Stewart Enterprises (STEI) 10-Q 2010 Q2 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 April 30, 2010

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	72-0693290
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1333 South Clearview Parkway
Jefferson, Louisiana	70121
(Address of principal executive offices)	(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 filero Accelerated filerþ 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 May 31, 2010, was 89,606,268 and 3,555,020, respectively.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

INDEX

	Page
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings — Three Months Ended April 30, 2010 and 2009	3
Condensed Consolidated Statements of Earnings — Six Months Ended April 30, 2010 and 2009	4
Condensed Consolidated Balance Sheets — April 30, 2010 and October 31, 2009	5
Condensed Consolidated Statement of Shareholders’ Equity — Six Months Ended April 30, 2010	7
Condensed Consolidated Statements of Cash Flows — Six Months Ended April 30, 2010 and 2009	8
Notes to Condensed Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	49
Item 3. Quantitative and Qualitative Disclosures About Market Risk	61
Item 4. Controls and Procedures	62
Part II. Other Information
Item 1. Legal Proceedings	62
Item 1A. Risk Factors	62
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 6. Exhibits	63
Signatures	65
EX-31.1
EX-31.2
EX-32.1

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

	Three Months Ended April 30,
	2010			2009
				(As Adjusted)
Revenues:
Funeral	$	71,386		$	71,240
Cemetery		56,973			55,378
		128,359			126,618
Costs and expenses:
Funeral		54,641			52,715
Cemetery		48,802			48,308
		103,443			101,023
Gross profit		24,916			25,595
Corporate general and administrative expenses		(5,948	)		(7,006	)
Hurricane related charges, net		(32	)		(205	)
Separation charges		—			(275	)
Net impairment losses on dispositions		—			(35	)
Other operating income, net		265			304
Operating earnings		19,201			18,378
Interest expense		(5,891	)		(7,366	)
Gain on early extinguishment of debt		—			3,384
Investment and other income, net		36			32
Earnings before income taxes		13,346			14,428
Income taxes		4,955			5,562
Net earnings	$	8,391		$	8,866
Net earnings per common share:
Basic	$	.09		$	.10
Diluted	$	.09		$	.10
Weighted average common shares outstanding (in thousands):
Basic		92,113			91,888
Diluted		92,387			91,888
Dividends declared per common share	$	.030		$	.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)

	Six Months Ended April 30,
	2010			2009
				(As Adjusted)
Revenues:
Funeral	$	143,494		$	142,990
Cemetery		109,265			102,958
		252,759			245,948
Costs and expenses:
Funeral		107,552			106,210
Cemetery		95,122			91,060
		202,674			197,270
Gross profit		50,085			48,678
Corporate general and administrative expenses		(12,502	)		(14,512	)
Hurricane related charges, net		(32	)		(520	)
Separation charges		—			(275	)
Net impairment losses on dispositions		—			(98	)
Other operating income, net		444			563
Operating earnings		37,995			33,836
Interest expense		(12,347	)		(14,761	)
Gain on early extinguishment of debt		17			3,384
Investment and other income, net		60			73
Earnings before income taxes		25,725			22,532
Income taxes		9,847			8,900
Net earnings	$	15,878		$	13,632
Net earnings per common share:
Basic	$	.17		$	.15
Diluted	$	.17		$	.15
Weighted average common shares outstanding (in thousands):
Basic		92,082			91,856
Diluted		92,332			91,865
Dividends declared per common share	$	.06		$	.05

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)

	April 30, 2010		October 31, 2009
			(As Adjusted)
ASSETS
Current assets:
Cash and cash equivalents	$	64,559	$	62,808
Certificates of deposit and marketable securities		10,411		—
Receivables, net of allowances		56,138		59,439
Inventories		36,374		36,156
Prepaid expenses		9,019		6,748
Deferred income taxes, net		24,693		21,715
Total current assets		201,194		186,866
Receivables due beyond one year, net of allowances		61,625		63,011
Preneed funeral receivables and trust investments		413,799		389,512
Preneed cemetery receivables and trust investments		205,941		193,417
Goodwill		247,236		247,236
Cemetery property, at cost		384,652		385,977
Property and equipment, at cost:
Land		43,677		43,677
Buildings		333,861		329,685
Equipment and other		189,560		187,100
		567,098		560,462
Less accumulated depreciation		272,985		261,005
Net property and equipment		294,113		299,457
Deferred income taxes, net		100,785		113,398
Cemetery perpetual care trust investments		224,190		205,476
Other assets		13,517		14,654
Total assets	$	2,147,052	$	2,099,004

(continued)

5

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

	April 30, 2010			October 31, 2009
				(As Adjusted)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	5		$	5
Accounts payable and accrued expenses		21,554			25,604
Accrued payroll and other benefits		10,542			15,200
Accrued insurance		20,182			20,504
Accrued interest		4,452			4,561
Estimated obligation to fund cemetery perpetual care trust		13,489			14,010
Other current liabilities		12,183			14,099
Income taxes payable		1,616			2,028
Total current liabilities		84,023			96,011
Long-term debt, less current maturities		341,014			339,721
Deferred preneed funeral revenue		245,721			247,825
Deferred preneed cemetery revenue		261,285			266,964
Deferred preneed funeral and cemetery receipts held in trust		551,715			514,787
Perpetual care trusts’ corpus		222,787			204,168
Other long-term liabilities		19,801			20,871
Total liabilities		1,726,346			1,690,347
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 89,607,802 and 89,128,700 shares at April 30, 2010 and October 31, 2009, respectively		89,608			89,129
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at April 30, 2010 and October 31, 2009; 10 votes per share convertible into an equal number of Class A shares		3,555			3,555
Additional paid-in capital		556,755			561,063
Accumulated deficit		(229,247	)		(245,125	)
Accumulated other comprehensive income:
Unrealized appreciation of investments		35			35
Total accumulated other comprehensive income		35			35
Total shareholders’ equity		420,706			408,657
Total liabilities and shareholders’ equity	$	2,147,052		$	2,099,004

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)

									Unrealized
	Common		Additional Paid-In						Appreciation of		Total Shareholders’
	Stock(1)		Capital			Accumulated Deficit			Investments		Equity
Balance October 31, 2009, as previously reported	$	92,684	$	526,062		$	(227,897	)	$	35	$	390,884
Adoption of convertible debt standard (See Note 2)		—		35,001			(17,228	)		—		17,773
Balance October 31, 2009, as adjusted	$	92,684	$	561,063		$	(245,125	)	$	35	$	408,657
Comprehensive income:
Net earnings		—		—			15,878			—		15,878
Total comprehensive income		—		—			15,878			—		15,878
Restricted stock activity		294		143			—			—		437
Issuance of common stock		122		448			—			—		570
Stock options exercised		63		252			—			—		315
Stock option expense		—		540			—			—		540
Tax benefit associated with stock activity		—		(52	)		—			—		(52	)
Retirement of call options, net of tax expense of $37		—		70			—			—		70
Retirement of common stock warrants		—		(107	)		—			—		(107	)
Repurchase of convertible notes, net of tax benefit of $7		—		(13	)		—			—		(13	)
Dividends ($.06 per share)		—		(5,589	)		—			—		(5,589	)
Balance April 30, 2010	$	93,163	$	556,755		$	(229,247	)	$	35	$	420,706

⁽¹⁾ Amount includes 89,608 and 89,129 shares (in thousands) of Class A common stock with a stated value of $1 per share as of April 30, 2010 and October 31, 2009, 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)

	Six Months Ended April 30,
	2010			2009
				(As Adjusted)
Cash flows from operating activities:
Net earnings	$	15,878		$	13,632
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net impairment losses on dispositions		—			98
Gain on early extinguishment of debt		(17	)		(3,384	)
Depreciation and amortization		13,194			13,968
Non-cash interest and amortization of discount on senior convertible notes		3,046			3,810
Provision for doubtful accounts		2,406			4,344
Share-based compensation		1,500			1,259
Excess tax benefits from share-based payment arrangements		(26	)		—
Provision for deferred income taxes		8,395			1,791
Estimated obligation to fund cemetery perpetual care trust		—			3,200
Other		12			157
Changes in assets and liabilities:
Decrease in receivables		754			5,041
Increase in prepaid expenses		(2,271	)		(2,915	)
(Increase) decrease in inventories and cemetery property		1,106			(515	)
Federal income tax refunds		1,600			134
Decrease in accounts payable and accrued expenses		(11,501	)		(10,382	)
Net effect of preneed funeral production and maturities:
Decrease in preneed funeral receivables and trust investments		5,925			15,895
Decrease in deferred preneed funeral revenue		(2,104	)		(743	)
Decrease in deferred preneed funeral receipts held in trust		(6,926	)		(14,018	)
Net effect of preneed cemetery production and deliveries:
Decrease in preneed cemetery receivables and trust investments		793			7,584
Decrease in deferred preneed cemetery revenue		(5,679	)		(7,595	)
Increase (decrease) in deferred preneed cemetery receipts held in trust		325			(4,433	)
Increase in other		45			2,156
Net cash provided by operating activities		26,455			29,084
Cash flows from investing activities:
Proceeds from sales of marketable securities		250			—
Purchases of certificates of deposit and marketable securities		(10,661	)		(99	)
Proceeds from sale of assets		—			494
Purchase of subsidiaries and other investments, net of cash acquired		—			(1,623	)
Additions to property and equipment		(8,366	)		(10,729	)
Other		50			28
Net cash used in investing activities		(18,727	)		(11,929	)
Cash flows from financing activities:
Repayments of long-term debt		(847	)		(13,538	)
Retirement of common stock warrants		(107	)		(1,182	)
Issuance of common stock		471			149
Retirement of call options		107			1,261
Debt refinancing costs		(38	)		—
Dividends		(5,589	)		(4,636	)
Excess tax benefits from share-based payment arrangements		26			—
Net cash used in financing activities		(5,977	)		(17,946	)
Net increase (decrease) in cash		1,751			(791	)
Cash and cash equivalents, beginning of period		62,808			72,574
Cash and cash equivalents, end of period	$	64,559		$	71,783
Supplemental cash flow information:
Cash paid (received) during the period for:
Income taxes, net	$	(430	)	$	3,374
Interest	$	9,728		$	11,798
Non-cash investing and financing activities:
Issuance of common stock to executive officers and directors	$	414		$	305
Issuance of restricted stock, net of forfeitures	$	931		$	52

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 and cremation merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of April 30, 2010, the Company owned and operated 218 funeral homes and 140 cemeteries in 24 states within the United States and Puerto Rico. 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 April 30, 2010, and for the three and six months ended April 30, 2010 and 2009, 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, 2009 (the “2009 Form 10-K”).

     The October 31, 2009 condensed consolidated balance sheet data was derived from audited financial statements in the Company’s 2009 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 2009 Form 10-K. Certain amounts reported in prior periods have been adjusted to conform to the 2010 presentation as further discussed in Note 2.

     The results of operations for the three and six months ended April 30, 2010 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2010.

     (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 2009 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 2009 Form 10-K. Net earnings for the three months ended April 30, 2010 and 2009 include $265 and $285, 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 six months ended April 30, 2010 and 2009 include $540 and $609, 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 April 30, 2010, there was $2,039 of total unrecognized compensation costs related to nonvested stock options that is expected to be recognized over a weighted-average period of 2.87 years of which $1,007 of

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)

total stock option expense is expected for fiscal year 2010. The expense related to restricted stock is reflected in earnings and amounted to $273 and $172 for the three months ended April 30, 2010 and 2009, respectively, and $546 and $345 for the six months ended April 30, 2010 and 2009, respectively. As of April 30, 2010, there was $935 of remaining future restricted stock expense to be recognized. Total restricted stock expense for fiscal year 2010 is expected to be $963.

     In November 2009, the Company issued 90,000 shares of Class A common stock and paid approximately $96 in cash to the independent directors of the Company. The expense related to this stock grant amounted to $414 and was recorded in corporate general and administrative expenses during the first quarter of 2010. Each of the shares received has a restriction requiring each independent director to hold the respective share 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 six months ended April 30, 2010:

	Number of Shares		Weighted Average
Grant Type	Granted		Price per Share		Vesting Period	Vesting Condition
Stock options		960,750	$	5.08	Equal one-fourth portions over 4 years	Service condition
Restricted stock		324,500	$	5.09	Equal one-third portions over 3 years	Market condition
Restricted stock		7,500	$	4.89	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 six months ended April 30, 2010: expected dividend yield of 2.4 percent; expected volatility of 40.1 percent; risk-free interest rate of 2.2 percent; and an expected term of 4.8 years. In the first quarter of 2010, the Company granted 324,500 shares of restricted stock with market conditions based on achieving certain target stock prices in the years 2010, 2011 and 2012. The Company records the expense over the requisite service period. The market condition related to fiscal year 2010 was achieved during the quarter ended April 30, 2010.

     (f) Goodwill

     The Company’s evaluation of the goodwill of its operations previously consisted of eight reporting units as described in the Company’s 2009 Form 10-K. In the third quarter of fiscal year 2010, the Company combined its Western North and Western South regions to form a new Western region in both of the funeral and cemetery segments. In connection with this change in its regions, the Company reviewed its reporting units and increased the number of reporting units that will be evaluated in the Company’s annual goodwill impairment test from eight to ten reporting units.

     (g) Reclassifications

     Certain reclassifications have been made to the 2009 condensed consolidated statement of cash flows in order for these periods to be comparable. These reclassifications had no effect on operating cash flows.

10

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
(Dollars in thousands, except per share amounts)

(2) New Accounting Principles

     In December 2007, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification 805-Business Combinations (“ASC 805”). This guidance 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. ASC 805 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 guidance will apply to any future business combinations as of that date.

     In December 2007, the FASB amended guidance regarding noncontrolling interests in consolidated financial statements. This guidance states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of shareholders’ equity. This guidance 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 guidance 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 adoption did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

     In May 2008, the FASB issued guidance regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. The guidance states that issuers of convertible debt instruments that may be settled in cash upon conversion 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 as the related interest cost is recognized in subsequent periods. The entity must determine the carrying amount of the liability component of any outstanding debt instrument by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the debt instrument. The value of the debt instrument is adjusted through a discount to the face value of the debt, which is amortized as non-cash interest expense over the expected life of the debt. This guidance applies to the Company’s 3.125 percent senior convertible notes due 2014 and 3.375 percent senior convertible notes due 2016 which were originally issued in 2007, and is required to be applied retrospectively to all periods presented. The Company adopted this guidance effective November 1, 2009. The tables below reflect the Company’s retrospective adoption of this guidance as of November 1, 2009 and summarize the impact on the Company’s balance sheet as of October 31, 2009 and statements of earnings for the three and six months ended April 30, 2009 and the year ended October 31, 2009. See Note 13 for additional information.

     In June 2008, the FASB issued guidance on determining whether instruments granted in share-based payment transactions are participating securities. This guidance 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. Unvested share-based payment awards that contain nonforfeitable rights to dividends are considered participating securities. Dividends are currently paid by the Company on all shares of restricted stock, whether vested or nonvested, at the same rate as dividends on normal shares of the Company’s stock. In addition, restricted stockholders are not required to return the dividends to the Company if their shares of nonvested restricted stock do not vest. Therefore, under this guidance, the Company must include nonvested restricted stock in the basic earnings per share calculation and allocate earnings to common stock and the participating securities according to dividends declared and participation rights in undistributed earnings. This is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied retrospectively to all periods presented (including interim financial statements, summaries of earnings and selected financial data). The Company adopted this guidance effective November 1, 2009. The impact of adopting this guidance for the three and six months ended April 30, 2009 and the year ended October 31, 2009

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)

was immaterial and is presented in the statements of earnings tables below, along with the impact of the adoption of the convertible debt guidance described above.

				Effects of the
				Adoption of
	October 31, 2009			Convertible Debt			October 31, 2009
	As Reported			Guidance			As Adjusted
Balance Sheet:
Deferred tax assets	$	145,110		$	(9,997	)	$	135,113
Long-term debt		367,496			(27,770	)		339,726
Additional paid-in capital		526,062			35,001			561,063
Accumulated deficit		(227,897	)		(17,228	)		(245,125	)

						Effects of
	Three Months		Effects of the			Adoption of			Three Months
	Ended		Adoption of			Participating			Ended
	April 30, 2009		Convertible			Share			April 30, 2009
	As Reported		Debt Guidance			Guidance			As Adjusted
Statement of earnings:
Interest expense	$	5,879	$	1,487					$	7,366
Gain on early extinguishment of debt		8,671		(5,287	)					3,384
Income taxes		8,000		(2,438	)					5,562
Net earnings		13,202		(4,336	)					8,866
Basic earnings per share	$	.14	$	(.04	)				$	.10
Diluted earnings per share	$	.14	$	(.04	)				$	.10
Weighted average basic shares outstanding		91,888					—			91,888
Weighted average diluted shares outstanding		91,921					(33	)		91,888

						Effects of
	Six Months		Effects of the			Adoption of			Six Months
	Ended		Adoption of			Participating			Ended
	April 30, 2009		Convertible			Share			April 30, 2009
	As Reported		Debt Guidance			Guidance			As Adjusted
Statement of earnings:
Interest expense	$	11,789	$	2,972					$	14,761
Gain on early extinguishment of debt		8,671		(5,287	)					3,384
Income taxes		11,873		(2,973	)					8,900
Net earnings		18,918		(5,286	)					13,632
Basic earnings per share	$	.21	$	(.06	)				$	.15
Diluted earnings per share	$	.21	$	(.06	)				$	.15
Weighted average basic shares outstanding		91,856					—			91,856
Weighted average diluted shares outstanding		91,871					(6	)		91,865

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)

			Effects of the
	Year Ended		Adoption of			Effects of Adoption			Year Ended October
	October 31, 2009		Convertible Debt			of Participating			31, 2009
	As Reported		Guidance			Share Guidance			As Adjusted
Statement of earnings:
Interest expense	$	22,353	$	5,423					$	27,776
Gain on early extinguishment of debt		20,078		(13,932	)					6,146
Income taxes		19,611		(6,968	)					12,643
Net earnings		35,653		(12,387	)					23,266
Basic earnings per share	$	.39	$	(.14	)				$	.25
Diluted earnings per share	$	.39	$	(.14	)				$	.25
Weighted average basic shares outstanding		91,898					—			91,898
Weighted average diluted shares outstanding		91,995					(17	)		91,978

     In January 2010, the FASB issued Accounting Standards Update No. 2010-06, which requires additional fair value disclosures. This guidance requires reporting entities to disclose transfers in and out of Levels 1 and 2 and requires gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements related to Level 3 activity. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The guidance on transfers between Levels 1 and 2 was adopted by the Company as of its second fiscal quarter ended April 30, 2010. The guidance on Level 3 activity is effective for the Company’s fiscal year beginning November 1, 2011. The Company is evaluating the impact the adoption will have on its consolidated financial statements.

     In June 2009, the FASB issued guidance on the accounting for transfers of financial assets. It 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, it eliminates the concept of a qualifying special-purpose entity. This guidance 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 will have on its consolidated financial statements.

     In June 2009, the FASB issued guidance which amends the consolidation guidance for variable interest entities. It will require additional disclosures about involvement with variable interest entities and any significant changes in risk exposure due to that involvement. This guidance 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 will have 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 these trust and escrow accounts is detailed below and in Notes 4 and 5.

13

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

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 April 30, 2010 and October 31, 2009 are as follows:

	April 30,
	2010			October 31, 2009
Trust assets	$	383,135		$	358,430
Receivables from customers		42,503			43,225
		425,638			401,655
Allowance for cancellations		(11,839	)		(12,143	)
Preneed funeral receivables and trust investments	$	413,799		$	389,512

     The cost basis and market values associated with preneed funeral merchandise and services trust assets as of April 30, 2010 are detailed below.

	April 30, 2010
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	29,972	$	—	$	—		$	29,972
U.S. Government, agencies and municipalities		2,938		132		(1	)		3,069
Corporate bonds		43,455		1,923		(212	)		45,166
Preferred stocks		56,785		186		(6,142	)		50,829
Common stocks		239,168		1,080		(86,545	)		153,703
Mutual funds:
Equity		28,684		170		(3,008	)		25,846
Fixed income		58,273		567		(947	)		57,893
Insurance contracts and other long-term investments		18,982		105		(3,433	)		15,654
Trust investments	$	478,257	$	4,163	$	(100,288	)		382,132
Market value as a percentage of cost										79.9	%
Accrued investment income									1,003
Trust assets								$	383,135

14

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 cost basis and market values associated with preneed funeral merchandise and services trust assets as of October 31, 2009 are detailed below.

	October 31, 2009
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	28,979	$	—	$	—		$	28,979
U.S. Government, agencies and municipalities		6,044		214		(1	)		6,257
Corporate bonds		39,007		1,650		(1,458	)		39,199
Preferred stocks		56,885		9		(10,394	)		46,500
Common stocks		248,750		848		(106,788	)		142,810
Mutual funds:
Equity		28,841		20		(7,486	)		21,375
Fixed income		56,193		448		(916	)		55,725
Insurance contracts and other long-term investments		19,054		112		(2,594	)		16,572
Trust investments	$	483,753	$	3,301	$	(129,637	)	$	357,417
Market value as a percentage of cost										73.9	%
Accrued investment income									1,013
Trust assets								$	358,430

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

	April 30, 2010
Due in one year or less	$	1,873
Due in one to five years		31,068
Due in five to ten years		15,270
Thereafter		24
	$	48,235

     The Company is actively managing a covered call program on its equity securities within the funeral merchandise and services trust in order to provide an opportunity for additional income. As of April 30, 2010 and October 31, 2009, the Company has outstanding covered calls with a market value of $861 and $424, respectively. These covered calls are included at market value in the balance sheet line “preneed funeral receivables and trust investments.” For the three months ended April 30, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($17) and $188, respectively, related to the covered call program. For the six months ended April 30, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($253) and $442, respectively, related to the covered call program. These trust earnings and losses are accounted for in the same manner as for other funeral merchandise and services trust earnings and flow through funeral revenue in the statements of earnings. Although the Company realized losses associated with the covered call program for the three and six months ended April 30, 2010, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $651 and $3,786, respectively, during the period that the covered calls were outstanding.

     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. The Company’s Level 1 investments include cash, money market and other short-term investments, common stock and mutual funds.

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)

     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 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 is based upon the current face value of the contracts according to the respective insurance companies 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.

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

	Quoted Market
	Prices in Active		Significant Other		Significant
	Markets		Observable Inputs		Unobservable Inputs		Fair Market
	(Level 1)		(Level 2)		(Level 3)		Value
Trust investments—April 30, 2010	$	275,191	$	99,063	$	7,878	$	382,132
Trust investments—October 31, 2009	$	256,799	$	91,956	$	8,662	$	357,417

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

	Three Months Ended April 30,						Six Months Ended April 30,
	2010			2009			2010			2009
Fair market value, beginning balance	$	8,735		$	9,070		$	8,662		$	11,299
Total unrealized losses included in other comprehensive income(1)		(930	)		(840	)		(930	)		(2,554	)
Purchases, sales, contributions and distributions, net		73			369			146			(146	)
Fair market value, ending balance	$	7,878		$	8,599		$	7,878		$	8,599

⁽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.

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)

     Activity related to preneed funeral trust investments is as follows:

	Three Months Ended April 30,						Six Months Ended April 30,
	2010			2009			2010			2009
Purchases	$	14,709		$	937		$	15,558		$	1,578
Sales		18,079			4,512			22,428			9,128
Realized gains from sales of investments		809			484			1,437			992
Realized losses from sales of investments and other		(538	)		(392	)(1)		(1,054	)		(8,893	)(2)
Interest income, dividends and other ordinary income		2,542			2,672			4,887			5,825
Deposits		5,590			6,655			13,605			13,013
Withdrawals		10,070			10,386			22,047			21,438

(1)	Includes $292 in losses from the sale of investments and $100 in losses related to certain investments 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.
(2)	Includes $487 in losses from the sale of investments and $8,406 in losses related to certain investments 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.

     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 April 30, 2010 and October 31, 2009.

	April 30, 2010
	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	$	—	$	—		$	21	$	(1	)	$	21	$	(1	)
Corporate bonds		2,312		(12	)		8,378		(200	)		10,690		(212	)
Preferred stocks		—		—			44,004		(6,142	)		44,004		(6,142	)
Common stocks		583		(782	)		140,765		(85,763	)		141,348		(86,545	)
Mutual funds:
Equity		—		—			19,781		(3,008	)		19,781		(3,008	)
Fixed income		10,867		(28	)		4,611		(919	)		15,478		(947	)
Insurance contracts and other long-term investments		—		—			2,289		(3,433	)		2,289		(3,433	)
Total	$	13,762	$	(822	)	$	219,849	$	(99,466	)	$	233,611	$	(100,288	)

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)

	October 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	$	—	$	—		$	21	$	(1	)	$	21	$	(1	)
Corporate bonds		—		—			10,154		(1,458	)		10,154		(1,458	)
Preferred stocks		493		(7	)		43,519		(10,387	)		44,012		(10,394	)
Common stocks		1,000		(276	)		133,428		(106,512	)		134,428		(106,788	)
Mutual funds:
Equity		—		—			21,237		(7,486	)		21,237		(7,486	)
Fixed income		318		(1	)		4,539		(915	)		4,857		(916	)
Insurance contracts and other long-term investments		1,203		(1,060	)		2,016		(1,534	)		3,219		(2,594	)
Total	$	3,014	$	(1,344	)	$	214,914	$	(128,293	)	$	217,928	$	(129,637	)

     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 April 30, 2010, 92 percent, or $92,687, 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 40 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 financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The preferred stocks are primarily in the financial services sector which experienced a significant decline in market value during late 2008 and early 2009 due to the 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’s policy for recognizing trust income follows the allocation of trust earnings to individual contracts as stipulated in the Company’s respective trust agreements for distributable income. In substantially all of the Company’s trusts, dividends and interest earned and net capital gains and losses realized by preneed funeral trust or escrow accounts net of fees are allocated to individual contracts when earned or realized. In these trusts, unrealized gains and losses are not allocated to contracts. The trust earnings allocated to individual contracts are recognized as components of revenue along with the original contract sales price when the underlying service or merchandise is delivered. Principal and earnings are withdrawn only as the merchandise or services are delivered or contracts are cancelled, except in jurisdictions that permit trust earnings to be withdrawn currently.

     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

18

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)

components of preneed cemetery receivables and trust investments in the condensed consolidated balance sheets as of April 30, 2010 and October 31, 2009 are as follows:

	April 30,
	2010			October 31, 2009
Trust assets	$	178,630		$	163,938
Receivables from customers		32,954			35,718
		211,584			199,656
Allowance for cancellations		(5,643	)		(6,239	)
Preneed cemetery receivables and trust investments	$	205,941		$	193,417

     The cost basis and market values associated with the preneed cemetery merchandise and services trust assets as of April 30, 2010 are detailed below.

	April 30, 2010
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	18,347	$	—	$	—		$	18,347
U.S. Government, agencies and municipalities		7,054		563		—			7,617
Corporate bonds		11,239		636		(24	)		11,851
Preferred stocks		20,831		105		(2,963	)		17,973
Common stocks		121,369		704		(44,985	)		77,088
Mutual funds:
Equity		30,291		39		(7,480	)		22,850
Fixed income		21,715		185		(17	)		21,883
Other long-term investments		612		—		—			612
Trust investments	$	231,458	$	2,232	$	(55,469	)		178,221
Market value as a percentage of cost										77.0	%
Accrued investment income									409
Trust assets								$	178,630

19

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 basis and market values associated with the preneed cemetery merchandise and services trust assets as of October 31, 2009 are detailed below.

	October 31, 2009
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	15,123	$	—	$	—		$	15,123
U.S. Government, agencies and municipalities		9,259		678		—			9,937
Corporate bonds		7,554		552		(74	)		8,032
Preferred stocks		20,831		46		(4,363	)		16,514
Common stocks		127,942		714		(54,254	)		74,402
Mutual funds:
Equity		30,291		15		(9,980	)		20,326
Fixed income		18,530		125		(4	)		18,651
Other long-term investments		562		—		(8	)		554
Trust investments	$	230,092	$	2,130	$	(68,683	)	$	163,539
Market value as a percentage of cost										71.1	%
Accrued investment income									399
Trust assets								$	163,938

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

	April 30, 2010
Due in one year or less	$	2,936
Due in one to five years		10,433
Due in five to ten years		5,958
Thereafter		141
	$	19,468

     The Company is actively managing a covered call program on its equity securities within the cemetery merchandise and services trust in order to provide an opportunity for additional income. As of April 30, 2010 and October 31, 2009, the Company has outstanding covered calls with a market value of $398 and $308, respectively. These covered calls are included at market value in the balance sheet line “preneed cemetery receivables and trust investments”. For the three months ended April 30, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($26) and $152, respectively, related to the covered call program. For the six months ended April 30, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($214) and $239 respectively, related to the covered call program. These trust earnings and losses are accounted for in the same manner as for other cemetery merchandise and services trust earnings and flow through cemetery revenue in the statements of earnings. Although the Company realized losses associated with the covered call program for the three and six months ended April 30, 2010, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $503 and $2,912, respectively, during the period that the covered calls were outstanding.

     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. The Company’s Level 1 investments include cash, money market and other short-term investments, common stock and mutual funds.

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)

     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 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:

	Quoted Market
	Prices in Active		Significant Other		Significant
	Markets		Observable Inputs		Unobservable Inputs		Fair Market
	(Level 1)		(Level 2)		(Level 3)		Value
Trust investments—April 30, 2010	$	140,673	$	37,548	$	—	$	178,221
Trust investments—October 31, 2009	$	129,032	$	34,507	$	—	$	163,539

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

	Three Months Ended April 30,						Six Months Ended April 30,
	2010			2009			2010			2009
Purchases	$	9,089		$	2,273		$	11,135		$	3,426
Sales		10,449			2,042			12,769			4,498
Realized gains from sales of investments		836			274			1,259			378
Realized losses from sales of investments and other		(637	)		(1,286	)(1)		(1,518	)		(5,750	)(2)
Interest income, dividends and other ordinary income		1,237			1,208			2,390			2,508
Deposits		3,783			4,289			9,476			8,322
Withdrawals		4,325			4,614			8,729			8,382

(1)	Includes $1,231 in losses from the sale of investments and $55 in losses related to certain investments 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.
(2)	Includes $2,474 in losses from the sale of investments and $3,276 in losses related to certain investments 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.

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)

     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 April 30, 2010 and October 31, 2009.

	April 30, 2010
	Less than 12 Months					12 Months or Greater					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Corporate bonds	$	1,916	$	(9	)	$	1,184	$	(15	)	$	3,100	$	(24	)
Preferred stocks		—		—			17,011		(2,963	)		17,011		(2,963	)
Common stocks		752		(342	)		69,331		(44,643	)		70,083		(44,985	)
Mutual funds:
Equity		80		(45	)		21,715		(7,435	)		21,795		(7,480	)
Fixed income		3,671		(13	)		15		(4	)		3,686		(17	)
Total	$	6,419	$	(409	)	$	109,256	$	(55,060	)	$	115,675	$	(55,469	)

	October 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	$	—	$	—		$	1,045	$	(74	)	$	1,045	$	(74	)
Preferred stocks		—		—			16,356		(4,363	)		16,356		(4,363	)
Common stocks		1,755		(464	)		67,374		(53,790	)		69,129		(54,254	)
Mutual funds:
Equity		—		—			20,186		(9,980	)		20,186		(9,980	)
Fixed income		20		—			15		(4	)		35		(4	)
Other long-term investments		—		—			—		(8	)		—		(8	)
Total	$	1,775	$	(464	)	$	104,976	$	(68,219	)	$	106,751	$	(68,683	)

     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 April 30, 2010, 86 percent, or $47,948, 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 43 percent of the Company’s preneed cemetery merchandise and services trust portfolio is currently invested in common stock, the Company generally expects its portfolio performance to improve if the performance of the overall financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The preferred stocks are primarily in the financial services sector which experienced a significant decline in market value in late 2008 and early 2009 due to the 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’s policy for recognizing trust income follows the allocation of trust earnings to individual contracts as stipulated in the Company’s respective trust agreements for distributable income. In substantially all of the Company’s trusts, dividends and interest earned and net capital gains and losses realized by preneed cemetery trust or escrow accounts net of fees are allocated to individual contracts when earned or realized. In these trusts, unrealized gains and losses are not allocated to contracts. The trust earnings allocated to individual contracts are recognized as components of revenue along with the original sales price when the underlying service or merchandise

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)

is delivered. Principal and earnings are withdrawn only as the merchandise or services are delivered or contracts are cancelled, except in jurisdictions that permit trust earnings to be withdrawn currently.

     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 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 $1,346 and $2,079 for the three months ended April 30, 2010 and 2009, respectively, and $3,819 and $3,801 for the six months ended April 30, 2010 and 2009, respectively.

     The cost basis and market values of the trust investments held by the cemetery perpetual care trusts as of April 30, 2010 are detailed below.

	April 30, 2010
	Cost Basis		Unrealized Gains		Unrealized Losses			Market
Cash, money market and other short-term investments	$	24,293	$	—	$	—		$	24,293
U.S. Government, agencies and municipalities		3,768		337		(81	)		4,024
Corporate bonds		46,956		1,542		(877	)		47,621
Preferred stocks		57,893		55		(10,154	)		47,794
Common stocks		90,589		1,044		(35,428	)		56,205
Mutual funds:
Equity		8,864		33		(812	)		8,085
Fixed income		35,034		340		(341	)		35,033
Other long-term investments		576		2		(177	)		401
Trust investments	$	267,973	$	3,353	$	(47,870	)		223,456
Market value as a percentage of cost										83.4	%
Accrued investment income									734
Trust assets								$	224,190

23

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 basis and market values of the trust investments held by the cemetery perpetual care trusts as of October 31, 2009 are detailed below.

	October 31, 2009
	Cost Basis		Unrealized Gains		Unrealized Losses			Market
Cash, money market and other short-term investments	$	17,784	$	—	$	—		$	17,784
U.S. Government, agencies and municipalities		5,416		394		(82	)		5,728
Corporate bonds		42,735		2,088		(1,085	)		43,738
Preferred stocks		58,421		2		(17,137	)		41,286
Common stocks		96,831		2,663		(42,792	)		56,702
Mutual funds:
Equity		6,838		25		(1,560	)		5,303
Fixed income		32,561		1,340		(342	)		33,559
Other long-term investments		766		4		(177	)		593
Trust investments	$	261,352	$	6,516	$	(63,175	)	$	204,693
Market value as a percentage of cost										78.3	%
Accrued investment income									783
Trust assets								$	205,476

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

	April 30, 2010
Due in one year or less	$	10,468
Due in one to five years		25,688
Due in five to ten years		15,027
Thereafter		462
	$	51,645

     The Company is actively managing a covered call program on its equity securities within the cemetery perpetual care trust in order to provide an opportunity for additional income. As of April 30, 2010 and October 31, 2009, the Company has outstanding covered calls with a market value of $412 and $220, respectively. These covered calls are included at market value in the balance sheet line “cemetery perpetual care trust investments.” For the three months ended April 30, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($18) and $120, respectively, related to the covered call program. For the six months ended April 30, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($183) and $157, respectively, related to the covered call program. These trust earnings and losses are accounted for in the same manner as for other cemetery perpetual care trust earnings and flow through cemetery revenue in the statements of earnings. Although the Company realized losses associated with the covered call program for the three and six months ended April 30, 2010, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $397 and $1,996, respectively, during the period that the covered calls were outstanding.

     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. The Company’s Level 1 investments include cash, money market and other short-term investments, common stock and mutual funds.

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)

     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 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 investment 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:

	Quoted Market
	Prices in Active		Significant Other		Significant
	Markets		Observable Inputs		Unobservable Inputs		Fair Market
	(Level 1)		(Level 2)		(Level 3)		Value
Trust investments—April 30, 2010	$	123,767	$	99,439	$	250	$	223,456
Trust investments—October 31, 2009	$	113,715	$	90,752	$	226	$	204,693

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

	Three Months Ended April 30,					Six Months Ended April 30,
	2010		2009			2010		2009
Fair market value, beginning balance	$	168	$	243		$	226	$	611
Total unrealized losses included in other comprehensive income(1)		—		(59	)		—		(177	)
Transfers out of Level 3 category and other		82		103			24		(147	)
Fair market value, ending balance	$	250	$	287		$	250	$	287

⁽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 initial corpus. As of April 30, 2010 and October 31, 2009, 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 and 2009 losses of $13,489 and $14,010, respectively. The Company recorded no additional estimated probable funding obligation for the three and six months ended April 30, 2010. The Company had earnings of $153 and $521 for the three and six months ended April 30, 2010, respectively, within the trusts that it did not withdraw from the trusts in order to satisfy a portion of its estimated probable funding obligation. In those states where realized net capital gains have not been withdrawn, the Company believes it is reasonably possible but not probable that additional

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)

funding obligations may exist with an estimated amount of approximately $2,600; no charge has been recorded for these amounts as of April 30, 2010.

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

	Three Months Ended April 30,						Six Months Ended April 30,
	2010			2009			2010			2009
Purchases	$	22,930		$	7,540		$	39,102		$	7,869
Sales		13,200			47			42,085			1,853
Realized gains from sales of investments		2,258			175			4,283			534
Realized losses from sales of investments and other		(268	)		(3,113	)(1)		(818	)		(3,209	)(2)
Interest income, dividends and other ordinary income		2,177			2,572			4,338			4,856
Deposits		1,895			1,767			3,733			4,221	(3)
Withdrawals		2,121			1,368			3,009			2,954

(1)	Includes $3,112 in losses related to certain investments that were rendered worthless or practically worthless.
(2)	Includes $3,196 in losses related to certain investments that were rendered worthless or practically worthless.
(3)	Includes $734 that the Company contributed to the cemetery perpetual care trusts as part of its funding obligation during the six months ended April 30, 2009..

     During the three months ended April 30, 2010 and 2009, cemetery revenues were $56,973 and $55,378, respectively, of which $2,311 and $2,041, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and expenses. During the six months ended April 30, 2010 and 2009, cemetery revenues were $109,265, and $102,958, respectively, of which $4,645 and $3,653, 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 April 30, 2010 and October 31, 2009.

	April 30, 2010
	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	$	79	$	(1	)	$	118	$	(80	)	$	197	$	(81	)
Corporate bonds		4,721		(20	)		3,265		(857	)		7,986		(877	)
Preferred stocks		—		—			44,647		(10,154	)		44,647		(10,154	)
Common stocks		521		(399	)		52,438		(35,029	)		52,959		(35,428	)
Mutual funds:
Equity		1,998		(4	)		5,754		(808	)		7,752		(812	)
Fixed income		6,019		(13	)		1,043		(328	)		7,062		(341	)
Other long-term investments		—		—			201		(177	)		201		(177	)
Total	$	13,338	$	(437	)	$	107,466	$	(47,433	)	$	120,804	$	(47,870	)

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)

	October 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	$	270		$	(81	)	$	6	$	(1	)	$	276	$	(82	)
Corporate bonds		600			(124	)		1,732		(961	)		2,332		(1,085	)
Preferred stocks		—			—			40,784		(17,137	)		40,784		(17,137	)
Common stocks		(38	)		(473	)		50,445		(42,319	)		50,407		(42,792	)
Mutual funds:
Equity		43			(11	)		5,034		(1,549	)		5,077		(1,560	)
Fixed income		118			—			1,096		(342	)		1,214		(342	)
Other long-term investments		201			(177	)		—		—			201		(177	)
Total	$	1,194		$	(866	)	$	99,097	$	(62,309	)	$	100,291	$	(63,175	)

     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 April 30, 2010, 95 percent, or $45,582, 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. The Company generally expects its portfolio performance to improve if the performance of the overall financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The preferred stocks are primarily in the financial services sector which experienced a significant decline in market value in late 2008 and early 2009 due to the 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 April 30, 2010 are as follows:

	Deferred Receipts Held in Trust
	Preneed			Preneed
	Funeral			Cemetery			Total
Trust assets at market value	$	383,135		$	178,630		$	561,765
Less:
Pending withdrawals		(8,086	)		(5,026	)		(13,112	)
Pending deposits		1,728			1,334			3,062
Deferred receipts held in trust	$	376,777		$	174,938		$	551,715

27

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 April 30, 2010 are as follows:

	Perpetual Care
	Trusts’ Corpus
Trust assets at market value	$	224,190
Less:
Pending withdrawals		(2,074	)
Pending deposits		671
Perpetual care trusts’ corpus	$	222,787

Investment and other income, net

     The components of investment and other income, net in the condensed consolidated statements of earnings for the three and six months ended April 30, 2010 and 2009 are detailed below.

	Three Months Ended April 30,						Six Months Ended April 30,
	2010			2009			2010			2009
Realized gains from sales of investments	$	3,903		$	933		$	6,979		$	1,904
Realized losses from sales of investments and other		(1,443	)		(4,791	)		(3,390	)		(17,852	)
Interest income, dividends and other ordinary income		5,956			6,452			11,615			13,189
Trust expenses and income taxes		(2,602	)		(1,963	)		(5,140	)		(4,097	)
Net trust investment income (loss)		5,814			631			10,064			(6,856	)
Reclassification to deferred preneed funeral and cemetery receipts held in trust		(2,646	)		(1,660	)		(3,996	)		7,613
Reclassification to perpetual care trusts’ corpus		(3,168	)		1,029			(6,068	)		(757	)
Total deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus		—			—			—			—
Investment and other income, net(1)		36			32			60			73
Total investment and other income, net	$	36		$	32		$	60		$	73

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

28

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Commitments and Contingencies—(Continued)

     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 amounts sought from all defendants as damages to the proposed class would be in the range of approximately $950 million to approximately $1.5 billion, before trebling. Accordingly, any judgment in favor of the proposed class could have a material adverse effect on the Company’s financial condition and results of operations.

     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.

     The named plaintiffs (Funeral Consumers Alliance and thirteen individuals) are proceeding with a jury trial scheduled for August 2, 2010 on their individual claims for alleged damages arising out of the purchase of ten caskets. The named plaintiffs also have indicated their intent to seek injunctive relief and attorneys’ fees.

     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.

Other Litigation

     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 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.

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)

     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 April 30, 2010, the Company had $13,489 recorded as a liability for an estimated probable funding obligation. As of April 30, 2010, the Company had unrealized losses of approximately $38,297 in the cemetery perpetual care 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 an additional 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 $3.0 million as of April 30, 2010 and October 31, 2009.

     The Company is required to maintain a bond ($24,815 as of April 30, 2010) 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 senior secured revolving credit facility and return to the trusts the amounts it previously withdrew that relate to the remaining undelivered preneed contracts in lieu of this bond.

30

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

	Earnings			Shares		Per Share
	(Numerator)			(Denominator)		Data
Three Months Ended April 30, 2010
Net earnings	$	8,391
Allocation of earnings to nonvested restricted stock		(89	)
Basic earnings per common share:
Net earnings available to common shareholders	$	8,302			92,113	$	.09
Effect of dilutive securities:
Stock options assumed exercised					274
Diluted earnings per common share:
Net earnings available to common shareholders plus stock options assumed exercised	$	8,302			92,387	$	.09

	Earnings			Shares		Per Share
	(Numerator)			(Denominator)		Data
Three Months Ended April 30, 2009
Net earnings	$	8,866
Allocation of earnings to nonvested restricted stock		(72	)
Basic earnings per common share:
Net earnings available to common shareholders	$	8,794			91,888	$	.10
Effect of dilutive securities:
Stock options assumed exercised					—
Diluted earnings per common share:
Net earnings available to common shareholders plus stock options assumed exercised	$	8,794			91,888	$	.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
	(Numerator)			(Denominator)		Data
Six Months Ended April 30, 2010
Net earnings	$	15,878
Allocation of earnings to nonvested restricted stock		(168	)
Basic earnings per common share:
Net earnings available to common shareholders	$	15,710			92,082	$	.17
Effect of dilutive securities:
Stock options assumed exercised					250
Diluted earnings per common share:
Net earnings available to common shareholders plus stock options assumed exercised	$	15,710			92,332	$	.17

	Earnings			Shares		Per Share
	(Numerator)			(Denominator)		Data
Six Months Ended April 30, 2009
Net earnings	$	13,632
Allocation of earnings to nonvested restricted stock		(111	)
Basic earnings per common share:
Net earnings available to common shareholders	$	13,521			91,856	$	.15
Effect of dilutive securities:
Stock options assumed exercised					9
Diluted earnings per common share:
Net earnings available to common shareholders plus stock options assumed exercised	$	13,521			91,865	$	.15

     As discussed in Note 2, the Company adopted guidance on determining whether instruments granted in share-based payment transactions are participating securities, effective November 1, 2009. Since this guidance requires retrospective treatment, the information presented above for the three and six months ended April 30, 2009 has been adjusted to reflect the adoption of this guidance.

     During the three months ended April 30, 2010, options to purchase 1,285,255 shares of common stock at prices ranging from $5.84 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 that period. Additionally, weighted-average shares outstanding for the three months ended April 30, 2010 exclude the effect of approximately 959,006 options because such options were not dilutive. These options expire between December 20, 2011, and January 18, 2017.

     During the six months ended April 30, 2010, options to purchase 1,312,058 shares of common stock at prices ranging from $5.35 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 that period. Additionally, weighted-average shares outstanding for the six months ended April 30, 2010 exclude the effect of approximately 4,173 options because such options were not dilutive. These options expire between December 20, 2011, and January 18, 2017.

     Options to purchase 1,655,767 and 1,669,920 shares of common stock at prices ranging from $5.06 to $8.47 per share for the three and six months ended April 30, 2009, respectively, were outstanding but were not

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)

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 six months ended April 30, 2009 exclude the effect of approximately 968,896 and 247,514 options, respectively, because such options were not dilutive.

     For the three and six months ended April 30, 2010 and 2009, 438,000 market based stock options were not dilutive. The market based stock options were not dilutive because the market conditions required for vesting for the respective grants were not achieved during any of periods presented.

     For the three and six months ended April 30, 2010, a maximum of 16,640,100 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 13,312,080 shares of Class A common stock under the common stock warrants associated with the June 2007 senior convertible debt transaction were not dilutive, as the average price of the Company’s stock for the three and six months ended April 30, 2010 was less than the conversion price of the senior convertible notes and strike price of the warrants. For the three and six months ended April 30, 2009, a maximum of 22,735,500 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 18,188,400 shares of Class A common stock under the associated common stock warrants were also not dilutive.

     The Company includes Class A and Class B common stock in its diluted shares calculation. As of April 30, 2010, 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 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.

	Total Revenue				Total Revenue
	Three Months		Three Months		Six Months		Six Months
	Ended		Ended		Ended		Ended
	April 30, 2010		April 30, 2009		April 30, 2010		April 30, 2009
Funeral	$	67,062	$	67,075	$	135,092	$	135,221
Cemetery(1)		55,072		53,600		105,579		99,290
Corporate Trust Management(2)		6,225		5,943		12,088		11,437
Total	$	128,359	$	126,618	$	252,759	$	245,948

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
	Ended		Three Months Ended		Six Months Ended		Six Months Ended
	April 30, 2010		April 30, 2009		April 30, 2010		April 30, 2009
Funeral	$	12,615	$	14,559	$	27,961	$	29,401
Cemetery(1)		6,457		5,525		10,868		8,712
Corporate Trust Management(2)		5,844		5,511		11,256		10,565
Total	$	24,916	$	25,595	$	50,085	$	48,678
	Net Total Preneed Merchandise and				Net Total Preneed Merchandise and
	Service Sales(3)				Service Sales(3)
	Three Months
	Ended		Three Months Ended		Six Months Ended		Six Months Ended
	April 30, 2010		April 30, 2009		April 30, 2010		April 30, 2009
Funeral	$	25,426	$	24,727	$	43,537	$	43,222
Cemetery		12,334		11,921		22,538		22,700
Total	$	37,760	$	36,648	$	66,075	$	65,922

(1)	Perpetual care trust earnings are included in the revenues and gross profit of the cemetery segment and amounted to $1,346 and $2,079 for the three months ended April 30, 2010 and 2009, respectively, and $3,819 and $3,801 for the six months April 30, 2010 and 2009, 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 generated over the life of the preneed contracts delivered during the relevant periods and distributable to the Company based upon the Company’s respective trust agreements. Trust management fees included in funeral revenue for the three months ended April 30, 2010 and 2009 were $1,148 and $885, respectively, and funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for the three months ended April 30, 2010 and 2009 were $3,176 and $3,280, respectively. Trust management fees included in cemetery revenue for the three months ended April 30, 2010 and 2009 were $1,235 and $912, respectively, and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for the three months ended April 30, 2010 and 2009 were $666 and $866, respectively. Trust management fees included in funeral revenue for the six months ended April 30, 2010 and 2009 were $2,263 and $1,823, respectively, and funeral trust earnings for the six months ended April 30, 2010 and 2009 were $6,139 and $5,946, respectively. Trust management fees included in cemetery revenue for the six months ended April 30, 2010 and 2009 were $2,424 and $1,863, respectively, and cemetery trust earnings for the six months ended April 30, 2010 and 2009 were $1,262 and $1,805, 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 six months ended April 30, 2010 and 2009 is as follows:

	Three Months Ended April 30,						Six Months Ended April 30,
	2010			2009			2010			2009
Gross profit for reportable segments	$	24,916		$	25,595		$	50,085		$	48,678
Corporate general and administrative expenses		(5,948	)		(7,006	)		(12,502	)		(14,512	)
Hurricane related charges, net		(32	)		(205	)		(32	)		(520	)
Separation charges		—			(275	)		—			(275	)
Net impairment losses on dispositions		—			(35	)		—			(98	)
Other operating income, net		265			304			444			563
Interest expense		(5,891	)		(7,366	)		(12,347	)		(14,761	)
Gain on early extinguishment of debt		—			3,384			17			3,384
Investment and other income, net		36			32			60			73
Earnings before income taxes	$	13,346		$	14,428		$	25,725		$	22,532

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 six months ended April 30, 2010 and 2009.

	Three Months Ended April 30,				Six Months Ended April 30,
	2010		2009		2010		2009
Service revenue
Funeral	$	45,659	$	45,494	$	91,010	$	90,807
Cemetery		15,238		15,009		30,809		30,110
		60,897		60,503		121,819		120,917
Merchandise revenue
Funeral		24,058		24,349		49,176		49,259
Cemetery		37,601		37,114		70,742		66,141
		61,659		61,463		119,918		115,400
Other revenue
Funeral		1,669		1,397		3,308		2,924
Cemetery		4,134		3,255		7,714		6,707
		5,803		4,652		11,022		9,631
Total revenue	$	128,359	$	126,618	$	252,759	$	245,948
Service costs
Funeral	$	14,954	$	14,702	$	29,664	$	29,371
Cemetery		10,551		9,618		20,356		19,374
		25,505		24,320		50,020		48,745
Merchandise costs
Funeral		14,544		14,584		29,123		29,590
Cemetery		24,151		25,690		46,354		44,940
		38,695		40,274		75,477		74,530
Facility expenses
Funeral		25,143		23,429		48,765		47,249
Cemetery		14,100		13,000		28,412		26,746
		39,243		36,429		77,177		73,995
Total costs	$	103,443	$	101,023	$	202,674	$	197,270

     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 estimated obligation to fund the cemetery perpetual care trusts.

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 April 30, 2010 and October 31, 2009 and for the three and six months ended April 30, 2010 and 2009, 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 April 30, 2010
				Guarantor
				Subsidiaries-			Guarantor			Non-Guarantor
	Parent			Tier 1			Subsidiaries-Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	66,586		$	470		$	4,330		$	—		$	71,386
Cemetery		—			50,870			829			5,274			—			56,973
		—			117,456			1,299			9,604			—			128,359
Costs and expenses:
Funeral		—			51,161			296			3,184			—			54,641
Cemetery		—			44,133			649			4,020			—			48,802
		—			95,294			945			7,204			—			103,443
Gross profit		—			22,162			354			2,400			—			24,916
Corporate general and administrative expenses		(5,948	)		—			—			—			—			(5,948	)
Hurricane related recoveries (charges), net		(33	)		—			1			—			—			(32	)
Other operating income, net		26			149			3			87			—			265
Operating earnings (loss)		(5,955	)		22,311			358			2,487			—			19,201
Interest income (expense)		5			(5,420	)		(3	)		(473	)		—			(5,891	)
Investment and other income, net		35			1			—			—			—			36
Equity in subsidiaries		11,392			165			—			—			(11,557	)		—
Earnings before income taxes		5,477			17,057			355			2,014			(11,557	)		13,346
Income tax expense (benefit)		(2,914	)		7,042			124			703			—			4,955
Net earnings		8,391			10,015			231			1,311			(11,557	)		8,391
Other comprehensive income, net		1			—			—			1			(1	)		1
Comprehensive income	$	8,392		$	10,015		$	231		$	1,312		$	(11,558	)	$	8,392

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 April 30, 2009
				Guarantor
				Subsidiaries-			Guarantor			Non-Guarantor
	Parent			Tier 1			Subsidiaries-Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	66,393		$	501		$	4,346		$	—		$	71,240
Cemetery		—			49,863			753			4,762			—			55,378
		—			116,256			1,254			9,108			—			126,618
Costs and expenses:
Funeral		—			49,458			275			2,982			—			52,715
Cemetery		—			44,132			596			3,580			—			48,308
		—			93,590			871			6,562			—			101,023
Gross profit		—			22,666			383			2,546			—			25,595
Corporate general and administrative expenses		(7,006	)		—			—			—			—			(7,006	)
Hurricane related recoveries (charges), net		(350	)		145			—			—			—			(205	)
Separation charges		(55	)		(220	)		—			—			—			(275	)
Net impairment losses on dispositions		—			(35	)		—			—			—			(35	)
Other operating income, net		21			243			—			40			—			304
Operating earnings (loss)		(7,390	)		22,799			383			2,586			—			18,378
Interest expense		(735	)		(6,109	)		(26	)		(496	)		—			(7,366	)
Gain on early extinguishment of debt		3,384			—			—			—			—			3,384
Investment and other income, net		32			—			—			—			—			32
Equity in subsidiaries		13,136			288			—			—			(13,424	)		—
Earnings before income taxes		8,427			16,978			357			2,090			(13,424	)		14,428
Income tax expense (benefit)		(439	)		5,567			97			337			—			5,562
Net earnings		8,866			11,411			260			1,753			(13,424	)		8,866
Other comprehensive loss, net		(6	)		—			—			(6	)		6			(6	)
Comprehensive income	$	8,860		$	11,411		$	260		$	1,747		$	(13,418	)	$	8,860

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

	Six Months Ended April 30, 2010
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	133,818		$	955		$	8,721		$	—		$	143,494
Cemetery		—			97,546			1,401			10,318			—			109,265
		—			231,364			2,356			19,039			—			252,759
Costs and expenses:
Funeral		—			100,602			559			6,391			—			107,552
Cemetery		—			85,706			1,269			8,147			—			95,122
										��
		—			186,308			1,828			14,538			—			202,674
Gross profit		—			45,056			528			4,501			—			50,085
Corporate general and administrative expenses		(12,502	)		—			—			—			—			(12,502	)
Hurricane related recoveries (charges), net		(87	)		—			55			—			—			(32	)
Other operating income, net		42			292			3			107			—			444
Operating earnings (loss)		(12,547	)		45,348			586			4,608			—			37,995
Interest expense		(482	)		(10,898	)		(11	)		(956	)		—			(12,347	)
Gain on early extinguishment of debt		17			—			—			—			—			17
Investment and other income, net		59			1			—			—			—			60
Equity in subsidiaries		23,213			245			—			—			(23,458	)		—
Earnings before income taxes		10,260			34,696			575			3,652			(23,458	)		25,725
Income tax expense (benefit)		(5,618	)		14,085			178			1,202			—			9,847
Net earnings		15,878			20,611			397			2,450			(23,458	)		15,878
Other comprehensive loss, net		—			—			—			—			—			—
Comprehensive income	$	15,878		$	20,611		$	397		$	2,450		$	(23,458	)	$	15,878

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

	Six Months Ended April 30, 2009
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	133,264		$	900		$	8,826		$	—		$	142,990
Cemetery		—			92,888			1,414			8,656			—			102,958
		—			226,152			2,314			17,482			—			245,948
Costs and expenses:
Funeral		—			99,458			566			6,186			—			106,210
Cemetery		—			82,943			1,232			6,885			—			91,060
		—			182,401			1,798			13,071			—			197,270
Gross profit		—			43,751			516			4,411			—			48,678
Corporate general and administrative expenses		(14,512	)		—			—			—			—			(14,512	)
Hurricane related recoveries (charges), net		(626	)		106			—			—			—			(520	)
Separation charges		(55	)		(220	)		—			—			—			(275	)
Net impairment losses on dispositions		(8	)		(90	)		—			—			—			(98	)
Other operating income, net		19			487			1			56			—			563
Operating earnings (loss)		(15,182	)		44,034			517			4,467			—			33,836
Interest expense		(1,401	)		(12,274	)		(62	)		(1,024	)		—			(14,761	)
Gain on early extinguishment of debt		3,384			—			—			—			—			3,384
Investment and other income, net		73			—			—			—			—			73
Equity in subsidiaries		24,307			423			—			—			(24,730	)		—
Earnings before income taxes		11,181			32,183			455			3,443			(24,730	)		22,532
Income tax expense (benefit)		(2,451	)		10,403			116			832			—			8,900
Net earnings		13,632			21,780			339			2,611			(24,730	)		13,632
Other comprehensive loss, net		(3	)		—			—			(3	)		3			(3	)
Comprehensive income	$	13,629		$	21,780		$	339		$	2,608		$	(24,727	)	$	13,629

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

	April 30, 2010
			Guarantor			Guarantor		Non-
			Subsidiaries-			Subsidiaries-		Guarantor
	Parent		Tier 1			Tier 2		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	58,541	$	5,631		$	50	$	337	$	—		$	64,559
Certificates of deposit and marketable securities		10,000		—			—		411		—			10,411
Receivables, net of allowances		5,411		46,055			437		4,235		—			56,138
Inventories		327		33,593			345		2,109		—			36,374
Prepaid expenses		1,299		6,048			70		1,602		—			9,019
Deferred income taxes, net		12,507		10,672			36		1,478		—			24,693
Intercompany receivables		6,000		—			—		—		(6,000	)		—
Total current assets		94,085		101,999			938		10,172		(6,000	)		201,194
Receivables due beyond one year, net of allowances		—		47,797			408		13,420		—			61,625
Preneed funeral receivables and trust investments		—		404,342			—		9,457		—			413,799
Preneed cemetery receivables and trust investments		—		198,103			1,112		6,726		—			205,941
Goodwill		—		227,401			48		19,787		—			247,236
Cemetery property, at cost		—		347,858			11,218		25,576		—			384,652
Property and equipment, at cost		55,310		470,995			2,212		38,581		—			567,098
Less accumulated depreciation		38,284		217,782			1,084		15,835		—			272,985
Net property and equipment		17,026		253,213			1,128		22,746		—			294,113
Deferred income taxes, net		16,930		77,335			—		9,476		(2,956	)		100,785
Cemetery perpetual care trust investments		—		211,562			8,734		3,894		—			224,190
Other assets		7,532		4,938			7		1,040		—			13,517
Intercompany receivables		723,704		—			—		—		(723,704	)		—
Equity in subsidiaries		17,667		8,366			—		—		(26,033	)		—
Total assets	$	876,944	$	1,882,914		$	23,593	$	122,294	$	(758,693	)	$	2,147,052
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	5	$	—		$	—	$	—	$	—		$	5
Accounts payable, accrued expenses and other current liabilities		13,497		66,040			174		4,307		—			84,018
Intercompany payables		—		—			—		6,000		(6,000	)		—
Total current liabilities		13,502		66,040			174		10,307		(6,000	)		84,023
Long-term debt, less current maturities		341,014		—			—		—		—			341,014
Deferred income taxes		—		—			2,956		—		(2,956	)		—
Intercompany payables		—		711,083			2,814		9,807		(723,704	)		—
Deferred preneed funeral revenue		—		199,119			—		46,602		—			245,721
Deferred preneed cemetery revenue		—		234,196			301		26,788		—			261,285
Deferred preneed funeral and cemetery receipts held in trust		—		544,298			1,059		6,358		—			551,715
Perpetual care trusts’ corpus		—		210,151			8,742		3,894		—			222,787
Other long-term liabilities		17,450		2,299			—		52		—			19,801
Negative equity in subsidiaries		84,272		—			—		—		(84,272	)		—
Total liabilities		456,238		1,967,186			16,046		103,808		(816,932	)		1,726,346
Common stock		93,163		102			324		52		(478	)		93,163
Other		327,508		(84,374	)		7,223		18,399		58,752			327,508
Accumulated other comprehensive income		35		—			—		35		(35	)		35
Total shareholders’ equity		420,706		(84,272	)		7,547		18,486		58,239			420,706
Total liabilities and shareholders’ equity	$	876,944	$	1,882,914		$	23,593	$	122,294	$	(758,693	)	$	2,147,052

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, 2009
			Guarantor			Guarantor		Non-
			Subsidiaries-			Subsidiaries-		Guarantor
	Parent		Tier 1			Tier 2		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	56,734	$	5,096		$	52	$	926	$	—		$	62,808
Receivables, net of allowances		7,062		47,388			504		4,485		—			59,439
Inventories		269		33,440			312		2,135		—			36,156
Prepaid expenses		1,218		3,804			38		1,688		—			6,748
Deferred income taxes, net		9,006		11,168			47		1,494		—			21,715
Intercompany receivables		6,000		—			—		—		(6,000	)		—
Total current assets		80,289		100,896			953		10,728		(6,000	)		186,866
Receivables due beyond one year, net of allowances		—		48,783			420		13,808		—			63,011
Preneed funeral receivables and trust investments		—		379,899			—		9,613		—			389,512
Preneed cemetery receivables and trust investments		—		185,447			1,124		6,846		—			193,417
Goodwill		—		227,401			48		19,787		—			247,236
Cemetery property, at cost		—		348,627			11,315		26,035		—			385,977
Property and equipment, at cost		53,956		466,187			2,183		38,136		—			560,462
Less accumulated depreciation		36,015		208,806			994		15,190		—			261,005
Net property and equipment		17,941		257,381			1,189		22,946		—			299,457
Deferred income taxes, net		—		107,636			—		10,415		(4,653	)		113,398
Cemetery perpetual care trust investments		—		193,616			8,207		3,653		—			205,476
Other assets		8,402		5,196			6		1,050		—			14,654
Intercompany receivables		765,490		—			—		—		(765,490	)		—
Equity in subsidiaries		15,065		8,121			—		—		(23,186	)		—
Total assets	$	887,187	$	1,863,003		$	23,262	$	124,881	$	(799,329	)	$	2,099,004
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	5	$	—		$	—	$	—	$	—		$	5
Accounts payable, accrued expenses and other current liabilities		15,209		75,920			199		4,678		—			96,006
Intercompany payables		—		—			—		6,000		(6,000	)		—
Total current liabilities		15,214		75,920			199		10,678		(6,000	)		96,011
Long-term debt, less current maturities		339,721		—			—		—		—			339,721
Deferred income taxes		1,672		—			2,981		—		(4,653	)		—
Intercompany payables		—		747,847			3,402		14,241		(765,490	)		—
Deferred preneed funeral revenue		—		200,990			—		46,835		—			247,825
Deferred preneed cemetery revenue		—		239,177			277		27,510		—			266,964
Deferred preneed funeral and cemetery receipts held in trust		—		507,912			1,045		5,830		—			514,787
Perpetual care trusts’ corpus		—		192,324			8,208		3,636		—			204,168
Other long-term liabilities		17,040		3,716			—		115		—			20,871
Negative equity in subsidiaries		104,883		—			—		—		(104,883	)		—
Total liabilities		478,530		1,967,886			16,112		108,845		(881,026	)		1,690,347
Common stock		92,684		102			324		52		(478	)		92,684
Other		315,938		(104,985	)		6,826		15,949		82,210			315,938
Accumulated other comprehensive income		35		—			—		35		(35	)		35
Total shareholders’ equity		408,657		(104,883	)		7,150		16,036		81,697			408,657
Total liabilities and shareholders’ equity	$	887,187	$	1,863,003		$	23,262	$	124,881	$	(799,329	)	$	2,099,004

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

	Six Months Ended April 30, 2010
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	(1,511	)	$	24,505		$	661		$	2,800		$	—	$	26,455
Cash flows from investing activities:
Proceeds from sales of marketable securities		—			—			—			250			—		250
Purchases of certificates of deposit and marketable securities		(10,000	)		—			—			(661	)		—		(10,661	)
Additions to property and equipment		(1,430	)		(6,416	)		(75	)		(445	)		—		(8,366	)
Other		—			50			—			—			—		50
Net cash used in investing activities		(11,430	)		(6,366	)		(75	)		(856	)		—		(18,727	)
Cash flows from financing activities:
Repayments of long-term debt		(847	)		—			—			—			—		(847	)
Intercompany receivables (payables)		20,725			(17,604	)		(588	)		(2,533	)		—		—
Retirement of common stock warrants		(107	)		—			—			—			—		(107	)
Issuance of common stock		471			—			—			—			—		471
Retirement of call options		107			—			—			—			—		107
Debt refinancing costs		(38	)		—			—			—			—		(38	)
Dividends		(5,589	)		—			—			—			—		(5,589	)
Excess tax benefits from share-based payment arrangements		26			—			—			—			—		26
Net cash provided by (used in) financing activities		14,748			(17,604	)		(588	)		(2,533	)		—		(5,977	)
Net increase (decrease) in cash		1,807			535			(2	)		(589	)		—		1,751
Cash and cash equivalents, beginning of period		56,734			5,096			52			926			—		62,808
Cash and cash equivalents, end of period	$	58,541		$	5,631		$	50		$	337		$	—	$	64,559

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

	Six Months Ended April 30, 2009
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	(1,044	)	$	25,339		$	434		$	4,355		$	—	$	29,084
Cash flows from investing activities:
Purchases of marketable securities		—			—			—			(99	)		—		(99	)
Proceeds from sale of assets		292			202			—			—			—		494
Purchase of subsidiaries and other investments, net of cash acquired		—			(1,623	)		—			—			—		(1,623	)
Additions to property and equipment		(3,596	)		(6,627	)		(130	)		(376	)		—		(10,729	)
Other		—			28			—			—			—		28
Net cash used in investing activities		(3,304	)		(8,020	)		(130	)		(475	)		—		(11,929	)
Cash flows from financing activities:
Repayments of long-term debt		(13,538	)		—			—			—			—		(13,538	)
Intercompany receivables (payables)		19,064			(13,888	)		(287	)		(4,889	)		—		—
Retirement of common stock warrants		(1,182	)		—			—			—			—		(1,182	)
Issuance of common stock		149			—			—			—			—		149
Retirement of call options		1,261			—			—			—			—		1,261
Dividends		(4,636	)		—			—			—			—		(4,636	)
Net cash provided by (used in) financing activities		1,118			(13,888	)		(287	)		(4,889	)		—		(17,946	)
Net increase (decrease) in cash		(3,230	)		3,431			17			(1,009	)		—		(791	)
Cash and cash equivalents, beginning of period		65,593			4,332			22			2,627			—		72,574
Cash and cash equivalents, end of period	$	62,363		$	7,763		$	39		$	1,618		$	—	$	71,783

44

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12) Consolidated Comprehensive Income

     Consolidated comprehensive income for the three and six months ended April 30, 2010 and 2009 is as follows:

	Three Months Ended April 30,						Six Months Ended April 30,
	2010			2009			2010			2009
Net earnings	$	8,391		$	8,866		$	15,878		$	13,632
Other comprehensive income (loss):
Unrealized appreciation (depreciation) of investments, net of deferred tax (expense) benefit of ($1), $4 and $2, respectively		1			(6	)		—			(3	)
(Increase) reduction in net unrealized losses associated with available-for-sale securities of the trusts		35,437			23,346			55,667			(12,569	)
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		(35,437	)		(23,346	)		(55,667	)		12,569
Total other comprehensive income (loss)		1			(6	)		—			(3	)
Total comprehensive income	$	8,392		$	8,860		$	15,878		$	13,629

(13) Long-term Debt

	April 30, 2010		October 31, 2009
Long-term debt:
3.125% senior convertible notes due 2014, net of unamortized discount of $11,540 and $12,912 as of April 30, 2010 and October 31, 2009, respectively	$	74,876	$	74,504
3.375% senior convertible notes due 2016, net of unamortized discount of $13,935 and $14,858 as of April 30, 2010 and October 31, 2009, respectively		66,051		65,127
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 rate of 8.0% as of April 30, 2010 and October 31, 2009, partially secured by assets of subsidiaries, with maturities through 2022		92		95
Total long-term debt		341,019		339,726
Less current maturities		5		5
	$	341,014	$	339,721

Fair Value

     As of April 30, 2010, 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 $75,671 and $66,845, respectively, compared to fair values of $80,568 and $72,131, respectively. As of April 30, 2010, the carrying value of the Company’s 6.25 percent senior notes, including accrued interest, was $202,604 compared to a fair value of $200,093.

45

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(13) Long-term Debt — (Continued)

Senior Convertible Notes

     During the six months ended April 30, 2010, the Company purchased $1,000 aggregate principal amount of its 3.125 percent senior convertible notes due 2014 in 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 at discounts, the Company recorded $17 in pre-tax gains on early extinguishment of debt during the six months ended April 30, 2010. The Company also recorded $3,384 in pre-tax gains on early extinguishment of debt during the three and six months ended April 30, 2009, related to debt purchases occurring during those periods.

Adoption of Convertible Debt Guidance

     In May 2008, the FASB issued guidance regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. The guidance states that issuers of convertible debt instruments that may be settled in cash upon conversion 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 as the related interest cost is recognized in subsequent periods. The entity must determine the carrying amount of the liability component of any outstanding debt instrument by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the debt instrument. The value of the debt instrument is adjusted through a discount to the face value of the debt, which is amortized as non-cash interest expense over the expected life of the debt.

     This guidance applies to the Company’s 3.125 percent senior convertible notes due 2014 (“2014 Notes”) and 3.375 percent senior convertible notes due 2016 (“2016 Notes” and together with the 2014 Notes, the “senior convertible notes”), which were originally issued in 2007, and must be applied retrospectively to all periods since inception. The Company adopted this guidance effective November 1, 2009. The impact of adopting this guidance on the Company’s October 31, 2009 balance sheet was a $9,997 decrease to deferred tax assets, a $27,770 decrease in long-term debt, a $35,001 increase to additional paid-in capital and an increase of $17,228 to accumulated deficit. See Note 2 for additional information on the effects of the adoption of this guidance.

     The remaining periods over which the discount on the 2014 Notes and 2016 Notes will be amortized is approximately four years and six years, respectively. The carrying value of the equity component of the 2014 Notes as of April 30, 2010 and October 31, 2009 was $16,191 and $16,204, respectively. The carrying value of the equity component of the 2016 Notes was $18,797 as of April 30, 2010 and October 31, 2009. The amount of interest expense recorded for the senior convertible notes related both to the contractual interest coupon and amortization of the discount on the liability component was $2,432 and $3,477 for the three months ended April 30, 2010 and 2009, respectively, and was $4,858 and $6,993 for the six months ended April 30, 2010 and 2009, respectively. For the three and six months ended April 30, 2010 and 2009, the coupon and amortization of the discount yielded an effective interest rate of approximately 6.96 percent on the 2014 Notes and the 2016 Notes.

     Holders may convert their senior convertible notes based on a conversion rate of 90.4936 shares of the Company’s Class A common stock per $1,000 principal amount of senior convertible notes (which is equal to an initial conversion price of approximately $11.05 per share), subject to adjustment: (1) during any fiscal quarter beginning after October 31, 2007, if the closing price of the Company’s Class A common stock for a specified period in the prior quarter is more than 130 percent of the conversion price per share, (2) for a specified period after five trading days in which the trading price of the notes for each trading day was less than 95 percent of the product of the closing price of the Company’s Class A common stock and the then applicable conversion rate, (3) if specified distributions to holders of the Company’s Class A common stock occur, (4) if a fundamental change occurs or (5) during the last month prior to the maturity date of the notes. None of these conditions had been met during the three and six months ended April 30, 2010, fiscal year 2009 or fiscal year 2008.

46

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

13) Long-term Debt — (Continued)

     Upon conversion, in lieu of shares of the Company’s Class A common stock, for each $1,000 principal amount of senior convertible notes converted, a holder will receive an amount in cash equal to the lesser of (1) $1,000 or (2) the conversion value, determined in the manner set forth in the indentures, of the number of shares of the Company’s Class A common stock equal to the conversion rate. If the conversion value exceeds $1,000, the Company will also deliver, at the Company’s election, cash or Class A common stock or a combination of cash and Class A common stock with respect to such excess amount, subject to the limitations in the indentures. If a holder elects to convert its senior convertible notes in connection with certain fundamental change transactions, the Company will pay, to the extent described in the indentures, a make whole premium by increasing the conversion rate applicable to such senior convertible notes.

     Upon specified fundamental change events, holders will have the option to require the Company to purchase for cash all or any portion of their senior convertible notes at a price equal to 100 percent of the principal amount of the senior convertible notes plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date.

     Also, in connection with the sale of the senior convertible notes in 2007, the Company purchased call options with respect to its Class A common stock from Bank of America/Merrill Lynch International. The call options cover, subject to anti-dilution adjustments, 11,311,700 shares of Class A common stock for each series of senior convertible notes, at strike prices that correspond to the initial conversion price of the notes. The call options are expected to offset the Company’s exposure to dilution from conversion of the senior convertible notes because any shares the Company would be obligated to deliver to holders upon conversion of the senior convertible notes would be delivered to the Company by the counterparty to the call options. The Company paid approximately $60,000 for the call options.

     The Company also entered into warrant transactions in 2007 whereby it sold to Bank of America/Merrill Lynch Financial Markets warrants expiring in 2014 and 2016 to acquire, subject to customary anti-dilution adjustments, 11,311,700 and 11,311,700 shares of Class A common stock, respectively. The strike prices of the sold warrants expiring in 2014 and 2016 are $12.93 per share of Class A common stock and $13.76 per share of Class A common stock, respectively. The warrants expiring in 2014 and 2016 may not be exercised prior to the maturity of the 2014 Notes and 2016 Notes, respectively. The Company can elect to settle the warrants in cash or Class A common stock, subject to certain conditions. The Company received approximately $43,850 for the warrants. In connection with the purchases of the Company’s senior convertible notes during fiscal years 2009 and 2010, the number of shares subject to the warrants was reduced to 6,913,280 related to the 2014 Notes and 6,398,800 related to the 2016 Notes.

     The price of the call options is treated for tax purposes as interest expense, which amortizes over the lives of the notes. Accordingly, the Company will have a tax benefit of approximately $21,000 over the lives of the senior convertible notes. The sale of the warrants is not expected to have any tax consequences to the Company.

     By selling the warrants, the Company used the proceeds to offset much of the cost of the call options. By simultaneously purchasing the call options and selling the warrants, the Company has effectively increased the conversion premium on the senior convertible notes to 55-65 percent above the market price of the Class A common stock at the time of the offering.

(14) Income Taxes

     The Company continues to pursue several tax planning strategies. The Company received IRS approval in fiscal year 2010 on two pending requests for changes in tax accounting methods, which will result in the deferral of

47

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(14) Income Taxes — (Continued)

approximately $70.0 million of taxable income. The combination of these two changes increases the current net operating loss carryforward to approximately $90.0 million and will significantly reduce federal income tax cash payments (approximately $32.0 million) for the next two to three years.

(15) Subsequent Events

     As of May 28, 2010, the fair market value of the Company’s preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts decreased 4.6 percent, or approximately $36,000, from April 30, 2010.

     Subsequent to April 30, 2010, the Company purchased an additional $5,000 aggregate principal amount of its 3.375 percent senior convertible notes in the open market.

48

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, 2009 (the “2009 Form 10-K”), and in conjunction with our consolidated financial statements included in this report and in our 2009 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 2009 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 April 30, 2010, we owned and operated 218 funeral homes and 140 cemeteries in 24 states within the United States and Puerto Rico. We sell cemetery property and funeral, cremation 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 2009 Form 10-K.

     As of November 1, 2009, we adopted guidance regarding the accounting for our 2014 and 2016 senior convertible notes and applied the change retrospectively for all periods presented. See Note 2 and Note 13 to the condensed consolidated financial statements for further information on the impact of the accounting change on our statements of earnings and balance sheets.

Financial Summary

     For the second quarter of fiscal year 2010, net earnings decreased $0.5 million to $8.4 million from $8.9 million for the second quarter of fiscal year 2009. Revenue increased $1.7 million to $128.3 million for the quarter ended April 30, 2010. Funeral revenue increased $0.1 million to $71.3 million in the second quarter of 2010, primarily due to a 0.8 percent increase in same-store average revenue per funeral service, including trust earnings, partially offset by a 2.8 percent, or 398 event, decline in same-store funeral services performed. Cemetery revenue increased $1.6 million to $57.0 million for the quarter ended April 30, 2010. This increase is due primarily to a $1.1 million improvement in the reserve for cancellations, a $1.0 million increase in merchandise delivered and a $0.9 million, or 3.9 percent, increase in cemetery property sales, net of discounts. These increases were partially offset by a $2.2 million decrease in construction during the period on various cemetery projects primarily due to a high rate of completion on construction of several private mausoleums completed in the second quarter of 2009. Consolidated gross profit decreased $0.7 million to $24.9 million for the quarter ending April 30, 2010. This compares to gross profit of $25.6 million for the quarter ended April 30, 2009, which included a $3.1 million charge to record our probable funding obligation related to our perpetual care trusts. In addition, we experienced a $1.0 million improvement in gross profit during the second quarter of 2009 primarily due to a high rate of completion on construction of several private mausoleums. The decrease in gross profit is primarily due to a $2.4 million increase in expenses. Expenses related to our worker’s compensation and general liability claims and reserves were higher in the second quarter of 2010 compared to the second quarter of 2009, primarily due to a $1.3 million reduction in our

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self-insurance reserves during the second quarter of 2009. Improvement in our claims experience enabled us to reduce the self-insurance reserves during the second quarter of 2009. The fiscal year 2010 self-insurance reserves have been consistent since that time. In addition, we experienced $1.2 million in increased costs in the second quarter of 2010 primarily due to new business initiatives, market research and additional advertising. We are in the final stages of successfully resolving litigation that resulted in a $0.7 million charge in the second quarter of 2010.

     Corporate general and administrative expenses decreased $1.1 million to $5.9 million for the quarter ended April 30, 2010 largely due to a decrease in information technology costs and training costs related to our implementation of a new business system in the prior year, coupled with a decline in incentive compensation and employee benefits. Interest expense decreased $1.5 million to $5.9 million during the second quarter of 2010 primarily due to the significant repurchases of our senior convertible notes in the open market that occurred during the last nine months of fiscal year 2009. We recorded a $3.4 million net gain on early extinguishment of debt in the second quarter of 2009. The effective tax rate for the second quarter of 2010 decreased to 37.1 percent from 38.5 percent for the same period in 2009 primarily due to tax valuation allowance recorded in the second quarter of fiscal year 2009.

     For the second quarter of 2010, preneed cemetery property sales, net of discounts, increased 3.9 percent compared to the same period of last year, which increased our cemetery revenue as described above. Our net preneed funeral sales increased 2.8 percent during the second quarter of 2010 compared to the second quarter of 2009. Preneed funeral sales are deferred until a future period and have no impact on current revenue.

     For the six months ended April 30, 2010, net earnings increased $2.3 million to $15.9 million from $13.6 million for the same period of fiscal year 2009. Revenue increased $6.8 million to $252.8 million for the six months ended April 30, 2010. Funeral revenue increased $0.5 million to $143.5 million in the first half of 2010, primarily due to a $0.6 million increase in earnings related to trust activities. We also experienced a 0.1 percent increase in the same-store average revenue per funeral service, including trust earnings. These increases were partially offset by a 2.0 percent, or 576 event, decrease in same-store funeral services performed. Cemetery revenue increased $6.3 million to $109.3 million for the six months ended April 30, 2010. This increase is due primarily to a $2.7 million, or 6.5 percent, increase in cemetery property sales, net of discounts, a $2.4 million increase in merchandise delivered and a $1.4 million improvement in the reserve for cancellations. The increases were partially offset by a $1.6 million decrease in construction during the period on various cemetery projects completed in the first six months of 2009 primarily due to a high rate of completion on construction of several private mausoleums completed in the first six months of fiscal 2009. Consolidated gross profit increased $1.4 million to $50.1 million for the six months ending April 30, 2010. This compares to $48.7 million of gross profit for the six months ended April 30, 2009, which included a $3.2 million charge to record our probable funding obligation related to our perpetual care trusts. The increase in gross profit is primarily due to the increases in revenue as described above, partially offset by a $5.4 million increase in expenses. Expenses related to our worker’s compensation and general liability claims and reserves were higher in the first six months of 2010 compared to the first six months of 2009, primarily due to a $1.4 million reduction in our self-insurance reserves during the first six months of 2009. Improvement in our claims experience enabled us to reduce the self-insurance reserves during the second quarter of 2009. The fiscal year 2010 self-insurance reserves have been consistent since that time. In addition, we experienced increased costs in the first six months of 2010 primarily due to new business initiatives, market research, additional advertising and litigation costs.

     Corporate general and administrative expenses decreased $2.0 million to $12.5 million for the six months ended April 30, 2010 largely due to a decrease in information technology costs and training costs related to our implementation of a new business system in the prior year. Interest expense decreased $2.4 million to $12.4 million during the first half of fiscal 2010 primarily due to the significant fiscal year 2009 repurchases of our senior convertible notes in the open market that occurred during the last nine months of fiscal year 2009. We recorded a $3.4 million net gain on early extinguishment of debt during the six months ended April 30, 2009. The effective tax rate for the six months ended April 30, 2010 decreased to 38.3 percent from 39.5 percent for the same period in 2009 primarily due to a tax valuation allowance recorded in the first six months of fiscal year 2009.

     For the first six months of 2010, preneed cemetery property sales, net of discounts, increased 6.5 percent compared to the same period of last year, which increased our cemetery revenue as described above. Our net

50

preneed funeral sales increased 0.7 percent during the six months ended April 30, 2010 compared to the same period of last year. Preneed funeral sales are deferred until a future period and have no impact on current revenue.

     During the second quarter of fiscal 2010, we experienced positive trends in the overall financial markets and in our preneed and perpetual care trusts. Specifically, our preneed funeral and cemetery merchandise and services trusts experienced a total return, including both realized and unrealized losses, of 6.5 percent, and our cemetery perpetual care trusts experienced a total return, including both realized and unrealized losses, of 5.5 percent.

     As of April 30, 2010 and October 31, 2009, the fair market value of the investments in our funeral and cemetery merchandise and services trusts were $149.4 million and $192.9 million, respectively, lower than our cost basis. 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 April 30, 2010 and October 31, 2009, we had $217.2 million and $220.7 million, respectively, in distributable 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 April 30, 2010 and October 31, 2009, the fair market value of our investments were $44.5 million and $56.7 million, respectively, lower than our cost basis. See Note 5 to the condensed consolidated financial statements for further information on the estimated probable funding obligation.

     As of May 28, 2010, the fair market value of our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts decreased 4.6 percent, or approximately $36.2 million from April 30, 2010.

     The sectors in which our trust investment portfolio is invested have not materially changed from that disclosed in our 2009 Form 10-K.

     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 April 30, 2010		6.5	%		5.5	%
For the last twelve months ended April 30, 2010		30.6	%		33.6	%
For the last five years ended April 30, 2010		2.9	%		3.7	%
For the last ten years ended April 30, 2010		2.5	%		3.2	%

     Our operations provided cash of $26.5 million for the six months ended April 30, 2010, compared to $29.1 million for the corresponding period in 2009. The decrease in operating cash flow is largely due to an increase in working capital, partly driven by a $4.3 million change in receivables during the first six months of fiscal year 2010 due in part to the improved cemetery property sales, which are typically financed. This decrease is partially offset by a $3.8 million decrease in net tax payments in the first six months of fiscal 2010 due to effective tax planning

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strategies. We paid $3.4 million in net tax payments for the first six months of 2009 compared to receiving $0.4 million of net tax refunds in the first six months of 2010.

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 2009 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2009 Form 10-K.

Results of Operations

     The following discussion segregates the financial results into our various segments, grouped by our funeral and cemetery operations. For a discussion of our segments, see Note 9 to the condensed consolidated financial statements included herein. As there have been no material acquisitions or construction of new locations in fiscal years 2010 and 2009, results essentially reflect those of same-store locations.

Three Months Ended April 30, 2010 Compared to Three Months Ended April 30, 2009

Funeral Operations

	Three Months Ended April 30,
					Increase
	2010		2009		(Decrease)
			(In millions)
Funeral Revenue:
Funeral Home Locations	$	67.0	$	67.0	$	—
Corporate Trust Management(1)		4.3		4.2		.1
Total Funeral Revenue	$	71.3	$	71.2	$	.1
Funeral Costs:
Funeral Home Locations	$	54.4	$	52.5	$	1.9
Corporate Trust Management(1)		.2		.2		—
Total Funeral Costs	$	54.6	$	52.7	$	1.9
Funeral Gross Profit:
Funeral Home Locations	$	12.6	$	14.5	$	(1.9	)
Corporate Trust Management(1)		4.1		4.0		.1
Total Funeral Gross Profit	$	16.7	$	18.5	$	(1.8	)

Same-Store Analysis for the Three Months Ended April 30, 2010 and 2009

Change in Average Revenue	Change in Same-Store	Same-Store Cremation Rate
Per Funeral Service	Funeral Services	2010	2009
0.8%(1)	(2.8)%	42.2%	41.4%

(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

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amount of distributable earnings as stipulated by our respective trust agreements that are generated 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 April 30, 2010 and 2009 were $1.1 million and $0.9 million, respectively. Funeral trust earnings recognized in funeral revenue for the three months ended April 30, 2010 and 2009 were $3.2 million and $3.3 million, respectively.

     Funeral revenue increased $0.1 million, or 0.1 percent, from $71.2 million in the second quarter of 2009 to $71.3 million in the second quarter of 2010. During the second quarter of 2010, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 1.2 percent and an increase in average revenue per cremation service of 3.4 percent. These averages were partially offset by a shift in mix to lower-priced cremation services and a decrease in funeral trust earnings resulting in an overall increase in the same-store average revenue per funeral service of 0.8 percent. Same-store funeral services decreased 2.8 percent, or 398 events, which we believe is consistent with industry-wide data. The cremation rate for our same-store operations was 42.2 percent for the second quarter of 2010 compared to 41.4 percent for the second quarter of 2009.

     Funeral gross profit decreased $1.8 million, or 9.7 percent, to $16.7 million for the second quarter of 2010 compared to $18.5 million for the same period of 2009, primarily due to a $1.9 million increase in expenses. Expenses related to our worker’s compensation and general liability claims and reserves were higher in the second quarter of 2010, primarily due to a $0.7 million reduction in our self-insurance reserves during the second quarter of 2009. Improvement in our claims experience enabled us to reduce our self-insurance reserves during the second quarter of 2009. The fiscal year 2010 reserves have been consistent with this level since that time. In addition, we experienced increased costs in the second quarter of 2010 primarily due to new business initiatives, market research, additional advertising and litigation costs, as previously discussed.

Cemetery Operations

	Three Months Ended April 30,
	2010		2009		Increase
			(In millions)
Cemetery Revenue:
Cemetery Locations	$	55.1	$	53.6	$	1.5
Corporate Trust Management(1)		1.9		1.8		.1
Total Cemetery Revenue	$	57.0	$	55.4	$	1.6
Cemetery Costs:
Cemetery Locations	$	48.6	$	48.1	$	.5
Corporate Trust Management(1)		.2		.2		—
Total Cemetery Costs	$	48.8	$	48.3	$	.5
Cemetery Gross Profit:
Cemetery Locations	$	6.5	$	5.5	$	1.0
Corporate Trust Management(1)		1.7		1.6		.1
Total Cemetery Gross Profit	$	8.2	$	7.1	$	1.1

⁽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 distributable earnings as stipulated by our respective trust agreements that are generated 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

53

realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for the three months ended April 30, 2010 and 2009 were $1.2 million and $0.9 million, respectively, and cemetery trust earnings recognized included in cemetery revenue for the three months ended April 30, 2010 and 2009 were $0.7 million and $0.9 million, respectively. Perpetual care trust earnings of $1.4 million and $2.1 million for the three months ended April 30, 2010 and 2009, respectively, 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 increased $1.6 million, or 2.9 percent, from $55.4 million for the quarter ended April 30, 2009 to $57.0 million for the quarter ended April 30, 2010. This increase is due primarily to a $1.1 million improvement in the reserve for cancellations, a $1.0 million increase in merchandise delivered and a $0.9 million, or 3.9 percent, increase in cemetery property sales, net of discounts. These increases were partially offset by a $2.2 million decrease in construction during the period on various cemetery projects primarily due to a high rate of completion on construction of several private mausoleums completed in the second quarter of 2009.

     Cemetery gross profit increased $1.1 million, or 15.5 percent, to $8.2 million for the second quarter of 2010. This compares to $7.1 million of gross profit for the same period of 2009, which included a $3.1 million charge to record our probable funding obligation related to our perpetual care trusts. In addition, we experienced a $1.0 million improvement in gross profit during the second quarter of 2009 primarily due to a high rate of completion on construction of several private mausoleums. Expenses related to our worker’s compensation and general liability claims and reserves were higher in the second quarter of 2010 primarily due to a $0.6 million reduction in our self-insurance reserves during the second quarter of 2009, for the reasons previously discussed. In addition, we experienced increased costs in the second quarter of 2010 primarily due to new business initiatives, market research, additional advertising and litigation costs, as previously discussed.

Other

     Corporate general and administrative expenses decreased $1.1 million to $5.9 million for the quarter ended April 30, 2010 largely due to a decrease in information technology costs and training costs related to our implementation of a new business system in the prior year, coupled with a decline in incentive compensation and employee benefits.

     Interest expense decreased $1.5 million to $5.9 million during the second quarter of fiscal year 2010 primarily due to the significant repurchases of our senior convertible notes in the open market that occurred during the last nine months of fiscal year 2009.

     The effective tax rate for the three months ended April 30, 2010 was 37.1 percent compared to 38.5 percent for the same period in 2009. The decrease is primarily due to a tax valuation allowance recorded in the second quarter of fiscal 2009.

     In the second quarter of fiscal year 2009, we purchased $4.0 million aggregate principal amount of our 3.125 percent senior convertible notes due 2014 and $18.6 million aggregate principal amount of our 3.375 percent senior convertible notes due 2016 in the open market. As a result, we recorded a $3.4 million net gain on early extinguishment of debt during the quarter ended April 30, 2009.

Preneed Sales into the Backlog

     Net preneed funeral sales increased 2.8 percent during the second quarter of 2010 compared to the corresponding period in 2009.

     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 $37.8 million in net preneed funeral and cemetery merchandise and services sales (including $21.0 million related to insurance-funded preneed funeral contracts) during the second quarter of 2010 to be recognized in the future as these prepaid products and services are delivered, compared to net sales of $36.6 million (including $20.2 million related to insurance-funded preneed

54

funeral contracts) for the corresponding period in 2009. 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.

Six Months Ended April 30, 2010 Compared to Six Months Ended April 30, 2009

Funeral Operations

	Six Months Ended April 30,
					Increase
	2010		2009		(Decrease)
			(In millions)
Funeral Revenue:
Funeral Home Locations	$	135.1	$	135.2	$	(.1	)
Corporate Trust Management(1)		8.4		7.8		.6
Total Funeral Revenue	$	143.5	$	143.0	$	.5
Funeral Costs:
Funeral Home Locations	$	107.1	$	105.8	$	1.3
Corporate Trust Management(1)		.4		.4		—
Total Funeral Costs	$	107.5	$	106.2	$	1.3
Funeral Gross Profit:
Funeral Home Locations	$	28.0	$	29.4	$	(1.4	)
Corporate Trust Management(1)		8.0		7.4		.6
Total Funeral Gross Profit	$	36.0	$	36.8	$	(.8	)

Same-Store Analysis for the Six Months Ended April 30, 2010 and 2009

Change in Average
Revenue Per Funeral	Change in Same-Store
Service	Funeral Services			Same-Store Cremation Rate
				2010			2009
0.1%(1)		(2.0	)%		41.8	%		40.9	%

⁽¹⁾ Corporate trust management consists of 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 distributable earnings as stipulated by our respective trust agreements that are generated 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 six months ended April 30, 2010 and 2009 were $2.2 million and $1.8 million, respectively. Funeral trust earnings recognized in funeral revenue for the six months ended April 30, 2010 and 2009 were $6.2 million and $6.0 million, respectively.

��    Funeral revenue increased $0.5 million, or 0.3 percent, from $143.0 million in the first half of fiscal 2009 to $143.5 million in the first half of fiscal 2010. The increase in funeral revenue is primarily due to a $0.6 million increase in funeral earnings related to trust activities. During the second quarter of 2010, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 0.2 percent and an increase in average revenue per cremation service of 2.3 percent. These averages were impacted by a year-over-year increase in funeral trust earnings and a shift in mix to lower-priced cremation services, resulting in an overall increase in the same-store average revenue per funeral service of 0.1 percent. Same-store funeral services decreased 2.0 percent, or 576 events, which we believe is consistent with industry-wide data. The cremation rate for our same-store

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operations was 41.8 percent for the first six months of fiscal year 2010 compared to 40.9 percent for the same period of fiscal year 2009.

     Funeral gross profit decreased $0.8 million, or 2.2 percent, to $36.0 million for the first six months of fiscal 2010 compared to $36.8 million for the same period of fiscal 2009 primarily due to a $1.3 million increase in expenses, partially offset by the increase in revenue, as noted above. Expenses related to our worker’s compensation and general liability claims and reserves were higher in the first six months of fiscal 2010 primarily due to a $0.7 million reduction in our self-insurance reserves during the first six months of 2009, as previously discussed. In addition, we experienced increased costs in the second quarter of 2010 primarily due to new business initiatives, market research, additional advertising and litigation costs, as previously discussed.

Cemetery Operations

	Six Months Ended April 30,
	2010		2009		Increase
			(In millions)
Cemetery Revenue:
Cemetery Locations	$	105.6	$	99.3	$	6.3
Corporate Trust Management(1)		3.7		3.7		—
Total Cemetery Revenue	$	109.3	$	103.0	$	6.3
Cemetery Costs:
Cemetery Locations	$	94.7	$	90.6	$	4.1
Corporate Trust Management(1)		.5		.5		—
Total Cemetery Costs	$	95.2	$	91.1	$	4.1
Cemetery Gross Profit:
Cemetery Locations	$	10.9	$	8.7	$	2.2
Corporate Trust Management(1)		3.2		3.2		—
Total Cemetery Gross Profit	$	14.1	$	11.9	$	2.2

⁽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 distributable earnings as stipulated by our respective trust agreements that are generated 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 six months ended April 30, 2010 and 2009 were $2.4 million and $1.9 million, respectively, and cemetery trust earnings recognized included in cemetery revenue for the six months ended April 30, 2010 and 2009 were $1.3 million and $1.8 million, respectively. Perpetual care trust earnings of $3.8 million for both the six months ended April 30, 2010 and 2009 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 increased $6.3 million, or 6.1 percent, from $103.0 million for the six months ended April 30, 2009 to $109.3 million for the six months ended April 30, 2010. This increase is primarily due to a $2.7 million, or 6.5 percent, increase in cemetery property sales, net of discounts, a $2.4 million increase in cemetery merchandise delivered and a $1.4 million improvement in the reserve for cancellations. These increases were partially offset by a $1.6 million decrease in construction during the period on various cemetery projects primarily due to a high rate of completion on construction of several private mausoleums completed in the first six months of 2009.

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     Cemetery gross profit increased $2.2 million, or 18.5 percent, to $14.1 million in the first six months of 2010. This compares to $11.9 million of cemetery gross profit for the first six months of 2009, which included a $3.2 million charge in the first six months of fiscal year 2009 to record our probable funding obligation related to our perpetual care trusts. Expenses related to our worker’s compensation and general liability claims and reserves were higher in the first six months of fiscal 2010 compared to the first six months of fiscal 2009 primarily due to a $0.7 million reduction in our self-insurance reserves during the first six months of 2009, as previously discussed. In addition, we experienced increased costs in the second quarter of 2010 primarily due to new business initiatives, market research, additional advertising and litigation costs, as previously discussed.

Other

     Corporate general and administrative expenses decreased $2.0 million to $12.5 million for the first half of fiscal 2010 primarily due to a decrease in information technology costs and training costs related to our implementation of a new business system in the prior year.

     Interest expense decreased $2.4 million to $12.4 million during the first half of fiscal year 2010 primarily due to the significant fiscal year 2009 repurchases of our senior convertible notes in the open market.

     The effective tax rate for the six months ended April 30, 2010 was 38.3 percent compared to 39.5 percent for the same period in 2009. The decrease is primarily due to a tax valuation allowance recorded in the first six months of fiscal 2009.

     During the first six months of fiscal year 2009, we purchased $4.0 million aggregate principal amount of our 3.125 percent senior convertible notes due 2014 and $18.6 million aggregate principal amount of our 3.375 percent senior convertible notes due 2016 in the open market. As a result, we recorded a $3.4 million net gain on early extinguishment of debt during the six months ended April 30, 2009.

     As of June 8, 2010, we have repurchased $88.6 million aggregate principal amount of our senior convertible notes in the open market, including purchases of $6.0 million in fiscal year 2010.

     Current and long-term receivables decreased $3.3 million and $1.4 million, respectively, from October 31, 2009 to April 30, 2010 primarily due to collections of prior period sales exceeding receivables for new sales and the collection of income taxes receivable. Prepaid expenses increased $2.3 million from October 31, 2009 to April 30, 2010 primarily due to annual premiums paid in the first quarter of fiscal year 2010 for property, general liability and other insurance. Current deferred income taxes increased $3.0 million primarily due to an increase in the current portion of the net operating loss in the second quarter of 2010. Long-term deferred income taxes decreased $12.6 million from October 31, 2009 to April 30, 2010 primarily due to $3.0 million of net operating losses being reclassified to current deferred income taxes and $8.0 million related to timing differences. 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 improvement in the market value of our trust assets during the six months ended April 30, 2010. For additional information, see Notes 3, 4 and 5 to our condensed consolidated financial statements included herein.

     Accounts payable decreased $4.1 million from October 31, 2009 to April 30, 2010 primarily due to the timing of payables related to professional fees and vendor payments. Accrued payroll decreased $4.7 million from October 31, 2009 to April 30, 2010 primarily due to fiscal year 2009 annual bonuses paid in the first quarter of 2010. Other current liabilities decreased $1.9 million from October 31, 2009 to April 30, 2010 primarily due to a $2.0 million decline in accrued property taxes, as 80 percent of our property taxes are paid in the months of December and January each year.

Preneed Sales into the Backlog

     Net preneed funeral sales increased 0.7 percent during the first six months of fiscal year 2010 compared to the corresponding period in 2009.

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     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 $66.1 million in net preneed funeral and cemetery merchandise and service sales (including $37.2 million related to insurance-funded preneed funeral contracts) during the six months ended April 30, 2010 to be recognized in the future as these prepaid products and services are delivered, compared to net sales of $65.9 million (including $36.5 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2009. 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 placed in trust 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 $95.0 million 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 of April 30, 2010, we had no amounts drawn on the $95.0 million senior secured revolving credit facility, and our availability under the senior secured revolving credit facility, after giving consideration to $8.8 million outstanding letters of credit and the $24.8 million Florida bond, was $61.4 million. We also have the ability to request the addition of a new tranche of term loans, an increase in the commitments to the senior secured revolving credit facility, or a combination thereof, not to exceed $30.0 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 $166.4 million in senior convertible notes as of April 30, 2010 of which $86.4 million mature in 2014 and $80.0 million mature in 2016. See the table below under “Contractual Obligations and Commercial Commitments” for further information on our long-term debt obligations.

     Beginning in the fourth quarter of fiscal year 2009, we increased our quarterly cash dividend from two and one-half cents per share to three cents per share on our Class A and B common stock, which amounted to $5.6 million for the six months ended April 30, 2010. 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 April 30, 2010. 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. We have not made open-market stock repurchases under the program since July 2008. During fiscal year 2009, we repurchased $82.6 million aggregate principal amount of our senior convertible notes in the open market at substantial discounts and repurchased an additional $1.0 million aggregate principal amount during the first half of fiscal year 2010. Subsequent to April 30, 2010, we repurchased an additional $5.0 million aggregate principal amount of our senior convertible notes in the open market.

     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, construct funeral homes on cemeteries of unaffiliated third parties or in strategic locations, make acquisitions of or investments in death care or related businesses and repurchase debt and stock are all 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 and are continuing to invest in further improving our business processes.

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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 continue to pursue several tax planning strategies. We received IRS approval in fiscal year 2010 on two pending requests for changes in tax accounting methods, which will result in the deferral of approximately $70 million of taxable income. The combination of these two changes increases the current net operating loss carryforward to approximately $90 million and will significantly reduce federal income tax cash payments (approximately $32 million) for the next two to three years. 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 reductions in future tax payments. At this time, we cannot predict with certainty what, if any, reductions in future tax payments we will obtain. However, we currently do not expect that these potential reductions in future tax payments, if obtained, will be as substantial as those obtained in fiscal year 2009 or to date in fiscal year 2010.

Cash Flow

     Our operations provided cash of $26.5 million for the six months ended April 30, 2010, compared to $29.1 million for the corresponding period in 2009. The decrease in operating cash flow is largely due to an increase in working capital, partly driven by a $4.3 million change in receivables during the first six months of fiscal year 2010 due in part to the improved cemetery property sales, which are typically financed. This decrease is partially offset by a $3.8 million decrease in net tax payments in the first six months of fiscal 2010 due to effective tax planning strategies. We paid $3.4 million in net tax payments for the first six months of 2009 compared to receiving $0.4 million of net tax refunds in the first six months of 2010.

     Our investing activities resulted in a net cash outflow of $18.7 million for the six months ended April 30, 2010, compared to a net cash outflow of $11.9 million for the comparable period in 2009. The change is primarily due to $10.0 million in purchases of certificates of deposit in the first half of fiscal year 2010. In the first quarter of fiscal year 2010, we entered into a certificate of deposit account registry service program in order to obtain a higher rate of return on our cash balances, while maintaining our FDIC insurance protection. For the six months ended April 30, 2010, capital expenditures amounted to $8.4 million, which included $6.2 million for maintenance capital expenditures, $1.7 million for growth initiatives and $0.5 million related to the implementation of new business systems. For the six months ended April 30, 2009, capital expenditures were $10.7 million, which included $6.5 million for maintenance capital expenditures, $2.7 million for growth initiatives and $1.5 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 $6.0 million for the six months ended April 30, 2010, compared to a net cash outflow of $17.9 million for the comparable period in 2009. The change is primarily due to $13.5 million in repayments of long-term debt during the first half of fiscal year 2009 compared to $0.8 million for the first half of fiscal year 2010. Also, dividends in the first half of fiscal year 2010 reflect the increased quarterly dividend rate of $0.030 per share, from $0.025 per share, which went into effect in the fourth quarter of fiscal year 2009.

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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 April 30, 2010.

	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)	$	366.5	$	—	$	200.0	$	86.4	$	80.1
Interest on long-term debt(2)		67.3		17.9		35.8		9.5		4.1
Operating lease obligations(3)		28.8		2.3		6.0		3.8		16.7
Purchase obligations(4)		2.7		2.7		—		—		—
Non-competition agreements(5)		1.3		.2		.5		.2		.4
	$	466.6	$	23.1	$	242.3	$	99.9	$	101.3

(1)	See below for a breakdown of our future scheduled principal payments and maturities of our long-term debt by type as of April 30, 2010.
(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 for all operating leases as of April 30, 2010 are $2.3 million, $3.3 million, $2.7 million, $2.1 million, $1.7 million and $16.7 million for the years ending October 31, 2010, 2011, 2012, 2013, 2014 and later years, respectively.
(4)	Represents a construction contract for a funeral home.
(5)	This category includes payments pursuant to non-competition agreements with prior owners and key employees of acquired businesses.

     The following table details our known potential or possible future cash payments related to the contingent obligations specified below (in millions) as of April 30, 2010.

	Expiration by Period
Contingent Obligations	Total		Less than 1 year		1 – 3 years		3 – 5 years		More than 5 years
Cemetery perpetual care trust funding obligations(1)	$	13.5	$	13.5	$	—	$	—	$	—
Long-term obligations related to uncertain tax positions(2)		2.2		—		—		—		2.2
	$	15.7	$	13.5	$	—	$	—	$	2.2

⁽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 $13.5 million as of April 30, 2010. As of April 30, 2010, we had unrealized losses of $38.3 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 but not probable that additional funding obligations may exist with an estimated amount of approximately $2.6 million; no charge has been recorded for these amounts as of April 30, 2010.

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⁽²⁾  In accordance with the required accounting guidance on uncertain tax positions, as of April 30, 2010, we have recorded $2.2 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 of any potential cash payments.

     As of April 30, 2010, our outstanding long-term debt balance was $366.5 million, consisting of $86.4 million in 3.125 percent senior convertible notes due 2014, $80.0 million in 3.375 percent senior convertible notes due 2016, $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 April 30, 2010.

	Senior
	Secured						Other, Principally
	Revolving						Seller Financing
	Credit		Senior Convertible		Senior		of Acquired
Fiscal Years Ending October 31,	Facility		Notes		Notes		Operations		Total
2010	$	—	$	—	$	—	$	—	$	—
2011		—		—		—		—		—
2012		—		—		—		—		—
2013		—		—		200.0		—		200.0
2014		—		86.4		—		—		86.4
Thereafter		—		80.0		—		.1		80.1
Total long-term debt	$	—	$	166.4	$	200.0	$	.1	$	366.5

Off-Balance Sheet Arrangements

     Our off-balance sheet arrangements as of April 30, 2010 consist of the following items:

(1)	the $24.8 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 2009 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 2009 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, 2009, filed with the Securities and Exchange Commission (“SEC”) on December 17, 2009. For a discussion of fair market value as of April 30, 2010 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 April 30, 2010 and October 31, 2009, the carrying values of our long-term fixed-rate debt, including accrued interest, were approximately $345.2 million and $343.9 million, respectively, compared to fair values of $352.9 million and $339.4 million, respectively. Fair values were determined using quoted market prices. As of April 30, 2010, each approximate 10 percent, or 65 basis point, change in the average interest rate applicable to determine the fair value of such debt would result in a change of approximately $7.9 million in the fair value of these instruments. As of October 31, 2009, each approximate 10 percent, or 70 basis point, change in the average

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interest rate applicable to determine the fair value of such debt would result in a change of approximately $9.0 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(b). 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

     There have been no changes in the Company’s internal control over financial reporting during the quarter ended April 30, 2010 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 2009 Form 10-K, except for the following:

Increased costs, including potential increased health care costs, may have a negative impact on earnings and cash flows.

     We may not be successful in maintaining our margins and may incur additional costs. For example, in the past we have experienced increased property and casualty insurance costs primarily as a result of hurricanes and natural disasters and are currently experiencing increased health care costs. On March 23, 2010, the Patient

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Protection and Affordable Care Act became law, and one week later, the Health Care and Education Reconciliation Act of 2010 became effective, together enacting comprehensive health care reform in the United States. The legislation is likely to increase our health care costs. Many provisions of the law that could impact our business will not become effective until 2014, or later, and require implementation through regulations that have not yet been promulgated. Accordingly, the costs and other effects of the legislation, which may include the cost of compliance and potentially increased costs of providing for medical insurance for our employees, cannot be determined with certainty at this time. We incurred additional costs in fiscal year 2009 in conjunction with improving our business systems. We have also incurred significant legal costs related to the unanticipated class action litigation. Some of the costs impacting our business are largely beyond our control. To the extent that we are unable to pass these cost increases on to our customers, they will have a negative impact on our earnings and cash flows.

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

							Maximum approximate
					Total number of		dollar value of shares
					shares purchased as		that may yet be
					part of		purchased under the
	Total number		Average price paid		publicly-announced		plans or
Period	of shares purchased		per share		plans or programs		programs(1)
February 1, 2010 through February 28, 2010		—	$	—		—	$	26,495,706
March 1, 2010 through March 31, 2010		—	$	—		—	$	26,495,706
April 1, 2010 through April 30, 2010		—	$	—		—	$	26,495,706
Total		—	$	—		—	$	26,495,706

⁽¹⁾ We announced a $25.0 million stock repurchase program in September 2007, which was increased by $25.0 million in December 2007 and June 2008, resulting in a $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	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)

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4.4	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 (File No. 001-15449))
4.5	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 (File No. 001-15449))
4.6	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)
4.7	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 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.
June 8, 2010	/s/ THOMAS M. KITCHEN
	Thomas M. Kitchen
	Senior Executive Vice President and Chief Financial Officer
June 8, 2010	/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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