Stewart Enterprises (STEI) 10-Q 2009 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 31, 2009

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                     to                    

Commission File Number: 1-15449

STEWART ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

LOUISIANA (State or other jurisdiction of incorporation or organization)	72-0693290 (I.R.S. Employer Identification No.)
1333 South Clearview Parkway Jefferson, Louisiana (Address of principal executive offices)	70121 (Zip Code)

Registrant’s telephone number, including area code: (504) 729-1400

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ      Noo

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso      Noo

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

Large accelerated filerþ Accelerated filero Non-accelerated filero
(Do not check if a smaller reporting company) Smaller reporting companyo

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

     The number of shares of the registrant’s Class A common stock, no par value per share, and Class B common stock, no par value per share, outstanding as of August 31, 2009, was 89,119,832 and 3,555,020, respectively.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

INDEX

		Page
Part I.	Financial Information
	Item 1. Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings — Three Months Ended July 31, 2009 and 2008		3
	Condensed Consolidated Statements of Earnings — Nine Months Ended July 31, 2009 and 2008		4
	Condensed Consolidated Balance Sheets — July 31, 2009 and October 31, 2008		5
	Condensed Consolidated Statement of Shareholders’ Equity — Nine Months Ended July 31, 2009		7
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended July 31, 2009 and 2008		8
	Notes to Condensed Consolidated Financial Statements		9
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		50
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		64
	Item 4. Controls and Procedures		64
Part II.	Other Information
	Item 1. Legal Proceedings		65
	Item 1A. Risk Factors		65
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		65
	Item 6. Exhibits		66
	Signatures		68
EX-31.1
EX-31.2
EX-32.1

2

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)

	Three Months Ended July 31,
	2009			2008
Revenues:
Funeral	$	66,017		$	68,558
Cemetery		51,735			61,870
		117,752			130,428
Costs and expenses:
Funeral		51,607			53,524
Cemetery		46,812			48,906
		98,419			102,430
Gross profit		19,333			27,998
Corporate general and administrative expenses		(8,089	)		(8,188	)
Hurricane related charges, net		(46	)		(341	)
Gains on dispositions and impairment (losses), net		(117	)		25
Other operating income, net		397			407
Operating earnings		11,478			19,901
Interest expense		(5,299	)		(6,000	)
Gain on early extinguishment of debt		8,533			—
Investment and other income, net		12			593
Earnings before income taxes		14,724			14,494
Income taxes		3,886			5,365
Net earnings	$	10,838		$	9,129
Net earnings per common share:
Basic	$	.12		$	.10
Diluted	$	.12		$	.10
Weighted average common shares outstanding (in thousands):
Basic		91,936			92,203
Diluted		92,118			92,414
Dividends declared per common share	$	.025		$	.025

See accompanying notes to condensed consolidated financial statements.

3

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)

	Nine Months Ended July 31,
	2009			2008
Revenues:
Funeral	$	209,007		$	218,862
Cemetery		154,693			178,658
		363,700			397,520
Costs and expenses:
Funeral		157,817			163,260
Cemetery		137,872			143,558
		295,689			306,818
Gross profit		68,011			90,702
Corporate general and administrative expenses		(22,601	)		(24,226	)
Hurricane related charges, net		(566	)		(351	)
Separation charges		(275	)		—
Gains on dispositions and impairment (losses), net		(215	)		153
Other operating income, net		960			753
Operating earnings		45,314			67,031
Interest expense		(17,088	)		(17,981	)
Gain on early extinguishment of debt		17,204			—
Investment and other income, net		85			1,670
Earnings before income taxes		45,515			50,720
Income taxes		15,759			18,766
Net earnings	$	29,756		$	31,954
Net earnings per common share:
Basic	$	.32		$	.34
Diluted	$	.32		$	.34
Weighted average common shares outstanding (in thousands):
Basic		91,883			94,504
Diluted		91,936			94,676
Dividends declared per common share	$	.075		$	.075

See accompanying notes to condensed consolidated financial statements

4

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)

	July 31, 2009		October 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	71,214	$	72,574
Marketable securities		—		55
Receivables, net of allowances		62,205		59,129
Inventories		36,256		35,870
Prepaid expenses		9,279		7,317
Deferred income taxes, net		18,604		8,798
Total current assets		197,558		183,743
Receivables due beyond one year, net of allowances		63,142		70,671
Preneed funeral receivables and trust investments		378,096		368,412
Preneed cemetery receivables and trust investments		191,135		182,141
Goodwill		247,236		247,236
Cemetery property, at cost		385,946		377,271
Property and equipment, at cost:
Land		42,244		42,244
Buildings		327,243		319,463
Equipment and other		184,571		178,534
		554,058		540,241
Less accumulated depreciation		254,618		236,066
Net property and equipment		299,440		304,175
Deferred income taxes, net		134,658		179,515
Cemetery perpetual care trust investments		197,858		173,090
Non-current assets held for sale		1,663		1,787
Other assets		15,695		16,474
Total assets	$	2,112,427	$	2,104,515

(continued)

5

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)

	July 31, 2009			October 31, 2008
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	5		$	20
Accounts payable		23,828			27,652
Accrued payroll and other benefits		14,824			14,133
Accrued insurance		20,765			21,287
Accrued interest		6,310			5,864
Estimated obligation to fund cemetery perpetual care trust		14,134			13,281
Other current liabilities		14,260			16,198
Income taxes payable		2,302			2,061
Total current liabilities		96,428			100,496
Long-term debt, less current maturities		391,747			450,095
Deferred preneed funeral revenue		245,411			245,182
Deferred preneed cemetery revenue		272,685			275,835
Deferred preneed funeral and cemetery receipts held in trust		499,362			475,420
Perpetual care trusts’ corpus		196,835			171,371
Other long-term liabilities		21,471			20,479
Total liabilities		1,723,939			1,738,878
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $1.00 par value, 5,000,000 shares authorized; no shares issued		—			—
Common stock, $1.00 stated value:
Class A authorized 200,000,000 shares; issued and outstanding 89,119,832 and 88,693,127 shares at July 31, 2009 and October 31, 2008, respectively		89,120			88,693
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at July 31, 2009 and October 31, 2008; 10 votes per share convertible into an equal number of Class A shares		3,555			3,555
Additional paid-in capital		529,574			536,902
Accumulated deficit		(233,794	)		(263,550	)
Accumulated other comprehensive income:
Unrealized appreciation of investments		33			37
Total accumulated other comprehensive income		33			37
Total shareholders’ equity		388,488			365,637
Total liabilities and shareholders’ equity	$	2,112,427		$	2,104,515

See accompanying notes to condensed consolidated financial statements.

6

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts)

				Additional						Unrealized			Total
	Common			Paid-In			Accumulated			Appreciation of			Shareholders’
	Stock(1)			Capital			Deficit			Investments			Equity
Balance October 31, 2008	$	92,248		$	536,902		$	(263,550	)	$	37		$	365,637
Comprehensive income (loss):
Net earnings		—			—			29,756			—			29,756
Other comprehensive loss:
Unrealized depreciation of investments, net of deferred tax benefit of $2		—			—			—			(4	)		(4	)
Total other comprehensive loss		—			—			—			(4	)		(4	)
Total comprehensive income (loss)		—			—			29,756			(4	)		29,752
Restricted stock activity		273			184			—			—			457
Issuance of common stock		166			364			—			—			530
Stock option expense		—			896			—			—			896
Tax benefit associated with stock activity		—			(120	)		—			—			(120	)
Purchase and retirement of common stock		(12	)		(40	)		—			—			(52	)
Retirement of call options, net of tax expense of $1,789		—			3,322			—			—			3,322
Retirement of common stock warrants		—			(4,981	)		—			—			(4,981	)
Dividends ($.075 per share)		—			(6,953	)		—			—			(6,953	)
Balance July 31, 2009	$	92,675		$	529,574		$	(233,794	)	$	33		$	388,488

⁽¹⁾ Amount includes 89,120 and 88,693 shares (in thousands) of Class A common stock with a stated value of $1 per share as of July 31, 2009 and October 31, 2008, respectively, and includes 3,555 shares (in thousands) of Class B common stock.

See accompanying notes to condensed consolidated financial statements.

7

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands, except per share amounts)

	Nine Months Ended July 31,
	2009			2008
Cash flows from operating activities:
Net earnings	$	29,756		$	31,954
Adjustments to reconcile net earnings to net cash provided by operating activities:
(Gains) on dispositions and impairment losses, net		215			(153	)
Gain on early extinguishment of debt		(17,204	)		—
Depreciation and amortization		22,060			21,188
Provision for doubtful accounts		6,610			5,742
Share-based compensation		1,732			2,519
Excess tax benefits from share-based payment arrangements		—			(171	)
Provision for deferred income taxes		12,994			5,844
Estimated obligation to fund cemetery perpetual care trust		3,222			—
Other		146			(115	)
Changes in assets and liabilities:
(Increase) decrease in receivables		6,736			(3,902	)
Increase in prepaid expenses		(1,962	)		(2,574	)
Decrease in inventories and cemetery property		(639	)		(2,072	)
Federal income tax refund		12,000			—
Decrease in accounts payable and accrued expenses		(8,068	)		(477	)
Net effect of preneed funeral production and maturities:
Decrease in preneed funeral receivables and trust investments		16,245			7,711
Increase (decrease) in deferred preneed funeral revenue		229			(5,767	)
Decrease in deferred preneed funeral receipts held in trust		(13,288	)		(5,395	)
Net effect of preneed cemetery production and deliveries:
(Increase) decrease in preneed cemetery receivables and trust investments		7,530			(52	)
Decrease in deferred preneed cemetery revenue		(10,620	)		(4,652	)
Increase (decrease) in deferred preneed cemetery receipts held in trust		(5,222	)		3,712
Increase (decrease) in other		1,118			(1,087	)
Net cash provided by operating activities		63,590			52,253
Cash flows from investing activities:
Proceeds from sales of marketable securities		250			20,219
Purchases of marketable securities		(199	)		(19,955	)
Proceeds from sale of assets		494			358
Purchase of subsidiaries and other investments, net of cash acquired		(1,923	)		(1,378	)
Additions to property and equipment		(15,029	)		(20,370	)
Other		37			75
Net cash used in investing activities		(16,370	)		(21,051	)
Cash flows from financing activities:
Repayments of long-term debt		(39,901	)		(190	)
Issuance of common stock		225			1,659
Retirement of call options		5,111			—
Purchase and retirement of common stock		(52	)		(48,627	)
Retirement of common stock warrants		(4,981	)		—
Debt refinancing costs		(2,029	)		—
Dividends		(6,953	)		(7,067	)
Excess tax benefits from share-based payment arrangements		—			171
Net cash used in financing activities		(48,580	)		(54,054	)
Net decrease in cash		(1,360	)		(22,852	)
Cash and cash equivalents, beginning of period		72,574			71,545
Cash and cash equivalents, end of period	$	71,214		$	48,693
Supplemental cash flow information:
Cash paid (received) during the period for:
Income taxes, net	$	(8,168	)	$	11,767
Interest	$	15,647		$	15,799
Non-cash investing and financing activities:
Issuance of common stock to executive officers and directors	$	305		$	923
Issuance of restricted stock, net of forfeitures	$	22		$	260

See accompanying notes to condensed consolidated financial statements.

8

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation

     (a) The Company

     Stewart Enterprises, Inc. (the “Company”) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, the Company offers a complete line of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of July 31, 2009, the Company owned and operated 220 funeral homes and 140 cemeteries in 24 states within the United States and Puerto Rico. As discussed in Note 9, effective for the second quarter of fiscal year 2009, the Company has three operating and reportable segments consisting of a funeral segment, cemetery segment and corporate trust management segment.

     (b) Principles of Consolidation

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

     (c) Interim Disclosures

     The information as of July 31, 2009, and for the three and nine months ended July 31, 2009 and 2008, is unaudited but, in the opinion of management, reflects all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position and results of operations for the interim periods. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2008 (the “2008 Form 10-K”).

     The October 31, 2008 condensed consolidated balance sheet data was derived from audited financial statements in the Company’s 2008 Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America, which are presented in the Company’s 2008 Form 10-K.

     The results of operations for the three and nine months ended July 31, 2009 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2009.

     (d) Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates are disclosed in Note 2 in the Company’s 2008 Form 10-K.

     (e) Share-Based Compensation

     The Company has share-based compensation plans, which are described in more detail in Note 19 to the consolidated financial statements in the Company’s 2008 Form 10-K. Net earnings for the three months ended July 31, 2009 and 2008 include $287 and $481, respectively, of stock option expenses, all of which are included in corporate general and administrative expenses in the condensed consolidated statements of earnings. Net earnings for the nine months ended July 31, 2009 and 2008 include $896 and $1,431, respectively, of stock option expenses, all of which are included in corporate general and administrative expenses in the condensed consolidated statements of earnings. As of July 31, 2009, there was $1,544 of total unrecognized compensation costs related to nonvested stock options that is expected to be recognized over a weighted-average period of 2.28 years of which $1,116 of total stock option expense is expected for fiscal year 2009. The expense related to restricted stock is reflected in

9

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation—(Continued)

earnings and amounted to $186 and $187 for the three months ended July 31, 2009 and 2008, respectively, and $531 and $557 for the nine months ended July 31, 2009 and 2008, respectively.

     On November 18, 2008, the Company issued 15,000 shares of Class A common stock and paid $34 in cash to each of the independent directors of the Company. The expense related to this stock grant amounted to $305 and was recorded in corporate general and administrative expenses during the first quarter of 2009. Each independent director must hold at least 75 percent of the shares received until completion of service as a member of the Board of Directors.

     The table below presents all stock options and restricted stock granted to employees during the nine months ended July 31, 2009:

	Number of Shares	Exercise Price
Grant Type	Granted	per Share	Vesting Period	Vesting Condition
Stock options	586,750	$2.65	Equal one-fourth portions over 4 years	Service condition
Stock options	390,000	$3.09	Equal one-fourth portions over 4 years	Service condition
Restricted stock	102,000	$2.65	Equal one-third portions over 3 years	Market condition
Restricted stock	195,000	$3.09	Equal one-third portions over 3 years	Market condition
Restricted stock	56,000	$3.09	Equal one-third portions over 3 years	Service condition

     The fair value of the Company’s service based stock options is the estimated present value at grant date using the Black-Scholes option pricing model with the following weighted average assumptions for the nine months ended July 31, 2009: expected dividend yield of 3.6 percent; expected volatility of 38.5 percent; risk-free interest rate of 1.6 percent; and an expected term of 4.8 years. In the first quarter of 2009, the Company granted 297,000 shares of restricted stock with market conditions based on achieving certain target stock prices in the years 2009, 2010 and 2011. The Company records the expense over the requisite service period.

     (f)Goodwill

     The Company’s evaluation of the goodwill of its operations previously consisted of 13 reporting units as described in the Company’s 2008 Form 10-K. As discussed in Note 9, in the second quarter of 2009, the Company eliminated its two geographical divisions of Western and Eastern and the positions of Western and Eastern division presidents from its organizational structure, which resulted in a change to the Company’s operating and reportable segments from five to three segments. In conjunction with the reorganization, the Company has re-evaluated its reporting units for its evaluation of goodwill and has reduced the number of reporting units from 13 to eight reporting units.

10

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation—(Continued)

     (g)Reclassifications

     Certain reclassifications have been made to the 2008 condensed consolidated balance sheet and statement of cash flows in order for these periods to be comparable. These reclassifications had no effect on net earnings or operating cash flows.

     During the Company’s review of Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statement—amendments of ARB No. 51 (“SFAS No. 160”),” the Company determined that balances historically designated as “non-controlling interest in funeral and cemetery trusts” and “non-controlling interest in perpetual care trusts” in its condensed consolidated balance sheet do not meet the criteria for noncontrolling interests as prescribed by SFAS No. 160. SFAS No. 160 indicates that only a financial instrument classified as equity in the trusts’ financial statements can be a noncontrolling interest in the consolidated financial statements. The interest related to the Company’s funeral and cemetery merchandise and services trusts is classified as a liability because the preneed contracts underlying these trusts are unconditionally redeemable upon the occurrence of an event that is certain to occur. Since the earnings from the Company’s cemetery perpetual care trusts are used to support the maintenance of its cemeteries and the Company cannot access the initial corpus, the Company believes the interest in these trusts also retains the characteristics of a liability.

     In light of this review, in the first quarter of fiscal year 2009, these line items in the Company’s condensed consolidated balance sheets as of January 31, 2009 and October 31, 2008 were renamed. The line historically titled “non-controlling interest in funeral and cemetery trusts” has been renamed “deferred preneed funeral and cemetery receipts held in trust.” In addition, the line historically titled “non-controlling interest in perpetual care trusts” has been renamed “perpetual care trusts’ corpus” and has been reclassified to be included in total liabilities. These changes had no effect on total assets or shareholders’ equity.

(2) New Accounting Principles

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which the Company adopted effective November 1, 2008. The statement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date, establishes a framework for measuring fair value and expands disclosures about instruments measured at fair value. SFAS No. 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

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

• Level 2—inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable; inputs that are derived principally from or corroborated by observable market data by correlation or other means; and

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

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

11

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) New Accounting Principles—(Continued)

     In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP FAS 157-1”) and FSP FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-1 amends SFAS No. 157 to exclude SFAS No. 13, “Accounting for Leases,” and its related accounting pronouncements that address leasing transactions. FSP FAS 157-2 provides a one-year deferral of the effective date of SFAS No. 157 for non-financial assets and liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In accordance with FSP FAS 157-2, the Company adopted the provisions of SFAS No. 157 for its financial assets and liabilities that are measured on a recurring basis at fair value, effective November 1, 2008. These financial assets include the investments of the Company’s preneed funeral merchandise and services trusts, preneed cemetery merchandise and services trusts and cemetery perpetual care trusts. For additional disclosures required by SFAS No. 157 for these assets, see Notes 3 through 5 to the Company’s condensed consolidated financial statements. The provisions of SFAS No. 157 have not been applied to the Company’s non-financial assets and liabilities. The major categories of assets and liabilities that are subject to non-recurring fair value measurement for which the provisions of SFAS No. 157 have not yet been applied are as follows: reporting units measured at fair value in the goodwill impairment test under SFAS No. 142, “Goodwill and Other Intangible Assets” and non-financial assets and liabilities initially measured at fair value in a business combination under SFAS No. 141, “Business Combinations.”

     In October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP FAS 157-3”), which clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective immediately, including prior periods for which financial statements have not been issued. The Company adopted FSP FAS 157-3 effective with the preparation of the Company’s condensed consolidated financial statements for the quarter ended January 31, 2009. The adoption of FSP FAS 157-3 had no impact on the Company’s consolidated results of operations, financial position or cash flows.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). This statement permits entities to choose to measure many financial assets and liabilities and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007, which corresponds to the Company’s fiscal year beginning November 1, 2008. The Company did not elect the fair value option under SFAS No. 159.

     In December 2008, FASB Staff Position SFAS No. 140-4 and FASB Interpretation (“FIN”) No. 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” was issued. This pronouncement requires public entities to provide additional disclosures about transfers of financial assets. It also amends FIN 46(R) to require public enterprises to provide additional disclosures about their involvement with variable interest entities. This FSP is effective for reporting periods ending after December 15, 2008, which corresponds to the Company’s first fiscal quarter of 2009. The adoption of this FSP had no impact on the Company’s consolidated financial statements but requires the Company to add additional disclosures related to its variable interest entities, which consist of its preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts investments. The Company’s accounting policies related to its preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts are discussed in Note 2(k) of the Company’s 2008 Form 10-K. For further disclosures, see Notes 3, 4 and 5 to the condensed consolidated financial statements included herein.

12

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) New Accounting Principles—(Continued)

     In April 2009, FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). FSP FAS 157-4 provides guidance on how to determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased and reemphasizes that the objective of a fair value measurement remains an exit price. The Company adopted FSP FAS 157-4 effective with the preparation of the Company’s condensed consolidated financial statements for the quarter ended July 31, 2009. The adoption of FSP FAS 157-4 had no impact on the Company’s consolidated results of operations, financial position or cash flows.

     In April 2009, FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”) was issued. FSP FAS 107-1 and APB 28-1 require companies to disclose the fair value of financial instruments within interim financial statements, adding to the current requirement to provide those disclosures annually. The Company adopted FSP FAS 107-1 and APB 28-1 effective with the preparation of the Company’s condensed consolidated financial statements for the quarter ended July 31, 2009 and included the required disclosures in Note 16.

     In April 2009, FASB Staff Position No. FAS 115-2 and 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”) was issued. FSP FAS 115-2 modifies the requirements for recognizing other than temporary impairment on debt securities and significantly changes the impairment model for such securities. The FSP also modifies the presentation of other-than-temporary impairment losses and increases related disclosure requirements. The Company adopted FSP FAS 115-2 effective with the preparation of the Company’s condensed consolidated financial statements for the quarter ended July 31, 2009 and included the required disclosures in Notes 3, 4 and 5. The adoption did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

     In May 2009, FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”). This statement does not apply to subsequent events or transactions that are within the scope of other applicable generally accepted accounting principles that provide different guidance on the accounting treatment for subsequent events or transactions. SFAS No. 165 applies to both interim financial statements and annual financial statements and should not result in significant changes in the subsequent events that are reported. SFAS No. 165 introduces the concept of financial statements being available to be issued. It requires the disclosure of the date through which a Company has evaluated subsequent events and the basis for that date, whether that represents the date the financial statements were issued or were available to be issued. SFAS No. 165 should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. The Company adopted SFAS No. 165 effective with the preparation of the Company’s condensed consolidated financial statements for the quarter ended July 31, 2009 and included the required disclosures in Note 19.

Other, not yet adopted

     In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations (SFAS 141(R))” (“SFAS No. 141R”). SFAS No. 141R states that all business combinations, whether full, partial or step acquisitions, will result in all assets and liabilities of an acquired business being recorded at their fair values at the acquisition date. In subsequent periods, contingent liabilities will be measured at the higher of their acquisition date fair value or the estimated amounts to be realized. SFAS No. 141R applies to all transactions or other events in which an entity obtains control of one or more businesses. This statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008, which corresponds to the Company’s fiscal year beginning November 1, 2009. This statement will apply to any future business combinations as of that date.

13

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) New Accounting Principles—(Continued)

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statement—amendments of ARB No. 51.” SFAS No. 160 states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of shareholders’ equity. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008, which corresponds to the Company’s fiscal year beginning November 1, 2009. The Company does not expect this statement to have any impact on its consolidated financial statements. However, as described in Note 1(g), in light of the Company’s review of SFAS No. 160, certain balances in the condensed consolidated balance sheets were renamed and a line item historically classified outside of liabilities was moved to be included in total liabilities.

     In May 2008, FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”) was issued. FSP APB 14-1 states that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of Accounting Principles Board Opinion No. 14 and that issuers of such instruments should account separately for the liability and equity components of the instruments in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008, which corresponds to the Company’s fiscal year beginning November 1, 2009, and must be applied retrospectively to all periods presented. The Company is currently evaluating the impact the adoption of FSP APB 14-1 will have on its consolidated financial statements. While the Company does not expect any impact on its net cash flows, the Company does expect to record higher interest expense in fiscal 2010 as a result of the adoption of FSP APB 14-1. Based upon the face value of debt outstanding as of August 31, 2009, the Company anticipates recording interest expense of approximately $10,000 to $12,000 compared to the approximate $6,000 that will be paid in cash to bondholders according to the stated coupon rates. This is expected to reduce net earnings, after tax, in fiscal 2010 by approximately $2,750 to $3,500.

     In June 2008, FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP EITF 03-6-1”) was issued. FSP EITF 03-6-1 states whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in SFAS No. 128, “Earnings Per Share.” This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, which corresponds to the Company’s fiscal year beginning November 1, 2009, and must be applied retrospectively to all periods presented (including interim financial statements, summaries of earnings and selected financial data) to conform with the provisions of this FSP. The Company does not expect the adoption of FSP EITF 03-6-1 to have a material impact on its consolidated financial statements.

     In June 2009, FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets” (“SFAS No. 166”). SFAS No. 166 is a revision to SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and will require more information about transfers of financial assets, including securitization transactions, and enhanced disclosures when companies have continuing exposure to the risks related to transferred financial assets. Additionally, SFAS No. 166 eliminates the concept of a qualifying special-purpose entity. This statement is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, which corresponds to the Company’s fiscal year beginning November 1, 2010. The Company is evaluating the impact the adoption of SFAS No. 166 will have on its consolidated financial statements.

     In June 2009, FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”). SFAS No. 167 is a revision to FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities,” (“FIN 46(R)”) and amends the consolidation guidance for variable interest entities. Additionally, SFAS No. 167

14

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) New Accounting Principles—(Continued)

will require additional disclosures about involvement with variable interest entities and any significant changes in risk exposure due to that involvement. This statement is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, which corresponds to the Company’s fiscal year beginning November 1, 2010. The Company is evaluating the impact the adoption of SFAS No. 167 will have on its consolidated financial statements.

     In June 2009, FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168 requires the FASB Accounting Standards Codification (“ASC”) to become the source of authoritative U.S. accounting and reporting standards for nongovernmental entities in addition to the guidance issued by the Securities and Exchange Commission (“SEC”). FASB ASC significantly changes the way financial statement preparers, auditors and academics perform accounting research. This statement is effective for interim and annual periods ending after September 15, 2009, which corresponds to the Company’s fiscal year ending October 31, 2009. The Company does not expect SFAS No. 168 to have a material impact on its consolidated financial statements.

(3) Preneed Funeral Activities

     The Company maintains three types of trust and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care, the activity of which is detailed below and in Notes 4 and 5.

Preneed Funeral Receivables and Trust Investments

     Preneed funeral receivables and trust investments represent trust assets and customer receivables related to unperformed, price-guaranteed trust-funded preneed funeral contracts. The components of preneed funeral receivables and trust investments in the condensed consolidated balance sheets as of July 31, 2009 and October 31, 2008 are as follows:

	July 31,			October 31,
	2009			2008
Trust assets	$	347,525		$	336,782
Receivables from customers		42,617			44,796
		390,142			381,578
Allowance for cancellations		(12,046	)		(13,166	)
Preneed funeral receivables and trust investments	$	378,096		$	368,412

     The cost and market values associated with preneed funeral merchandise and services trust assets as of July 31, 2009 are detailed below. Based on the Company’s quarterly evaluation, the cost basis of the funeral merchandise and services trust assets below reflects realized losses of approximately $34 during the quarter ended July 31, 2009 from their original cost basis. These realized losses are related to certain investments held that were rendered worthless or practically worthless and to certain investments that the Company determined it did not have the intent to hold until they recover in value.

15

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

	July 31, 2009
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	40,982	$	—	$	—		$	40,982
U.S. Government, agencies and municipalities		7,046		236		(1	)		7,281
Corporate bonds		52,176		1,490		(3,534	)		50,132
Preferred stocks		63,015		25		(11,071	)		51,969
Common stocks		257,069		886		(114,129	)		143,826
Mutual funds:
Equity		28,865		14		(8,262	)		20,617
Fixed income		15,964		109		(1,114	)		14,959
Insurance contracts and other long-term investments		19,245		109		(2,603	)		16,751
Trust investments	$	484,362	$	2,869	$	(140,714	)		346,517
Market value as a percentage of cost										71.5	%
Accrued investment income									1,008
Trust assets								$	347,525

     The cost and market values associated with preneed funeral merchandise and services trust assets as of October 31, 2008 are detailed below.

	October 31, 2008
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	35,355	$	—	$	—		$	35,355
U.S. Government, agencies and municipalities		11,585		157		(4	)		11,738
Corporate bonds		56,661		67		(9,078	)		47,650
Preferred stocks		68,300		12		(21,906	)		46,406
Common stocks		272,598		1,847		(124,156	)		150,289
Mutual funds:
Equity		28,972		10		(9,680	)		19,302
Fixed income		6,256		1		(1,084	)		5,173
Insurance contracts and other long-term investments		19,645		104		(63	)		19,686
Trust investments	$	499,372	$	2,198	$	(165,971	)	$	335,599
Market value as a percentage of cost										67.2	%
Accrued investment income									1,183
Trust assets								$	336,782

16

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

     The estimated maturities and market values of debt securities included above are as follows:

	July 31, 2009
Due in one year or less	$	2,449
Due in one to five years		34,961
Due in five to ten years		19,975
Thereafter		28
	$	57,413

     The Company is actively managing a covered call program on its equity securities within the funeral merchandise and services trust. As of July 31, 2009, the Company has outstanding covered calls with a market value of $507. These covered calls constitute a hedge on $14,800, or approximately 10.3 percent, of the common stock portion of the Company’s portfolio within the funeral merchandise and services trust and also provide an opportunity for income. For the nine months ended July 31, 2009, the Company realized trust earnings of approximately $600 related to the covered call program.

     The Company adopted FSP FAS 115-2 as of the quarter ended July 31, 2009 for the debt security investments in its funeral trust portfolio. In conjunction with its quarterly evaluation of the investments in its trusts as of July 31, 2009, the Company had to determine whether impairments in its debt securities were temporary or other than temporary in nature. Based on the analysis performed by the Company, it does not consider any of its debt security investments in the funeral merchandise and services trust to be other than temporarily impaired as of July 31, 2009.

     Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy provided in SFAS No. 157. The Company’s Level 1 investments include cash, money market and other short-term investments, common stock and mutual funds.

     Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are primarily U. S. Government, agencies and municipalities, corporate bonds and preferred stocks, all of which are classified within Level 2 of the SFAS No. 157 valuation hierarchy.

     The Company’s Level 3 investments include insurance contracts and partnership investments. The valuation of insurance contracts and partnership investments requires significant management judgment due to the absence of quoted prices, inherent lack of liquidity and the long-term nature of such assets. The fair market value of the insurance contracts was obtained from the insurance companies’ sites showing the current face value of the contracts which is deemed to approximate fair market value. The fair market value of the partnership investments was determined by using their most recent audited financial statements and assessing the market value of the underlying securities within the partnership.

17

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

     The inputs into the fair value of the Company’s preneed funeral merchandise and services trust investments are categorized as follows:

	July 31, 2009
			Significant
	Quoted Market		Other		Significant
	Prices in Active		Observable		Unobservable
	Markets		Inputs		Inputs		Fair Market
	(Level 1)		(Level 2)		(Level 3)		Value
Trust investments	$	228,424	$	109,382	$	8,711	$	346,517

     The change in the Company’s preneed funeral merchandise and services trust investments with significant unobservable inputs (Level 3) is as follows:

Fair market value, November 1, 2008	$	11,299
Total unrealized losses included in other comprehensive income(1)		(2,554	)
Purchases, sales, contributions, and distributions, net		(34	)
Fair market value, July 31, 2009	$	8,711

⁽¹⁾ All gains (losses) recognized in other comprehensive income for funeral trust investments are attributable to the Company’s preneed customers and are offset by a corresponding increase (decrease) in deferred preneed funeral receipts held in trust.

     Activity related to preneed funeral trust investments is as follows:

	Three Months Ended July 31,						Nine Months Ended July 31,
	2009			2008			2009			2008
Purchases	$	10,198		$	10,153		$	11,776		$	19,009
Sales		15,372			7,743			24,500			20,517
Realized gains from sales of investments		710			731			1,702			2,169
Realized losses from sales of investments and other		(511	)(1)		(309	)		(9,404	)(2)		(620	)
Deposits		6,442			8,129			19,456			24,111
Withdrawals		9,202			11,362			32,101			35,499

(1)	Includes $477 in losses from the sale of investments and $34 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined during the quarter ended July 31, 2009 it did not have the intent to hold until they recover in value.
(2)	Includes $964 in losses from the sale of investments and $8,440 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined during the nine months ended July 31, 2009 it did not have the intent to hold until they recover in value.

     The following tables show the gross unrealized losses and fair value of the preneed funeral merchandise and services trust investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of July 31, 2009 and October 31, 2008.

18

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

	July 31, 2009
	Less than 12 Months					12 Months or Greater					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government, agencies and municipalities	$	—	$	—		$	20	$	(1	)	$	20	$	(1	)
Corporate bonds		914		(37	)		18,276		(3,497	)		19,190		(3,534	)
Preferred stocks		2,083		(130	)		49,097		(10,941	)		51,180		(11,071	)
Common stocks		11,411		(3,729	)		120,511		(110,400	)		131,922		(114,129	)
Mutual funds:
Equity		4,836		(1,309	)		15,663		(6,953	)		20,499		(8,262	)
Fixed income		1,311		(4	)		4,320		(1,110	)		5,631		(1,114	)
Insurance contracts and other long-term investments		—		—			3,219		(2,603	)		3,219		(2,603	)
Total	$	20,555	$	(5,209	)	$	211,106	$	(135,505	)	$	231,661	$	(140,714	)

	October 31, 2008
	Less than 12 Months					12 Months or Greater					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government, agencies and municipalities	$	1,147	$	(3	)	$	21	$	(1	)	$	1,168	$	(4	)
Corporate bonds		20,609		(2,027	)		21,258		(7,051	)		41,867		(9,078	)
Preferred stocks		9,055		(6,686	)		36,445		(15,220	)		45,500		(21,906	)
Common stocks		51,658		(25,033	)		86,718		(99,123	)		138,376		(124,156	)
Mutual funds:
Equity		16,557		(8,200	)		2,628		(1,480	)		19,185		(9,680	)
Fixed income		67		—			5,079		(1,084	)		5,146		(1,084	)
Insurance contracts and other long-term investments		3,510		—			58		(63	)		3,568		(63	)
Total	$	102,603	$	(41,949	)	$	152,207	$	(124,022	)	$	254,810	$	(165,971	)

     The unrealized losses in the preneed funeral merchandise and services trust portfolio are not considered to be other than temporary. For each of these securities, the Company evaluates consensus analyst recommendations, ratings from established ratings agencies, any concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at July 31, 2009, 89 percent, or $125,200, were generated by common stock and preferred stock investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred stocks had a rating of “A” or better at the time of purchase. Because approximately 42 percent of the Company’s preneed funeral trust portfolio is currently invested in common stock, the Company generally expects its portfolio performance to improve if the performance of the overall stock market improves, but would also expect its performance to deteriorate if the overall stock market declines. The preferred stocks are primarily in the financial services sector which has experienced a significant decline in market value due to the current economic crisis. The Company believes that it has sufficient cash and cash equivalents within the trusts and from cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow the Company to hold these investments until they recover in value.

     The Company defers all dividends and interest earned and net capital gains and losses realized by its preneed funeral merchandise and services trust until the underlying service or merchandise is delivered. Unrealized capital gains and losses are not allocated to contracts. When a contract is delivered, the earned interest, dividends and net realized capital gain or loss which have been allocated to the contract are recognized as components of revenue along with the original contract sales price.

19

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

     Cash flows from preneed funeral contracts are presented as operating cash flows in the Company’s condensed consolidated statements of cash flows.

(4) Preneed Cemetery Merchandise and Service Activities

Preneed Cemetery Receivables and Trust Investments

     Preneed cemetery receivables and trust investments represent trust assets and customer receivables for contracts sold in advance of when the merchandise or services are needed. The receivables related to the sale of preneed property interment rights are included in the Company’s current and long-term receivables. The components of preneed cemetery receivables and trust investments in the condensed consolidated balance sheets as of July 31, 2009 and October 31, 2008 are as follows:

	July 31,			October 31,
	2009			2008
Trust assets	$	161,015		$	148,533
Receivables from customers		36,891			39,868
		197,906			188,401
Allowance for cancellations		(6,771	)		(6,260	)
Preneed cemetery receivables and trust investments	$	191,135		$	182,141

     The cost and market values associated with the preneed cemetery merchandise and services trust assets as of July 31, 2009 are detailed below. Based on the Company’s quarterly evaluation, the cost basis of the cemetery merchandise and services trust assets below reflects realized losses of approximately $20 during the quarter ended July 31, 2009 from their original cost basis. These realized losses are related to certain investments held that were rendered worthless or practically worthless and to certain investments that the Company determined it did not have the intent to hold until they recover in value.

	July 31, 2009
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	22,347	$	—	$	—		$	22,347
U.S. Government, agencies and municipalities		10,870		673		—			11,543
Corporate bonds		10,688		508		(427	)		10,769
Preferred stocks		23,643		25		(4,558	)		19,110
Common stocks		131,969		612		(59,329	)		73,252
Mutual funds:
Equity		30,291		3		(10,884	)		19,410
Fixed income		3,555		17		(6	)		3,566
Other long-term investments		623		—		(9	)		614
Trust investments	$	233,986	$	1,838	$	(75,213	)		160,611
Market value as a percentage of cost										68.6	%
Accrued investment income									404
Trust assets								$	161,015

20

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Cemetery Merchandise and Service Activities—(Continued)

     The cost and market values associated with the preneed cemetery merchandise and services trust assets as of October 31, 2008 are detailed below.

	October 31, 2008
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	15,939	$	—	$	—		$	15,939
U.S. Government, agencies and municipalities		12,960		647		(5	)		13,602
Corporate bonds		12,399		15		(1,859	)		10,555
Preferred stocks		25,589		1		(8,828	)		16,762
Common stocks		140,654		303		(67,576	)		73,381
Mutual funds:
Equity		30,291		—		(12,575	)		17,716
Fixed income		19		—		(6	)		13
Other long-term investments		107		—		(15	)		92
Trust investments	$	237,958	$	966	$	(90,864	)	$	148,060
Market value as a percentage of cost										62.2	%
Accrued investment income									473
Trust assets								$	148,533

     The estimated maturities and market values of debt securities included above are as follows:

	July 31, 2009
Due in one year or less	$	3,592
Due in one to five years		12,012
Due in five to ten years		6,534
Thereafter		174
	$	22,312

     The Company is actively managing a covered call program on its equity securities within the cemetery merchandise and services trust. As of July 31, 2009, the Company has outstanding covered calls with a market value of $284. These covered calls constitute a hedge on $9,365, or approximately 12.8 percent, of the common stock portion of the Company’s portfolio within the cemetery merchandise and services trust and also provide an opportunity for income. For the nine months ended July 31, 2009, the Company realized trust earnings of approximately $250 related to the covered call program.

     The Company adopted FSP FAS 115-2 as of the quarter ended July 31, 2009 for the debt security investments in its cemetery merchandise and services trust portfolio. In conjunction with its quarterly evaluation of the investments in its trusts as of July 31, 2009, the Company had to determine whether impairments in its debt securities were temporary or other than temporary in nature. Based on the analysis performed by the Company, it does not consider any of its debt security investments in the cemetery merchandise and services trust to be other than temporarily impaired as of July 31, 2009.

     Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy provided in SFAS No. 157. The Company’s Level 1 investments include cash, money market and other short-term investments, common stock and mutual funds.

21

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Cemetery Merchandise and Service Activities—(Continued)

     Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are U. S. Government, agencies and municipalities, corporate bonds and preferred stocks, all of which are classified within Level 2 of the SFAS No. 157 valuation hierarchy.

     There are no Level 3 investments in the preneed cemetery merchandise and services trust investment portfolio.

     The inputs into the fair value of the Company’s preneed cemetery merchandise and services trust investments are categorized as follows:

	July 31, 2009
			Significant
	Quoted Market		Other		Significant
	Prices in Active		Observable		Unobservable
	Markets		Inputs		Inputs		Fair Market
	(Level 1)		(Level 2)		(Level 3)		Value
Trust investments	$	119,076	$	41,535	$	—	$	160,611

     Activity related to preneed cemetery merchandise and services trust investments is as follows:

	Three Months Ended July 31,						Nine Months Ended July 31,
	2009			2008			2009			2008
Purchases	$	4,444		$	7,302		$	7,870		$	13,933
Sales		6,966			3,356			11,464			10,014
Realized gains from sales of investments		233			501			611			1,339
Realized losses from sales of investments and other		(776	)(1)		(89	)		(6,526	)(2)		(285	)
Deposits		4,370			4,815			12,692			13,432
Withdrawals		4,641			4,327			13,023			14,897

(1)	Includes $756 in losses from the sale of investments and $20 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined during the quarter ended July 31, 2009 it did not have the intent to hold until they recover in value.
(2)	Includes $3,230 in losses from the sale of investments and $3,296 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined during the nine months ended July 31, 2009 it did not have the intent to hold until they recover in value.

     The following tables show the gross unrealized losses and fair value of the preneed cemetery merchandise and services trust investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of July 31, 2009 and October 31, 2008.

22

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Cemetery Merchandise and Service Activities—(Continued)

	July 31, 2009
	Less than 12 Months					12 Months or Greater					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Corporate bonds	$	—	$	—		$	2,129	$	(427	)	$	2,129	$	(427	)
Preferred stocks		827		(36	)		17,977		(4,522	)		18,804		(4,558	)
Common stocks		9,692		(3,485	)		58,485		(55,844	)		68,177		(59,329	)
Mutual funds:
Equity		457		(126	)		18,825		(10,758	)		19,282		(10,884	)
Fixed income		583		(2	)		15		(4	)		598		(6	)
Other long-term investments		—		—			10		(9	)		10		(9	)
Total	$	11,559	$	(3,649	)	$	97,441	$	(71,564	)	$	109,000	$	(75,213	)

	October 31, 2008
	Less than 12 Months					12 Months or Greater					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government, agencies and municipalities	$	458	$	(3	)	$	201	$	(2	)	$	659	$	(5	)
Corporate bonds		5,371		(312	)		3,819		(1,547	)		9,190		(1,859	)
Preferred stocks		4,587		(3,128	)		12,069		(5,700	)		16,656		(8,828	)
Common stocks		18,227		(12,604	)		51,495		(54,972	)		69,722		(67,576	)
Mutual funds:
Equity		13,599		(10,201	)		4,117		(2,374	)		17,716		(12,575	)
Fixed income		—		—			13		(6	)		13		(6	)
Other long-term investments		—		—			40		(15	)		40		(15	)
Total	$	42,242	$	(26,248	)	$	71,754	$	(64,616	)	$	113,996	$	(90,864	)

     The unrealized losses in the preneed cemetery merchandise and services trust portfolio are not considered to be other than temporary. For each of these securities, the Company evaluates consensus analyst recommendations, ratings from established ratings agencies, any concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at July 31, 2009, 85 percent, or $63,887, were generated by common stock and preferred stock investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred stocks had a rating of “A” or better at the time of purchase. Because approximately 46 percent of the Company’s preneed cemetery merchandise and service trusts portfolio is currently invested in common stock, the Company generally expects its portfolio performance to improve if the performance of the overall stock market improves, but would also expect its performance to deteriorate if the overall stock market declines. The preferred stocks are primarily in the financial services sector which has experienced a significant decline in market value due to the current economic crisis. The Company believes that it has sufficient cash and cash equivalents within the trusts and from cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow the Company to hold these investments until they recover in value.

     The Company defers all dividends and interest earned and net capital gains and losses realized by its preneed cemetery merchandise and services trust until the underlying service or merchandise is delivered. Unrealized capital gains and losses are not allocated to contracts. When a contract is delivered, the earned interest, dividends and net realized capital gain or loss which have been allocated to the contract are recognized as components of revenue along with the original contract sales price.

23

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Cemetery Merchandise and Service Activities—(Continued)

     Cash flows from preneed cemetery merchandise and services contracts are presented as operating cash flows in the Company’s condensed consolidated statements of cash flows.

(5) Cemetery Interment Rights and Perpetual Care Trusts

     Earnings realized from cemetery perpetual care trust investments that the Company is legally permitted to withdraw are recognized in current cemetery revenues and are used to defray cemetery maintenance costs which are expensed as incurred. Recognized earnings related to these cemetery perpetual care trust investments were $1,541 and $2,635 for the three months ended July 31, 2009 and 2008, respectively, and $5,342 and $8,040 for the nine months ended July 31, 2009 and 2008, respectively.

     The cost and market values of the trust investments held by the cemetery perpetual care trusts as of July 31, 2009 are detailed below. Based on the Company’s quarterly evaluation, the cost basis of the cemetery perpetual care trusts below reflects realized losses of approximately $23 during the quarter ended July 31, 2009 from their original cost basis. These realized losses are related to certain investments held that were rendered worthless or practically worthless and to certain investments that the Company determined it did not have the intent to hold until they recover in value.

	July 31, 2009
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	16,513	$	—	$	—		$	16,513
U.S. Government, agencies and municipalities		5,530		377		(86	)		5,821
Corporate bonds		47,236		1,653		(2,063	)		46,826
Preferred stocks		63,639		—		(17,107	)		46,532
Common stocks		106,119		2,960		(45,975	)		63,104
Mutual funds:
Equity		6,821		—		(1,742	)		5,079
Fixed income		12,137		1,139		(409	)		12,867
Other long-term investments		486		1		(183	)		304
Trust investments	$	258,481	$	6,130	$	(67,565	)		197,046
Market value as a percentage of cost										76.2	%
Accrued investment income									812
Trust assets								$	197,858

24

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)

     The cost and market values of the trust investments held by the cemetery perpetual care trusts as of October 31, 2008 are detailed below.

	October 31, 2008
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	16,920	$	—	$	—		$	16,920
U.S. Government, agencies and municipalities		8,739		292		(96	)		8,935
Corporate bonds		44,287		397		(5,709	)		38,975
Preferred stocks		67,514		—		(26,299	)		41,215
Common stocks		106,347		3,427		(50,431	)		59,343
Mutual funds:
Equity		6,740		—		(2,103	)		4,637
Fixed income		2,086		—		(472	)		1,614
Other long-term investments		594		28		(11	)		611
Trust investments	$	253,227	$	4,144	$	(85,121	)	$	172,250
Market value as a percentage of cost										68.0	%
Accrued investment income									840
Trust assets								$	173,090

     The estimated maturities and market values of debt securities included above are as follows:

	July 31, 2009
Due in one year or less	$	2,864
Due in one to five years		33,072
Due in five to ten years		16,160
Thereafter		551
	$	52,647

     The Company is actively managing a covered call program on its equity securities within the cemetery perpetual care trust. As of July 31, 2009, the Company has outstanding covered calls with a market value of $274. These covered calls constitute a hedge on $8,442, or approximately 13.4 percent, of the common stock portion of the Company’s portfolio within the cemetery perpetual care trust and also provide an opportunity for current income. For the nine months ended July 31, 2009, the Company realized trust earnings of approximately $200 related to the covered call program.

     The Company adopted FSP FAS 115-2 as of the quarter ended July 31, 2009 for the debt security investments in its cemetery perpetual care trust portfolio. In conjunction with its quarterly evaluation of the investments in its trusts as of July 31, 2009, the Company had to determine whether impairments in its debt securities were temporary or other than temporary in nature. Based on the analysis performed by the Company, it does not consider any of its debt security investments in the cemetery perpetual care trust to be other than temporarily impaired as of July 31, 2009.

     Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy provided in SFAS No. 157. The Company’s Level 1 investments include cash, money market and other short-term investments, common stock and mutual funds.

25

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)

     Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are primarily U. S. Government, agencies and municipalities, corporate bonds and preferred stocks, all of which are classified within Level 2 of the SFAS No. 157 valuation hierarchy.

     The Company’s Level 3 investments include an investment in a partnership. The valuation of partnership investments requires significant management judgment due to the absence of quoted prices, inherent lack of liquidity and the long-term nature of such assets. The fair market value of the partnership investments was determined by using its most recent audited financial statements and assessing the market value of the underlying securities within the partnership.

     The inputs into the fair value of the Company’s cemetery perpetual care trust investments are categorized as follows:

	July 31, 2009
			Significant
	Quoted Market		Other		Significant
	Prices in Active		Observable		Unobservable
	Markets		Inputs		Inputs		Fair market
	(Level 1)		(Level 2)		(Level 3)		value
Trust investments	$	97,663	$	99,179	$	204	$	197,046

     The change in the Company’s cemetery perpetual care trust investments with significant unobservable inputs (Level 3) is as follows:

Fair market value, November 1, 2008	$	611
Total unrealized losses included in other comprehensive income(1)		(177	)
Transfers out of Level 3 category		(230	)
Fair market value, July 31, 2009	$	204

⁽¹⁾ All gains (losses) recognized in other comprehensive income for cemetery perpetual care trust investments are attributable to the Company’s customers and are offset by a corresponding increase (decrease) in perpetual care trusts’ corpus.

     In states where the Company withdraws and recognizes capital gains in its cemetery perpetual care trusts, if it realizes net capital losses (i.e. losses in excess of capital gains in the trust) and the fair market value of the trust assets is less than the aggregate amounts required to be contributed to the trust, some states may require the Company to make cash deposits to the trusts or may require the Company to stop withdrawing earnings until future earnings restore the net realized losses. As of October 31, 2008, the Company had a liability recorded for the estimated probable funding obligation to restore the net realized losses as a result of fiscal year 2008 losses of $13,281, which was recognized as a realized loss in the consolidated statement of earnings for the year ended October 31, 2008 in cemetery costs. The Company recorded an additional $23 and $3,222 for the estimated probable funding obligation to restore the net realized losses in the cemetery perpetual care trust for the quarter and nine months ended July 31, 2009, respectively. The Company contributed approximately $734 to the trusts as part of its funding obligation during the nine months ended July 31, 2009. The Company also had earnings of $614 and $1,635 for the three and nine months ended July 31, 2009, respectively, within the trusts that it did not withdraw from the trusts in order to satisfy its estimated probable funding obligation. In those states where realized net capital gains have not been withdrawn, the Company believes it is reasonably possible that additional funding obligations may exist with an estimated amount of approximately $3,500.

26

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)

     Activity related to preneed cemetery perpetual care trust investments is as follows:

	Three Months Ended July 31,					Nine Months Ended July 31,
	2009			2008		2009			2008
Purchases	$	1,721		$	16,376	$	9,590		$	46,640
Sales		1,492			17,841		3,345			42,899
Realized gains from sales of investments		85			865		619			3,063
Realized losses from sales of investments and other		(26	)(1)		—		(3,235	)(2)		(7	)
Deposits		2,526			2,186		6,747	(3)		6,147
Withdrawals		1,182			2,350		4,136			7,351

(1)	Includes $23 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined during the quarter ended July 31, 2009 it did not have the intent to hold until they recover in value.
(2)	Includes $16 in losses from the sale of investments and $3,219 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined during the nine months ended July 31, 2009 it did not have the intent to hold until they recover in value.
(3)	Includes $734 that the Company contributed to the cemetery perpetual care trusts as part of its funding obligation during the nine months ended July 31, 2009, respectively.

     During the three months ended July 31, 2009 and 2008, cemetery revenues were $51,735 and $61,870, respectively, of which $1,972 and $2,209, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and expenses. During the nine months ended July 31, 2009 and 2008, cemetery revenues were $154,693 and $178,658, respectively, of which $5,625 and $6,820, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and expenses.

     The following tables show the gross unrealized losses and fair value of the cemetery perpetual care trust investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of July 31, 2009 and October 31, 2008.

	July 31, 2009
	Less than 12 Months					12 Months or Greater					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government, agencies and municipalities	$	146	$	(4	)	$	131	$	(82	)	$	277	$	(86	)
Corporate bonds		5,958		(948	)		8,640		(1,115	)		14,598		(2,063	)
Preferred stocks		1,942		(4,415	)		44,589		(12,692	)		46,531		(17,107	)
Common stocks		5,809		(1,107	)		50,642		(44,868	)		56,451		(45,975	)
Mutual funds:
Equity		1,642		(452	)		3,271		(1,290	)		4,913		(1,742	)
Fixed income		8		—			1,034		(409	)		1,042		(409	)
Other long-term investments		—		—			201		(183	)		201		(183	)
Total	$	15,505	$	(6,926	)	$	108,508	$	(60,639	)	$	124,013	$	(67,565	)

27

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)

	October 31, 2008
	Less than 12 Months					12 Months or Greater						Total
	Market		Unrealized			Market			Unrealized			Market			Unrealized
	Value		Losses			Value			Losses			Value			Losses
U.S. Government, agencies and municipalities	$	324	$	(1	)	$	627		$	(95	)	$	951		$	(96	)
Corporate bonds		15,652		(2,352	)		12,281			(3,357	)		27,933			(5,709	)
Preferred stocks		8,752		(6,227	)		32,463			(20,072	)		41,215			(26,299	)
Common stocks		17,832		(8,252	)		34,352			(42,179	)		52,184			(50,431	)
Mutual funds:
Equity		4,501		(2,075	)		90			(28	)		4,591			(2,103	)
Fixed income		258		(14	)		1,078			(458	)		1,336			(472	)
Other long-term investments		—		—			(12	)		(11	)		(12	)		(11	)
Total	$	47,319	$	(18,921	)	$	80,879		$	(66,200	)	$	128,198		$	(85,121	)

     The unrealized losses in the cemetery perpetual care trust portfolio are not considered to be other than temporary. For each of these securities, the Company evaluates consensus analyst recommendations, ratings from established ratings agencies, any concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at July 31, 2009, 93 percent, or $63,082, were generated by common stock and preferred stock investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred stocks had a rating of “A” or better at the time of purchase. Because approximately 32 percent of the Company’s cemetery perpetual care trusts portfolio is currently invested in common stock, the Company generally expects its portfolio performance to improve if the performance of the overall stock market improves, but would also expect its performance to deteriorate if the overall stock market declines. The preferred stocks are primarily in the financial services sector which has experienced a significant decline in market value due to the current economic crisis. The Company believes that it has sufficient cash and cash equivalents within the trusts and from cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow the Company to hold these investments until they recover in value.

     Cash flows from cemetery perpetual care contracts are presented as operating cash flows in the Company’s condensed consolidated statements of cash flows.

(6) Deferred Preneed Funeral and Cemetery Receipts Held in Trust and Perpetual Care Trusts’ Corpus

     The components of deferred preneed funeral and cemetery receipts held in trust in the condensed consolidated balance sheet at July 31, 2009 are as follows:

	Deferred Receipts Held in Trust
	Preneed			Preneed
	Funeral			Cemetery			Total
Trust assets at market value	$	347,525		$	161,015		$	508,540
Less:
Pending withdrawals		(7,716	)		(6,423	)		(14,139	)
Pending deposits		2,818			2,143			4,961
Deferred receipts held in trust	$	342,627		$	156,735		$	499,362

28

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(6) Deferred Preneed Funeral and Cemetery Receipts Held in Trust and Perpetual Care Trusts’ Corpus—(Continued)

     The components of perpetual care trusts’ corpus in the condensed consolidated balance sheet at July 31, 2009 are as follows:

	Perpetual Care
	Trusts’ Corpus
Trust assets at market value	$	197,858
Less:
Pending withdrawals		(1,862	)
Pending deposits		839
Perpetual care trusts’ corpus	$	196,835

Investment and other income, net

     The components of investment and other income, net in the condensed consolidated statements of earnings for the three and nine months ended July 31, 2009 and 2008 are detailed below.

	Three Months Ended July 31,						Nine Months Ended July 31,
	2009			2008			2009			2008
Realized gains from sales of investments	$	1,028		$	2,097		$	2,932		$	6,571
Realized losses from sales of investments and other		(1,313	)		(398	)		(19,165	)		(912	)
Interest income, dividend and other ordinary income		6,355			7,876			19,544			23,292
Trust expenses and income taxes		(2,106	)		(2,639	)		(6,203	)		(8,415	)
Net trust investment income (loss)		3,964			6,936			(2,892	)		20,536
Investment income (loss) of deferred preneed funeral and cemetery receipts held in trust		(2,453	)		(4,259	)		5,160			(11,947	)
Investment loss of perpetual care trusts’ corpus		(1,511	)		(2,677	)		(2,268	)		(8,589	)
Total deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus		—			—			—			—
Investment and other income, net(1)		12			593			85			1,670
Total investment and other income, net	$	12			593		$	85			1,670

⁽¹⁾ Investment and other income, net consists of interest income primarily on the Company’s cash, cash equivalents and marketable securities not held in trust.

(7) Commitments and Contingencies

Litigation

     Funeral Consumers Alliance, Inc., et al. v. Service Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co., number H-05-3394 on the docket of the United States District Court for the Southern District of Texas. This purported class action was originally filed on May 2, 2005, in the United States District Court for the Northern District of California, on behalf of a nationwide class defined to include all consumers who purchased a Batesville casket from the funeral home

29

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Commitments and Contingencies—(Continued)

defendants at any time. The court consolidated it with five subsequently filed, substantially similar cases (the “Consolidated Consumer Cases”).

     The Consolidated Consumer Cases allege that the defendants acted jointly to reduce competition from independent casket discounters and fix and maintain prices on caskets in violation of the federal antitrust laws and California’s Business and Professions Code. The plaintiffs seek treble damages, restitution, injunctive relief, interest, costs and attorneys’ fees.

     At the defendants’ request, in late September 2005, the court transferred the Consolidated Consumer Cases to the United States District Court for the Southern District of Texas. The transferred Consolidated Consumer Cases have been consolidated before a single judge in the Southern District of Texas.

     On November 10, 2006, after the court denied defendants’ motions to dismiss, the Company answered the first amended consolidated class action complaint, denying liability and asserting various affirmative defenses. Fact discovery has been completed, and expert discovery is complete with the exception of the deposition of one expert witness.

     In April 2007, the plaintiffs filed an expert report indicating that the damages sought from all defendants would be in the range of approximately $950 million to approximately $1.5 billion, before trebling. A successful plaintiff in an antitrust case may elect to enforce any judgment against any or all of the co-defendants, who have no right of contribution against one another. Accordingly, any adverse judgment could have a material adverse effect on the Company’s financial condition and results of operations. The Company believes it has meritorious defenses to the substantive allegations asserted, to class certification, and to the plaintiffs’ damage theories and calculations, and the Company intends to aggressively defend itself in these proceedings. The Company has not recorded a liability related to this litigation given that it does not believe that a loss is probable and estimable.

     On March 26, 2009, the court denied plaintiffs’ motion for class certification. The United States Court of Appeals for the Fifth Circuit denied plaintiffs’ petition for permission to appeal on June 19, 2009, and denied plaintiffs’ motion for reconsideration on July 29, 2009.

     In Re: State Attorney General Civil Investigative Demands- On August 4, 2005, the Attorney General for the State of Maryland issued a civil investigative demand to the Company seeking documents and information relating to funeral and cemetery goods and services. Subsequently, the Attorneys General for the States of Florida and Connecticut issued a similar civil investigative demand to the Company. In May 2009, the Office of the Connecticut Attorney General advised the Company that it had closed its investigation with no further action required. During August 2009, the Company received oral confirmations from the Offices of the Attorneys General for the States of Florida and Maryland that they have closed their investigations also, with no further action required.

Other Litigation

     The Company is a defendant in a variety of other litigation matters that have arisen in the ordinary course of business, which are covered by insurance or otherwise not considered to be material. The Company carries insurance with coverages and coverage limits that it believes to be adequate.

Other Commitments and Contingencies

     In those states where the Company has withdrawn realized net capital gains in the past from its cemetery perpetual care trusts, regulators may seek replenishment of the realized net capital losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals of future earnings until they cover the loss. As of October 31, 2008, the Company had $13,281 recorded as a liability for an estimated probable funding obligation as

30

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Commitments and Contingencies—(Continued)

an increase in cemetery costs in fiscal year 2008 and recorded an additional $23 and $3,222 for the estimated probable funding obligation in the three and nine months ended July 31, 2009, respectively. As of July 31, 2009, the Company had unrealized losses of approximately $51,973 in the trusts in these states. Because all of these trusts currently have assets with a fair market value less than the aggregate amounts required to be contributed to the trust, any additional realized net capital losses in these trusts may result in a corresponding funding liability and increase in cemetery costs.

     From time to time, unidentified contracts are presented to the Company relating to contracts sold prior to the time the Company acquired certain businesses. In addition, from time to time, the Company has identified in its backlog, certain contracts in which services or merchandise have already been delivered. Using historical trends and statistical analysis, the Company has recorded an estimated net liability for these items of approximately $6.1 million and $7.0 million as of July 31, 2009 and October 31, 2008, respectively.

     The Company is required to maintain a bond ($27,047 as of July 31, 2009) to guarantee its obligations relating to funds the Company withdrew in fiscal year 2001 from its preneed funeral trusts in Florida. This amount would become senior secured debt if the Company was required to borrow funds under the revolving credit facility to extinguish the bond obligation by returning to the trusts the amounts it previously withdrew that relate to the remaining undelivered preneed contracts.

(8) Reconciliation of Basic and Diluted Per Share Data

	Earnings		Shares		Per Share
Three Months Ended July 31, 2009	(Numerator)		(Denominator)		Data
Net earnings	$	10,838
Basic earnings per common share:
Net earnings available to common shareholders	$	10,838		91,936	$	.12
Effect of dilutive securities:
Stock options assumed exercised and restricted stock				182
Diluted earnings per common share:
Net earnings available to common shareholders plus stock options assumed exercised and restricted stock	$	10,838		92,118	$	.12

	Earnings		Shares		Per Share
Three Months Ended July 31, 2008	(Numerator)		(Denominator)		Data
Net earnings	$	9,129
Basic earnings per common share:
Net earnings available to common shareholders	$	9,129		92,203	$	.10
Effect of dilutive securities:
Stock options assumed exercised and restricted stock				211
Diluted earnings per common share:
Net earnings available to common shareholders plus stock options assumed exercised and restricted stock	$	9,129		92,414	$	.10

31

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(8) Reconciliation of Basic and Diluted Per Share Data—(Continued)

	Earnings		Shares		Per Share
Nine Months Ended July 31, 2009	(Numerator)		(Denominator)		Data
Net earnings	$	29,756
Basic earnings per common share:
Net earnings available to common shareholders	$	29,756		91,883	$	.32
Effect of dilutive securities:
Stock options assumed exercised and restricted stock				53
Diluted earnings per common share:
Net earnings available to common shareholders plus stock options assumed exercised and restricted stock	$	29,756		91,936	$	.32

	Earnings		Shares		Per Share
Nine Months Ended July 31, 2008	(Numerator)		(Denominator)		Data
Net earnings	$	31,954
Basic earnings per common share:
Net earnings available to common shareholders	$	31,954		94,504	$	.34
Effect of dilutive securities:
Stock options assumed exercised and restricted stock				172
Diluted earnings per common share:
Net earnings available to common shareholders plus stock options assumed exercised and restricted stock	$	31,954		94,676	$	.34

     During the three and nine months ended July 31, 2009, options to purchase 1,556,373 and 1,631,653 shares, respectively, of common stock at prices ranging from $5.06 to $8.47 per share were outstanding but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares for those periods. Additionally, weighted-average shares outstanding for the nine months ended July 31, 2009 exclude the effect of approximately 278,681 options because such options were not dilutive. These options expire between December 20, 2011 and January 5, 2016.

     Options to purchase 361,549 and 316,455 shares of common stock at prices ranging from $7.65 to $8.24 per share for the three and nine months ended July 31, 2008, respectively, were outstanding but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares for those periods. Additionally, weighted-average shares outstanding for the three and nine months ended July 31, 2008 exclude the effect of approximately 468,210 and 457,264 options, respectively, because such options were not dilutive.

     For the three and nine months ended July 31, 2009, 438,000 market based stock options and 612,000 market and performance based shares of restricted stock were not dilutive. For the three and nine months ended July 31, 2008, 697,500 market based stock options and 415,000 market and performance based shares of restricted stock were not dilutive. The market based stock options and the market and performance based restricted stock were not dilutive because the market conditions or performance conditions for the respective grants were not achieved during any of periods presented.

     For the three and nine months ended July 31, 2009, a maximum of 19,165,600 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 15,332,480 shares of Class A common stock under the common stock warrants associated with the June 2007 senior convertible debt transaction

32

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(8) Reconciliation of Basic and Diluted Per Share Data—(Continued)

were not dilutive, as the average price of the Company’s stock for the three and nine months ended July 31, 2009 was less than the conversion price of the senior convertible notes and strike price of the warrants. For the three and nine months ended July 31, 2008, a maximum of 25,000,000 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 20,000,000 shares of Class A common stock under the associated common stock warrants were also not dilutive. As discussed in Note 16, during the nine months ended July 31, 2009, the Company purchased $58,344 of its senior convertible notes on the open market which resulted in associated common stock warrants being terminated. This accounts for the decrease in the Class A common stock related to the senior convertible notes and associated common stock warrants that could potentially be included in the diluted earnings per share calculations as of July 31, 2009.

     The Company includes Class A and Class B common stock in its diluted shares calculation. As of July 31, 2009, the Company’s Chairman, Frank B. Stewart, Jr., was the record holder of all of the Company’s shares of Class B common stock. The Company’s Class A and B common stock are substantially identical, except that holders of Class A common stock are entitled to one vote per share, and holders of Class B common stock are entitled to ten votes per share. Each share of Class B common stock is automatically converted into one share of Class A common stock upon transfer to persons other than certain affiliates of Frank B. Stewart, Jr.

(9) Segment Data

     The Company previously had five operating and reportable segments consisting of a corporate trust management segment and a funeral and cemetery segment for each of the two geographical divisions (each with a division president): Western and Eastern. In the second quarter of 2009, the Company eliminated its two geographical divisions of Western and Eastern and the positions of Western and Eastern division presidents from its organizational structure in order to maximize the benefits of its Best in Class initiative, improve efficiencies and provide more focus on the development of new revenue opportunities. As of July 31, 2009, the Company’s Chief Executive Officer and Chief Financial Officer meet monthly with the Senior Vice President of Operations to discuss operational performance. There is also a president of the Company’s wholly-owned subsidiary, Investor’s Trust, Inc. (“ITI”), who reports to the Chief Financial Officer. The Company’s Senior Vice President of Operations acts as the segment manager for the funeral and cemetery businesses and the Executive Vice President and President of ITI acts as segment manager for corporate trust.

     The Company has determined that its Chief Executive Officer and Chief Financial Officer remain the chief operating decision makers (“CODM”) as they make decisions about the Company’s overall resource allocation and assessment of performance. In order to re-evaluate the Company’s segments, the CODM review of the Company’s operational performance and management compensation were considered. Based on its evaluation, the Company has determined that managements’ approach to operating the business indicates that there are three operating and reportable segments: a funeral segment, a cemetery segment and a corporate trust management segment. The Company does not aggregate its operating segments. Therefore, its operating and reportable segments are the same. Prior period data has been retrospectively adjusted to conform to the new segment presentation.

	Total Revenue				Total Revenue
	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	July 31, 2009		July 31, 2008		July 31, 2009		July 31, 2008
Funeral	$	62,476	$	63,948	$	197,698	$	204,747
Cemetery(1)		49,779		59,577		149,069		171,666
Corporate Trust Management(2)		5,497		6,903		16,933		21,107
Total	$	117,752	$	130,428	$	363,700	$	397,520

33

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(9) Segment Data—(Continued)

	Total Gross Profit				Total Gross Profit
	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	July 31, 2009		July 31, 2008		July 31, 2009		July 31, 2008
Funeral	$	11,112	$	10,632	$	40,513	$	42,135
Cemetery(1)		3,202		10,902		11,914		28,855
Corporate Trust Management(2)		5,019		6,464		15,584		19,712
Total	$	19,333	$	27,998	$	68,011	$	90,702

	Net Total Preneed Merchandise				Net Total Preneed Merchandise
	and Service Sales(3)				and Service Sales(3)
	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	July 31, 2009		July 31, 2008		July 31, 2009		July 31, 2008
Funeral	$	27,121	$	26,004	$	70,343	$	72,963
Cemetery(1)		13,454		14,244		36,154		40,567
Total	$	40,575	$	40,248	$	106,497	$	113,530

(1)	Perpetual care trust earnings are included in the revenues and gross profit of the cemetery segment and amounted to $1,541 and $2,635 for the three months ended July 31, 2009 and 2008, respectively, and $5,342 and $8,040 for the nine months ended July 31, 2009 and 2008, respectively.
(2)	Corporate trust management consists of trust management fees and funeral and cemetery merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of the assets managed and are paid by the trusts to the Company’s subsidiary, Investors Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. Trust management fees included in funeral revenue for the three months ended July 31, 2009 and 2008 were $1,010 and $1,264, respectively, and funeral trust earnings for the three months ended July 31, 2009 and 2008 were $2,531 and $3,346, respectively. Trust management fees included in cemetery revenue for the three months ended July 31, 2009 and 2008 were $1,060 and $1,255, respectively, and cemetery trust earnings for the three months ended July 31, 2009 and 2008 were $896 and $1,038, respectively. Trust management fees included in funeral revenue for the nine months ended July 31, 2009 and 2008 were $2,832 and $3,957, respectively, and funeral trust earnings for the nine months ended July 31, 2009 and 2008 were $8,477 and $10,158, respectively. Trust management fees included in cemetery revenue for the nine months ended July 31, 2009 and 2008 were $2,923 and $3,844, respectively, and cemetery trust earnings for the nine months ended July 31, 2009 and 2008 were $2,701 and $3,148, respectively.
(3)	Preneed sales amounts represent total preneed funeral trust and insurance sales and cemetery service and merchandise trust sales generated in the applicable period, net of cancellations.

34

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(9) Segment Data—(Continued)

     A reconciliation of total segment gross profit to total earnings before income taxes for the three and nine months ended July 31, 2009 and 2008 is as follows:

	Three Months Ended July 31,						Nine Months Ended July 31,
	2009			2008			2009			2008
Gross profit for reportable segments	$	19,333		$	27,998		$	68,011		$	90,702
Corporate general and administrative expenses		(8,089	)		(8,188	)		(22,601	)		(24,226	)
Hurricane related charges, net		(46	)		(341	)		(566	)		(351	)
Separation charges		—			—			(275	)		—
Gains on dispositions and impairment (losses), net		(117	)		25			(215	)		153
Other operating income, net		397			407			960			753
Interest expense		(5,299	)		(6,000	)		(17,088	)		(17,981	)
Gain on early extinguishment of debt		8,533			—			17,204			—
Investment and other income, net		12			593			85			1,670
Earnings before income taxes	$	14,724		$	14,494		$	45,515		$	50,720

35

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Supplementary Information

     The detail of certain income statement accounts is as follows for the three and nine months ended July 31, 2009 and 2008.

	Three Months Ended July 31,				Nine Months Ended July 31,
	2009		2008		2009		2008
Service revenue
Funeral	$	41,821	$	42,795	$	132,658	$	136,202
Cemetery		13,952		15,726		44,062		48,592
		55,773		58,521		176,720		184,794
Merchandise revenue
Funeral		22,631		23,872		71,861		76,800
Cemetery		34,315		42,227		100,456		118,299
		56,946		66,099		172,317		195,099
Other revenue
Funeral		1,565		1,891		4,488		5,860
Cemetery		3,468		3,917		10,175		11,767
		5,033		5,808		14,663		17,627
Total revenue	$	117,752	$	130,428	$	363,700	$	397,520
Service costs
Funeral	$	14,497	$	15,403	$	43,883	$	45,979
Cemetery		10,568		11,515		29,941		32,043
		25,065		26,918		73,824		78,022
Merchandise costs
Funeral		14,073		15,116		43,647		47,094
Cemetery		22,479		23,615		67,419		69,818
		36,552		38,731		111,066		116,912
Facility expenses
Funeral		23,037		23,005		70,287		70,187
Cemetery		13,765		13,776		40,512		41,697
		36,802		36,781		110,799		111,884
Total costs	$	98,419	$	102,430	$	295,689	$	306,818

     Service revenue includes funeral service revenue, funeral trust earnings, insurance commission revenue, burial site openings and closings and perpetual care trust earnings. Merchandise revenue includes funeral merchandise revenue, flower sales, cemetery property sales revenue, cemetery merchandise delivery revenue and merchandise trust earnings. Other revenue consists of finance charge revenue and trust management fees. Service costs include the direct costs associated with service revenue and preneed selling costs associated with preneed service sales. Merchandise costs include the direct costs associated with merchandise revenue, preneed selling costs associated with preneed merchandise sales and the Company’s $23 and $3,222 estimated obligation to fund the cemetery perpetual care trusts for the three and nine months ended July 31, 2009, respectively.

36

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes

     The following tables present the condensed consolidating historical financial statements as of July 31, 2009 and October 31, 2008 and for the three and nine months ended July 31, 2009 and 2008, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the Company’s 6.25 percent senior notes and its 3.125 percent and 3.375 percent senior convertible notes, and the financial results of the Company’s subsidiaries that do not serve as guarantors. Non-guarantor subsidiaries of the 6.25 percent senior notes include the Puerto Rican subsidiaries, Investors Trust, Inc. and certain immaterial domestic subsidiaries, which are prohibited by law from guaranteeing the senior notes. The guarantor subsidiaries of the 6.25 percent senior notes are wholly-owned directly or indirectly by the Company, except for three immaterial guarantor subsidiaries of which the Company is the majority owner. The non-guarantor subsidiaries of the senior convertible notes are identical to those of the 6.25 percent senior notes but also include three immaterial non-wholly owned subsidiaries and any future non-wholly owned subsidiaries. The guarantees are full and unconditional and joint and several. In the statements presented within this footnote, Tier 2 guarantor subsidiaries represent the three immaterial non-wholly owned subsidiaries that do not guaranty the senior convertible notes but do guaranty the 6.25 percent senior notes. Non-guarantor subsidiaries represent the identical non-guarantor subsidiaries of the 6.25 percent senior notes and senior convertible notes. In the condensed consolidating statements of earnings and other comprehensive income, corporate general and administrative expenses and interest expense of the parent are presented net of amounts charged to the guarantor and non-guarantor subsidiaries.

Condensed Consolidating Statements of Earnings and Other Comprehensive Income

	Three Months Ended July 31, 2009
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	61,217		$	497		$	4,303		$	—		$	66,017
Cemetery		—			46,813			786			4,136			—			51,735
		—			108,030			1,283			8,439			—			117,752
Costs and expenses:
Funeral		—			48,093			314			3,200			—			51,607
Cemetery		—			42,379			673			3,760			—			46,812
		—			90,472			987			6,960			—			98,419
Gross profit		—			17,558			296			1,479			—			19,333
Corporate general and administrative expenses		(8,089	)		—			—			—			—			(8,089	)
Hurricane related charges, net		(44	)		(2	)		—			—			—			(46	)
Gains on dispositions and impairment (losses), net		—			2			—			(119	)		—			(117	)
Other operating income, net		20			317			—			60			—			397
Operating earnings (loss)		(8,113	)		17,875			296			1,420			—			11,478
Interest income (expense)		1,211			(5,990	)		(28	)		(492	)		—			(5,299	)
Gain on early extinguishment of debt		8,533			—			—			—			—			8,533
Investment and other income, net		12			—			—			—			—			12
Equity in subsidiaries		8,354			32			—			—			(8,386	)		—
Earnings before income taxes		9,997			11,917			268			928			(8,386	)		14,724
Income tax expense (benefit)		(841	)		4,401			86			240			—			3,886
Net earnings		10,838			7,516			182			688			(8,386	)		10,838
Other comprehensive loss, net		(1	)		—			—			(1	)		1			(1	)
Comprehensive income	$	10,837		$	7,516		$	182		$	687		$	(8,385	)	$	10,837

37

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

Condensed Consolidating Statements of Earnings and Other Comprehensive Income

	Three Months Ended July 31, 2008
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	63,398		$	381		$	4,779		$	—		$	68,558
Cemetery		—			56,046			842			4,982			—			61,870
		—			119,444			1,223			9,761			—			130,428
Costs and expenses:
Funeral		—			49,648			265			3,611			—			53,524
Cemetery		—			44,114			698			4,094			—			48,906
		—			93,762			963			7,705			—			102,430
Gross profit		—			25,682			260			2,056			—			27,998
Corporate general and administrative expenses		(8,188	)		—			—			—			—			(8,188	)
Hurricane related recoveries (charges), net		(402	)		—			61			—			—			(341	)
Gains on dispositions and impairment (losses), net		—			25			—			—			—			25
Other operating income, net		22			341			—			44			—			407
Operating earnings (loss)		(8,568	)		26,048			321			2,100			—			19,901
Interest expense		(1,585	)		(3,869	)		(40	)		(506	)		—			(6,000	)
Investment and other income, net		563			29			—			1			—			593
Equity (loss) in subsidiaries		16,458			(74	)		—			—			(16,384	)		—
Earnings before income taxes		6,868			22,134			281			1,595			(16,384	)		14,494
Income tax expense (benefit)		(2,261	)		7,236			195			195			—			5,365
Net earnings		9,129			14,898			86			1,400			(16,384	)		9,129
Other comprehensive loss, net		(26	)		—			—			(4	)		4			(26	)
Comprehensive income	$	9,103		$	14,898		$	86		$	1,396		$	(16,380	)	$	9,103

38

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

Condensed Consolidating Statements of Earnings and Other Comprehensive Income

	Nine Months Ended July 31, 2009
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	194,481		$	1,397		$	13,129		$	—		$	209,007
Cemetery		—			139,701			2,200			12,792			—			154,693
		—			334,182			3,597			25,921			—			363,700
Costs and expenses:
Funeral		—			147,551			880			9,386			—			157,817
Cemetery		—			125,322			1,905			10,645			—			137,872
		—			272,873			2,785			20,031			—			295,689
Gross profit		—			61,309			812			5,890			—			68,011
Corporate general and administrative expenses		(22,601	)		—			—			—			—			(22,601	)
Hurricane related recoveries (charges), net		(670	)		104			—			—			—			(566	)
Separation charges		(55	)		(220	)		—			—			—			(275	)
Gains on dispositions and impairment (losses), net		(8	)		(88	)		—			(119	)		—			(215	)
Other operating income, net		39			804			1			116			—			960
Operating earnings (loss)		(23,295	)		61,909			813			5,887			—			45,314
Interest income (expense)		2,782			(18,264	)		(90	)		(1,516	)		—			(17,088	)
Gain on early extinguishment of debt		17,204			—			—			—			—			17,204
Investment and other income, net		85			—			—			—			—			85
Equity in subsidiaries		32,661			455			—			—			(33,116	)		—
Earnings before income taxes		29,437			44,100			723			4,371			(33,116	)		45,515
Income tax expense (benefit)		(319	)		14,804			202			1,072			—			15,759
Net earnings		29,756			29,296			521			3,299			(33,116	)		29,756
Other comprehensive loss, net		(4	)		—			—			(4	)		4			(4	)
Comprehensive income	$	29,752		$	29,296		$	521		$	3,295		$	(33,112	)	$	29,752

39

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

          Condensed Consolidating Statements of Earnings and Other Comprehensive Income

	Nine Months Ended July 31, 2008
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	202,495		$	1,410		$	14,957		$	—		$	218,862
Cemetery		—			161,205			2,565			14,888			—			178,658
		—			363,700			3,975			29,845			—			397,520
Costs and expenses:
Funeral		—			151,970			898			10,392			—			163,260
Cemetery		—			129,453			2,155			11,950			—			143,558
		—			281,423			3,053			22,342			—			306,818
Gross profit		—			82,277			922			7,503			—			90,702
Corporate general and administrative expenses		(24,226	)		—			—			—			—			(24,226	)
Hurricane related recoveries (charges), net		(779	)		37			391			—			—			(351	)
Gains on dispositions and impairment (losses), net		—			153			—			—			—			153
Other operating income, net		79			509			1			164			—			753
Operating earnings (loss)		(24,926	)		82,976			1,314			7,667			—			67,031
Interest expense		(3,318	)		(12,916	)		(113	)		(1,634	)		—			(17,981	)
Investment and other income, net		1,614			50			—			6			—			1,670
Equity in subsidiaries		54,263			418			—			—			(54,681	)		—
Earnings before income taxes		27,633			70,528			1,201			6,039			(54,681	)		50,720
Income tax expense (benefit)		(4,321	)		21,280			399			1,408			—			18,766
Net earnings		31,954			49,248			802			4,631			(54,681	)		31,954
Other comprehensive income, net		17			—			—			17			(17	)		17
Comprehensive income	$	31,971		$	49,248		$	802		$	4,648		$	(54,698	)	$	31,971

40

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

Condensed Consolidating Balance Sheets

	July 31, 2009
			Guarantor			Guarantor		Non-
			Subsidiaries-			Subsidiaries-		Guarantor
	Parent		Tier 1			Tier 2		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	63,984	$	5,420		$	43	$	1,767	$	—		$	71,214
Receivables, net of allowances		10,659		47,470			293		3,783		—			62,205
Inventories		299		33,530			305		2,122		—			36,256
Prepaid expenses		1,397		6,151			62		1,669		—			9,279
Deferred income taxes, net		5,698		11,266			40		1,600		—			18,604
Total current assets		82,037		103,837			743		10,941		—			197,558
Receivables due beyond one year, net of allowances		—		48,472			432		14,238		—			63,142
Preneed funeral receivables and trust investments		—		368,638			—		9,458		—			378,096
Preneed cemetery receivables and trust investments		—		182,983			1,125		7,027		—			191,135
Goodwill		—		227,401			48		19,787		—			247,236
Cemetery property, at cost		—		348,618			11,351		25,977		—			385,946
Property and equipment, at cost		53,389		460,655			2,128		37,886		—			554,058
Less accumulated depreciation		34,627		204,160			951		14,880		—			254,618
Net property and equipment		18,762		256,495			1,177		23,006		—			299,440
Deferred income taxes, net		13,845		113,076			—		10,917		(3,180	)		134,658
Cemetery perpetual care trust investments		—		186,329			7,962		3,567		—			197,858
Non-current assets held for sale		—		1,433			—		230		—			1,663
Other assets		9,269		5,365			6		1,055		—			15,695
Intercompany receivables		770,304		—			—		—		(770,304	)		—
Equity in subsidiaries		31,443		7,829			—		—		(39,272	)		—
Total assets	$	925,660	$	1,850,476		$	22,844	$	126,203	$	(812,756	)	$	2,112,427
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	5	$	—		$	—	$	—	$	—		$	5
Accounts payable		2,854		19,493			145		1,336		—			23,828
Accrued expenses and other current liabilities		14,220		54,883			14		3,478		—			72,595
Total current liabilities		17,079		74,376			159		4,814		—			96,428
Long-term debt, less current maturities		391,747		—			—		—		—			391,747
Deferred income taxes				—			3,180		—		(3,180	)		—
Intercompany payables		—		761,757			3,054		5,493		(770,304	)		—
Deferred preneed funeral revenue		—		198,693			104		46,614		—			245,411
Deferred preneed cemetery revenue		—		244,636			325		27,724		—			272,685
Deferred preneed funeral and cemetery receipts held in trust		—		492,708			1,048		5,606		—			499,362
Perpetual care trusts’ corpus		—		185,283			7,990		3,562		—			196,835
Other long-term liabilities		17,205		4,164			—		102		—			21,471
Negative equity in subsidiaries		111,141		—			—		—		(111,141	)		—
Total liabilities		537,172		1,961,617			15,860		93,915		(884,625	)		1,723,939
Common stock		92,675		102			324		52		(478	)		92,675
Other		295,780		(111,243	)		6,660		32,203		72,380			295,780
Accumulated other comprehensive income		33		—			—		33		(33	)		33
Total shareholders’ equity		388,488		(111,141	)		6,984		32,288		71,869			388,488
Total liabilities and shareholders’ equity	$	925,660	$	1,850,476		$	22,844	$	126,203	$	(812,756	)	$	2,112,427

41

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

Condensed Consolidating Balance Sheets

	October 31, 2008
			Guarantor			Guarantor		Non-
			Subsidiaries-			Subsidiaries-		Guarantor
	Parent		Tier 1			Tier 2		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	65,593	$	4,332		$	22	$	2,627	$	—		$	72,574
Marketable securities		—		—			—		55		—			55
Receivables, net of allowances		2,987		51,137			546		4,459		—			59,129
Inventories		300		32,821			361		2,388		—			35,870
Prepaid expenses		1,282		4,618			37		1,380		—			7,317
Deferred income taxes, net		1,395		6,117			55		1,231		—			8,798
Total current assets		71,557		99,025			1,021		12,140		—			183,743
Receivables due beyond one year, net of allowances		—		54,326			404		15,941		—			70,671
Preneed funeral receivables and trust investments		—		358,891			—		9,521		—			368,412
Preneed cemetery receivables and trust investments		—		173,484			1,047		7,610		—			182,141
Goodwill		—		227,401			48		19,787		—			247,236
Cemetery property, at cost		—		340,232			11,424		25,615		—			377,271
Property and equipment, at cost		49,583		450,617			1,932		38,109		—			540,241
Less accumulated depreciation		30,479		190,645			824		14,118		—			236,066
Net property and equipment		19,104		259,972			1,108		23,991		—			304,175
Deferred income taxes, net		25,853		148,403			—		8,527		(3,268	)		179,515
Cemetery perpetual care trust investments		—		162,789			7,137		3,164		—			173,090
Non-current assets held for sale		—		1,787			—		—		—			1,787
Other assets		9,451		5,937			16		1,070		—			16,474
Intercompany receivables		837,282		—			—		—		(837,282	)		—
Equity in subsidiaries		28,082		7,374			—		—		(35,456	)		—
Total assets	$	991,329	$	1,839,621		$	22,205	$	127,366	$	(876,006	)	$	2,104,515
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	20	$	—		$	—	$	—	$	—		$	20
Accounts payable		2,530		23,237			167		1,718		—			27,652
Accrued expenses and other current liabilities		15,496		54,683			13		2,632		—			72,824
Total current liabilities		18,046		77,920			180		4,350		—			100,496
Long-term debt, less current maturities		450,095		—			—		—		—			450,095
Deferred income taxes		—		—			3,268		—		(3,268	)		—
Intercompany payables		—		819,691			3,939		13,652		(837,282	)		—
Deferred preneed funeral revenue		—		199,867			—		45,315		—			245,182
Deferred preneed cemetery revenue		—		248,098			324		27,413		—			275,835
Deferred preneed funeral and cemetery receipts held in trust		—		470,167			899		4,354		—			475,420
Perpetual care trusts’ corpus		—		161,074			7,132		3,165		—			171,371
Other long-term liabilities		17,114		3,241			—		124		—			20,479
Negative equity in subsidiaries		140,437		—			—		—		(140,437	)		—
Total liabilities		625,692		1,980,058			15,742		98,373		(980,987	)		1,738,878
Common stock		92,248		102			324		52		(478	)		92,248
Other		273,352		(140,539	)		6,139		28,904		105,496			273,352
Accumulated other comprehensive income		37		—			—		37		(37	)		37
Total shareholders’ equity		365,637		(140,437	)		6,463		28,993		104,981			365,637
Total liabilities and shareholders’ equity	$	991,329	$	1,839,621		$	22,205	$	127,366	$	(876,006	)	$	2,104,515

42

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

Condensed Consolidating Statements of Cash Flows

	Nine Months Ended July 31, 2009
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities	$	15,345		$	39,487		$	1,036		$	7,722		$	—	$	63,590
Cash flows from investing activities:
Proceeds from sales of marketable securities		—			—			—			250			—		250
Purchases of marketable securities		—			—			—			(199	)		—		(199	)
Proceeds from sale of assets		292			202			—			—			—		494
Purchase of subsidiaries and other investments, net of cash acquired		(300	)		(1,623	)		—			—			—		(1,923	)
Additions to property and equipment		(4,144	)		(10,281	)		(130	)		(474	)		—		(15,029	)
Other		—			37			—			—			—		37
Net cash used in investing activities		(4,152	)		(11,665	)		(130	)		(423	)		—		(16,370	)
Cash flows from financing activities:
Repayments of long-term debt		(39,901	)		—			—			—			—		(39,901	)
Intercompany receivables (payables)		35,778			(26,734	)		(885	)		(8,159	)		—		—
Issuance of common stock		225			—			—			—			—		225
Retirement of call options		5,111			—			—			—			—		5,111
Purchase and retirement of common stock		(52	)		—			—			—			—		(52	)
Retirement of common stock warrants		(4,981	)		—			—			—			—		(4,981	)
Debt refinancing costs		(2,029	)		—			—			—			—		(2,029	)
Dividends		(6,953	)		—			—			—			—		(6,953	)
Net cash used in financing activities		(12,802	)		(26,734	)		(885	)		(8,159	)		—		(48,580	)
Net increase (decrease) in cash		(1,609	)		1,088			21			(860	)		—		(1,360	)
Cash and cash equivalents, beginning of period		65,593			4,332			22			2,627			—		72,574
Cash and cash equivalents, end of period	$	63,984		$	5,420		$	43		$	1,767		$	—	$	71,214

43

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

Condensed Consolidating Statements of Cash Flows

	Nine Months Ended July 31, 2008
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	(22,882	)	$	63,484		$	464		$	11,187		$	—	$	52,253
Cash flows from investing activities:
Proceeds from sales of marketable securities		19,969			—			—			250			—		20,219
Purchases of marketable securities		(19,952	)		—			—			(3	)		—		(19,955	)
Proceeds from sale of assets		—			358			—			—			—		358
Purchase of subsidiaries and other investments, net of cash acquired		(1,378	)		—			—			—			—		(1,378	)
Additions to property and equipment		(5,147	)		(14,399	)		(42	)		(782	)		—		(20,370	)
Other		—			75			—			—			—		75
Net cash used in investing activities		(6,508	)		(13,966	)		(42	)		(535	)		—		(21,051	)
Cash flows from financing activities:
Repayments of long-term debt		(190	)		—			—			—			—		(190	)
Intercompany receivables (payables)		59,113			(48,314	)		(425	)		(10,374	)		—		—
Issuance of common stock		1,659			—			—			—			—		1,659
Purchase and retirement of common stock		(48,627	)		—			—			—			—		(48,627	)
Dividends		(7,067	)		—			—			—			—		(7,067	)
Excess tax benefits from share-based payment arrangements		171			—			—			—			—		171
Net cash provided by (used in) financing activities		5,059			(48,314	)		(425	)		(10,374	)		—		(54,054	)
Net increase (decrease) in cash		(24,331	)		1,204			(3	)		278			—		(22,852	)
Cash and cash equivalents, beginning of period		63,202			6,685			36			1,622			—		71,545
Cash and cash equivalents, end of period	$	38,871		$	7,889		$	33		$	1,900		$	—	$	48,693

44

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12) Dispositions and Acquisitions

     Assets associated with assets held for sale are presented in the “non-current assets held for sale” line in the condensed consolidated balance sheet. As of October 31, 2008, $1,440 in cemetery property and $1,433 in land were included in non-current assets held for sale in the consolidated balance sheet presented in the 2008 Form 10-K. As of July 31, 2009, the $1,440 of cemetery property held for sale at October 31, 2008 was no longer for sale. In addition, a property consisting of $354 of land, buildings and equipment was designated as held for sale in the third quarter of 2009. Therefore, these amounts were reclassified in the October 31, 2008 condensed consolidated balance sheet presented herein. Therefore, as of July 31, 2009 and October 31, 2008, non-current assets held for sale consists of $1,663 and $1,787, respectively, of land, buildings and equipment held for sale.

     During the nine months ended July 31, 2009, the Company acquired a new cemetery for approximately $1,623. This cemetery acquisition was accounted for under the purchase method, and the acquired assets and liabilities (primarily deferred revenue of approximately $7,500, cemetery property of approximately $5,700 and inventory of approximately $2,900) were valued at their estimated fair values. Its results of operations, which are considered immaterial, have been included since the acquisition date.

     During the third quarter of 2009, the Company invested an additional $300 in its investment in an outside business that sells on-line obituaries. The Company made its initial investment in this business for $1,378 in the second quarter of fiscal year 2008. The Company’s investment is accounted for under the cost method of accounting.

(13) Consolidated Comprehensive Income

     Consolidated comprehensive income for the three and nine months ended July 31, 2009 and 2008 is as follows:

	Three Months Ended July 31,						Nine Months Ended July 31,
	2009			2008			2009			2008
Net earnings	$	10,838		$	9,129		$	29,756		$	31,954
Other comprehensive income (loss):
Unrealized appreciation (depreciation) of investments, net of deferred tax (expense) benefit of $0, $17, $2 and ($9), respectively		(1	)		(26	)		(4	)		17
(Increase) reduction in net unrealized losses associated with available-for-sale securities of the trusts		74,562			(63,723	)		61,993			(136,026	)
Reclassification of the net unrealized (increases) losses activity attributable to the deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus		(74,562	)		63,723			(61,993	)		136,026
Total other comprehensive income (loss)		(1	)		(26	)		(4	)		17
Total comprehensive income	$	10,837		$	9,103		$	29,752		$	31,971

(14) Hurricane Related Charges

     The Company has insurance coverage related to property damage, incremental costs and property operating expenses it incurred due to damage caused by Hurricanes Katrina and Ike. In September 2008, Hurricane Ike struck the Texas Gulf Coast and the Company’s facilities in the area. The Company has submitted its insurance claim related to Hurricane Ike. The insurance policies also provide coverage for interruption to the business, including lost profits, and reimbursement for other expenses and costs incurred relating to the damages and losses suffered. In the third quarter of fiscal year 2009, the Company received $202 in insurance proceeds related to Hurricane Ike. Net expenses of $46 and $566, respectively, are reflected in the “Hurricane related charges, net” line in the condensed

45

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(14) Hurricane Related Charges—(Continued)

consolidated statements of earnings for the three and nine months ended July 31, 2009, respectively, compared to net expenses of $341 and $351 for the three and nine months ended July 31, 2008, respectively. Net expenses recorded in fiscal year 2009 primarily relate to the lawsuit the Company filed against its insurance carriers related to its Hurricane Katrina claim which is described below. For additional information on the effects of Hurricanes Katrina and Ike on the Company, see Note 23 in the Company’s 2008 Form 10-K.

     The Company has been unable to finalize its negotiations with its insurance carriers related to property damage and extra expenses, and business interruption damages, related to Hurricane Katrina, and filed suit against the carriers in August 2007. In 2007, the carriers advanced an additional $1,100, which the Company has not recorded as income but as a liability pending the outcome of the litigation. The suit involves numerous significant policy interpretation disputes, among other issues, and no assurance can be given as to how much additional proceeds the Company may recover from its insurers, if any, or the timing of the receipt of any additional proceeds. The trial process for this suit has begun and is ongoing. With the exception of any legal costs related to this suit, the Company does not anticipate any additional charges related to Hurricane Katrina.

(15) Separation Charges

     The Company previously had five operating and reportable segments consisting of a corporate trust management segment and a funeral and cemetery segment for each of the two geographical divisions (each with a division president): Western and Eastern. As described in Note 9, in the second quarter of 2009, the Company eliminated its two geographic divisions of Western and Eastern and the positions of Western and Eastern division presidents from its organizational structure and now has three operating segments: a funeral segment, a cemetery segment and a corporate trust management segment.

     During the nine months ended July 31, 2009, the Company recorded $275 in total separation charges, of which $175 related to the separation pay of a former executive officer. The remaining separation charges related to severance costs associated with the reorganization. Of the total separation charges amount, $147 was paid during the nine months ended July 31, 2009. As of July 31, 2009, the Company has $128 in remaining payments under all executive officer separation agreements.

(16) Long-term Debt

	July 31, 2009		October 31, 2008
Long-term debt:
3.125% senior convertible notes due 2014	$	109,221	$	125,000
3.375% senior convertible notes due 2016		82,435		125,000
Senior secured revolving credit facility		—		—
6.25% senior notes due 2013		200,000		200,000
Other, principally seller financing of acquired operations or assumption upon acquisition, weighted average interest rates of 8.0% and 7.7% as of July 31, 2009 and October 31, 2008, respectively, partially secured by assets of subsidiaries, with maturities through 2022		96		115
Total long-term debt		391,752		450,115
Less current maturities		5		20
	$	391,747	$	450,095

46

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(16) Long-term Debt—(Continued)

     Fair Value

     As of July 31, 2009, the carrying values of the Company’s 3.125 percent senior convertible notes due 2014 and 3.375 percent senior convertible notes due 2016, including accrued interest, were $109,373 and $82,559, respectively, compared to fair values of $90,510 and $66,088, respectively. As of July 31, 2009, the carrying value of the Company’s 6.25 percent senior notes, including accrued interest, was $205,729 compared to a fair value of $198,728.

     Senior Convertible Notes

     During the nine months ended July 31, 2009, the Company purchased $15,779 aggregate principal amount of its 3.125 percent senior convertible notes due 2014 and $42,565 aggregate principal amount of its 3.375 percent senior convertible notes due 2016 on the open market. In connection with these debt purchases, corresponding call options and common stock warrants were also terminated. The total value of the call options terminated that Bank of America/Merrill Lynch would have been required to pay the Company was $5,111 for the nine months ended July 31, 2009. The total value of the common stock warrants terminated that would have required a payment from the Company to Bank of America/Merrill Lynch was $4,981 for the nine months ended July 31, 2009. In connection with the debt purchases that occurred during the third quarter of 2009, the value of the call options was greater than the value of the warrants, and Bank of America/Merrill Lynch owed the Company approximately $52. This amount was settled by Bank of America/Merrill Lynch delivering 11,465 shares to the Company which reduced the number of the Company’s outstanding common shares.

     As a result of the debt purchases at significant discounts, the Company recorded $8,624 and $17,295 in gains on early extinguishment of debt during the quarter and nine months ended July 31, 2009, respectively, which represents the discount on the purchase of the senior convertible notes less the write-off of remaining deferred charges.

     Senior Secured Revolving Credit Facility

     The Company’s previous $125,000 revolving credit facility was set to mature on November 19, 2009. On June 2, 2009, the Company entered into a new senior secured revolving credit facility which replaced the previous $125,000 revolving credit facility. The new senior secured revolving credit facility matures on June 2, 2012, which is three years from the closing date and includes a $95,000 revolving credit facility, a $30,000 sublimit for the issuance of standby letters of credit and a $10,000 sublimit for swingline loans. As of July 31, 2009, there were no amounts drawn on the senior secured revolving credit facility, and the Company’s availability under the senior secured revolving credit facility, after giving consideration to $12,035 outstanding letters of credit and the $27,047 Florida bond, was $55,918. The Company may also request the addition of a new tranche of terms loans, an increase in the commitments to the senior secured revolving credit facility or a combination thereof not to exceed $30,000. During the third quarter of 2009, the Company recorded a charge for the loss on early extinguishment of debt of $91 to write-off a portion of the unamortized fees on the prior agreement. The remaining fees related to the prior agreement and the fees incurred for the new agreement were $2,195 (of which $2,029 has been paid as of July 31, 2009) and will be amortized over the life of the new debt.

     The leverage-based grid pricing for the interest rate on the new senior secured revolving credit facility ranges from LIBOR plus 300 to 400 basis points based on the Company’s consolidated leverage ratio and was LIBOR plus 400 basis points at July 31, 2009. The Company also has a base rate option, and swingline loans bear interest at the base rate which is the highest of (a) the federal funds rate plus 0.50 percent, (b) the prime rate or (c) the Eurodollar rate plus 1 percent; plus a spread ranging from 200 to 300 basis points depending on the Company’s consolidated leverage ratio. The annual commitment fee is 75 basis points payable quarterly.

47

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(16) Long-term Debt—(Continued)

     The new senior secured revolving credit facility is governed by the following financial covenants at all times:

• Maintenance on a rolling four quarter basis of a maximum consolidated senior secured leverage ratio (total funded senior secured debt divided by EBITDA (as defined)) – Maximum 1.25x;

• Maintenance on a rolling four quarter basis of a minimum consolidated interest coverage ratio (EBITDAR (as defined) divided by interest expense paid in cash plus rent expense) – Minimum 2.50x through January 31, 2010 and 2.60x thereafter and

• Maintenance at all times of a minimum cash balance of the greater of $20,000 and the then outstanding amount of all letters of credit obligations.

   In addition, the new senior secured revolving credit facility is governed by the following additional financial covenant only when a loan under the facility is outstanding:

• Maintenance on a rolling four quarter basis of a maximum consolidated leverage ratio (funded debt (net of domestic cash, cash equivalents and marketable securities) divided by EBITDA (as defined)) – Maximum 5.0x through January 31, 2010, 4.75x from February 1, 2010 through January 31, 2011 and 4.50x thereafter.

     The covenants include limitations on liens, limitations on mergers, consolidations and asset sales, limitations on incurrence of debt, limitations on dividends, stock redemptions and the redemption, repurchase and/or prepayment of other debt, limitation on capital expenditures, limitations on investments and acquisitions and limitations on transactions with affiliates. If there is no default or event of default, the Company may pay cash dividends and repurchase its stock, provided that the aggregate amount of the dividends and stock repurchased plus other types of restricted payments in any fiscal year does not exceed $30,000 plus any positive amounts in the discretionary basket. As of July 31, 2009, the amount available to pay dividends or repurchase stock was $124,576. In addition, the Company may prepay its debt without limitation as long as it has $35,000 in cash and marketable securities. If the Company’s cash and marketable securities are below $35,000, the Company is limited to $25,000 of debt prepayments in any twelve month period. The agreement also limits capital expenditures in any fiscal year to $40,000, with a provision for the carryover of permitted but unused amounts. The lenders under the senior secured revolving credit facility can accelerate all obligations under the facility and terminate the revolving credit commitment if an event of default occurs and is continuing.

     Obligations under the senior secured revolving credit facility are guaranteed by substantially all existing and future direct and indirect domestic subsidiaries of the Company formed under the laws of any one of the states or the District of Columbia of the United States of America (“SEI Guarantors”).

     The lenders under the new senior secured revolving credit facility have received a first priority perfected security interest in (1) all of the capital stock or other equity interests of each of the domestic subsidiaries of the Company whether now existing or hereafter created or acquired other than certain excluded immaterial subsidiaries and 65 percent of the voting capital stock of all direct foreign subsidiaries whether now existing or hereafter acquired and (2) all other present and future assets and properties of the Company and the SEI Guarantors except (a) real property, (b) vehicles, (c) assets to which applicable law or regulation prohibits security interest therein or requires the consent of a third party, (d) contract rights in which a security interest without the approval of the other party to the contract would constitute a default thereunder and (e) any assets with respect to which a security interest cannot be perfected.

48

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(17) Income Taxes

     During the third quarter of fiscal year 2009, the Internal Revenue Service approved a change in one of the Company’s tax accounting policies that is expected to result in a combination of refunds and reductions of federal income tax payments totaling approximately $32,000. Of that amount, $12,000 was received as a refund in the third quarter of fiscal 2009, approximately $7,500 is expected to be received as a refund by the end of the first quarter of 2010, approximately $8,500 was used to offset estimated tax payments during fiscal 2009 and the remaining approximately $4,000 is expected to be used to offset future federal income tax payments. The change relates to the Company’s tax accounting policy for preneed contracts in one state. For those contracts, the Company was recognizing income for tax purposes (and paying taxes) relating to amounts received from customers and placed in trust at the time the cash was received from the customers. This policy resulted in approximately $89,400 of income that was taxed prior to the delivery of the merchandise or services. The change permits the Company to instead recognize income for tax purposes (and pay taxes) with respect to those amounts at the time the service is performed or the merchandise delivered and cash is withdrawn from the trust, which generally aligns the Company’s book and tax accounting for these amounts and is consistent with the Company’s approach in the other states. The change essentially allowed the Company to apply the approximately $89,400 reversal of previously reported taxable income to reduce taxable income for fiscal years 2006, 2007, 2008, 2009 and potentially part of 2010 depending on its taxable income in fiscal year 2009. The Company will eventually have to pay federal income taxes with respect to the $89,400 as the related preneed contracts are performed over time.

     During the quarter ended July 31, 2009, the Company recognized a tax benefit of $1,025 resulting from a reduction in the valuation allowance on its capital loss carryforward established at October 31, 2008. This reduction was primarily due to a capital gain from the expected sale of excess cemetery land.

     During the nine months ended July 31, 2009, the Company recognized a tax benefit of $150 resulting from a reduction in the valuation allowance on its capital loss carryforward established at October 31, 2008. This reduction was primarily due to a capital gain from the expected sale of excess cemetery land, partially offset by an increase in realized capital losses in Company grantor trust funds.

(18) Significant Risks and Uncertainties

     During the third quarter of fiscal year 2009, there have been no material changes to the Company’s significant risks and uncertainties as disclosed in the Company’s 2008 Form 10-K except on June 2, 2009, the Company entered into a $95,000 senior secured revolving credit facility which replaced the then existing $125,000 revolving credit facility. See Note 16 for additional information.

(19) Subsequent Events

     The Company has evaluated subsequent events for recognition and disclosure through September 9, 2009, which was the date the Company filed this Form 10-Q with the Securities and Exchange Commission.

     Subsequent to July 31, 2009 through August 31, 2009, the Company purchased an additional $9,700 aggregate principal amount of its 3.125 percent senior convertible notes due 2014 and $2,450 aggregate principal amount of its 3.375 percent senior convertible notes due 2016 on the open market. The Company expects to record a gain on early extinguishment of debt of approximately $1,800 in the fourth quarter of 2009 related to these transactions.

     As of August 31, 2009, the fair market value of the Company’s preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts increased approximately one percent from July 31, 2009.

49

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

     The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our MD&A and Risk Factors contained in our Form 10-K for the fiscal year ended October 31, 2008 (the “2008 Form 10-K”), and in conjunction with our consolidated financial statements included in this report and in our 2008 Form 10-K.

     This report contains forward-looking statements that are generally identifiable through the use of words such as “believe,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “project,” “will” and similar expressions. These forward-looking statements rely on assumptions, estimates and predictions that could be inaccurate and that are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that may cause our actual results to differ materially from expectations reflected in our forward-looking statements include those described in Risk Factors in our 2008 Form 10-K. Forward-looking statements speak only as of the date of this report, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.

Overview

General

     We are the second largest provider of funeral and cemetery products and services in the death care industry in the United States. As of July 31, 2009, we owned and operated 220 funeral homes and 140 cemeteries in 24 states within the United States and Puerto Rico. We sell cemetery property and funeral and cemetery products and services both at the time of need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales, preneed sales delivered out of our backlog during the period (including the accumulated trust earnings or build-up in the face value of insurance contracts related to these preneed deliveries), preneed cemetery property sales and other items such as perpetual care trust earnings, finance charges and trust management fees. We also earn commissions on the sale of insurance-funded preneed funeral contracts that will be funded by life insurance or annuity contracts issued by third-party insurers when we act as an agent on the sale. For a more detailed discussion of our accounting for preneed sales and trust and escrow account earnings, see MD&A included in Item 7 in our 2008 Form 10-K.

Financial Summary

     For the third quarter of fiscal year 2009, net earnings increased $1.7 million to $10.8 million from $9.1 million for the third quarter of fiscal year 2008. Net earnings for the third quarter of 2009 included an $8.5 million pre-tax gain on the early extinguishment of debt related to our open market repurchases of $35.7 million aggregate principal amount of our senior convertible notes during the quarter. Revenue decreased $12.7 million to $117.7 million for the quarter ended July 31, 2009. Funeral revenue decreased $2.5 million to $66.0 million in the third quarter of 2009. During the third quarter of 2009, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 3.2 percent and an increase in average revenue per cremation service of 4.2 percent. These increases were partially offset by a quarter-over-quarter decrease in funeral trust earnings resulting in an overall increase in the same-store average revenue per funeral service of 2.3 percent. The increases in same-store average revenue were offset by a 6.3 percent, or 884 event, decrease in same-store funeral services performed. The decline in events is due in part to a 313 event decrease, or 35 percent of the total decline, in our West Coast operations, due in part to a decrease in low-end cremation events. The remaining decrease in funeral services is primarily due to a decrease in deaths in our markets, when compared to the comparable prior year period. We experienced a $1.1 million decrease in funeral earnings related to trust activities. Cemetery revenue decreased $10.2 million to $51.7 million for the quarter ended July 31, 2009. This decrease is due primarily to a $3.7 million, or 13.5 percent, decrease in cemetery property sales, net of discounts, due in part to current economic conditions. While cemetery property sales have increased in some of our operations, approximately 75 percent of the decline is occurring in two states where the current economic environment is having the largest impact. In addition, we experienced a $2.8 million decrease in cemetery merchandise delivered and services performed, a $2.4 million decrease in construction on various cemetery projects and a $1.5 million decrease in cemetery earnings related to trust activities. Consolidated gross profit decreased $8.7 million to $19.3 million primarily due to an $8.1 million decrease in cemetery gross profit and a $0.6 million decrease in funeral gross profit.

50

     Interest expense decreased $0.7 million to $5.3 million during the third quarter of 2009 primarily due to the repurchase of our senior convertible notes on the open market. We believe that this is an attractive use of our cash and have taken advantage of the current market discounts to achieve some deleveraging. The effective tax rate for the three months ended July 31, 2009 was 26.4 percent compared to 37.0 percent for the same period in 2008. The decreased rate in the current quarter is primarily due to a tax benefit of $1.0 million attributable to a decrease in our valuation allowance on our capital loss carryforward established at October 31, 2008 and a lower effective state tax rate primarily attributable to the gain on early extinguishment of debt.

     Current economic conditions have continued to negatively impact our ability to close preneed sales. For the third quarter of 2009, preneed cemetery property sales, net of discounts, declined 13.5 percent compared to the same period of last year, which decreased our cemetery revenue as described above. In contrast, our net preneed funeral sales increased 4.3 percent during the third quarter of 2009 compared to the third quarter of 2008, despite current economic conditions. Preneed funeral sales are deferred until a future period and have no impact on current revenue.

     For the nine months ended July 31, 2009, net earnings decreased $2.2 million to $29.8 million from $32.0 million for the same period in fiscal year 2008. Net earnings for the first nine months of 2009 included a $17.2 million pre-tax gain on the early extinguishment of debt related to our open market repurchases of $58.3 million principal amount of our senior convertible notes. Revenue decreased $33.9 million to $363.7 million for the nine months ended July 31, 2009. Funeral revenue decreased $9.9 million to $209.0 million in the first nine months of 2009. During the nine months ended July 31, 2009, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 3.8 percent and an increase in average revenue per cremation service of 7.0 percent. These increases were partially offset by a decrease in funeral trust earnings resulting in an overall increase in the same-store average revenue per funeral service of 3.6 percent. The increases in same-store average revenue were partially offset by a 7.5 percent, or 3,400 event, decrease in same-store funeral services performed. The decline is due to several factors. We experienced a 1,384 call decline, or 40.7 percent of the total decline, in our West Coast operations, due in part to a decrease in low-end cremation events. In addition, we experienced a 222 call decline, or 6.5 percent of the total decline, in funeral services due to an additional day in the second quarter of 2008 due to leap year. Finally, the remaining decrease in funeral services is primarily due to a decrease in deaths in our markets, when compared with the comparable prior year period. For the nine months ended July 31, 2009, we experienced a $2.8 million decrease in funeral earnings related to trust activities. Cemetery revenue decreased $24.0 million to $154.7 million for the nine months ended July 31, 2009. This decrease is due primarily to a $13.2 million, or 16.8 percent, decrease in cemetery property sales, net of discounts, due to current economic conditions, a $5.8 million decrease in cemetery merchandise delivered and services performed and a $4.1 million decrease in cemetery earnings related to trust activities. For the nine months ended July 31, 2009, consolidated gross profit decreased $22.7 million to $68.0 million primarily due to an $18.3 million decrease in cemetery gross profit, coupled with a $4.4 million decrease in funeral gross profit. For the nine months ended July 31, 2009, we recorded a $3.2 million charge in cemetery costs for our estimated probable obligation to restore the net realized losses in certain of our cemetery perpetual care trusts, which contributed in part to the decline in gross profit.

     Corporate general and administrative expenses decreased $1.6 million to $22.6 million for the nine months ended July 31, 2009 primarily due to a $1.6 million decrease in professional fees due in part to the resolution of the SEC investigation in 2008. Interest expense decreased $0.9 million to $17.1 million during the first nine months of fiscal 2009 primarily due to the repurchase of our senior convertible notes on the open market. Our weighted average diluted shares outstanding decreased to 91.9 million shares for the nine months ended July 31, 2009 compared to 94.7 million shares for the same period of 2008, yielding a positive impact on earnings per share.

     For the first nine months of 2009, preneed cemetery property sales, net of discounts, declined 16.8 percent compared to the same period of last year, which decreased our cemetery revenue as described above. In addition, net preneed funeral sales decreased 3.6 percent for the nine months ended July 31, 2009 compared to the same period of last year, which does not impact current revenue, but reduces our backlog and could reduce our future revenues.

51

     During the third quarter of fiscal 2009, we experienced positive trends in regards to the overall market and in our preneed and perpetual care trusts. For the quarter ended July 31, 2009, our preneed funeral and cemetery merchandise and services trusts experienced a total return, including both realized and unrealized losses, of 13.6 percent, and our cemetery perpetual care trusts experienced a total return, including both realized and unrealized losses, of 16.2 percent.

     We defer all dividends and interest earned and net capital gains and losses realized by our preneed trusts until the underlying service or merchandise is delivered. Unrealized capital gains and losses are not allocated to contracts. When a contract is delivered, the earned interest, dividends and net realized capital gain or loss which have been allocated to the contract are recognized as components of revenue along with the original contract sales price.

     As of July 31, 2009 and October 31, 2008, the fair market value of the investments in our funeral and cemetery merchandise and services trusts were $211.2 million and $253.6 million, respectively, lower than our cost basis. We review our investment portfolio quarterly, and as part of that review during the quarter ended July 31, 2009, we determined that we no longer had the intent to hold certain securities until they recovered their value. In addition, there were certain securities that we deemed were practically worthless as of October 31, 2008 that further declined in value during fiscal year 2009. As a result, for the first nine months of fiscal 2009, we realized additional losses of $11.7 million in our funeral and cemetery merchandise and services trusts, of which less than $0.1 million was realized in the third quarter of fiscal 2009. These losses were allocated to the underlying contracts and will affect the amount of future revenue recognized, and cash withdrawn, at the time the specific contract is performed.

     The preneed contracts we manage are long-term in nature, and we believe that the trust investments will appreciate in value over the long-term. We continue to monitor our investment portfolio closely. As of July 31, 2009 and October 31, 2008, we had $224.3 million and $240.9 million, respectively, in earnings that have been realized and allocated to contracts that will be recognized in the future as the underlying contracts are performed.

     In our cemetery perpetual care trusts, as of July 31, 2009 and October 31, 2008, the fair market value of our investments were $61.4 million and $81.0 million, respectively, lower than our cost basis. In addition, during the first nine months of fiscal 2009, we realized losses of $3.2 million in our cemetery perpetual care trusts, of which less than $0.1 million was realized in the third quarter of fiscal 2009. This loss resulted in the recording of an additional funding obligation of $3.2 million included in cemetery costs in the statement of earnings for the first nine months of fiscal 2009. See Note 5 to the condensed consolidated financial statements for further information on the estimated probable funding obligation.

     The sectors in which our trust investment portfolio is invested in have not materially changed from that disclosed in our 2008 Form 10-K.

     We anticipate that a sustained decline in the value of our trust investments could have several negative impacts on our Company in the future. Unless the market values of our trusts increase substantially, we expect to report lower earnings from our trusts which will reduce future revenue. In addition, our trust management fees are based on the fair market value of the assets managed; therefore, we expect to report lower trust management fees. In fiscal year 2008, cemetery perpetual care trust earnings, funeral and cemetery merchandise and services trust earnings and trust management fees comprised 7 percent of our revenue and 36 percent of our gross profit. In our 2008 Form 10-K, we disclosed that based on then current market conditions and then current realized losses, we believed the decrease in revenue from trust earnings recognized on delivery of preneed services and merchandise, cemetery perpetual care trust earnings and trust management fees for fiscal year 2009 could be as much as $10 million, or approximately 2 percent, of fiscal year 2008 revenue and approximately 10 percent of fiscal year 2008 gross profit. During the first nine months of fiscal 2009, we realized a $6.9 million decrease in earnings related to trust activities, of which $2.8 million related to the funeral segment and $4.1 million related to the cemetery segment. This decrease is consistent with our previously announced expectations of a reduction in revenue of approximately $10 million on an annual basis, and we continue to believe that an approximate $10 million decline in revenue related to trust activities can be expected based on current market conditions and current realized losses. If market conditions further deteriorate and our investment portfolio experiences additional realized losses or we conclude we are no longer able, or intend to hold our investments until they recover in value, it is likely the decrease in revenue and gross profit could be significantly higher. Approximately two-thirds of our funeral revenue and

52

nearly 80 percent of our cemetery revenue, or approximately 70 percent of our consolidated revenue, is not impacted by declines in the value of our trust investments.

     In addition, each quarter we perform an analysis to determine whether our preneed contracts are in a loss position, which would necessitate a charge to earnings. When we review our backlog for potential loss contracts, we consider the impact of the market value of our trust assets. We look at unrealized gains and losses based on current market prices quoted for the investments, but we do not include anticipated future returns on the investments in our analysis. If a deficiency were to exist, we would record a charge to earnings and a corresponding liability for the expected loss on the delivery of those contracts in our backlog. Due to the positive margins of our preneed contracts and the trust portfolio returns we have experienced in prior years and deferred on our consolidated balance sheet until delivery, currently there is capacity for additional market depreciation before a contract loss would result.

     For additional information regarding our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts, see Notes 3, 4 and 5 to the condensed consolidated financial statements included in this report.

     The following table presents our trust portfolio returns including realized and unrealized gains and losses.

	Funeral and Cemetery
	Merchandise and			Cemetery Perpetual
	Services Trusts			Care Trusts
For the quarter ended July 31, 2009		13.6	%		16.2	%
For the nine months ended July 31, 2009		11.2	%		15.5	%
For the last three years ended July 31, 2009		(2.8	)%		(.8	)%
For the last five years ended July 31, 2009		.8	%		1.4	%

     Our operations provided cash of $63.6 million for the nine months ended July 31, 2009, compared to $52.3 million for the corresponding period in 2008. The increase in operating cash flow is primarily due to a $12.0 million tax refund received in the third quarter of 2009 due to effective planning strategies. We paid $11.8 million in net tax payments in the first nine months of 2008 compared to $8.2 million in net tax refunds received in the first nine months of 2009. In addition, the increase is partially due to collections on prior period sales exceeding receivables for new sales. These increases were partially offset by $1.2 million of cash outflows related to Hurricane Ike paid in the first nine months of 2009, coupled with the timing of payments to vendors and the timing of payroll payments.

Critical Accounting Policies

     The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions (see Note 1(d) to the condensed consolidated financial statements). Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgment. These critical accounting policies are discussed in MD&A in our 2008 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2008 Form 10-K.

Results of Operations

     Effective during the second quarter of fiscal year 2009, we have three operating and reportable segments consisting of a funeral segment, cemetery segment and a corporate trust management segment. For a discussion of our segments, see Note 9 to the condensed consolidated financial statements included herein. Prior period data has been retrospectively adjusted to conform to the new segment presentation. As there have been no material acquisitions or construction of new locations in fiscal years 2009 and 2008, results essentially reflect those of same-store locations.

53

Three Months Ended July 31, 2009 Compared to Three Months Ended July 31, 2008

Funeral Operations

	Three Months Ended July 31,
					Increase
	2009		2008		(Decrease)
			(In millions)
Funeral Revenue:
Funeral Home Locations	$	62.5	$	63.9	$	(1.4	)
Corporate Trust Management(1)		3.5		4.6		(1.1	)
Total Funeral Revenue	$	66.0	$	68.5	$	(2.5	)
Funeral Costs:
Funeral Home Locations	$	51.4	$	53.3	$	(1.9	)
Corporate Trust Management(1)		.2		.2		—
Total Funeral Costs	$	51.6	$	53.5	$	(1.9	)
Funeral Gross Profit:
Funeral Home Locations	$	11.1	$	10.6	$	.5
Corporate Trust Management(1)		3.3		4.4		(1.1	)
Total Funeral Gross Profit	$	14.4	$	15.0	$	(.6	)

Same-Store Analysis for the Three Months Ended July 31, 2009 and 2008

Change in Average Revenue	Change in Same-Store
Per Funeral Service	Funeral Services	Same-Store Cremation Rate
		2009	2008
2.3%(1)	(6.3)%	41.8%	39.9%

⁽¹⁾ Corporate trust management consists of the trust management fees and funeral merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of earnings realized by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 3 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for the three months ended July 31, 2009 and 2008 were $1.0 million and $1.3 million, respectively. As corporate trust management is considered a separate operating segment, trust earnings are included in the total average revenue per funeral service presented. Funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for the three months ended July 31, 2009 and 2008 were $2.5 million and $3.3 million, respectively.

     Funeral revenue decreased $2.5 million, or 3.6 percent, from $68.5 million in the third quarter of 2008 to $66.0 million in the third quarter of 2009. The decrease in funeral revenue is primarily due to a $1.1 million decrease in funeral earnings related to trust activities and a 6.3 percent, or 884 event, decrease in our same-store funeral services performed, to 13,173 events. The decline in events is due in part to a 313 event decrease, or 35 percent of the total decline, in our West Coast operations, due in part to a decrease in low-end cremation events. The remaining decrease in funeral services is primarily due to a decrease in deaths in our markets, when compared to the comparable prior year period. These decreases were partially offset by an increase in average revenue per traditional funeral service of 3.2 percent and an increase in average revenue per cremation service of 4.2 percent. These increases were partially offset by a quarter-over-quarter decrease in funeral trust earnings resulting in an overall increase in our same-store average revenue per funeral service of 2.3 percent. The cremation rate for

54

our same-store operations was 41.8 percent for the third quarter of 2009 compared to 39.9 percent for the third quarter of 2008.

     Funeral gross profit decreased $0.6 million to $14.4 million for the third quarter of 2009 compared to $15.0 million for the same period of 2008, primarily due to the decrease in revenue, noted above, partially offset by a $1.9 million decrease in expenses. The decrease in expenses is primarily due to a decrease in merchandise costs resulting from decreased volume and a reduction in salaries and wages due to effective labor management.

Cemetery Operations

	Three Months Ended July 31,
	2009		2008		Decrease
			(In millions)
Cemetery Revenue:
Cemetery Locations	$	49.8	$	59.6	$	(9.8	)
Corporate Trust Management(1)		1.9		2.3		(.4	)
Total Cemetery Revenue	$	51.7	$	61.9	$	(10.2	)
Cemetery Costs:
Cemetery Locations	$	46.6	$	48.7	$	(2.1	)
Corporate Trust Management(1)		.2		.2		—
Total Cemetery Costs	$	46.8	$	48.9	$	(2.1	)
Cemetery Gross Profit:
Cemetery Locations	$	3.2	$	10.9	$	(7.7	)
Corporate Trust Management(1)		1.7		2.1		(.4	)
Total Cemetery Gross Profit	$	4.9	$	13.0	$	(8.1	)

⁽¹⁾ Corporate trust management consists of trust management fees and cemetery merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of earnings realized by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 4 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for the three months ended July 31, 2009 and 2008 were $1.0 million and $1.3 million, respectively, and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for the three months ended July 31, 2009 and 2008 were $0.9 million and $1.0 million, respectively. Perpetual care trust earnings are included in the revenues and gross profit of the cemetery segment. See Notes 5 and 6 to the condensed consolidated financial statements included herein for information regarding the cemetery perpetual care trusts.

     Cemetery revenue decreased $10.2 million from $61.9 million for the quarter ended July 31, 2008 to $51.7 million for the quarter ended July 31, 2009. This decrease is primarily due to a $3.7 million, or 13.5 percent, decrease in cemetery property sales, net of discounts, due in part to current economic conditions. While cemetery property sales have increased in some of our operations, approximately 75 percent of the decline is occurring in two states where the current economic environment is having the largest impact. In addition, we experienced a $2.8 million decrease in cemetery merchandise delivered and services performed, a $2.4 million decrease in construction on various cemetery projects and a $1.5 million decrease in cemetery earnings related to trust activities, of which $1.1 million of the decrease relates to cemetery perpetual care trust earnings.

     Cemetery gross profit decreased $8.1 million to $4.9 million for the third quarter of 2009 compared to $13.0 million for the same period of 2008. The decrease in gross profit is primarily due to the decrease in cemetery

55

revenue, as discussed above, partially offset by a $2.1 million decrease in expenses. The decrease in expenses is primarily due to a decrease in property costs and selling costs resulting from the decline in cemetery property sales.

Other

     Interest expense decreased $0.7 million to $5.3 million during the third quarter of fiscal year 2009 primarily due to the repurchase of our senior convertible notes on the open market.

     Investment and other income, net decreased $0.6 million to less than $0.1 million due primarily to a decrease in the average rate earned on our cash balances from 1.42 percent in the third quarter of 2008 to 0.08 percent in the third quarter of 2009.

     The effective tax rate for the three months ended July 31, 2009 was 26.4 percent compared to 37.0 percent for the same period in 2008. The decreased rate in the current quarter is primarily due to a tax benefit of $1.0 million attributable to a reduction in our valuation allowance on our capital loss carryforward established at October 31, 2008 and a lower effective state tax rate primarily attributable to the gain on early extinguishment of debt.

     In the third quarter of fiscal year 2009, we purchased $11.8 million aggregate principal amount of our 3.125 percent senior convertible notes due 2014 and $23.9 million aggregate principal amount of our 3.375 percent senior convertible notes due 2016 on the open market. As a result, we recorded an $8.5 million net gain on early extinguishment of debt during the quarter ended July 31, 2009.

Preneed Sales into the Backlog

     Net preneed funeral sales increased 4.3 percent during the third quarter of 2009 compared to the corresponding period in 2008, despite current economic conditions.

     The revenues from our preneed funeral and cemetery merchandise and service sales are deferred into our backlog and are not included in our operating results presented above. We had $40.6 million in net preneed funeral and cemetery merchandise and services sales (including $20.5 million related to insurance-funded preneed funeral contracts) during the third quarter of 2009 to be recognized in the future as these prepaid products and services are delivered, compared to net sales of $40.2 million (including $19.6 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2008. Insurance-funded preneed funeral contracts which will be funded by life insurance or annuity contracts issued by third-party insurers are not reflected in the condensed consolidated balance sheets.

Nine Months Ended July 31, 2009 Compared to Nine Months Ended July 31, 2008

Funeral Operations

	Nine Months Ended July 31,
	2009		2008		Decrease
			(In millions)
Funeral Revenue:
Funeral Home Locations	$	197.7	$	204.8	$	(7.1	)
Corporate Trust Management(1)		11.3		14.1		(2.8	)
Total Funeral Revenue	$	209.0	$	218.9	$	(9.9	)
Funeral Costs:
Funeral Home Locations	$	157.2	$	162.7	$	(5.5	)
Corporate Trust Management(1)		.6		.6		—
Total Funeral Costs	$	157.8	$	163.3	$	(5.5	)
Funeral Gross Profit:
Funeral Home Locations	$	40.5	$	42.1	$	(1.6	)
Corporate Trust Management(1)		10.7		13.5		(2.8	)
Total Funeral Gross Profit	$	51.2	$	55.6	$	(4.4	)

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Same-Store Analysis for the Nine Months Ended July 31, 2009 and 2008

Change in Average
Revenue Per Funeral	Change in Same-Store
Service	Funeral Services	Same-Store Cremation Rate
		2009	2008
3.6%(1)	(7.5)%	41.2%	40.0%

⁽¹⁾ Corporate trust management consists of trust management fees and funeral merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of earnings realized by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 3 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for the nine months ended July 31, 2009 and 2008 were $2.8 million and $4.0 million, respectively. As corporate trust management is considered a separate operating segment, trust earnings are included in the total average revenue per funeral service presented above. Funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for the nine months ended July 31, 2009 and 2008 were $8.5 million and $10.1 million, respectively.

Consolidated Operations—Funeral

     Funeral revenue decreased $9.9 million, or 4.5 percent, from $218.9 million in the first nine months of 2008 to $209.0 million in the first nine months of 2009. The decrease in funeral revenue is primarily due to a $2.8 million decline in funeral earnings related to trust activities and a 7.5 percent, or 3,400 event, decrease in our same-store funeral services performed, to 42,170 events. The decline is due to several factors. We experienced a 1,384 call decline, or 40.7 percent of the total decline, in our West Coast operations, due in part to a decrease in low-end cremation events. In addition, we experienced a 222 call decline, or 6.5 percent of the total decline, in funeral services due to an additional day in the second quarter of 2008 due to leap year. Finally, the remaining decrease in funeral services is primarily due to a decrease in deaths in our markets, when compared with the comparable prior year period. These decreases were partially offset by an increase in average revenue per traditional funeral service of 3.8 percent and an increase in average revenue per cremation service of 7.0 percent. These increases were partially offset by a decrease in funeral trust earnings resulting in an overall increase in our same-store average revenue per funeral service of 3.6 percent. The cremation rate for our same-store operations was 41.2 percent for the first nine months of fiscal year 2009 compared to 40.0 percent for the same period of fiscal year 2008.

     Funeral gross profit decreased $4.4 million to $51.2 million for the first nine months of 2009 compared to $55.6 million for the same period of 2008, primarily due to the decrease in revenue, noted above, partially offset by a $5.5 million decrease in expenses. The decrease in expenses is primarily due to a decrease in merchandise costs resulting from decreased volume and a reduction in salaries and wages due to effective labor management.

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Cemetery Operations

	Nine Months Ended July 31,
	2009		2008		Decrease
	(In millions)
Cemetery Revenue:
Cemetery Locations	$	149.1	$	171.7	$	(22.6	)
Corporate Trust Management(1)		5.6		7.0		(1.4	)
Total Cemetery Revenue	$	154.7	$	178.7	$	(24.0	)
Cemetery Costs:
Cemetery Locations	$	137.2	$	142.9	$	(5.7	)
Corporate Trust Management(1)		.7		.7		—
Total Cemetery Costs	$	137.9	$	143.6	$	(5.7	)
Cemetery Gross Profit:
Cemetery Locations	$	11.9	$	28.8	$	(16.9	)
Corporate Trust Management(1)		4.9		6.3		(1.4	)
Total Cemetery Gross Profit	$	16.8	$	35.1	$	(18.3	)

⁽¹⁾ Corporate trust management consists of trust management fees and cemetery merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of earnings realized by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 4 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for the nine months ended July 31, 2009 and 2008 were $2.9 million and $3.8 million, respectively, and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for the nine months ended July 31, 2009 and 2008 were $2.7 million and $3.2 million, respectively. Perpetual care trust earnings are included in the revenues and gross profit of the cemetery segment. See Notes 5 and 6 to the condensed consolidated financial statements included herein for information regarding the cemetery perpetual care trusts.

Consolidated Operations—Cemetery

     Cemetery revenue decreased $24.0 million from $178.7 million for the nine months ended July 31, 2008 to $154.7 million for the nine months ended July 31, 2009. This decrease is primarily due to a $13.2 million, or 16.8 percent, decrease in cemetery property sales, net of discounts, due to current economic conditions, a $5.8 million decrease in cemetery merchandise delivered and services performed and a $4.1 million decrease in cemetery earnings related to trust activities, of which $2.7 million of the decrease relates to cemetery perpetual care trust earnings.

     Cemetery gross profit decreased $18.3 million to $16.8 million for the first nine months of 2009 compared to $35.1 million for the same period of 2008. The decrease in gross profit is primarily due to the decrease in cemetery revenue, as discussed above, partially offset by a $5.7 million decrease in expenses. The decrease in expenses is primarily related to a decrease in property costs and selling costs resulting from the decline in cemetery property sales and a reduction in salaries and wages due to effective labor management. The decrease in cemetery expenses is partially offset by a $3.2 million charge recorded during the nine months ended July 31, 2009 for our estimated probable obligation to restore the net realized losses in certain of our cemetery perpetual care trusts primarily related to investments in General Motors.

     Goodwill of a reporting unit must be tested for impairment on at least an annual basis. We conduct our annual goodwill impairment analysis during the fourth quarter of each fiscal year. In addition to an annual review,

58

we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of goodwill may be greater than its fair value. Factors we consider important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of our assets or the strategy for our overall business, market capitalization of the Company below its book value and significant negative industry or economic trends.

     While the current economic downturn has negatively impacted cemetery property sales in the nine months ended July 31, 2009, a triggering event requiring an impairment assessment did not occur. In determining if a trigger had occurred, we considered the factors noted above. If economic conditions and current performance do not continue to improve, an impairment charge could result from our fourth quarter annual review. As of July 31, 2009, we have $48.7 million of cemetery goodwill recorded. Our cemetery segment tends to be more sensitive to goodwill impairments than our funeral segment, because our cemetery segment relies more heavily on preneed sales which are impacted by changes in customer discretionary income. Accordingly, further economic and market declines could be more likely to result in an impairment of goodwill in our cemetery segment. Currently, the fair values of our funeral segment reporting units substantially exceed their book value.

Other

     Corporate general and administrative expenses decreased $1.6 million to $22.6 million for the first nine months of fiscal 2009 primarily due to a $1.6 million decrease in professional fees due in part to the resolution of the SEC investigation in 2008.

     Interest expense decreased $0.9 million to $17.1 million during the first nine months of fiscal 2009 primarily due to the repurchase of our senior convertible notes on the open market.

     Investment and other income, net decreased $1.6 million to $0.1 million due primarily to a decrease in the average rate earned on our cash balances from 2.08 percent for the nine months ended July 31, 2008 to 0.16 percent for the nine months ended July 31, 2009.

     The effective tax rate for the nine months ended July 31, 2009 was 34.6 percent compared to 37.0 percent for the same period in 2008. The decreased rate is primarily due to a lower effective state tax rate primarily attributable to the gain on early extinguishment of debt.

     Our weighted average diluted shares outstanding decreased to 91.9 million shares for the first nine months of 2009 compared to 94.7 million shares for the same period of 2008, yielding a positive impact on earnings per share.

     In the first nine months of fiscal year 2009, we purchased $15.8 million aggregate principal amount of our 3.125 percent senior convertible notes due 2014 and $42.5 million aggregate principal amount of our 3.375 percent senior convertible notes due 2016 on the open market. As a result, we recorded a $17.2 million net gain on early extinguishment of debt during the nine months ended July 31, 2009.

     Current receivables increased $3.1 million from October 31, 2008 primarily due to an increase in income tax receivables. Long-term receivables decreased $7.5 million from October 31, 2008 to July 31, 2009 primarily due to the decline in current year cemetery property sales of 16.8 percent and collections of prior period sales exceeding receivables for new sales. Prepaid expenses increased $2.0 million from October 31, 2008 to July 31, 2009 primarily due to annual premiums paid for fiscal year 2009 for property, general liability and other insurance. Cemetery property increased $8.7 million primarily due to an acquisition in the first quarter of fiscal 2009, as well as current year construction projects. Current deferred income taxes increased $9.8 million due in large part to an increase in the net operating loss resulting from the change in tax accounting policy, discussed in Note 17 to the condensed consolidated financial statements. Long-term deferred income taxes decreased $44.9 million from October 31, 2008 to July 31, 2009 primarily due to the change in tax accounting policy, discussed in Note 17 to the condensed consolidated financial statements. Preneed funeral receivables and trust investments, preneed cemetery receivables and trust investments, cemetery perpetual care trust investments, deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus were all positively impacted by the recent improvement in the

59

market value of our trust assets. For additional information, see Notes 3, 4 and 5 to our condensed consolidated financial statements included herein.

     Accounts payable decreased $3.8 million from October 31, 2008 to July 31, 2009 primarily due to the timing of payables related to professional fees and vendor payments. We automated payments to one of our major vendors which impacted the timing of payments. Other current liabilities decreased $1.9 million from October 31, 2008 to July 31, 2009 primarily due to a $1.3 million decline in accrued Hurricane Ike related expenses which were paid in the first nine months of 2009. The estimated probable funding obligation to restore the net realized losses in certain of our cemetery perpetual care trusts increased $0.9 million from October 31, 2008 to July 31, 2009 primarily due to the $3.2 million charge to fund the perpetual care trusts, partially offset by $1.6 million of trust earnings that were not withdrawn from the trust in order to satisfy our estimated probable funding obligation. We purchased $58.3 million aggregate principal amount of our senior convertible notes during the nine months ended July 31, 2009 resulting in a decrease in long-term debt.

Preneed Sales into the Backlog

     Net preneed funeral sales decreased 3.6 percent during the first nine months of fiscal year 2009 compared to the corresponding period in 2008 due to current economic conditions.

     The revenues from our preneed funeral and cemetery merchandise and service sales are deferred into our backlog and are not included in our operating results presented above. We had $106.5 million in net preneed funeral and cemetery merchandise and service sales (including $57.0 million related to insurance-funded preneed funeral contracts) during the nine months ended July 31, 2009 to be recognized in the future as these prepaid products and services are delivered, compared to net sales of $113.5 million (including $56.4 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2008. Insurance-funded preneed funeral contracts which will be funded by life insurance or annuity contracts issued by third-party insurers are not reflected in the condensed consolidated balance sheets.

Liquidity and Capital Resources

General

     We generate cash in our operations primarily from at-need sales, preneed sales that turn at-need, funds we are able to withdraw from our trusts and escrow accounts when preneed sales turn at-need, monies collected on preneed sales that are not required to be trusted and cemetery perpetual care trust earnings. Over the last five years, we have generated more than $50.0 million each year in cash flow from operations. We have historically satisfied our working capital requirements with cash flows from operations. We believe that our current level of cash on hand, projected cash flows from operations and available capacity under our new senior secured revolving credit facility will be sufficient to meet our cash requirements for the foreseeable future, although we will need to refinance the senior secured revolving credit facility in 2012 and long-term debt becoming due in 2013 through 2016, as described below.

     As described in the “Overview—Recent Events” section of MD&A in our 2008 Form 10-K, during our 2008 fiscal year and particularly during our fourth fiscal quarter of 2008, the United States and global economies experienced substantial declines. The anticipated future effect of these events on our cash flow is described in that section and in Item 1A. “Risk Factors” in our 2008 Form 10-K.

     On June 2, 2009, we entered into a new $95.0 million senior secured revolving credit facility that replaced our previous $125.0 million revolving credit facility which was set to mature in November 2009. As a result, we recorded a $0.1 million charge for the loss on early extinguishment of debt in the third quarter of 2009. For additional information, see Note 16 to the condensed consolidated financial statements included herein. As of July 31, 2009, we had no amounts drawn on the new senior secured revolving credit facility, and our availability under the senior secured revolving credit facility, after giving consideration to $12.0 million outstanding letters of credit and the $27.0 million Florida bond, was $56.0 million. Our $200.0 million senior notes mature on February 15, 2013 and are currently redeemable at the redemption prices set forth in the indenture. We also have $191.6 million

60

in senior convertible notes as of July 31, 2009 which mature in 2014 and in 2016. See the table below under “Contractual Obligations and Commercial Commitments” for further information on our long-term debt obligations.

   �� We plan to continue to evaluate our options for deployment of cash flow as opportunities arise. We believe that the use of our cash to pay dividends, repurchase debt and stock, construct funeral homes on cemeteries of unaffiliated third parties and make acquisitions of or investments in death care or related businesses are attractive options. We believe that growing our organization through acquisitions and investments is a good business strategy, as it will enable us to enjoy the important synergies and economies of scale from our existing infrastructure. We have also redesigned our websites to support e-commerce initiatives that will provide new revenue opportunities in the future. We regularly review acquisition and other strategic opportunities, which may require us to draw on our senior secured revolving credit facility or pursue additional debt or equity financing.

     We currently pay quarterly cash dividends of two and one-half cents per share on our Class A and B common stock, which amounted to $7.0 million for the nine months ended July 31, 2009. The declaration and payment of future dividends are discretionary and will be subject to determination by the Board of Directors each quarter after its review of our financial performance. We also have a $75.0 million stock repurchase program, of which $26.5 million remains available as of July 31, 2009. Repurchases under the program are limited to our Class A common stock, and are made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending upon market conditions and other factors. In addition, during the nine months ended July 31, 2009, we purchased $15.8 million aggregate principal amount of our 3.125 percent senior convertible notes due 2014 and $42.5 million aggregate principal amount of our 3.375 percent senior convertible notes due 2016 on the open market at significant discounts. As a result of these transactions, we recorded $8.6 million and $17.3 million in gains on early extinguishment of debt during the quarter and nine months ended July 31, 2009, respectively. The annual cash interest cost savings from the debt purchased during the nine months ended July 31, 2009 is $1.9 million. Subsequent to July 31, 2009 through August 31, 2009, we purchased an additional $9.7 million aggregate principal amount of our 3.125 percent senior convertible notes due 2014 and $2.5 million aggregate principal amount of our 3.375 percent senior convertible notes due 2016 on the open market.

     During the third quarter of 2009, the Internal Revenue Service approved a change in one of our tax accounting policies that is expected to result in a combination of refunds and reductions of federal income tax payments totaling approximately $32.0 million. Of that amount, $12.0 million was received as a refund in the third quarter of fiscal 2009, approximately $7.5 million is expected to be received as a refund by the end of the first quarter of 2010, approximately $8.5 million was used to offset estimated tax payments during fiscal 2009, and the remaining approximately $4.0 million is expected to be used to offset future federal income tax payments. The change relates to our tax accounting policy for preneed contracts in one state. For those contracts, we were recognizing income for tax purposes (and paying taxes) relating to amounts received from customers and placed in trust at the time the cash was received from the customers. This policy related to approximately $89.4 million of income that was taxed prior to the delivery of the merchandise or services. The change permits us to instead recognize income for tax purposes (and pay taxes) with respect to those amounts at the time the service is performed or the merchandise is delivered and cash is withdrawn from the trust, which generally aligns our book and tax accounting for these amounts and is consistent with our approach in the other states. The change essentially allowed us to apply the approximately $89.4 million reversal of previously reported taxable income to reduce taxable income for fiscal years 2006, 2007, 2008, 2009 and potentially part of 2010 depending on our taxable income in fiscal year 2009. We will eventually have to pay federal income taxes with respect to the $89.4 million as the related preneed contracts are performed over time.

     We are continuing to review all of our tax accounting policies to determine opportunities to improve our current tax position. Several possible changes are being considered that could result in potential tax refunds or reductions in future tax payments. At this time, we cannot predict with certainty what, if any, additional refunds or reduced payments we will obtain.

Cash Flow

     Our operations provided cash of $63.6 million for the nine months ended July 31, 2009, compared to $52.3 million for the corresponding period in 2008. The increase in operating cash flow is primarily due to a $12.0 million tax refund received in the first nine months of 2009 due to effective tax planning strategies, as discussed in Note 17

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to the condensed consolidated financial statements. We paid $11.8 million in net tax payments in the first nine months of 2008 compared to $8.2 million in net tax refunds received in the first nine months of 2009. In addition, the increase is partially due to collections on prior period sales exceeding receivables for new sales. These increases were partially offset by $1.2 million of cash outflows related to Hurricane Ike paid in the first nine months of 2009, coupled with the timing of payments to vendors and the timing of payroll payments.

     Our investing activities resulted in a net cash outflow of $16.4 million for the nine months ended July 31, 2009, compared to a net cash outflow of $21.1 million for the comparable period in 2008. The change is primarily due to the decline in capital expenditures. For the nine months ended July 31, 2009, capital expenditures amounted to $15.0 million, which included $8.5 million for maintenance capital expenditures, $4.7 million for growth initiatives and $1.8 million related to the implementation of new business systems. For the nine months ended July 31, 2008, capital expenditures were $20.4 million, which included $12.4 million for maintenance capital expenditures, $0.5 million for growth initiatives, $2.9 million related to Hurricane Katrina and $4.6 million related to the implementation of new business systems. We also purchased a cemetery business in the first quarter of fiscal year 2009 resulting in a net cash outflow of $1.6 million.

     Our financing activities resulted in a net cash outflow of $48.6 million for the nine months ended July 31, 2009, compared to a net cash outflow of $54.1 million for the comparable period in 2008. This change is due to $48.6 million in stock repurchases made under our current stock repurchase plan in the first nine months of 2008. There was less than $0.1 million in stock repurchases during first nine months of 2009. This was offset by $39.9 million in repayments of long-term debt in the first nine months of 2009 due primarily to the purchases of our senior convertible notes, compared to $0.2 million in repayments in the first nine months of 2008.

Contractual Obligations and Commercial Commitments

     We have contractual obligations requiring future cash payments under existing contractual arrangements. The following table details our known future cash payments (in millions) related to various contractual obligations as of July 31, 2009.

	Payments Due by Period
			Less than						More than
Contractual Obligations	Total		1 year		1 – 3 years		3 – 5 years		5 years
Long-term debt obligations(1)	$	391.7	$	—	$	—	$	309.2	$	82.5
Interest on long-term debt(2)		86.6		18.7		37.4		24.9		5.6
Operating and capital lease obligations(3)		28.6		1.2		6.1		3.6		17.7
Non-competition and other agreements(4)		1.7		.2		.8		.2		.5
	$	508.6	$	20.1	$	44.3	$	337.9	$	106.3

(1)	See below for a breakdown of our future scheduled principal payments and maturities of our long-term debt by type as of July 31, 2009.
(2)	Includes contractual interest payments for our senior convertible notes, senior notes and third-party debt.
(3)	Our noncancellable operating leases are primarily for land and buildings and expire over the next one to 14 years, except for eight leases that expire between 2032 and 2039. Our future minimum lease payments as of July 31, 2009 are $1.2 million, $3.5 million, $2.6 million, $2.0 million, $1.6 million and $17.7 million for the years ending October 31, 2009, 2010, 2011, 2012, 2013 and later years, respectively.
(4)	This category includes payments pursuant to non-competition agreements with prior owners and key employees of acquired businesses and separation pay related to former executive officers.

     The following table details our known potential or possible future cash payments related to various contingent obligations (in millions) as of July 31, 2009.

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	Expiration by Period
			Less than 1						More than 5
Contingent Obligations	Total		year		1 – 3 years		3 – 5 years		years
Cemetery perpetual care trust funding obligations(1)	$	14.1	$	14.1	$	—	$	—	$	—
Long-term obligations related to uncertain tax positions(2)		4.7		—		—		—		4.7
	$	18.8	$	14.1	$	—	$	—	$	4.7

(1)

In those states where we have withdrawn realized net capital gains in the past from our cemetery perpetual care trusts, regulators may seek replenishment of the realized net capital losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals of future earnings until they cover the loss. The estimated probable funding obligation in the cemetery perpetual care trusts in these states was $14.1 million as of July 31, 2009. As of July 31, 2009, we had unrealized losses of $52.0 million in the trusts in these states. Because some of these trusts currently have assets with a fair market value less than the aggregate amounts required to be contributed to the trust, any additional realized net capital losses in these trusts may result in a corresponding funding liability and increase in cemetery costs. In those states where realized net capital gains have not been withdrawn, we believe it is reasonably possible that additional funding obligations may exist with an estimated amount of approximately $3.5 million.

(2)

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”), on November 1, 2007. In accordance with the provisions of FIN 48, as of July 31, 2009, we have recorded $4.7 million of unrecognized tax benefits and related interest and penalties. Due to the uncertainty regarding the timing and completion of audits and possible outcomes, it is not possible to estimate the range of increase and decrease and the timing thereof of any potential cash payments.

     As of July 31, 2009, our outstanding debt balance was $391.7 million, consisting of $191.6 million in senior convertible notes, $200.0 million of 6.25 percent senior notes and $0.1 million of other debt. There were no amounts drawn on the senior secured revolving credit facility. The following table reflects future scheduled principal payments and maturities of our long-term debt (in millions) as of July 31, 2009.

							Other,
	Senior						Principally
	Secured						Seller
	Revolving		Senior				Financing
	Credit		Convertible		Senior		of Acquired
Fiscal Years Ending October 31,	Facility		Notes		Notes		Operations		Total
2009	$	—	$	—	$	—	$	—	$	—
2010		—		—		—		—		—
2011		—		—		—		—		—
2012		—		—		—		—		—
2013		—		—		200.0		—		200.0
Thereafter		—		191.6		—		.1		191.7
Total long-term debt	$	—	$	191.6	$	200.0	$	.1	$	391.7

     Our outstanding debt balance was reduced by $12.2 million between July 31, 2009 and August 31, 2009 due to debt purchases of our senior convertible notes taking place after the end of our third fiscal quarter.

Off-Balance Sheet Arrangements

     Our off-balance sheet arrangements as of July 31, 2009 consist of the following items:

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(1)	the $27.0 million bond we are required to maintain to guarantee our obligations relating to funds we withdrew in fiscal year 2001 from our preneed funeral trusts in Florida, which is discussed above and in Note 20 to the consolidated financial statements in our 2008 Form 10-K; and
(2)	the insurance-funded preneed funeral contracts, which will be funded by life insurance or annuity contracts issued by third-party insurers, are not reflected in our condensed consolidated balance sheets, and are discussed in Note 2(i) to the consolidated financial statements in our 2008 Form 10-K.

Recent Accounting Standards

     See Note 2 to the condensed consolidated financial statements included herein.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Quantitative and qualitative disclosure about market risk is presented in Item 7A in our Annual Report on Form 10-K for the fiscal year ended October 31, 2008, filed with the Securities and Exchange Commission (“SEC”) on December 18, 2008. For a discussion of fair market value as of July 31, 2009 of investments in our trusts, see Notes 3, 4 and 5 to the condensed consolidated financial statements included herein. The following disclosure discusses only those instances in which market risk has changed by more than 10 percent from the annual disclosures.

     As of July 31, 2009 and October 31, 2008, the carrying values of our long-term fixed-rate debt, including accrued interest, were approximately $397.8 million and $455.1 million, respectively, compared to fair values of $355.4 million and $331.6 million, respectively. Fair values were determined using quoted market prices. As of July 31, 2009, each approximate 10 percent, or 75 basis point, change in the average interest rate applicable to determine the fair value of such debt would result in a change of approximately $10.6 million in the fair value of these instruments. As of October 31, 2008, each approximate 10 percent, or 115 basis point, change in the average interest rate applicable to determine the fair value of such debt would result in a change of approximately $17.6 million in the fair value of these instruments. If these instruments are held to maturity, no change in fair value will be realized.

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 reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required 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 CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

     As of November 1, 2008, the Company began the implementation of Hanlon Management Information Systems (“HMIS”), which is an integrated software system targeted specifically to the death care industry in areas such as customer data, billing information, products and services sold and/or delivered, collections, accounts receivables and property inventory. As of July 31, 2009, the HMIS implementation was completed in all of the Company’s regions. In connection with this implementation, the Company expects to improve its internal controls over financial reporting by increasing its reliance on automated controls. During the first nine months of 2009, the

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Company supplemented its automated internal controls with additional manual and detective controls as it implemented the new system. There was a particular focus on revenue completeness and cut-off with additional manual and analytic procedures performed during the transition to the new system.

     With the exception of the HMIS implementation described above, there have been no changes in the Company’s internal control over financial reporting during the quarter ended July 31, 2009 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

     For a discussion of our current litigation, see Note 7 to the condensed consolidated financial statements included herein.

     In addition to the matters in Note 7, we and certain of our subsidiaries are parties to a number of other legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

     We carry insurance with coverages and coverage limits that we believe to be adequate. Although there can be no assurance that such insurance is sufficient to protect us against all contingencies, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.

Item 1A. Risk Factors

     There have been no material changes from the risk factors previously disclosed in our 2008 Form 10-K, except for the following:

     Our 2008 Form 10-K described the risks associated with the refinancing of our $125.0 million senior secured credit facility which was set to mature in November 2009. On June 2, 2009, we entered into a new $95.0 million senior secured revolving credit facility which replaced the former facility. See Note 16 to the condensed consolidated financial statements for additional information.

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

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Issuer Purchases of Equity Securities

						Total number of		Maximum
						shares		approximate dollar
						purchased as		value of shares that
	Total number			Average		part of publicly-		may yet be
	of shares			price paid		announced plans		purchased under the
Period	purchased			per share		or programs		plans or programs(2)
May 1, 2009 through May 31, 2009		—		$	—		—	$	26,571,185
June 1, 2009 through June 30, 2009		—		$	—		—	$	26,571,185
July 1, 2009 through July 31, 2009		11,465	(1)	$	4.51		11,465	$	26,519,479
Total		11,465		$	4.51		11,465	$	26,519,479

⁽¹⁾ As described in Note 16 to the condensed consolidated financial statements included herein, during the nine months ended July 31, 2009, we purchased $15.8 million aggregate principal amount of our 3.125 percent

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senior convertible notes due 2014 and $42.5 million aggregate principal amount of our 3.375 percent senior convertible notes due 2016 on the open market. In connection with these debt purchases, corresponding call options and common stock warrants were also terminated. As a result of the debt purchases that occurred during the third quarter of 2009, the value of the call options was greater than the value of the warrants, and Bank of America/Merrill Lynch owed us less than $0.1 million. This amount was settled by Bank of America/Merrill Lynch delivering 11,465 shares to us. Other than this transaction, there were no other stock repurchases occurring during the three months ended July 31, 2009 under the $75.0 stock repurchase program.

(2)

We announced a $25.0 million stock repurchase program on September 19, 2007, which was increased by $25.0 million in December 2007 and June 2008, resulting in $75.0 million program.

Item 6. Exhibits

3.1	Amended and Restated Articles of Incorporation of the Company, as amended and restated as of April 3, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2008)
3.2	By-laws of the Company, as amended and restated as of September 8, 2008 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2008)
4.1	See Exhibits 3.1 and 3.2 for provisions of the Company’s Amended and Restated Articles of Incorporation, as amended, and By-laws, as amended, defining the rights of holders of Class A and Class B common stock
4.2	Specimen of Class A common stock certificate (incorporated by reference to Exhibit 3 to the Company’s Registration Statement on Form 8-A/A filed with the Commission on June 21, 2007)
4.3	Rights Agreement, dated as of October 28, 1999, between Stewart Enterprises, Inc. and ChaseMellon Shareholder Services, L.L.C. as Rights Agent (incorporated by reference to Exhibit 1 to the Company’s Form 8-A filed November 4, 1999)
4.4	Amendment No. 1 to the Rights Agreement dated June 26, 2007 between Stewart Enterprises, Inc. and Mellon Investor Services LLC (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed June 27, 2007)
4.5	Second Amended and Restated Credit Agreement dated June 2, 2009 by and among the Company, Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America, N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer and The Other Lenders party hereto (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 3, 2009)
4.6	Indenture dated as of February 11, 2005 by and among Stewart Enterprises, Inc., the Guarantors thereunder and U.S. Bank National Association, as Trustee, with respect to the 6.25 percent Senior Notes due 2013 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed February 14, 2005)
4.7	Form of 6.25 percent Senior Note due 2013 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed February 14, 2005)
4.8	Indenture dated June 27, 2007 by and among Stewart Enterprises, Inc., the guarantors named therein and U.S. Bank National Association, as Trustee, with respect to 3.125 percent Senior Convertible Notes due 2014 (including Form of 3.125 percent Senior Convertible Notes due 2014) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 27, 2007)
4.9	Indenture dated June 27, 2007 by and among Stewart Enterprises, Inc., the guarantors named therein and U.S. Bank National Association, as Trustee, with respect to 3.375 percent Senior Convertible Notes due

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2016 (including Form of 3.375 percent Senior Convertible Notes due 2016) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed June 27, 2007)

31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer, and Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

SIGNATURES

     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.

	STEWART ENTERPRISES, INC.
September 9, 2009	/s/ THOMAS M. KITCHEN
	Thomas M. Kitchen
	Senior Executive Vice President and Chief Financial Officer
September 9, 2009	/s/ ANGELA M. LACOUR
	Angela M. Lacour
	Vice President Corporate Controller Chief Accounting Officer

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Exhibit Index

31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer, and Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer

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