity interest ~~equity investment~~ in funeral operations of an entity in France. ~~The~~Additionally, the Company owns ~~and operates~~ Kenyon International Emergency Services (Kenyon), a wholly owned subsidiary that specializes in providing disaster ~~response team that engages~~management services in mass fatality ~~and emergency response services, which is~~incidents. Kenyon’s results are included in the Company’s funeral operations segment.

~~The funeral service and cemetery operations consist of funeral service locations, cemeteries, crematoria and related businesses. Personnel at the funeral~~Funeral service locations provide all professional services relating to atneed funerals, including the use of funeral facilities and motor vehicles, and preparation and embalming services. Funeral related merchandise (including caskets, burial vaults, cremation receptacles, flowers, and other ancillary products and services) is sold at funeral service locations. Certain funeral service locations contain crematoria. The Company also sells preneed funeral services whereby a customer contractually agrees to the terms of a funeral to be performed in the future. The Company’s cemeteries provide cemetery property interment rights (including mausoleum spaces, lots, and lawn crypts) and sell cemetery related merchandise (including stone and bronze memorials, ~~burial vaults, casket~~markers, and cremation memorialization products) and services (primarily merchandise installations and burial openings and closings). Cemetery items are sold on an atneed or preneed basis. Personnel at cemeteries perform interment services and provide management and maintenance of cemetery grounds. Certain cemeteries operate crematoria, and certain cemeteries contain gardens specifically for the purpose of cremation memorialization.

2. Restatement of Financial Statements

~~Overview~~

The Company has restated herein its previously issued condensed consolidated statement of operations and condensed consolidated statement of cash flows for the three months ended March 31, 2006 and 2005, and ~~2004, and~~ its condensed consolidated balance sheet atas of March 31, ~~2005~~2006 and December 31, ~~2004.~~2005. This restatement corrects errors related to ~~(1)~~1) the miscalculation of the Company’s ~~recognition of income~~actuarially determined pension benefit obligation, 2) the accounting for certain leases related to ~~its preneed~~ funeral ~~and cemetery trust accounts, (2) preneed funeral trust income that was~~home properties which were previously ~~understated~~accounted for as ~~a result of a point-of-sale system error, (3) the computation of gains and losses on certain asset divestiture activities, including the write-off of certain covenant-not-to-compete agreements which~~operating leases, but should have been ~~recognized~~accounted for as capital leases, and 3) other out-of-period adjustments previously identified by the Company but deemed to be not material either individually or in the Company’s 2002 consolidated financial statements, and a loss on a property disposition recorded in April 2005 which should have been recognized in the Company’s first quarter 2005 condensed consolidated financial statements, and (4) the accrual of a dividend.aggregate. All applicable amounts ~~relating~~related to this restatement have been reflected in the Company’s condensed consolidated financial statements and disclosed in the notes to the condensed consolidated statements in this amended Form 10-Q.

Pension Benefit Obligation

As previously disclosed in the Company’s 2004 Form 10-K, effective January 1, 2004, the Company adopted a new accounting policy related to the accounting for actuarial gains and losses in its pension plan. Under the new accounting policy, the Company began to recognize such gains and losses in its consolidated statement of operations as they occurred. Previously, the Company amortized the difference between actual and expected investment returns and other actuarial gains and losses over seven years (except to the extent that settlements with employees required earlier recognition). As a result of this accounting change, the Company initially recognized an after tax charge in its 2004 financial statements, representing the cumulative effect of this accounting change, of $33,599 ($54,873 before tax). This amount represented the accumulated unrecognized net losses related to the pension plan assets and liabilities as of January 1, 2004.

During the second quarter of 2006, the Company discovered that its actuarially determined pension benefit obligation (PBO) had been incorrectly calculated for the years ended December 31, 2005, 2004, 2003, and 2002 as the impact of pending lump sum cash settlements in the PBO calculation at the end of each respective year had been inadvertently omitted. The net aggregate pre-tax impact of this error over the four-year period ended December 31, 2005 was $4,233. Had this PBO calculation been correct at the time the Company adopted its new accounting policy effective January 1, 2004, the Company would have recognized an additional cumulative effect of accounting change of $4,961 ($3,037 after tax) in its December 31, 2004 consolidated statement of operations, as the vast majority of the impact of previously unrecognized pending lump sum settlements for 2002 and 2003 would have been recognized in connection with the accounting policy change.

In addition, in connection with the preparation of its second quarter 2006 condensed consolidated financial statements; the Company also identified an actuarial calculation error that resulted in an understatement of pension expense of $1,940 in the fourth quarter of 2005.

Lease Accounting

As previously disclosed in the Company’s initial first quarter 2006 Form 10-Q filing, the Company determined, in the first quarter of 2006, that certain of its leases related to funeral home properties that were previously accounted for as operating leases should have been accounted for as capital leases. The aggregate pre-tax adjustment to the Company’s previously issued consolidated financial statements ~~in this Form 10-Q/A (Amendment No. 1).~~

is $2,677, of which $657 relates to the three-year period ended December 31, 2005. The Company previously restated its unaudited quarterly financial data for the first three quarters of 2004 which was included in its 2004 Form 10-K for correction of errors related to (1) the recognition of deferred preneed cemetery contract revenues, (2) certain reconciliations of the Company’s preneed funeral and cemetery trust assets and deferred revenues, and (3) operating leases and other account reconciliations. At that time, the Company concluded that the net aggregate impact of such errors relatedremaining $2,020 relates to periods prior to January 1, ~~2004 was~~2003.

Other Out-of-Period Adjustments

The Company has also included other adjustments that were previously identified but deemed to be not material ~~to its consolidated financial statements~~either individually or toin the ~~first quarter~~aggregate and therefore corrected in a subsequent period. Such adjustments impacted the timing of ~~2004, nor for any quarterly or annual period prior to January 1, 2004, and as a result, the Company recorded the net aggregate impact of such errors (a $416 increase to pre-tax income) in~~~~Other operating (expense)~~expense items, including income~~as a correction of an immaterial error~~ tax expenses previously recognized in the first quarter of ~~2004.~~

~~However, in light~~2006. The cumulative amount of ~~the material impact~~such out-of-period adjustments was a net aggregate decrease to pre-tax income of ~~the errors identified in the second quarter~~$1,079 and an additional $496 of ~~2005, as detailed below under “Current Period Restatement”, the Company has concluded that prior period financial statements~~income tax expense for the ~~fiscal years ended 2004, 2003 and 2002 should be restated and has corrected such prior periods for the $416 net impact to~~~~Other operating (expense) income~~described above. Please refer to the Company’s 2004 Form 10-K/A (Amendment No. 2) for details related to the impacts of this restatement on the Company’s consolidated statements for each of the five yearsyear ended December 31, ~~2004; all four interim periods of 2004; and all four interim periods of 2003.~~2005.

~~Current Period Restatement~~

~~Preneed Funeral and Cemetery Trust Verification and Reconciliation Project~~

~~During 2003, the Company began implementation of the revised Financial Accounting Standards Board (FASB) Interpretation No. 46,~~~~“Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51”~~(FIN 46R), the preparation for the implementation of Section 404 of the Sarbanes Oxley Act, and the implementation of its new funeral and cemetery point-of-sale system. As a result of these events, the Company began a project to reconcile its preneed funeral and cemetery trust accounts and verify its preneed funeral and preneed cemetery contracts.

The preneed funeral and cemetery trust verification and reconciliation project included three primary components: (1) the reconciliation of assets and deferred revenue related to preneed cemetery merchandise and service trusts; preneed funeral merchandise and service trusts; and cemetery perpetual care trusts, (2) the verification of approximately 430,000 preneed funeral contracts to determine if those contracts were appropriately included in the Company’s new point-of-sale system, and (3) the verification of each individual item on each preneed cemetery contract (approximately 3.6 million contract items) to determine if revenue was appropriately recognized at the time of delivery or at the time of service.

As these projects progressed, the Company assessed their status and adjusted the applicable general ledger accounts accordingly. At December 31, 2003, June 30, 2004, and December 31, 2004, the Company made certain adjustments to its consolidated financial statements based on its best estimates at that time. These adjustments were based on statistical sampling methods which were influenced by the percentage of reconciliations and verifications completed at the location level and the expected error rate of such uncompleted verifications and reconciliations. Please see the Company’s 2004 Form 10-K/A (Amendment No. 2) for additional information related to the history of these projects.

By March 2005, the Company completed its examination of the 430,000 preneed funeral contracts and had also implemented the reconciliation procedures described above, which resulted in the identification of a significant number of reconciling items. In light of these reconciling items, the Company reevaluated previous adjustments related to these projects and the impact to previously issued financial statements. The Company determined that these adjustments had a material impact on its consolidated financial statements for the first three interim periods of 2004. As a result, the Company restated its unaudited quarterly financial data for the first three interim periods of 2004 in its original 2004 Form 10-K. The Company evaluated the materiality of these adjustments on its consolidated financial statements issued prior to January 1, 2004 and concluded that the impact of these adjustments was not material to the fiscal period ended 2004 or any quarterly or annual period prior to January 1, 2004. As a result, the Company recorded the net aggregate impact of these adjustments ($416 increase to pretax income) in~~Other operating income (expense)in its restated first quarter 2004 financial statements as a correction of an error.~~

During the first and second quarters of 2005, the Company continued to find and record reconciling items to its trust asset and deferred revenue detailed records. During the second quarter of 2005, the Company determined that certain of the reconciling items had been reflected improperly in its initial reconciliation process at December 31, 2004 which resulted in the identification of errors to the Company’s consolidated financial statements. The Company recorded a $1,600 charge in its first quarter 2005 consolidated financial statements for similar prior period adjustments arising from the aforementioned reconciliation process.

Also during the second quarter of 2005, the Company identified other adjustments, one of which related to a point-of-sale system error that caused preneed funeral trust income accounts to be understated in the fourth quarter of 2004 and the first quarter of 2005 by $1,570 and $2,700, respectively, and another of which related to the

recognition of a loss on a disposition recorded in April 2005 that should have been recognized in the Company’s first quarter 2005 unaudited consolidated financial statements. In connection with the asset divestitures, the Company did not write off certain covenant-not-to-compete agreements, which should have been recorded in the Company’s 2002 consolidated financial statements.

Additionally, the Company adjusted its method of accounting for certain types of operating leases related primarily to the Company’s funeral home properties. Historically, the Company recorded operating lease expense, related primarily to funeral home properties, over the initial lease term without regard to reasonably assured renewal options or fixed escalation provisions. The Company now calculates its straight-line operating lease expense over the lease term (including certain renewal options and fixed escalation provisions, to the extent necessary) in accordance with SFAS 13, “~~Accounting for Leases~~”.

Materiality Assessment

The Company evaluated the materiality of these adjustments ~~(including the $1,600 charge recorded in the current quarter~~to its previously issued interim and ~~the adjustments aggregating to $416 associated with the restatement of the first three interim periods of 2004 described above) on its consolidated~~annual financial statements including its interim financial statements as of and for the ~~second quarter of 2005, its unaudited quarterly financial statements for 2004 and 2003, and for each of the five prior annual periods~~three months ended ~~December~~March 31, ~~2004.~~2006. The Company determined that the ~~net effect~~impact of these ~~adjustments ($5,192 charge to pretax income), which primarily related to periods prior to 2000,~~errors was not material to ~~the Company’s~~its previously ~~reported~~issued consolidated financial ~~statements for the periods described above;~~statements; however, the Company has determined that ~~such impact was~~the cumulative correction of the errors in the second quarter of 2006 would have been material to the ~~Company’s second quarter 2005 consolidated~~current period. Therefore, in accordance with paragraph 29 of Accounting Principles Board Opinion No. 28 and the SEC’s Staff Accounting Bulletin (SAB) Topic 5-F, the Company is restating its previously issued financial ~~statements.~~statements to reflect the corrections of the errors in each of the periods affected. As a result, the Company has restated its ~~previously issued~~condensed consolidated statements of operations and cash flows for the three months ended March 31, 2006 and 2005 and its condensed consolidated balance sheet at March 31, 2006 and December 31, 2005. The effect of the adjustments to the Company’s condensed consolidated statement of operations for the three months ended March 31, 2006 and 2005 is as follows:


	For the three months ended						For the three months ended
	March 31, 2006						March 31, 2005
	As						As
	previously			As			previously			As
	reported			restated			reported			restated
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Costs and expenses		(355,995	)		(354,191	)		(350,215	)		(349,642	)
Gross profit		85,803			87,607			97,227			97,800
General and administrative expenses		(22,007	)		(22,007	)		(19,716	)		(19,707	)
Other operating expense		(2,884	)		—			—			—
Operating income		56,402			61,090			71,770			72,352
Interest expense		(26,724	)		(26,728	)		(24,656	)		(25,005	)
Income from continuing operations before income taxes and cumulative effects of accounting changes		38,073			42,757			48,755			48,988
Provision for income taxes		(13,824	)		(15,776	)		(17,338	)		(17,520	)
Income from continuing operations before cumulative effects of accounting changes		24,249			26,981			31,417			31,468
Net income (loss)		24,194			26,926		$	(154,946	)	$	(154,895	)
Earnings per share:
Basic		0.08			0.09		$	(.49	)	$	(.49	)
Diluted		0.08			0.09		$	(.49	)	$	(.49	)

The effect of the above restatement on the Company’s previously reported condensed consolidated balance sheet as of March 31, 2006 and December 31, 2005 is as follows:


	March 31, 2006				December 31, 2005
	As				As
	previously		As		previously		As
	reported		restated		reported		restated
	(unaudited)		(unaudited)
Selected condensed consolidated balance sheet data:
Property and equipment, at cost, net	$	1,043,544	$	1,043,073	$	942,229	$	950,174
Deferred charges and other assets		264,234		264,366		249,449		249,581
Total assets		7,694,646		7,694,307		7,536,692		7,544,769
Accounts payable and accrued liabilities		215,196		213,961		231,129		231,693
Current maturities of long-term debt		36,055		35,996		20,468		20,716
Long-term debt		1,271,828		1,271,857		1,175,463		1,186,485
Deferred income taxes		158,527		157,481		141,676		138,677
Other liabilities		311,607		317,778		320,812		326,985
Stockholders’ equity		1,608,385		1,604,186		1,588,486		1,581,555
Total liabilities and stockholders’ equity		7,694,646		7,694,307	$	7,536,692	$	7,544,769

The effect of the above restatement on the Company’s previously reported condensed consolidated statement of cash flows for the three months ended March 31, 2005 ~~and 2004, and its consolidated balance sheet at March 31, 2005 and December 31, 2004.~~is as follows:



	Three months ended
	March 31, 2005

	As
	previously			As
	reported			restated

Net cash provided by operating activities		127,066			127,114




Net cash used in financing activities		(109,615	)		(109,663	)

~~As discussed above,~~The restatement had no impact to the ~~quarterly financial statements~~Company’s net cash provided by operating activities or net cash used in financing activities for the three months ended March 31, ~~2004 have been further restated in connection with this restatement. We have~~2006.

The Company has also reflected the effects of this restatement in notes four, five, six, seven, eight and ten ~~eleven, and twelve. The effect of~~to these ~~adjustments to the Company’s consolidated statement of operations for the first quarter of both 2005 and 2004 is detailed below.~~condensed financial statements.

Three months ended
March 31, 2005
As As
Reported Restated
Revenues $ 452,923 $ 454,871
Costs and expenses 355,136 355,097
Gross profits 97,787 99,774
Gains and impairment (losses) on dispositions, net (3,962 ) (5,741 )
Operating income 72,509 74,317
Income from continuing operations before income taxes and cumulative effects of accounting changes 49,333 51,141
Provision for income taxes 17,266 17,899
Cumulative effects of accounting changes (187,538 ) (187,538 )
Net loss $ (156,121 ) $ (154,946 )
Loss per share:
Basic – EPS $ (.50 ) $ (.49 )
Diluted – EPS $ (.49 ) $ (.49 )

Three months ended
March 31, 2004
As As
Reported Restated
Revenues $ 589,422 $ 588,699
Costs and expenses 473,109 473,070
Gross profits 116,313 115,629
Gains and impairment (losses) on dispositions, net 34,782 34,785
Operating income 100,490 99,393
Income from continuing operations before income taxes and cumulative effects of accounting changes 74,256 73,159
Benefit for income taxes (3,375 ) (3,779 )
Cumulative effects of accounting changes (47,074 ) (47,556 )
Net income $ 31,311 $ 30,136
Earnings per share:
Basic – EPS $ .10 $ .10
Diluted – EPS $ .10 $ .10

~~The effect of the restatement on the Company’s previously reported consolidated balance sheet as of March 31, 2005 and December 31, 2004 is as follows:~~

March 31, 2005 December 31, 2004
As As As As
Reported Restated Reported Restated
Selected consolidated balance sheet data:
Receivables, net of allowances $ 102,002 $ 102,515 $ 102,156 $ 102,622
Total current assets 543,317 543,279 533,497 533,963
Preneed funeral receivables and trust investments 1,236,538 1,245,726 1,264,600 1,267,784
Preneed cemetery receivables and trust investments 1,368,451 1,362,276 1,402,750 1,399,778
Deferred charges and other assets 295,789 299,201 618,565 621,561
Total assets 7,783,879 7,791,751 8,199,196 8,205,687
Deferred preneed funeral revenues 492,455 500,943 486,191 498,571
Deferred preneed cemetery revenues 809,581 813,149 801,065 803,144
Deferred income taxes 193,473 191,204 279,474 276,572
Non-controlling interest in funeral and cemetery trusts 2,042,879 2,042,933 2,095,852 2,092,881
Accumulated deficit 980,485 984,190 824,364 829,244
Total stockholders’ equity 1,664,572 1,653,108 1,853,576 1,848,667
Total liabilities and stockholders’ equity 7,783,879 7,791,751 8,199,196 8,205,687

3. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The condensed consolidated financial statements for the three months ended March 31, 2006 and 2005 include the accounts of SCI and ~~2004~~all majority-owned subsidiaries. These statements also include the accounts of the funeral trusts, cemetery merchandise and services trusts and perpetual care trusts in which the Company has a variable interest and ~~all majority-owned subsidiaries and~~is the primary beneficiary. The interim condensed consolidated financial statements are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments, which management considers necessary for a fair presentation of the results for these periods. These condensed consolidated financial statements have been prepared in a manner consistent with the accounting policies described in the Company’s ~~annual report~~amended Annual Report on Form ~~10-K/A (Amendment No. 2),~~10-K, for the year ended December 31, ~~2004,~~2005, unless otherwise disclosed herein, and should be read in conjunction therewith. The accompanying year-end ~~consolidated~~condensed balance sheet data was derived from ~~the~~ audited ~~consolidated~~ financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period.

The Company has reclassified certain prior ~~year~~period amounts to conform to the current period financial presentation with no effect on previously reported results of operations, financial condition or cash flows.

Use of Estimates in the Preparation of Financial Statements

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

The effective tax rate in the three months ended March 31, 2005 was an expense of 35.0% compared to a benefit of 5.2% in the three months ended March 31, 2004. The 2004 rate was favorably impacted by non-cash tax benefits realized from the joint venture of the Company’s French operations consummated in March 2004. For more information regarding the sale of the Company’s French funeral operations, see note twelve to the consolidated financial statements.

4. ~~Accounting Changes~~Share-Based Compensation and ~~New Accounting Pronouncements~~Stockholders’ Equity

~~Deferred Selling Costs~~

Effective January 1, 2005, the Company changed its method of accounting for direct selling costs related to the acquisition of preneed funeral and preneed cemetery contracts. Prior to this change, the Company capitalized such direct selling costs and amortized these

~~deferred selling costs~~
(All shares reported in proportion to the revenue recognized. Under the new method of accounting, the Company expenses these direct selling costs as incurred. The Company believes the new method is preferable because it better reflects the economics of the Company’s business.

As of January 1, 2005, the Company recorded a cumulative effect of $187,538, net of tax of $117,428. This amount represents the cumulative balance of deferred selling costs recorded on the Company’s consolidated balance sheet in~~Deferred charges and other assets~~at the time of the accounting change. If the Company had not changed its method of accounting for direct selling costs as described above, net income for the first quarter of 2005 would have been $2,296 after tax or $.01 per basic and diluted share higher than currently reported.

The three months ended March 31, 2004 pro forma amounts in the table below reflect the new policy to expense selling costs as incurred. The effect of the change for the quarter ended March 31, 2004 would have decreased net income from continuing operations before cumulative effects of accounting changes by approximately $2,848 after tax or $.01 per basic and diluted share.

Three months ended March 31, 2004
Deferred Selling
Historical Costs, net (1) Pro forma
(Restated) (Restated)
note 2 note 2
Gross profits:
Funeral $ 86,559 $ (487 ) $ 86,072
Cemetery 29,070 (3,894 ) 25,176

115,629 (4,381 ) 111,248

Income (loss) from continuing operations before income taxes and cumulative effects of accounting changes $ 73,159 $ (4,381 ) $ 68,778
Net income (loss) $ 30,136 $ (2,848 ) $ 27,288

Amounts per common share:
Net income (loss) – basic $ .10 $ (.01 ) $ .09
Net income (loss) – diluted $ .10 $ (.01 ) $ .09


~~(1)~~		~~Represents net deferred selling costs that would have been expensed under the new method of accounting adopted on January 1, 2005.~~

~~Other Than Temporary Impairments~~

~~In March 2004, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue 03-1, “~~~~The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments~~~~” (EITF 03-1). The guidance is applicable to debt and equity securities that are within the scope of FASB Statement of Financial Accounting Standard (SFAS) No. 115, “~~~~Accounting for Certain Investments in Debt and Equity Securities~~” (SFAS 115). EITF 03-1 specifies that an impairment would be considered other-than-temporary unless (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment and (b) evidence indicating the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. EITF 03-1 was scheduled to be effective for reporting periods ending after June 15, 2004. The measurement and recognition provisions relating to debt and equity securities have been delayed until the FASB issues additional guidance. The Company adopted the disclosure provisions of EITF 03-1 during the period ended June 30, 2004. The adoption of the measurement and recognition provisions are not expected to have a material impact on the consolidated financial statements, results of operations, financial position, or cash flows of the Company.

~~Inventory Costs~~

~~In November 2004, the FASB issued SFAS No. 151,~~~~“Inventory Costs – an amendment of ARB 43, Chapter 4”~~~~(SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4,~~~~“Inventory Pricing,”~~ to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS 151 requires that those items be recognized as current-period charges, rather than as a portion of the inventory cost. In addition, SFAS 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect this statement to have a material impact on its consolidated financial statements, results of operations, financial position, or cash flows.

~~Income Taxes~~

~~In December 2004, the FASB issued Staff Position No. FAS 109-2 “~~~~Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004~~” (FAS 109-2). The American Jobs Creation Act of 2004 (“Jobs Act”), enacted on October 22, 2004, provides for a temporary 85% dividends-received deduction on certain foreign earnings repatriated to a U.S. taxpayer, provided certain criteria are met. FAS 109-2 provides accounting and disclosure guidance for the repatriation provision, and was effective immediately upon issuance. The Company has adopted the provisions of FAS 109-2. The Company is in the process of evaluating whether it will repatriate earnings under the repatriation provisions of the Jobs Act, and if so, the amount that will be repatriated; therefore, as provided for in FAS 109-2, deferred tax liabilities have not been adjusted. The Company estimates the range of possible amounts of unremitted earnings under consideration is between $0 and $2,276. If the maximum amount of $2,276 were to be repatriated, the Company would accrue tax expense of approximately $434.whole numbers)

Share-Based Payment

In December 2004, the ~~FASB~~Financial Accounting Standards Board (FASB) issued ~~SFAS~~Statement of Financial Accounting Standard (SFAS) No. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R is a revision of SFAS No. 123, “Accounting for Stock-Based

Compensation”, and supersedes Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees”. Among other items, SFAS 123R eliminates the use of the intrinsic value method of accounting, and requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the ~~grant date~~grant-date fair value of those awards. The Company adopted SFAS 123R on January 1, 2006 and utilizes the modified-prospective transition method.

Prior to January 1, 2006, the Company accounted for share-based payments using the intrinsic value recognition method prescribed by APB 25. Because all of the Company’s stock options were granted at market value on the date of each grant, no stock-based compensation expense related to stock options was reflected in net income prior to adopting SFAS 123R.

Under the modified-prospective transition method, the Company recognizes compensation expense on a straight-line basis in its condensed consolidated financial statements issued subsequent to the date of adoption for all share-based payments granted, modified or settled after December 31, 2005, as well as for any awards that were granted prior to December 31, 2005 for which requisite service will be provided after December 31, 2005. The compensation expense on awards granted prior to December 31, 2005 is recognized using the fair values determined for the pro forma disclosures on stock-based compensation included in ~~the financial statements.~~prior filings. The ~~effective~~amount of compensation expense recognized on awards that were not fully vested at the date of SFAS 123R isadoption excludes the ~~first annual reporting period beginning after June 15, 2005, which is~~compensation expense cumulatively recognized in the ~~first quarter~~pro forma disclosures on stock-based compensation. Further, the Company assumed no forfeitures on restricted shares granted prior to the adoption of ~~2006~~SFAS 123R due to the nature of the employees to whom the shares were granted, thus the Company recorded no cumulative effect of accounting change upon the adoption of SFAS 123R.

Stock Benefit Plans

The Company maintains benefit plans whereby shares of its common stock may be issued pursuant to the exercise of stock options or restricted stock granted to officers and key employees. The Company’s Amended 1996 Incentive Plan reserves 24,000,000 shares of common stock for outstanding and future awards of stock options, restricted stock and other stock based awards to officers and key employees of the Company. The Company’s 1996 Non-qualified Incentive Plan reserves 8,700,000 shares of common stock for outstanding and future awards of nonqualified stock options to employees who are not officers of the Company.

~~For disclosure purposes,~~The benefit plans allow for options to be granted as either non-qualified or incentive stock options. The options are granted with an exercise price equal to the ~~Company currently utilizes~~market price of the Company’s common stock at the date of grant. The options are generally exercisable at a ~~standard option pricing model (i.e., Black-Scholes) to measure~~rate of 33 1/3% each year unless alternative vesting methods are approved by the ~~fair value~~Company’s Compensation Committee of the Board of Directors. Restricted stock ~~options granted to employees. While SFAS 123R permits entities to continue to use such~~awards generally vest at a ~~model, the standard also permits the use~~rate of ~~a “lattice” model.~~33 1/3% each year. The Company ~~will continue~~issues new shares for option exercises and treasury shares for restricted stock awards. At March 31, 2006 and December 31, 2005, 2,800,550 and 4,856,459 shares, respectively, were reserved for future option and restricted stock grants under these stock benefit plans.

Options of 1,868,163 and 1,959,283, respectively, were outstanding with alternative vesting methods at March 31, 2006 and December 31, 2005. These shares were fully vested prior to ~~utilize~~the implementation of FAS 123R and as such compensation expense for these options is not included in the Statement of Operations for the period ended March 31, 2006.

The Company utilizes the Black-Scholes option ~~pricing~~valuation model ~~to measure~~for estimating the fair value of its stock options.

This model allows the use of a range of assumptions related to volatility, the risk-free interest rate, the expected life, and the dividend yield. The ~~Company expects to adopt SFAS 123R effective January 1, 2006. The Company~~expected volatility utilized in the valuation model is ~~currently evaluating the impact that the adoption will have~~based on implied volatilities from traded options on the Company’s ~~results~~stock and the historical volatility of ~~operations.~~

~~Variable Interest Entities~~

~~In January 2003,~~ the ~~FASB issued FASB Interpretation No. 46,~~~~“Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51.”~~~~This interpretation clarifies~~Company’s stock price. The decrease in expected volatility from the ~~application of ARB No. 51,~~~~“Consolidated Financial Statements,”~~three months ended March 31, 2005 to ~~certain entities in which equity investors do not have~~ the ~~characteristics~~three months ended March 31, 2006 is primarily the result of a ~~controlling financial~~lower implied volatility. Similarly, the dividend yield and the expected holding period are both based on historical experience and management’s estimate of future events. The risk-free interest ~~or do not have sufficient equity~~rate is derived from the U.S. Treasury yield curve based on the expected life of the grant in effect at ~~risk~~the time of grant. The fair values of the Company’s stock options are calculated using the following weighted average assumptions based on the methods described above for the ~~entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB revised FASB Interpretation No. 46 (FIN 46R).~~

~~Under the provisions of FIN 46R, the Company is required to consolidate certain cemeteries~~three months ended March 31, 2006 and trust assets. Merchandise and service trusts and cemetery perpetual care trusts are considered variable interest entities because the trusts meet the conditions of paragraphs 5(a) and 5(b)(1) of FIN 46R. That is, as a group, the equity investors (if any) do not have sufficient equity at risk and do not have the direct or indirect ability through voting or similar rights to make decisions about the trusts’ activities that have a2005:

159

significant effect on the success of the trusts. FIN 46R required the Company to consolidate merchandise and service trusts and cemetery perpetual care trusts for which the Company is the primary beneficiary (i.e., those for which the Company absorbs a majority of the trusts’ expected losses). The Company is the primary beneficiary of a trust whenever a majority of the assets of the trust are attributable to deposits of customers of the Company.


	Three months ended
	March 31,
Assumptions	2006			2005
Dividend yield		1.3	%		1.5	%
Expected volatility		37.9	%		43.3	%
Risk-free interest rate		4.5	%		3.7	%
Expected holding period	5.6 years			5.5 years

~~Consolidation of Trusts:~~The Company implemented FIN 46R as of March 31, 2004, which resulted in the consolidation of the Company’s preneed funeral and cemetery merchandise and service trust assets and the Company’s cemetery perpetual care trusts. No cumulative effect of an accounting change was recognized by the Company asAs a result of the ~~implementation~~adoption of ~~FIN 46R as it relates~~SFAS 123R, income from continuing operations before income taxes was reduced by $1,433, income from continuing operations and net income were both reduced by $931 and basic and diluted earnings per share were both reduced by less than $.01 for the three months ended March 31, 2006.

Results for the first quarter of 2005 have not been restated for SFAS 123R. If, prior to January 1, 2006, the ~~consolidation of the trusts. The implementation of FIN 46R affects certain line items~~Company had elected to recognize compensation expense for its stock option plans, based on the ~~Company’s consolidated balance sheet~~fair value of awards at the grant dates, net loss and ~~statement of operations as described below; however, there is no impact to net income in~~loss per share would have changed for the statement of operations as a result of the implementation. Additionally, the implementation of FIN 46R did not result in any net changes to the Company’s consolidated statement of cash flows; however, it does require certain financing and investing activities to be disclosed.

Although FIN 46R requires consolidation of most of the merchandise and service and perpetual care trusts, it does not change the legal relationships among the trusts, the Company and its customers. In the case of merchandise and service trusts, the customers are the legal beneficiaries. In the case of cemetery perpetual care trusts, the Company does not have a legal right to the perpetual care trust assets. For these reasons, upon consolidation of the trusts, the Company recognizes non-controlling interests in its financial statements to reflect third party interests in these trusts in accordance with FASB Statement No. 150,~~“Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity”~~(SFAS 150). The Company classifies deposits to merchandise and service trusts as non-controlling liability interests and classifies deposits to cemetery perpetual care trusts as non-controlling equity interests.

~~The Company records cash received from customers that is payable to the trusts but not yet required to be deposited in the trusts as restricted cash in~~~~Deferred charges and other assets~~~~in its consolidated balance sheet. At~~three months ended March 31, 2005 ~~and December 31, 2004, these pending deposits totaled $13,430 and $11,218, respectively.~~ to the following pro forma amounts:


	Three months ended
	March 31, 2005
	(Restated)
	note 2
Net loss, as reported	$	(154,895	)
Deduct: Total pro forma stock-based employee compensation expense determined under fair value based method, net of related tax expense		(391	)

Pro forma net loss	$	(155,286	)



Basic loss per share:
Net loss, as reported	$	(.49	)
Deduct: Total pro forma stock-based employee compensation expense determined under fair value based method, net of related tax expense		—

Pro forma basic loss per share	$	(.49	)


Diluted loss per share:
Net loss, as reported	$	(.49	)
Deduct: Total pro forma stock-based employee compensation expense determined under fair value based method, net of related tax expense		—

Pro forma diluted loss per share	$	(.49	)

The ~~Company continues to account~~tax benefit associated with this additional compensation expense would have been $211 for ~~amounts received from customers prior to delivery of merchandise or services that are not required to be deposited in merchandise and service trusts as deferred revenue.~~

~~Beginning~~the three months ended March 31, 2004, the Company began recognizing net realized investment earnings of the merchandise and service trusts and perpetual care trusts, as well as the related trustee investment expenses and taxes, within~~Other income, net. The Company recognizes a corresponding expense within~~~~Other income, net~~representing the net realized earnings of those trusts that are attributable to the non-controlling interest holders. The corresponding credit for this expense is reflected in the Company’s consolidated balance sheet in~~Non-controlling interest in funeral and cemetery trustsfor merchandise and service trusts or~~~~Non-controlling interest in perpetual care trusts~~~~for cemetery perpetual care trusts. The sum of these expenses recorded in~~~~Other income, net~~ ~~offset the net realized earnings of such trusts also recognized within~~~~Other income, net~~~~. Accordingly, the Company’s net income in the consolidated statement of operations is not affected by consolidation of the trusts in accordance with FIN 46R.~~2005.

To the extent the earnings of the trusts are distributed prior to the delivery of merchandise and/or services, a corresponding amount of non-controlling interest is reclassified to deferred revenue until the corresponding revenues are recognized. In the case of merchandise and service trusts, the Company recognizes as revenues amounts previously attributed to non-controlling interests and deferred revenues upon the performance of services and delivery of merchandise, including earnings accumulated in these trusts. In the case of the cemetery perpetual care trusts, distributable earnings are recognized in cemetery revenues to the extent of qualifying cemetery maintenance costs.

Prior to the implementation of ~~FIN 46R and~~SFAS 123R, the ~~consolidation~~Company computed stock-based compensation cost for employees eligible to retire over the three-year standard vesting period of the ~~trusts, funds received from customers and deposited into merchandise and service trusts until maturity~~grants. Upon adoption of ~~the preneed contract were recorded as receivables due from trust assets. Upon implementation of FIN 46R,~~SFAS 123R, the Company ~~replaced receivables due from trust assets~~amortizes new option grants to such retirement-eligible employees immediately upon grant, consistent with the ~~trust assets, at market, to the extent~~retirement vesting acceleration provisions of these grants. If the Company ~~was required to consolidate~~had historically computed stock-based compensation cost for these employees under this accelerated method, $559 or less than $.01 per diluted share of after-tax compensation cost would have been accelerated and cumulatively included in the ~~trusts.~~pro forma expense above through March 31, 2005.

1610

~~An allowance~~The following table shows a summary of information with respect to stock option and restricted share compensation for contract cancellation is provided based on historical experience. An allowance is no longer provided on the funds associated with the preneed contracts that are held in trust, currently recorded as trust assets, but previously recorded as receivables due from trust assets. As such, the amount has decreased since the implementation of FIN 46R.

~~Both the merchandise~~2006 and services trusts and the cemetery perpetual care trusts hold investments in marketable securities that are classified as available-for-sale by the Company under the requirements of Statement of Financial Accounting Standards No. 115,~~“Accounting~~restricted share compensation for ~~Certain Investments in Debt and Equity Securities”~~(SFAS 115). In accordance with SFAS 115, available-for-sale securities of the trusts are recorded at fair value, with unrealized gains and losses excluded from earnings and initially recorded as a component of~~Accumulated other comprehensive income (loss)in the Company’s consolidated balance sheet. Using the guidance in EITF Topic D-41, “~~~~Adjustments in Assets and Liabilities for Holding Gains and Losses as Related to the Implementation of FASB Statement No. 115~~~~” (“Topic D-41”), unrealized gains and losses on available-for-sale securities of the trusts attributable to the non-controlling interest holders are not recorded as~~~~Accumulated other comprehensive income (loss)~~~~, but are recorded as an adjustment to either~~~~Non-controlling interest in funeral and cemetery trusts~~or~~Non-controlling interest in perpetual care trusts. Therefore, unrealized gains and losses attributable to the non-controlling interest holders are reclassified from~~~~Accumulated other comprehensive income (loss)~~~~to either~~~~Non-controlling interest in funeral and cemetery trusts~~or~~Non-controlling interest in perpetual care trusts. The gross effect from applying Topic D-41 on the Company’s~~~~Accumulated other comprehensive income (loss)~~~~is disclosed in note eleven of the consolidated financial statements. However, the Company’s~~~~Accumulated other comprehensive income (loss)~~~~balance on the face of the balance sheet is ultimately not affected by consolidation of the trusts.~~

~~Consolidation of Certain Cemeteries:~~~~Prior to December 31, 2003, the Company operated certain cemeteries in Michigan~~2005, which the Company managed but did not own. During the Company’s evaluation of FIN 46R, the Company evaluated these cemeteries to determine whether such cemeteries were within the scope of FIN 46R. The investment capital of these cemeteries was financed by the Company in exchange for a long-term sales, accounting, and cash management agreement. In accordance with this agreement, the Company receives the majority of the cash flows from these cemeteries. Additionally, the Company absorbs the majority of these cemeteries’ expected losses and receives a majority of the cemeteries’ residual returns. As a result, the Company determined itself to be the primary beneficiary of these cemeteries and determined the long-term sales, accounting, and cash management agreement to be a variable interest as defined by FIN 46R. Given the circumstances above, the Company consolidated such cemeteries at March 31, 2004. The Company recognized an after tax charge of $13,957, representing the cumulative effect of an accounting change, as a result of consolidating these cemeteries. The results of operations and cash flows of these cemeteries are included in the Company’s consolidated statements of operations and cash flows beginning March 31, 2004. Excluding the cumulative effect of accounting change, the effect of consolidating these entities did not have a significant impact on the Company’s reported results of operations.

~~Pension Plans~~

~~Effective January 1, 2004, the Company changed its accounting for gains and losses on its pension plan assets and obligations. The Company now recognizes such gains and losses in its~~condensed consolidated statement of operations for those respective periods:


	For the Three Months
	Ended March 31,
	2006		2005
Total pretax share-based compensation expense included in net income (loss)	$	2,145	$	447
Income tax benefit related to share-based compensation included in net income (loss)	$	778	$	156

Stock Options

The following tables set forth certain stock option information:

(Shares reported in whole numbers)


				Weighted Average
	Options			Exercise Price
Outstanding at December 31, 2005		24,250,429		$	9.21
Granted		1,602,800			8.24
Exercised		(298,653	)		4.31
Forfeited		(11,150	)		6.88
Expired		(557,253	)		21.56


Outstanding at March 31, 2006		24,986,173		$	8.93


Exercisable at March 31, 2006		22,436,321		$	9.07

As of March 31, 2006, the aggregate intrinsic value for stock options outstanding and exercisable was $51,198 and $50,328, respectively.

(Shares reported in whole numbers)


	Options outstanding						Options exercisable
			Weighted-
	Number		Average		Weighted-		Number		Weighted-
Range of	Outstanding at		Remaining		Average		Exercisable at		Average
Exercise Price	March 31, 2006		Contractual Life		Exercise Price		March 31, 2006		Exercise Price
$0.00 — 3.00		2,068,212		2.3	$	2.61		2,068,212	$	2.61
3.01 — 4.00		5,641,334		2.9		3.74		5,641,334		3.74
4.01 — 6.00		4,374,512		3.6		4.96		4,374,512		4.96
6.01 — 9.00		6,414,017		4.6		7.11		3,864,165		6.70
9.01 — 15.00		2,898,003		1.3		13.73		2,898,003		13.73
15.01 — 21.00		2,285,160		1.4		19.18		2,285,160		19.18
21.01 — 38.00		1,304,935		0.5		35.05		1,304,935		35.05


$0.00 — 38.00		24,986,173		2.9	$	8.93		22,436,321	$	9.07

Other information pertaining to option activity during the three months ended March 31 was as such gains and losses are incurred. Prior to January 1, 2004, the Company amortized the difference between actual and expected investment returns and actuarial gains and losses over seven years (except to the extent that settlements with employees required earlier recognition). The Company believes the new method of accounting better reflects the economic nature of the Company’s pension plans and recognizes gains and losses on the pension plan assets and liabilities in the year the gains or losses occur. As a result of this accounting change, the Company recognized a charge for the cumulative effect of an accounting change of $33,599 (net of tax) as of January 1, 2004. This amount represents accumulated unrecognized net losses related to the pension plan assets and liabilities. In addition, for interim periods, the Company records net pension expense or income reflecting estimated returns on plan assets and obligations. The Company will recognize actual gains and losses on plan assets and obligations as actuarial information becomes available upon review of the annual remeasurement.follows:


	For the Three Months
	Ended March 31,
	2006		2005
Weighted average grant-date fair value of stock options granted	$	3.11	$	2.71
Total fair value of stock options vested	$	1,987	$	6,003
Total intrinsic value of stock options exercised	$	1,112	$	3,098

1711

~~5. Debt~~
~~Debt~~ The Company calculated its historical pool of windfall tax benefits by comparing the book expense for individual stock grants and the related tax deduction for options granted after January 1, 1995. Adjustments were made to exclude windfall tax benefits which were not realized due to the Company’s net operating loss position. The Company has completed this calculation and has determined an additional paid in capital pool of $2,140.

For the three months ended March 31, 2006, cash received from the exercise of stock options was $1,219. As of March 31, 2006, the unrecognized compensation expense related to stock options of $6,415 is expected to be recognized over a weighted average period of 2.1 years.

Restricted Shares

Restricted shares awarded under the Amended 1996 Incentive Plan were 355,500 in the first quarter of 2006 and 498,800 in the first quarter of 2005. The weighted average fair market value per share at the date of grant for shares granted during the first quarter of 2006 and 2005 was $8.24 and $6.90, respectively. The fair market value of the stock, as determined on the grant date, is being amortized and charged to income (with similar credits to capital in excess of par value) generally over the average period during which the restrictions lapse. At March 31, 2006, unrecognized compensation expense related to restricted shares totaling $5,811 is expected to be recognized over a weighted average period of 1.8 years. The Company recognized compensation cost of $712 in the first quarter of 2006 and $447 in the first quarter of 2005 related to the restricted shares of this Plan.

Restricted share activity for the three months ended March 31, 2006 was as follows:

March 31, 2005 December 31, 2004
6.0% notes due December 2005 $ 63,801 $ 63,801
7.2% notes due June 2006 150,000 150,000
6.875% notes due October 2007 143,475 143,475
6.5% notes due March 2008 195,000 195,000
7.7% notes due April 2009 351,135 358,266
7.875% debentures due February 2013 55,627 55,627
6.75% notes due April 2016 250,000 250,000
Convertible debentures, maturities through 2013, fixed interest rates from 4.75% to 5.5%, conversion prices from $13.02 to $50.00 per share 30,841 30,853
Mortgage notes and other debt, maturities through 2050 46,232 48,194
Deferred charges (38,036 ) (41,256 )

Total debt 1,248,075 1,253,960
Less current maturities (75,936 ) (75,075 )

Total long-term debt $ 1,172,139 $ 1,178,885


				Weighted Average
	Restricted			Grant-Date
(Shares reported in whole numbers)	Shares			Fair Value
Nonvested restricted shares at December 31, 2005		779,850		$	6.87

Granted		355,500			8.24
Vested		(308,867	)		6.86


Nonvested restricted shares at March 31, 2006		826,483		$	7.46

Share Authorization

The Company is authorized to issue 1,000,000 shares of preferred stock, $1 per share par value. No preferred shares were issued as of March 31, 2006. At March 31, 2006 and December 31, 2005, 500,000,000 common shares of $1 par value were authorized. The Company had 295,454,597 and 294,808,872 common shares issued and outstanding, net of 48,606,563 and 48,962,063 common shares held in treasury at par at March 31, 2006 and December 31, 2005, respectively.

Share Purchase Rights Plan

The Company’s preferred share purchase rights plan declares a dividend of one preferred share purchase right for each share of common stock outstanding. The rights are exercisable in the event certain investors attempt to acquire 20% or more of the common stock of the Company and entitle the rights holders to purchase certain securities of the Company or the acquiring company. The rights, which are redeemable by the Company for $.01 per right, expire in July 2008 unless otherwise extended.

Accumulated Other Comprehensive Income

The components ofAccumulated other comprehensive incomeare as follows:


	Foreign currency						Accumulated other
	translation			Unrealized gains			comprehensive
	adjustment			and losses			income
Balance at December 31, 2005	$	70,499		$	—		$	70,499
Activity in 2006		(330	)		—			(330	)
Increase in net unrealized gains associated with available-for-sale securities of the trusts		—			16,210			16,210
Reclassification of net unrealized gains activity attributable to the non-controlling interest holders		—			(16,210	)		(16,210	)

Balance at March 31, 2006	$	70,169		$	—		$	70,169

The assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. The U.S. dollar amount that arises from such translation, as well as exchange gains and losses on intercompany balances of a long-term investment nature, are included in the cumulative currency translation adjustments inAccumulated other comprehensive income. Income taxes are generally not provided for foreign currency translation.

The components of Comprehensive income (loss) are as follows for the three months ended March 31, 2006 and 2005:


	Three months ended
	March 31,
	2006			2005

		(Restated) note 2			(Restated) note 2
Comprehensive income (loss):
Net income (loss)	$	26,926		$	(154,895	)
Total other comprehensive (loss) income		(330	)		65,301

Comprehensive income (loss)	$	26,596		$	(89,594	)

Cash Dividends

On January 31, 2006, the Company paid a cash dividend of $7,371 to shareholders of record at the close of business on January 16, 2006. In the first quarter of 2006, the Company’s Board of Directors approved a cash dividend of $.025 per common share that was paid on April 28, 2006 based on the Company’s fourth quarter 2005 financial results. At March 31, 2006, this dividend totaling $7,329 was recorded inAccrued LiabilitiesandCapital in Excess of Par Valuein the condensed consolidated balance sheet. Subsequent to March 31, 2006, the company’s Board of Directors approved a cash dividend of $.025 per common share based on the company’s first quarter 2006 financial results.

5. Debt

Debt as of March 31, 2006 and December 31, 2005 was as follows:


	March 31, 2006			December 31, 2005
	(Restated)			(Restated)
	note 2			note 2
7.2% notes due June 2006	$	10,698		$	10,698
6.875% notes due October 2007		13,497			13,497
6.5% notes due March 2008		195,000			195,000
7.7% notes due April 2009		341,635			341,635
7.875% debentures due February 2013		55,627			55,627
6.75% notes due April 2016		250,000			250,000
7.0% notes due June 2017		300,000			300,000
Convertible debentures, maturities through 2013, fixed interest rates from 4.75% to 5.25%, conversion prices from $13.02 to $50.00 per share		22,213			22,213
Obligations under capital leases		110,998			11,425
Mortgage notes and other debt, maturities through 2050		28,406			29,588
Unamortized pricing discounts and other		(20,221	)		(22,482	)

Total debt		1,307,853			1,207,201
Less current maturities		(35,996	)		(20,716	)

Total long-term debt	$	1,271,857		$	1,186,485

Current maturities of debt at March 31, 2006 were comprised primarily of the 7.2% notes due June 2006, convertible debentures and capital leases. The Company’s consolidated debt had a weighted average interest rate of ~~7.02%~~7.21% at March 31, ~~2005~~2006 and 7.11% at December 31, ~~2004.~~2005. Approximately 95% and 99% of the total debt had a fixed interest rate at March 31, ~~2005~~2006 and December 31, ~~2004.~~2005, respectively.

Capital Leases

In the first quarter of 2006, the Company acquired $105,085 of transportation equipment utilizing capital leases, of which $102,322 were classified as operating leases in prior periods. See additional information regarding these leases in note nine to these condensed consolidated financial statements.

Bank Credit Agreements

The Company’s bank credit ~~agreement, which was executed on August 11, 2004 and~~facility matures in August of 2007 and provides a total lending commitment of $200,000, including a sublimit of $175,000 for letters of credit. The Company will commence negotiations on an amendment or a new credit facility during 2006. As of March 31, ~~2005,~~2006, the Company has no cash borrowings under this credit facility, but has used it to support ~~$62,042~~$51,193 of letters of credit. The ~~new bank~~ credit facility provides the Company with flexibility ~~in terms of~~for acquisitions, dividends, and share repurchases. It is secured by the stock of the Company’s domestic subsidiaries and these domestic subsidiaries have guaranteed the Company’s indebtedness associated with this credit facility. The subsidiary guarantee is a guarantee of payment of the outstanding amount of the total lending commitment. It covers the term of the ~~agreement,~~credit facility, including extensions of our letters of credit, and totaled a maximum potential amount of ~~$62,042~~$51,193 and ~~$66,985~~$54,727 at March 31, ~~2005~~2006 and December 31, ~~2004,~~2005, respectively. The credit facility contains certain financial covenants, including a minimum interest coverage ratio, a maximum leverage ratio, maximum capital expenditure limitations, minimum net worth requirements and certain cash distribution restrictions. As of March 31, 2006, the Company was in compliance with all of its debt covenants. Interest rates for the outstanding borrowings ~~will be~~are based on various indices as determined by the Company. The Company also pays a quarterly fee on the unused commitment ~~which~~that ranges from 0.25% to 0.50%.

~~Debt Extinguishments and Reductions~~Early Extinguishment

In the first quarter of 2005, the Company purchased $7,131 aggregate principal amount of its 7.70% notes due ~~2009~~ in the open market. As a result of this transaction, the Company recognized a loss of $1,207 recorded in~~Loss~~loss on early extinguishment of debt, in ~~the~~its condensed consolidated statement of operations.

In March 2004, in connection with the sale of the Company’s funeral operations in France, mortgage notes and other debt was reduced by approximately $24,194 for capital lease obligations related to vehicles used in the French funeral operations.

~~Additional Debt Disclosures~~

At March 31, 2005 and December 31, 2004, the Company had deposited $14,638 and $26,707, respectively, in restricted, interest-bearing accounts that were pledged as collateral for various credit instruments and commercial commitments. They are included in~~Deferred charges and other assetsin the consolidated balance sheet.~~

6. Retirement Plans

The components of net periodic pension plan benefit cost for the three months ended March 31 were as follows:


	Three months ended						Three months ended
	March 31,						March 31,
	2005			2004			2006			2005
Service cost – benefits earned during the period	$	—		$	—
							Restated (note 2)			Restated (note 2)
Interest cost on projected benefit obligation		2,015			2,245		$	1,973		$	2,027
Return on plan assets		(1,202	)		(1,790	)
Actual return on plan assets								(1,038	)		(1,806	)
Actuarial loss								—			305
Amortization of prior service cost		46			45			46			46

	$	859		$	500		$	981		$	572

7. Segment Reporting

The Company’s operations are both product based and geographically ~~based, and the reportable operating segments presented below include the Company’s funeral and cemetery operations.~~based. The Company’s ~~geographic areas~~reportable segments include ~~North America~~its funeral operations and ~~Other Foreign. In 2005, Other Foreign consists~~its cemetery operations and collectively represent 100% of the Company’s operations in Singapore, Germany and South America. In 2004, Other Foreign also included operations in France, which were disposed of in the first quarter of 2004. The Company conducts both funeral and cemetery operations in the North America and Other Foreign geographic areas.revenues.

The Company’s reportable segment information is as follows:


					Reportable						Reportable
	Funeral		Cemetery		segments		Funeral		Cemetery		segments
Revenues from external customers:
Three months ended March 31,
2005 (Restated – note 2)	$	319,451	$	135,420	$	454,871
2004 (Restated – note 2)	$	434,521	$	154,178	$	588,699
2006							$	302,984	$	138,814	$	441,798
2005							$	319,451	$	127,991	$	447,442

Gross profit:
Three months ended March 31,
2005 (Restated – note 2)	$	79,622	$	20,152	$	99,774
2004 (Restated – note 2)	$	86,559	$	29,070	$	115,629
2006 (Restated — note 2)							$	65,396	$	22,211	$	87,607
2005 (Restated — note 2)							$	80,126	$	17,674	$	97,800

The following table reconciles gross profit from reportable segments to the Company’s consolidated income from continuing operations before income taxes and cumulative ~~effects~~effect of accounting ~~changes:~~change:


	Three months ended
	March 31,						Three months ended
	2005			2004			March 31,
	(Restated)			(Restated)			2006			2005
	note 2			note 2				(Restated) note 2			(Restated) note 2
Gross profit from reportable segments	$	99,774		$	115,629		$	87,607		$	97,800
General and administrative expenses		(19,716	)		(51,021	)		(22,007	)		(19,707	)
Gains and impairment (losses) on dispositions, net		(5,741	)		34,785
Gains (losses) on dispositions and impairment charges, net								(4,510	)		(5,741	)

Operating income		74,317			99,393			61,090			72,352
Interest expense		(24,656	)		(32,658	)		(26,728	)		(25,005	)
Loss on early extinguishment of debt		(1,207	)		—
Other income, net		2,687			6,424
Loss on early extinguishment of debt, net								—			(1,207	)
Interest income								5,981			4,056
Other income (expense), net								2,414			(1,208	)

Income from continuing operations before income taxes and cumulative effects of accounting changes	$	51,141		$	73,159
Income from continuing operations before income taxes and cumulative effect of accounting change							$	42,757		$	48,988

The Company’s geographic areas include North America and Other Foreign. North America includes funeral and cemetery operations in the United States and Canada. Other Foreign consists of the Company’s operations in Singapore and Germany. Results from the Company’s funeral and cemetery businesses in Argentina, Uruguay, and Chile, which were sold in 2005, are classified as

1915

discontinued operations for all periods presented. The Company conducts both funeral and cemetery operations in North America and funeral operations in Other Foreign geographic areas.

The Company’s geographic area information is as follows:

North Other
America Foreign Total
Revenues from external customers:
Three months ended March 31,
2005 (Restated – note 2) $ 444,177 $ 10,694 $ 454,871
2004 (Restated – note 2) $ 451,288 $ 137,411 $ 588,699

Gains and impairment (losses) on dispositions, net:
Three months ended March 31,
2005 (Restated – note 2) $ (5,741 ) $ — $ (5,741 )
2004 (Restated – note 2) $ 34,693 $ 92 $ 34,785

Operating income:
Three months ended March 31,
2005 (Restated – note 2) $ 71,253 $ 3,064 $ 74,317
2004 (Restated – note 2) $ 85,461 $ 13,932 $ 99,393

Depreciation and amortization:
Three months ended March 31,
2005 (Restated – note 2) $ 20,915 $ 174 $ 21,089
2004 (Restated – note 2) $ 35,459 $ 868 $ 36,327

Total assets at:
March 31, 2005 (Restated – note 2) $ 7,660,950 $ 130,801 $ 7,791,751
December 31, 2004 (Restated – note 2) $ 8,048,337 $ 157,350 $ 8,205,687


	North
	America			Other Foreign		Total
Revenues from external customers:
Three months ended March 31,
2006	$	438,890		$	2,908	$	441,798
2005	$	444,177		$	3,265	$	447,442

Gains (losses) on dispositions and impairment charges, net:
Three months ended March 31,
2006	$	(4,510	)	$	—	$	(4,510	)
2005	$	(5,741	)	$	—	$	(5,741	)

Operating income:
Three months ended March 31,
2006 (Restated — note 2)	$	60,485		$	605	$	61,090
2005 (Restated — note 2)	$	71,835		$	517	$	72,352

Depreciation and amortization:
Three months ended March 31,
2006 (Restated — note 2)	$	25,077		$	14	$	25,091
2005 (Restated — note 2)	$	20,577		$	68	$	20,645

Included in the North America figures above are the following United States amounts:

Three months ended
March 31,
2005 2004
(Restated) (Restated)
note 2 note 2
Revenues from external customers $ 416,699 $ 422,905
Operating income $ 64,594 $ 76,207
Depreciation and amortization $ 19,729 $ 32,927
Total assets (a) $ 7,292,972 $ 7,671,171


	Three months ended
	March 31,
	2006		2005

Revenues from external customers	$	410,482	$	416,699
Operating income (Restated — note 2)	$	55,995	$	65,176
Depreciation and amortization (Restated — note 2)	$	23,474	$	19,391

8. Supplementary Information

Prior to the fourth quarter of 2005, certain costs, specifically salaries and facility costs, were allocated based upon each of the respective segments’ revenue components within goods and services.


~~(a)~~		~~Prior year amounts are as of December 31, 2004.~~

~~Included~~Beginning in the ~~Other Foreign figures~~fourth quarter of 2005, the Company refined its allocation of the costs described above to more accurately reflect the cost of goods and services for its funeral and cemetery segments. Such costs are now allocated based on an hourly factor, which represents the ~~following France amounts:~~

Three months ended
March 31,
2005 2004
Revenues from external customers $ — $ 127,282
Operating income $ — $ 11,664
average amount of time spent by employees when selling or providing goods and services to a consumer. The Company has made certain disclosure reclassifications to comparative prior periods to conform to the current period presentation. The disclosure reclassifications made to these prior periods to conform to the current period presentation have no effect on the Company’s condensed consolidated financial position, results of operations or statement of cash flows.

2016

~~The changes in the carrying amounts of goodwill for the Company’s two segments are as follows:~~

Funeral Cemetery Total
Balance as of December 31, 2004 $ 1,166,657 $ 2,383 $ 1,169,040
Dispositions (5,836 ) — (5,836 )
Effects of foreign currency and other (871 ) (118 ) (989 )

Balance as of March 31, 2005 $ 1,159,950 $ 2,265 $ 1,162,215

~~8. Supplementary Information~~

The detail of certain income statement accounts is as follows for the three months ended March 31:


	2006		2005
	(Restated) note 2		(Restated) note 2
North America goods and services revenues
Goods
Funeral	$	120,173	$	140,334
Cemetery		89,452		82,768

Total goods		209,625		223,102
Services
Funeral		171,920		169,198
Cemetery		41,215		36,287

Total services		213,135		205,485

North America goods and services revenues		422,760		428,587

International revenues		2,908		3,265
Other revenues		16,130		15,590

Total revenues	$	441,798	$	447,442


North America goods and services costs
Goods
Funeral	$	56,100	$	53,502
Cemetery		37,343		34,605

Total cost of goods		93,443		88,107
Services
Funeral		88,856		92,491
Cemetery		23,477		23,877

Total cost of services		112,333		116,368

North America goods and services costs		205,776		204,475

International costs and expenses		2,303		2,748
Overhead and other expenses		146,112		142,419

Total costs and expenses	$	354,191	$	349,642

9. Commitments and Contingencies

Leases

The Company’s leases principally relate to funeral home facilities and transportation equipment. Rental expense for operating leases was $7,375 and $14,043 for the quarters ended March 31, 2006 and 2005, respectively. As of March 31, 2006, future minimum lease payments for non-cancelable operating and capital leases exceeding one year are as follows:

2005 2004
(Restated) (Restated)
note 2 note 2
North America revenues, net
Goods
Funeral $ 140,401 $ 132,370
Cemetery 82,722 97,607

Total goods 223,123 229,977

Services
Funeral 169,132 163,915
Cemetery 36,337 38,004

Total Services 205,469 201,919

North America revenues, net 428,592 431,896

International revenues 10,694 137,411

Other revenues 15,585 19,392

Total revenues, net $ 454,871 $ 588,699

North America costs
Goods
Funeral $ 76,803 $ 74,662
Cemetery 34,581 43,316

Total cost of goods 111,384 117,978

Services
Funeral 69,339 62,356
Cemetery 23,904 25,021

Total cost of services 93,243 87,377

North America costs 204,627 205,355

International cost of goods and services 7,630 123,571

Overhead and other expenses 142,840 144,144

Total costs $ 355,097 $ 473,070


	Operating		Capital
	(Restated) note 2		(Restated) note 2
Remainder of 2006	$	6,456	$	19,695
2007		7,581		23,004
2008		7,116		18,878
2009		6,791		15,179
2010		5,617		37,745
2011 and thereafter		54,995		30,525

Subtotal		88,556		145,026
Less: Subleases		(1,644)		—

Total	$	86,912	$	145,026

Less: Interest on capital leases				(34,028	)

Total principal payable on capital leases			$	110,998

To eliminate the variable interest rate risk in the Company’s operating margins and improve the transparency of our financial statements, we amended certain of our transportation lease agreements in the first quarter of 2006. Based on the amended terms, these leases have been classified as capital leases as of March 31, 2006 and are presented as such in the table above. For additional information, see note five to these condensed consolidated financial statements.

2117

~~9. Commitments~~Representations and ~~Contingencies~~Warranties

As of March 31, 2006, the Company has contingent obligations of $33,177 resulting from the Company’s international asset sales and joint venture transactions. In some cases, the Company has agreed to guarantee certain representations and warranties made in such disposition transactions with letters of credit or interest-bearing cash investments. The Company has interest-bearing cash investments of $5,908 included inDeferred charges and other assetscollateralizing certain of these contingent obligations. The Company believes it is remote that it will ultimately be required to fund to third parties claims against these representations and warranties above the carrying value of the liability.

In March 2004, the Company disposed of its funeral operations in France to a newly formed, third party company. As a result of this sale, the Company recognized $35,768 of contractual obligations related to representations, warranties, and other indemnifications in accordance with the provisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” During the first quarter of 2006, the Company paid $481 to settle certain tax and litigation matters. The remaining obligation of $23,657 at March 31, 2006 represents the following:


	Original				Maximum potential
	contractual				amount of future			Carrying value as
	obligation			Time limit	payments			of March 31, 2006
Tax reserve liability	$	18,610		December 31, 2007	2006€30 million			$	10,000

Litigation provision		7,765		Until entire resolution of (i) the relevant claims or (ii) settlement of the claim by the purchaser at the request of the vendor		(1	)		4,264

Employee litigation provision		6,512		December 31, 2006 (for all claims other than those relating to tax and social security matters) one month after expiration of the statutory period of limitations for tax and social security matters.		(2	)		6,512

VAT taxes		3,882		One month after the expiration of statutory period of limitations		(1	)		3,882

Other		3,381		Until entire resolution of (i) the relevant claims or (ii) settlement of the claim by the purchaser at the request of the vendor		(2	)		3,381


Total	$	40,150						$	28,039


Less: Deductible of majority equity owner		(4,382	)						(4,382	)


	$	35,768						$	23,657


(1)		The potential maximum exposure for these two items combined is€20 million or $24,152 at March 31, 2006.

(2)		The potential maximum exposure for these two items combined is€40 million or $48,304 at March 31, 2006.

Litigation

The Company is a party to various litigation matters, investigations and proceedings. For each of its outstanding legal matters, the Company evaluates the merits of the case, its exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. IfThe Company intends to defend itself in the lawsuits described herein, however, if the Company determines that an unfavorable outcome is probable and can be reasonably estimated, it establishes the necessary accruals. Certain insurance policies held by the Company may reduce cash outflows with respect to an adverse outcome of certain of these litigation matters. The Company accrues such insurance recoveries when they become probable of being paid and can be reasonably estimated. ~~The following discussion describes certain litigation and proceedings as of May 13, 2005.~~

Conley Investment Counsel v. Service Corporation International, et al;Civil Action 04-MD-1609; In the United States District Court for the Southern District of Texas, Houston Division (the 2003 Securities Lawsuit). The 2003 Securities Lawsuit resulted from the transfer and consolidation by the Judicial Panel on Multidistrict Litigation of three lawsuits—Edgar Neufeld v. Service Corporation International, ~~et.al,;~~et al;Cause No. CV-S-03-1561-HDM-PAL; In the United States District Court for the District of Nevada; andRujira Srisythemp v. Service Corporation International, et. Alal.; Cause No. CV-S-03-1392-LDG-LRL; In the United States District Court for the District of Nevada; andJoshua Ackerman v. Service Corporation International, et. ~~Al.~~al.;Cause No. 04-CV-20114; In the United States District Court for the Southern District of Florida. The 2003 Securities Lawsuit names as defendants the Company and several of the Company’s current and former executive officers or directors. The 2003 Securities Lawsuit is a purported class action alleging that the defendants failed to disclose the unlawful treatment of human remains and gravesites at two cemeteries in Fort Lauderdale and West Palm Beach, Florida. Since the action is in its preliminary stages, no discovery has occurred, and the Company cannot quantify its ultimate liability, if any, for the payment of damages. ~~The Company intends to aggressively defend itself in the 2003 Securities Lawsuit.~~

David Hijar v. SCI Texas Funeral Services, Inc., SCI Funeral Services, Inc., and Service Corporation ~~International.~~International;In the County Court of El Paso, County, Texas, County Court at Law Number Three; Cause Number 2002-740, with an interlocutory appeal pending in the El Paso Court of Appeals, No. 08-05-00182-CV, ~~(Hijar~~and a mandamus proceeding which has been denied by the El Paso Court of Appeals, No. 08-05-00335-CV (collectively, the Hijar Lawsuit). The Hijar Lawsuit isinvolves a state-wide class action brought on behalf of all persons, entities and organizations who purchased funeral services from the Company or its subsidiaries in Texas at any time since March 18, 1998. Plaintiffs allege that federal and Texas funeral related regulations and/or statutes (Rules) required the Company to disclose its markups on all items obtained from third parties in connection with funeral service contracts and that the failure to make certain disclosures of markups resulted in breach of contract and other legal claims. The ~~Hijar Lawsuit seeks~~Plaintiffs seek to recover an unspecified amount of monetary damages. The plaintiffs also seek attorneys’ fees, costs of court, pre- and post-judgment interest, and unspecified “injunctive and declaratory relief.” The Company denies that the plaintiffs have standing to sue for violations of the Texas Occupations Code or the Rules; denies that plaintiffs have standing to sue for violations under the relevant regulations and statutes; denies that any breaches of contractual terms ~~occurred, and otherwise~~occurred; and on other grounds denies liability on all of the plaintiffs’ claims. Finally, the Company denies that the Hijar Lawsuit satisfies the requirements for class certification.

~~Each side in~~In May 2004, the trial court heard summary judgment cross-motions filed by the Company and Plaintiff Hijar (at that time, the only plaintiff). The trial court granted Hijar’s Motion for partial summary judgment and denied the Company’s motion. In its partial summary judgment order, the trial court made certain findings to govern the case, consistent with its summary judgement ruling. The Company’s request for rehearing was denied.

During the course of the Hijar Lawsuit, ~~filed motions to summarily establish that its interpretation~~the parties have disputed the proper scope and substance of ~~the Rules was correct,~~discovery. Following briefing by both parties and evidentiary hearings, the ~~judge has ruled in favor of the plaintiffs. This ruling allows the plaintiffs to proceed with the case. The~~ trial court entered three orders against the Company that are the subject of appellate review: (a) a January 2005 discovery sanctions order; (b) an April 2005 discovery sanctions order; and (c) an April 2005 certification order, certifying ~~the~~a class and two ~~subclasses on April 15, 2005.~~subclasses. On April 29, 2005, the trial court entered an order imposing sanctions against the Company and (i) finding that the Company breached its contracts by failing to disclose that funeral goods and services were purchased from third parties and resold to customers at higher prices, and by failing to disclose the amount of price mark-ups, and (ii) approving a damage calculation methodology proposed by the plaintiffs under which the damages would equal the difference between the costs to the Company of items of funeral goods and services purchased from third parties and the price at which they were resold to persons arranging funerals, minus any legally proper off-sets. On April 29, 2005, pursuant to section 51.014(a)(3) of the Texas Civil Practice and Remedies Code, the Company filed ~~a notice of~~an appeal regarding the ~~trial court’s~~certification order ~~certifying~~and, concurrently with its initial brief in that appeal, filed a ~~class, and it appears from section 51.014(b) that this interlocutory~~separate mandamus proceeding regarding the sanctions orders. In the certification appeal, ~~“also stays all other proceedings in the trial court pending resolution of that appeal.” In response to requests from the District Clerk~~briefing has concluded, and the court ~~reporters responsible for preparing~~of appeals heard oral arguments on April 4, 2006. In the ~~appellate record,~~mandamus proceeding, the ~~El Paso~~court of appeals denied the mandamus petition in January 2006, and denied rehearing on March 15, 2006. The Company is considering further steps, including the option of pursuing mandamus relief from the Supreme Court of Texas.

2219

Appeals has extended the deadline for filing the Clerk’s Record to May 29, 2005 and the deadline for filing the Reporter’s Records to June 23, 2005. The briefing schedule does not begin until the last of these records is filed.

The ultimate outcome of the Hijar Lawsuit cannot be determined at this time. An adverse decision in the Hijar Lawsuit could have a material adverse effect on the Company, its financial condition, results of operation and cash flows. However, the Company intends to aggressively defend this lawsuit and pursue the pending interlocutory appeal.

Mary Louise Baudino, et al v. Service Corporation International, et alal;; the plaintiffs’ counsel in the Hijar Lawsuit initiated an arbitration claim raising similar issues in California and filed in November 2004 a case styledMary Louise Baudino, et al v. Service Corporation International, et alal;; in Los Angeles County Superior Court; Case No. BC324007 (Baudino Lawsuit). The Baudino Lawsuit makes claims similar to those made in the Hijar lawsuit. However, the Baudino Lawsuit seeks a nation-wide class of plaintiffs. The Baudino Lawsuit is in its early stages and no discovery ~~has been conducted. The ultimate outcome of the Baudino Lawsuit cannot be determined at this time. However, the Company intends to aggressively defend this action.~~is in its infancy.

The Company is a defendant in three related class action antitrust cases filed in 2005. The first case is Cause No 4:05-CV-03394;Funeral Consumers Alliance, Inc. ~~et al~~ v. Service Corporation International, et ~~al;~~al; In the United States District Court for the ~~Northern~~Southern District of ~~California;~~Texas — Houston (Funeral Consumers Case). This is a purported class action on behalf of casket consumers throughout the United States alleging that the Company and several other companies involved in the funeral industry violated federal antitrust laws and state consumer laws by engaging in various anti-competitive conduct associated with the sale of caskets. A related class action lawsuit (Leoncio Solis v. Service Corporation International; In the United States District Court for the Southern District of Texas — Houston Division) was consolidated into the Funeral Consumers Case in the fourth quarter of 2005.

The Company is also currently a defendant inRalph Lee Fancher v. Service Corporation International, et al; In the United States District Court for the Southern District of Texas — Houston Division, and Cause No. ~~C0501804 (2005 Consumer Lawsuit).~~4:05-CV-00246. This lawsuit, which was previously consolidated with the Funeral Consumers Case, makes the same allegations as the Funeral Consumers Case and is also brought against several other companies involved in the funeral industry. The ~~2005 Consumer Lawsuit,~~case is a purported class action on behalf of casket consumers throughout the United States and alleges that the Company violated the Tennessee Trade Practices Act. On May 4, 2006, plaintiffs in the Fancher case filed a Notice of Voluntary Dismissal requesting that the case be dismissed without prejudice.

The Company is also a defendant in ~~May 2005,~~Cause No. 4:05-CV-03399;Pioneer Valley Casket, et al v. Service Corporation International, et al. In the United States District Court for the Southern District of Texas — Houston Division. This lawsuit makes the same allegations as the Funeral Consumers Case and is also brought against several other companies involved in the funeral industry. Unlike the Funeral Consumers Case, this case is a purported class action on behalf of all ~~persons and entities who have purchased caskets~~independent casket distributors that are in the ~~United States. The suit names as defendants the Company and four other public companies involved~~business or were in the business any time between July 18, 2001 to the present.

The funeral orand casket ~~industry. The plaintiffs allege that defendants violated federal and state~~ antitrust ~~laws by engaging in anticompetitive practices with respect to sales of caskets and overcharged for caskets. The 2005 Consumer Lawsuit seeks~~lawsuits seek injunctions, an unspecified ~~amount~~amounts of monetary damages, and treble damages. In the Funeral Consumers Case, plaintiffs are seeking the Court’s permission to add a claim to enjoin the Company and the Alderwoods Group, Inc. from closing the proposed merger discussed on pages 22 and 23 herein. Since the ~~2005 Consumer Lawsuit~~litigation is in its preliminary stages, ~~no discovery has occurred and~~ the Company cannot quantify its ultimate liability, if any, for the payment of damages.

In addition to the funeral and casket antitrust lawsuits, the Company has received Civil Investigative Demands, dated in August 2005 and February 2006, from the Attorney General of Maryland on behalf of itself and other state attorneys general, who have commenced an investigation of alleged anti-competitive practices in the funeral industry. The Company has also received similar Civil Investigative Demands from the Attorneys General of Florida and Connecticut.

The ultimate outcome of the matters described above under the captionLitigationcannot be determined at this time. The Company intends to aggressively defend ~~itself~~all of the above lawsuits; however, an adverse decision in ~~this action.~~one or more of such matters could have a material adverse effect on the Company, its financial condition, results of operation and cash flows.

10. Earnings Per Share

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

2320

A reconciliation of the numerators and denominators of the basic and diluted ~~earnings per share~~EPS computations is presented below:

Three months ended
March 31,
2005 2004
(Restated) (Restated)
note 2 note 2
Income from continuing operations before cumulative effects of accounting changes (numerator):
Income from continuing operations before cumulative effects of accounting changes – basic $ 33,242 $ 76,938
After tax interest on convertible debt 12 3,562

Income from continuing operations before cumulative effects of accounting changes – diluted $ 33,254 $ 80,500

Net (loss) income (numerator):
Net (loss) income – basic $ (154,946 ) $ 30,136
Interest on convertible debt 12 3,562

Net (loss) income – diluted $ (154,934 ) $ 33,698

Shares (denominator):
Shares – basic 313,490 303,018
Stock options 4,086 4,211
Restricted stock 54 6
Convertible debt 121 45,853

Shares – diluted 317,751 353,088

Income from continuing operations per share before cumulative effects of accounting changes:
Basic $ .11 $ .25
Diluted $ .10 $ .23

Cumulative effects of accounting changes per share, net of tax:
Basic $ (.60 ) $ (.15 )
Diluted $ (.59 ) $ (.13 )

Net (loss) income per share:
Basic $ (.49 ) $ .10
Diluted $ (.49 ) $ .10


	Three months ended
	March 31,
	2006		2005
	(Restated) note 2		(Restated) note 2
Income from continuing operations before cumulative effect of accounting change (numerator):
Income from continuing operations before cumulative effect of accounting change — basic	$	26,981	$	31,468
After tax interest on convertible debt		—		12

Income from continuing operations before cumulative effect of accounting change — diluted	$	26,981	$	31,480

Net income (loss) (numerator):
Net income (loss) — basic	$	26,926	$	(154,895	)
After tax interest on convertible debt		—		12

Net income (loss) — diluted	$	26,926	$	(154,883	)

Weighted average shares (denominator):
Weighted average shares — basic		294,308		313,490
Stock options		4,251		4,086
Restricted stock		119		54
Convertible debt		—		121

Weighted average shares — diluted		298,678		317,751

Income from continuing operations before cumulative effect of accounting change per share:
Basic	$	.09	$	.10
Diluted	$	.09	$	.10

Cumulative effect of accounting change per share, net of tax:
Basic	$	—	$	(.59	)
Diluted	$	—	$	(.59	)

Net income (loss) per share:
Basic	$	.09	$	(.49	)
Diluted	$	.09	$	(.49	)

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


	Three months ended				Three months ended
	March 31,				March 31,
	2005		2004		2006		2005
Antidilutive options		8,912		10,709		7,479		8,912
Antidilutive convertible debt		859		581
Antidilutive convertible debentures						659		859

Total common stock equivalents excluded from computation		9,771		11,290		8,138		9,771

11. ~~Stockholders’ Equity~~

~~Stock Options~~

The Company accounts for employee stock-based compensation expense under the intrinsic value method. Under this method, no compensation expense is recognized on stock options if the grant price equals the market value on the date of grant.

If the Company had elected to recognize compensation expense for its option plans based on the fair value method, net (loss) income and per share amounts would have changed to the pro forma amounts indicated below.

Three months ended
March 31,
2005 2004
(Restated) (Restated)
note 2 note 2
Net (loss) income $ (154,946 ) $ 30,136
Deduct: Total additional stock-based employee compensation expense determined under fair value based method for all awards, net of related tax expense (391 ) (779 )

Pro forma net (loss) income $ (155,337 ) $ 29,357

Basic (loss) earnings per share:
Net (loss) income $ (.49 ) $ .10
Deduct: Total additional stock-based employee compensation expense determined under fair value based method for all awards, net of related tax expense — —

Pro forma basic (loss) earnings per share $ (.49 ) $ .10

Diluted (loss) earnings per share:
Net (loss) income $ (.49 ) $ .10
Deduct: Total additional stock-based employee compensation expense determined under fair value based method for all awards, net of related tax expense — —

Pro forma diluted (loss) earnings per share $ (.49 ) $ .10

The fair value of the Company’s stock options used to compute the pro forma net (loss) income and per share disclosures is determined by calculating the estimated fair value at grant date using the Black-Scholes option-pricing model.

~~Accumulated Other Comprehensive (Loss) Income~~

~~The components of~~~~Accumulated other comprehensive (loss) income~~~~are as follows:~~

Foreign Minimum Accumulated
currency pension Unrealized other
translation liability gains comprehensive
adjustment adjustment and losses (loss) income
Balance at December 31, 2004 $ (38,349 ) $ — $ — $ (38,349 )
Activity in 2005 (6,469 ) — (6,469 )
Reduction in net unrealized gains associated with available-for-sale securities of the trusts — — (43,577 ) (43,577 )
Reclassification of net unrealized gains activity attributable to the non-controlling interest holders — — 43,577 43,577
Reclassification for translation adjustment realized in net loss 71,770 — — 71,770

Balance at March 31, 2005 $ 26,952 $ — $ — $ 26,952

Balance at December 31, 2003 $ (78,113 ) $ (33,599 ) $ — $ (111,712 )
Activity in 2004 13,953 33,599 — 47,552

Balance at March 31, 2004 $ (64,160 ) $ — $ — $ (64,160 )

~~The reclassification adjustment of $71,770 during the three months ended March 31, 2005 relates to the sale of the Company’s Argentina and Uruguay operations.~~

~~The components of Comprehensive (loss) income are as follows:~~

Three months ended
March 31,
2005 2004
(Restated) (Restated)
note 2 note 2
Comprehensive (loss) income:
Net (loss) income $ (154,946 ) $ 30,136
Total other comprehensive income 65,301 47,552

Comprehensive (loss) income $ (89,645 ) $ 77,688

~~Share Repurchase Program~~

On February 10, 2005, the Company announced an increase in the share repurchase program authorizing the investment of up to an additional $100,000 to repurchase its common stock for an aggregate authorized amount of $300,000. The Company, subject to market conditions and normal trading restrictions, makes purchases in the open market or through privately negotiated transactions. During the first quarter of 2005, the Company repurchased 14,651 shares of common stock at an aggregate cost of $103,570.

~~Cash Dividend~~

In the first quarter of 2005, the Company’s Board of directors approved a cash dividend of $.025 per common share payable in the second quarter of 2005. At March 31, 2005, this dividend totaling $7,734 was recorded in~~Accrued Liabilitiesand~~~~Capital in Excess of Par Value~~~~in the condensed consolidated balance sheet.~~

~~12.~~ Gains ~~and Impairment~~ (Losses) on Dispositions and Impairment Charges, Net

~~Gains and Impairment (Losses) on Dispositions for the Three Months Ended March 31, 2005 and 2004~~

As dispositions occur in the normal course of business, gains or losses on the sale of such businesses are recognized in the income statement line itemGains ~~and impairment~~ (losses) on dispositions and impairment charges, net. Additionally, as dispositions occur ~~related~~pursuant to the Company’s ongoing asset sale programs, adjustments are made through this income statement line item to reflect the difference between actual proceeds received from the sale compared to the original impairment estimates.

Gains ~~and impairment~~ (losses) on dispositions and impairment charges, netfor the three months ended March 31, consists of the following:


	Three months ended
	March 31,
	2005			2004			Three months ended					��
	(Restated)			(Restated)			March 31,
	note 2			note 2			2006			2005
Gains on dispositions	$	889		$	41,532		$	1,432		$	889
Impairment losses for assets held for sale		(7,118	)		(5,940	)		(5,942	)		(7,118	)
Changes to previously estimated impairment losses		488			(807	)		—			488

	$	(5,741	)	$	34,785		$	(4,510	)	$	(5,741	)

12. Discontinued Operations

Original
Calculation Adjustment
Q1 2004 in Q2 2004 Total
Pretax gain (loss) $ 12,639 $ (6,219 ) $ 6,420
Tax benefit (24,929 ) (2,275 ) (27,204 )

After tax gain (loss) $ 37,568 $ (3,944 ) $ 33,624

indemnifications and related primarily to foreign taxes and legal expenses. The Company applied $772 to the indemnifications during the first quarter of 2005. Also, goodwill in the amount of $23,467 was removed from the Company’s consolidated balance sheet as a result of this transaction.

NEWCO completed a refinancing in May 2005 and is expected to complete an additional refinancing during the third quarter of 2005 in order to reduce its cost of debt. Expected to be included in this refinancing is the note payable to the Company in the amount of EUR 10,000 plus interest and the redemption of the Company’s investment in preferred equity certificates and convertible preferred equity certificates totaling EUR 20,955 plus interest. The Company has recorded interest income of $2,379 related to interest on these preferred equity certificates and convertible preferred equity certificates as of March 31, 2005. The Company’s investment in common stock and 25% voting interest is expected to remain unchanged as a result of this transaction.

~~Proceeds from Investment in United Kingdom Company~~

~~The Company recognized income of $27,179, recorded in~~~~Gains and impairment (losses) on disposition, net~~, in the consolidated statement of operations as of March 31, 2004, to adjust the carrying amount of its note receivable from its former United Kingdom company to its realizable value. In addition, the Company recognized interest income on the note receivable, in the amount of $4,478 recorded in~~Other income, netin the consolidated statement of operations as of March 31, 2004. In the second quarter of 2004, the Company recorded a pretax gain of $13,984 in~~~~Gains and impairment (losses) on dispositions, net~~~~in the consolidated statement of operations, as a result of the sale and recognized a non-cash tax benefit of $8,000.~~

During the second quarter of 2004, the Company received proceeds of $53,839 from the sale of its minority interest equity investment in the United Kingdom and the prepayment of its note receivable, with accrued interest, following a successful public offering transaction of its United Kingdom company.

~~Sale of Argentina and Uruguay Operations~~

~~During the second quarter of 2004, the Company recorded an impairment~~disposed of its funeral and cemetery operations in Argentina ~~in the amount of $15,189 recorded in~~~~Loss from discontinued operations~~~~in the consolidated statement of operations. As a result of the sale of the Argentina~~ and Uruguay ~~businesses in 2005, the Company recorded a gain of $2,041 in~~~~Income from discontinued operations~~in the consolidated statement of operations in December 2004 associated with the revised estimated fair value. The new carrying amount reflected the fair value based on current market conditions less costs to sell. Additionally, the Company recognized a non-cash tax benefit of $49,236 in discontinued operations during the second quarter of 2004, which represents the reduction of a previously recorded valuation allowance. The Company also recognized an additional tax benefit of $2,629 in discontinued operations during the fourth quarter of 2004, which represents the revised estimated fair value and ~~differences between book and tax basis.~~

~~13. Discontinued Operations~~

~~The Company committed to a plan during the second quarter of 2004 to divest~~ its ~~existing funeral and~~ cemetery operations in ~~Argentina and Uruguay.~~Chile. Accordingly, the operations in these ~~operations~~countries are classified as discontinued operations for all periods presented.

The ~~provision for~~Company’s current year discontinued operations are attributable to a remaining income ~~taxes~~ tax receivable of approximately $15,859 denominated in Chilean pesos. This receivable is fully hedged; therefore, the Company has no foreign exchange rate risk associated with it. The fair market value hedge, which is effective, is recorded at market value at March 31, 2006 and December 31, 2005. Currency fluctuations associated with this hedge resulted in a loss of $55, net of a tax benefit of $35, which is included inIncome from discontinued operationsin the ~~amount~~Company’s condensed consolidated statement of ~~$594 in~~operations for the first quarter of 2005 results from a state net operating loss valuation allowance and a tax accrual release. During the first quarter of 2005, the Company disposed of its operations in Argentina and Uruguay.three months ended March 31, 2006. This hedge will expire June 30, 2006.

The results of the Company’s discontinued operations for the three months ended March 31, ~~2005~~2006 and ~~2004~~2005 were as follows:


	Three months ended						Three months ended
	March 31,						March 31,
	2005			2004			2006			2005
Revenues	$	1,749		$	3,500		$	—		$	9,177
Other costs and expenses		(1,805	)		(2,605	)
Costs and other expenses								(90	)		(6,847	)

(Loss) income from discontinued operations before income taxes		(56	)		895			(90	)		2,330
Provision for income taxes		594			141
Benefit (provision) for income taxes								35			(1,155	)

(Loss) income from discontinued operations	$	(650	)	$	754		$	(55	)	$	1,175

13. Subsequent Event

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

~~Introduction~~General

~~Our Competitive Strengths~~

~~National branding strategy.~~~~In 2000, we launched the first national branding strategy in the funeral service industry in North America under the name Dignity Memorial~~^®. While this branding process is intended to emphasize our seamless national network of funeral service locations and cemeteries, the original names associated with acquired locations generally remain the same. The Dignity Memorial^® ~~brand name is a co-brand to the existing name of the business. Signage, advertising and promotional efforts emphasize both names. We believe that a national brand gives us a competitive advantage.~~

~~Favorable demographics over the long term.~~The population is aging at an unprecedented rate. According to the U.S. Census Bureau, the number of persons 65 years or older totaled 36 million in 2003. They represented 12.3% of the population, or about one in every eight Americans. The number of Americans aged 65 and older is expected to climb to approximately 16% of the total population by 2020, and to approximately 20% by 2030. Approximately 75% of all deaths in the United States are at ages 65 and older. We believe these demographic trends will provide a growing demand in the future for our services on both an atneed and preneed basis.

~~Stable revenues and cash flows.~~Our core business can be described as stable, with relatively consistent revenue and cash flows on an annual basis. We believe our ability to consistently generate strong cash flows sets us apart from others in the industry. This stability is enhanced by a large backlog of future revenues associated with preneed funeral and cemetery sales. In North America, our backlog of preneed funeral and cemetery sales consists of more than $5 billion of revenues that will be recognized in future periods. These unfulfilled preneed funeral and cemetery contracts are primarily supported by investments in trust funds which are included in our consolidated balance sheet or third party insurance policies, which are not included in our consolidated balance sheet.

~~Financial flexibility.~~We believe we have significant opportunities to grow shareholder value due to our strong cash flows and liquidity, and modest debt maturities in the near term. For a further discussion about our financial flexibility, please see Financial Condition, Liquidity and Capital Resources in Item 2 of this amended Form 10-Q.

~~Business Challenges~~

~~No meaningful near-term increase in the numbers of deaths.~~The numbers of deaths in the United States are not expected to increase meaningfully in the near term. Modern advances in medicine and healthier lifestyles are contributing to record levels of life expectancy in the United States. In 2003, life expectancy in the United States reached 77.6 years according to the Centers for Disease Control and Prevention. The Baby Boom generation is expected to have an impact on the numbers of deaths in the future; however, the first Baby Boomers do not reach age 65 until the year 2011.

~~Increasing trend toward cremation.~~In North America, social trends (such as a mobile less rooted society), religious preferences, environmental issues and cultural preferences are driving an increasing preference for cremation. SCI is the largest provider of cremation services in North America where approximately 40% of the total funeral services we perform are cremation services. The mix of cremation in our business has been increasing approximately 100 to 150 basis points each year and we expect this trend to continue in the near term. Cremation services historically have generated less revenue and gross profit dollars than traditional funeral services that involve burials. Additionally, the cremation consumer may choose not to purchase cemetery property or merchandise. Industry research has shown that most consumers choose cremation for reasons other than cost, which we believe provides us significant opportunities to better serve the cremation consumer. We believe we are well positioned to respond to this trend and have experienced initial success through the use of contemporary marketing strategies and unique product and service offerings that specifically appeal to cremation consumers. See a further discussion regarding initiatives to address cremation as part of our long-term revenue growth opportunities described below.

3022

~~The Path to Growth~~Competitive Strengths

~~We have taken significant actions in~~In recent years, ~~to improve~~we have improved both our operating margins and operating cash flows by introducing more efficient systems and processes, effectively streamlining our infrastructure, and ~~reduce overhead costs~~strengthening our balance sheet. While continuing to pursue additional efficiencies, we now intend to improve shareholder value by (1) seeking enhancement opportunities through disciplined acquisition activities and construction of new properties and (2) increasing volume and profitability at existing businesses.

In 2006, our acquisition strategy has focused on transactions that would most effectively enhance our position as ~~further described below. In doing so,~~North America’s premier funeral and cemetery services provider. Consistent with this objective to expand scale and scope, on April 3, 2006, we ~~believe we have now established~~announced our execution of a ~~solid platform for future growth. We believe strategies centered on our national brand, Dignity Memorial~~^®definitive agreement to acquire all of the outstanding shares of the Alderwoods Group, Inc. (Alderwoods), the second largest operator of funeral homes and ~~other revenue growth initiatives, along with a continued focus on cost management,~~cemeteries in North America. This transaction will ~~provide the framework for sustainable growth over the longer term.~~

~~Improving the Infrastructure~~

~~Historically, our infrastructure did not~~ allow us the ability to ~~fully realize the inherent efficiencies~~serve a number of ~~our business organization. As a result, we were unable~~new, complementary areas, while enabling us to capitalize on ~~all of the benefits of standardization, technology,~~significant synergies and process improvement. Beginning in late 2002 and continuing through 2003, we moved to reduce fixed costs by reformulating our infrastructure. We redesigned our sales organization, improved business and financial processes, and outsourced certain of our accounting functions. In 2003 and continuing through 2004, we implemented a new information system in our field locations. In November 2003, we eliminated the dual management structures of sales and operations and replaced them with a single-line business management structure while also improving our corporate support system by establishing market support centers.

~~Building the Brand~~

~~SCI has implemented the first national brand in the funeral service industry. This brand is called Dignity Memorial~~^®. We believe that a national brand name will provide us access to new customers over the long term given the increasingly mobile nature of families in North America. Internally, we are focused on ensuring that we have consistency in service standards and processes across our network of businesses.

~~Externally, we continue to enhance signage and local advertising efforts using the Dignity Memorial~~^® name and logo. Through our national brand we are the sponsor of several nationally recognized community programs. We also have a national advertising and marketing campaign to promote awareness of our brand name throughout North America that focuses on the distinct benefits and values that set Dignity Memorial^® ~~apart from other providers~~

~~Growing Our Revenues~~

We have made significant improvements to our cost structure in the last two years; however, we realize that to achieve sustainable long-term earnings growth, we must also increase our revenues. We believe we can be successful in this regard by developing the Dignity Memorial^® ~~brand and focusing on our customers’ concerns and satisfaction.~~

~~Through our Dignity Memorial~~^® brand we are developing more contemporary and comprehensive products and services that we believe will help the consumer create a personal experience as well as help them with the administrative and legal challenges that occur when a loved one dies. Some of the exclusive items offered through Dignity Memorial^® providers include special rates on airfare, care rentals and hotel accommodations; grief counseling services; a legal services membership; internet memorial archive capabilities through Making Everlasting Memories^®~~, or MeM~~^® (~~www.mem.com); and the Aftercare~~^® Planner — a comprehensive organization system that helps families manage the many financial details that arise after a death occurs. Importantly, these products and services appeal to both burial and cremation consumers.

We are also focused on offering consumers new ways to personalize funeral services and create value in the experience. Examples include creating movies from pictures that span the deceased person’s life and important events; displaying items that were special to the individual or that reflect a hobby; having a dove, butterfly or balloon release; or holding a memorial service in a favorite place such as a park, marina or sports venue.

~~Near-Term Revenue Growth Opportunities~~

~~Dignity Memorial~~^®~~packaged plans~~. Our national brand name represents a unique set of packaged funeral and cremation plans offered exclusively through our network on an atneed and preneed basis. These packages are designed to simplify customer decision-making

and include the unique value-added products and services described above that have traditionally been unavailable through funeral service locations. The plans also offer the security of a 100% service guarantee and national transferability of preneed services to any Dignity Memorial^® ~~provider in North America. We continue to receive positive feedback from consumers regarding the value of these packages. In addition, when Dignity Memorial~~^® packages are sold, it results in significant incremental revenue and gross profit margin per funeral service compared to non-packaged sales due to the comprehensive product and service offerings these packages provide.

In early 2005, we began to develop Dignity Memorial® packaged cemetery plans. These plans are being tested in a limited number of locations. After completing a successful test, we intend to begin the roll-out of this packaged plan initiative to our cemeteries in mid-2005.

~~Contemporary funeral merchandising strategies.~~~~We believe we can increase the selection rate of the Dignity~~^® packaged plans through improved merchandising strategies that place less emphasis on traditional funeral merchandise and more focus on the comprehensive product and service offerings unique to Dignity Memorial^® ~~providers. In late 2004, we began to roll-out enhanced merchandise displays and other presentation models in our funeral homes that offer personalization options. In addition, funeral personnel~~operating efficiencies. Based upon businesses owned at ~~each of these locations have completed a comprehensive training and certification program to ensure their effectiveness and optimal customer satisfaction.~~

~~Contemporary cemetery marketing strategies.~~We are beginning to use more contemporary marketing techniques within our cemetery segment. We have begun to employ a tiered-product model that emphasizes a wide range of product and service offerings, including a variety of grave spaces at various price levels, cremation gardens, mausoleums, lawn crypts and niches. We are particularly focused on the development of high-end cemetery property such as private family estates.

In late 2004, we also developed and began to implement a standardized pricing methodology for each of our cemeteries. This approach incorporates marketplace demographic information and data about competitive cemeteries in the market, as well as historical retail and wholesale prices. This new pricing methodology complements our tiered-product strategy and ensures that we are capturing appropriate values for the different levels of our products.

~~Improved management structure.~~In late 2003, we eliminated the dual management structures of sales and operations and replaced them with a single-line business management structure. In addition to reducing costs, this new structure is intended to have our strongest operation managers focused on producing favorable financial results in each of our markets. Under the old structure, multiple persons shared accountability and responsibility for financial results in multiple markets. Now accountability rests solely in the market director in charge of the geographical area that he or she manages. Under the new structure, many of the administrative and financial functions are now handled by market support centers. We believe this new structure allows for greater focus on developing people, growing market share, and improving profitability.

~~Preneed sales.~~~~At March~~December 31, 2005, the ~~backlog~~combined companies will have an expanded geographic footprint that would include a network of ~~revenues associated with unfulfilled preneed contracts sold for~~1,712 funeral homes and ~~cemetery merchandise~~490 cemeteries (of which 243 are combination funeral homes and ~~services~~cemeteries) in ~~North America totaled more than $5 billion.~~48 states, eight Canadian provinces and Puerto Rico. This ~~includes deferred revenues associated with insurance funded contracts which are not included in~~transaction is expected to close by the ~~Company’s consolidated balance sheet.~~end of 2006; however, it is subject to antitrust clearance and approval by the shareholders of Alderwoods.

We believe that the ~~sale~~success of ~~preneed goods~~this combination can be achieved by optimizing our competitive strengths, which will be enhanced by capitalizing on the best practices and ~~services is a primary driver~~processes of ~~maintaining and growing market share. It~~both companies. These competitive strengths include:

	•		Industry leadership, which allows us to establish standardization and industry best practices;

	•		A network of funeral homes and cemeteries unequalled in geographic scale and reach, which has provided efficiencies of scale and enabled us to pursue strategic affinity partnerships with national groups that can influence their members’ choice of deathcare provider;

	•		A North America brand, Dignity Memorial^{^®}, that stands for integrity, respect and service excellence wherever we do business and supports the creation of enduring family and community relationships with SCI. We are currently developing our most recent brand, Funeraria del Angel^TM, that has been established to serve North America’s growing Hispanic population;

	•		More comprehensive product and service offerings than traditional industry practice such as bereavement travel discounts, grief counseling for survivors and assistance with legal and other family business details and packaged plans for funerals, cemeteries and cremations that are designed to simplify customer decision-making;

	•		A reputation of service excellence achieved through a culture of disciplined consistency across our network of businesses and a commitment to attract, develop and retain a superior team of people;

	•		Holding a level of financial strength and flexibility that allows us to reward shareholders through quarterly dividends and share repurchases while maintaining a prudent capital structure and allowing us to reinvest in our business; and

	•		Retaining a strong preneed backlog that not only contributes to profitability and volume but increases the predictability and stability of our revenues and cash flow.

We also provides a level of predictability and stability to our revenues and cash flows. An important advantage of SCI preneed sales for consumers, besides protecting them from having to make important decisions at a difficult time and locking in prices at today’s level, is the ability to transfer preneed contracts tocompleted two business acquisitions, which included five funeral homes and ~~cemeteries throughout~~one cemetery, during the three months ended March 31, 2006. These acquisitions were selected because of their strategic fit with our ~~geographically diverse network of properties.~~

~~Long-Term Revenue Growth Opportunities~~

~~Enhancing cremation opportunities.~~~~To grow core revenues~~initiatives to target customers who yield high returns and ~~profits, we believe we must capitalize on the opportunities provided by the growing cremation trend. We believe a successful cremation strategy is built on product differentiation, personalization and~~to combine existing stand-alone funeral homes with cemeteries.

3223

~~simplicity. Along~~Opportunity for Growth

Over the long-term, we believe that our industry leadership, along with superior brand, reputation, financial strength and geographic reach, will result in expanded growth opportunities with the ~~sale~~aging of ~~Dignity Memorial~~^® ~~cremation plans,~~the Baby Boom generation. During the short-term, we believe we can grow our existing businesses by centralization and standardization of our processes. This includes aligning preneed and pricing strategies with customer segments and expanding customer segments in which we excel.

We believe we can expand operating and financial growth by replacing the industry’s traditional one-size-fits-all approach with an operating strategy that considers customers personal needs and preferences. Using this approach, we will tailor our product and service offerings based on four variables: convenience and location, religious and ethnic customs, quality and prestige, and price. By identifying these customer bases, we can re-deploy resources to the most attractive customer segments. In 2006, we are ~~developing new displays~~continuing to ~~be used~~refine our pricing, product, and marketing strategies to support this approach.

Understanding customer attitude and preferences is essential to our business. We believe customers are less focused on products and more concerned about creating a meaningful funeral service. Accordingly, we have realigned our pricing strategy from products to service offerings and as such have focused on services that are most valued by our customers. Our initial results have been favorable as evidenced by the increase in the ~~arrangement process that clearly explain~~North America comparable average per funeral service in the first quarter of 2006. See a more detailed discussion regarding average revenue inResults of Operationswithin this Management’s Discussion and Analysis.

With our industry leadership, geographic reach, and financial strength, we are well-positioned to deliver superior service to an expanding customer base while achieving profitable growth for our shareholders.

Key Performance Indicators

Overview

We utilize various key operating and financial measures to monitor the performance of our business and to respond quickly to performance changes as necessary. Key performance indicators in our cemetery segment include preneed and atneed sales production and cemetery operating profit. Key performance indicators in our funeral segment include preneed sales production (both insurance and trust), case volume, average revenue per funeral service, and funeral operating profit. See a more detailed discussion regarding funeral and cemetery operating profit, funeral case volume and average revenue per funeral inResults of Operationswithin this Management’s Discussion and Analysis.

Our key financial performance indicator is cash flow from operating activities (CFOA). CFOA is discussed in more detail in theFinancial Condition and Liquiditydiscussion within this Management’s Discussion and Analysis.

Preneed Production and Maturities

In addition to selling our products and services ~~available~~ to ~~cremation consumers. We also own and operate National Cremation~~^®~~, which specifically targets~~client families at the ~~cremation consumer. Within the cemetery segment,~~time of need, we are promoting cremation gardens, which are separate sections located within certain of our cemeteries where cremated remains can be permanently placed and which contain other unique memorialization products.

~~Developing access to new customers.~~We believe that SCI has opportunities to grow market share due to its size and geographic diversity. We believe that a national brand name will provide us access to new customers over the long term. We will continue to capitalize on our nationwide network of providers to develop affinity relationships with large groups of individuals to whom we can market our products and services. We are also developing marketing strategies that will target growing segments of the population.

~~Expanding through acquisition, construction, or franchise.~~We are targeting expansion through acquisition or construction in the top 150 markets in North America where probable investment returns will exceed our cost of capital. We will focus future growth capital deployment in the major metropolitan markets where there is a large population base. We intend to focus construction efforts on developing combination operations by building funeral homes on our existing cemeteries. Combination operations create synergies betweensell price guaranteed preneed funeral and cemetery ~~functions~~trust contracts which provide for future funeral or cemetery services and ~~provide consumers the convenience of making all arrangements at a single location.~~

Over the longer term, the potential for a franchising opportunity exists for further expansion in the smaller markets. In a franchise relationship, we could recruit independent funeral providers to join the Dignity Memorial^® ~~network and earn fees for a comprehensive range of services that we could provide to the franchisee – all at very little or no capital investment to us.~~

~~Focusing on employee development and customer satisfaction.~~We have developed a comprehensive education strategy in an online campus format called Dignity University™. Dignity University™ features job-focused curriculum for each position in the company. Upon completion of coursework, participants are required to pass examinations to be certified in their individual jobs. Dignity University™ uses a blended approach to learning using a combination of traditional classroom, web-based courses, virtual classroom and on-the-job training for the approximately 19,000 individuals that we employ in North America.

We have recently partnered with J.D. Power and Associates, one of the world’s premier marketing firms specializing in customer satisfaction, to assist us with better understanding and measuring feedback from our consumers. We launched new customer surveys in March 2005. Our new survey to client families utilizes a combined approach – measuring satisfaction and loyalty and the relationship between the two.

~~Becoming the preplanning experts.~~As the Baby Boom generation ages, many are becoming more aware of their own mortality or facing their parents’ approaching need for funeral and burial arrangements. While research indicates high public approval of the pre-planning concept, the percentage of North Americans who have actually completed such arrangements is quite small.

Historically we have focused on preplanning and prefunding funeral arrangements. Our focus for the long-term is developing a comprehensive marketing strategy to give consumers the opportunity to make the decisions about their funeral and to choose a Dignity Memorial^® ~~funeral provider – without paying in advance if they choose not to do so.~~

~~Critical Accounting Policies and Accounting Changes~~

~~Deferred Selling Costs~~

~~Effective January 1, 2005, we changed our method of accounting for direct selling costs incurred related to the acquisition of~~merchandise. Since preneed funeral and ~~preneed~~ cemetery ~~contracts. Prior to this change, we capitalized such direct selling costs~~services or merchandise will not be provided until some time in the future, most states and amortized the costs in proportion to the revenue recognized. Under the new method of accounting, we expense these direct selling costs as incurred. We believe the new method is preferable because it better reflects the economicsprovinces require that all or a portion of the ~~business.~~funds collected from customers on preneed funeral and cemetery contracts be paid into trusts until the merchandise is delivered or the service is performed. In certain situations, where permitted by state or provincial laws, we post a surety bond as financial assurance for a certain amount of the preneed funeral or cemetery contract in lieu of placing funds into trust accounts.

3324


	North America
	Three Months Ended
	March 31,
	2006		2005
	(Dollars in millions)
Funeral
Preneed Trust Funded (including bonded):
Sales Production	$	33.7	$	32.1

Sales Production (number of contracts)		7,902		9,615

Sales Maturities	$	46.4	$	45.9

Sales Maturities (number of contracts)		10,676		11,180


Cemetery

Sales Production:
Preneed	$	77.4	$	74.4
Atneed		56.0		54.8

Total Sales Production	$	133.4	$	129.2

Sales Production Deferred to Backlog:
Preneed	$	37.5	$	36.4
Atneed		41.6		40.9

Total Sales Production Deferred to Backlog	$	79.1	$	77.3

Revenue Recognized from Backlog:
Preneed	$	28.1	$	29.9
Atneed		40.3		38.7

Total Revenue Recognized from Backlog	$	68.4	$	68.6

Three months ended March 31, 2004
Deferred selling
Historical costs, net(1) Pro forma
(Restated) (Restated)
(Dollars in thousands, except per share amounts) note 2 note 2
Gross profits:
Funeral $ 86,559 $ (487 ) $ 86,072
Cemetery 29,070 (3,894 ) 25,176

115,629 (4,381 ) 111,248

Income (loss) from continuing operations before income taxes and cumulative effects of accounting changes $ 73,159 $ (4,381 ) $ 68,778
Net income (loss) $ 30,136 $ (2,848 ) $ 27,288

Amounts per common share:
Net income (loss) — basic $ .10 $ (.01 ) $ .09
Net income (loss) — diluted $ .10 $ (.01 ) $ .09


	North America
	Three Months Ended
	March 31,
	2006		2005
	(Dollars in millions)
Preneed Funeral Insurance Funded (1):
Sales Production	$	47.6	$	54.5

Sales Production (number of contracts)		9,635		11,842

General Agency Revenue	$	8.0	$	6.5

Sales Maturities	$	50.0	$	54.7

Sales Maturities (number of contracts)		10,640		12,044

The table also reflects the North America trust funded preneed funeral and cemetery receivables and trust investments (investments at market and cost bases) associated with the backlog of trust funded deferred preneed funeral and cemetery contract revenues, net of an estimated cancellation allowance.

The market value of funeral and cemetery trust investments was based primarily on quoted market prices at March 31, 2006 and December 31, 2005. The difference between the backlog and asset amounts represents the contracts for which we have posted surety bonds as financial assurance in lieu of trusting, the amounts collected from customers that were not required to be deposited to trust and allowable cash distributions from trust assets. The table also reflects the amounts expected to be received from insurance companies from the assignment of policy proceeds related to insurance funded funeral contracts.


	North America
	Funeral
	March 31, 2006				December 31, 2005
	Market		Cost		Market		Cost
			(Dollars in millions)
Backlog of trust funded deferred preneed funeral revenues (1)	$	1,503.5	$	1,483.1	$	1,495.5	$	1,482.6
Backlog of insurance funded preneed funeral revenues (2)	$	2,188.0	$	2,188.0	$	2,162.7	$	2,162.7


Total backlog of preneed funeral revenues	$	3,691.5	$	3,671.1	$	3,658.2	$	3,645.3


Assets associated with backlog of trust funded deferred preneed funeral revenues, net of estimated allowance for cancellation	$	1,164.4	$	1,144.0	$	1,158.7	$	1,145.9
Insurance policies associated with insurance funded deferred preneed funeral revenues, net of estimated allowance for cancellation (2)	$	2,188.0	$	2,188.0	$	2,162.7	$	2,162.7


Total assets associated with backlog of preneed funeral revenues	$	3,352.4	$	3,332.0	$	3,321.4	$	3,308.6


	North America
	Cemetery
	March 31, 2006				December 31, 2005
	Market		Cost		Market		Cost
			(Dollars in millions)
Backlog of deferred cemetery revenues (1)	$	1,673.1	$	1,612.4	$	1,644.5	$	1,600.5


Assets associated with backlog of deferred cemetery revenues, net of estimated allowance for cancellation	$	1,171.6	$	1,119.0	$	1,157.4	$	1,119.3


(1)		Includes amounts reflected as Non-controlling interest in funeral and cemetery trusts in the consolidated balance sheet, net of estimated allowance for cancellation.

(2)		Insurance funded preneed funeral contracts, net of estimated allowance for cancellation, are not included in the consolidated balance sheet.

Other ~~Than Temporary Impairments~~Matters

The Staff of the Securities and Exchange Commission (Staff) recently issued a letter (Comment Letter) to us dated April 19, 2006, commenting on certain aspects of our initial Annual Report on Form 10-K for the year ended December 31, 2005 as filed on March 6, 2006. We believe that most of the issues raised in the Comment Letter have been appropriately addressed, and we have included required disclosures in this report or will include in future filings to the extent necessary as a result of the SEC’s comments. While there may be others, we believe that three items from the Comment Letter remain under consideration with the Staff at this time.

First, the Staff requested information regarding the treatment of preneed funeral and cemetery merchandise and services trust and cemetery perpetual care trust activity in the consolidated statement of cash flows. We have responded to the Staff’s request for additional information. To the best of our knowledge, this issue remains unresolved with the Staff. Although we believe that our consolidated statement of cash flows is properly presented, there can be no certainty that the Staff will agree to our position.

Second, the Staff requested information regarding our operating and reporting segments and whether these segments have been appropriately identified and disclosed. We have responded to the Staff’s request for additional information. We believe that our treatment of operating and reporting segments and reporting units is appropriate under the provisions of SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information” and SFAS No. 142 “Goodwill and Other Intangible Assets”. Although we believe that we have addressed this matter appropriately, there can be no certainty that the Staff will agree with our position.

Third, the Staff requested information regarding the classification of our operating leases related primarily to funeral home properties. During the first quarter of 2006, the Company determined that certain of its leases related to funeral home properties should have been accounted for as capital leases. For additional information, see note two for discussion.

Critical Accounting Policies

The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Our critical accounting policies are disclosed in our amended Annual Report on Form 10-K for the year ended December 31, 2005. No significant changes to our accounting policies have occurred subsequent to December 31, 2005, except as described below withinAccounting Changes.

Accounting Changes

In ~~March~~December 2004, the Financial Accounting Standards Board ~~(“FASB”) reached consensus on the guidance provided by Emerging Issues Task Force Issue 03-1 (“EITF 03-1”), “~~~~The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments~~~~.” The guidance is applicable to debt and equity securities that are within the scope of FASB~~(FASB) issued Statement of Financial

Accounting Standard ~~(“SFAS”) No. 115, “~~~~Accounting for Certain Investments in Debt and Equity Securities~~.” EITF 03-1 specifies that an impairment would be considered other-than-temporary unless (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment and (b) evidence indicating the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. EITF 03-1 was scheduled to be effective for reporting periods ending after June 15, 2004. The measurement and recognition provisions relating to debt and equity securities have been delayed until the FASB issues additional guidance. We adopted the disclosure provisions of EITF 03-1 during the period ended June 30, 2004. The adoption of the measurement and recognition provisions are not expected to have a material impact on our consolidated financial statements, results of operations, financial position, or cash flows.

~~Inventory Costs~~

~~In November 2004, the FASB issued SFAS No. 151,~~~~“Inventory Costs – an amendment of ARB 43, Chapter 4”~~~~(SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4,~~~~“Inventory Pricing,”~~to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS 151 requires that those items be recognized as current-period charges, rather than as a portion of the inventory cost. In addition, SFAS 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect this statement to have a material impact on our consolidated financial statements, results of operations, financial position, or cash flows.

~~Income Taxes~~

~~In December 2004, the FASB issued Staff Position No. FAS 109-2 “~~~~Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004~~” (FAS 109-2). The American Jobs Creation Act of 2004 (“Jobs Act”), enacted on October 22, 2004, provides for a temporary 85% dividends-received deduction on certain foreign earnings repatriated to a U.S. taxpayer, provided certain criteria are met. FAS 109-2 provides accounting and disclosure guidance for the repatriation provision, and was effective immediately upon issuance. We are in the process of evaluating whether we will repatriate earnings under the repatriation provisions of the Jobs Act, and if so, the amount that will be repatriated; therefore, as provided for in FAS 109-2, deferred tax liabilities have not been adjusted. We estimate the range of possible amounts of unremitted earnings under consideration is between $0 and $2.3 million. If the maximum amount of $2.3 million were to be repatriated, we would accrue tax expense of approximately $0.4 million.

~~Share-Based Payment~~

~~In December 2004, the FASB issued SFAS~~(SFAS) No. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. Among other items, SFAS 123R eliminates the use of the intrinsic value method of accounting, and requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those ~~awards, in the financial statements. The effective date of~~awards. We adopted SFAS 123R ~~is the first annual reporting period beginning after June 15, 2005, which is the first quarter of 2006 for SCI.~~

We currently utilize a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees. While SFAS 123R permits entities to continue to use such a model, the standard also permits the use of a “lattice” model. We will continue to utilize the Black-Scholes option pricing model to measure the fair value of our stock options.

~~We expect to adopt SFAS 123R effective~~on January 1, ~~2006. We~~2006 and are ~~currently evaluating~~utilizing the ~~impact that this adoption will have on our results of operations.~~

~~Variable Interest Entities~~

~~In January 2003, the FASB issued FASB Interpretation No. 46,~~~~“Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51.”~~~~This interpretation clarifies the application of ARB No. 51,~~~~“Consolidated Financial Statements,”~~to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB revised FASB Interpretation No. 46 (FIN 46R).

Under the provisions of FIN 46R, we are required to consolidate certain cemeteries and trust assets. Merchandise and service trusts and cemetery perpetual care trusts are considered variable interest entities because the trusts meet the conditions of paragraphs 5(a) and 5(b)(1) of FIN 46R. That is, as a group, the equity investors (if any) do not have sufficient equity at risk and do not have the direct or indirect ability through voting or similar rights to make decisions about the trusts’ activities that have a significant effect on the success of the trusts. FIN 46R requires consolidation of merchandise and service trusts and cemetery perpetual care trusts for which we are the primary beneficiary (i.e., those for which the Company absorbs a majority of the trusts’ expected losses). The Company is the primary beneficiary of a trust whenever a majority of the assets of the trust are attributable to deposits of our customers.

~~Consolidation of Trusts:~~We implemented FIN 46R as of March 31, 2004, which resulted in the consolidation of our preneed funeral and cemetery merchandise and service trust assets and our cemetery perpetual care trusts. No cumulative effect of an accounting change was recognized as a result of the implementation of FIN 46R as it relates to the consolidation of the trusts. The implementation of FIN 46R affects certain line items on our consolidated balance sheet and statement of operations as described below; however, there is no impact to net income in the statement of operations as a result of the implementation. Additionally, the implementation of FIN 46R did not result in any net changes to the Company’s consolidated statement of cash flows; however, it does require certain financing and investing activities to be disclosed.

Although FIN 46R requires consolidation of most of the merchandise and service and perpetual care trusts, it does not change the legal relationships among the trusts, SCI and our customers. In the case of merchandise and service trusts, the customers are the legal beneficiaries. In the case of cemetery perpetual care trusts, we do not have a legal right to the perpetual care trust assets.modified-prospective transition method. For these reasons, upon consolidation of the trusts, we recognize non-controlling interests in our financial statements to reflect third party interests in these trusts in accordance with FASB Statement No. 150,~~“Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity”~~~~(SFAS 150). We classify deposits to merchandise and service trusts as non-controlling liability interests and classifies deposits to cemetery perpetual care trusts as non-controlling equity interests.~~

~~We record cash received from customers, that is payable to the trusts but not yet required to be deposited in the trusts, as restricted cash in~~~~Deferred charges and other assets~~in our consolidated balance sheet. At March 31, 2005, these pending deposits totaled $13.4 million. We continue to account for amounts received from customers prior to delivery of merchandise or services that are not required to be deposited in merchandise and service trusts as deferred revenue.

Beginning March 31, 2004, we recognize net realized investment earnings of the merchandise and service trusts and perpetual care trusts, as well as the related trustee investment expenses and taxes, within~~Other income, net. We then recognize a corresponding expense within~~~~Other income, net~~representing the net realized earnings of those trusts that are attributable to the non-controlling interest holders. The corresponding credit for this expense is reflected in our consolidated balance sheet in~~Non-controlling interest in funeral and cemetery trustsfor merchandise and service trusts or~~~~Non-controlling interest in perpetual care trusts~~~~for cemetery perpetual care trusts. The sum of these expenses recorded in~~~~Other income, net~~~~offset the net realized earnings of such trusts also recognized within~~~~Other income, net~~~~. Accordingly, our net income in the consolidated statement of operations is not affected by consolidation of the trusts in accordance with FIN 46R.~~

To the extent the earnings of the trusts are distributed prior to the delivery of merchandise and/or services, a corresponding amount of non-controlling interest is reclassified to deferred revenue until the corresponding revenues are recognized. In the case of merchandise and service trusts, we recognize as revenues amounts previously attributed to non-controlling interests and deferred revenues upon the performance of services and delivery of merchandise, including earnings accumulated in these trusts. In the case of

~~the cemetery perpetual care trusts, distributable earnings are recognized in cemetery revenues to the extent of qualifying cemetery maintenance costs.~~

Prior to the implementation of FIN 46R and the consolidation of the trusts, funds received from customers and deposited into merchandise and service trusts until maturity of the preneed contract were recorded as receivables due from trust assets. Upon implementation of FIN 46R, we replaced receivables due from trust assets with the trust assets, at market, to the extent we were required to consolidate the trusts.

An allowance for contract cancellation is provided based on historical experience. An allowance is no longer provided on the funds associated with the preneed contracts that are held in trust, currently recorded as trust assets, but previously recorded as receivables due from trust assets. As such, the amount has decreased since the implementation of FIN 46R.

Both the merchandise and services trusts and the cemetery perpetual care trusts hold investments in marketable securities that are classified as available-for-sale under the requirements of Statement of Financial Accounting Standards No. 115,~~“Accounting for Certain Investments in Debt and Equity Securities”~~(“SFAS 115”). In accordance with SFAS 115, available-for-sale securities of the trusts are recorded at fair value, with unrealized gains and losses excluded from earnings and initially recorded as a component of~~Accumulated other comprehensive income (loss)in our consolidated balance sheet. Using the guidance in EITF Topic D-41, “~~~~Adjustments in Assets and Liabilities for Holding Gains and Losses as Related to the Implementation of FASB Statement No. 115~~~~” (“Topic D-41”), unrealized gains and losses on available-for-sale securities of the trusts attributable to the non-controlling interest holders are not recorded as~~~~Accumulated other comprehensive income (loss)~~~~, but are recorded as an adjustment to either~~~~Non-controlling interest in funeral and cemetery trusts~~or~~Non-controlling interest in perpetual care trusts. Therefore, unrealized gains and losses attributable to the non-controlling interest holders are reclassified from~~~~Accumulated other comprehensive income (loss)~~~~to either~~~~Non-controlling interest in funeral and cemetery trusts~~or~~Non-controlling interest in perpetual care trusts. The gross effect from applying Topic D-41 on our~~~~Accumulated other comprehensive income (loss)~~~~is disclosed in note eleven of the consolidated financial statements. However, our~~~~Accumulated other comprehensive income (loss)~~~~balance on the face of the balance sheet is ultimately not affected by consolidation of the trusts.~~

~~Consolidation of Certain Cemeteries:~~Prior to December 31, 2003, we operated certain cemeteries in Michigan which we managed but did not own. During our evaluation of FIN 46R, we evaluated these cemeteries to determine whether such cemeteries were within the scope of FIN 46R. The investment capital of these cemeteries was financed by SCI in exchange for a long-term sales, accounting, and cash management agreement. In accordance with this agreement, we receive the majority of the cash flows from these cemeteries. Additionally, we absorb the majority of these cemeteries’ expected losses and receive a majority of the cemeteries’ residual returns. As a result, we determined ourself to be the primary beneficiary of these cemeteries and determined the long-term sales, accounting, and cash management agreement to be a variable interest as defined by FIN 46R. Given the circumstances above, we consolidated such cemeteries at March 31, 2004. We recognized an after tax charge of $14.0 million, representing the cumulative effect of an accounting change, as a result of consolidating these cemeteries. The results of operations and cash flows of these cemeteries are included in our consolidated statements of operations and cash flows beginning March 31, 2004. Excluding the cumulative effect of accounting change, the effect of consolidating these entities did not have a significant impact on our reported results of operations.

~~Pension Plans~~

Effective January 1, 2004, we changed our accounting for gains and losses on our pension plan assets and obligations. We now recognize such gains and losses in our consolidated statement of operations as such gains and losses are incurred. Prior to January 1, 2004, we amortized the difference between actual and expected investment returns and actuarial gains and losses over seven years (except to the extent that settlements with employees required earlier recognition). We believe the new method of accounting better reflects the economic nature of our pension plans and recognize gains and losses on the pension plan assets and liabilities in the year the gains or losses occur. As a result of this accounting change, we recognized a charge for the cumulative effect of an accounting change of $33.6 million (net of tax) as of January 1, 2004. This amount represents accumulated unrecognized net losses related to the pension plan assets and liabilities. In addition, for interim periods, we record net pension expense or income reflecting estimated returns on plan assets and obligations. We will recognize actual gains and losses on plan assets and obligations as actuarialfurther information ~~becomes available upon review of the annual remeasurement.~~

~~Results of Operations – Three Months Ended March 31, 2005 and 2004~~

At December 31, 2004, we restated results for the first three interim periods of 2004. Subsequently, we have restated our condensed consolidated statements of operations for the three months ended March 31, 2005 and 2004 and our consolidated balance sheets as of March 31, 2005 and December 31, 2004. For details relating to this restatement, see note two to the consolidated financial statements and the Company’s Form 10-K/A (Amendment No. 2) for the year ended December 31, 2004. Effective January 1, 2005, we changed our accounting for preneed selling costs. For details surroundingregarding this accounting change, see note four to the condensed consolidated financial ~~statements.~~statements in Item 1 of this amended Form 10-Q.

~~In the following discussion~~

Restatement of ~~results~~Financial Statements

We have restated herein our condensed consolidated statements of operations ~~certain prior period amounts have been reclassified to conform to the current period financial presentation with no effect on previously reported net income, financial position or~~and cash ~~flows.~~

~~Net loss~~flows for the three months ended March 31, 2006 and 2005. We have also restated herein our condensed consolidated balance sheet as of March 31, 2006 and December 31, 2005. For details related to this restatement, please see note two to the condensed consolidated financial statements in Item 1 of this amended Form 10-Q. This restatement has been reported in an amendment to our Annual Report on Form 10-K for the year ended December 31, 2005 ~~was $154.9 million or $.49 per diluted share compared~~and our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006. In addition, this restatement will be reported in an amendment to ~~net income~~our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005.

Results of $30.1 million or $.10 per diluted share in the same period of 2004. These results included cumulative effects of accounting changes, litigation expenses, gains and losses on dispositions, losses on early extinguishments of debt, income tax benefits, earnings from discontinued operations, and other income and expenses as further described below. Additionally, our former funeral operations in France (which were sold in March 2004) contributed $8.1 million or $.02 of earnings per diluted share in the first three months of 2004.

~~Net (loss) income in the periods presented was affected by the following items, which are presented on an after tax basis:~~

Operations — Three Months Ended March 31, ~~2005:~~2006 and 2005

Management Summary

We began 2006 with renewed financial strength, allowing us to focus on profitability and growth. Led by a strong performance from our cemetery segment, our total revenue from comparable operations continued to improve in the first quarter. Other key highlights to date include:

	•		~~A charge~~On April 3, 2006, announced the execution of ~~$187.5 million or $.59 per diluted share for~~a definitive agreement to acquire the ~~cumulative effect~~outstanding shares of Alderwoods Group, Inc. combining two of the ~~change~~leading providers of funeral and cemetery services in ~~accounting related to preneed selling expenses.~~North America.

	•		~~Net loss on dispositions~~An improvement in first quarter 2006 cemetery margins of ~~$3.7 million or $.02 per diluted share.~~

	•		~~Net loss on early extinguishment of debt of $0.8 million or less than $.01 per diluted share related to certain purchases of 7.7% notes due April 2009.~~220 basis points over the same period in 2005.

	•		A ~~net loss of $0.7 million or less than $.01~~6.6% increase in comparable average revenue per ~~diluted share from discontinued operations.~~

~~Three Months Ended March 31, 2004:~~

	•		~~A charge of $47.6 million or $.13 per diluted share for the cumulative effects of accounting changes related~~funeral service compared to the ~~implementation~~first quarter of ~~FIN 46R~~2005, which helped to offset a 5.1% decline in comparable funeral services performed, and ~~changes in pension accounting.~~

	•		~~Expenses~~The declaration of ~~$22.5 million or $.06 per diluted share related to outstanding litigation matters.~~

	•		~~Net gain~~a dividend payable in May 2006 based on ~~dispositions of $51.4 million or $.14 per diluted share (including tax benefits realized from the disposition of~~ our ~~French operations and a minority interest in our former United Kingdom company).~~

	•		~~Interest income on a note receivable from our former United Kingdom company of $2.7 million, or $.01 per diluted share.~~first quarter 2006 financial results.

~~Net earnings~~Results of ~~$0.8~~Operations

In the first quarter of 2006, we reported net income of $26.9 million or ~~less than~~$.09 per diluted share. These results were impacted by net losses on dispositions and impairment charges of $3.5 million after tax or $.01 per diluted ~~share from discontinued operations.~~share.

~~The consolidated effective tax rate in~~In the first quarter of 2005, ~~was~~we reported a ~~provision~~net loss of ~~35.0% compared to a benefit of 5.2% in 2004. The tax rate in 2004 was favorably~~$154.9 million or $.49 per diluted share. These results were also impacted by non-recurring items that decreased earnings including accounting changes of $187.5 million, losses on the early extinguishment of debt of $0.8 million after tax, ~~benefits realized from~~and net losses on dispositions and impairment charges of $3.7 million after tax. During the ~~disposition~~first quarter of ~~our funeral~~2005, discontinued operations ~~in France and the United Kingdom. The tax benefits from dispositions result from differences between book and tax basis and the reversal~~produced $1.2 million of ~~tax liabilities that were then recorded as warranty indemnification liabilities.~~earnings.

~~The diluted weighted average number of shares decreased to 317.8 million at~~

Actual Versus Comparable Results — Three Months Ended March 31, 2006 and 2005 ~~compared to 353.1 million at March 31, 2004. This decrease is mainly due~~

The table below reconciles our GAAP results to our share repurchase program which began in the third quarter of 2004. Effective January 1, 2005, we began to contribute cash to fund the Company’s matching contribution to its 401(k) retirement plan and discontinued funding through the issuance of common stockcomparable, or treasury stock. The Company’s matching cash contribution was previously required to be invested in SCI stock. Effective April 1, 2005, we changed our policy to allow employees the choice to allocate the Company’s matching contributions to a variety of investment options.

~~Consolidated Funeral Results~~

~~Funeral revenues in~~“same store,” results for the three months ended March 31, 2006 and 2005. We define comparable operations (or same store operations) as those that were owned for the entire period beginning January 1, 2005 ~~declined $115.1 million from 2004 primarily due~~and ending March 31, 2006. The following tables present operating results for SCI funeral and cemetery locations that were owned by SCI for this period.

Less: Less:
Activity Activity
Associated with Associated
Acquisition / with
Three Months Ended March 31, 2006 Actual New Construction Dispositions Comparable
(Restated) (Dollars in millions) (Restated)
North America
Funeral revenue $ 300.1 $ 0.2 $ 0.8 $ 299.1
Cemetery revenue 138.8 0.1 1.4 137.3

438.9 0.3 2.2 436.4

Other foreign
Funeral revenue 2.9 — — 2.9

2.9 — — 2.9

Total revenues $ 441.8 $ 0.3 $ 2.2 $ 439.3

North America
Funeral gross profits $ 64.8 $ 0.1 $ (0.7 ) $ 65.4
Cemetery gross profits 22.2 (0.1 ) (0.3 ) 22.6

87.0 — (1.0 ) 88.0

Other foreign
Funeral gross profits 0.6 — — 0.6

0.6 — — 0.6

Total gross profit $ 87.6 $ — $ (1.0 ) $ 88.6

Less:
Activity
Associated
with
Three Months Ended March 31, 2005 Actual Dispositions Comparable
(Restated) (Dollars in millions) (Restated)
North America
Funeral revenue $ 316.3 $ 15.0 $ 301.3
Cemetery revenue 127.9 4.6 123.3

444.2 19.6 424.6

Other foreign
Funeral revenue 3.2 — 3.2

3.2 — 3.2

Total revenues $ 447.4 $ 19.6 $ 427.8

North America
Funeral gross profits $ 79.6 $ 1.7 $ 77.9
Cemetery gross profits 17.7 (0.1 ) 17.8

97.3 1.6 95.7

Other foreign
Funeral gross profits 0.5 — 0.5

0.5 — 0.5

Total gross profit $ 97.8 $ 1.6 $ 96.2

The following table provides the data necessary to ~~a decline of $127.3 million~~calculate SCI’s comparable average revenue per funeral service in ~~revenues associated with our French~~North America for the three months ended March 31, 2006 and 2005. We calculate average revenue per funeral ~~operations, which were sold on March 11, 2004.~~service by dividing adjusted comparable North America funeral revenue ~~increased $11.9~~by the comparable number of funeral services performed in North America during the period. In calculating average revenue per funeral service, we exclude GA revenues and revenues from our Kenyon subsidiary in order to avoid distorting our funeral case volume averages.

Three Months Ended
March 31,
2006 2005
(Dollars in millions,
except average revenue
per funeral service)
Comparable North America funeral revenue $ 299.1 $ 301.3
Less: GA revenues 8.0 6.5
Kenyon revenues 1.2 8.1

Adjusted Comparable North America funeral revenue $ 289.9 $ 286.7

Comparable North America funeral services performed 63,036 66,420

Comparable North America average revenue per funeral service:
Preneed $ 4,515 $ 4,264
Atneed $ 4,641 $ 4,342
Total $ 4,599 $ 4,316

Funeral Results

Consolidated Funeral Revenue

Consolidated revenues from funeral operations were $303.0 million in the first quarter of 2006 compared to $319.5 million in the first quarter of 2005. Higher average revenue per funeral service and the increase of floral revenues of approximately $4.0 million were more than offset by a decline in volume. This decline was primarily attributable to a decrease in funeral properties as a result of our effort to dispose of non-strategic locations as well as a decrease in the mortality rate. Additionally, Kenyon’s revenue fell $6.9 million compared to the prior year as we were not involved in any catastrophic events in the first quarter of 2006.

Comparable Funeral Revenue

North America comparable funeral revenue decreased less than 1% in the first quarter of 2006 compared to the first quarter of 2005 reflecting higher average revenue per funeral service and the increase of floral revenue described above, essentially offset by a decline in comparable funeral volume. Therefore, the decrease in revenue in the first quarter of 2006 was attributable primarily to the decrease in Kenyon’s revenue. GA revenue increased $1.5 million, or over 20%, in the first quarter of 2006 as a result of a mix shift in the types of insurance contracts sold.

Average Revenue per Funeral

Despite a 130 basis point increase in cremation rates, our focus on strategic pricing in the second half of 2005 and early in 2006 resulted in an increase in average revenue per funeral service of 6.6%, or $283 per funeral service (5.1% or $222 per service excluding the floral revenue increase) over the prior year. We have realigned prices in approximately half of our regions and expect these benefits to continue in the future as the remaining half of our regions implement these changes. We anticipate that the realignment will be substantially complete by the end of the second quarter of 2006. See a ~~$7.1 million increase~~more detailed discussion regarding our strategic pricing initiative in ~~revenues from Kenyon,~~Opportunity for Growthin this Management’s Discussion and Analysis.

Funeral Case Volume

The overall success of our ~~subsidiary that engages~~strategic pricing initiative was offset by a 5.1% decrease in ~~mass fatality and emergency response services. Kenyon revenues were higher~~comparable funeral volume in the first quarter of ~~2005 than~~2006 compared to the first quarter of 2005. The decrease of 3,384 is largely attributable to a decline in atneed funeral services performed during the first quarter of 2006 compared to the first quarter of 2005. This decline appears consistent with decreases reported by other funeral service companies and with our review of preliminary mortality data which indicates a decline in the number of deaths in early 2006. Over time, we believe the decline in the number of deaths will stabilize because of the aging population. In the short term, we believe that our reputation of providing excellent service, increasing our brand recognition, and expanding scale and reach through our pending acquisition will result in increased volume as we continue to stay firm to our pricing strategy and customer focus.

Consolidated Funeral Gross Profit

Consolidated funeral gross profits decreased $14.7 million in the first quarter of ~~2004 primarily due to its involvement with the tsunami disaster that occurred in Asia at the end of 2004.~~

Funeral gross profits decreased $6.9 million in the three months ended March 31, 2005 compared to the same period in 2004 primarily as a result of an $11.6 million decline in gross profits related to our former French operations, which were sold in March 2004. North America funeral gross profits increased $4.7 million despite our change in accounting related to deferred selling costs, which had an effect of $0.5 million. This increase in gross profit is primarily related to an increase in average revenue per funeral service, an increase in Kenyon revenue, and an improvement in overhead expenses, partially offset by a decline in GA revenue, and an increase of approximately $7.0 million of expenses related to Kenyon.

~~Consolidated Cemetery Results~~

~~Cemetery revenues decreased $18.8 million in the three months ended March 31, 2005~~2006 compared to the same period of ~~2004.~~2005. The decline in revenues against an inflationary high fixed-cost structure negatively impacted gross profit. Increases in salaries, healthcare, floral and energy costs contributed to the decrease in gross profit. Additionally, gross profit was reduced by $3.0 million from Kenyon’s operations.

Comparable Funeral Gross Profit

Comparable North America ~~cemetery revenues~~funeral gross profit decreased ~~$19.0~~$12.5 million ~~primarily as a result of less constructed cemetery property revenue and decreases in cemetery preneed production. Cemetery gross profits decreased $8.9 million~~or 16.0% in the ~~three months ended March 31, 2005~~first quarter of 2006 versus the same period of 2005. The comparable funeral gross margin percentage decreased to 21.9% compared to 25.9% in 2005. Comparable gross profit was negatively impacted by the decrease in revenues described above against an inflationary high fixed-cost structure. The remainder of the decrease in gross profit was due to increases in salary, healthcare and energy costs.

Cemetery Results

Consolidated Cemetery Revenue

Despite a decrease in the number of operating locations, consolidated revenues from our cemetery operations increased $10.9 million, or 8.5%, in the first quarter of 2006 compared to the same period of ~~2004~~2005. Sales production increased $4.2 million due to our tiered-product strategy, which focuses on the development of high-end cemetery property and our related pricing realignment. Recognized production rates increased in the first quarter of 2006 compared to the prior year period due to an increase in the recognition of merchandise and the success of our strategy to shorten the time between when property is sold and when it is constructed.

Comparable Cemetery Revenue

North America comparable cemetery revenue increased $14.0 million or 11.3% compared to the first quarter of 2005. This increase primarily asresulted from the revenue increases described above.

Consolidated Cemetery Gross Profits

Consolidated cemetery gross profits increased $4.5 million, or 25.7%, in the first quarter of 2006 compared to the first quarter of 2005 and margins increased over 220 basis points to 16.0%. The increase in revenue described above was partially offset by a related increase in variable costs and higher healthcare and energy costs.

Comparable Cemetery Gross Profits

North America comparable cemetery gross profits increased $4.8 million in the first quarter of 2006 compared to the same period of 2005. The comparable cemetery percentage increased to 16.5% in the first quarter of 2006 from 14.4% in the first quarter of 2005. These improvements were also a result of the ~~decreases in revenues~~strong revenue increases offset by cost increases as described ~~above, as well as the effect of our change in accounting related to deferred selling costs, which had an effect of $3.9 million.~~above.

Other Financial Statement Items

General and Administrative Expenses

General and administrative expenses were ~~$19.7 million in the three months ended March 31, 2005 compared to $51.0 million in the same period of 2004. We recognized litigation expenses of $35.0~~$22.0 million in the first quarter of ~~2004. Excluding litigation expenses, general and administrative expenses in the three months ended March 31, 2005 were $19.7 million~~2006 compared to ~~$16.0~~$19.7 million in the ~~same period~~first quarter of ~~2004. This increase is the result of increased professional fees of $3.5 million~~2005. Increased costs associated with ~~Sarbanes-Oxley compliance~~the expensing of stock options, which totaled $1.4 million (pretax), and higher audit fees contributed to the ~~costs~~increase. We expect stock option expense in the remaining quarters of ~~our funeral and cemetery verification projects. General and administrative expenses excluding litigation expenses is a non-GAAP financial measure; however, we believe this non-GAAP measure is useful~~2006 to ~~investors as it provides a consistent basis for comparison between periods and better reflects the performance of our core operations, as it is not influenced by certain non-recurring expenses.~~be approximately $2.5 million in aggregate.

3931

~~Other~~Interest Expense

~~In the first quarter of 2005, we recognized a net pretax loss on dispositions of $5.7~~Interest expense increased 6.8% to $26.7 million associated with certain dispositions in North America. In the first quarter of 2004, we recognized a net pretax gain on dispositions of $34.8 million predominantly related to gains of $12.6 million from the sale of our funeral operations in France and the adjustment of $27.2 million to a note receivable associated with a United Kingdom company to its realizable value. The gains in the first quarter of ~~2004 were partially offset by net losses associated with the disposition of certain funeral and cemetery businesses in North America.~~

~~Interest expense~~~~decreased~~2006, compared to ~~$24.7~~$25.0 million in the ~~three months ended March 31, 2005~~first quarter of 2005. The increase of $1.7 million reflects the modification of the contractual terms of certain transportation leases in January 2006, which resulted in additional interest expense related to these newly reclassified capital leases. For additional information, see notes four and eight to the condensed consolidated financial statements included in this Form 10-Q.

Interest Income

Interest income of $6.0 million in the first quarter of 2006 increased $1.9 million compared to ~~$32.7 million in~~ the same period of ~~2004. These declines are consistent with~~2005, reflecting the ~~Company’s decreases~~increase in ~~debt.~~our cash balances invested in commercial paper and higher interest returns.

Other Income (Expense), Net

Other income (expense), net was ~~$2.7~~a $2.4 million gain in the first quarter of 2006, compared to an expense of $1.2 million in the ~~three months ended March 31, 2005 compared to $6.4 million in the same period~~first quarter of ~~2004.~~2005. The components of other income for the periods presented ~~were~~are as follows:

	•		Interest income was $4.1 million and $6.3 million in the first quarters of 2005 and 2004, respectively. Included in the first quarter of 2005 was $2.4 million of interest income from our French operations for preferred equity certificates and convertible preferred equity certificates. The first quarter of 2004 included the receipt of $4.5 million of interest income related to a note receivable collected from a United Kingdom company.

	•		Cash overrides received from a third party insurance provider related to the sale of insurance funded preneed funeral contracts were ~~$1.6~~$1.5 million in the first quarter of ~~2005 and~~2006 compared to $1.6 million in the ~~first quarter~~same period of ~~2004.~~2005.

	•		Surety bond premium costs were $1.0 million in the first ~~quarter~~quarters of ~~2005 compared to $1.1 million in the first quarter of 2004.~~2006 and 2005.

	•		The remaining ~~expense~~income of ~~$2.0~~$1.9 million in the first quarter of ~~2005 and $0.4~~2006 is primarily due to favorable adjustments to our allowance on notes receivable. The expense of $1.8 million in the ~~first quarter~~same period of ~~2004~~2005 is primarily ~~related~~attributable to net gains and losses ~~from~~related to foreign currency transactions.

~~Comparable Results of Operations — Three Months Ended March 31, 2005 and 2004~~
(Provision) Benefit for Income Taxes

The table below reconciles our actual results to our comparable or “same store” results for the periods ended March 31, 2005 and 2004. We regard “same store” results of operations as analogous to our comparable results of operations. We consider comparable operations as operations that were not acquired or constructed after January 1, 2004 or divested prior to March 31, 2005. Therefore, in the following two periods presented, we are providing results of operations for the same funeral and cemetery locations. Comparable results are a non-GAAP financial measure; however, we believe this non-GAAP measure is useful to investors as it provides a consistent basis for comparison between periods and better reflects the performance of our core operations.

Activity Activity
associated with associated
acquisition/new with
(Dollars in thousands) Actual construction dispositions Comparable
2005 (Restated) (Restated)
North America
Funeral revenue $ 316,268 $ 472 $ 898 $ 314,898
Cemetery revenue 127,909 — (1,084 ) 128,993

444,177 472 (186 ) 443,891
Other foreign
Funeral revenue 3,183 — — 3,183
Cemetery revenue 7,511 — 82 7,429

10,694 — 82 10,612

Total revenues $ 454,871 $ 472 $ (104 ) $ 454,503

North America
Funeral gross profits $ 79,065 $ 104 $ (1,217 ) $ 80,178
Cemetery gross profits 17,645 — (2,579 ) 20,224

96,710 104 (3,796 ) 100,402
Other foreign
Funeral gross profits 557 — — 557
Cemetery gross profits 2,507 — (40 ) 2,547

3,064 — (40 ) 3,104

Total gross profits $ 99,774 $ 104 $ (3,836 ) $ 103,506

Activity Activity
associated with associated
acquisition/new with
(Dollars in thousands) Actual construction dispositions Comparable
2004 (Restated) (Restated)
North America
Funeral revenue $ 304,361 $ — $ 7,129 $ 297,232
Cemetery revenue 146,927 — 1,656 145,271

451,288 — 8,785 442,503
Other foreign
Funeral revenue 130,160 — 127,282 2,878
Cemetery revenue 7,251 — 223 7,028

137,411 — 127,505 9,906

Total revenues $ 588,699 $ — $ 136,290 $ 452,409

North America
Funeral gross profits $ 74,356 $ — $ (496 ) $ 74,852
Cemetery gross profits 27,433 — (9 ) 27,442

101,789 — (505 ) 102,294
Other foreign
Funeral gross profits 12,203 — 11,572 631
Cemetery gross profits 1,637 — (28 ) 1,665

13,840 — 11,544 2,296

Total gross profits $ 115,629 $ — $ 11,039 $ 104,590

Other Foreign revenues and gross profits shown in the preceding tables above are primarily related to our funeral operations in France which were sold in March 2004. Since we did not own these businesses for the quarter ended March 31, 2005, they are not considered comparable or “same store” locations.

The following table provides the components to calculate our comparable average revenue per funeral service in North America for the three months ended March 31, 2005 and 2004. We calculate average revenue per funeral service as adjusted comparable North America funeral revenue divided by the comparable number of funeral services performed in North America during the applicable

period. In the calculation of average revenue per funeral service, General Agency (GA) revenues and Kenyon revenues are excluded from comparable North America funeral revenue to avoid distorting our averages of normal funeral case volume.

(Dollars in millions, except average revenue perfuneral service) 2005 2004
(Restated) (Restated)
Comparable North America funeral revenue $ 314.9 $ 297.2
Less: GA revenues (1) 6.7 8.0
Kenyon revenues (2) 8.1 1.0

Adjusted Comparable North America funeral revenue 300.1 288.2

Comparable North America funeral services performed 69,842 69,368

North America average revenue per funeral service $ 4,297 $ 4,155


~~(1)~~		General Agency (GA) revenues are commissions we receive from third-party insurance companies when customers purchase insurance contracts from such third-party insurance companies to fund funeral services and merchandise at a future date.

~~(2)~~		Kenyon International Emergency Services (Kenyon) is our disaster response subsidiary that engages in mass fatality and emergency response services. Revenues and gross profits associated with Kenyon are subject to significant variation due to the nature of their operations.

~~Comparable North America Funeral~~

~~Comparable North America funeral revenues~~consolidated effective tax rate in the first quarter of ~~2005 increased $17.7 million or 5.9% from 2004 primarily due~~2006 resulted in a provision of 36.9%, compared to ~~a $7.1 million increase~~35.8% in ~~revenues from Kenyon, increases in funeral volume, an increase in the average revenue per funeral service, partially offset by a decrease in GA revenue.~~

~~The number of funeral services performed increased 0.7% in 2005 compared to~~ the same period ~~in 2004 primarily attributable to increased volumes in February~~of 2005. The 2006 and ~~March related to a late~~ 2005 ~~influenza season.~~ tax rates were negatively impacted by permanent differences between the book and tax bases of North American asset dispositions.

Weighted Average Shares

The ~~comparable~~diluted weighted average ~~revenue per funeral service increased 3.4%~~number of shares outstanding was 298.7 million in the first quarter of ~~2005~~2006, compared to the prior year period. The first quarter of 2005 represents the nineteenth consecutive quarter that we have reported an increase in our average revenue per funeral service. This consistent growth in average revenue is largely a result of the success of our nationally branded Dignity Memorial^® packaged funeral and cremation plan initiative. We have been able to generate increases in the average revenue per funeral despite an increase in the rate of cremation. Of the total comparable funeral services performed in the first quarter of 2005, 40.2% were cremation services versus 39.6%317.8 million in the same period of ~~2004.~~

~~Funeral gross profit improved $5.3 million or 7.1%. This improvement is primarily a result of the increase~~2005. The decrease in revenue described above and continued reduction in overhead expenses, partially offset by our change in accounting for deferred selling costs, a decline in GA revenue, and an increase of approximately $7.0 million of expenses related to Kenyon. In 2004, we deferred and amortized preneed funeral direct selling costs. Effective January 1,2006 versus 2005 we are now expensing these costs as incurred. Had we expensed funeral preneed selling costs as incurred in 2004, funeral gross profits in the first quarter of 2004 would have been reduced by approximately $0.5 million.

~~Comparable North America Cemetery~~

North America cemetery revenue decreased $16.3 million or 11.2% from the first quarter of 2005 to $129.0 million. This decline is primarily a result of decreases in cemetery preneed production and expected declines in legacy revenues associated with the recognition of constructed property revenues that were sold prior to 2005. This expected reduction iswas mainly due to the full quarter impact of our shift in strategy to focus on shortening the time between when property is sold and when it is constructed. This decline in recognized preneed revenue was partially offset by an increase in atneed sales of property, merchandise and services.

Cemetery gross profits decreased 26.3% or $7.2 million in the three months ended March 31, 2005 compared to the same period in 2004. Reductions in overhead costs, selling costs, and maintenance expenses helped to offset the declines in revenue described above as well as increases in costs related to our change in accounting for preneed cemetery direct selling costs. In 2004, we deferred and amortized preneed cemetery direct selling costs. Effective January 1, 2005, we are now expensing these costs as incurred. Had we expensed cemetery preneed selling costs as incurred in 2004, cemetery gross profits in the first quarter of 2004 would have been reduced by $3.9 million.

Overhead expenses from our field management, market support centers and corporate office, which are allocated to funeral and cemetery operations in North America, were reduced by $3.9 million or 12.7% in the first quarter of 2005 compared to the first quarter of 2004 primarily as a result of continued improvement in management structure and reduction of fixed costs.share repurchase program initiated during 2005.

Financial Condition, Liquidity and Capital Resources

Overview

~~Our primary financial objectives are to capitalize on our financial flexibility and to continue generating strong operating cash flows.~~ We believe that we have sufficient resources to meet our near and intermediate term debt obligations, our planned capital expenditures, and other cash requirements. Our primary sources of liquidity are financially sound and have liquidity to consider opportunities to deploy capital and strategic acquisitions at reasonable market values. During the first quarter of 2005, we continued to invest in our share repurchase program and announced the approval of our Board to reinstate a quarterly dividend. Our current credit ratings of “BB” with Standard and Poor’s (S&P) and “Ba3” with Moody’s Investors Service (Moody’s) provide us with adequate access to obtain funds at a reasonable cost, if necessary. Our financial position continues to improve as demonstrated by the following trend in ourcurrently cash flows from operations, available cash reserves, and debt ~~balances:~~

March 31, December 31,
(In millions) 2005 2004 2003 2002
Total debt $ 1,248.1 $ 1,254.0 $ 1,701.9 $ 1,974.4
Cash and cash equivalents 320.5 287.8 239.4 200.6

Total debt less cash and cash equivalents $ 927.6 $ 966.2 $ 1,462.5 $ 1,773.8

~~Total debt less cash and cash equivalents at March 31, 2005 was $927.6 million, representing the lowest levels in~~capacity available under our ~~company since 1992. Total debt has been reduced by over $726.3 million or 36.8% since December 31, 2002. This reduction is a result of strong operating cash flows~~credit facility. We are focusing our capital resources on funding disciplined growth initiatives, including the ~~receipt~~planned acquisition of tax refunds of approximately $130 million, approximately $240 million in proceeds from the issuance of 6.75% notes due April 1, 2016, and a successful asset divestiture and joint venture program that produced over $560 million of net cash proceeds.Alderwoods.

Cash Flow

We believe our ability to generate strong operating cash flow is one of our fundamental financial strengths and provides us with substantial flexibility in meeting operating and investing needs. Highlights of cash flow for the first three months of ~~2005~~2006 compared to the same period of ~~2004~~2005 are as follows:

Operating Activities —Cash flows from ~~operations increased by $39.0~~operating activities in the first quarter of 2006 were $80.2 million, a decrease of $46.9 million compared to the first quarter of ~~2004.~~2005. The first quarter of 2005 included a federal income tax refund of $29.0 ~~million unusual tax refund. Included~~million.

Additionally, in the first quarter of ~~2004 was a $20.0~~2006, bonus payments increased $21.7 million voluntary cash contribution to our pension plan and $18.3 million in operating cash flows provided by our French operations for the period January 1, 2004 through March 11, 2004. Excluding these items in both periods, cash flows from operations increased $8.3 million or 9.2%. Cash flows from operating activities that exclude the items above are a non-GAAP financial measure; however, we believe this non-GAAP measure is useful to investors as ~~it better reflects the performance of our core operations, as it is not influenced by non-recurring items. Positively affecting cash flow from operations in the first quarter of 2005~~ compared to the ~~first quarter~~same period of 2004 was an approximate $32 million decrease in payroll and bonus payments and an approximate $8 million more in net trust fund withdrawals. Negatively affecting cash flows from operations in the first quarter of 2005 compared to the first quarter of 2004 was $3.92005. This increase reflects $16.5 million of ~~cash outflows for funding the matching contribution of~~long-term incentive compensation payments related to a 2003 award program as previously disclosed in our ~~401(k) plan with cash, an approximate $6 million increase in cash outflows~~

for professional fees associated with Sarbanes-Oxley compliance and our preneed cemetery backlog verification project, an approximate $7 million increase in operating expenses associated with Kenyon, and an approximate $15 million of other working capital declines primarily associated with increased activity late in the quarter and decreases in accounts receivable collections.2006 annual guidance.

Investing Activities –—Cash flows from investing activities decreased by ~~$157.9~~$39.1 million ~~primarily~~in the first three months of 2006 compared to the same period of 2005 due to a ~~decrease~~decline in proceeds ~~of $266.3 million~~ from sales of international businesses and ~~equity investments.~~an increase in acquisition activities. In the first quarter of 2006, we paid $14.7 million in cash for acquisitions as we begin to focus on growth. We also sold the 280,952 StoneMor Limited Partner units received in the fourth quarter of 2005 related to the disposition of assets. The proceeds from the sale of these shares totaled $5.9 million. In the first quarter of 2005, we received $21.6 million from the disposition of our businesses in Argentina and ~~Uruguay businesses. In the first quarter of 2004, we received $287.9~~Uruguay.

Financing Activities —Cash used in financing activities decreased $96.9 million ~~from the sale of our French operations. These cash receipts were partially offset by a $112.6 million change in restricted cash primarily related to certain litigation matters in Florida~~ in the first ~~quarter~~three months of ~~2004.~~

~~Capital expenditures increased $2.9 million~~2006 compared to the first ~~quarter~~three months of 2004. Capital expenditures in North America increased $6.0 million due to additional spending on existing facilities, including the renovation of our corporate headquarters as well as new growth initiatives primarily related to cemetery inventory. This was offset by $2.8 million in capital expenditures included in 2004 associated with our French operations that were sold in March of 2004.

~~Financing Activities –~~~~Cash used for financing activities increased $107.5 million~~2005 primarily due to ~~the repurchase of Company stock~~share repurchases and a debt extinguishment in ~~the first quarter of 2005.~~2005, partially offset by dividend payments and an increase in capital lease payments in 2006. During the first quarter of 2005, we repurchased 14.7 million shares of common stock for an aggregate of ~~$103.5 million. Between April 1, 2005~~$103.6 million and May 16, 2005, we purchased an additional 5.5 million shares for $39.6 million. As of May 16, 2005, the remaining dollar value of shares that may be purchased under our share repurchase programs was approximately $46.6 million. The remaining increase is due topaid $7.7 million ~~in early extinguishment of~~to extinguish debt ~~in 2005, partially offset by~~(of which $7.1 million is reported as a ~~$3.9 million decrease in scheduled debt payments~~financing activity). Dividends, which were not paid in the first quarter of 2005, totaled $7.4 million in 2006. Capital lease payments increased $5.4 million compared to the ~~first quarter of 2004.~~prior year reflecting new capital leases for certain transportation assets.

Liquidity

We believe we have sufficient cash and cash equivalents and a strong trend of operating cash flows. This liquidity affords us the opportunity to consider opportunities to deploy capital strategic acquisitions at reasonable prices and other considerations.

As of March 31, ~~2005,~~2006, our cash balance was ~~$320.5~~$490.4 million. We also have a ~~$200~~$200.0 million credit facility that was executed in August 2004. We have no cash borrowings under this credit facility, but we have used it to support ~~$62.0~~$51.2 million of letters of credit as of March 31, ~~2005. We believe these resources are adequate~~2006. As a result of the terms of the bridge facility discussed below, we plan to ~~meet our near and intermediate term debt obligations, planned capital expenditures and other cash requirements, as well as~~commence negotiations on an amendment or a new credit facility prior to ~~have funds available for future growth.~~the closing of the Alderwoods’ acquisition.

We expect to generate cash flows in the next several years above our operating and financing needs. We ~~currently have approximately $238.9 million in debt maturing during the remainder of 2005 and 2006. We~~ believe that this financial flexibility ~~coupled with our liquidity~~ allows us to consider investments or capital structure related transactions that will enhance shareholder value. On April 3, 2006, we entered into a definitive agreement to acquire all of the outstanding shares of Alderwoods for $20.00 per share. This transaction is valued at $1.2 billion, which includes approximately $374.0 million of Alderwoods’ debt. We have received a commitment letter from JPMorgan for an $850.0 million bridge facility and believe we also have access to debt markets. We intend to fund this transaction with at least $400 million of cash on hand as well as through the utilization of term loans and bonds. We will continue to evaluate external opportunities and expect to make acquisitions, if such acquisitions are available at reasonable market prices and align with our strategic plan. We will also evaluate internal opportunities such as construction of new funeral homes and development of high-end cemetery inventory.

We ~~expect to make acquisitions, if such acquisitions are available at reasonable market prices.~~

~~In February 2005,~~currently have $64.6 million authorized by the Board of Directors ~~authorized an additional $100 million for our share~~to repurchase program for an aggregate of $300 million. From August 2004 through May 16, 2005, we repurchased approximately 36.9 million shares at a total cost of approximately $253.4 million leaving approximately $46.6 million for additional repurchases.common stock. We ~~plan to continue~~have made and intend to make purchases from time to time in the open market or through privately negotiated transactions, subject to market conditions and normal trading restrictions.

~~In the first quarter of 2005,~~ There can be no assurance that we ~~announced the reinstatement of a quarterly dividend. The first disbursement of this dividend paid in April of 2005 totaled $7.7 million or $.025 per~~will buy our common ~~share.~~

~~We expect to receive approximately $43.0 million~~stock under our share repurchase program in the second and third quarters of 2005 related to the collection of our note receivable resulting from the sale of our funeral operations in France in March 2004 and the redemption of other various preferred equity instruments. As of May 10,future.

Since April 2005, we have ~~received EUR 27.3 million, or approximately $35.0 million~~paid a quarterly cash dividend of $.025 per share. While we intend to pay regular quarterly cash dividends for the ~~expected $43.0 million, from this transaction. For more details related~~foreseeable future, all subsequent dividends are subject to ~~this transaction, see note twelve to the consolidated~~final determination by our Board of Directors each quarter after its review of our financial ~~statements.~~performance.

We are continuing our program to divest of our operations outside of North America. In the first quarter of 2005, we sold our operations in Argentina and Uruguay for net cash proceeds of $21.6 million. In the third quarter of 2005, we sold our cemetery operations in Chile. We expect to receive the remaining proceeds from this disposition, as income tax receivable totaling approximately $15,859, in the second quarter of 2006. We currently own funeral businesses in Germany and

Singapore ~~and cemetery businesses in Chile~~ that we will look to exit when market values and economic conditions are conducive to a sale; however, these businesses are not currently being held for sale. In addition, our improved financial condition and credit profile have allowed us to receive cash collateral previously pledged in connection with various commercial commitments. During the first quarter of 2005, we received $9.3 million of such collateral. As of March 31, 2005, we have no cash pledged as collateral with surety companies.

~~Preneed Funeral and Cemetery Activities~~

In addition to selling our products and services to client families at the time of need, we believe an active funeral and cemetery preneed program can increase future market share in our service markets. Preneed arrangement is a means through which a customer contractually agrees to the terms of a funeral service, cremation service, and/or cemetery burial interment right, merchandise or cemetery service to be performed or provided in the future (that is, in advance of when needed or “preneed”).

~~Preneed Funeral Activities~~

Since preneed funeral services or merchandise will not be provided until some time in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed funeral contracts be protected for the benefit of the customer pursuant to state or provincial law. Some or all of the funds may be required to be placed into trust accounts, or a surety bond may be posted in lieu of trusting (collectively “trust funded preneed funeral contracts”). Alternatively, where allowed, customers may choose to purchase a life insurance or annuity policy from third party insurance companies to fund their preneed funeral (“insurance funded preneed funeral contract”). Only certain of these customer funding options may be applicable in any given market we serve.

The contract amounts associated with unfulfilled insurance funded preneed funeral contracts are not reflected on our consolidated balance sheet. However, when customers enter into a trust funded preneed contract, we record an asset,~~Preneed funeral receivables and trust investments~~~~and a corresponding obligation,~~~~Deferred preneed funeral revenues~~in our consolidated balance sheet for the contract price. The preneed funeral receivable is then decreased by the cash received from the customer at the time of sale. The funeral revenues are deferred and will not be recognized in the consolidated statement of operations until the funeral services are performed or the merchandise is delivered. When we receive payments on a trust funded preneed funeral contract from the customer, we deposit the amount required by law into the trust and reclassify the corresponding amount from~~Deferred preneed funeral revenuesinto~~~~Non-controlling interest in funeral and cemetery trusts~~. While some customers may pay for their contract in a single payment, most trust funded preneed funerals are sold on an installment basis over a period of one to seven years. On these installment contracts, we receive, on average, a down payment at the time of sale of approximately 10%. Historically, the majority of our trust funded preneed funeral contracts have not included a finance charge. However, we began test marketing of a finance charge for these contracts during the fourth quarter of 2004. We plan a phased roll-out during 2005 to the states where such finance charges are allowed on trust funded preneed funeral trust contracts.

~~Trust Funded Preneed Funeral Contracts:~~Where the state or provincial law requires that all or a portion of the funds collected from preneed funeral contracts be placed in trust accounts, the funds deposited into trust are invested by the independent trustees in accordance with the investment guidelines established by statute or, where the prudent investor rule is applicable, the guidelines established by the Investment Committee of our Board of Directors. The trustees utilize professional investment advisors to select and monitor the money managers that make the individual investment decisions in accordance with the guidelines. We retain any funds above the amounts required to be deposited into trust accounts and use them for working capital purposes, generally to offset the selling and administrative costs of the preneed programs. State or provincial law governs the timing of the required deposits into the trust accounts, which generally ranges from five to 45 days after receipt of the funds from the customer.

The trust investments are expected to generate earnings sufficient to offset the inflationary costs of providing the preneed funeral services and merchandise in the future for the prices that were guaranteed at the time of sale. As a result of the adoption of the revised Financial Accounting Standards Board Interpretation No. 46, “~~Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No.~~~~51” (FIN 46R), the preneed funeral trust assets have been consolidated and are recorded in our~~

~~consolidated balance sheet at market value in accordance with Statement of Financial Accounting Standards No. 115, “~~~~Accounting for Certain Investments in Debt and Equity Securities~~” (SFAS 115). Investment earnings on trust assets are generally accumulated in the trust and distributed as each preneed contract is either utilized upon the death of, or cancelled by, the customer. However, in certain states, the trusts are allowed to distribute a portion of the investment earnings to us prior to that date. See the Critical Accounting Policies and Accounting Changes of this section of this amended Form 10-Q for additional information regarding the implementation of FIN 46R.

~~Prior to January 1, 2005, direct selling costs incurred pursuant to the sales of trust funded preneed funeral contracts were deferred and included in~~~~Deferred charges and other assets~~in the consolidated balance sheet. The deferred selling costs were expensed in proportion to the corresponding trust funded preneed funeral contract revenues when recognized. Other selling costs associated with the sales and marketing of preneed funeral contracts (e.g., lead procurements costs, brochures and marketing materials, advertising and administrative costs) were expensed as incurred. An allowance for cancellation was recorded for trust funded preneed funeral contract deferred selling costs based on historical contract cancellation experience.

Beginning January 1, 2005, we have made an accounting change to expense all direct selling costs as incurred with the sales of preneed funeral contracts. See Critical Accounting Policies and Accounting Changes in this section of this amended Form 10-Q for additional information regarding this change in accounting for selling costs.

If a customer cancels the trust funded preneed funeral contract, state or provincial law determines the amount of the refund owed to the customer, including in certain situations the amount of the attributed investment earnings. Upon cancellation, we receive the amount of principal deposited to trust and previously undistributed net investment earnings and pay the customer the required refund. We retain any excess funds and recognize the amounts as funeral revenues in our consolidated statement of operations. In certain jurisdictions, we may be obligated to fund any shortfall if the amounts deposited on behalf of the customer exceed the funds in trust. As a result, when realized or unrealized losses of a trust result in trust funded preneed funeral contracts being under-funded, we will assess those contracts to determine whether a loss provision should be recorded. We have not been required to recognize any loss amounts at March 31, 2005 or December 31, 2004.

~~The cash flow activity over the life of a trust funded preneed funeral contract from the date of sale to its death maturity or cancellation is captured in the line items~~~~Net effect of preneed funeral production and maturities~~~~and~~~~Net income (loss)~~in the consolidated statement of cash flows. While the contract is outstanding, cash flow is provided by the amount retained from funds collected from the customer and any distributed investment earnings. Prior to January 1, 2005, this was reduced by the payment of trust funded preneed funeral selling costs and the effect of amortizing trust funded preneed funeral deferred selling costs was reflected in~~Depreciation and amortization~~in the consolidated statement of cash flows. Effective January 1, 2005, the payment of direct selling expenses associated with trust funded preneed funeral contracts is reflected in the consolidated statement of cash flows as cash flows from operating activities in the line item~~Net income (loss)~~. At the time of death maturity, we receive the principal and undistributed investment earnings from the trust and any remaining receivable due from the customer. This cash flow at the time of service is generally less than the revenue recognized, thus creating a negative effect on working capital cash flow from operating activities.

In certain situations pursuant to state or provincial laws, we can post a surety bond as financial assurance for an amount that would otherwise be required to be deposited in trust accounts for trust funded preneed funeral contracts. See the~~Financial Assurances~~section within this Preneed Funeral and Cemetery Activities section for further details on our practice of posting such surety bonds. We believe the deferred revenues associated with preneed funeral bonded contracts exceed the expected cost of meeting our obligations to provide funeral services and merchandise for the outstanding preneed funeral bonded contracts, and our future operating cash flows will be sufficient to fulfill these contracts without use of the surety bonds. If the expected costs were to exceed the deferred revenues, we would be required to record a loss provision in our consolidated statements of operations.

If a customer cancels the trust funded preneed funeral contract that has been bonded prior to death maturity, state or provincial law determines the amount of the refund owed to the customer. Because the funds have not been held in trust, there are no earnings to be refunded to the customer or us. We pay the customer refund out of our operating funds, which reduces working capital cash flow from operating activities.

~~The cash flow activity over the life of a preneed funeral contract that has been bonded from the date of sale to its death maturity or cancellation is captured in the line items~~~~Net effect of preneed funeral production and maturities~~ ~~and~~~~Net income (loss)~~in the consolidated statement of cash flows. The payments received from our customers for their trust funded preneed funeral contracts that have been bonded are a source of working capital cash flow from operating activities until the contracts mature. When a trust funded preneed funeral contract that has been bonded matures upon the death of the beneficiary, there is no additional cash flow to us unless the customer owed an outstanding balance, thus creating a negative effect on the cash flow from operating activities. Refunds on customer cancellations of bonded contracts are also a reduction of working capital from operating activities reflected in the line item~~Net effect of preneed funeral production and maturities. Effective January 1, 2005, the payments of direct selling costs are included in the line item~~~~Net income (loss)~~~~. Prior to January 1, 2005, the payment of direct selling costs was included in the line item~~~~Net effect of preneed funeral production and maturities~~~~and the effect of amortizing the deferred selling costs was reflected in~~~~Depreciation and amortization~~~~. The premiums paid to the surety companies for the bond coverage are reflected in the line item~~~~Net income (loss)~~~~as a use of working capital.~~

~~Insurance Funded Preneed Funeral Contracts:~~Where permitted, customers may arrange their funeral contract by purchasing a life insurance or annuity policy from third party insurance companies, for which we earn a commission for being the general agent for the insurance company. The policy amount of the insurance contract between the customer and the third party insurance company generally equals the amount of the preneed funeral contract. However, we do not reflect the unfulfilled insurance funded preneed funeral contract amounts in our consolidated balance sheet, as these contracts are not assets and liabilities as defined by Statement of Financial Accounting Concepts No. 6, “~~Elements in Financial Statements~~”.

The third party insurance company collects funds related to the insurance contract directly from the customer. The life insurance contracts include increasing death benefit provisions, which are expected to offset the inflationary costs of providing the preneed funeral services and merchandise in the future for the prices that were guaranteed at the time of the preneed sale. The customer/policy holder assigns the policy benefits to our funeral home to pay for the preneed funeral contract at the time of need. Approximately 63% of our 2005 North America preneed funeral production is insurance funded preneed funeral contracts.

We receive general agency (GA) commissions from third party insurance companies when customers purchase insurance contracts from such third party insurance companies to fund funeral services and merchandise at a future date. These general agency commissions are based on a percentage per contract sold (typically ranging between 11% and 16%) and are recognized as funeral revenues when the insurance purchase transaction between the customer and third party insurance provider is completed. GA commissions totaled $6.7 million and $8.0 million in the first quarter of 2005 and 2004, respectively. Direct selling costs incurred pursuant to the sale of insurance funded preneed funeral contracts are expensed as incurred.

Additionally, we may receive cash overrides based on achieving certain dollar volume targets of life insurance policies sold as a result of marketing agreements entered into in connection with the sale of our insurance subsidiaries in 2000. These overrides are recorded in~~Other income, net~~ ~~in the consolidated statement of operations.~~

If a customer cancels the insurance funded preneed funeral contract prior to death maturity, the insurance company pays the cash surrender value under the insurance policy directly to the customer. If the contract was outstanding for less than one year, the insurance company charges back the GA revenues and overrides we received on the contract. An allowance for these chargebacks is included in the consolidated balance sheet based on our historical chargeback experience.

Because insurance funded preneed funeral contracts are not reflected in our consolidated balance sheet, the cash flow activity associated with these contracts generally occurs only at the time of sale and at death maturity or cancellation and is recorded as cash flows from operating activities within our funeral segment. At the time of sale, the GA revenues and overrides received net of the direct selling costs provide a net source of cash flow. If the cancellation occurs within the one year following the date of sale, our cash flow is reduced by the charge-back of GA revenues and overrides. When the funeral service is performed at death maturity, atneed funeral revenues and related accounts receivable are recorded for the services and merchandise included on the insurance funded preneed contracts, the increasing death benefit associated with the insurance policy, and any additional items purchased by the family. Proceeds from the insurance policies are applied to satisfy the receivables due and any remaining funds due are collected from the

family. The insurance proceeds (which include the increasing death benefit of approximately 1% per year) less the funds used to provide the funeral goods and services provide a net source of cash flow. There is no guarantee that the increasing insurance benefit will cover future increases in the cost of providing a price guaranteed funeral service, which could materially adversely affect our future cash flows, revenues, and profit margins.

The table below details the North America results of trust and insurance funded preneed funeral production for the three months ended March 31, 2005 and 2004, the total selling costs incurred to obtain the preneed arrangements. Total selling costs incurred to obtain the preneed arrangements include compensation and associated fringe benefits, facility expense, advertising and lead procurement costs, sales supplies expense, and other associated costs.

North America
Funeral
Three months ended
March 31,
(In millions) 2005 2004
Preneed Production:
Trust (including bonded) $ 32.1 $ 26.6
Insurance (1) 54.5 64.4

Total $ 86.6 $ 91.0

Total selling costs $ 19.1 $ 19.5


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

~~The following table reflects the North America backlog of trust funded deferred preneed funeral contract revenues (including amounts related to~~~~Non-controlling interest in funeral and cemetery trusts~~) at March 31, 2005 and December 31, 2004. Additionally, we have reflected the North American backlog of unfulfilled insurance funded contracts (not included in our consolidated balance sheet) and total North American backlog of preneed funeral contract revenues at March 31, 2005 and December 31, 2004. The backlog amounts presented are reduced by an amount that we believe will cancel before maturity.

The table also reflects the North America trust funded preneed funeral receivables and trust investments (investments at market and cost basis) associated with the backlog of trust funded deferred preneed funeral contract revenues, net of an estimated cancellation allowance. The cost and market values associated with funeral trust investments included in the assets associated with the backlog of trust funded deferred preneed funeral revenues at March 31, 2005 and December 31, 2004 are computed as follows. Cost reflects the investment (net of redemptions) of control holders in common trust funds, mutual funds and private equity investments. Market reflects the fair market value of securities or cash held by the common trust funds, mutual funds at published values and the estimated market value of private equity investments (including debt as well as the estimated fair value related to the contract holders’ equity in majority-owned real estate investments). The market value of funeral trust investments was based primarily on quoted market prices at March 31, 2005 and December 31, 2004. The difference between the backlog and asset amounts represents the contracts for which we have posted surety bonds as financial assurance in lieu of trusting and the amounts collected from customers that were not required to be deposited to trust. The table also reflects the amounts expected to be received from insurance companies from the assignment of policy proceeds related to insurance funded contracts.

North America
Funeral
March 31, 2005 December 31, 2004
(Restated) (Restated)
Market Cost Market Cost
Backlog of trust funded deferred preneed funeral revenues (1) $ 1,456.0 $ 1,454.7 $ 1,475.9 $ 1,440.8
Backlog of insurance funded preneed funeral revenues (2) $ 2,211.6 $ 2,211.6 $ 2,202.6 $ 2,202.6

Total backlog of preneed funeral revenues (including bonded) $ 3,667.6 $ 3,666.3 $ 3,678.5 $ 3,643.4

Assets associated with backlog of trust funded deferred preneed funeral revenues, net of estimated allowance for cancellation $ 1,145.8 $ 1,144.4 $ 1,165.8 $ 1,130.6
Insurance policies associated with insurance funded deferred preneed funeral revenues, net of estimated allowance for cancellation (2) $ 2,211.6 $ 2,211.6 $ 2,202.6 $ 2,202.6

Total assets associated with backlog of preneed funeral revenues $ 3,357.4 $ 3,356.0 $ 3,368.4 $ 3,333.2


~~(1)~~		~~Includes amounts reflected as~~~~Non-controlling interest in funeral and cemetery trusts~~~~in the consolidated balance sheet, net of estimated cancellation allowance.~~

~~(2)~~		~~Insurance funded preneed funeral contracts are not included in the consolidated balance sheet.~~

~~Preneed Cemetery Activities~~

When purchasing cemetery property interment rights, merchandise, and services on a preneed basis, approximately 30% of our consumers choose to pay the entire amount of the contract at the time of sale. The remaining customers choose to pay for their contracts on an installment basis generally over a period of one to seven years. On these installment contracts, we receive an average down payment at the time of sale of approximately 14%. Historically, the installment contracts have included a finance charge ranging from 3.5% to 15.7% depending on the date sold, the payment period selected, state laws and the payment method (i.e., monthly statement billing or automated bank draft). Unlike trust funded preneed funeral contracts, where the entire purchase price is deferred and the revenue is recognized as one event at the time of death maturity, the revenues associated with a preneed cemetery contract can be recognized as different contract events occur. Preneed sales of cemetery interment rights (cemetery burial property) are recognized when a minimum of 10% of the sales price has been collected and the property has been constructed or is available for interment. With the customer’s direction, which is generally obtained at the time of sale, we can choose to order, store, and transfer title to the customer of their personalized marker merchandise. Upon the earlier of vendor storage of these items or delivery in our cemetery, we recognize the associated revenues and record the cost of sale. For services, personalized marker merchandise where the customer chooses not to elect vendor storage or early delivery to our cemetery, and non-personalized merchandise (such as vaults), we defer the revenues until the services are performed and the merchandise is delivered.

Because the services or merchandise will not be provided until some time in the future, all or a portion of the proceeds from the sale of preneed cemetery merchandise and services may be required by law to be paid into merchandise and services trusts until the merchandise is delivered or the service is provided. As with trust funded preneed funeral contracts, the funds deposited into trust are invested by the independent trustees in accordance with the investment guidelines established by statute or, where the prudent investor rule is applicable, the guidelines as established by our Investment Committee of the Board of Directors. The trustees utilize professional investment advisors to select and monitor the money managers that make the investment decisions in accordance with the guidelines. We retain any funds above the amounts required to be deposited into trust accounts and use them for working capital purposes, generally to offset the selling and administrative costs of the preneed programs. State or provincial law governs the timing of the required deposits into the trust accounts, which generally ranges from five to 45 days after receipt of the funds from the customer. In certain situations pursuant to state or provincial laws, we post a surety bond as financial assurance for a certain amount of the preneed cemetery contract in lieu of placing funds into trust accounts. See the~~Financial Assurancessection within this Preneed Funeral and Cemetery Activities section for further details on our practice of posting such surety bonds.~~

The trust investments are expected to generate earnings sufficient to offset the inflationary costs of providing the preneed cemetery services and merchandise in the future for the prices that were guaranteed at the time of sale. As a result of the adoption of FIN 46R, the preneed cemetery trust investments have been consolidated in our balance sheet and are recorded at market value in accordance with SFAS 115. Investment earnings on trust assets are generally accumulated in the trust and distributed as each preneed contract item is delivered or cancelled. However, in certain states, the trustees are allowed to distribute a portion of the investment earnings to us before the preneed cemetery service or merchandise item is delivered (“distributable states”). Until delivered or cancelled, any investment earnings are attributed to the individual contract items. Recognition of the net investment earnings is independent of the timing of the receipt of the related cash flows, but generally will be the same in states that are not distributable states.

As a result of our 2003 restatement and other events including the implementation of Section 404 of the Sarbanes Oxley Act and the implementation of the new point-of-sale system, we began a process to examine all cemetery contracts in our deferred preneed cemetery contract balance to ensure that revenue was recognized in the appropriate period (when merchandise and services were delivered). As of May 2, 2005, we have completed our reconciliation procedures for our cemetery contracts and our results indicated no significant fluctuations from our expectations. Therefore, no adjustment in the first quarter was required.

~~Prior to January 1, 2005, direct selling costs incurred pursuant to the sales of preneed cemetery contracts were deferred and included in~~~~Deferred charges and other assets~~in the consolidated balance sheet. The deferred selling costs were expensed in proportion to the corresponding revenues when recognized. Other selling costs associated with the sales and marketing of preneed cemetery contracts (e.g., lead procurements costs, brochures and marketing materials, advertising and administrative costs) were expensed as incurred. An allowance for cancellation was recorded for cemetery deferred selling costs based on historical contract cancellation experience.

Beginning January 1, 2005, we made an accounting change to expense all direct selling costs as incurred with the sales of preneed cemetery contracts. See Critical Accounting Policies and Accounting Changes in Item 2 in this amended Form 10-Q for additional information regarding this change in accounting for selling costs.

If a preneed cemetery contract is cancelled prior to delivery, state or provincial law determines the amount of the refund owed to the customer, if any, including the amount of the attributed investment earnings. Upon cancellation, we receive the amount of principal deposited to trust and previously undistributed investment earnings and, where required, issue a refund to the customer. We retain any excess funds and recognize the attributed investment earnings (net of any investment earnings payable to the customer) in our consolidated statement of operations. Based on our historical experience, we have included an allowance for cancellation for preneed cemetery contracts in~~Preneed cemetery receivables and trust investmentsand~~~~Deferred preneed cemetery revenues~~~~in our consolidated balance sheet.~~

As the preneed cemetery contract merchandise and service items for which we were required to deposit funds to trust are delivered and recognized as revenues, we receive the principal and previously undistributed investment earnings from the trust. There is generally no remaining receivable due from the customer, as our policy is to deliver preneed cemetery merchandise and service items only upon payment of the contract balance in full. This cash flow at delivery is generally less than the revenue recognized, thus creating a negative effect on working capital cash flow from operating activities, especially if we posted a surety bond in lieu of

~~trusting for the preneed cemetery contract merchandise and service items, as there are no funds in trust available for withdrawal.~~

The cash flow activity from the date of sale of a preneed cemetery contract (origination) to the date of the recognition of the deferred revenue upon its delivery or cancellation (maturity) is reported in the~~Net effect of cemetery production and deliveriesand~~~~Net income (loss)~~line items in the consolidated statement of cash flows. Net effect of preneed cemetery production and deliveries is affected by cash flows provided by the amount retained from funds collected from the customer and distributed trust earnings. Prior to January 1, 2005, this was reduced by the use of funds for the payment of trust funded preneed cemetery selling costs when the preneed cemetery contracts were originated.

The table below details the North America results of total cemetery sales production for the three months ended March 31, 2005 and 2004. Additionally, the table reflects previously deferred revenues recognized in the consolidated statements of operations associated with deliveries/services of cemetery contract items for the three months ended March 31, 2005 and 2004. The Company has conformed the data presented in 2004 on a pro forma basis to be consistent with the presentation of 2005.

North America
Cemetery
Three months ended
March 31,
(In millions) 2005 2004
(Restated)
Pro forma
Total preneed cemetery production $ 74.4 $ 85.7
Total atneed cemetery production 54.8 47.6

Total cemetery sales production 129.2 133.3

Total selling costs $ 24.4 $ 33.6

~~Subsequent to March 31, 2004, we refined our allocation of selling costs between the funeral and cemetery segments. This reallocation resulted in a decrease of selling costs to our cemetery segment.~~

~~The following table reflects the total North America backlog of~~~~Deferred cemetery contract revenues~~~~(including amounts related to~~~~Non-controlling interests in funeral and cemetery trusts~~~~) included in our consolidated balance sheet at March 31, 2005 and December 31, 2004. The backlog amount presented is reduced by an amount that we believe will cancel before maturity.~~

North America
Cemetery
March 31, 2005 December 31, 2004
(Restated) (Restated)
Market Cost Market Cost
Backlog of deferred cemetery revenues (including bonded) (1) $ 1,665.5 $ 1,629.8 $ 1,682.3 $ 1,605.4

Assets associated with backlog of deferred cemetery revenues, net of estimated allowance for cancellation $ 1,205.0 $ 1,174.0 $ 1,237.4 $ 1,170.8


~~(1)~~		~~Includes amounts reflected as~~~~Non-controlling interest in funeral and cemetery trusts~~~~in the consolidated balance sheet, net of estimated cancellation allowance.~~

Financial Assurances

In support of operations, we have entered into arrangements with certain surety companies whereby such companies agree to issue

5133

surety bonds on our behalf as financial assurance and/or as required by existing state and local regulations. The surety bonds are used for various business purposes; however, the majority of the surety bonds issued and outstanding have been used to support our preneed funeral and cemetery sales activities. The obligations underlying ~~obligations~~ these surety bonds ~~assure~~ are recorded on the condensed consolidated balance sheet asDeferred preneed funeral revenuesandDeferred preneed cemetery revenues. The breakdown of surety bonds between funeral and cemetery preneed arrangements, as well as surety bonds for other activities, isare described below. The increase in preneed surety bonds for cemetery is primarily a result of the periodic review performed to adjust the bonds to cover the increased costs for liabilities associated with sales in prior years. We expect this number to decline in subsequent years as merchandise and services related to bonded contracts in Florida are delivered or performed (see further discussion related to Florida bonding below).


	March 31,		December 31,		March 31,		December 31,
(In millions)	2005		2004		2006		2005
Preneed funeral	$	137.0	$	146.7	$	132.0	$	139.3
Preneed cemetery:
Merchandise and services		193.2		186.7		159.7		161.8
Preconstruction		8.7		8.3
Pre-construction						12.5		12.5

Bonds supporting preneed funeral and cemetery obligations		338.9		341.7		304.2		313.6

Bonds supporting preneed business permits		5.0		5.3		4.5		4.7
Other bonds		5.6		5.5		11.0		11.0

Total surety bonds outstanding	$	349.5	$	352.5	$	319.7	$	329.3

Cautionary Statement on Forward-Looking Statements

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

•		The outcome of the acquisition of Alderwoods and the possibility that certain closing conditions will not be satisfied that will result in the acquisition not being completed.

•		Our ability to successfully integrate Alderwoods or that the anticipated benefits of the acquisition are not fully realized.

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

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

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

•		Our ability to continue to successfully implement our ~~strategic~~ plan ~~related~~ to ~~producing operating improvements~~realign pricing according to our strategy and ~~strong cash flows.~~to increase standardization of our processes.

•		Our ability to ~~successfully implement our plan to reduce costs and increase cash flows associated with significant~~manage changes ~~being made to our organization structure, process and quality of our sales efforts.~~

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

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

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

•		Our ability to successfully ~~complete our ongoing process improvement projects, particularly related to the implementation of new processes and internal controls.~~

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

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

•		~~The outcome of a pending Internal Revenue Service audit.~~

•		The effectiveness of our internal controls over financial reporting, and our ability to certify the effectiveness of the internal controls and to obtain a favorable attestation report of our auditors regarding our assessment of our internal controls.

For further information on these and other risks and uncertainties, see our Securities and Exchange Commission filings, including our ~~2004~~2005 Annual Report on Form 10-K, as amended. Copies of this document as well as other SEC filings can be obtained from our website at ~~www.sci-corp.com.~~www.sci-corp.com. We assume no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by us, whether as a result of new information, future events or otherwise.

Item 3.Quantitative and Qualitative Disclosures ~~about~~About Market Risk

For information regarding our exposure to certain market risks, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk in our current report on Form 10-K, as amended, for the year ended December 31, 2004. At March 31, 2005 and December 31, 2004, less than 1% of our net assets related to our equity investment in France after consummation of a joint venture transaction. There have been no ~~other material~~significant changes ~~to the disclosure on this matter made in such amended Form 10-K.~~

~~We occasionally use derivative instruments, primarily~~ in the ~~form of forward exchange contracts,~~Company’s exposure to ~~hedge our net investment in foreign assets and for other hedging activities. We do not participate in derivative transactions that are leveraged or considered speculative in nature. During~~market risk during the first quarter 2004, we executed certain forward exchange contracts as hedges of our net foreign investment in our France operations and related to our expected proceeds from the sale of a portion of our equity interest in and the prepayment of a note receivable from a United Kingdom company.

As of March 31, 2005, the above derivative instruments had expired with the sale of France and the receipt of the proceeds from the United Kingdom. We were not a party to any derivative transactions at March 31, 2005.most recently completed fiscal quarter.

Item 4.Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s periodic Securities Exchange Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required ~~financial~~ disclosure.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Disclosure Committee and management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of ~~our~~its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon, and as of the date of this evaluation, such officers concluded that the Company’s disclosure controls and procedures were not effective because of the material weaknesses described below. In light of the material weaknesses described below, the Company performed additional analysis and other post-closing procedures to ensure our consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the consolidated financial statements included in this report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.effective.

~~Internal Control Over Financial Reporting (As Restated)~~

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

~~Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria described in~~~~Internal Control~~—~~Integrated Framework~~~~issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)~~.

A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. We identified the following material weaknesses in our assessment of the effectiveness of internal control over financial reporting as of December 31, 2004:

The Company did not maintain effective controls over the completeness of revenue recognition on preneed cemetery contracts. Specifically, the Company did not maintain effective controls over revenue recognition transactions associated with the timely recording of the physical delivery and performance of cemetery goods and services sold on a preneed basis. This control deficiency resulted in the restatement of the Company’s 2004, 2003 and 2002 consolidated financial statements as well as its quarterly financial data for all quarters of both 2004 and 2003. Additionally, this control deficiency could result in the misstatement of cemetery merchandise and service revenues and of deferred revenues and assets associated with cemetery goods and services sold

on a preneed basis that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.

B.		The Company did not maintain effective controls over the reconciliations of preneed funeral and cemetery detailed records to trust fund assets and corresponding deferred revenue and non-controlling interest accounts related to preneed funeral and cemetery activities, and of cemetery deferred selling costs. This control deficiency resulted in the restatement of the Company’s 2004, 2003 and 2002 consolidated financial statements as well as its condensed consolidated financial statements for the first quarter of 2005 and quarterly financial data for all quarters of both 2004 and 2003. Additionally, this control deficiency could result in the misstatement of funeral and cemetery revenues and of assets and liabilities associated with preneed funeral and cemetery activities that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.

C.		The Company did not maintain effective controls over its application and monitoring of the appropriate accounting policies related to certain lease accounting. Specifically, the Company did not maintain effective controls over the application and monitoring of its accounting policies relating to lease renewal options and rent escalation provisions. This control deficiency contributed to the restatement of the Company’s 2004, 2003 and 2002 consolidated financial statements as well as its quarterly financial data for all quarters of both 2004 and 2003. Additionally, this control deficiency could result in the misstatement of accrued rental liability and related operating rental expense that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.

D.		The Company did not maintain effective controls over the validity, accuracy and completeness over revenue recognition and deferred revenue from preneed and atneed funeral and cemetery contracts. Specifically, the Company did not maintain effective controls over the proper review of preneed and atneed funeral and cemetery contracts by local management, the proper review by location management for customer and authorized Company signatures and proper completion of customer contracts. This control deficiency did not result in an adjustment to the 2004 annual or interim financial statements. However, this control deficiency could result in a misstatement of revenues, accounts receivable and deferred revenue that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.

E.		The Company did not maintain effective controls over the use and control of pre-numbered manual contracts, and the accuracy of information pertaining to manual contracts entered into the Company’s point-of-sale system over revenue and deferred revenue from preneed and atneed funeral and cemetery contracts. Specifically, manual contracts are not consistently controlled to ensure that revenues related to preneed and atneed funeral and cemetery manual contracts are reflected in the financial statements in the appropriate time period. Additionally, sales detail reports for atneed funeral and cemetery and preneed cemetery manual contracts are not consistently being reviewed by location personnel to ensure agreement between manual contract information and information entered into the point-of-sale system. This control deficiency did not result in an adjustment to the 2004 annual or interim financial statements. However, this control deficiency could result in a misstatement of revenue, accounts receivable and deferred revenues that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.

F.		The Company did not maintain effective controls over the accuracy, completeness and safeguarding of cash receipts. Specifically, individual cash receipt documentation is not consistently prepared for all cash or check payments made by the customer, daily

reconciliations of cash are not consistently reviewed by location personnel and customer payments are not consistently secured at all times prior to deposit. This control deficiency did not result in an adjustment to the 2004 annual or interim financial statements. However, this control deficiency could result in misappropriation of Company assets and a misstatement of cash and accounts receivable that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.

G.		The Company did not maintain effective controls over the approval of adjustments to and review of collectability of atneed funeral and cemetery accounts receivable. Client families commonly request changes to items or services after the initial contract has been signed which requires adjustments to their contract and requires an adjustment to revenue and accounts receivable. The Company did not have effective controls over proper review by location management of adjustments to the customer revenue and accounts receivable related to such items or services or proper review of accounts receivable balances for reasonableness or collectability. Additionally, the Company did not have effective controls over review by location management of the outstanding account balances at period-end to ensure appropriate follow up is performed or write-off of account balance is performed. This control deficiency did not result in an adjustment to the 2004 annual or interim financial statements. However, this control deficiency could result in a misstatement of accounts receivable and revenues that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.

H.		The Company did not maintain effective controls over the review of cash disbursements at the funeral and cemetery locations. Specifically, the Company did not maintain effective controls over the review by location management of disbursements made at those locations and by the corporate office in Houston on behalf of such locations in order to verify that all expenditures are accurate and reasonable. This control deficiency did not result in an adjustment to the 2004 annual or interim financial statements. However, this control deficiency could result in expenditures being made that are erroneous or not for legitimate business purposes or could result in a misstatement of accounts payable or expenses that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.

I.		The Company did not maintain effective controls over the existence, completeness and accuracy of merchandise inventory. Specifically, the Company did not maintain effective controls over physical inventory counts at the funeral and cemetery locations. Inventory count sheets were not signed by individuals who performed and verified the counts. Also, in some instances, inventory counts were not conducted on a timely basis or the inventory counts by location personnel were not accurate. This control deficiency did not result in an adjustment to the 2004 annual or interim consolidated financial statements. However, this control deficiency could result in the misstatement of inventory and cost of sales that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.

J.		The Company did not maintain effective controls over the accounting for capitalized covenant-not-to-compete agreements and the recording of asset impairments and divestitures related to the sale or disposition of locations in accordance with generally accepted accounting principles. Specifically, the Company failed to write off certain previously capitalized covenant-not-to-compete assets resulting in a misstatement of the gain or loss upon exiting locations and the ongoing amortization expense. Additionally, the Company did not maintain effective controls over the impairment or disposition of assets related to the sale of certain locations in the proper period. This control deficiency resulted in the restatement of the Company’s 2004, 2003 and 2002 consolidated financial statements, as well as its condensed consolidated financial statements for the first quarter of 2005 and quarterly financial data for all quarters of both 2004 and 2003. Furthermore, this control deficiency could result in the misstatement of gains and impairment (losses) on dispositions, property, plant and equipment and deferred charges and other assets that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.

K.		The Company did not maintain effective controls over its information technology program change control procedures with respect to the Company’s point-of-sale system (HMIS) and associated interfaces. Specifically, the Company did not maintain effective controls to assess the impact of HMIS program changes to related interfaces and to adequately test the accuracy and performance of such program changes. This control deficiency contributed to the material weaknesses and restatement described in (B) and (L) herein. Additionally, this control deficiency could result in the

misstatement of funeral revenues and of assets and liabilities associated with preneed funeral activities that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.

L.		The Company did not maintain effective controls over the accuracy of preneed funeral trust income recorded upon the maturity of certain preneed funeral contracts. Specifically, the Company did not maintain effective controls over the posting of automated journal entries to the general ledger resulting in the entries being posted to the incorrect account. This control deficiency resulted in the restatement of the Company’s 2004 financial statements including an adjustment to the fourth quarter 2004 financial data as well as its condensed consolidated financial statements for the first quarter of 2005. Additionally, this control deficiency could result in the misstatement of funeral revenues and of assets and liabilities associated with preneed funeral activities that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.

M.		The Company did not maintain effective controls over the communication and evaluation by the legal department of information related to legal claims. Specifically, the legal department did not communicate information relevant to the complete and accurate recording of legal accruals in the proper period in accordance with generally accepted accounting principles. This control deficiency did not result in an adjustment to the Company’s 2004 consolidated financial statements or first quarter 2005 condensed consolidated financial statements. However, this control deficiency did result in an adjustment detected by the auditor to the second quarter 2005 condensed consolidated financial statements. Additionally, this control deficiency could result in the misstatement of general and administrative expenses and accrued liabilities that would result in a misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.

~~Because of these material weaknesses, we concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2004 based on the criteria in the~~~~Internal Control~~—~~Integrated Framework~~~~issued by the COSO~~.~~The above described material weaknesses continue to exist as of March 31, 2005.~~

Management had previously concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2004 because of the material weaknesses described in (A) — (M) above. In connection with the restatement of the Company’s interim financial data described in note two, management has determined that the restatement was an additional effect of the material weaknesses described in (B), (J), (K), and (L) above that were previously disclosed in Item 9A of the Company’s 2004 Form 10-K/A (Amendment No. 2). Accordingly, this restatement did not have an effect on this report on internal control over financial reporting.

~~Status of Plan for Remediation~~

Management, with the oversight of the Audit Committee, has been aggressively addressing all of the above deficiencies and is committed to effectively remediating known weaknesses in our internal control over financial reporting and disclosure controls and procedures as expeditiously as possible. We have devoted significant time and resources to remediate the deficiencies identified.

We previously initiated projects to reconcile our preneed backlog detailed records to trust assets and corresponding liabilities. These reconciliation projects involved examining the contract details for the individual preneed funeral trust contracts and undelivered cemetery contracts in our detail accounting system records against the manual contract files in the individual funeral homes and cemeteries. We then reconciled the adjusted detail accounting system records to the general ledger balances and recorded any required adjustments. For the related trust assets, we reconciled the contract detail balances to the related trustee bank statements and the general ledger balances. The Company has completed these examination projects and implemented the reconciliation procedures

as described above, which resulted in the identification of a significant number of reconciling items. Subsequent to the completion of the examination of the contracts, the Company began recording the reconciling items to the trust asset and deferred revenue detailed records. During this review, the Company determined that certain of the reconciling items had been reflected improperly in its initial review which resulted in an error to the Company’s consolidated financial statements. However, we have further strengthened the internal controls and procedures surrounding the reconciliation process and anticipate that these internal controls will be operating effectively for the current reconciliations by the end of 2005.

The Company is currently developing control procedures to ensure lease payments and related asset depreciation are expensed in accordance with generally accepted accounting principles. We expect these procedures to be completed during 2005.

We currently rely on processes that are heavily dependent on manual and detective controls and on human intervention at our funeral and cemetery locations. Many of the funeral and cemetery location controls are widely dispersed across the Company’s network of approximately 1,600 locations making it very difficult to achieve a consistently high level of precision. In May 2005 we implemented the following additional redundant, compensating, and monitoring controls at a consolidated level to monitor the control activities performed at the funeral and cemetery locations.

	•		~~Review of preneed and atneed funeral and cemetery contracts to verify location management approval.~~

	•		~~Review of manual contract control logs at funeral and cemetery locations to verify completeness of contracts issued.~~

	•		~~Review of manual contracts to verify the accuracy of data entered into the point-of-sale system.~~

	•		~~Review of daily cash receipts and cash report reconciliations at the funeral and cemetery locations to verify accuracy and performance.~~

	•		~~Review of revenue recognition transactions at cemetery locations to verify accuracy of the delivery and performance of cemetery goods and services which were previously sold on a preneed basis.~~

	•		~~Verification of approvals of accounts receivable adjustments at funeral and cemetery locations.~~

	•		~~Verification of reviews of cash disbursement reports at funeral and cemetery locations.~~

These additional controls and procedures will provide us with greater visibility over the performance of the controls in the funeral and cemetery locations. We will continue with formal training at the funeral and cemetery locations and continually assess the effectiveness of controls. Additionally, we are also planning for longer-term improvements in key business processes with an emphasis on preventative controls (versus detective controls), and system-based controls (versus manual controls) wherever possible.

We believe our consolidated financial statements present fairly the financial position of the Company and do not contain any material misstatements. The above described material weaknesses in internal control over financial reporting if left unremediated increase the likelihood of misstatements occurring in future periods and not being detected in a timely manner.

Changes in Internal Control Over Financial Reporting

The component of the material weakness noted above related to the reconciliation of cemetery deferred selling costs is no longer applicable due to the Company’s change in accounting for direct selling costs effective January 1, 2005 whereby all deferred selling costs were expensed as a change in accounting and all future direct selling costs are expensed when incurred, eliminating the requirement to reconcile deferred selling costs. Please see note four to the Company’s interim consolidated financial statements for more information related to this accounting change. Except as otherwise discussed herein, thereThere have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

Information regarding legal proceedings is set forth in note ~~nine~~eight to the unaudited condensed consolidated financial statements in Item 1 of Part I of this ~~amended~~Amended Form 10-Q which information is hereby incorporated by reference herein.

Item 1A.Risk Factors

There have been no material changes in our Risk Factors as set forth in Item 1A of the Company’s Form 10-K, as amended for the fiscal year ended December 31, 2005 except as detailed below.

The acquisition of Alderwoods is subject to certain closing conditions that, if not satisfied or waived, will result in the acquisition not being completed, which may cause the market price of SCI common stock to decline.

The acquisition is subject to customary conditions to closing, including the receipt of the required approval of the shareholders of Alderwoods. If any condition to the acquisition agreement is not satisfied or, if permissible, waived, the acquisition will not be completed. In addition, SCI and Alderwoods may terminate the acquisition agreement in certain circumstances. If the acquisition is not completed, the market price of SCI common stock may decline if the current market price reflects a market assumption that the acquisition will be completed. SCI will also still be obligated to pay certain investment banking, financing, legal and accounting fees and related expenses.

We may fail to realize the anticipated benefits of the acquisition of Alderwoods.

The success of the acquisition will depend, in part, on our ability to realize the anticipated cost savings from shared corporate and administrative areas and the rationalization of duplicative expenses. However, to realize the anticipated benefits from the acquisition, we must successfully combine the businesses of SCI and Alderwoods in a manner that permits those costs savings to be realized. If we are not able to successfully achieve these objectives, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer or cost more to realize than expected. SCI and Alderwoods have operated and, until the completion of the acquisition, will continue to operate, independently. It is possible that the integration process could result in the loss of valuable employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures, practices, and policies that could adversely impact our operations.

Item 2.~~Changes in~~Unregistered Sales of Equity Securities and Use of Proceeds ~~and Issuer Purchases of Equity Securities~~

~~In October 1999,~~On January 31, 2006, we ~~suspended payment of regular quarterly cash dividends on our outstanding~~issued 330 deferred common stock ~~in order~~equivalents, or units, pursuant to ~~focus on improving cash flow and reducing existing debt. On February 10, 2005, our Board of Directors approved~~provisions regarding dividends under the ~~initiation of a quarterly cash dividend of $.025 per common share. The first dividend totaling $7.7 million was paid on April 29, 2005~~Director Fee Plan to ~~shareholders of record at April 15, 2005. While we intend to pay regular quarterly cash dividends~~four non-employee directors. We did not receive any monetary consideration for the ~~foreseeable future, all subsequent dividends are subject to final determination by~~issuances. These issuances were unregistered because they did not constitute a “sale” within the ~~Board~~meaning of ~~Directors~~Section 2(3) of ~~SCI each quarter after its review~~the Securities Act of ~~our financial performance.~~

On August 16, 2004, we announced a share repurchase program authorizing the investment of up to $100 million to repurchase our common stock. On November 10, 2004 and February 10, 2005, we announced two increases in the share repurchase program each authorizing the investment of up to an additional $100 million to repurchase our common stock for an aggregate of $300 million. Pursuant to the program, we have repurchased shares of our common stock1933, as ~~set forth in the table below. As of March 31, 2005, the purchases totaled $213.8 million.~~

Issuer purchases of equity securities
(a) (b) (c) (d)
Total number
of shares Dollar value of
Total purchased as shares that may
number of Average part of publicly yet be purchased
shares price paid announced under the
Period purchased per share programs programs
January 1, 2005 — January 31, 2005 10,863,863 $ 7.00 10,863,863 $ 13,483,247
February 1, 2005 — February 28, 2005 3,623,200 $ 7.18 3,623,200 $ 87,380,214
March 1, 2005 — March 31, 2005 163,000 $ 7.39 163,000 $ 86,171,928

14,650,063 $ 7.05 14,650,063 $ 86,171,928

From April 1, 2005 to May 16, 2005, we repurchased 5.5 million shares for a total cost of $39.6 million. As of May 16, 2005, the remaining dollar value of shares that may yet be purchased under our share repurchase programs was approximately $46.6 million.amended.

Item 6.Exhibits

	2.1		Agreement and Plan of Merger, dated April 2, 2006, by and among Service Corporation International, Coronado Acquisition Corporation and Alderwoods Group, Inc. (Incorporated by reference to Exhibit 2.1 to Form 8-K dated April 5, 2006).

	10.1		Commitment Letter, dated as of April 2, 2006, by and among Service Corporation International, Chase Lincoln First Commercial Corporation and J.P. Morgan Securities Inc. (Incorporated by reference to Exhibit 10.1 to Form 8-K dated April 5, 2006).

	10.2		Employment and Noncompetition Agreement, dated January 1, 2004, between SCI Executive Services, Inc. and ~~First Amendment~~Sumner J. Waring, III. (Incorporated by reference to ~~Amended~~Exhibit 10.2 to Form 10-Q for the quarterly period ended March 31, 2006)

	10.3		Addendum to Employment and ~~Restated Credit~~Noncompetition Agreement, ~~among~~dated December 1, 2005, between SCI Executive Services, Inc. and Sumner J. Waring, III. (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the ~~Company, as Borrower,~~quarterly period ended March 31, 2006)

	10.4		Employment and Noncompetition Agreement, dated January 1, 2004 between SCI Executive Services, Inc. and Stephen M. Mack. (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the ~~lenders party thereto, JPMorgan Chase Bank, National Association, as Administrative Agent, Bank of America, N.A., as Syndication Agent,~~quarterly period ended March 31, 2006)

	10.5		Addendum to Employment and ~~Calyon New York Branch, Amegy Bank, National Association~~Noncompetition Agreement, dated December 1, 2005, between SCI Executive Services, Inc. and ~~Merrill Lynch Capital Corporation, as Co-Documentation Agents, and JPMorgan Chase Banks National Association, as Administrative Agent.~~Stephen M. Mack. (Incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarterly period ended March 31, 2006)

	12.1		Ratio of earnings to fixed charges for the three months ended March 31, ~~2005~~2006 and ~~2004.~~

	~~18.1~~		Preferability letter from Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP) regarding change in accounting principle. (Incorporated by reference to Exhibit 18.1 to Form 10-Q for the quarterly period ended March 31, 2005).2005.

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

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


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

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

Undertaking

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

SIGNATURE

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


~~October 27, 2005~~	August 11, 2006	SERVICE CORPORATION INTERNATIONAL

	By:	~~By: /s/~~/s/ Jeffrey ~~E. Curtiss~~
	I. Beason
		Jeffrey ~~E. Curtiss~~I. Beason
		~~Senior~~ Vice President ~~Chief Financial Officer~~ and Corporate Controller (Chief Accounting Officer)
			~~Treasurer (Principal Financial Officer)~~

6038

Exhibit Index

~~Index to Exhibits~~


Exhibits		~~Description~~
2.1		Agreement and Plan of Merger, dated April 2, 2006, by and among Service Corporation International, Coronado Acquisition Corporation and Alderwoods Group, Inc. (Incorporated by reference to Exhibit 2.1 to Form 8-K dated April 5, 2006).

10.1		Commitment Letter, dated as of April 2, 2006, by and among Service Corporation International, Chase Lincoln First Commercial Corporation and J.P. Morgan Securities Inc. (Incorporated by reference to Exhibit 10.1 to Form 8-K dated April 5, 2006).

10.2		Employment and Noncompetition Agreement, dated January 1, 2004, between SCI Executive Services, Inc. and ~~First Amendment~~Sumner J. Waring, III. (Incorporated by reference to ~~Amended~~Exhibit 10.2 to Form 10-Q for the quarterly period ended March 31, 2006)

10.3		Addendum to Employment and ~~Restated Credit~~Noncompetition Agreement, ~~among~~dated December 1, 2005, between SCI Executive Services, Inc. and Sumner J. Waring, III. (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the ~~Company, as Borrower,~~quarterly period ended March 31, 2006)

10.4		Employment and Noncompetition Agreement, dated January 1, 2004 between SCI Executive Services, Inc. and Stephen M. Mack. (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the ~~lenders party thereto, JPMorgan Chase Bank, National Association, as Administrative Agent, Bank of America, N.A., as Syndication Agent,~~quarterly period ended March 31, 2006)

10.5		Addendum to Employment and ~~Calyon New York Branch, Amegy Bank, National Association~~Noncompetition Agreement, dated December 1, 2005, between SCI Executive Services, Inc. and ~~Merrill Lynch Capital Corporation, as Co-Documentation Agents, and JPMorgan Chase Banks National Association, as Administrative Agent.~~Stephen M. Mack. (Incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarterly period ended March 31, 2006)

12.1		Ratio of earnings to fixed charges for the three months ended March 31, ~~2005~~2006 and ~~2004.~~

~~18.1~~		Preferability letter from Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP) regarding change in accounting principle. (Incorporated by reference to Exhibit 18.1 to Form 10-Q for the quarterly period ended March 31, 2005).2005.

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

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

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

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


	Page
Part I. Financial Information


Item 1. Financial Statements

Unaudited Condensed Consolidated Statement of Operations -— Three Months Ended March 31, 2006 and 2005 ~~and 2004~~(Restated)		4

Unaudited Condensed Consolidated Balance Sheet -— March 31, ~~2005~~2006 and December 31, ~~2004~~2005 (Restated)		5

Unaudited Condensed Consolidated Statement of Cash Flows -— Three Months Ended March 31, 2006 and 2005 ~~and 2004~~(Restated)		6

Unaudited Condensed Consolidated Statement of Stockholders’ Equity -— Three Months Ended March 31, ~~2005~~2006 (Restated)		7


Notes to Unaudited Condensed Consolidated Financial Statements		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
~~Introduction~~General		2922
~~Our~~ Competitive Strengths		2923
~~Business Challenges~~		30
~~The Path to~~Opportunity for Growth		3124
~~Near-Term Revenue Growth Opportunities~~Key Performance Indicators		3124
~~Long-Term Revenue Growth Opportunities~~Other Matters		3227
Critical Accounting Policies ~~and~~		27
Accounting Changes		3327
Results of Operations –— Three Months Ended March 31, ~~2005~~2006 and ~~2004~~2005		38
~~Comparable Results of Operations – Three Months Ended March 31, 2005 and 2004~~		4028
Financial Condition, Liquidity and Capital Resources		43
~~Preneed Funeral and Cemetery Activities~~		4532
Cautionary Statement on Forward-Looking Statements		5234

Item 3. Quantitative and Qualitative Disclosures ~~about~~About Market Risk		5335

Item 4. Controls and Procedures		5435

Part II. Other Information

Item 1. Legal Proceedings		5936

Item 1A. Risk Factors		36

Item 2. ~~Changes in~~Unregistered Sales of Equity Securities and Use of Proceeds ~~and Issuer Purchases of Equity Securities~~		5936

Item 6. Exhibits		5936

Signature		6038
~~Agreement & First Amendment to Credit Agreement~~
Ratio of Earnings to Fixed Charges
Certification of CEO ~~Pursuant to~~in Satisfaction of Section 302
Certification of ~~PFO Pursuant to~~Principal Financial Officer in Satisfaction of Section 302
Certification of CEO ~~Pursuant to~~in Satisfaction of Section 906
Certification of ~~PFO Pursuant to~~Principal Financial Officer in Satisfaction of Section 906


	Three months ended
	March 31, 2004
	As			As
	Reported			Restated
Revenues	$	589,422		$	588,699
Costs and expenses		473,109			473,070
Gross profits		116,313			115,629
Gains and impairment (losses) on dispositions, net		34,782			34,785
Operating income		100,490			99,393
Income from continuing operations before income taxes and cumulative effects of accounting changes		74,256			73,159
Benefit for income taxes		(3,375	)		(3,779	)
Cumulative effects of accounting changes		(47,074	)		(47,556	)
Net income	$	31,311		$	30,136
Earnings per share:
Basic – EPS	$	.10		$	.10
Diluted – EPS	$	.10		$	.10


	March 31, 2005				December 31, 2004
	As		As		As		As
	Reported		Restated		Reported		Restated
Selected consolidated balance sheet data:
Receivables, net of allowances	$	102,002	$	102,515	$	102,156	$	102,622
Total current assets		543,317		543,279		533,497		533,963
Preneed funeral receivables and trust investments		1,236,538		1,245,726		1,264,600		1,267,784
Preneed cemetery receivables and trust investments		1,368,451		1,362,276		1,402,750		1,399,778
Deferred charges and other assets		295,789		299,201		618,565		621,561
Total assets		7,783,879		7,791,751		8,199,196		8,205,687
Deferred preneed funeral revenues		492,455		500,943		486,191		498,571
Deferred preneed cemetery revenues		809,581		813,149		801,065		803,144
Deferred income taxes		193,473		191,204		279,474		276,572
Non-controlling interest in funeral and cemetery trusts		2,042,879		2,042,933		2,095,852		2,092,881
Accumulated deficit		980,485		984,190		824,364		829,244
Total stockholders’ equity		1,664,572		1,653,108		1,853,576		1,848,667
Total liabilities and stockholders’ equity		7,783,879		7,791,751		8,199,196		8,205,687


	Three months ended March 31, 2004
			Deferred Selling
	Historical		Costs, net (1)			Pro forma
	(Restated)					(Restated)
	note 2					note 2
Gross profits:
Funeral	$	86,559	$	(487	)	$	86,072
Cemetery		29,070		(3,894	)		25,176

		115,629		(4,381	)		111,248

Income (loss) from continuing operations before income taxes and cumulative effects of accounting changes	$	73,159	$	(4,381	)	$	68,778
Net income (loss)	$	30,136	$	(2,848	)	$	27,288

Amounts per common share:
Net income (loss) – basic	$	.10	$	(.01	)	$	.09
Net income (loss) – diluted	$	.10	$	(.01	)	$	.09


	March 31, 2005			December 31, 2004
6.0% notes due December 2005	$	63,801		$	63,801
7.2% notes due June 2006		150,000			150,000
6.875% notes due October 2007		143,475			143,475
6.5% notes due March 2008		195,000			195,000
7.7% notes due April 2009		351,135			358,266
7.875% debentures due February 2013		55,627			55,627
6.75% notes due April 2016		250,000			250,000
Convertible debentures, maturities through 2013, fixed interest rates from 4.75% to 5.5%, conversion prices from $13.02 to $50.00 per share		30,841			30,853
Mortgage notes and other debt, maturities through 2050		46,232			48,194
Deferred charges		(38,036	)		(41,256	)

Total debt		1,248,075			1,253,960
Less current maturities		(75,936	)		(75,075	)

Total long-term debt	$	1,172,139		$	1,178,885


	Foreign			Minimum						Accumulated
	currency			pension			Unrealized			other
	translation			liability			gains			comprehensive
	adjustment			adjustment			and losses			(loss) income
Balance at December 31, 2004	$	(38,349	)	$	—		$	—		$	(38,349	)
Activity in 2005		(6,469	)					—			(6,469	)
Reduction in net unrealized gains associated with available-for-sale securities of the trusts		—			—			(43,577	)		(43,577	)
Reclassification of net unrealized gains activity attributable to the non-controlling interest holders		—			—			43,577			43,577
Reclassification for translation adjustment realized in net loss		71,770			—			—			71,770

Balance at March 31, 2005	$	26,952		$	—		$	—		$	26,952


Balance at December 31, 2003	$	(78,113	)	$	(33,599	)	$	—		$	(111,712	)
Activity in 2004		13,953			33,599			—			47,552

Balance at March 31, 2004	$	(64,160	)	$	—		$	—		$	(64,160	)


	Original
	Calculation			Adjustment
	Q1 2004			in Q2 2004			Total
Pretax gain (loss)	$	12,639		$	(6,219	)	$	6,420
Tax benefit		(24,929	)		(2,275	)		(27,204	)

After tax gain (loss)	$	37,568		$	(3,944	)	$	33,624



			Less:			Less:
			Activity			Activity
			Associated with			Associated
			Acquisition /			with
Three Months Ended March 31, 2006	Actual		New Construction			Dispositions			Comparable
	(Restated)		(Dollars in millions)						(Restated)

North America
Funeral revenue	$	300.1	$	0.2		$	0.8		$	299.1
Cemetery revenue		138.8		0.1			1.4			137.3

		438.9		0.3			2.2			436.4


Other foreign
Funeral revenue		2.9		—			—			2.9

		2.9		—			—			2.9

Total revenues	$	441.8	$	0.3		$	2.2		$	439.3


North America
Funeral gross profits	$	64.8	$	0.1		$	(0.7	)	$	65.4
Cemetery gross profits		22.2		(0.1	)		(0.3	)		22.6

		87.0		—			(1.0	)		88.0


Other foreign
Funeral gross profits		0.6		—			—			0.6

		0.6		—			—			0.6

Total gross profit	$	87.6	$	—		$	(1.0	)	$	88.6


	Issuer purchases of equity securities
	(a)		(b)		(c)		(d)
					Total number
					of shares		Dollar value of
	Total				purchased as		shares that may
	number of		Average		part of publicly		yet be purchased
	shares		price paid		announced		under the
Period	purchased		per share		programs		programs
January 1, 2005 — January 31, 2005		10,863,863	$	7.00		10,863,863	$	13,483,247
February 1, 2005 — February 28, 2005		3,623,200	$	7.18		3,623,200	$	87,380,214
March 1, 2005 — March 31, 2005		163,000	$	7.39		163,000	$	86,171,928

		14,650,063	$	7.05		14,650,063	$	86,171,928


YESþ NO o		NOþ


YESo NO þ		NOo