Stewart Enterprises (STEI) 10-Q 2005 Q3 Quarterly report

This report does not reflect the effect of certain adjustments described in the Explanatory Note on page 2 including those that might result from completion of the deferred revenue project, and accordingly, this report is being filed without the independent registered public accounting firm’s review being completed and without the certifications of the Company’s Chief Executive Officer and Chief Financial Officer.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended July 31, 2005

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. Yeso Noþ

     Indicate by check mark whether the Registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934.
Yesþ Noo

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

     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 September 30, 2005, was 105,114,486 and 3,555,020, respectively.

EXPLANATORY NOTE

Introduction

     This Form 10-Q is not complete because it is being filed without the effects of any potential adjustments that may result from the completion of our deferred revenue project described below and the adjustments in the table below. Accordingly it is being filed without the completion of the review by our independent registered public accounting firm and without the certifications of our Chief Executive Officer and Chief Financial Officer. We believe that, except for the results of the deferred revenue project, there should be no material outstanding issues on this report; however, this cannot be assured. We have decided to make this filing now because we believe the information in this report would be meaningful to our security holders.

     We have been in discussions with NASDAQ, where our Class A common stock is traded, and believe NASDAQ may find that our inability to timely file a complete Form 10-Q for the quarter ended July 31, 2005 constitutes a failure to comply with the requirements for continued listing. If we receive a notice of delisting proceedings from NASDAQ, we plan to seek a hearing before NASDAQ’s Listing Qualifications Panel to request an extension of time to complete the filing and thereby regain compliance with the listing standards; the delisting would be stayed pending a final determination by NASDAQ. We are optimistic that our request would be granted, although no assurances can be given. Delisting of our Class A common stock from NASDAQ could have a material adverse effect on the trading price of and market for our Class A common stock and on our ability to raise capital. In addition, during any period when we are not current with our SEC reports, neither our affiliates nor any person that purchased shares in a private offering during the preceding two years will be able to sell their shares in public markets pursuant to Rule 144 under the Securities Act of 1933. Also our registration statements on Form S-8 regarding sales of our securities through our employee benefit plans will not be available, and we will be suspending sales under these registration statements until we are current in our SEC filings.

The Deferred Revenue Project

     In connection with our internal control assessment under Section 404 of Sarbanes-Oxley, we undertook a project (the “deferred revenue project”) earlier this year to verify the balances in deferred preneed cemetery revenue and deferred preneed funeral revenue by physically reviewing certain of the preneed cemetery and funeral service and merchandise contracts.

     While we have made significant progress, we have not completed our overall review and reconciliation. We had anticipated completing our review prior to filing our Annual Report on Form 10-K for fiscal year 2005. Although the progress of the project has been disrupted by Hurricane Katrina, we still plan to try to complete the project in time to file our Annual Report on Form 10-K for fiscal year 2005 by its due date.

     Management believes that the deferred revenue project could result in a restatement of our prior period financial statements. Management believes that to the extent there is an adjustment, a significant portion of that adjustment would relate to the cumulative effect of adopting Staff Accounting Bulletin 101 (“SAB No. 101”) on November 1, 2000 and could impact reported earnings for periods subsequent to the implementation of SAB No. 101. Management believes that the adjustment, if any, would result in a non-cash adjustment to deferred revenue and to shareholders’ equity in an amount that should not exceed $60 million and could be materially less than that amount. In connection with our deferred revenue project, we are also evaluating whether there could be a material weakness in internal control related to deferred preneed revenue.

     Once the deferred revenue project is completed and our independent registered public accounting firm has completed its review, we will amend this filing to note completion with respect to the Form 10-Q, and to make any necessary adjustments.

2

Other Adjustments

     The following table demonstrates certain adjustments that will be recorded in the reviewed Form 10-Q for the quarter ended July 31, 2005 that we will file when our deferred revenue project is complete. We believe that, except for the results of the deferred revenue project, there should be no material outstanding issues on these reports; however, this cannot be assured. As described above, we have decided to make this filing now because we believe the information provided in these reports would be meaningful to our security holders.

	Nine Months
	Ended
	July 31, 2005
Net loss as reported in Form 10-Q	$	(124,256	)
Remove correction of an error for leases(1)		1,140
Net loss after adjustments	$	(123,116	)
Earnings (loss) per diluted share as reported in Form 10-Q	$	(1.14	)
Earnings (loss) per diluted share after adjustments	$	(1.13	)

(1) As discussed in Note 2 to the condensed consolidated financial statements included herein, we reviewed our lease-related accounting practices and determined that certain adjustments related to rent escalations and leasehold improvement amortization were necessary. The cumulative effect of these adjustments for all prior periods amounted to a charge of $1.8 million ($1.1 million after tax, or $.01 per share). We evaluated the materiality of these operating lease adjustments on our financial statements in the second quarter of fiscal year 2005 and concluded that the impact of these adjustments was not material. As a result, we recorded the cumulative effect of these prior period adjustments of $1.8 million as non-cash charges to funeral and cemetery costs in the second quarter of fiscal year 2005. Because we are amending our Form 10-K for the year ended October 31, 2004 for the restatement discussed in Note 1 to the condensed consolidated financial statements included herein, we are now required to record the lease adjustments in the period they were actually incurred. In a subsequent Form 10-Q amendment, we will remove the cumulative effect of this prior period adjustment of $1.8 million ($1.1 million after tax) for the nine months ended July 31, 2005.

3

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

INDEX

		Page
Part I.	Financial Information
	Item 1. Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings — Three Months Ended July 31, 2005 and 2004		5
	Condensed Consolidated Statements of Earnings — Nine Months Ended July 31, 2005 and 2004		6
	Condensed Consolidated Balance Sheets — July 31, 2005 and October 31, 2004		7
	Condensed Consolidated Statement of Shareholders’ Equity — Nine Months Ended July 31, 2005		9
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended July 31, 2005 and 2004		10
	Notes to Condensed Consolidated Financial Statements		11
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		66
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		85
	Item 4. Controls and Procedures		86
Part II.	Other Information
	Item 1. Legal Proceedings		87
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		89
	Item 5. Other Information		90
	Item 6. Exhibits		98
	Signatures		100
Amendment No. 1 to Employment Agreement - Everett N. Kendrick
Amendment No. 1 to Employment Agreement - Brent F. Heffron
Amendment No. 1 to Employment Agreement - G. Kenneth Stephens, Jr.
Amendment No. 1 to Employment Agreement - Randall L. Stricklin
Separation Agreement - Michael K. Crane
Calculation of Ratio of Earnings to Fixed Charges

See Explanatory Note on page 2 for important information.

4

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(Dollars in thousands, except per share amounts)

	Three Months Ended July 31,
	2005			2004
				(Restated)
Revenues:
Funeral	$	67,879		$	67,716
Cemetery		62,085			60,557
		129,964			128,273
Costs and expenses:
Funeral		53,477			50,142
Cemetery		47,577			46,807
		101,054			96,949
Gross profit		28,910			31,324
Corporate general and administrative expenses		(5,545	)		(4,150	)
Separation charges (Note 14)		(147	)		(1,085	)
Gains on dispositions and impairment (losses), net (Note 13)		63			304
Other operating income, net		571			1,000
Operating earnings		23,852			27,393
Interest expense		(6,456	)		(11,502	)
Loss on early extinguishment of debt (Note 15)		(114	)		—
Investment and other income, net		184			76
Earnings from continuing operations before income taxes		17,466			15,967
Income taxes		6,577			5,823
Earnings from continuing operations		10,889			10,144
Discontinued operations (Note 13):
Earnings from discontinued operations before income taxes		590			536
Income tax benefit		(157	)		(1,207	)
Earnings from discontinued operations		747			1,743
Net earnings	$	11,636		$	11,887
Basic earnings per common share:
Earnings from continuing operations	$	.10		$	.09
Earnings from discontinued operations		.01			.02
Net earnings	$	.11		$	.11
Diluted earnings per common share:
Earnings from continuing operations	$	.10		$	.09
Earnings from discontinued operations		.01			.02
Net earnings	$	.11		$	.11
Weighted average common shares outstanding (in thousands):
Basic		109,147			107,067
Diluted		109,266			108,068
Dividends declared per common share	$	.025		$	—

See accompanying notes to condensed consolidated financial statements.

See Explanatory Note on page 2 for important information.

5

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(Dollars in thousands, except per share amounts)

	Nine Months Ended July 31,
	2005			2004
				(Restated)
Revenues:
Funeral	$	214,547		$	214,218
Cemetery		177,464			175,378
		392,011			389,596
Costs and expenses:
Funeral		161,531			152,552
Cemetery		136,034			132,302
		297,565			284,854
Gross profit		94,446			104,742
Corporate general and administrative expenses		(14,343	)		(12,684	)
Separation charges (Note 14)		(147	)		(3,216	)
Gains on dispositions and impairment (losses), net (Note 13)		1,300			54
Other operating income, net		1,069			1,948
Operating earnings		82,325			90,844
Interest expense		(23,503	)		(35,976	)
Loss on early extinguishment of debt (Note 15)		(32,822	)		—
Investment and other income (expense), net		404			(992	)
Earnings from continuing operations before income taxes and cumulative effect of change in accounting principle		26,404			53,876
Income taxes		10,359			20,015
Earnings from continuing operations before cumulative effect of change in accounting principle		16,045			33,861
Discontinued operations (Note 13):
Earnings from discontinued operations before income taxes		969			2,626
Income tax benefit		(48	)		(1,196	)
Earnings from discontinued operations		1,017			3,822
Earnings before cumulative effect of change in accounting principle		17,062			37,683
Cumulative effect of change in accounting principle (net of $93,235 income tax benefit) (Note 3)		(141,318	)		—
Net earnings (loss)	$	(124,256	)	$	37,683
Basic earnings (loss) per common share:
Earnings from continuing operations before cumulative effect of change in accounting principle	$	.14		$	.31
Earnings from discontinued operations		.01			.04
Cumulative effect of change in accounting principle		(1.29	)		—
Net earnings (loss)	$	(1.14	)	$	.35
Diluted earnings (loss) per common share:
Earnings from continuing operations before cumulative effect of change in accounting principle	$	.14		$	.31
Earnings from discontinued operations		.01			.04
Cumulative effect of change in accounting principle		(1.29	)		—
Net earnings (loss)	$	(1.14	)	$	.35
Weighted average common shares outstanding (in thousands):
Basic		109,243			107,461
Diluted		109,430			108,061
Dividends declared per common share	$	.05		$	—

See accompanying notes to condensed consolidated financial statements.

See Explanatory Note on page 2 for important information.

6

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

	July 31,		October 31,
ASSETS	2005		2004
			(Restated)
Current assets:
Cash and cash equivalent investments	$	29,335	$	21,514
Marketable securities		1,290		1,297
Receivables, net of allowances		62,709		60,167
Inventories		37,258		39,225
Prepaid expenses		3,626		2,953
Deferred income taxes, net		4,198		4,522
Assets held for sale		738		10,493
Total current assets		139,154		140,171
Receivables due beyond one year, net of allowances		76,721		78,692
Preneed funeral receivables and trust investments		514,721		503,808
Preneed cemetery receivables and trust investments		263,456		258,176
Goodwill		267,859		267,169
Deferred charges (Note 3)		19,565		254,278
Cemetery property, at cost		370,189		370,334
Property and equipment, at cost:
Land		41,188		39,527
Buildings		301,100		296,720
Equipment and other		160,814		156,205
		503,102		492,452
Less accumulated depreciation		199,933		189,362
Net property and equipment		303,169		303,090
Deferred income taxes, net		138,123		54,940
Cemetery perpetual care trust investments		218,829		210,267
Other assets		1,417		1,408
Total assets	$	2,313,203	$	2,442,333

(continued)

See Explanatory Note on page 2 for important information.

7

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

	July 31,			October 31,
LIABILITIES AND SHAREHOLDERS’ EQUITY	2005			2004
				(Restated)
Current liabilities:
Current maturities of long-term debt	$	3,232		$	1,725
Accounts payable		7,461			9,075
Accrued payroll		12,198			13,005
Accrued insurance		22,020			21,430
Accrued interest		7,972			11,315
Other current liabilities		10,609			13,089
Income taxes payable		1,242			130
Liabilities associated with assets held for sale		401			6,491
Total current liabilities		65,135			76,260
Long-term debt, less current maturities		407,552			415,080
Deferred preneed funeral revenue		138,731			156,967
Deferred preneed cemetery revenue		292,928			284,258
Non-controlling interest in funeral and cemetery trusts		645,739			627,344
Other long-term liabilities		11,063			11,130
Total liabilities		1,561,148			1,571,039
Commitments and contingencies		—			—
Non-controlling interest in perpetual care trusts		216,633			208,893
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 150,000,000 shares; issued and outstanding 105,114,486 and 104,330,101 shares at July 31, 2005 and October 31, 2004, respectively		105,114			104,330
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at July 31, 2005 and October 31, 2004; 10 votes per share; convertible into an equal number of Class A shares		3,555			3,555
Additional paid-in capital		670,384			673,630
Accumulated deficit		(242,815	)		(118,559	)
Unearned restricted stock compensation		(814	)		(222	)
Accumulated other comprehensive loss:
Unrealized depreciation of investments		(2	)		—
Derivative financial instrument losses		—			(333	)
Total accumulated other comprehensive losses		(2	)		(333	)
Total shareholders’ equity		535,422			662,401
Total liabilities and shareholders’ equity	$	2,313,203		$	2,442,333

See accompanying notes to condensed consolidated financial statements.

See Explanatory Note on page 2 for important information.

8

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except per share amounts)

										Unearned			Unrealized			Derivative
				Additional						Restricted			Depreciation			Financial			Total
	Common			Paid-In			Accumulated			Stock			of			Instrument			Shareholders’
	Stock(1)			Capital			Deficit			Compensation			Investments			Gains (Losses)			Equity
Balance October 31, 2004 - Restated	$	107,885		$	673,630		$	(118,559	)	$	(222	)	$	—		$	(333	)	$	662,401
Comprehensive income (loss):
Net loss								(124,256	)											(124,256	)
Other comprehensive income:
Unrealized depreciation of investments, net of deferred tax expense of ($1)														(2	)					(2	)
Unrealized appreciation on derivative instrument designated and qualifying as a cash flow hedging instrument, net of deferred tax expense of ($204)																	333			333
Total other comprehensive income (loss)		—			—			—			—			(2	)		333			331
Total comprehensive income (loss)		—			—			(124,256	)		—			(2	)		333			(123,925	)
Restricted stock activity		166			991						(592	)								565
Issuance of common stock		76			359															435
Stock options exercised		2,642			10,464															13,106
Tax benefit associated with stock options exercised		—			1,991															1,991
Purchase and retirement of common stock		(2,100	)		(11,585	)														(13,685	)
Dividends ($.025 per share)		—			(5,466	)														(5,466	)
Balance July 31, 2005	$	108,669		$	670,384		$	(242,815	)	$	(814	)	$	(2	)	$	—		$	535,422

⁽¹⁾ Amount includes 105,114 and 104,330 shares (in thousands) of Class A common stock with a stated value of $1 per share as of July 31, 2005 and October 31, 2004, respectively, and includes 3,555 shares (in thousands) of Class B common stock.

See accompanying notes to condensed consolidated financial statements.

See Explanatory Note on page 2 for important information.

9

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(Dollars in thousands, except per share amounts)

	Nine Months Ended July 31,
	2005			2004
				(Restated)
Cash flows from operating activities:
Net earnings (loss)	$	(124,256	)	$	37,683
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
(Gains) on dispositions and impairment losses, net		(2,368	)		(1,359	)
Cumulative effect of change in accounting principle		141,318			—
Loss on early extinguishment of debt		32,822			—
Depreciation and amortization		16,235			17,637
Amortization of preneed selling costs		—			20,955
Provision for doubtful accounts		5,306			5,595
Net loss realized on marketable securities		—			1,203
Provision for deferred income taxes		9,935			11,541
Other		782			258
Changes in assets and liabilities:
(Increase) decrease in other receivables		(8,138	)		28,642
Decrease in deferred charges		1,432			4,958
Decrease in inventories and cemetery property		1,746			1,839
Decrease in accounts payable and accrued expenses		(3,833	)		(11,477	)
Net effect of preneed funeral production and maturities		(13,438	)		(22,441	)
Net effect of preneed cemetery production and deliveries		3,039			257
Change in deferred charges — prearranged acquisition costs		—			(25,429	)
Decrease in other		(1,392	)		(1,260	)
Net cash provided by operating activities		59,190			68,602
Cash flows from investing activities:
Proceeds from sales of marketable securities		16			1,121
Proceeds from sale of assets, net		9,731			12,871
Additions to property and equipment		(17,896	)		(14,280	)
Other		113			208
Net cash used in investing activities		(8,036	)		(80	)
Cash flows from financing activities:
Proceeds from long-term debt		440,000			—
Repayments of long-term debt		(446,021	)		(64,748	)
Debt issue costs and tender premium		(31,710	)		—
Issuance of common stock		13,541			13,066
Purchase and retirement of common stock		(13,685	)		(19,349	)
Dividends		(5,466	)		—
Other		8			—
Net cash used in financing activities		(43,333	)		(71,031	)
Net increase (decrease) in cash		7,821			(2,509	)
Cash and cash equivalents, beginning of period		21,514			18,585
Cash and cash equivalents, end of period	$	29,335		$	16,076
Supplemental cash flow information:
Cash paid (received) during the period for:
Income taxes	$	3,700		$	(26,900	)
Interest	$	25,200		$	39,500

See accompanying notes to condensed consolidated financial statements.

See Explanatory Note on page 2 for important information.

10

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(1) Restatement

     In response to comments raised by the Staff of the Securities and Exchange Commission (“SEC”), the Company has re-evaluated its application of FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), and has revised its operating and reportable segments. The Company’s historical presentation of segment data consisted of two operating and reportable segments, funeral and cemetery. The Company’s restated presentation includes 11 operating and reportable segments described in Note 2(a). The Company does not aggregate its operating segments in determining its reportable segments. For further discussion and disclosure of the Company’s operating and reportable segments, see Note 10.

     This revision of the Company’s operating segments had the related effect of requiring changes in the Company’s reporting units for purposes of goodwill impairment reviews under FASB Statement No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”), retroactive to the November 1, 2001 adoption date of SFAS No. 142. The Company’s evaluation of goodwill for its operations will now consist of 13 reporting units. Those reporting units include nine reporting units that are consistent with nine of the Company’s 11 operating and reportable segments and an additional four which are a further breakdown of its two operating and reportable segments in its Western division. These reporting units include the Archdiocese of Los Angeles Funeral operations, Southern Regional Cemetery operations, Other Cemetery operations and Other Funeral operations. For further discussion of the Company’s reporting units, see Note 2(i).

     The revision of the Company’s operating segments and reporting units resulted in the need to perform goodwill impairment reviews of the revised reporting units as of November 1, 2001 (the date the Company adopted SFAS No. 142) and as of October 31, 2002, 2003 and 2004. For further discussion of the restatement to report the resulting charge for the cumulative effect of adoption of SFAS No. 142 and the restatement of the goodwill impairment charge previously reported in fiscal year 2003, see Note 2(i). Further, the restatement of goodwill on the Company’s balance sheet had the effect of changing the net book value of the assets the Company has sold as part of the Company’s plan to sell a number of its businesses and the net book value of assets held for sale on the Company’s balance sheet. For further discussion of the restatement of the gains and losses reported for sales of these assets, see Note 13.

See Explanatory Note on page 2 for important information.

11

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(1) Restatement—(Continued)

A summary of the effects of the restatement on the Company’s financial statements is as follows:

     Consolidated Statements of Earnings:

	As Previously Reported(1)				As Restated(1)
	Three Months Ended		Nine Months Ended		Three Months Ended		Nine Months Ended
	July 31, 2004		July 31, 2004		July 31, 2004		July 31, 2004
Gains on dispositions and impairment (losses), net(2)	$	586	$	495	$	304	$	54
Operating earnings(2)		26,189		89,297		27,393		90,844
Earnings from continuing operations before income taxes		16,349		54,964		15,967		53,876
Income taxes		5,984		20,477		5,823		20,015
Earnings from continuing operations		10,365		34,487		10,144		33,861
Earnings from discontinued operations		478		2,841		1,743		3,822
Net earnings(3)	$	10,843	$	37,328	$	11,887	$	37,683
Basic earnings per common share:
Earnings from continuing operations	$	.10	$	.32	$	.09	$	.31
Earnings from discontinued operations		—		.03		.02		.04
Net earnings per share	$	.10	$	.35	$	.11	$	.35
Diluted earnings per common share:
Earnings from continuing operations	$	.10	$	.32	$	.09	$	.31
Earnings from discontinued operations		—		.03		.02		.04
Net earnings per share	$	.10	$	.35	$	.11	$	.35

(1)

The previously reported amounts represent amounts reported in the third quarter 2004 Form 10-Q using the third quarter 2004 classification of continuing and discontinued operations. The restated amounts represent the third quarter 2005 classification of continuing and discontinued operations.

(2)

In the Company’s Form 10-Q for the quarter ended July 31, 2004, gains on dispositions and impairment (losses) was included in the “Other income, net” line. Therefore, it was not included in operating earnings. In the restated statement of earnings for the three and nine months ended July 31, 2004, gains on dispositions and impairment (losses), net is on its own line and is included in operating earnings.

	Three Months		Nine Months
	Ended		Ended
	July 31, 2004		July 31, 2004
(3) Net earnings, as previously reported	$	10,843	$	37,328
Changes in gains on dispositions and impairment (losses), net, net of taxes		1,044		355
Net earnings, as restated	$	11,887	$	37,683

See Explanatory Note on page 2 for important information.

12

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Restatement—(Continued)

     Consolidated Balance Sheets:

	As Reported in the
	April 12, 2005 Form 8-K(2)		As Restated(2)
	October 31, 2004		October 31, 2004
Assets held for sale	$	3,590	$	10,493
Total current assets		134,491		140,171
Deferred income taxes		43,124		54,940
Goodwill		404,169		267,169
Total assets		2,565,198		2,442,333
Liabilities associated with assets held for sale		2,388		6,491
Total current liabilities		71,781		76,260
Retained earnings (accumulated deficit)		3,298		(118,559	)
Total shareholders’ equity(1)		784,258		662,401
Total liabilities and shareholders’ equity	$	2,565,198	$	2,442,333

	October 31,
	2004
(1)  Total shareholders’ equity, as previously reported	$	784,258
Cumulative effect of change in accounting principle (net of $16,310 income tax benefit)		(193,090	)
Reversal of original goodwill impairment, net of tax		66,900
Change in gains on dispositions and impairment (losses), net for 2003, net of tax		2,023
Change in gains on dispositions and impairment (losses), net for 2004, net of tax		2,310
Total shareholders’ equity, as restated	$	662,401

⁽²⁾ The reported amounts from the April 12, 2005 Form 8-K represent the January 2005 classification of continuing and discontinued operations. The restated amounts represent the July 2005 classification of continuing and discontinued operations.

See Explanatory Note on page 2 for important information.

13

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation

     (a) The Company

     The Company is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, the Company offers a complete line of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of July 31, 2005, the Company owned and operated 233 funeral homes and 145 cemeteries in 26 states within the United States and Puerto Rico. The Company has 11 operating and reportable segments consisting of a corporate trust management segment and a funeral and cemetery segment for each of five geographic areas: Central, Western, Eastern, Southern – Florida and All Other. All Other consists of the Company’s operations in Puerto Rico. Additional information on segments can be found in Note 10.

     (b) Principles of Consolidation

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

     (c) Interim Disclosures

     The information as of July 31, 2005, and for the three and nine months ended July 31, 2005 and 2004, 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, except for any adjustments that may be required as a result of the completion of the deferred revenue project. See the Explanatory Note on page 2. 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, 2004 as amended by Amendments No. 1 and 2 thereto (the “Amended 2004 Form 10-K”).

     The October 31, 2004 condensed consolidated balance sheet data was derived from financial statements in the Company’s Amended 2004 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 Amended 2004 Form 10-K.

     The results of operations for the three and nine months ended July 31, 2005 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2005.

     (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.

See Explanatory Note on page 2 for important information.

14

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

     (e) Fair Value of Financial Instruments

     Estimated fair value amounts have been determined using available market information and the valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts the Company could realize in a current market. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

     The carrying amounts of cash and cash equivalents and current receivables approximate fair value due to the short-term nature of these instruments. The carrying amounts of receivables due beyond one year approximate fair value because they bear interest at rates currently offered by the Company for receivables with similar terms and maturities. The carrying amounts of marketable securities, including marketable securities in preneed funeral trust investments, preneed cemetery trust investments and cemetery perpetual care trust investments, are stated at fair value as they are classified as available for sale under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” See Note 3(b) for additional information. The fair value of the Company’s long-term variable- and fixed-rate debt is estimated using quoted market prices, where applicable, or future cash flows discounted at rates for similar types of borrowing arrangements.

     Any investment with a fair market value that has been less than its cost basis by 20 percent or greater for more than six months as of the respective balance sheet reporting date is considered to be other than temporarily impaired. The Company periodically reviews its investment portfolio to determine if any of the temporarily impaired assets should be designated as other than temporarily impaired. This evaluation includes determining if the Company has the ability and intent to hold these investments for its forecasted recovery period and determining if there have been any changes in market conditions or concerns specific to the issuer of the securities. Otherwise, an investment with a fair market value that is less than its cost basis is considered to be temporarily impaired. This evaluation of impairment with respect to the Company’s trust portfolio is performed each quarter using quoted market prices. If a loss is other than temporary, the cost basis of the security is adjusted downward to its market value. This affects the Company’s footnote disclosure, but does not otherwise have an effect on the financial statements, since the trust portfolio amount as reported in the consolidated balance sheet is already marked to market value each quarter.

     (f) Inventories

     Inventories are stated at the lower of cost (specific identification and first-in, first-out methods) or net realizable value. The portion of developed cemetery property that management estimates will be used in the next twelve months is included in inventories. Such estimates are based on the Company’s historical experience or results.

     (g) Depreciation and Amortization

     Buildings and equipment are recorded at cost and are depreciated over their estimated useful lives, ranging from 10 to 40 years and from 3 to 10 years, respectively, primarily using the straight-line method.

See Explanatory Note on page 2 for important information.

15

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

     (h) Long-lived Assets

     The Company reviews for continued appropriateness the carrying value of its long-lived assets whenever events and circumstances indicate a potential impairment. This review is based on its projections of anticipated undiscounted future cash flows. If indicators of impairment were present, the Company would evaluate the undiscounted future cash flows estimated to be generated by those assets compared to the carrying amount of those assets. The net carrying value of assets not recoverable would be reduced to fair value. While the Company believes that its estimates of undiscounted future cash flows are reasonable, different assumptions regarding such cash flows and comparable sales values could materially affect its evaluations.

     (i) Goodwill (Restated)

     The Company’s historical evaluation of goodwill was performed at the funeral and cemetery segment levels, which the Company previously reported as its reporting units. As discussed in Note 1, the Company’s evaluation of the goodwill of its operations will now consist of 13 reporting units. Those reporting units include nine reporting units that are consistent with nine of the Company’s 11 operating and reportable segments and an additional four reporting units which are a further breakdown of its two operating and reportable segments in its Western division. These reporting units include the Archdiocese of Los Angeles Funeral operations, Southern Regional Cemetery operations, Other Cemetery operations and Other Funeral operations.

     The revision of the Company’s operating segments and reporting units resulted in the need to perform goodwill impairment reviews of the revised reporting units as of November 1, 2001 (the date the Company adopted SFAS No. 142) and as of October 31, 2002, 2003 and 2004. Consequently, the Company recorded a $193,090 million after-tax ($1.78 per diluted share) charge for the year ended October 31, 2002, which was reflected as a cumulative effect of change in accounting principle for the adoption of SFAS No. 142. The Company’s previously reported financial statements did not include a goodwill impairment charge upon the initial adoption of SFAS No. 142 on November 1, 2001 or during its annual assessment in the fourth quarter of fiscal year 2002. The Company also restated its previously reported fiscal year 2003 goodwill impairment charge of $73,000 ($66,900 after tax, or $.62 per share) to reflect its revised reporting units, which resulted in no goodwill impairment charge for the year ended October 31, 2003. The Company’s annual goodwill assessment for the year ended October 31, 2004, applying the revised reporting units, resulted in no goodwill impairment charge for fiscal year 2004. This was consistent with the previous reporting for fiscal year 2004.

     The Company’s goodwill impairment test involves estimates and management judgment and was performed with assistance from an independent valuation advisor using a discounted cash flow valuation methodology. Step two of the impairment test involves determining estimates of fair values of the Company’s assets and liabilities. The Company obtains assistance from third parties in assessing the fair value of certain of its assets, primarily real estate, in performing the step two analysis.

     Goodwill of a reporting unit must be tested for impairment on at least an annual basis. The Company conducts its annual goodwill impairment analysis during the fourth quarter of each fiscal year. In addition to an annual review, the Company assesses the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors the Company considers important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant

See Explanatory Note on page 2 for important information.

16

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

changes in the manner of the use of the Company’s assets or the strategy for its overall business and significant negative industry or economic trends.

     In reviewing goodwill for impairment, the Company first compares the fair value of each of its reporting units with its carrying amount (including goodwill). If the carrying amount of a reporting unit (including goodwill) exceeds its fair value, the Company then measures the amount of impairment of the reporting unit’s goodwill by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of a reporting unit’s goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined. That is, the Company allocates the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment charge is recorded when the carrying amount of goodwill exceeds its implied fair value.

     Restated goodwill in excess of net assets of companies acquired, totaled approximately $267,859 and $267,169 as of July 31, 2005 and October 31, 2004, respectively. Goodwill and changes in goodwill by operating segment from October 31, 2004 to July 31, 2005 is presented below.

	Goodwill		Changes due to businesses			Goodwill
	October 31, 2004		held for sale			July 31, 2005
Central Division – Funeral	$	116,881	$	—		$	116,881
Western Division – Funeral		—		—			—
Eastern Division – Funeral		17,051		—			17,051
Southern Division Florida – Funeral		46,199		(40	)		46,159
All Other – Funeral(1)		17,571		815			18,386
Total Funeral Goodwill	$	197,702	$	775		$	198,477
Central Division – Cemetery	$	44,345	$	—		$	44,345
Western Division – Cemetery		—		—			—
Eastern Division – Cemetery		25,122		(85	)		25,037
Southern Division Florida – Cemetery		—		—			—
All Other – Cemetery(1)		—		—			—
Total Cemetery Goodwill	$	69,467	$	(85	)	$	69,382
Total Goodwill	$	267,169	$	690		$	267,859

⁽¹⁾ All Other includes the Company’s operations in Puerto Rico.

     (j) Stock-Based Compensation

     As of July 31, 2005, the Company had five stock-based compensation plans, which are described in more detail in Note 22 to the consolidated financial statements of the Company’s Amended 2004 Form 10-K. The Company

See Explanatory Note on page 2 for important information.

17

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123.” No stock-based employee compensation cost related to stock options is reflected in net earnings, as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the grant date. The expense related to the restricted stock granted in fiscal year 2005 and 2004 is reflected in earnings and amounted to $214 and $87 for the three months ended July 31, 2005 and 2004, respectively, and $566 and $459 for the nine months ended July 31, 2005 and 2004, respectively. See Note 2(o) for further discussion on the Company’s restricted stock. The FASB issued SFAS No. 123R in December 2004, which is effective for the Company in the first quarter of fiscal year 2006. The Company has evaluated the impact of its adoption on its financial statements. See Note 3 for additional information. The following table illustrates the effect on net earnings (loss) and net earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2005			2004			2005			2004
				(Restated)						(Restated)
Net earnings (loss)	$	11,636		$	11,887		$	(124,256	)	$	37,683
Stock-based employee compensation expense included in reported net earnings, net of tax.		133			54			351			285
Total stock-based employee compensation expense determined under fair value-based method, net of tax		(416	)		(416	)		(1,351	)		(1,386	)
Pro forma net earnings (loss)	$	11,353		$	11,525		$	(125,256	)	$	36,582
Net earnings (loss) per common share:
Basic – as reported	$	.11		$	.11		$	(1.14	)	$	.35
Basic – pro forma	$	.10		$	.11		$	(1.15	)	$	.34
Diluted – as reported	$	.11		$	.11		$	(1.14	)	$	.35
Diluted – pro forma	$	.10		$	.11		$	(1.14	)	$	.34

     (k) Funeral Revenue

     The Company sells price-guaranteed prearranged funeral services and merchandise under contracts that provide for delivery of the services and merchandise at the time of death. Prearranged funeral services are recorded as funeral revenue in the period the funeral is performed. Prearranged funeral merchandise is recognized as revenue upon delivery. Prior to performing the funeral or delivering the merchandise, such sales are deferred. Funeral services and merchandise sold at the time of need are recorded as funeral revenue in the period the funeral is performed or the merchandise is delivered.

     On May 31, 2005, the Company changed its method of accounting for preneed selling costs incurred related to the acquisition of new prearranged funeral service and merchandise sales. The Company has applied this change in

See Explanatory Note on page 2 for important information.

18

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

accounting principle effective November 1, 2004. All selling costs related to the acquisition of new prearranged funeral service sales and prearranged funeral merchandise sales are now expensed as incurred. Prior to that time, the selling costs that related to the Company’s preneed funeral service and merchandise contracts were included in deferred charges and amortized in proportion to the preneed revenue recognized during the period. See Note 3(a) for additional information.

     Prearranged funeral services and merchandise generally are funded either through trust or escrow accounts established by the Company or through third-party insurance companies. Principal amounts deposited in the trust or escrow accounts generally range from 70 percent to 90 percent of each installment received. The sale of caskets is treated in some jurisdictions in the same manner as the sale of cemetery merchandise and in some jurisdictions as the sale of funeral services for trusting purposes. Amounts deposited are available to the Company as funeral services and merchandise are delivered and are refundable to the customer in those situations where state law provides for the return of those amounts under the purchaser’s option to cancel the contract. Certain jurisdictions provide for non-refundable trust or escrow accounts where the Company receives such amounts upon cancellation by the customer. The Company defers all dividends and interest earned and net capital gains and losses realized by preneed funeral trust or escrow accounts until the underlying service or merchandise is delivered.

     Earnings are withdrawn from trust or escrow accounts only as funeral services and merchandise are delivered or contracts are cancelled, except in jurisdictions that permit earnings to be withdrawn currently and in unregulated jurisdictions where escrow accounts are used. Even so, such withdrawn earnings are not recognized as revenue until the related funeral services are performed or merchandise delivered.

     When prearranged funeral services and merchandise are funded through insurance policies purchased by customers from third-party insurance companies, the Company earns a commission if it acts as agent on the sale of the policies. Customer payments of premiums on the insurance policies are sent directly to the insurance company, and the insurance premium receivables and related customer payments are not recorded on the Company’s financial statements. Insurance commissions are recognized as revenue at the point at which the commission is no longer subject to refund. The costs related to the commissions are expensed at the same time. Nothing more is recorded until the contracted service or merchandise is delivered. At that time, the face amount of the contract and the build-up in the face value of the contract (i.e., the policy proceeds) are recorded as funeral revenue, and the related expenses are recorded. A receivable from the insurance company for the policy proceeds is recorded as a funeral receivable.

     (l) Cemetery Revenue

     The Company sells preneed cemetery merchandise and services under contracts that provide for delivery of the merchandise and services at the time of need. Preneed cemetery merchandise and service sales are recorded as cemetery revenue in the period the merchandise is delivered or service is performed. Cemetery merchandise and services sold at the time of need are recorded as cemetery revenue in the period the service is performed or the merchandise is delivered.

     On May 31, 2005, the Company changed its method of accounting for preneed selling costs related to the acquisition of new prearranged cemetery service and merchandise sales. The Company has applied this change in accounting principle effective November 1, 2004. All selling costs related to the acquisition of new prearranged

See Explanatory Note on page 2 for important information.

19

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

cemetery service sales and prearranged cemetery merchandise sales are now expensed as incurred. Prior to that time, the selling costs that related to the Company’s preneed cemetery merchandise and services contracts were included in deferred charges and amortized in proportion to the preneed revenue recognized during the period. See Note 3(a) for additional information.

     In certain jurisdictions in which the Company operates, local law or contracts with customers generally require that a portion of the sale price of preneed cemetery merchandise and services be placed in trust or escrow accounts. With respect to the preneed sale of cemetery merchandise, the Company is generally required to place in trust 30 percent to 50 percent of each installment received. With respect to the preneed sale of cemetery services, the Company is generally required to place in trust 70 percent to 90 percent of each installment received. The Company defers all dividends and interest earned and net capital gains and losses realized by preneed cemetery merchandise and services trust or escrow accounts until the underlying merchandise or service is delivered. Principal and earnings are withdrawn only as the merchandise or services are delivered or contracts are cancelled, except in jurisdictions that permit earnings to be withdrawn currently and in unregulated jurisdictions where escrow accounts are used.

     The Company sells price-guaranteed preneed cemetery contracts providing for property interment rights. For preneed sales of interment rights (cemetery property), the associated revenue and all costs to acquire the sale are recognized in accordance with SFAS No. 66, “Accounting for Sales of Real Estate.” Under SFAS No. 66, recognition of revenue and costs must be deferred until 10 percent of the property sale price has been collected. Revenue related to the preneed sale of cemetery property prior to its construction is recognized on a percentage of completion method of accounting as construction occurs. The Company measures the percentage of completion by taking the costs incurred to date and dividing that number by the total projected cost of the project.

     Pursuant to cemetery perpetual care contracts and laws, a portion, generally 10 percent, of the proceeds from cemetery property sales is deposited into perpetual care trusts. The income from these trusts, which have been established in most jurisdictions in which the Company operates cemeteries, is used for maintenance of those cemeteries, but principal, including in some jurisdictions net realized capital gains, must generally be held in perpetuity. As payments are received, the Company generally funds the perpetual care trust in the same proportion as the payment bears to the contract amount. For example, if the Company receives 20 percent of the contract price, it places in trust 20 percent of the total amount to be placed in trust for that contract. The Company currently recognizes and withdraws all dividend and interest income earned and, where permitted, capital gains realized by cemetery perpetual care trusts.

     Some of the Company’s sales of cemetery property and merchandise are made under installment contracts bearing interest at prevailing rates. Finance charges are recognized as cemetery revenue under the effective interest method over the terms of the related installment receivables.

(m)Allowance for Doubtful Accounts

     The Company establishes a reserve based on a range of percentages applied to accounts receivable aging categories. These percentages are based on historical collection and write-off experience.

See Explanatory Note on page 2 for important information.

20

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

     (n) Income Taxes

     Income taxes are accounted for using the asset and liability method under which deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. Management provides a valuation allowance against the deferred tax asset for amounts which are not considered more likely than not to be realized. As of July 31, 2005 and October 31, 2004, the Company’s deferred tax asset valuation allowance was $10,230 and $9,744, respectively. The valuation allowance is attributed primarily to expected capital losses related to businesses held for sale or sold for which the Company does not expect to receive a benefit.

     For the purpose of calculating income taxes for discontinued operations, earnings (loss) from discontinued operations is segregated into two categories: operating results and gain or loss on dispositions. Operating results are tax effected in the ordinary manner (i.e., income tax expense on net operating income, income tax benefit on net operating loss).

     For calculating the gain or loss on dispositions, businesses held for sale are grouped by sale type (i.e., stock sale or asset sale). Those classified as asset sales for tax purposes are netted, and any gains or losses are characterized as “ordinary.” An income tax provision or benefit is calculated as appropriate on these gains or losses. Those classified as stock sales for tax purposes are netted, and any gains or losses are characterized as “capital.” An income tax provision or benefit is calculated as appropriate on these gains or losses. The Company’s current policy is to provide a valuation allowance for any net benefits because capital losses are deductible only against capital gains, and the Company cannot at this time predict with certainty its ability to generate sufficient capital gains in future periods to absorb the losses before the carry-forward expiration given the significant amount of capital losses that were incurred in prior years.

     As sales are finalized, the Company adjusts the gain or loss for changes in actual sales proceeds as compared to estimates, and for basis differences at the time of sale, as well as any changes in the type of sale. Sales originally anticipated to be stock sales but consummated as asset sales will generate ordinary losses. The Company records a tax benefit and adjusts the valuation allowance for the respective amount resulting from the changes in circumstances surrounding the finalized sale. This adjustment is allocated to continuing operations or discontinued operations consistent with the reporting of the pre-tax income or loss.

     The Company received a $33,222 income tax refund in December 2003 due to a change in the tax accounting methods for cemetery merchandise revenue. At the end of fiscal year 2003, the Company had decreased its deferred tax asset and increased receivables by $33,222. When the refund was received in the first quarter of 2004, the Company increased cash and decreased the corresponding receivable. The Company used this refund to reduce its outstanding debt balance.

     (o) Earnings Per Common Share

     Basic earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding during each period. Diluted earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if the dilutive potential common shares (in this case, exercise of the Company’s time-vest stock options and non-vested restricted stock awards) had been issued during each period as discussed in Note 9.

See Explanatory Note on page 2 for important information.

21

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

     On March 17, 2005, the Company substantially completed its $28,000 stock repurchase program initiated in June 2003, having repurchased 4,400,000 shares since its inception. On March 28, 2005, the Company announced a new $30,000 stock repurchase program. The repurchases are limited to the Company’s 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 on market conditions and other factors. These repurchases reduce the weighted average number of common shares outstanding during each period. Since the inception of the new program through July 31, 2005, the Company has repurchased 1,200,000 shares of its Class A common stock at an average price of $6.64 per share.

     On December 22, 2003, the Company granted 271,000 shares of restricted stock to its executive officers (of which 110,666 shares have been cancelled as of July 31, 2005 and 27,972 shares were withheld to cover the tax obligation related to the vested restricted stock as of July 31, 2005). The restricted stock vests in equal one-third portions at October 31, 2004, October 31, 2005 and October 31, 2006. On November 18, 2004, the Company granted 72,000 shares of restricted stock to an executive officer, which vest 25 percent on November 18, 2005, 25 percent on November 18, 2006 and 50 percent on November 18, 2007. On December 20, 2004, the Company granted 58,000 shares of restricted stock to executive officers, which vest 25 percent on December 20, 2005, 25 percent on December 20, 2006 and 50 percent on December 20, 2007. On December 20, 2004, the Company also granted 36,500 shares of restricted stock to executive officers, which vest in equal 25 percent portions on December 20, 2005, 2006, 2007 and 2008. Once granted, the restricted stock is included in total shares outstanding but is not included in the weighted average number of common shares outstanding in each period used to calculate basic earnings per common share until the shares vest.

     (p) Derivatives

     The Company accounted for its derivative financial instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” The notional amounts of derivative financial instruments do not represent amounts exchanged between parties and, therefore, are not a measure of the Company’s exposure resulting from its use of derivatives. The amounts exchanged are calculated based upon the notional amounts as well as other terms of the instruments, such as interest rates, exchange rates or other indices. In accordance with SFAS No. 133, the Company accounted for its sole derivative instrument, a $50,000 interest rate swap which expired on March 11, 2005, as a cash flow hedge whereby the fair value of the interest rate swap is reflected as a liability in the accompanying consolidated balance sheet as of October 31, 2004 with the offset recorded to other comprehensive income. The Company has no remaining interest rate swaps.

     (q) Estimated Insurance Loss Liabilities

     The Company purchases comprehensive general liability, automobile liability and workers compensation insurance coverages structured within a large deductible/self-insured retention premium rating program. This program results in the Company being primarily self-insured for claims and associated costs and losses covered by these policies. Historical insurance industry experience indicates some degree of inherent variability in assessing the ultimate amount of losses associated with the types of claims covered by the program. This is especially true due to the extended period of time that transpires between when the claim might occur and the full settlement of such claim, often many years. The Company continually evaluates the receivables due from its insurance carriers as well as loss estimates associated with claims and losses related to these insurance coverages with information obtained from its primary insurer.

See Explanatory Note on page 2 for important information.

22

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

     With respect to health insurance that covers substantially all of the Company’s employees, the Company purchases individual and aggregate stop loss coverage with a large deductible. This program results in the Company being primarily self-insured for claims and associated costs up to the amount of the deductible, with claims in excess of the deductible amount being covered by insurance. Expected claims are based on actuarial estimates; actual claims may differ from those estimates. The Company continually evaluates its claims experience related to this coverage with information obtained from its insurer.

     Assumptions used in preparing these estimates are based on factors such as claim settlement patterns, claim development trends, claim frequency and severity patterns, inflationary trends and data reasonableness. Together these factors will generally affect the analysis and determination of the “best estimate” of the projected ultimate claim losses. The results of these evaluations are used to assess the reasonableness of the Company’s insurance loss liability.

     The estimated liability on the uninsured legal and employment-related claims are established by management based upon the recommendations of professionals who perform a review of both reported claims and estimate a liability for incurred but not reported claims. These liabilities include the estimated settlement costs. Although management believes estimated liabilities related to uninsured claims are adequately recorded, it is possible that actual results could significantly differ from the recorded liabilities.

     (r) Dividends

     On March 28, 2005, the Company announced that its Board of Directors approved the initiation of a quarterly cash dividend of two and one-half cents per share of common stock. The first dividend was paid on April 29, 2005 to shareholders of record at the close of business on April 15, 2005. Another dividend was paid on July 29, 2005 to shareholders of record as of July 15, 2005. Although the Company intends to pay regular quarterly cash dividends for the foreseeable future, 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 the Company’s financial performance.

     (s) Leases

     The Company has noncancellable operating leases, primarily for land and buildings, that expire over the next 1 to 15 years, except for six leases that expire between 2032 and 2039. As of July 31, 2005, approximately 73 percent of the Company’s 233 funeral locations were owned by the Company’s subsidiaries and approximately 27 percent were held under operating leases.

     On February 7, 2005, the Office of the Chief Accountant of the SEC issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease accounting issues and their application under accounting principles generally accepted in the United States of America. The Company subsequently reviewed its lease-related accounting practices and determined that certain adjustments related to rent escalations and leasehold improvement amortization were necessary. The cumulative effect of these adjustments for all prior periods amounted to a charge of $1,838 ($1,140 after tax, or $.01 per share).

     The Company evaluated the materiality of these operating lease adjustments on its financial statements and concluded that the impact of these adjustments was not material. As a result, the Company recorded the cumulative effect of these prior period adjustments of $1,838 as non-cash charges to funeral and cemetery costs in the second quarter of fiscal year 2005. Of this amount, $1,823 was attributed to funeral costs and expenses, and the remaining $15 to cemetery costs and expenses.

See Explanatory Note on page 2 for important information.

23

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

     The Company records operating lease expense for leases with escalating rents on a straight-line basis over the life of the lease, including reasonably assured lease renewals. The Company amortizes leasehold improvements in an operating lease over the shorter of their economic lives or the lease term, including reasonably assured lease renewals.

     (t) Reclassifications

     Certain reclassifications have been made to the 2004 condensed consolidated statements of earnings and cash flows in order for these periods to be comparable. These reclassifications had no effect on net earnings or shareholders’ equity. See Note 13 for a discussion of the reclassifications related to discontinued operations.

(3) Change in Accounting Principles and New Accounting Principles

     (a) Preneed Selling Costs

     On May 31, 2005, the Company changed its method of accounting for preneed selling costs incurred related to the acquisition of new prearranged funeral and cemetery service and merchandise sales. The Company has applied this change in accounting principle effective November 1, 2004. Therefore, the Company’s results of operations for the three and nine months ended July 31, 2005 are reported on the basis of the changed method. Prior to this change, commissions and other costs that varied with and were primarily related to the acquisition of new prearranged funeral and cemetery service and merchandise sales were deferred and included in deferred charges and amortized in proportion to preneed revenue recognized during the period in a manner consistent with SFAS No. 60, “Accounting and Reporting for Insurance Companies.” This expense amortization was included in amortization of preneed selling costs in the consolidated statements of cash flows. Accordingly, fiscal year 2004 includes the amortization of these deferred preneed selling costs, while fiscal year 2005 does not. The Company has decided to change its accounting for preneed selling costs to expense such costs as incurred. The Company concluded that expensing these costs as they are incurred would be preferable to the old method because it will make its reported results more comparable with other public death care companies, better align the costs of obtaining preneed contracts with the cash outflows associated with obtaining such contracts and eliminate the burden of maintaining deferred selling cost records.

     As of November 1, 2004, the Company recorded a cumulative effect of change in accounting principle of $234,553 ($141,318 after tax, or $1.29 per diluted share), which represents the cumulative balance of deferred preneed selling costs in the deferred charges line on the Company’s condensed consolidated balance sheet at the time of the change. The table below presents the Company’s earnings from continuing operations before cumulative effect of change in accounting principle, net earnings (loss), diluted earnings per share from continuing operations before cumulative effect of change in accounting principle and diluted net earnings (loss) per share for the three and nine months ended July 31, 2005 had the Company not made this accounting change.

See Explanatory Note on page 2 for important information.

24

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Change in Accounting Principles and New Accounting Principles—(Continued)

	Three Months Ended						Nine Months Ended
	July 31, 2005						July 31, 2005
					Results under							Results under
	As Reported		Changes		Old Method		As Reported			Changes		Old Method
Earnings from continuing operations before cumulative effect of change in accounting principle	$	10,889	$	1,259	$	12,148	$	16,045		$	2,691	$	18,736
Net earnings (loss)	$	11,636	$	1,257	$	12,893	$	(124,256	)	$	143,542	$	19,286
Basic earnings per common share from continuing operations before cumulative effect of change in accounting principle	$	.10	$	.01	$	.11	$	.14		$	.03	$	.17
Diluted earnings per common share from continuing operations before cumulative effect of change in accounting principle	$	.10	$	.01	$	.11	$	.14		$	.03	$	.17
Basic earnings (loss) per common share	$	.11	$	.01	$	.12	$	(1.14	)	$	1.32	$	.18
Diluted earnings (loss) per common share	$	.11	$	.01	$	.12	$	(1.14	)	$	1.32	$	.18

     The table below presents the pro forma amounts for the three and nine months ended July 31, 2004 as if the accounting change had been in effect during those periods.

	Three Months Ended							Nine Months Ended
	July 31, 2004							July 31, 2004
	As Reported							As Reported
	- Restated		Changes			Pro Forma		- Restated		Changes			Pro Forma
Gross profit:
Funeral	$	17,574	$	(1,433	)	$	16,141	$	61,666	$	(3,588	)	$	58,078
Cemetery		13,750		(128	)		13,622		43,076		(1,129	)		41,947
	$	31,324	$	(1,561	)	$	29,763	$	104,742	$	(4,717	)	$	100,025
Earnings from continuing operations	$	10,144	$	(967	)	$	9,177	$	33,861	$	(2,924	)	$	30,937
Net earnings	$	11,887	$	(912	)	$	10,975	$	37,683	$	(2,775	)	$	34,908
Basic earnings per common share from continuing operations	$	.09	$	—		$	.09	$	.31	$	(.02	)	$	.29
Diluted earnings per common share from continuing operations	$	.09	$	(.01	)	$	.08	$	.31	$	(.03	)	$	.28
Basic earnings per common share	$	.11	$	(.01	)	$	.10	$	.35	$	(.03	)	$	.32
Diluted earnings per common share	$	.11	$	(.01	)	$	.10	$	.35	$	(.03	)	$	.32

See Explanatory Note on page 2 for important information.

25

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Change in Accounting Principles and New Accounting Principles—(Continued)

     (b) FASB Interpretation No. 46 (“FIN 46” and “FIN 46R”), “Consolidation of Variable Interest Entities”

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

     The Company implemented FIN 46R as of April 30, 2004, which resulted in the consolidation of the Company’s preneed funeral and cemetery merchandise and service trusts and the Company’s cemetery perpetual care trusts. The implementation of FIN 46R affects certain line items in the consolidated balance sheet and statement of earnings as described below, but has no impact on net earnings. Also, the implementation of FIN 46R did not result in any net changes to the Company’s consolidated statement of cash flows, but does require disclosure of certain financing and investing activities. See Notes 4, 5 and 6.

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

     All of these trusts hold investments in marketable securities, which have been classified as available-for-sale and are reported at fair value, with unrealized gains and losses excluded from earnings and initially reported as a separate component of accumulated other comprehensive income or loss in the Company’s consolidated balance sheet pursuant to the provisions of SFAS No. 115. Unrealized gains and losses attributable to the non-controlling interest holders are reclassified from accumulated other comprehensive income or loss to non-controlling interest in funeral and cemetery trusts and perpetual care trusts in the Company’s consolidated balance sheet. Unrealized gains and losses attributable to the Company, but that have not been earned through the performance of services or delivery of merchandise are reclassified from accumulated other comprehensive income or loss to deferred revenues.

     Beginning April 30, 2004, the Company recognizes realized earnings of the preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts within investment and other income, net (with a corresponding debit to the related trust asset). The Company then recognizes a corresponding expense within investment and other income, net, representing the realized earnings of these trusts attributable to the non-controlling interest holders (with a corresponding credit to non-controlling interest in funeral and cemetery trusts or non-controlling interest in cemetery perpetual care trusts, as the case may be). The Company also simultaneously recognizes a similar expense for realized earnings of the trusts attributable to the Company (with a corresponding credit to deferred preneed funeral or cemetery revenue), when such earnings have not been earned by the Company through the performance of services or delivery of merchandise (see Note 7). The net effect is an increase by the amount of the realized earnings in both the trust asset and the related non-controlling interest and deferred revenue; there is no effect on net earnings. In the case of preneed funeral and cemetery merchandise and services trusts, the Company recognizes as revenues amounts attributed to the non-controlling interest holders and the Company upon the performance of services and delivery of merchandise, including realized earnings accumulated in these trusts (with corresponding debits to non-controlling interest in funeral and cemetery trusts and to deferred preneed funeral

See Explanatory Note on page 2 for important information.

26

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Change in Accounting Principles and New Accounting Principles—(Continued)

revenues or deferred preneed cemetery revenues, as the case may be). In the case of cemetery perpetual care trusts, the Company recognizes investment earnings in cemetery revenues when such earnings are realized and permitted to be legally withdrawn by the Company (with a corresponding debit to non-controlling interest in cemetery perpetual care trusts). These earnings and related funds are intended to defray cemetery maintenance costs.

     The end result of FIN 46R is that the Company’s trust assets are now recorded on the consolidated balance sheet at their market value and included in preneed receivables and trust investments with corresponding credits to deferred preneed revenue and non-controlling interest in the trusts, as opposed to being recorded at their original cost as prearranged receivables and prearranged deferred revenue prior to adoption of FIN 46R. The realized earnings on these trust assets under FIN 46R flow into and out of the statement of earnings through investment and other income, net with no net effect on revenue or net earnings. Both prior to and after the adoption of FIN 46R, accumulated trust earnings from the preneed funeral and cemetery merchandise and services trusts are recognized as revenue when the related merchandise and services are delivered, and cemetery perpetual care trust earnings are recognized as revenue as they are realized in the trust and permitted to be legally withdrawn by the Company. In summary, the adoption of FIN 46R had no effect on revenues, net earnings, cash flows or shareholders’ equity.

     For more detailed discussions of the Company’s accounting policies after the implementation of FIN 46R, see Notes 4 through 7.

     (c) Other Accounting Pronouncements

     In December 2004, the FASB revised its SFAS No. 123 (“SFAS No. 123R”), “Accounting for Stock Based Compensation.” The revision establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, particularly transactions in which an entity obtains employee services in share-based payment transactions. The revised statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is to be recognized over the period during which the employee is required to provide service in exchange for the award. Changes in fair value during the requisite service period are to be recognized as compensation cost over that period. In addition, the revised statement amends SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits be reported as a financing cash flow rather than as a reduction of taxes paid. The provisions of the revised statement are effective for financial statements issued for the first interim reporting period of the first fiscal year that begins on or after June 15, 2005. Based on current options and restricted stock outstanding, selection of the modified prospective method and an implementation date of November 1, 2005, the Company would expect an impact of approximately $.01 per share in fiscal year 2006.

     In March 2004, the FASB issued Emerging Issues Task Force (“EITF”) 03-1, “Impairment and Its Application to Certain Investments.” EITF 03-1 includes new guidance for evaluating and recording impairment losses on debt and equity investments, as well as new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued Staff Position EITF 03-1-1, which delays the effective date until additional guidance is issued for the application of the recognition and measurement provisions of EITF 03-1 to investments in securities that are impaired. The disclosure guidance included in EITF 03-1 remains effective. The Company is continuing to evaluate the impact of EITF 03-1. The amount of other than temporary impairment to be recognized, if any, will depend on market conditions, management’s intent and ability to hold investments until a forecasted recovery and the finalization of the proposed guidance by the FASB. This pronouncement as it relates to the Company’s trusts will have no impact on net earnings. See Notes 2(e), 3(b), 4, 5 and 6.

     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This statement will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this statement was issued.

See Explanatory Note on page 2 for important information.

27

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Change in Accounting Principles and New Accounting Principles—(Continued)

This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change.

(4) Preneed Funeral Activities

     The Company sells price-guaranteed preneed funeral contracts through various programs. Because the services or merchandise will not be provided until the future, most states require that all or a portion of the customer payments under these contracts be protected for the benefit of the customers pursuant to applicable law. Some or all of the funds may be required to be placed into trust accounts (“trust-funded preneed funeral contracts”). Alternatively, where allowed, customers may purchase a life insurance or annuity policy from third-party insurance companies to fund their preneed funeral contracts (“insurance-funded preneed funeral contracts”). The funeral goods and services selected at the time of contract origination will be funded by the insurance policy proceeds, which include increasing insurance benefits. Under either customer funding option, the Company enters into a preneed funeral contract with the customer to provide funeral services in the future.

     Effective April 30, 2004, the Company changed certain aspects of its accounting for preneed funeral contracts and related trust investments in connection with the implementation of FIN 46R. See Note 3(b) for additional information. The Company also changed its accounting for insurance-funded preneed funeral contracts. The contract amounts associated with unfulfilled insurance-funded preneed funeral contracts are not reflected on the consolidated balance sheet. However, when a trust-funded preneed funeral contract is entered into, the Company records an asset (included in preneed funeral receivables and trust investments) and a corresponding liability (included in deferred preneed funeral revenues) for the contract price. As the customer makes payments on the contract prior to performance by the Company, the Company deposits into the related trust the required portion of the payment and reclassifies the corresponding amount from deferred preneed funeral revenues into non-controlling interest in funeral and cemetery trusts.

     Funeral revenues are recognized in the consolidated statement of earnings on preneed funeral contracts (trust- funded and insurance-funded) at the time the funeral service is performed. Through April 30, 2004, trust investment earnings, net of taxes and certain other expenses paid by the trust, were accrued and deferred when realized. When the services were performed, those net investment earnings were recognized in funeral revenues. These amounts are intended to cover future increases in the cost of providing a price-guaranteed funeral service. Beginning with the third quarter of 2004, the Company now recognizes realized earnings of these trusts within investment and other income, net (with a corresponding debit to preneed funeral receivables and trust investments) when such earnings have not been earned by the Company through the performance of services or delivery of merchandise. The Company simultaneously recognizes a corresponding expense within investment and other income, net equal to the realized earnings of the trusts attributable to the non-controlling interest holders (with a corresponding credit to non-controlling interest in funeral and cemetery trusts), or attributable to the Company (with a corresponding credit to deferred preneed funeral revenues). The net effect is an increase by the amount of the unrealized earnings in both (1) the trust asset and (2) the related non-controlling interest or deferred preneed funeral revenue line items; there is no effect on net earnings. Effective April 30, 2004, the cumulative undistributed net trust investment earnings of the funeral merchandise and services trusts are included in non-controlling interest in funeral and cemetery trusts instead of deferred preneed funeral revenues. Upon performance of the funeral services, the Company recognizes as revenues amounts attributed to the non-controlling interest holders or included in deferred preneed funeral revenue, including realized trust earnings.

See Explanatory Note on page 2 for important information.

28

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) 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 sheet at July 31, 2005 and October 31, 2004 are as follows:

	July 31, 2005		October 31, 2004
Trust assets	$	454,743	$	439,625
Receivables from customers		59,978		64,183
Preneed funeral receivables and trust investments	$	514,721	$	503,808

     Upon cancellation of a trust-funded preneed funeral contract, a customer is generally entitled to receive a refund of the funds held in trust. In many jurisdictions, the Company may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust including investment income at the time of cancellation. If the fair market value of the trusts were to decline below the estimated costs to deliver the underlying products and services, the Company would record a charge to earnings to record a liability for the expected loss on the delivery of contracts in the Company’s backlog. Based upon this assessment, no loss amounts have been required to be recognized as of July 31, 2005.

     Preneed funeral receivables and trust investments are reduced by the trust investment earnings the Company has been allowed to withdraw prior to performance by the Company and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws. These amounts are reflected in deferred preneed funeral revenues until the underlying service is performed or merchandise is delivered.

     The cost and market values associated with preneed funeral merchandise and services trust assets at July 31, 2005 are detailed below. The adjusted cost basis of the funeral merchandise and services trust assets below reflect an other than temporary decline in the trust assets of approximately $80,136 as of July 31, 2005 from their original cost basis. The Company believes the unrealized losses reflected below of $8,940 related to trust investments are temporary in nature. See Note 2(e) for additional information.

	July 31, 2005
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	51,433	$	—	$	—		$	51,433
U.S. Government, agencies and municipalities		6,452		67		(44	)		6,475
Corporate bonds		21,287		1,010		(370	)		21,927
Preferred stocks		67,511		1,350		(635	)		68,226
Common stocks		238,846		19,973		(7,758	)		251,061
Mutual funds		28,907		1,025		(133	)		29,799
Insurance contracts and other long- term investments		23,666		354		—			24,020
Trust investments	$	438,102	$	23,779	$	(8,940	)	$	452,941
Market value as a percentage of cost											103.4	%
Accrued investment income									1,995
Less trust investments of assets held for sale									(193	)
Trust assets								$	454,743

See Explanatory Note on page 2 for important information.

29

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Funeral Activities—(Continued)

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

	July 31, 2005
Due in one year or less	$	3,297
Due in one to five years		11,836
Due in five to ten years		12,958
Thereafter		311
	$	28,402

     During the three months ended July 31, 2005, purchases and sales of available for sale securities included in trust investments were $43,230 and $40,860, respectively. These sales resulted in realized gains and losses of $3,716 and $669, respectively. During the three months ended July 31, 2004, purchases and sales of available for sale securities included in trust investments were $1,003 and $9,732, respectively, and these sales resulted in realized gains and losses of $292 and $1,562, respectively. During the nine months ended July 31, 2005, purchases and sales of available for sale securities included in trust investments were $174,901 and $104,373, respectively, and these sales resulted in realized gains and losses of $8,747 and $5,295, respectively.

     The cost and market values associated with preneed funeral merchandise and services trust assets as of October 31, 2004 are detailed below. The adjusted cost basis of the funeral merchandise and services trust assets below reflect an other than temporary decline in the trust assets of approximately $76,135 as of October 31, 2004 from their original cost basis. The Company believes the unrealized losses reflected below of $13,735 related to trust investments are temporary in nature. See Note 2(e) for additional information.

	October 31, 2004
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	133,205	$	9	$	—		$	133,214
U.S. Government, agencies and municipalities		1,971		115		(26	)		2,060
Corporate bonds		22,826		1,938		—			24,764
Preferred stocks		62,947		1,703		(422	)		64,228
Common stocks		188,298		3,692		(13,214	)		178,776
Mutual funds		12,431		322		(73	)		12,680
Insurance contracts and other long- term investments		23,631		298		—			23,929
Trust investments	$	445,309	$	8,077	$	(13,735	)	$	439,651
Market value as a percentage of cost											98.7	%
Accrued investment income									2,002
Less trust investments of assets held for sale									(2,028	)
Trust assets								$	439,625

See Explanatory Note on page 2 for important information.

30

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Funeral Activities—(Continued)

Deferred Preneed Funeral Revenue

     Deferred preneed funeral revenue represents future funeral contract revenues. In addition to amounts receivable from customers and amounts not required to be trusted, this includes distributed and distributable trust investment earnings associated with unperformed trust-funded preneed funeral contracts where the related cash or investments are not held in trust accounts (generally because the Company was permitted to withdraw the cash from the trust before performance of the service or delivery of the merchandise). Future funeral contract revenues and non-distributable net trust investment earnings where the related cash or investments are held in trust accounts are included in non-controlling interest in funeral and cemetery trusts.

Insurance-Funded Preneed Funeral Contracts

     Insurance-funded preneed funeral contracts that will be funded by life insurance or annuity contracts issued by third-party insurers are not reflected above or in the consolidated balance sheet. The net amount of these contracts that have not been fulfilled as of July 31, 2005 and October 31, 2004 was $374,237 and $352,092, respectively, of which $71 relates to assets held for sale at October 31, 2004. The proceeds of the life insurance policies or annuity contracts will be reflected in funeral revenues as these funerals are performed by the Company. See Note 2(k) for additional information.

(5) Preneed Cemetery Merchandise and Service Activities

     The Company sells price-guaranteed preneed cemetery contracts providing for merchandise or services to be delivered in the future at prices prevailing when the agreements are signed. Some or all of the funds received under these contracts for merchandise or services may be required to be placed into trust accounts, pursuant to applicable state law. Effective April 30, 2004, the Company changed certain aspects of its accounting for preneed cemetery contracts upon implementation of FIN 46R. For additional information, see Note 3(b). When a trust-funded preneed cemetery contract is entered into, the Company records an asset (included in preneed cemetery receivables and trust investments) and a corresponding liability (included in deferred preneed cemetery revenues) for the contract price. As the customer makes payments on the contract prior to performance by the Company, the Company deposits into the related trust the required portion of the payment and reclassifies the corresponding amount from deferred preneed cemetery revenues into non-controlling interest in funeral and cemetery trusts.

     Beginning with the third quarter of 2004, the Company recognizes realized earnings of these trusts within investment and other income, net (with a corresponding debit to preneed cemetery receivables and trust investments). The Company simultaneously recognizes a corresponding expense within investment and other income, net equal to the realized earnings of the trusts attributable to the non-controlling interest holders (with a corresponding credit to non-controlling interest in funeral and cemetery trusts), or attributable to the Company (with a corresponding credit to deferred preneed cemetery revenues) when such earnings have not been earned by the Company through the performance of services or delivery of merchandise. The net effect is an increase by the amount of the unrealized earnings in both (1) the trust asset and (2) the related non-controlling interest or deferred preneed cemetery revenue line items; there is no effect on net earnings. Effective April 30, 2004, the cumulative undistributed net trust investment earnings of the cemetery merchandise and services trusts are included in non-controlling interest in funeral and cemetery trusts instead of deferred preneed cemetery revenues. Upon performance of services or delivery of merchandise, the Company recognizes as revenues amounts attributed to the non-controlling interest holders or included in deferred preneed cemetery revenue, including realized trust earnings.

See Explanatory Note on page 2 for important information.

31

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

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 current and long-term receivables. The components of preneed cemetery receivables and trust investments in the condensed consolidated balance sheet as of July 31, 2005 and October 31, 2004 are as follows:

	July 31, 2005		October 31, 2004
Trust assets	$	204,684	$	194,008
Receivables from customers		58,772		64,168
Preneed cemetery receivables and trust investments	$	263,456	$	258,176

     The cost and market values associated with the preneed cemetery merchandise and services trust assets as of July 31, 2005 are detailed below. The adjusted cost basis of the cemetery merchandise and services trust assets below reflect an other than temporary decline in the trust assets of approximately $44,011 as of July 31, 2005 from their original cost basis. The Company believes the unrealized losses reflected below of $3,333 related to trust investments are temporary in nature. See Note 2(e) for additional information.

	July 31, 2005
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	27,414	$	—	$	—		$	27,414
U.S. Government, agencies and municipalities		6,470		96		(18	)		6,548
Corporate bonds		10,077		472		(88	)		10,461
Preferred stocks		34,341		705		(317	)		34,729
Common stocks		106,048		9,909		(2,908	)		113,049
Mutual funds		10,410		494		(2	)		10,902
Insurance contracts and other long-term investments		569		1		—			570
Trust investments	$	195,329	$	11,677	$	(3,333	)	$	203,673
Market value as a percentage of cost											104.3	%
Accrued investment income									1,075
Less trust investments of assets held									(64	)
Trust assets								$	204,684

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

	July 31, 2005
Due in one year or less	$	1,175
Due in one to five years		7,629
Due in five to ten years		7,618
Thereafter		587
	$	17,009

See Explanatory Note on page 2 for important information.

32

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

     During the three months ended July 31, 2005, purchases and sales of available for sale securities included in trust investments were $24,959 and $18,314, respectively. These sales resulted in realized gains and losses of $1,340 and $(273), respectively. During the three months ended July 31, 2004, purchases and sales of available for sale securities included in trust investments were $993 and $3,270, respectively, and these sales resulted in realized gains and losses of $31 and $98, respectively. During the nine months ended July 31, 2005, purchases and sales of available for sale securities included in trust investments were $83,690 and $59,259, respectively, and these sales resulted in realized gains and losses of $4,517 and $2,724, respectively.

     The cost and market values associated with the preneed cemetery merchandise and services trust assets as of October 31, 2004 are detailed below. The adjusted cost basis of the cemetery merchandise and services trust assets below reflect an other than temporary decline in the trust assets of approximately $42,537 as of October 31, 2004 from their original cost basis. The Company believes the unrealized losses reflected below of $6,098 related to trust investments are temporary in nature. See Note 2(e) for additional information.

	October 31, 2004
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	50,646	$	4	$	—		$	50,650
U.S. Government, agencies and municipalities		1,050		21		(4	)		1,067
Corporate bonds		10,690		1,086		—			11,776
Preferred stocks		24,287		869		(158	)		24,998
Common stocks		104,788		2,482		(5,934	)		101,336
Mutual funds		3,774		70		(2	)		3,842
Insurance contracts and other long-term investments		569		—		—			569
Trust investments	$	195,804	$	4,532	$	(6,098	)	$	194,238
Market value as a percentage of cost											99.2	%
Accrued investment income									956
Less trust investments of assets held for sale									(1,186	)
Trust assets								$	194,008

Deferred Preneed Cemetery Revenue

     Deferred preneed cemetery revenue represents future preneed cemetery revenues to be recognized upon delivery of merchandise or performance of services. In addition to the amounts receivable from customers and amounts not required to be trusted, this includes distributed and distributable trust investment earnings associated with unperformed preneed cemetery services or undelivered preneed cemetery merchandise where the related cash or investments are not held in trust accounts (generally because the Company was permitted to withdraw the cash from the trust before performance of the service or delivery of the merchandise). Future contract revenues and non-distributable net trust investment earnings where the related cash or investments are held in trust accounts are included in non-controlling interest in funeral and cemetery trusts.

See Explanatory Note on page 2 for important information.

33

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(6) Cemetery Interment Rights and Perpetual Care Trusts

     As a result of the implementation of FIN 46R, the Company has consolidated the cemetery perpetual care trusts, including investments accounted for under SFAS No. 115, resulting in such funds being reflected in cemetery perpetual care trust investments within total assets, with a corresponding amount reflected as non-controlling interest in perpetual care trusts.

     Beginning April 30, 2004, the Company recognizes realized earnings of these trusts within investment and other income, net (with a corresponding debit to cemetery perpetual care trust investments). The Company recognizes a corresponding expense within investment and other income, net for the amount of realized earnings of the trusts attributable to the non-controlling interest holders (with a corresponding credit to non-controlling interest in perpetual care trusts). The net effect is an increase by the amount of the realized earnings of the trusts in both the trust asset and the related non-controlling interest; there is no effect on net earnings.

     Earnings realized from these 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 $3,122 and $635 for the three months ended July 31, 2005 and 2004, respectively, and $5,822 and $5,271 for the nine months ended July 31, 2005 and 2004, respectively.

     The cost and market values of the trust investments held by the cemetery perpetual care trusts at July 31, 2005 are detailed below. The adjusted cost basis of the cemetery perpetual care trusts below reflect an other than temporary decline in the trust assets of $30,894 as of July 31, 2005 from their original cost basis. The Company believes the unrealized losses reflected below of $4,991 related to trust investments are temporary in nature. See Note 2(e) for additional information.

	July 31, 2005
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	18,818	$	—	$	—		$	18,818
U.S. Government, agencies and municipalities		7,043		87		(51	)		7,079
Corporate bonds		18,816		1,966		(102	)		20,680
Preferred stocks		71,794		1,468		(1,596	)		71,666
Common stocks		86,082		11,875		(3,196	)		94,761
Mutual funds		3,550		142		(42	)		3,650
Insurance contracts and other long-term investments		940		77		(4	)		1,013
Trust investments	$	207,043	$	15,615	$	(4,991	)	$	217,667
Market value as a percentage of cost										105.1	%
Accrued investment income									1,162
Trust assets								$	218,829

See Explanatory Note on page 2 for important information.

34

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

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

	July 31, 2005
Due in one year or less	$	1,058
Due in one to five years		8,974
Due in five to ten years		16,345
Thereafter		1,382
	$	27,759

     During the three months ended July 31, 2005, purchases and sales of available for sale securities were $40,425 and $36,887, respectively. These sales resulted in realized gains and losses of $1,879 and $(167), respectively. During the three months ended July 31, 2004, purchases and sales of available for sale securities were $8,391 and $15,444, respectively, and these sales resulted in realized gains and losses of $474 and $841, respectively. During the nine months ended July 31, 2005, purchases and sales of available for sale securities were $ 91,550 and $77,943, respectively, and these sales resulted in realized gains and losses of $3,778 and $1,850, respectively.

     The cost and market values of the trust investments held by the cemetery perpetual care trusts as of October 31, 2004 are detailed below. The adjusted cost basis of the cemetery perpetual care trusts below reflect an other than temporary decline in the trust assets of $30,524 as of October 31, 2004 from their original cost basis. The Company believes the unrealized losses reflected below of $6,017 related to trust investments are temporary in nature. See Note 2(e) for additional information.

	October 31, 2004
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	29,154	$	—	$	(3	)	$	29,151
U.S. Government, agencies and municipalities		3,173		62		(97	)		3,138
Corporate bonds		19,368		2,731		(23	)		22,076
Preferred stocks		65,176		2,571		(46	)		67,701
Common stocks		78,531		8,406		(5,797	)		81,140
Mutual funds		5,072		193		(51	)		5,214
Insurance contracts and other long-term investments		841		43		—			884
Trust investments	$	201,315	$	14,006	$	(6,017	)	$	209,304
Market value as a percentage of cost										104.0	%
Accrued investment income									963
Trust assets								$	210,267

See Explanatory Note on page 2 for important information.

35

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

     The components of non-controlling interest in funeral and cemetery trusts and non-controlling interest in perpetual care trusts at July 31, 2005 are as follows:

	Non-controlling Interest
										Non-controlling
										Interest in
	Preneed			Preneed						Perpetual
	Funeral			Cemetery			Total			Care Trusts
Trust assets at market value	$	454,743		$	204,684		$	659,427		$	218,829
Less:
Pending withdrawals		(5,955	)		(10,838	)		(16,793	)		(2,789	)
Pending deposits		1,650			1,455			3,105			593
Non-controlling interest	$	450,438		$	195,301		$	645,739		$	216,633

     The components of non-controlling interest in funeral and cemetery trusts and non-controlling interest in perpetual care trusts at October 31, 2004 are as follows:

	Non-controlling Interest
										Non-controlling
										Interest in
	Preneed			Preneed						Perpetual
	Funeral			Cemetery			Total			Care Trusts
Trust assets at market value	$	439,625		$	194,008		$	633,633		$	210,267
Less:
Pending withdrawals		(6,847	)		(2,797	)		(9,644	)		(1,951	)
Pending deposits		1,788			1,567			3,355			577
Non-controlling interest	$	434,566		$	192,778		$	627,344		$	208,893

See Explanatory Note on page 2 for important information.

36

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual Care Trusts—(Continued)

Investment and other income, net

     The components of investment and other income, net in the condensed consolidated statements of earnings for the three months ended July 31, 2005 and 2004 and the nine months ended July 31, 2005 are detailed below.

	Three Months			Three Months			Nine Months
	Ended			Ended			Ended
	July 31, 2005			July 31, 2004			July 31, 2005
Non-controlling interest:
Realized gains	$	6,935		$	797		$	17,042
Realized losses		(229	)		(2,501	)		(9,869	)
Interest income, dividend and other ordinary income		6,658			5,783			19,538
Trust expenses and income taxes		(2,880	)		(3,160	)		(9,192	)
Net trust investment income		10,484			919			17,519
Interest expense related to non-controlling interest in funeral and cemetery trust investments		(6,988	)		(201	)		(11,656	)
Interest expense related to non-controlling interest in perpetual care trust investments		(3,496	)		(718	)		(5,863	)
Total non-controlling interest		—			—			—
Investment and other income, net(1)		184			76			404
Total investment and other income, net	$	184		$	76		$	404

⁽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.

(8) Commitments and Contingencies

     Henrietta Torres and Teresa Fiore, on behalf of themselves and all others similarly situated and the General Public v. Stewart Enterprises, Inc., et al.; No. BC328961 on the docket of the Superior Court for the State of California for the County of Los Angeles, Central District. This purported class action was filed on February 17, 2005, on behalf of a nationwide class defined to include all persons, entities and organizations who purchased funeral goods and/or services in the United States from defendants at any time on or after February 17, 2001. The suit named the Company and several of its Southern California affiliates as defendants and also sought to assert claims against a class of all entities located anywhere in the United States whose ultimate parent corporation has been the Company at any time on or after February 17, 2001.

     The plaintiffs alleged that defendants failed to disclose that the prices charged by defendants for certain goods and services exceeded what defendants paid to third parties for those same goods and services on the plaintiffs’ behalf. Plaintiffs further alleged that this failure violated provisions of the Federal Trade Commission’s “Funeral Rule” that require a funeral home to disclose, if true, that it marks up the price of certain items purchased from third parties on behalf of customers on a “cash advance” or “accommodation” basis. The plaintiffs alleged that by failing to comply with the Funeral Rule, defendants (i) breached contracts with the plaintiffs, (ii) were unjustly enriched, (iii) engaged in unfair, unlawful and fraudulent business practices in violation of a provision of California’s Business

See Explanatory Note on page 2 for important information.

37

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(8) Commitments and Contingencies—(Continued)

and Professions Code, and (iv) engaged in a civil conspiracy among the defendants to breach plaintiffs’ contracts and commit acts of unfair competition. The plaintiffs sought restitution damages, disgorgement, interest, costs, and attorneys’ fees.

     By order dated May 5, 2005, the court ruled that this case was related to similar actions against Service Corporation International (“SCI”) and Alderwoods Group, Inc. On August 18, 2005, the court sustained a demurrer in the SCI case, dismissing the conspiracy count, but allowing the plaintiffs to amend the remainder of the complaint. This ruling, by stipulation of the parties, applied equally to the suit filed against the Company.

     In response, on August 29, 2005, the plaintiffs in each of the three cases filed amended complaints. SCI has filed a demurrer in its case, and Stewart joined in that demurrer on October 6, 2005. As before, the ruling on this demurrer will apply equally to the suit against the Company. Because the matter is in its early stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in this matter.

     In re: Funeral Consumer Antitrust Litigation— On May 2, 2005, a purported class action lawsuit entitledFuneral Consumers Alliance, Inc, et al. v. Service Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co.(“FCA Case”) was filed in the Federal 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.

     The suit alleges that the defendants acted jointly to fix and maintain prices on caskets and reduce competition from independent casket discounters 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.

     Thereafter, five substantially similar lawsuits were filed in the Northern District of California asserting claims under the federal antitrust laws and various state antitrust and consumer protection laws. These five suits were transferred to the division in which the FCA Case was pending and consolidated with the FCA Case (collectively referred to as the “Consolidated Consumer Cases”).

     On July 8, 2005, a purported class action was filed in the Northern District of California entitledPioneer Valley Casket Co., Inc., et al. v. Service Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co. (“Pioneer Valley Case”). The Pioneer Valley Case involves the same claims asserted in the Consolidated Consumer Cases, except that it was brought on behalf of a nationwide class defined to include only independent casket retailers. On August 15, 2005, the Court issued an order relating the Pioneer Valley Case to the Consolidated Cases, but it has not been consolidated with the Consolidated Consumer Cases for purposes of trial.

     On July 15, 2005, the defendants filed motions to dismiss for failure to plead facts sufficient to establish viable antitrust and unfair competition claims. On September 9, 2005, the Court denied the defendants’ motions to dismiss, without prejudice, but ordered the plaintiffs to file an amended and consolidated complaint that satisfies the objections raised in the motions to dismiss.

     At the defendants’ request, the Court also issued orders in late September 2005 transferring the Consolidated Consumer Cases and the Pioneer Valley Case to the United States District Court for the Southern District of Texas. The transferred cases were assigned to different judges in the Southern District of Texas, but Stewart believes they ultimately will be consolidated or related before a single judge. Because these matters are in their preliminary stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in these matters.

See Explanatory Note on page 2 for important information.

38

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(8) Commitments and Contingencies—(Continued)

     A similar action captionedRalph Lee Fancher, on behalf of himself and all others similarly situated v. Service Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., Aurora Casket Co., York Group, Inc., and Batesville Casket Co.,was filed in the United States District Court for the Eastern District of Tennessee on behalf of consumers in twenty-three states and the District of Columbia who purchased caskets. The allegations of fact were essentially the same as those made in the FCA Case, but the plaintiff in this suit alleged that the defendants violated various state antitrust, consumer protection and/or unjust enrichment laws. The plaintiff in this purported class action withdrew his complaint on August 2, 2005, and re-filed a nearly identical complaint under Tennessee law and on behalf of only Tennessee consumers in the Northern District of California on September 23, 2005, the same day that the Consolidated Consumer Cases were transferred to the Southern District of Texas. Accordingly, this case remains pending in the Northern District of California. Because these matters are in their preliminary stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in these matters.

     Civil Investigative Demands– On August 4, 2005, the Attorney General for the State of Maryland issued a civil investigative demand to the Company seeking documents and information relating to funeral and cemetery goods and services. The Attorney General for the State of Florida issued a similar civil investigative demand to the Company. The Company is cooperating with the attorneys general and has begun providing them with information relevant to their investigations. Because these matters are in their preliminary stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in these matters.

     In addition to the matters above, the Company and certain of its 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, management does not expect these matters to have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

     The Company carries insurance with coverages and coverage limits that it believes to be adequate. Although there can be no assurance that such insurance is sufficient to protect the Company against all contingencies, management believes that its insurance protection is reasonable in view of the nature and scope of the Company’s operations.

See Explanatory Note on page 2 for important information.

39

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(9) Reconciliation of Basic and Diluted Per Share Data

	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Data
Three Months Ended July 31, 2005
Earnings from continuing operations	$	10,889
Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	10,889		109,147	$	.10
Effect of dilutive securities:
Time-vest stock options assumed exercised and restricted stock		—		119
Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus time-vest stock options assumed exercised and restricted stock	$	10,889		109,266	$	.10

	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Data
Three Months Ended July 31, 2004 - Restated
Earnings from continuing operations	$	10,144
Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	10,144		107,067	$	.09
Effect of dilutive securities:
Time-vest stock options assumed exercised and restricted stock		—		1,001
Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus time-vest stock options assumed exercised and restricted stock	$	10,144		108,068	$	.09

See Explanatory Note on page 2 for important information.

40

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Data
Nine Months Ended July 31, 2005
Earnings from continuing operations before cumulative effect of change in accounting principle	$	16,045
Basic earnings per common share:
Earnings from continuing operations before cumulative effect of change in accounting principle available to common shareholders	$	16,045		109,243	$	.14
Effect of dilutive securities:
Time-vest stock options assumed exercised and restricted stock		—		187
Diluted earnings per common share:
Earnings from continuing operations before cumulative effect of change in accounting principle available to common shareholders plus time-vest stock options assumed exercised and restricted stock	$	16,045		109,430	$	.14

	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Data
Nine Months Ended July 31, 2004 — Restated
Earnings from continuing operations	$	33,861
Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	33,861		107,461	$	.31
Effect of dilutive securities:
Time-vest stock options assumed exercised and restricted stock		—		600
Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus time-vest stock options assumed exercised and restricted stock	$	33,861		108,061	$	.31

     Options to purchase 1,182,100 and 1,095,234 shares of common stock at prices ranging from $6.90 to $7.03 per share were outstanding during the three and nine months ended July 31, 2005, respectively, 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. These options expire on November 18, 2011 and December 20, 2011. Options to purchase 545,352 and 684,796 shares of common stock at prices ranging from $16.00 to $27.25 and $6.96 to $27.25 per share were outstanding during the three and nine months ended July 31, 2004, respectively, but were not included in the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common shares.

See Explanatory Note on page 2 for important information.

41

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Segment Data

     In response to comments raised by the Staff of the SEC, the Company has re-evaluated its application of SFAS No. 131, and has revised its operating and reportable segments. The Company’s historical presentation of segment data consisted of two operating and reportable segments, funeral and cemetery. The Company’s restated presentation of segment data reflects 11 operating and reportable segments consisting of a corporate trust management segment and a funeral and cemetery segment for each of five geographic areas: Central, Western, Eastern, Southern – Florida and All Other. All Other consists of the Company’s operations in Puerto Rico. The Company does not aggregate its operating segments. Therefore, its operating and reportable segments are the same.

     The Company operates four geographic divisions each with a division president: Central division, Western division, Eastern division and Southern division. The Company’s chief executive officer, who is the chief operating decision maker (“CODM”), reviews the Southern division’s operations separately for Florida and Puerto Rico. Thus, the five geographic areas are the Central division, Western division, Eastern division, Southern division-Florida and Southern division-Puerto Rico. The Company’s funeral operations and cemetery operations in each of those geographic areas are further reviewed separately, resulting in 10 segments. The Central division consists of 72 funeral homes and 46 cemeteries in Alabama, Arkansas, Illinois, Iowa, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, Tennessee, Texas and Wisconsin. The Western division consists of 56 funeral homes and 8 cemeteries in California, Oregon and Washington. The Eastern division consists of 49 funeral homes and 62 cemeteries in Georgia, Kentucky, Maryland, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia. The Southern division consists of 41 funeral homes and 21 cemeteries in Florida and 15 funeral homes and 8 cemeteries in Puerto Rico.

     The eleventh operating segment is the corporate trust management segment. The corporate trust management segment includes (i) the funeral and cemetery service and merchandise trust earnings recognized for GAAP purposes, which are further described below, and (ii) fee income related to the Company’s wholly-owned subsidiary, Investor’s Trust, Inc. (“ITI”). Trust assets and the earnings on those assets are associated exclusively with preneed sales. Because preneed services and merchandise will not be provided until an unknown future date, most states require that all or a portion of the customer payments under preneed contracts be placed in trust or escrow accounts for the benefit of the customers. These trust assets and the earnings on the trust assets are described in detail in Notes 4, 5, 6, and 7.

     ITI serves as investment advisor exclusively to the Company’s trust funds. ITI provides investment advisory services to the trusts for a fee. The Company has elected to perform these services in-house, and the fees are recognized as income as earned.

     The corporate trust management segment revenues reflect (1) investment management fees earned and (2) the realized earnings related to preneed contracts delivered, which are the earnings realized over the life of the contracts delivered during the relevant period. Earnings recognition in this segment is unrelated to investment results in the current period. Current investment results of the funeral and cemetery merchandise and service trusts are deferred and are not reflected in the statement of earnings but are disclosed in Notes 4, 5, and 7 along with the cost and market value of the trust assets. The Company’s fee income related to management of its trust assets, the investment income recognized on preneed contracts delivered and the trust assets are referred to as “corporate trust management” for the benefit of the divisions.

     Perpetual care trust earnings are reported in the geographic segments, as these revenues are recognized currently and are used to maintain the cemeteries. Perpetual care trust earnings and the cost and market values of the perpetual care trust assets are presented in Note 6.

     The accounting policies of the Company’s segments are the same as those described in Note 2. The Company evaluates the performance of its segments and allocates resources to them using a variety of profitability metrics. The most comprehensive of these measures is gross profit.

See Explanatory Note on page 2 for important information.

42

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Segment Data—(Continued)

     The Company also measures its preneed sales growth year-over-year. Preneed sales and the accounting for these sales are discussed in Notes 2(k) and 2(l), and Notes 3 through 7. Although the Company does not consider its preneed selling activities to be a separate segment, the Company is providing additional disclosure of preneed funeral and cemetery merchandise and service sales in its segment footnote as preneed sales are reviewed monthly by the Company’s CODM to assess performance and allocate resources. Preneed sales are strategically significant to the Company as those sales are one of the primary drivers of market share protection and growth. That is because preneed selling not only adds to the Company’s backlog but also strengthens at-need performance in the near-term. As such, the CODM reviews the preneed sales data in addition to revenue and gross profit.

     The Company’s operations are product-based and geographically-based. As such, the Company’s primary reportable segments presented in the following table are based on products and services and their geographical orientation.

     The Company’s funeral homes offer a complete range of funeral services and products both at the time of need and on a preneed basis. The Company’s services and products include family consultation, removal and preparation of remains, the use of funeral home facilities for visitation, worship and funeral services, transportation services, flowers and caskets. In addition to traditional funeral services, all of the Company’s funeral homes offer cremation products and services. The Company’s cemetery operations involve the sale of cemetery property and related merchandise, including lots, lawn crypts, family and community mausoleums, monuments, memorials and burial vaults, along with the sale of burial site openings and closings and inscriptions. Cemetery property and merchandise sales are made both at the time of need and on a preneed basis.

     The Company incurs certain costs at the divisional or regional level which benefit all of the funeral homes and cemeteries in the division or region such as division management compensation, divisional and regional headquarters overhead, insurance costs or legal and professional fees. These costs are allocated to the facilities in the regions or divisions using various methods including their proportionate share of sales (which can include preneed sales) or payroll. These costs are included in funeral and cemetery costs.

     The Company incurs certain other costs at its Shared Services Center which benefit all of the funeral homes and cemeteries, such as the costs to process contracts, make collections, pay vendors, deliver information system services and deliver human resource services. These costs are allocated to the divisions and further allocated to the facilities in the division using various methods including their proportionate share of sales (which can include preneed sales) and the number of employees. These costs are included in funeral and cemetery costs.

     As discussed in Note 14, effective for the fourth quarter of fiscal year 2005, the Company reorganized its divisions. As a result, the Company will revise its operating and reportable segments and reporting units in the fourth quarter of 2005.

     The operating results of the Company’s businesses sold that meet the discontinued operations criteria in SFAS No. 144 are reported in the discontinued operations section of the consolidated statements of earnings (see Note 13). The table below presents information about reported segments for the Company’s continuing operations.

See Explanatory Note on page 2 for important information.

43

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Segment Data—(Continued)

	Funeral Revenue				Cemetery Revenue(1)				Total Revenue
	Three Months		Three Months		Three Months		Three Months		Three Months		Three Months
	Ended		Ended		Ended		Ended		Ended		Ended
	July 31, 2005		July 31, 2004		July 31, 2005		July 31, 2004		July 31, 2005		July 31, 2004
Central Division	$	20,572	$	20,086	$	19,469	$	18,388	$	40,041	$	38,474
Western Division		15,045		14,662		3,128		3,821		18,173		18,483
Eastern Division		12,207		12,070		19,400		18,577		31,607		30,647
Southern Division — Florida		10,654		10,672		13,104		10,717		23,758		21,389
All Other(2)		3,117		3,379		3,850		5,966		6,967		9,345
Corporate Trust Management(3)		6,284		6,847		3,134		3,088		9,418		9,935
Total	$	67,879	$	67,716	$	62,085	$	60,557	$	129,964	$	128,273

	Funeral Revenue				Cemetery Revenue(1)				Total Revenue
	Nine Months		Nine Months		Nine Months		Nine Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended		Ended		Ended
	July 31, 2005		July 31, 2004		July 31, 2005		July 31, 2004		July 31, 2005		July 31, 2004
Central Division	$	65,265	$	64,237	$	56,223	$	59,715	$	121,488	$	123,952
Western Division		46,369		46,436		9,429		10,117		55,798		56,553
Eastern Division		40,365		39,777		54,802		52,959		95,167		92,736
Southern Division — Florida		33,704		32,991		35,726		32,559		69,430		65,550
All Other(2)		10,177		10,129		11,991		10,675		22,168		20,804
Corporate Trust Management(3)		18,667		20,648		9,293		9,353		27,960		30,001
Total	$	214,547	$	214,218	$	177,464	$	175,378	$	392,011	$	389,596

	Funeral Gross Profit					Cemetery Gross Profit(1)					Total Gross Profit
	Three Months		Three Months			Three Months		Three Months			Three Months		Three Months
	Ended		Ended			Ended		Ended			Ended		Ended
	July 31, 2005		July 31, 2004			July 31, 2005		July 31, 2004			July 31, 2005		July 31, 2004
Central Division	$	4,562	$	4,937		$	3,973	$	3,965		$	8,535	$	8,902
Western Division		894		1,878			189		848			1,083		2,726
Eastern Division		1,709		1,913			3,434		2,831			5,143		4,744
Southern Division — Florida		853		1,490			3,674		2,018			4,527		3,508
All Other(2)		242		650			231		1,151			473		1,801
Corporate Trust Management(3)		6,142		6,706			3,007		2,937			9,149		9,643
Total	$	14,402	$	17,574	(4)	$	14,508	$	13,750	(4)	$	28,910	$	31,324	(4)

See Explanatory Note on page 2 for important information.

44

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Segment Data—(Continued)

	Funeral Gross Profit					Cemetery Gross Profit(1)					Total Gross Profit
	Nine Months		Nine Months			Nine Months		Nine Months			Nine Months		Nine Months
	Ended		Ended			Ended		Ended			Ended		Ended
	July 31, 2005		July 31, 2004			July 31, 2005		July 31, 2004			July 31, 2005		July 31, 2004
Central Division	$	16,967	$	17,944		$	12,487	$	14,550		$	29,454	$	32,494
Western Division		4,863		7,710			1,216		2,506			6,079		10,216
Eastern Division		6,716		9,034			8,841		10,040			15,557		19,074
Southern Division — Florida		4,580		4,959			8,525		6,852			13,105		11,811
All Other(2)		1,667		1,799			1,465		233			3,132		2,032
Corporate Trust Management(3)		18,223		20,220			8,896		8,895			27,119		29,115
Total	$	53,016	$	61,666	(4)	$	41,430	$	43,076	(4)	$	94,446	$	104,742	(4)

	Preneed Funeral Merchandise				Preneed Cemetery Merchandise				Total Preneed Merchandise
	and Service Sales(5)				and Service Sales(5)				and Service Sales(5)
	Three Months		Three Months		Three Months		Three Months		Three Months		Three Months
	Ended		Ended		Ended		Ended		Ended		Ended
	July 31, 2005		July 31, 2004		July 31, 2005		July 31, 2004		July 31, 2005		July 31, 2004
Central Division	$	5,900	$	5,227	$	3,708	$	3,766	$	9,608	$	8,993
Western Division		8,166		7,158		1,042		971		9,208		8,129
Eastern Division		4,733		4,135		7,098		7,341		11,831		11,476
Southern Division — Florida		4,907		4,677		3,053		3,174		7,960		7,851
All Other(2)		1,242		1,193		793		929		2,035		2,122
Total	$	24,948	$	22,390	$	15,694	$	16,181	$	40,642	$	38,571

	Preneed Funeral Merchandise				Preneed Cemetery Merchandise				Total Preneed Merchandise
	and Service Sales(5)				and Service Sales(5)				and Service Sales(5)
	Nine Months		Nine Months		Nine Months		Nine Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended		Ended		Ended
	July 31, 2005		July 31, 2004		July 31, 2005		July 31, 2004		July 31, 2005		July 31, 2004
Central Division	$	17,696	$	15,504	$	10,255	$	10,377	$	27,951	$	25,881
Western Division		21,118		18,902		2,902		2,828		24,020		21,730
Eastern Division		13,495		12,296		20,353		20,374		33,848		32,670
Southern Division — Florida		14,635		13,996		9,244		9,726		23,879		23,722
All Other(2)		3,410		3,627		2,513		2,933		5,923		6,560
Total	$	70,354	$	64,325	$	45,267	$	46,238	$	115,621	$	110,563

	Total Funeral Assets				Total Cemetery Assets				Total Assets
	July 31,		October 31,		July 31,		October 31,		July 31,		October 31,
	2005		2004		2005		2004		2005		2004
Central Division	$	213,540	$	244,379	$	325,886	$	334,928	$	539,426	$	579,307
Western Division		73,557		90,331		62,550		56,414		136,107		146,745
Eastern Division		69,040		78,932		327,726		343,661		396,766		422,593
Southern Division — Florida		134,178		153,247		235,687		297,668		369,865		450,915
All Other(2)		53,687		61,300		73,125		75,417		126,812		136,717
Corporate Trust Management(3)		454,743		439,625		204,684		194,008		659,427		633,633
Reconciling Items(6)										84,800		72,423
Total									$	2,313,203	$	2,442,333

See Explanatory Note on page 2 for important information.

45

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Segment Data—(Continued)

	Funeral Goodwill				Cemetery Goodwill				Total Goodwill
	July 31,		October 31,		July 31,		October 31,		July 31,		October 31,
	2005		2004		2005		2004		2005		2004
Central Division	$	116,881	$	116,881	$	44,345	$	44,345	$	161,226	$	161,226
Western Division		—		—		—		—		—		—
Eastern Division		17,051		17,051		25,037		25,122		42,088		42,173
Southern Division — Florida		46,159		46,199		—		—		46,159		46,199
All Other(2)		18,386		17,571		—		—		18,386		17,571
Total	$	198,477	$	197,702	$	69,382	$	69,467	$	267,859	$	267,169

1)	Perpetual care trust earnings are included in the revenues and gross profit of the related geographic segment.
(2)	All Other represents the Company’s operations in Puerto Rico.
(3)	Corporate trust management consists of trust management fees and funeral and cemetery merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms and are paid by the trusts to the Company’s subsidiary, Investor’s Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. Trust management fees included in funeral revenue for the three months ended July 31, 2005 and 2004 were $1,350 and $1,323, respectively, and funeral trust earnings for the three months ended July 31, 2005 and 2004 were $4,934 and $5,524, respectively. Trust management fees included in cemetery revenue for the three months ended July 31, 2005 and 2004 were $1,256 and $1,131, respectively, and cemetery trust earnings for the three months ended July 31, 2005 and 2004 were $1,878 and $1,957, respectively. Trust management fees included in funeral revenue for the nine months ended July 31, 2005 and 2004 were $4,027 and $4,199, respectively, and funeral trust earnings for the nine months ended July 31, 2005 and 2004 were $14,640 and $16,449, respectively. Trust management fees included in cemetery revenue for the nine months ended July 31, 2005 and 2004 were $3,721 and $3,525, respectively, and cemetery trust earnings for the nine months ended July 31, 2005 and 2004 were $5,572 and $5,828, respectively.
(4)	Funeral and cemetery gross profit for the three and nine months ended July 31, 2004 do not include net preneed selling costs which would have been expensed if the accounting change described in Note 3(a) had been implemented in fiscal year 2004. The effect of net preneed selling costs is calculated by removing the amortization of deferred selling costs and including in expense the preneed selling costs incurred during 2004. The result of that calculation is the net preneed selling costs that would have reduced 2004 gross profit if the accounting change had been implemented in fiscal year 2004. Net preneed funeral selling costs amounted to $1,433 and $3,588 for the three and nine months ended July 31, 2004, respectively. Net preneed cemetery selling costs amounted to $128 and $1,129 for the three and nine months ended July 31, 2004, respectively.
(5)	Preneed sales amounts represent total preneed funeral and cemetery service and merchandise sales generated in the applicable period, net of cancellations.
(6)	Reconciling items consist of unallocated corporate assets.

See Explanatory Note on page 2 for important information.

46

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Segment Data—(Continued)

     A reconciliation of total segment gross profit to total earnings from continuing operations before income taxes and cumulative effect of change in accounting principle for the three and nine months ended July 31, 2005 and 2004 is as follows:

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2005			2004			2005			2004
				(Restated)						(Restated)
Gross profit for reportable segments	$	28,910		$	31,324		$	94,446		$	104,742
Corporate general and administrative expenses		(5,545	)		(4,150	)		(14,343	)		(12,684	)
Separation charges		(147	)		(1,085	)		(147	)		(3,216	)
Gains on dispositions and impairment (losses), net		63			304			1,300			54
Other operating income, net		571			1,000			1,069			1,948
Interest expense		(6,456	)		(11,502	)		(23,503	)		(35,976	)
Loss on early extinguishment of debt		(114	)		—			(32,822	)		—
Investment and other income (expense), net		184			76			404			(992	)
Earnings from continuing operations before income taxes and cumulative effect of change in accounting principle	$	17,466		$	15,967		$	26,404		$	53,876

See Explanatory Note on page 2 for important information.

47

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11) Supplementary Information

     The detail of certain income statement accounts is as follows for the three and nine months ended July 31, 2005 and 2004.

	Three Months Ended					Nine Months Ended
	July 31,					July 31,
	2005			2004		2005		2004
Service revenue
Funeral	$	38,748		$	38,004	$	121,756	$	120,378
Cemetery		16,052			13,174		44,804		42,982
			��
		54,800			51,178		166,560		163,360
Merchandise revenue
Funeral		27,116			27,540		86,783		87,052
Cemetery		41,939			43,148		120,933		119,291
		69,055			70,688		207,716		206,343
Other revenue
Funeral		2,015			2,172		6,008		6,788
Cemetery		4,094			4,235		11,727		13,105
		6,109			6,407		17,735		19,893
Total revenue	$	129,964		$	128,273	$	392,011	$	389,596
Service costs
Funeral	$	14,024		$	11,985	$	40,200	$	35,892
Cemetery		10,772			10,412		30,166		29,124
		24,796			22,397		70,366		65,016
Merchandise costs
Funeral		15,877			15,196		48,698		47,483
Cemetery		23,256			23,320		66,227		64,100
		39,133			38,516		114,925		111,583
General and administrative expenses
Funeral		23,576			22,961		72,633		69,177
Cemetery		13,549			13,075		39,641		39,078
		37,125			36,036		112,274		108,255
Total costs	$	101,054		$	96,949	$	297,565	$	284,854

See Explanatory Note on page 2 for important information.

48

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes and Senior Notes

     The following tables present the condensed consolidating historical financial statements as of July 31, 2005 and October 31, 2004 and for the three and nine months ended July 31, 2005 and 2004, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the 10.75 percent senior subordinated notes and 6.25 percent senior notes, and the financial results of the Company’s subsidiaries that do not serve as guarantors. Non-guarantor subsidiaries include the Puerto Rican subsidiaries, Investor’s Trust, Inc. and certain immaterial domestic subsidiaries, which are prohibited by law from guaranteeing the senior subordinated notes and senior notes. The guarantees are full and unconditional and joint and several. The guarantor subsidiaries are wholly-owned directly or indirectly by the Company, except that the Company owned 99.5 percent and 98.4 percent of two immaterial guarantor subsidiaries.

Condensed Consolidating Statements of Earnings and Other Comprehensive Income

	Three Months Ended July 31, 2005
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	62,991		$	4,888		$	—		$	67,879
Cemetery		—			56,395			5,690			—			62,085
		—			119,386			10,578			—			129,964
Costs and expenses:
Funeral		—			50,119			3,358			—			53,477
Cemetery		—			43,606			3,971			—			47,577
		—			93,725			7,329			—			101,054
Gross profit		—			25,661			3,249			—			28,910
Corporate general and administrative expenses		(5,545	)		—			—			—			(5,545	)
Separation charges		(147	)		—			—			—			(147	)
Gains on dispositions and impairment (losses), net		—			(26	)		89			—			63
Other operating income, net		79			166			326			—			571
Operating earnings (loss)		(5,613	)		25,801			3,664			—			23,852
Interest income (expense)		14,483			(18,562	)		(2,377	)		—			(6,456	)
Loss on early extinguishment of debt		(114	)		—			—			—			(114	)
Investment and other income, net		184			—			—			—			184
Earnings from continuing operations before income taxes		8,940			7,239			1,287			—			17,466
Income taxes		2,926			2,762			889			—			6,577
Earnings from continuing operations		6,014			4,477			398			—			10,889
Discontinued operations:
Earnings (loss) from discontinued operations before income taxes		—			(281	)		871			—			590
Income tax benefit		—			(157	)		—			—			(157	)
Earnings (loss) from discontinued operations		—			(124	)		871			—			747
Net earnings before equity in subsidiaries		6,014			4,353			1,269			—			11,636
Equity in subsidiaries		5,622			—			—			(5,622	)		—
Net earnings		11,636			4,353			1,269			(5,622	)		11,636
Other comprehensive loss, net		(2	)		—			(2	)		2			(2	)
Comprehensive income	$	11,634		$	4,353		$	1,267		$	(5,620	)	$	11,634

See Explanatory Note on page 2 for important information.

49

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes and Senior Notes—(Continued)

Condensed Consolidating Statements of Earnings and Other Comprehensive Income

	Three Months Ended July 31, 2004
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(Restated)			(Restated)			(Restated)			(Restated)			(Restated)
Revenues:
Funeral	$	—		$	62,676		$	5,040		$	—		$	67,716
Cemetery		—			54,634			5,923			—			60,557
		—			117,310			10,963			—			128,273
Costs and expenses:
Funeral		—			46,998			3,144			—			50,142
Cemetery		—			42,362			4,445			—			46,807
		—			89,360			7,589			—			96,949
Gross profit		—			27,950			3,374			—			31,324
Corporate general and administrative expenses		(4,150	)		—			—			—			(4,150	)
Separation charges		(1,085	)		—			—			—			(1,085	)
Gains on dispositions and impairment (losses), net		—			(170	)		474			—			304
Other operating income, net		28			863			109			—			1,000
Operating earnings (loss)		(5,207	)		28,643			3,957			—			27,393
Interest income (expense)		10,246			(19,697	)		(2,051	)		—			(11,502	)
Investment and other income, net		76			—			—			—			76
Earnings from continuing operations before income taxes		5,115			8,946			1,906			—			15,967
Income taxes		1,665			3,335			823			—			5,823
Earnings from continuing operations		3,450			5,611			1,083			—			10,144
Discontinued operations:
Earnings from discontinued operations before income taxes		—			532			4			—			536
Income tax benefit		—			(1,207	)		—			—			(1,207	)
Earnings from discontinued operations		—			1,739			4			—			1,743
Net earnings before equity in subsidiaries		3,450			7,350			1,087			—			11,887
Equity in subsidiaries		8,437			—			—			(8,437	)		—
Net earnings		11,887			7,350			1,087			(8,437	)		11,887
Other comprehensive income, net		287			—			—			—			287
Comprehensive income	$	12,174		$	7,350		$	1,087		$	(8,437	)	$	12,174

See Explanatory Note on page 2 for important information.

50

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes and Senior Notes—(Continued)

Condensed Consolidating Statements of Earnings and Other Comprehensive Income

	Nine Months Ended July 31, 2005
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Revenues:
Funeral	$	—		$	199,164		$	15,383		$	—	$	214,547
Cemetery		—			160,262			17,202			—		177,464
		—			359,426			32,585			—		392,011
Costs and expenses:
Funeral		—			151,732			9,799			—		161,531
Cemetery		—			124,236			11,798			—		136,034
		—			275,968			21,597			—		297,565
Gross profit		—			83,458			10,988			—		94,446
Corporate general and administrative expenses		(14,343	)		—			—			—		(14,343	)
Separation charges		(147	)		—			—			—		(147	)
Gains on dispositions and impairment (losses), net		—			961			339			—		1,300
Other operating income, net		240			416			413			—		1,069
Operating earnings (loss)		(14,250	)		84,835			11,740			—		82,325
Interest income (expense)		40,043			(57,375	)		(6,171	)		—		(23,503	)
Loss on early extinguishment of debt		(32,822	)		—			—					(32,822	)
Investment and other income, net		404			—			—			—		404
Earnings (loss) from continuing operations before income taxes		(6,625	)		27,460			5,569			—		26,404
Income tax expense (benefit)		(2,505	)		10,233			2,631			—		10,359
Earnings (loss) from continuing operations		(4,120	)		17,227			2,938			—		16,045
Discontinued operations:
Earnings (loss) from discontinued operations before income taxes		—			(246	)		1,215			—		969
Income tax benefit		—			(48	)		—			—		(48	)
Earnings (loss) from discontinued operations		—			(198	)		1,215			—		1,017
Earnings (loss) before cumulative effect of change in accounting principle		(4,120	)		17,029			4,153			—		17,062
Cumulative effect of change in accounting principle		—			(131,395	)		(9,923	)		—		(141,318	)
Net loss before equity (loss) in subsidiaries		(4,120	)		(114,366	)		(5,770	)		—		(124,256	)
Equity (loss) in subsidiaries		(120,136	)		—			—			120,136		—
Net loss		(124,256	)		(114,366	)		(5,770	)		120,136		(124,256	)
Other comprehensive income (loss), net		331			—			(2	)		2		331
Comprehensive loss	$	(123,925	)	$	(114,366	)	$	(5,772	)	$	120,138	$	(123,925	)

See Explanatory Note on page 2 for important information.

51

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes and Senior Notes—(Continued)

Condensed Consolidating Statements of Earnings and Other Comprehensive Income

	Nine Months Ended July 31, 2004
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(Restated)			(Restated)			(Restated)			(Restated)			(Restated)
Revenues:
Funeral	$	—		$	198,637		$	15,581		$	—		$	214,218
Cemetery		—			157,290			18,088			—			175,378
		—			355,927			33,669			—			389,596
Costs and expenses:
Funeral		—			142,898			9,654			—			152,552
Cemetery		—			118,697			13,605			—			132,302
		—			261,595			23,259			—			284,854
Gross profit		—			94,332			10,410			—			104,742
Corporate general and administrative expenses		(12,684	)		—			—			—			(12,684	)
Separation charges		(1,567	)		(1,629	)		(20	)		—			(3,216	)
Gains on dispositions and impairment (losses), net		—			(676	)		730			—			54
Other operating income (expense), net		297			1,666			(15	)		—			1,948
Operating earnings (loss)		(13,954	)		93,693			11,105			—			90,844
Interest income (expense)		29,670			(59,364	)		(6,282	)		—			(35,976	)
Investment and other income (expense), net		(992	)		—			—			—			(992	)
Earnings from continuing operations before income taxes		14,724			34,329			4,823			—			53,876
Income taxes		4,468			12,865			2,682			—			20,015
Earnings from continuing operations		10,256			21,464			2,141			—			33,861
Discontinued operations:
Earnings from discontinued operations before income taxes		—			2,555			71			—			2,626
Income tax benefit		—			(1,196	)		—			—			(1,196	)
Earnings from discontinued operations		—			3,751			71			—			3,822
Net earnings before equity in subsidiaries		10,256			25,215			2,212			—			37,683
Equity in subsidiaries		27,427			—			—			(27,427	)		—
Net earnings		37,683			25,215			2,212			(27,427	)		37,683
Other comprehensive income, net		1,888			—			—			—			1,888
Comprehensive income	$	39,571		$	25,215		$	2,212		$	(27,427	)	$	39,571

See Explanatory Note on page 2 for important information.

52

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes and Senior Notes—(Continued)

Condensed Consolidating Balance Sheets

	July 31, 2005
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalent investments	$	22,937		$	6,147		$	251		$	—		$	29,335
Marketable securities		—			—			1,290			—			1,290
Receivables, net of allowances		7,993			41,520			13,196			—			62,709
Inventories		438			29,966			6,854			—			37,258
Prepaid expenses		666			2,712			248			—			3,626
Deferred income taxes, net		2,145			2,053			—			—			4,198
Assets held for sale		—			738			—			—			738
Total current assets		34,179			83,136			21,839			—			139,154
Receivables due beyond one year, net of allowances		—			63,575			13,146			—			76,721
Preneed funeral receivables and trust investments		—			503,230			11,491			—			514,721
Preneed cemetery receivables and trust investments		—			244,686			18,770			—			263,456
Goodwill		—			247,513			20,346			—			267,859
Deferred charges		3,770			14,846			949			—			19,565
Cemetery property, at cost		—			349,896			20,293			—			370,189
Property and equipment, at cost		34,095			432,789			36,218			—			503,102
Less accumulated depreciation		19,000			170,046			10,887			—			199,933
Net property and equipment		15,095			262,743			25,331			—			303,169
Deferred income taxes, net		12,808			105,828			19,487			—			138,123
Cemetery perpetual care trust investments		—			218,829			—			—			218,829
Other assets		105			1,312			—			—			1,417
Total assets	$	65,957		$	2,095,594		$	151,652		$	—		$	2,313,203
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	3,232		$	—		$	—		$	—		$	3,232
Accounts payable		137			7,101			223			—			7,461
Accrued expenses and other current liabilities		15,046			34,357			4,638			—			54,041
Liabilities associated with assets held for sale		—			401			—			—			401
Total current liabilities		18,415			41,859			4,861			—			65,135
Long-term debt, less current maturities		377,552			—			30,000			—			407,552
Intercompany payables, net		(1,011,181	)		989,119			22,062			—			—
Deferred preneed funeral revenue		—			76,371			62,360			—			138,731
Deferred preneed cemetery revenue		—			265,500			27,428			—			292,928
Non-controlling interest in funeral and cemetery trusts		—			645,739			—			—			645,739
Other long-term liabilities		145,749			2,157			—			(136,843	)		11,063
Total liabilities		(469,465	)		2,020,745			146,711			(136,843	)		1,561,148
Non-controlling interest in perpetual care trusts		—			216,633			—			—			216,633
Common stock		108,669			426			52			(478	)		108,669
Other		426,755			(142,210	)		4,891			137,319			426,755
Accumulated other comprehensive loss		(2	)		—			(2	)		2			(2	)
Total shareholders’ equity		535,422			(141,784	)		4,941			136,843			535,422
Total liabilities and shareholders’ equity	$	65,957		$	2,095,594		$	151,652		$	—		$	2,313,203

See Explanatory Note on page 2 for important information.

53

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes and Senior Notes—(Continued)

Condensed Consolidating Balance Sheets

	October 31, 2004
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries		Eliminations			Consolidated
	(Restated)			(Restated)			(Restated)		(Restated)			(Restated)
ASSETS
Current assets:
Cash and cash equivalent investments	$	13,553		$	7,625		$	336	$	—		$	21,514
Marketable securities		—			16			1,281		—			1,297
Receivables, net of allowances		4,551			41,087			14,529		—			60,167
Inventories		389			32,228			6,608		—			39,225
Prepaid expenses		822			2,117			14		—			2,953
Deferred income taxes, net		2,263			2,259			—		—			4,522
Assets held for sale		—			7,393			3,100		—			10,493
Total current assets		21,578			92,725			25,868		—			140,171
Receivables due beyond one year, net of allowances		98			64,139			14,455		—			78,692
Preneed funeral receivables and trust investments		—			487,840			15,968		—			503,808
Preneed cemetery receivables and trust investments		—			232,493			25,683		—			258,176
Goodwill		—			242,007			25,162		—			267,169
Deferred charges		4,859			229,507			19,912		—			254,278
Cemetery property, at cost		—			345,533			24,801		—			370,334
Property and equipment, at cost		31,845			426,969			33,638		—			492,452
Less accumulated depreciation		17,273			161,931			10,158		—			189,362
Net property and equipment		14,572			265,038			23,480		—			303,090
Deferred income taxes, net		12,808			29,198			12,934		—			54,940
Cemetery perpetual care trust investments		—			210,267			—		—			210,267
Other assets		104			1,304			—		—			1,408
Total assets	$	54,019		$	2,200,051		$	188,263	$	—		$	2,442,333
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	1,725		$	—		$	—	$	—		$	1,725
Accounts payable		1,090			7,662			323		—			9,075
Accrued expenses and other current liabilities		17,992			35,332			5,645		—			58,969
Liabilities associated with assets held for sale		—			4,777			1,714		—			6,491
Total current liabilities		20,807			47,771			7,682		—			76,260
Long-term debt, less current maturities		385,080			—			30,000		—			415,080
Intercompany payables, net		(1,041,358	)		1,001,193			40,165		—			—
Deferred preneed funeral revenue		—			95,911			61,056		—			156,967
Deferred preneed cemetery revenue		—			245,495			38,763		—			284,258
Non-controlling interest in funeral and cemetery trusts		—			627,344			—		—			627,344
Other long-term liabilities		27,089			860			—		(16,819	)		11,130
Total liabilities		(608,382	)		2,018,574			177,666		(16,819	)		1,571,039
Non-controlling interest in perpetual care trusts		—			208,893			—		—			208,893
Common stock		107,885			426			52		(478	)		107,885
Other		554,849			(27,842	)		10,545		17,297			554,849
Accumulated other comprehensive loss		(333	)		—			—		—			(333	)
Total shareholders’ equity		662,401			(27,416	)		10,597		16,819			662,401
Total liabilities and shareholders’ equity	$	54,019		$	2,200,051		$	188,263	$	—		$	2,442,333

See Explanatory Note on page 2 for important information.

54

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes and Senior Notes—(Continued)

Condensed Consolidating Statements of Cash Flows

	Nine Months Ended July 31, 2005
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities	$	21,424		$	24,857		$	12,909		$	—	$	59,190
Cash flows from investing activities:
Proceeds from sales of marketable securities		—			16			—			—		16
Proceeds from sale of assets, net		(328	)		7,594			2,465			—		9,731
Additions to property and equipment		(2,751	)		(11,647	)		(3,498	)		—		(17,896	)
Other		—			98			15			—		113
Net cash used in investing activities		(3,079	)		(3,939	)		(1,018	)		—		(8,036	)
Cash flows from financing activities:
Proceeds from long-term debt		440,000			—			—			—		440,000
Repayments of long-term debt		(446,021	)		—			—			—		(446,021	)
Intercompany receivables (payables)		34,372			(22,396	)		(11,976	)		—		—
Debt issue costs and tender premium		(31,710	)		—			—			—		(31,710	)
Issuance of common stock		13,541			—			—			—		13,541
Purchase and retirement of common stock		(13,685	)		—			—			—		(13,685	)
Dividends		(5,466	)		—			—			—		(5,466	)
Other		8			—			—			—		8
Net cash used in financing activities		(8,961	)		(22,396	)		(11,976	)		—		(43,333	)
Net increase (decrease) in cash		9,384			(1,478	)		(85	)		—		7,821
Cash and cash equivalents, beginning of period		13,553			7,625			336			—		21,514
Cash and cash equivalents, end of period	$	22,937		$	6,147		$	251		$	—	$	29,335

See Explanatory Note on page 2 for important information.

55

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes and Senior Notes — (Continued)

Condensed Consolidating Statements of Cash Flows

	Nine Months Ended July 31, 2004
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities	$	45,504		$	18,266		$	4,832		$	—	$	68,602
Cash flows from investing activities:
Proceeds from sales of marketable securities		1,121			—			—			—		1,121
Proceeds from sale of assets, net		(1,203	)		14,074			—			—		12,871
Additions to property and equipment		(2,393	)		(11,452	)		(435	)		—		(14,280	)
Other		—			199			9			—		208
Net cash provided by (used in) investing activities		(2,475	)		2,821			(426	)		—		(80	)
Cash flows from financing activities:
Repayments of long-term debt		(64,748	)		—			—			—		(64,748	)
Intercompany receivables (payables)		24,868			(20,120	)		(4,748	)		—		—
Issuance of common stock		13,066			—			—			—		13,066
Purchase and retirement of common stock		(19,349	)		—			—			—		(19,349	)
Net cash used in financing activities		(46,163	)		(20,120	)		(4,748	)		—		(71,031	)
Net increase (decrease) in cash		(3,134	)		967			(342	)		—		(2,509	)
Cash and cash equivalents, beginning of period		18,975			(478	)		88			—		18,585
Cash and cash equivalents, end of period	$	15,841		$	489		$	(254	)	$	—	$	16,076

See Explanatory Note on page 2 for important information.

56

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(13) Discontinued Operations, Assets Held for Sale and Impairment Charges

     In December 2003, the Company announced plans to close or sell a number of small businesses, primarily small funeral homes, most of which were acquired as part of a group of facilities, that were performing below acceptable levels or no longer fit the Company’s operating profile. One of the criteria for classification as discontinued operations or assets held for sale is that the transfer of the asset is normally expected to qualify for accounting recognition as a sale within one year’s time, with certain exceptions. Certain of the businesses classified as discontinued operations during the first quarter of fiscal year 2004 that were not sold within the one-year requirement were reclassified as continuing operations in the first quarter of fiscal year 2005. Subsequently, the Company has sold seven of these businesses. The operating results of those businesses that met the criteria in SFAS No. 144 that were sold during fiscal years 2005 or 2004 are currently reported in the discontinued operations section of the 2005 and 2004 consolidated statements of earnings. As of July 31, 2005, since the inception of the divestiture plan, the Company had closed on the sale of 71 businesses for approximately $29,000 in proceeds. As of July 31, 2005, total assets and total liabilities of the remaining businesses were $3,283 and $1,245, respectively. The operations of the remaining businesses (including $181 and $160 in revenue and $0 and ($4) in gross profit for the three months ended July 31, 2005 and 2004, respectively, and $583 and $541 in revenue and $25 and $1 in gross profit for the nine months ended July 31, 2005 and 2004, respectively) are included in continuing operations in the consolidated statements of earnings for the three and nine months ended July 31, 2005 and 2004.

     As discussed in Note 1, the restatement of goodwill on the Company’s balance sheet had the effect of changing the net book value of the assets the Company has sold as part of the Company’s plan initiated in December 2003 to sell a number of its businesses and the net book value of assets held for sale on the Company’s balance sheet. Due to these changes and changes in the classification of certain businesses between continuing operations and discontinued operations, the gain or loss on those sales has been re-evaluated and restated as has the assets held for sale balance. In 2004, this resulted in an additional net gain of $579, of which $638 occurred in the three months ended July 31, 2004 (a loss of $282 relates to continuing operations and a gain of $920 relates to discontinued operations) and $6 of which occurred in the nine months ended July 31, 2004 (a loss of $441 relates to continuing operations and a gain of $447 relates to discontinued operations).

     For the nine months ended July 31, 2005, the Company recorded net gains on dispositions and impairment (losses) of $63 and $1,300 for the three and nine months ended July 31, 2005 in continuing operations, respectively, for long-lived assets sold, primarily real estate, that did not qualify as discontinued operations. The Company also recorded net gains on dispositions and impairment (losses) related to discontinued operations of $622 and $1,068 for the three and nine months ended July 31, 2005, which is reflected in the discontinued operations section of the consolidated statement of earnings, all of which relates to businesses sold.

See Explanatory Note on page 2 for important information.

57

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(13) Discontinued Operations, Assets Held for Sale and Impairment Charges—(Continued)

     A summary of the assets and liabilities included in the “assets held for sale” and “liabilities associated with assets held for sale” line items as of July 31, 2005 and October 31, 2004 is set forth below. As of July 31, 2005, these assets and liabilities related primarily to the six remaining businesses the Company intends to sell. As of October 31, 2004, these assets and liabilities relate primarily to the businesses sold during the nine months ended July 31, 2005.

     The operating results of the discontinued operations for the three and nine months ended July 31, 2005 and 2004, respectively, are also set forth below:

	July 31, 2005		October 31, 2004
			Restated
Assets
Receivables, net of allowances	$	44	$	519
Inventories and other current assets		200		1,093
Net property and equipment		147		3,851
Preneed funeral receivables and trust investments		193		2,433
Preneed cemetery receivables and trust investments		65		1,283
Deferred income taxes, net		49		—
Deferred charges and other assets		40		1,314
Assets held for sale	$	738	$	10,493
Liabilities
Deferred income taxes, net	$	—	$	188
Deferred preneed funeral revenue		87		2,384
Deferred preneed cemetery revenue		52		705
Other long-term liabilities		5		—
Non-controlling interest in funeral and cemetery trusts		257		3,214
Liabilities associated with assets held for sale	$	401	$	6,491

	Three Months Ended					Nine Months Ended
	July 31,					July 31,
	2005			2004		2005			2004
				(Restated)					(Restated)
Revenue:
Funeral	$	139		$	2,551	$	685		$	10,317
Cemetery		82			199		493			964
	$	221		$	2,750	$	1,178		$	11,281
Gross profit:
Funeral	$	(52	)	$	188	$	(264	)	$	898
Cemetery		19			35		166			357
		(33	)		223		(98	)		1,255
Gains on dispositions and impairment (losses), net		622			277		1,068			1,305
Other operating income (expense), net		1			36		(1	)		66
Earnings from discontinued operations before income taxes	$	590		$	536	$	969		$	2,626

See Explanatory Note on page 2 for important information.

58

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(14) Separation Charges

     On July 14, 2005, the Company named a new Chief Operating Officer and announced that it was reorganizing its divisions. The reorganization consolidated operations from four divisions to two: Eastern and Western. These changes are a result of the Company’s recent strategic planning process and are effective for the fourth quarter of fiscal year 2005. The total charge for severance and other costs associated with the reorganization is expected to be approximately $1,000, the majority of which will be incurred during the fourth quarter of fiscal year 2005. During the quarter ended July 31, 2005, the Company recorded a charge of $147 for these costs.

     In December 2003, the Company announced plans to restructure and reduce its workforce by approximately 300 employees throughout the organization. For fiscal year 2004, the Company recorded a charge for severance and other costs associated with the workforce reductions of $2,435 ($1,510 after tax, or $.01 per share), of which $85 was recorded during the three months ended July 31, 2004 and $2,216 ($1,374 after tax, or $.01 per share) was recorded during the nine months ended July 31, 2004. There are no material remaining costs under the workforce reduction plan. The plan was completed June 1, 2004.

     In the third quarter of fiscal year 2004, the Company recorded charges of $1,000 related to separation pay of a former executive officer. For additional information, see Note 18.

(15) Long-term Debt

	July 31, 2005		October 31, 2004
Long-term debt:
Senior secured credit facility:
Revolving credit facility	$	—	$	59,000
Term Loan B		208,651		54,005
6.25% senior notes due 2013		200,000		—
10.75% senior subordinated notes due 2008		—		300,000
Other, principally seller financing of acquired operations or assumption upon acquisition, weighted average interest rates of 3.6% and 4.6% as of July 31, 2005 and October 31, 2004, respectively, partially secured by assets of subsidiaries, with maturities through 2022		2,133		3,800
Total long-term debt		410,784		416,805
Less current maturities		3,232		1,725
	$	407,552	$	415,080

     As of October 31, 2004, the Company’s revolving credit facility was set to mature in June of 2005, and the Company’s Term Loan B was set to mature in October of 2005. On November 19, 2004, the Company entered into an amended and restated senior secured credit facility consisting of a $125,000 five-year revolving credit facility and a $100,000 seven-year Term Loan B. Thus, in the October 31, 2004 balance sheet, the $59,000 outstanding balance of the revolving credit facility and the $54,005 outstanding balance of the Term Loan B were classified as long-term debt. During the first quarter of fiscal year 2005, the Company incurred a charge for early extinguishment of debt of $2,651 ($1,723 after tax, or $.02 per share) to write off fees associated with the prior facility.

     The new facility consists of a $125,000 five-year revolving credit facility and a $100,000 seven-year Term Loan B. The senior secured credit facility also included an accordion feature which provided for the Company to borrow additional funds on a one-time basis. As a result of the refinancing, the leverage-based grid pricing for the interest rate on the Company’s new revolving credit facility was reduced to LIBOR plus 150.0 basis points at closing, representing a 50 basis-point reduction. The grid for the new revolving credit facility ranges from 137.5 to

See Explanatory Note on page 2 for important information.

59

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(15) Long-term Debt—(Continued)

     200.0 basis points. The Company pays a quarterly commitment fee of 37.5 to 50.0 basis points, based on the Company’s consolidated leverage ratio. The interest rate on the Company’s Term Loan B was reduced to LIBOR plus 175.0 basis points, which is 75 basis points below the prior facility and is not subject to grid pricing. In connection with the refinancing in February 2005 of substantially all of the Company’s 10.75 percent senior subordinated notes (which is discussed below), the Company borrowed an additional $130,000 in Term Loan B under the aforementioned accordion feature of its senior secured credit facility. The Term Loan B matures on November 19, 2011 with 94 percent of the principal due in 2011, and the revolving credit facility matures on November 19, 2009.

     As of July 31, 2005, there were no amounts drawn on the Company’s $125,000 revolving credit facility. As of July 31, 2005, after giving consideration to the $15,658 of outstanding letters of credit and $41,061 bond the Company is required to maintain to guarantee its obligations relating to funds it withdrew in fiscal year 2001 from trust funds in Florida, the Company’s availability under the revolving credit facility was $68,281. As of July 31, 2005 and October 31, 2004, the weighted average interest rates of the Company’s revolving credit facility and Term Loan B that were not hedged by the interest rate swap agreement in effect at October 31, 2004 and were subject to short-term variable interest rates were approximately 5.0 percent and 4.0 percent, respectively. See Note 2(p) for information on derivatives. The Company’s revolving credit facility includes a provision whereby the revolving credit commitment may be terminated by the lenders if an event of default occurs and is continuing.

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

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

     The Company’s senior secured credit facility contains affirmative and negative covenants that, among other things, impose limitations on liens, mergers, consolidations and asset sales, the incurrence of debt, and the payment of dividends. The senior secured credit facility also contains mandatory and optional prepayment provisions, financial covenants and customary events of default. If an event of default occurs, the lenders under the senior secured credit facility are entitled, among other rights, to declare amounts outstanding under the facility to be due and payable immediately. For further information regarding the Company’s senior secured credit facility, see Note 18 to the consolidated financial statements of the Company’s Amended 2004 Form 10-K.

     On February 18, 2005, the Company completed its tender offer and consent solicitation for any and all of its $300,000 10.75 percent senior subordinated notes. The Company purchased a total of $298,250 in aggregate principal amount of the notes in the offer. In the second quarter of fiscal year 2005, the Company incurred a charge for early extinguishment of debt of approximately $30,057 ($19,210 after tax, or $.18 per share) representing $25,369 for a tender premium, related fees and expenses and $4,688 for the write-off of the remaining unamortized fees on the senior subordinated notes.

See Explanatory Note on page 2 for important information.

60

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(15) Long-term Debt—(Continued)

     The Company redeemed the remaining $1,750 principal amount of senior subordinated notes on the first call date of July 1, 2005 at the aggregate redemption price of $1,844, which was funded by cash on hand. In the third quarter of fiscal year 2005, the Company recorded a charge for the early extinguishment of debt of approximately $114 including the call premium and write-off of the remaining unamortized fees on the senior subordinated notes.

     The Company funded the tender offer for the 10.75 percent senior subordinated notes, including related tender premiums, fees, expenses and accrued interest of $28,931, with the net proceeds of the $130,000 in additional Term Loan B borrowings described above, a portion of its available cash, and the net proceeds of the issuance of $200,000 6.25 percent senior notes due 2013 (the “6.25 percent senior notes”), which were issued on February 11, 2005.

     The 6.25 percent senior notes are governed by the terms of an indenture dated as of February 11, 2005. Prior to February 15, 2009, the 6.25 percent senior notes are not redeemable. Beginning on February 15, 2009, the Company may redeem the 6.25 percent senior notes in whole or in part at any time at the redemption prices set forth in the indenture, plus any accrued and unpaid interest. In addition, upon a change of control of the Company, holders of the 6.25 percent senior notes will have the right to require the Company to repurchase all or any part of their 6.25 percent senior notes for cash at a price equal to 101 percent of the aggregate principal amount of the 6.25 percent senior notes repurchased, plus any accrued and unpaid interest.

     The 6.25 percent senior notes are guaranteed, jointly and severally, by the SEI Guarantors, and are the Company’s general unsecured and unsubordinated obligations, and the guarantees of the 6.25 percent senior notes are the SEI Guarantors’ general unsecured and unsubordinated obligations. Accordingly, they will rank equally in right of payment with all of the Company’s, in the case of the 6.25 percent senior notes, and the SEI Guarantors’, in the case of their guarantees of the 6.25 percent senior notes, existing and future unsubordinated indebtedness and senior to any existing and future subordinated indebtedness.

     In addition, the 6.25 percent senior notes effectively rank junior to any of the Company’s, and the guarantees of the 6.25 percent senior notes effectively rank junior to the SEI Guarantors’, existing and future secured indebtedness, including obligations under the Company’s senior secured credit facility, to the extent of the assets securing such indebtedness.

     The indenture contains affirmative and negative covenants that, among other things, limit the Company and the SEI Guarantors’ ability to engage in sale and leaseback transactions, effect a consolidation or merger or sale, transfer, lease, or other disposition of all or substantially all assets, and create liens on assets. The indenture also contains customary events of default. Upon the occurrence of certain events of default, the Trustee or the holders of the 6.25 percent senior notes may declare all outstanding 6.25 percent senior notes to be due and payable immediately.

     In connection with the issuance of the 6.25 percent senior notes, the Company entered into a registration rights agreement that requires that a registration statement be filed and declared effective by the SEC, and that an exchange offer be conducted providing for the exchange of the unregistered notes for similar registered notes, all within specified times.

     Due primarily to the restatements described in Note 1 and the deferred revenue project described in the Explanatory Note on page 2, the Company has so far been unable to cause the required registration statement to become effective and therefore is required to pay additional interest to the note holders until the default is cured. Additional interest began to accrue on June 12, 2005 at a rate of 0.50 percent per annum on the principal amount of the notes for a period of 90-days. The additional interest increases 0.50 percent for each 90-day period thereafter so long as the default exists, up to a maximum increase of 1.50 percent per annum. The additional interest is payable at the regular interest payment dates.

See Explanatory Note on page 2 for important information.

61

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(15) Long-term Debt—(Continued)

     Section 4.03 of the indenture governing the Company’s 6.25 percent notes requires it to furnish to the trustee for forwarding to the holders of the notes, within the time periods specified in the SEC’s rules and regulations, all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K, including a “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and, with respect to the annual information only, a report on the annual financial statements by the Company’s certified independent accountants. In addition, the Company must file a copy with the SEC for public availability within the time periods specified in the SEC’s rules and regulations. An event of default would occur if the Company failed to provide that information within 30 days after receipt of written notice by the trustee or holders of at least 25 percent of the principal amount outstanding. The Company is furnishing this report to the trustee and filing it with the SEC, and believes that doing so will comply with the requirements of the indenture.

     The restatements described in Note 1 may have created defaults or events of default related to the requirement to file the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America under the Company’s senior secured credit facility. However, the Company sought and received a waiver of any default or event of default that may have arisen as a result of such restatements. After consideration of the waiver, the Company was in compliance with its debt covenants as of July 31, 2005 and October 31, 2004.

(16) Consolidated Comprehensive Income

     Consolidated comprehensive income (loss) for the nine months ended July 31, 2005 and 2004 is as follows:

	Nine Months Ended July 31,
	2005			2004
				(Restated)
Net earnings (loss)	$	(124,256	)	$	37,683
Other comprehensive income:
Reclassification adjustment for realized loss on investments, net of deferred tax benefit of $454		—			740
Unrealized appreciation (depreciation) of investments, net of deferred tax expense of ($1) and ($14), respectively		(2	)		57
Termination of derivative instrument designated and qualifying as a cash flow hedging instrument, net of deferred tax expense of ($119)		—			194
Unrealized appreciation on derivative instrument designated and qualifying as a cash flow hedging instrument, net of deferred tax expense of ($204) and ($507), respectively		333			897
Reduction (increase) in net unrealized losses associated with available- for-sale securities of the trusts		33,797			(3,639	)
Reclassification of the net unrealized losses activity attributable to the non-controlling interest holders		(33,797	)		3,639
Total other comprehensive income		331			1,888
Total comprehensive income (loss)	$	(123,925	)	$	39,571

See Explanatory Note on page 2 for important information.

62

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(17) Guarantees

     The Company’s obligations under its senior secured credit facility and 6.25 percent senior notes are guaranteed by all of its existing and future direct and indirect subsidiaries formed under the laws of the United States, any state thereof or the District of Columbia, except for specified excluded subsidiaries. For additional information regarding the senior secured credit facility, see Note 18 to the consolidated financial statements of the Company’s Amended 2004 Form 10-K and Note 15 included herein. For additional information regarding the 6.25 percent senior notes, see Note 15 included herein.

     All obligations under the senior secured credit facility, including the guarantees and any interest rate protection and other hedging agreements with any lender or its affiliates, are secured by a first priority perfected security interest in (1) all capital stock and other equity interests of the Company’s existing and future direct and indirect domestic subsidiaries, other than certain domestic subsidiaries acceptable to the agents, (2) 65 percent of the voting equity interests and 100 percent of all other equity interests (other than qualifying shares of directors) of all direct existing and future foreign subsidiaries, and (3) all other existing and future assets and properties of the Company and the guarantors, except for real property, vehicles and other specified exclusions.

     Louisiana law gives Louisiana corporations broad powers to indemnify their present and former directors and officers and those of affiliated corporations against expenses incurred in the defense of any lawsuit to which they are made parties by reason of their positions. The Company’s By-laws make mandatory the indemnification of directors and officers permitted by Louisiana law. The Company has in effect a directors’ and officers’ liability insurance policy that provides for indemnification of its officers and directors against losses arising from claims asserted against them in their capacities as officers and directors, subject to limitations and conditions set forth in such policy. The Company has also entered into indemnity agreements with each director and executive officer, pursuant to which the Company has agreed, subject to certain exceptions, to purchase and maintain directors’ and officers’ liability insurance. The agreements also provide that the Company will indemnify each director and executive officer against any costs and expenses, judgments, settlements and fines incurred in connection with any claim involving him or her by reason of his or her position as director or officer, provided that the director or executive officer meets certain standards of conduct.

     As of July 31, 2005, the Company has guaranteed long-term debt of its subsidiaries of approximately $1,132 that represents notes the subsidiaries issued as part of the purchase price of acquired businesses or debt the subsidiaries assumed in connection with acquisitions.

(18) Related Party Transactions

     In June 2004, the Company entered into a separation agreement with William E. Rowe, who stepped down from his position as President and Chief Executive Officer, but continued in his role as Chairman of the Board. As part of Mr. Rowe’s separation agreement, the Company will pay Mr. Rowe $1,000 in equal installments over a two year period, beginning November 1, 2004. The Company recorded the $1,000 charge in the third quarter of fiscal year 2004 but will make the payments in accordance with the terms of the agreement.

     In July 2003, the Company entered into a retirement benefits agreement with Frank B. Stewart, Jr., who retired from his position as Chairman of the Board and became Chairman Emeritus of the Company. As part of Mr. Stewart’s retirement benefits agreement, the Company agreed to pay Mr. Stewart $1,650, payable in three installments of $550 each. The first payment was made within five days after the announcement of his retirement. The second payment was made on June 20, 2004, and the final payment was made on June 20, 2005. The Company recorded the $1,650 charge in the third quarter of 2003.

See Explanatory Note on page 2 for important information.

63

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(18) Related Party Transactions—(Continued)

     On June 10, 2003, the Company announced that Brian J. Marlowe, Chief Operating Officer, had stepped down. According to the terms of his employment agreement, he is entitled to receive an amount equal to two years of salary, or $800, over the next two years. The Company recorded the $800 charge in the third quarter of 2003 and has paid all of the $800 commitment as of July 31, 2005.

     In January 1998, the Company discontinued an insurance policy on the life of Mr. Frank B. Stewart, Jr., Chairman Emeritus of the Company. In order to purchase a replacement policy, The Stewart Family Special Trust borrowed $685 from the Company pursuant to a promissory note due 180 days after the death of Mr. Stewart. Interest on the note accrues annually at a rate equal to the Company’s cost of borrowing under its revolving credit facility and is payable when the principal becomes due. The amount of the loan was equal to the cash value received by the Company upon the discontinuance of the prior insurance policy. The loan proceeds were used by the trust to purchase a single premium policy on the life of Mr. Stewart. Certain of the beneficiaries of The Stewart Family Special Trust are members of Mr. Stewart’s family. The loan was approved by all of the disinterested members of the Board of Directors. The outstanding balance of the loan at July 31, 2005, including accrued interest, was approximately $1,033.

(19) Deferred Revenue

     In connection with the Company’s internal control assessment under Section 404 of Sarbanes-Oxley, the Company undertook a project (the “deferred revenue project”) earlier this year to verify the balances in deferred preneed cemetery revenue and deferred preneed funeral revenue by physically reviewing certain of the preneed cemetery and funeral service and merchandise contracts.

     While the Company has made significant progress, it has not completed its overall review and reconciliation. The Company had anticipated completing its review prior to filing its Annual Report on Form 10-K for fiscal year 2005. Although the progress of the project has been disrupted by Hurricane Katrina, the Company still plans to try to complete the project in time to file its Annual Report on Form 10-K for fiscal year 2005 by its due date.

     Management believes that the deferred revenue project could result in a restatement of the Company’s prior period financial statements. Management believes that to the extent there is an adjustment, a significant portion of that adjustment would relate to the cumulative effect of adopting Staff Accounting Bulletin 101 (“SAB No. 101”) on November 1, 2000 and could impact reported earnings for periods subsequent to the implementation of SAB No. 101. Management believes that the adjustment, if any, would result in a non-cash adjustment to deferred revenue and to shareholders’ equity in an amount that should not exceed $60,000 and could be materially less than that amount. In connection with its deferred revenue project, the Company is also evaluating whether there could be a material weakness in internal control related to the Company’s deferred preneed revenue.

(20) Subsequent Events

     On Monday, August 29, 2005, Hurricane Katrina struck the New Orleans metropolitan area and the Mississippi and Alabama Gulf Coasts. The Company’s executive offices and Shared Services Center are located in the New Orleans metropolitan area and its preliminary assessment indicates that no significant damage occurred to those facilities. However, most of the approximately 400 employees who work at this location did not have access to their homes until late September or early October, and many of those homes remain uninhabitable. For the month of September, the Company temporarily housed most of its Shared Services Center functions, such as cash receipts and disbursements, customer service, contract processing and information technology in Orlando, Florida, in newly-leased and existing Company office space, and temporarily housed other functions such as the executive offices, treasury, accounting, trust administration, human resources, training, communications, marketing, tax and compliance in the Dallas, Texas area in newly-leased office space. The Company has used approximately $2,500 in

See Explanatory Note on page 2 for important information.

64

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(20) Subsequent Events—(Continued)

cash on hand for temporary relocation expenses. Beginning in early October, the executive offices and Shared Services Center were open and operating.

     Of the Company’s 231 funeral homes and 144 cemeteries, three funeral homes and five cemeteries located in the New Orleans metropolitan area, representing approximately four percent of the Company’s annual revenues, have suffered substantial damage and are currently not operating. The book value of net property and equipment, receivables, inventory and cemetery property of these eight properties amounted to approximately $24,700 at July 31, 2005. The Company has established a team to formulate and implement a recovery plan for these businesses. The Company believes that the affected cemeteries will be operational prior to the affected funeral homes, and is in the process of establishing locations from which it can conduct temporary funeral home operations.

     The Company’s operations in Mississippi and Alabama experienced no significant damage or business interruption. Based on the Company’s preliminary review of its property insurance, flood insurance and business interruption insurance, the Company believes that much of the loss it will experience due to Hurricane Katrina should be covered by insurance. However, the Company cannot yet with any certainty make an estimate of the ultimate financial impact that Hurricane Katrina will have on the Company.

See Explanatory Note on page 2 for important information.

65

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

Restatement of Historical Financial Statements

     In response to comments raised by the Staff of the Securities and Exchange Commission (“SEC”), we have re-evaluated our application of FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), and have revised our operating and reportable segments. Our historical presentation of segment data consisted of two operating and reportable segments, funeral and cemetery. Our restated presentation reflects 11 operating and reportable segments consisting of a corporate trust management segment and a funeral and cemetery segment for each of five geographic areas: Central, Western, Eastern, Southern — Florida and All Other. All Other consists of our operations in Puerto Rico. For further discussion of our operating segments, see Note 10 to our consolidated financial statements included herein.

     This revision of operating segments had the related effect of requiring changes in our reporting units for purposes of goodwill impairment reviews under FASB Statement No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”), retroactive to the November 1, 2001 adoption date of SFAS No. 142. Our historical evaluation of goodwill consisted of two reporting units — funeral and cemetery. Our evaluation of the goodwill of our operations is now based on 13 reporting units. Those reporting units include nine reporting units that are consistent with nine of our 11 operating and reportable segments and an additional four reporting units which are a further breakdown of our two operating and reportable segments in our Western division. These reporting units include the Archdiocese of Los Angeles Funeral operations, Southern Regional Cemetery operations, Other Cemetery operations and Other Funeral operations. For further discussion of our reporting units, see Note 2(i) to our consolidated financial statements included herein.

     The revision of our operating segments and reporting units resulted in the need to perform goodwill impairment reviews of the revised reporting units as of November 1, 2001 (the time we adopted SFAS No. 142) and as of October 31, 2002, 2003 and 2004. For further discussion of the resulting charges, see Note 2(i) to our consolidated financial statements included herein. Further, the restatement of goodwill on our balance sheet had the effect of changing the net book value of assets we have sold as part of our plan to sell a number of our businesses and the net book value of assets held for sale on our balance sheet. Thus, the gain or loss on those sales has been re-evaluated and restated as has the assets held for sale balance. For further discussion of the effects of these changes, see Note 13 to our consolidated financial statements included herein. A summary of the effects of the restatement on our financial statements can be found in Note 1 to the consolidated financial statements included herein.

General

     We are the third largest provider of funeral and cemetery products and services in the death care industry in the United States. As of September 30, 2005, we owned and operated 231 funeral homes and 144 cemeteries in 26 states within the United States and Puerto Rico.

     On Monday, August 29, 2005, Hurricane Katrina struck the New Orleans metropolitan area and the Mississippi and Alabama Gulf Coasts. Our executive offices and Shared Services Center are located in the New Orleans metropolitan area and our preliminary assessment indicates that no significant damage occurred to those facilities. However, most of the approximately 400 employees who work at this location did not have access to their homes until late September or early October, and many of those homes remain uninhabitable. For the month of September, we temporarily housed most of our Shared Services Center functions, such as cash receipts and disbursements, customer service, contract processing and information technology in Orlando, Florida, in newly-leased and existing Company office space, and temporarily housed other functions such as the executive offices, treasury, accounting, trust administration, human resources, training, communications, marketing, tax and compliance in the Dallas, Texas area in newly-leased office space. We have used approximately $2.5 million in cash on hand for temporary relocation expenses. Beginning in early October, the executive offices and Shared Services Center were open and operating.

     Of our 231 funeral homes and 144 cemeteries, three funeral homes and five cemeteries, which represent approximately four percent of our annual revenues, are located in the New Orleans metropolitan area and have suffered substantial damage and are currently not operating. The book value of net property and equipment, receivables, inventory and cemetery property of these eight properties amounted to approximately $24.7 million at

See Explanatory Note on page 2 for important information.

66

July 31, 2005. We have established a team to formulate and implement a recovery plan for these businesses. We believe that the affected cemeteries will be operational prior to the affected funeral homes, and are in the process of establishing locations from which we can conduct temporary funeral home operations.

     Our operations in Mississippi and Alabama experienced no significant damage or business interruption. Based on our preliminary review of our property, flood and business interruption insurance, we believe that much of the loss we will experience due to the hurricane should be covered by insurance. However, we cannot yet with any certainty make an estimate of the ultimate financial impact that Hurricane Katrina will have on us.

     We sell cemetery property and funeral and cemetery products and services both at the time of need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales, preneed sales delivered out of our backlog during the period (including the accumulated trust earnings or build-up in the face value of insurance contracts related to these preneed deliveries), preneed cemetery property sales and other items such as perpetual care trust earnings and finance charges. For a discussion of our accounting for preneed sales and trust and escrow account earnings, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 in our Amended 2004 Form 10-K and Notes 2(e), 2(g), 2(k), 2(l) and Notes 3 through 7 to the condensed consolidated financial statements included herein.

     We believe that preneed funeral and cemetery property sales are two of the primary drivers of sustainable long-term growth in the number of families served by our funeral homes and cemeteries. Our preneed funeral service and merchandise sales and preneed cemetery service and merchandise sales are deferred into our backlog while our preneed cemetery property sales are recognized currently in accordance with SFAS No. 66. For a detailed discussion of our revenue recognition policies and how we account for our at-need sales, preneed sales and trust earnings, see Notes 2(e), 2(g), 2(k), 2(l) and Notes 3 through 7 to the condensed consolidated financial statements.

     We maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. Because a portion of the funds we receive from preneed sales are deposited into the trusts and invested in a variety of debt and equity securities and other investments, the performance of the trusts’ investments can affect our current and future revenue streams. From 1991 through 1999, we achieved an overall annual realized return of 8.0 percent to 9.0 percent in our domestic trusts. However, the average realized return on our domestic trusts was 5.8 percent, 6.3 percent, 4.3 percent, 4.8 percent, 2.6 percent and 3.8 percent for fiscal years 2000, 2001, 2002, 2003, 2004 and the nine months ended July 31, 2005, respectively. These returns represent interest, dividends and realized capital gains or losses but not unrealized capital gains or losses. We defer recognition of all earnings and losses realized by preneed funeral and cemetery merchandise and services trusts until the underlying products and services are delivered. Consequently, the lower investment returns realized during recent years reduced the trust earnings recognized as revenue in 2004 and the first nine months of 2005, and will likely do so for the remainder of fiscal year 2005. We recognize all earnings and losses realized by our cemetery perpetual care trusts currently, including capital gains and losses in those jurisdictions where capital gains can be withdrawn and used for cemetery maintenance. As a result, depressed stock prices and low returns on fixed-income investments put pressure on perpetual care trust earnings recognized in fiscal year 2004, in the first nine months of fiscal 2005, and may do so again during the remainder of fiscal year 2005. Because approximately 61 percent of our total trust portfolio is currently invested in a diversified group of equity securities, we would generally expect our portfolio performance to improve if the performance of the overall stock market improves, but we would also expect its performance to deteriorate over time if the overall stock market declines.

     We mark our trust portfolio to market value each quarter. Changes in the market value of the trusts are recorded by increasing or decreasing trust assets included in the preneed funeral and cemetery receivables and trust investments line items on the balance sheet, with a corresponding increase or decrease in the deferred preneed revenue and non-controlling interest line items on the balance sheet. Therefore, there is no effect on net income. We determine whether or not the investment portfolio has an other than temporary impairment on a security-by-security basis. A loss is considered other than temporary if the security has a reduction in market value compared with its cost basis of 20 percent or more for a period of six months or longer. We periodically review our investment portfolio to determine if any of the temporarily impaired assets should be designated as other than temporarily

See Explanatory Note on page 2 for important information.

67

impaired. This evaluation includes determining if we have the ability and intent to hold these investments for its forecasted recovery period and determining if there have been any changes in market conditions or concerns specific to the issuer of the securities. If a loss is other than temporary, the cost basis of the security is adjusted downward to its market value. This affects our footnote disclosure but does not have an effect on our financial statements, since the trust portfolio is already marked to market value each quarter. The footnotes disclose the adjusted cost basis and how much of the losses are considered other than temporary. Accordingly, unrealized gains and losses reflected in the tables in Notes 4, 5 and 6 to the condensed consolidated financial statements are temporary as the cost basis in these tables has already been adjusted to reflect the other than temporary unrealized losses. Our preneed funeral and cemetery merchandise and services trusts and escrow accounts had other than temporary declines of $80.1 million and $44.0 million, respectively, as of July 31, 2005, from their original cost basis. They had net unrealized appreciation of $14.8 million and $8.3 million, respectively, as of July 31, 2005 resulting from temporary unrealized gains and losses. See Notes 4 and 5 to the condensed consolidated financial statements.

     Our cemetery perpetual care trust accounts had other than temporary declines of $30.9 million as of July 31, 2005, from their original cost basis. They had net unrealized appreciation of $10.6 million as of July 31, 2005 resulting from temporary unrealized gains and losses. See Note 6 to the condensed consolidated financial statements. Unrealized gains and losses in the cemetery perpetual care trusts and escrow accounts do not affect current earnings but unrealized losses could limit the capital gains available to us and could eventually result in lower returns and lower revenues than we have historically achieved from these trusts.

     We perform a separate analysis to determine whether our preneed contracts are in a loss position, which would necessitate a charge to earnings. For this analysis, we determine which trusts are in a net loss position by comparing the aggregate market value of the trust’s investments with the aggregate actual cost basis of the investments. If the aggregate cost basis exceeds the aggregate market value of the investments, the trust is considered to be in a net loss position. For trusts in a net loss position, we add the sales prices of the underlying contracts and net realized earnings, then subtract net unrealized losses to derive the net amount of proceeds for contracts associated with the trusts in question as of that particular balance sheet date. We look at unrealized gains and losses based on current market prices quoted for the investments, but we do not include future expected returns on the investments in our analysis. We compare the amount of proceeds to the estimated costs to deliver the contracts, which consist primarily of merchandise costs. 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 from our backlog. Due to the margins of our preneed contracts and the relatively high trust portfolio returns we enjoyed prior to fiscal year 2000, there is currently substantial capacity for additional market depreciation before a contract loss would result.

     For a discussion of the principal assumptions underlying our expectations for fiscal year 2005 and risk factors related to our businesses and industry, see Item 5 below.

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 2(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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Amended 2004 Form 10-K. There have been no changes to our critical accounting policies since the filing of our Amended 2004 Form 10-K except for our treatment of preneed selling costs as noted below.

Preneed Selling Costs

     On May 31, 2005, we changed our method of accounting for preneed selling costs incurred related to the acquisition of new prearranged funeral and cemetery service and merchandise sales. We have applied this change in accounting principle effective November 1, 2004. Therefore, our results of operations for the three and nine months ended July 31, 2005 are reported on the basis of our changed method. Prior to this change, commissions and other costs that varied with and were primarily related to the acquisition of new prearranged funeral and cemetery service sales and prearranged funeral and cemetery merchandise sales were deferred and amortized in proportion to the

See Explanatory Note on page 2 for important information.

68

preneed revenue recognized in the period in a manner consistent with SFAS No. 60, “Accounting and Reporting for Insurance Companies.” We have decided to change our accounting for preneed selling costs to expense such costs as incurred. We concluded that expensing these costs as they are incurred would be preferable to the old method because it will make our reported results more comparable with other public death care companies, better align the costs of obtaining preneed contracts with the cash outflows associated with obtaining such contracts and eliminate the burden of maintaining deferred selling cost records.

     As of November 1, 2004, we recorded a cumulative effect of change in accounting principle of $234.5 million pretax, $141.3 million after tax (net of income tax benefit of $93.2 million), or $1.29 per diluted share, which represents the cumulative balance of deferred preneed selling costs in the deferred charges line in the condensed consolidated balance sheet at the time of the change. See Note 3(a) to the condensed consolidated financial statements for additional information.

Results of Operations

     The following discussion segregates the financial results of our continuing operations into our various segments, grouped by our funeral and cemetery operations. For a discussion of discontinued operations, see Note 13 to the condensed consolidated financial statements included herein. For a discussion of our segments, see Note 10 to the consolidated financial statements included herein. As there have been no material acquisitions or construction of new locations in fiscal years 2005 and 2004, results from continuing operations reflect those of same-store locations.

     As described above in “Critical Accounting Policies,” on May 31, 2005, we changed our method of accounting for selling costs incurred related to preneed funeral and cemetery service and merchandise sales. We have applied this change in accounting principle effective November 1, 2004. Prior to this time, we deferred preneed selling costs and amortized them into expense in proportion to the preneed revenue recognized in the period. We now expense these costs in the period incurred. In the discussion below, the amounts presented in the tables for the three and nine months ended July 31, 2004 reflect historical amounts and therefore are not adjusted for this accounting change. In order to present results for the three and nine months ended July 31, 2004 comparable to those for the same periods of 2005 which include the accounting change, we have also included a discussion of the net preneed selling costs for each period of 2004 and their effect on gross profit. The effect of net preneed selling costs is calculated by removing the amortization of deferred selling costs and including in expense the preneed selling costs incurred during 2004. The result of that calculation is the net preneed selling costs that would have reduced 2004 gross profit if the accounting change had been implemented in fiscal year 2004.

Three Months Ended July 31, 2005 Compared to Three Months Ended July 31, 2004 — Continuing Operations Funeral Operations

See Explanatory Note on page 2 for important information.

69

Funeral Operations

	Three Months Ended
	July 31,					Increase
	2005		2004			(Decrease)
			(In millions)
Funeral Revenue:
Central Division	$	20.6	$	20.1		$	.5
Western Division		15.0		14.6			.4
Eastern Division		12.2		12.1			.1
Southern Division — Florida		10.7		10.7			¯
All Other(1)		3.1		3.4			(.3	)
Corporate Trust Management(2)		6.3		6.8			(.5	)
Total Funeral Revenue	$	67.9	$	67.7		$	.2
Funeral Costs:
Central Division	$	16.0	$	15.1		$	.9
Western Division		14.2		12.8			1.4
Eastern Division		10.5		10.2			.3
Southern Division — Florida		9.8		9.2			.6
All Other(1)		2.9		2.7			.2
Corporate Trust Management(2)		.1		.1			¯
Total Funeral Costs	$	53.5	$	50.1	(3)	$	3.4	(3)
Funeral Gross Profit:
Central Division	$	4.6	$	5.0		$	(.4	)
Western Division		.8		1.8			(1.0	)
Eastern Division		1.7		1.9			(.2	)
Southern Division — Florida		.9		1.5			(.6	)
All Other(1)		.2		.7			(.5	)
Corporate Trust Management(2)		6.2		6.7			(.5	)
Total Funeral Gross Profit	$	14.4	$	17.6	(3)	$	(3.2	)(3)

     Same-Store Analysis

	Change in			Change in
	Average Revenue			Same-Store Funeral			Cremation Rate
	Per Call			Services			2005			2004
Central Division		4.3	%		.8	%		22.0	%		22.0	%
Western Division		.8	%		3.7	%		57.3	%		56.1	%
Eastern Division		1.8	%		(.7	)%		26.2	%		25.7	%
Southern Division — Florida		4.3	%		2.1	%		40.5	%		40.7	%
All Other(1)		(2.3	%)		(2.5	%)		18.0	%		14.8	%
Total		1.0	%		2.3	%		37.2	%		36.3	%

(1)

All Other represents our operations in Puerto Rico.

(2)

Corporate trust management consists of trust management fees and funeral merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. See Notes 4 and 7 to the 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

See Explanatory Note on page 2 for important information.

70

for the three months ended July 31, 2005 and 2004 were $1.4 million and $1.3 million, respectively, and funeral trust earnings for the three months ended July 31, 2005 and 2004 were $4.9 million and $5.5 million, respectively.

(3)

Funeral costs from continuing operations for the three months ended July 31, 2004 do not include net preneed selling costs of $1.5 million, which would have been expensed if the accounting change described above had been implemented in fiscal year 2004. Had we included these costs in 2004, funeral gross profit from continuing operations for the three months ended July 31, 2005 would have decreased $1.7 million from $16.1 million for the three months ended July 31, 2004.

     Consolidated Operations — Funeral

     Funeral revenue from continuing operations increased $0.2 million, or 0.3 percent, for the three months ended July 31, 2005, compared to the corresponding period in 2004. The increase in funeral revenue was primarily due to a 2.3 percent increase in the number of same-store funeral services performed, or 323 events out of 14,161 total same-store funeral services performed.

     We also experienced an increase in the average revenue per funeral service performed by our same-store businesses. Our same-store businesses achieved a 3.3 percent increase in the average revenue per traditional funeral service and a 2.5 percent increase in the average revenue per cremation service. The increase in average revenue per funeral service was partially offset by a reduction in trust earnings recognized upon the delivery of preneed funerals, resulting from lower investment returns realized in our preneed funeral trusts during previous years. This resulted in an overall 1.0 percent increase in the average revenue per funeral service for our same-store businesses. We believe the primary factors that contributed to the increases in our average revenue per traditional and cremation service were normal inflationary price increases, more effective merchandising and packaging, our focus on training, customized funeral planning and personalization and a new funeral home incentive compensation plan.

     Funeral gross profit margin from continuing operations decreased from 26.0 percent in the third quarter of fiscal year 2004 to 21.2 percent in the third quarter of fiscal year 2005. Funeral costs from continuing operations for the three months ended July 31, 2004 do not include $1.5 million of net preneed selling costs associated with the accounting change as described above. Including these costs, the pro forma funeral gross profit margin from continuing operations would have been 23.8 percent for the three months ended July 31, 2004. The remaining decrease resulted from the year-over-year reduction in revenue from funeral trust earnings and increased health insurance costs due to an increase in the number of high-dollar claims in 2005. The funeral margin was also impacted by bonuses related to the funeral home incentive compensation plan. The cremation rate for our same-store operations was 37.2 percent for the three months ended July 31, 2005 compared to 36.3 percent for the corresponding period in 2004.

     Segment Discussion — Funeral

     Funeral revenue in the Central division and Western division funeral segments increased primarily due to an increase in the number of funeral services performed by the same-store businesses of 0.8 percent and 3.7 percent, respectively, coupled with an increase in the average revenue per funeral service in the same-store businesses of 4.3 percent and 0.8 percent, respectively. Funeral revenue in the Eastern division segment increased primarily due to an increase in the average revenue per funeral service of 1.8 percent partially offset by a decrease in the number of funeral services performed by the same-store businesses of 0.7 percent. Funeral revenue in the corporate trust management segment declined primarily due to a reduction in trust earnings recognized upon the delivery of preneed funerals of $0.6 million, resulting from lower investment returns realized in our preneed funeral trusts during previous years.

     Funeral gross profit margin for the Central division, Western division, Eastern division and Southern division- Florida funeral segments decreased primarily due to increased health insurance costs, bonuses related to the funeral home incentive compensation plan and the effect of the accounting change as discussed above in “Consolidated Operations — Funeral.” As demonstrated in the table above, the same store cremation rate increased for the Western division and Eastern division funeral segments remained flat in the Central division segment, and decreased for the Southern division- Florida segment.

See Explanatory Note on page 2 for important information.

71

Cemetery Operations

	Three Months Ended
	July 31,					Increase
	2005		2004			(Decrease)
			(In millions)
Cemetery Revenue:
Central Division	$	19.5	$	18.4		$	1.1
Western Division		3.1		3.8			(.7	)
Eastern Division		19.4		18.6			.8
Southern Division — Florida		13.1		10.7			2.4
All Other(1)		3.9		5.9			(2.0	)
Corporate Trust Management(2)		3.1		3.1			—
Total Cemetery Revenue	$	62.1	$	60.5		$	1.6
Cemetery Costs:
Central Division	$	15.5	$	14.4		$	1.1
Western Division		3.0		3.0			—
Eastern Division		16.0		15.7			.3
Southern Division — Florida		9.4		8.7			.7
All Other(1)		3.6		4.8			(1.2	)
Corporate Trust Management(2)		.1		.2			(.1	)
Total Cemetery Costs	$	47.6	$	46.8	(3)	$	.8	(3)
Cemetery Gross Profit:
Central Division	$	4.0	$	4.0		$	—
Western Division		.1		.8			(.7	)
Eastern Division		3.4		2.9			.5
Southern Division — Florida		3.7		2.0			1.7
All Other(1)		.3		1.1			(.8	)
Corporate Trust Management(2)		3.0		2.9			.1
Total Cemetery Gross Profit	$	14.5	$	13.7	(3)	$	.8	(3)

(1)	All Other represents our operations in Puerto Rico.
(2)	Corporate trust management consists of trust management fees and cemetery merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. See Notes 5 and 7 to the consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for the three months ended July 31, 2005 and 2004 were $1.2 million and $1.1 million, respectively, and cemetery trust earnings for the three months ended July 31, 2005 and 2004 were $1.9 million and $2.0 million, respectively. Perpetual care trust earnings are included in the revenues and gross profit of the related geographic segment.
(3)	Cemetery costs from continuing operations for the three months ended July 31, 2004 do not include net preneed selling costs of $0.1 million, which would have been expensed if the accounting change described above had been implemented in fiscal year 2004. Had we included these costs in 2004, cemetery gross profit from continuing operations for the three months ended July 31, 2005 would have increased $ 0.9 million from $13.6 million for the three months ended July 31, 2004.

     Consolidated Operations — Cemetery

     Cemetery revenue from continuing operations increased $1.6 million, or 2.6 percent, for the three months ended July 31, 2005, compared to the corresponding period in 2004, primarily due to increases in perpetual care trust

See Explanatory Note on page 2 for important information.

72

earnings and cemetery property sales, which were partially offset by a decrease in revenue from cemetery merchandise deliveries during the quarter. Cemetery property sales increased 5.7 percent in the third quarter of fiscal year 2005 compared to the third quarter of fiscal year 2004, which is in line with the Company’s stated goal to increase cemetery property sales by 4 percent to 8 percent for fiscal year 2005.

     We experienced an annualized average return, excluding unrealized gains and losses, of 5.9 percent in our perpetual care trusts for the quarter ended July 31, 2005 resulting in revenue of $3.1 million, compared to 2.4 percent for the corresponding period in 2004 resulting in revenue of $0.6 million.

     Cemetery gross profit margin from continuing operations increased from 22.6 percent in the third quarter of fiscal year 2004 to 23.3 percent in the third quarter of fiscal year 2005. Cemetery costs from continuing operations for the three months ended July 31, 2004 do not include $0.1 million of net preneed selling costs associated with the accounting change as described above. Including these costs, the pro forma cemetery gross profit margin from continuing operations would have been 22.5 percent for the three months ended July 31, 2004. The overall increase resulted from increased revenues as discussed above, partially offset by increased health insurance costs due to an increase in the number of high dollar claims in 2005.

     Segment Discussion — Cemetery

     Cemetery revenue in the Central division cemetery segment increased primarily due to an increase in perpetual care trust earnings. Cemetery revenue in the Eastern division segment increased primarily due to an increase in preneed property sales and an increase in perpetual care trust earnings, partially offset by a decrease in revenue from cemetery merchandise deliveries. Cemetery revenue in the Southern division-Florida segment increased primarily due to an increase in cemetery property sales and an increase in perpetual care trust earnings. Cemetery revenue in the Western division segment decreased primarily due to a decrease in merchandise deliveries and a decrease in construction during the year on various cemetery development projects. All Other cemetery segment revenue decreased primarily due to a decline in revenue associated with the construction of cemetery projects in Puerto Rico. Revenue related to the sale of cemetery property prior to its construction is recognized on a percentage of completion method of accounting as construction occurs.

     Cemetery gross profit margin for the Eastern division and Southern division- Florida cemetery segments increased primarily due to increased cemetery revenue as discussed above, partially offset by the cost increases described in “Consolidated Operations — Cemetery.” Cemetery gross profit margin for the Western division segment and the All Other cemetery segment declined due to the decline in cemetery revenue coupled with the costs increases described in “Consolidated Operations - - Cemetery.” Cemetery gross profit margin for the Central division segment decreased primarily due to the cost increases described above in “Consolidated Operations — Cemetery.”

Discontinued Operations

     The operating results of those businesses sold in fiscal year 2004 and the first nine months of fiscal year 2005 are reported in the discontinued operations section of the consolidated statements of earnings. Included in discontinued operations for the three months ended July 31, 2005 and 2004 were gains on dispositions and impairment (losses), net of $.6 million and $.3 million, respectively. Revenues for the three months ended July 31, 2005 were $0.2 million compared to $2.8 million in the same period in 2004. Income tax benefits for our discontinued operations for the three months ended July 31, 2005 were $0.2 million compared to $1.2 million for the same period in 2004.

Other

     Corporate general and administrative expenses for the three months ended July 31, 2005 increased $1.3 million compared to the same period in 2004 due in large measure to professional fees associated with our Sarbanes Oxley Section 404 compliance effort and increased legal and professional fees relating in part to the class action law suits.

     In July 2005, we named a new Chief Operating Officer and announced a reorganization of our divisions from four to two, effective for the fourth quarter of fiscal year 2005. As a result of these changes, we recorded a charge of

See Explanatory Note on page 2 for important information.

73

$0.1 million for the three months ended July 31, 2005. In December 2003, we announced a reduction and restructuring of our workforce. For the nine months ended July 31, 2004, we recorded $2.2 million for severance and other costs associated with the workforce reductions, of which $0.1 million was recorded in the third quarter of fiscal year 2004. The December 2003 workforce reduction plan was completed June 1, 2004. We also recorded $1.0 million for separation pay related to a former executive officer for the three months ended July 31, 2004. These charges are presented in the “Separation charges” line item in the consolidated statements of earnings.

     Total depreciation and amortization was $5.4 million for the third quarter of fiscal year 2005 compared to $13.1 million for the same period in 2004. Depreciation and amortization from continuing operations was $5.4 million for the third quarter of fiscal year 2005 compared to $13.0 million for the same period in 2004. Amortization in fiscal year 2004 included $7.2 million of deferred selling costs. Effective November 1, 2004, we changed our accounting principle for selling costs related to preneed funeral and cemetery service and merchandise sales and we no longer amortize these costs but rather expense them as incurred.

     Interest expense decreased $5.0 million to $6.5 million for the third quarter of fiscal year 2005 compared to $11.5 million for the same period in 2004 primarily due to a 394 basis-point decrease in the average interest rate during the period resulting from recent debt refinancings, combined with a $32.9 million decrease in average debt outstanding.

     During the fourth quarter of fiscal year 2003, we identified a number of small businesses to close or sell, mostly funeral homes, and determined that their carrying value exceeded their fair values. For the three months ended July 31, 2005 and 2004, we reported net gains on dispositions and impairment (losses) of $0.1 million and $0.3 million in continuing operations, respectively. These charges are presented in the “Gains on dispositions and impairment (losses), net” line item in the condensed consolidated statements of earnings.

     Other operating income, net, was $0.5 million for the three months ended July 31, 2005 compared to $1.0 million for the three months ended July 31, 2004. The decrease is primarily due to net gains on the sale of excess land during the third quarter of 2004.

     The effective tax rate for our continuing operations for the three months ended July 31, 2005 was a 37.7 percent benefit compared to a 36.5 percent expense for the same period in 2004.

     As of July 31, 2005 and September 30, 2005, our outstanding debt totaled $410.8 million and $410.7 million, respectively. Of the total debt outstanding as of July 31, 2005, approximately 49 percent was subject to fixed rates averaging 6.2 percent, and 51 percent was subject to short-term variable rates averaging approximately 5.0 percent. In order to hedge a portion of the interest rate risk associated with our variable-rate debt, effective March 11, 2002, we entered into two interest rate swap agreements, each involving a notional amount of $50.0 million. One of the agreements expired on March 11, 2004, and the other expired on March 11, 2005. On November 19, 2004, we completed the refinancing of our senior secured credit facility and recorded a charge for early extinguishment of debt of $2.7 million ($1.7 million after tax, or $.02 per share) to write off fees associated with the previous credit facility. On February 11, 2005, we completed the private offering of $200.0 million principal amount of our 6.25 percent senior notes due 2013. We also borrowed $130.0 million in additional term loan debt under our senior secured credit facility. We used the net proceeds from these transactions, together with a portion of our available cash, to repurchase $298.2 million in aggregate principal amount of our 10.75 percent senior subordinated notes due 2008 and to pay related tender premiums, fees, expenses and accrued interest of $28.9 million. In the second quarter of fiscal year 2005, we recorded a charge for early extinguishment of debt of $30.0 million ($19.2 million after tax, or $.18 per share) representing the bond tender premium, related fees and expenses and the write-off of unamortized fees. In the third quarter of fiscal year 2005, the remaining 10.75 senior subordinated notes were redeemed. We recorded a charge for early extinguishment of debt of $0.1 million representing the call premium and write-off of remaining unamortized fees on the 10.75 percent senior subordinated notes. For additional information, see Note 15 to the condensed consolidated financial statements.

Preneed Sales into and Deliveries out of the Backlog

     Gross preneed funeral sales increased 11.4 percent during the third quarter of 2005 compared to the corresponding period in 2004.

     The revenues from our preneed funeral and cemetery merchandise and service sales are deferred into our

See Explanatory Note on page 2 for important information.

74

backlog and are not included in our operating results presented above. We added $45.1 million in gross preneed sales to our funeral and cemetery merchandise and services backlog (including $18.7 million related to insurance-funded preneed funeral contracts) during the three months ended July 31, 2005 to be recognized in the future (net of cancellations) as these prepaid products and services are delivered, compared to gross sales of $42.4 million (including $17.6 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2004. Revenues recognized on deliveries out of our preneed funeral and cemetery merchandise and services backlog, including accumulated trust earnings related to these preneed deliveries, amounted to $41.0 million for the three months ended July 31, 2005, compared to $42.7 million for the corresponding period in 2004, resulting in a net addition to the backlog of $4.1 million and a net reduction in the backlog of $0.3 million for the three months ended July 31, 2005 and 2004, respectively.

See Explanatory Note on page 2 for important information.

75

Nine Months Ended July 31, 2005 Compared to Nine Months Ended July 31, 2004 — Continuing Operations

Funeral Operations

	Nine Months Ended
	July 31,					Increase
	2005		2004			(Decrease)
			(In millions)
Funeral Revenue:
Central Division	$	65.2	$	64.3		$	.9
Western Division		46.4		46.4			—
Eastern Division		40.4		39.8			.6
Southern Division — Florida		33.7		33.0			.7
All Other(1)		10.2		10.1			.1
Corporate Trust Management(2)		18.6		20.6			(2.0	)
Total Funeral Revenue	$	214.5	$	214.2		$	.3
Funeral Costs:
Central Division	$	48.3	$	46.3		$	2.0
Western Division		41.5		38.7			2.8
Eastern Division		33.7		30.8			2.9
Southern Division — Florida		29.1		28.1			1.0
All Other(1)		8.5		8.3			.2
Corporate Trust Management(2)		.4		.4			—
Total Funeral Costs	$	161.5	$	152.6	(3)	$	8.9	(3)
Funeral Gross Profit:
Central Division	$	16.9	$	18.0		$	(1.1	)
Western Division		4.9		7.7			(2.8	)
Eastern Division		6.7		9.0			(2.3	)
Southern Division — Florida		4.6		4.9			(.3	)
All Other(1)		1.7		1.8			(.1	)
Corporate Trust Management(2)		18.2		20.2			(2.0	)
Total Funeral Gross Profit	$	53.0	$	61.6	(3)	$	(8.6	)(3)

Same-Store Analysis

	Change in
	Average Revenue			Change in Same-Store			Cremation Rate
	Per Call			Funeral Services			2005			2004
Central Division		3.8	%		—			22.3	%		21.7	%
Western Division		2.2	%		(1.3	%)		58.6	%		57.3	%
Eastern Division		.8	%		1.3	%		25.4	%		25.9	%
Southern Division — Florida		4.4	%		3.2	%		39.7	%		39.4	%
All Other(1)		3.1	%		.8	%		16.2	%		14.1	%
Total		1.8	%		.2	%		37.0	%		36.4	%

(1)

All Other represents our operations in Puerto Rico.

(2)

Corporate trust management consists of trust management fees and funeral merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. See Notes 4 and 7 to the consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for the nine months ended July 31, 2005 and 2004 were $4.0 million and $4.2 million, respectively, and funeral

See Explanatory Note on page 2 for important information.

76

trust earnings for the nine months ended July 31, 2005 and 2004 were $14.6 million and $16.4 million, respectively.

(3)

Funeral costs from continuing operations for the nine months ended July 31, 2004 do not include net preneed selling costs of $3.6 million, which would have been expensed if the accounting change described above had been implemented in fiscal year 2004. Had we included these costs in 2004, funeral gross profit from continuing operations for the nine months ended July 31, 2005 would have decreased $5.0 million from $58.0 million for the nine months ended July 31, 2004.

     Consolidated Operations — Funeral

     Funeral revenue from continuing operations increased $0.3 million, or 0.1 percent, for the nine months ended July 31, 2005, compared to the corresponding period in 2004. The increase in funeral revenue was primarily due to a 0.2 percent increase in the number of same store funeral services and an increase in the average revenue per funeral service performed by our same-store businesses. Our same-store businesses achieved a 3.2 percent increase in the average revenue per traditional funeral service and a 4.5 percent increase in the average revenue per cremation service. The increase in average revenue per funeral service was partially offset by a reduction in trust earnings recognized upon the delivery of preneed funerals, resulting from lower investment returns realized in our preneed funeral trusts during previous years, and by an increase in the proportion of non-traditional funerals, including cremations. This resulted in an overall 1.8 percent increase in the average revenue per funeral service for our same-store businesses. We believe a number of factors contributed to the increases in our average revenue per traditional and cremation service. We believe the primary factors were normal inflationary price increases, more effective merchandising and packaging, our focus on training, customized funeral planning and personalization and a new funeral home incentive compensation plan.

     Funeral gross profit margin from continuing operations decreased from 28.8 percent for the nine months ended July 31, 2004 to 24.7 percent in the corresponding period in 2005. Funeral costs from continuing operations for the nine months ended July 31, 2004 do not include $3.6 million of net preneed selling costs associated with the accounting change as described above. Including these costs, the pro forma funeral gross profit margin from continuing operations would have been 27.1 percent for the nine months ended July 31, 2004. The remaining decrease in our funeral margin is primarily due to a $1.8 million charge related to prior period operating leases recorded during the second quarter of 2005 combined with the decline in trust earnings described above and increased health insurance costs due to an increase in the number of high-dollar claims in 2005. See Note 2(s) to the condensed consolidated financial statements for additional information on the lease accounting adjustment. The cremation rate for our same store operations was 37.0 percent for the nine months ended July 31, 2005 compared to 36.4 percent for the corresponding period in 2004.

     Segment Discussion — Funeral

     Funeral revenue in the Eastern division and Southern division-Florida funeral segments increased primarily due to an increase in the number of funeral services performed by the same-store businesses of 1.3 percent and 3.2 percent, respectively, coupled with an increase in the average revenue per funeral service in the same-store businesses of 0.8 percent and 4.4 percent, respectively. Funeral revenue in the Central division segment increased primarily due to an increase in the average revenue per funeral service in the same-store businesses of 3.8 percent. Funeral revenue in the corporate trust management segment declined primarily due to a reduction in trust earnings recognized upon the delivery of preneed funerals of $1.8 million, resulting from lower investment returns realized in our preneed funeral trusts during previous years coupled with a decrease in trust management fees of $0.2 million.

     Funeral gross profit margin for the Central division, Western division, Eastern division and Southern division- Florida funeral segments decreased primarily due to increased health insurance costs and the effect of the accounting change as discussed above in “Consolidated Operations - Funeral.” As demonstrated in the table above, the same store cremation rate increased for the Central division, Western division and Southern division- Florida funeral segments and decreased for the Eastern division funeral segment.

See Explanatory Note on page 2 for important information.

77

Cemetery Operations

	Nine Months Ended
	July 31,					Increase
	2005		2004			(Decrease)
			(In millions)
Cemetery Revenue:
Central Division	$	56.2	$	59.7		$	(3.5	)
Western Division		9.5		10.1			(.6	)
Eastern Division		54.8		53.0			1.8
Southern Division — Florida		35.7		32.5			3.2
All Other(1)		12.0		10.7			1.3
Corporate Trust Management(2)		9.3		9.4			(.1	)
Total Cemetery Revenue	$	177.5	$	175.4		$	2.1
Cemetery Costs:
Central Division	$	43.8	$	45.2		$	(1.4	)
Western Division		8.2		7.6			.6
Eastern Division		46.0		42.9			3.1
Southern Division — Florida		27.2		25.7			1.5
All Other(1)		10.5		10.4			.1
Corporate Trust Management(2)		.4		.5			(.1	)
Total Cemetery Costs	$	136.1	$	132.3	(3)	$	3.8	(3)
Cemetery Gross Profit:
Central Division	$	12.4	$	14.5		$	(2.1	)
Western Division		1.3		2.5			(1.2	)
Eastern Division		8.8		10.1			(1.3	)
Southern Division — Florida		8.5		6.8			1.7
All Other(1)		1.5		.3			1.2
Corporate Trust Management(2)		8.9		8.9			—
Total Cemetery Gross Profit	$	41.4	$	43.1	(3)	$	(1.7	)(3)

(1)	All Other represents our operations in Puerto Rico.
(2)	Corporate trust management consists of trust management fees and cemetery merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. See Notes 5 and 7 to the consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for the nine months ended July 31, 2005 and 2004 were $3.7 million and $3.5 million, respectively, and cemetery trust earnings for the nine months ended July 31, 2005 and 2004 were $5.6 million and $5.9 million, respectively. Perpetual care trust earnings are included in the revenues and gross profit of the related geographic segment.
(3)	Cemetery costs from continuing operations for the nine months ended July 31, 2004 do not include net preneed selling costs of $1.1 million which would have been expensed if the accounting change described above had been implemented in fiscal year 2004. Had we included these costs in 2004, cemetery gross profit from continuing operations for the nine months ended July 31, 2005 would have decreased $0.6 million from $42.0 million for the nine months ended July 31, 2004.

     Consolidated Operations — Cemetery

     Cemetery revenue from continuing operations increased $2.1 million, or 1.2 percent, for the nine months ended July 31, 2005, compared to the corresponding period in 2004, primarily due to an increase in cemetery property sales, offset by a decrease in revenue from merchandise delivered during the nine months and a decrease in revenue

See Explanatory Note on page 2 for important information.

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associated with the construction of cemetery projects. Revenue related to the sale of cemetery property prior to its construction is recognized on a percentage of completion method of accounting as construction occurs. Cemetery property sales increased 4.9 percent in the nine months ended July 31, 2005 compared to the corresponding period in 2004.

     We experienced an annualized average return, excluding unrealized gains and losses, of 3.9 percent in our perpetual care trusts for the nine months ended July 31, 2005 resulting in revenue of $5.8 million, compared to 3.5 percent for the corresponding period in 2004 resulting in revenue of $5.3 million.

     Cemetery gross profit margin from continuing operations decreased from 24.6 percent in the nine months ended July 31, 2004 to 23.3 percent in the corresponding period in 2005. Cemetery costs from continuing operations for the nine months ended July 31, 2004 do not include $1.1 million of net preneed selling costs associated with the accounting change as described above. Including these costs, the pro forma cemetery gross profit margin from continuing operations would have been 23.9 percent for the nine months ended July 31, 2004. The remaining decline resulted from increased health insurance costs due to an increase in the number of high-dollar claims in 2005.

     Divisional Discussion — Cemetery

     Cemetery revenue in the Central division and Western division cemetery segments decreased primarily due to a decrease in the construction of cemetery projects and a decrease in revenue from merchandise delivered, partially offset by an increase in preneed cemetery property sales. For further discussion on the decrease in construction of cemetery projects, see “Consolidated Operations — Cemetery.” Cemetery revenue in the Eastern division segment increased primarily due to an increase in preneed property sales. Cemetery revenue in the Southern division-Florida segment increased primarily due to increases in cemetery property sales, merchandise deliveries and perpetual care trust earnings. All Other cemetery segment revenue increased primarily due to an increase in revenue associated with the construction of cemetery projects in Puerto Rico.

     The cemetery gross profit for each of the cemetery segments was impacted by the effect of the accounting change as discussed above in “Consolidated Operations — Cemetery.” In addition, cemetery gross profit margin for the Central and Western division segments decreased due primarily to a decline in cemetery revenue as described above and an increase in health insurance costs as described above in “Consolidated Operations — Cemetery.” Eastern division segment gross profit margin decreased due primarily to an increase in health insurance costs. The Southern division Florida segment increased primarily due to increased cemetery revenue, partially offset by an increase in health insurance costs. All Other cemetery segment gross profit margin increased due to the increase in cemetery revenue in Puerto Rico.

Discontinued Operations

     The operating results of those businesses sold in fiscal year 2004 and the first nine months of fiscal year 2005 are reported in the discontinued operations section of the consolidated statements of earnings. Included in discontinued operations for the nine months ended July 31, 2005 and 2004 were net gains on dispositions of $1.1 million and $1.3 million, respectively. Revenues for the nine months ended July 31, 2005 were $1.2 million compared to $11.3 million in the same period in 2004. Income tax benefits for our discontinued operations for the nine months ended July 31, 2005 were $0.1 million compared to $1.2 million for the same period in 2004.

Other

     Corporate general and administrative expenses for the nine months ended July 31, 2005 increased $1.6 million compared to the same period in 2004 primarily due to increased professional fees associated with our Sarbanes Oxley Section 404 compliance effort and increased legal and professional fees relating in part to the class action law suits.

     In July 2005, we named a new Chief Operating Officer and announced a reorganization of our divisions from four to two, effective for the fourth quarter of fiscal year 2005. As a result of these changes, we recorded a charge of $0.1 million for the nine months ended July 31, 2005. In December 2003, we announced a reduction and restructuring of our workforce. For the nine months ended July 31, 2004, we recorded $2.2 million for severance

See Explanatory Note on page 2 for important information.

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and other costs associated with the workforce reductions. The workforce reduction plan was completed June 1, 2004. We also recorded $1.0 million for separation pay related to a former executive officer for the nine months ended July 31, 2004. These charges are presented in the “Separation charges” line item in the condensed consolidated statements of earnings.

     Total depreciation and amortization was $16.2 million for the nine months ended July 31, 2005 compared to $38.6 million for the same period in 2004. Depreciation and amortization from continuing operations was $16.2 million for the nine months ended July 31, 2005 compared to $38.1 million for the same period in 2004. Amortization in fiscal year 2004 included $21.0 million of deferred selling costs. Effective November 1, 2004, we changed our accounting principle for selling costs related to preneed funeral and cemetery service and merchandise sales, and we no longer amortize these costs but rather expense them as incurred.

     Interest expense decreased $12.5 million to $23.5 million for the nine months ended July 31, 2005 compared to $36.0 million for the same period in 2004 primarily due to a 268 basis point decrease in the average interest rate during the period resulting from recent debt refinancings, combined with a $48.3 million decrease in average debt outstanding.

     During the fourth quarter of fiscal year 2003, we identified a number of small businesses to close or sell, mostly funeral homes, and determined that their carrying value exceeded their fair values, resulting in an impairment charge. For the nine months ended July 31, 2005, we evaluated our long-lived assets, reduced the 2003 impairment charge by $0.1 million and sold several assets that we held for sale at a net gain of $1.2 million. The net effect was that we reported net gains on dispositions and impairment (losses) of $1.3 million in continuing operations for the nine months ended July 31, 2005, compared to $0.1 million for the same period in 2004. These charges are presented in the “Gains on dispositions and impairment (losses), net” line item in the consolidated statements of earnings.

     Other operating income, net was $1.0 million for the nine months ended July 31, 2005 compared to $1.9 million for the nine months ended July 31, 2004. The decrease is primarily due to net gains on the sale of excess land and property during 2004.

     Investment and other income (expense), net, increased $1.4 million from an expense of $1.0 million for the nine months ended July 31, 2004 to income of $0.4 million for the nine months ended July 31, 2005. The $1.0 million expense for the nine months ended July 31, 2004 was primarily comprised of a write-down of certain marketable securities, which had market value losses that were deemed to be other than temporary.

     The effective tax rate for our continuing operations for the nine months ended July 31, 2005 was 39.2 percent compared to 37.2 percent for the same period in 2004. The change in the effective rate in 2005 compared to 2004 is primarily due to the tax benefit on the early extinguishment of debt, which was treated separately from the tax expense associated with ordinary income that was computed at 38.0 percent. The tax benefit on the early extinguishment of debt was calculated at 36.0 percent because of an expected reduced state benefit.

     On May 31, 2005, we changed our method of accounting for selling costs incurred related to new preneed funeral and cemetery service and merchandise sales. As of November 1, 2004, we recorded a cumulative effect of change in accounting principle of $234.5 million pretax, $141.3 million after tax (net of income tax benefit of $93.2 million) or $1.29 per diluted share, which represents the cumulative balance of deferred preneed selling costs in the deferred charges line in the condensed consolidated balance sheet at the time of the change. See Note 3(a) to the condensed consolidated financial statements for additional information.

     As of July 31, 2005 and September 30, 2005, our outstanding debt totaled $410.8 million and $410.7 million, respectively. Of the total debt outstanding as of July 31, 2005, approximately 49 percent was subject to fixed rates averaging 6.2 percent, and 51 percent was subject to short-term variable rates averaging approximately 5.0 percent. For the nine months ended July 31, 2005, we recorded charges for the early extinguishment of debt of $32.8 million. See the section entitled “Three Months Ended July 31, 2005 Compared to Three Months Ended July 31, 2004 — Other” for further information.

See Explanatory Note on page 2 for important information.

80

Preneed Sales into and Deliveries out of the Backlog

     Gross preneed funeral sales increased 9.4 percent for the nine months ended July 31, 2005 compared to the same period in 2004.

     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 added $128.6 million in gross preneed sales to our funeral and cemetery merchandise and services backlog (including $54.1 million related to insurance-funded preneed funeral contracts) during the nine months ended July 31, 2005 to be recognized in the future (net of cancellations) as these prepaid products and services are delivered, compared to gross sales of $121.1 million (including $48.4 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2004. Revenues recognized on deliveries out of our preneed funeral and cemetery merchandise and services backlog, including accumulated trust earnings related to these preneed deliveries, amounted to $125.6 million for the nine months ended July 31, 2005, compared to $128.3 million for the corresponding period in 2004, resulting in a net increase in the backlog of $3.0 million for the nine months ended July 31, 2005 and a net reduction in the backlog of $7.2 million for the nine months ended July 31, 2004.

Liquidity and Capital Resources

Cash Flow

          Our operations provided cash of $59.2 million for the nine months ended July 31, 2005, compared to $68.6 million for the corresponding period in 2004. The 2004 amount includes a $33.2 million tax refund received during the first quarter of 2004 resulting from a change in tax accounting methods for cemetery merchandise revenue. The reduction in cash flow from operations primarily resulted from the tax refund received during the first quarter of 2004. As discussed in Note 19 to the condensed consolidated financial statements included herein, in connection with our internal control assessment under Section 404 of Sarbanes-Oxley, we undertook a project (the “deferred revenue project”) earlier this year to verify the balances in deferred preneed cemetery revenue and deferred preneed funeral revenue by physically reviewing certain of the preneed cemetery and funeral service and merchandise contracts. One of the results of this deferred revenue project is that we identified approximately $4 million of cash that could be withdrawn from our trust funds, for merchandise and services previously delivered. This had no effect on current period earnings but increased our cash flow from operations by approximately $4 million. We expect to withdraw approximately $10 million in our fourth quarter related to this project.

     Our investing activities resulted in a net cash outflow of $8.0 million for the nine months ended July 31, 2005, compared to a net cash outflow of $.1 million for the comparable period in 2004. Net asset sale proceeds amounted to $9.7 million for the nine months ended July 31, 2005 compared to $12.9 million for the same period in 2004. For the nine months ended July 31, 2005, capital expenditures amounted to $17.9 million, which included $12.8 million for maintenance capital expenditures, $2.0 million for growth initiatives and $3.1 million related to a building we purchased which was previously leased, compared to capital expenditures of $14.3 million in the same period in 2004, which included $12.9 million for maintenance capital expenditures and $1.4 million for growth initiatives.

     Our financing activities resulted in a net cash outflow of $43.3 million for the nine months ended July 31, 2005, compared to $71.0 million for the comparable period in 2004. The change was due primarily to net repayments of $6.0 million in the nine months ended July 31, 2005 (which includes $440.0 million in proceeds of long-term debt and $446.0 million in repayments of long-term debt), compared to repayments of $64.7 million in the comparable period of 2004. We used the $33.2 million tax refund included in operating cash flow to reduce our outstanding Term Loan B in the first quarter of fiscal year 2004.

See Explanatory Note on page 2 for important information.

81

Contractual Obligations and Commercial Commitments

     As of July 31, 2005, our outstanding debt balance was $410.8 million. The following table details our known future cash payments (in millions) related to various contractual obligations as of July 31, 2005.

	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)	$	410.8	$	3.2	$	5.4	$	4.4	$	397.8
Interest on long-term debt(2)		172.4		24.4		48.5		47.8		51.7
Operating lease obligations(3)		35.5		1.2		7.9		6.8		19.6
Non-competition and other agreements(4)		6.9		.8		4.0		1.5		.6
	$	625.6	$	29.6	$	65.8	$	60.5	$	469.7

(1)	See below for a breakdown of our future scheduled principal payments and maturities of our long-term debt by type as of September 30, 2005.
(2)	Includes contractual interest payments for our revolving credit facility, Term Loan B, senior notes and third-party debt. The interest on the revolving credit facility and Term Loan B was calculated based on interest rates in effect as of July 31, 2005.
(3)	Our noncancellable operating leases are primarily for land and buildings and expire over the next one to 15 years, except for six leases that expire between 2032 and 2039. Our future minimum lease payments as of July 31, 2005 are $1.2 million, $4.2 million, $3.7 million, $2.9 million, $3.9 million and $19.6 million for the years ending October 31, 2005, 2006, 2007, 2008, 2009 and later years, respectively.
(4)	We have entered into non-competition agreements with prior owners and key employees of acquired subsidiaries that expire through 2012. This category also includes separation pay related to a former executive officer.

     We expect to be able to reduce our debt with approximately $10 million of remaining income tax benefits related to the sale of our foreign operations, which we expect to receive by the end of fiscal year 2007.

     In February 2005, we used the net proceeds of the issuance of $200.0 million of our 6.25 percent senior notes, an additional $130.0 million in Term Loan B borrowings and a portion of our available cash to complete a tender offer pursuant to which we repurchased $298.2 million of our 10.75 percent senior subordinated notes and paid related tender premiums, fees, expenses and accrued interest of $28.9 million. For additional information, see Note 15 to the condensed consolidated financial statements. We redeemed our remaining $1.8 million principal amount of senior subordinated notes on the first redemption date of July 1, 2005 at the aggregate redemption price of $1.8 million, which was funded by cash on hand. In the third quarter of fiscal year 2005, we recorded a charge for the early extinguishment of debt of $0.1 million representing the call premium and write-off of the remaining unamortized fees on the senior subordinated notes.

     In connection with the issuance of the 6.25 percent senior notes, we entered into a registration rights agreement that requires that a registration statement be filed and declared effective by the SEC, and that an exchange offer be conducted providing for the exchange of the unregistered notes for similar registered notes, all within specified times.

     Due primarily to the restatements described in Note 1 to the condensed consolidated financial statements included herein and the deferred revenue project described in the Explanatory Note on page 2, we have so far been unable to cause the required registration statement to become effective and therefore are required to pay additional interest to the note holders until the default is cured. Additional interest began to accrue on June 12, 2005 at a rate of 0.50 percent per annum on the principal amount of the notes for a period of 90-days. The additional interest increases 0.50 percent for each 90-day period thereafter so long as the default exists, up to a maximum increase of 1.50 percent per annum. The additional interest is payable at the regular interest payment dates.

See Explanatory Note on page 2 for important information.

82

     Section 4.03 of the indenture governing our 6.25 percent notes requires us to furnish to the trustee for forwarding to the holders of the notes, within the time periods specified in the SEC’s rules and regulations, all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K, including a “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and, with respect to the annual information only, a report on the annual financial statements by our certified independent accountants. In addition, we must file a copy with the SEC for public availability within the time periods specified in the SEC’s rules and regulations. An event of default would occur if we failed to provide that information within 30 days after receipt of written notice by the trustee or holders of at least 25 percent of the principal amount outstanding. We are furnishing this report to the trustee and filing it with the SEC, and believe that doing so will comply with the requirements of the indenture.

     As of September 30, 2005, our outstanding debt balance was $410.7 million, consisting of $208.7 million in Term Loan B, $200.0 million of 6.25 percent senior notes, and $2.0 million of other debt. There were no amounts drawn on the revolving credit facility. The following table reflects future scheduled principal payments and maturities of our long-term debt (in millions) as of September 30, 2005.

							Other,
							Principally
							Seller
Fiscal	Revolving						Financing of
Year Ending	Credit		Term		Senior		Acquired
October 31,	Facility		Loan B		Notes		Operations		Total
2005	$	—	$	.6	$	—	$	.1	$	.7
2006		—		2.2		—		1.0		3.2
2007		—		2.2		—		.6		2.8
2008		—		2.2		—		.2		2.4
2009		—		2.2		—		—		2.2
Thereafter		—		199.3		200.0		.1		399.4
Total long-term debt	$	—	$	208.7	$	200.0	$	2.0	$	410.7

     We also had $15.7 million of outstanding letters of credit as of July 31, 2005 and September 30, 2005, and we are required to maintain a bond of $41.1 million to guarantee our obligations relating to funds we withdrew in fiscal year 2001 from our preneed funeral trusts in Florida. We substituted a bond to guarantee performance under certain preneed funeral contracts and agreed to maintain unused credit facilities in an amount that will equal or exceed the bond amount. We believe that cash flow from operations will be sufficient to cover our estimated cost of providing the prearranged services and products in the future.

     As of July 31, 2005 and September 30, 2005, there were no amounts drawn on our $125.0 million revolving credit facility. As of July 31, 2005 and September 30, 2005, our availability under the revolving credit facility, after giving consideration to the aforementioned letters of credit and bond obligation, was $68.3 million.

     On March 17, 2005, we substantially completed our $28.0 million stock repurchase program, having repurchased 4,400,000 shares since the inception of the program. On March 28, 2005, we announced a new $30.0 million stock repurchase program. Repurchases under the new program are limited to our Class A common stock and will be made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending on market conditions and other factors. Since the inception of this program through September 30, 2005, we have repurchased and retired 1,200,000 shares of our Class A common stock at an average price of $6.64 per share.

     On March 28, 2005, we announced that our Board of Directors approved the initiation of a quarterly cash dividend of two and one-half cents per share of common stock. Dividends were paid on April 29, 2005, July 29, 2005 and October 18, 2005. Although we intend to pay regular quarterly cash dividends for the foreseeable future, 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.

     The restatements described in Note 1 to the consolidated financial statements included herein may have created

See Explanatory Note on page 2 for important information.

83

defaults or events of default under our senior secured credit facility. However, we sought and received a waiver of any default or event of default that may have arisen as a result of such restatements. After consideration of the waiver, we were in compliance with our debt covenants as of July 31, 2005 and October 31, 2004.

Off-Balance Sheet Arrangements

     Our off-balance sheet arrangements as of July 31, 2005 consist of the following items:

(1)	the $41.1 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 23 to the consolidated financial statements in our Amended 2004 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 consolidated balance sheets, and are discussed in Note 4 to the condensed consolidated financial statements included herein.

Ratio of Earnings to Fixed Charges

     Our ratio of earnings to fixed charges was as follows:

Nine Months
Ended	Years Ended October 31,
July 31,	2004			2003			2002
2005	(Restated)			(Restated)			(Restated)			2001			2000
2.05(1)(5)		2.35	(2)		1.47	(3)		1.73	(4)(5)		-	(5)(6)		2.54

(1)	Pretax earnings for the nine months ended July 31, 2005 include $1.3 million of gains on dispositions and impairment (losses), net and a charge of $32.8 million for the loss on early extinguishment of debt.
(2)	Pretax earnings for fiscal year 2004 includes separation charges of $3.4 million for costs related to workforce reductions and separation pay to a former executive officer and $0.1 million in gains on dispositions and impairment (losses), net.
(3)	Pretax earnings for fiscal year 2003 include a charge of $11.3 million for the loss on early extinguishment of debt in connection with redemption of the ROARS, a noncash charge of $10.5 million for long-lived asset impairment and a charge of $2.5 million for separation payments to former executive officers.
(4)	Pretax earnings for fiscal year 2002 include a noncash charge of $18.5 million in connection with the write-down of assets held for sale.
(5)	Excludes the cumulative effect of change in accounting principles.
(6)	Pretax earnings for fiscal year 2001 include a noncash charge of $269.2 million in connection with the write-down of assets held for sale and other charges and a $9.1 million charge for the loss on early extinguishment of debt. As a result of these charges, our earnings for fiscal year 2001 were insufficient to cover our fixed charges, and an additional $198.6 million in pretax earnings would have been required to eliminate the coverage deficiency.

     For purposes of computing the ratio of earnings to fixed charges, earnings consist of pretax earnings plus fixed charges (excluding interest capitalized during the period). Fixed charges consist of interest expense, capitalized interest, amortization of debt expense and discount or premium relating to any indebtedness and the portion of rental expense that management believes to be representative of the interest component of rental expense.

Inflation

     Inflation has not had a significant impact on our operations over the past three years, nor is it expected to have a significant impact in the foreseeable future.

Recent Accounting Standards

     See Note 3 to the condensed consolidated financial statements included herein.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See Explanatory Note on page 2 for important information.

84

     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, 2004, filed with the Securities and Exchange Commission on January 11, 2005. The following disclosure discusses only those instances in which the market risk has changed by more than 10 percent from the annual disclosure.

     The market risk inherent in our market risk sensitive instruments and positions is the potential change arising from increases or decreases in the prices of marketable equity securities and interest rates as discussed below. Generally, our market risk sensitive instruments and positions are characterized as “other than trading.” Our exposure to market risk as discussed below includes “forward-looking statements” and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in equity markets or interest rates. Our views on market risk are not necessarily indicative of actual results that may occur and do not represent the maximum possible gains and losses that may occur. Actual gains and losses, fluctuations in equity markets, interest rates and the timing of transactions may differ from those estimated.

Interest

     We have entered into various fixed-rate and variable-rate debt obligations, which are detailed in Note 18 to our consolidated financial statements included in our Amended 2004 Form 10-K and in Note 15 to the condensed consolidated financial statements included herein and in the “Liquidity and Capital Resources” section of our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in both reports.

     As of July 31, 2005 and October 31, 2004, the carrying values of our long-term fixed-rate debt, including accrued interest, were approximately $208.1 million and $314.6 million, respectively, compared to fair values of $203.7 million and $344.7 million, respectively. Fair values were determined using quoted market prices. Each approximate 10 percent change in the average interest rates applicable to such debt, 70 basis points and 40 basis points for July 31, 2005 and October 31, 2004, respectively, would result in changes of approximately $8.3 million and $0.9 million, respectively, in the fair values of these instruments. If these instruments are held to maturity, no change in fair value will be realized.

     Our variable-rate debt consists of our Term Loan B and revolving credit facility. As of July 31, 2005 and October 31, 2004, the carrying value of our Term Loan B was $210.5 million and $54.0 million, respectively, compared to a fair value of $212.5 million and $54.7 million, respectively. As of July 31, 2005 there were no amounts drawn on the revolving credit facility, and as of October 31, 2004, the carrying value and fair value of our revolving credit facility was $59.0 million. None of the $210.5 million outstanding under the Term Loan B at July 31, 2005 was hedged. Each approximate 10 percent, or 60 basis-point, change in the average interest rate applicable to this debt would result in a change of approximately $0.7 million in our pretax earnings. Of the $113.0 million outstanding under Term Loan B and the revolving credit facility on October 31, 2004, $63.0 million was not hedged by the interest rate swap in effect at that time and was subject to short-term variable interest rates. Each approximate 10 percent, or 55 basis-point, change in the average interest rate applicable to this debt would result in a change of approximately $0.3 million in our pretax earnings. Fair value was determined using quoted market prices, where applicable, or future cash flows discounted at market rates for similar types of borrowing arrangements.

     We monitor our mix of fixed- and variable-rate debt obligations in light of changing market conditions and from time to time may alter that mix by, for example, refinancing balances outstanding under our variable-rate revolving credit facility with fixed-rate debt or by entering into interest rate swaps.

See Explanatory Note on page 2 for important information.

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Item 4. Controls and Procedures

Evaluation of 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 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“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 financial disclosure.

     The Company’s management carried out an evaluation under the supervision and with the participation of the Company’s management, including the CEO and CFO, as of July 31, 2005 of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Exchange Act. Based upon, and as of the date of this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective because of the material weakness discussed below. Notwithstanding the material weakness discussed below, the Company’s management has concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.

Changes in Internal Control Over Financial Reporting

     Except as described below, there have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

     A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Although we have not yet been required to assess and report on the effectiveness of our internal control over financial reporting, as a result of the restatement described in Note 1 to the condensed consolidated financial statements included herein, the Company concluded that the material weakness described below existed as of October 31, 2004 and through July 31, 2005.

     The Company did not maintain effective controls over the determination of operating and reportable segments in accordance with accounting principles generally accepted in the United States of America with regard to identifying its segments and reporting units for purposes of assessing goodwill impairments. This control deficiency resulted in the restatement of the Company’s interim and annual consolidated financial statements for 2004 and 2003, the annual consolidated financial statements for 2002, and adjustments to the consolidated financial statements of the first and second quarters of 2005. Additionally, this control deficiency could result in further misstatements to the Company’s goodwill, deferred taxes, equity and disclosures that would result in a material misstatement in the annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness in internal control over financial reporting.

     In connection with its deferred revenue project discussed in Note 19 to the condensed consolidated financial statements included herein, the Company is also evaluating whether there could be a material weakness in internal control related to the Company’s deferred preneed revenue.

Management’s Remediation Initiatives

     The Company has taken a series of steps designed to improve the control processes regarding the accounting requirements for determining operating and reportable segments, reporting units and goodwill impairment. These steps include re-assessing the information provided to the Company’s CODM and how that determines the Company’s operating segments as well as assessing the economic similarity for reportable segments and reporting unit determination in the Company’s goodwill impairment analysis using gross profit.

See Explanatory Note on page 2 for important information.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     Henrietta Torres and Teresa Fiore, on behalf of themselves and all others similarly situated and the General Public v. Stewart Enterprises, Inc., et al.;No. BC328961 on the docket of the Superior Court for the State of California for the County of Los Angeles, Central District. This purported class action was filed on February 17, 2005, on behalf of a nationwide class defined to include all persons, entities and organizations who purchased funeral goods and/or services in the United States from defendants at any time on or after February 17, 2001. The suit named the Company and several of its Southern California affiliates as defendants and also sought to assert claims against a class of all entities located anywhere in the United States whose ultimate parent corporation has been the Company at any time on or after February 17, 2001.

     The plaintiffs alleged that defendants failed to disclose that the prices charged by defendants for certain goods and services exceeded what defendants paid to third parties for those same goods and services on the plaintiffs’ behalf. Plaintiffs further alleged that this failure violated provisions of the Federal Trade Commission’s “Funeral Rule�� that require a funeral home to disclose, if true, that it marks up the price of certain items purchased from third parties on behalf of customers on a “cash advance” or “accommodation” basis. The plaintiffs alleged that by failing to comply with the Funeral Rule, defendants (i) breached contracts with the plaintiffs, (ii) were unjustly enriched, (iii) engaged in unfair, unlawful and fraudulent business practices in violation of a provision of California’s Business and Professions Code, and (iv) engaged in a civil conspiracy among the defendants to breach plaintiffs’ contracts and commit acts of unfair competition. The plaintiffs sought restitution damages, disgorgement, interest, costs, and attorneys’ fees.

     By order dated May 5, 2005, the court ruled that this case was related to similar actions against Service Corporation International and Alderwoods Group, Inc. On August 18, 2005, the court sustained a demurrer in the SCI case, dismissing the conspiracy count, but allowing the plaintiffs to amend the remainder of the complaint. This ruling, by stipulation of the parties, applied equally to the suit filed against the Company.

     In response, on August 29, 2005, the plaintiffs in each of the three cases filed amended complaints. SCI has filed a demurrer in its case, and Stewart joined in that demurrer on October 6, 2005. As before, the ruling on this demurrer will apply equally to the suit against the Company. Because the matter is in its early stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in this matter.

     In re: Funeral Consumer Antitrust Litigation —On May 2, 2005, a purported class action lawsuit entitledFuneral Consumers Alliance, Inc, et al. v. Service Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co.(“FCA Case”) was filed in the Federal 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.

     The suit alleges that the defendants acted jointly to fix and maintain prices on caskets and reduce competition from independent casket discounters 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.

     Thereafter, five substantially similar lawsuits were filed in the Northern District of California asserting claims under the federal antitrust laws and various state antitrust and consumer protection laws. These five suits were transferred to the division in which the FCA Case was pending and consolidated with the FCA Case (collectively referred to as the “Consolidated Consumer Cases”).

     On July 8, 2005, a purported class action was filed in the Northern District of California entitledPioneer Valley Casket Co., Inc., et al. v. Service Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co. (“Pioneer Valley Case”). The Pioneer Valley Case involves the same claims asserted in the Consolidated Consumer Cases, except that it was brought on behalf of a nationwide class defined to include only independent casket retailers. On August 15, 2005, the Court issued an order relating

See Explanatory Note on page 2 for important information.

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the Pioneer Valley Case to the Consolidated Cases, but it has not been consolidated with the Consolidated Consumer Cases for purposes of trial.

     On July 15, 2005, the defendants filed motions to dismiss for failure to plead facts sufficient to establish viable antitrust and unfair competition claims. On September 9, 2005, the Court denied the defendants’ motions to dismiss, without prejudice, but ordered the plaintiffs to file an amended and consolidated complaint that satisfies the objections raised in the motions to dismiss.

     At the defendants’ request, the Court also issued orders in late September 2005 transferring the Consolidated Consumer Cases and the Pioneer Valley Case to the United States District Court for the Southern District of Texas. The transferred cases were assigned to different judges in the Southern District of Texas, but Stewart believes they ultimately will be consolidated or related before a single judge. Because these matters are in their preliminary stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in these matters.

     A similar action captionedRalph Lee Fancher, on behalf of himself and all others similarly situated v. Service Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., Aurora Casket Co., York Group, Inc., and Batesville Casket Co.,was filed in the United States District Court for the Eastern District of Tennessee on behalf of consumers in twenty-three states and the District of Columbia who purchased caskets. The allegations of fact were essentially the same as those made in the FCA Case, but the plaintiff in this suit alleged that the defendants violated various state antitrust, consumer protection and/or unjust enrichment laws. The plaintiff in this purported class action withdrew his complaint on August 2, 2005, and re-filed a nearly identical complaint under Tennessee law and on behalf of only Tennessee consumers in the Northern District of California on September 23, 2005, the same day that the Consolidated Consumer Cases were transferred to the Southern District of Texas. Accordingly, this case remains pending in the Northern District of California. Because these matters are in their preliminary stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in these matters.

     Civil Investigative Demands– On August 4, 2005, the Attorney General for the State of Maryland issued a civil investigative demand to the Company seeking documents and information relating to funeral and cemetery goods and services. The Attorney General for the State of Florida issued a similar civil investigative demand to the Company. The Company is cooperating with the attorneys general and has begun providing them with information relevant to their investigations. Because these matters are in their preliminary stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in these matters.

     In addition to the matters above, 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, management does 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, management believes that our insurance protection is reasonable in view of the nature and scope of our operations.

See Explanatory Note on page 2 for important information.

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Issuer Purchases of Equity Securities

					Total number of		Maximum approximate
					shares purchased		dollar value of shares
	Total number				as part of		that may yet be
	of shares		Average price		publicly-announced		purchased under the
Period	purchased		paid per share		plans or programs(1)		plans or programs
May 1, 2005 through May 31, 2005		—	$	—		—	$	30,129,265
June 1, 2005 through June 30, 2005		638,800	$	6.39		638,800	$	26,046,679
July 1, 2005 through July 31, 2005		561,200	$	6.92		561,200	$	22,161,798
Total		1,200,000	$	6.64		1,200,000	$	22,161,798

⁽¹⁾ On June 26, 2003, we announced that our Board of Directors had approved a stock repurchase program that allows us to invest up to $25.0 million in repurchases of our Class A common stock. In June 2004, the Board of Directors increased the program limit by an additional $3.0 million to $28.0 million. On March 17, 2005, we substantially completed our $28.0 million stock repurchase program, having repurchased 4,400,000 shares since its inception. On March 28, 2005, we announced a $30.0 million stock repurchase program. 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 on market conditions and other factors. Since the inception of the program through July 31, 2005, we have repurchased and retired 1,200,000 shares at an average price of $6.64 per share.

See Explanatory Note on page 2 for important information.

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Item 5. Other Information

Forward-Looking Statements

     Certain statements made herein or elsewhere by us or on our behalf that are not historical facts are intended to be forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan” or “anticipate” and other similar words. These statements include any projections of earnings, revenues, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any predictions concerning the effects of Hurricane Katrina; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements contained in this report include but are not limited to the financial projections made in this section and the assumptions underlying them, along with statements relating to (1) anticipated future performance of our preneed sales program, (2) anticipated future performance of funds held in trust, (3) anticipated mortality trends, (4) potential results of our operating initiatives, (5) our ability to control costs and maintain our margins, (6) the anticipated future effects of Hurricane Katrina, (7) our current plans for deployment of our projected cash flow, (8) the success and timing of selling the small businesses designated as held for sale, (9) our ability to realize the carrying value of our deferred tax assets and (10) estimates of the results of our deferred revenue project.

     The financial forecasts included in this Form 10-Q have been prepared by, and are the responsibility of, our management. PricewaterhouseCoopers LLP has neither examined nor compiled the financial forecasts and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto.

     Accuracy of the forecasts is dependent upon assumptions about events that change over time and is thus susceptible to periodic change based on actual experience and new developments. The forecasts are based on a variety of estimates and assumptions made by our management with respect to, among other things, industry performance; general economic, market, industry and interest rate conditions; preneed and at-need sales activities and trends; fluctuations in cost of goods sold and other expenses; capital expenditures; and other matters that cannot be accurately predicted, may not be realized and are subject to significant business, economic and competitive uncertainties, all of which are difficult to predict and many of which are beyond our control. Accordingly, there can be no assurance that the assumptions made in preparing the forecasts will prove accurate, and actual results may vary materially from those contained in the forecasts. For these reasons, the forecasts should not be regarded as an accurate prediction of future results, but only of results that may be obtained if substantially all of our principal expectations are realized.

     We caution readers that we assume no obligation to update or publicly release any revisions to forward-looking statements made herein or any other forward-looking statements made by us or on our behalf.

     Prior to Hurricane Katrina, we forecasted that earnings from continuing operations would be in the range of $.23 to $.27 per diluted share including three early extinguishment of debt charges estimated to total $.19 per share. This forecast did not include any adjustments that may be necessary as a result of our deferred revenue project. As described in more detail below, we cannot yet with any certainty make an estimate of the ultimate financial impact that Hurricane Katrina will have on us. Also, we have not completed our deferred revenue project. Therefore, we are no longer providing an earnings forecast for fiscal year 2005.

     Prior to Hurricane Katrina, our 2005 earnings forecast for continuing operations was based on the following principal assumptions:

(1) The average revenue per traditional and cremation funeral service performed was expected to increase by approximately 2 percent to 3 percent, excluding any impact from funeral trust earnings. Increases in average revenue per funeral service performed may be partially offset by a decrease in the number of families served by continuing operations in 2005 as compared to 2004. The upper end of the forecast range assumed that these businesses would serve the same number of families during fiscal year 2005 as in

See Explanatory Note on page 2 for important information.

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	2004, and the lower end assumed a possible reduction in the number of families served of up to 2 percent.
(2)	Cemetery property sales were expected to increase by 4 percent to 8 percent.
(3)	Total revenue from trust earnings, including earnings recognition from funeral, cemetery merchandise and perpetual care trusts, was expected to be down from that recognized in 2004.
(4)	While we intended to control costs, we did not anticipate further cost cuts as significant as those implemented in 2004.
(5)	As a result of refinancing the senior secured credit facility in November 2004 and refinancing substantially all of our 10.75 percent senior subordinated notes in February 2005, combined with continued debt reduction, interest expense was expected to decrease significantly for fiscal year 2005. During the first nine months of fiscal year 2005, we recorded charges for the early extinguishment of debt of $32.8 million.
(6)	We expected to spend approximately $2.0 million on our Sarbanes Oxley Section 404 compliance effort. This represented external costs and does not include personnel allocated to the project.

     Prior to Hurricane Katrina, we believe that we were on target to meet our forecasted fiscal year 2005 results. The size of our New Orleans area operations is small compared to our total operations, and the storm will affect only the last two months of our fiscal year. However, the disruption caused by the storm to our New Orleans-based employees and operations is significant, and we are incurring significant costs associated with the temporary relocation of our executive offices and Shared Services Center. Although we cannot currently predict the amount or timing of any insurance recoveries, we believe based on our preliminary assessment that a substantial portion of these costs should ultimately be covered by insurance. However, we cannot yet with any certainty make an estimate of the ultimate financial impact that Hurricane Katrina will have on us.

     Prior to Hurricane Katrina, we projected cash flow from operations in fiscal year 2005 to be between $50 million and $60 million. As a result of our deferred revenue project, we have withdrawn approximately $4 million in cash during the third quarter and expect to withdraw approximately $10 million of cash during the fourth quarter related to services performed in prior years with respect to which the Company had not yet withdrawn the cash from its trust funds. Maintenance capital expenditures are expected to be between $16 million and $18 million excluding any costs related to Hurricane Katrina.

     These forecasts for continuing operations exclude the results of a number of small businesses that we have closed or sold, the results of which will be reported separately as discontinued operations as appropriate in future reports.

Cautionary Statements

     We caution readers that the following important factors, among others, in some cases have affected, and in the future, could affect, our actual consolidated results and could cause our actual consolidated results in the future to differ materially from the goals and expectations expressed in the forward-looking statements above and in any other forward-looking statements made by us or on our behalf.

Risks Related to Our Business

In completing our deferred revenue project, we may uncover unanticipated issues during our review of the remaining preneed contracts, which could result in a larger than expected impact to our previously reported financial information.

     Our estimate of the results of the deferred revenue project is subject to uncertainties. We may uncover unanticipated issues during our review of the remaining preneed contracts, which could result in a larger than expected impact to our previously reported financial information. See the “Explanatory Note” on page 2.

     Our completedForm 10-Q for the period ended July 31, 2005 will be filed late, which could result in several adverse consequences to our business and to the trading price of and market for our Class A Common Stock.

     We have been in discussions with NASDAQ, where our Class A common stock is traded, and believe NASDAQ may find that our inability to timely file a complete Form 10-Q for the quarter ended July 31, 2005 constitutes a failure to comply with the requirements for continued listing. If we receive a notice of delisting proceedings from NASDAQ, we plan to seek a hearing before NASDAQ’s Listing Qualifications Panel to request an

See Explanatory Note on page 2 for important information.

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extension of time to complete the filing and thereby regain compliance with the listing standards; the delisting would be stayed pending a final determination by NASDAQ. We are optimistic that our request would be granted, although no assurances can be given. Delisting of our Class A common stock from NASDAQ could have a material adverse effect on the trading price of and market for our Class A common stock and on our ability to raise capital. In addition, during any period when we are not current with our SEC reports, neither our affiliates nor any person that purchased shares in a private offering during the preceding two years will be able to sell their shares in public markets pursuant to Rule 144 under the Securities Act of 1933. Also our registration statements on Form S-8 regarding sales of our securities through our employee benefit plans will not be available, and we will be suspending sales under these registration statements until we are current in our SEC filings.

We have experienced a decline in funeral call volume due to many factors, such as the number of deaths and competition in our markets, our ability to identify changing consumer preferences and various other factors, some of which are beyond our control.

     We have experienced declines in same-store funeral call volumes for a number of years due to many factors described elsewhere herein including the number of deaths, intense competition and our ability to identify changing consumer preferences. From fiscal years 2001 to 2002 and 2002 to 2003, same-store funeral call volumes decreased 1.5 percent and 2.6 percent, respectively. One of the operating initiatives announced in 2003 was the creation of a funeral call volume task force, which is using the most successful tactics of our top performing funeral homes to develop strategies to drive funeral call growth throughout our organization with an increased focus on preneed funeral sales. Nevertheless, we experienced a decline in same-store funeral call volumes from fiscal year 2003 to 2004 of 1.0 percent. We have experienced an increase of .2 percent in same-store funeral call volumes during the nine months ending July 31, 2005, as compared to the prior year. We can give no assurance that we will be successful in implementing the operating initiative described above in the long term or that it will succeed in stopping or reversing the decline in same-store funeral call volumes.

We may experience declines in preneed sales due to numerous factors, including changes made to contract terms and sales force compensation and a weakening economy. Declines in preneed property sales would reduce current revenue. Declines in preneed funeral and cemetery service and merchandise sales would reduce our backlog and could reduce our future market share.

     We do not anticipate making significant changes in our preneed sales organization, but we may decide that adjustments are advisable, which could cause declines in preneed sales. We experienced a decline in cemetery property sales in Puerto Rico during the first quarter of fiscal year 2005. We addressed this by dividing the responsibility from one sales executive on the island to three, allowing them to better focus on our primary markets. We experienced significant improvement in our preneed sales in Puerto Rico in the second quarter of fiscal year 2005. We can give no assurance that they will continue to be successful in improving preneed sales. In addition, a weakening economy that causes customers to reduce discretionary spending could cause, and we believe has caused in the past, a decline in preneed sales. Geopolitical concerns could lower consumer confidence, which could also result in a decline in preneed sales. Declines in preneed cemetery property sales would reduce current revenue, and declines in other preneed sales would reduce our backlog and future revenue and could reduce future market share.

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

     Our funeral home and cemetery operations generally face intense competition in local markets that typically are served by numerous funeral homes and cemetery firms. We have historically experienced price competition primarily from independent funeral home and cemetery operators, and from monument dealers, casket retailers, low-cost funeral providers and other non-traditional providers of services or products including, in recent years, Internet providers. From time to time, this price competition has resulted in losing market share in some markets. In other markets, we have had to reduce prices thereby reducing profit margins in order to retain or recapture market share. Increased price competition in the future could further reduce revenues, profit margins and the backlog and potentially impact our annual goodwill impairment analysis.

     Discount retailers have begun marketing caskets at prices sometimes lower than what we offer. Consumers can now buy caskets in funeral supply stores and directly from manufacturers, as well as over the Internet, and recently,

See Explanatory Note on page 2 for important information.

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the first large general merchandise company has entered the market for low-cost caskets. This could cause sales of caskets at our facilities to decrease, which could adversely affect funeral revenues and margins.

Increased advertising or better marketing by competitors, or increased activity by competitors offering products or services over the Internet, could cause us to lose market share and revenues or cause us to incur increased costs in order to retain or recapture our market share.

     In recent years, the marketing of preneed funeral services through television, radio and print advertising, direct mailings and personal sales calls has increased. Extensive advertising or effective marketing by competitors in local markets could cause us to lose market share and revenues or cause us to increase marketing costs. In addition, competitors may change the types or mix of products or services offered. These changes may attract customers, causing us to lose market share and revenue or to incur costs in response to competition in order to vary the types or mix of products or services offered by us. Also, increased use of the Internet by customers to research and/or purchase products and services could cause us to lose market share to competitors offering to sell products or services over the Internet. We do not currently sell products or services over the Internet.

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

     Future market share, revenues and profits will depend in part on our ability to anticipate, identify and respond to changing consumer preferences. During fiscal year 2000, we began to implement strategies based on a proprietary, extensive study of consumer preferences we commissioned in 1999. However, we may not correctly anticipate or identify trends in consumer preferences, or we may identify them later than our competitors do. In addition, any strategies we may implement to address these trends may prove incorrect or ineffective.

Earnings from and principal of trusts and escrow accounts could be reduced by changes in stock and bond prices and interest and dividend rates or by a decline in the size of the funds.

     We maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. Earnings and investment gains and losses on trusts and escrow accounts are affected by financial market conditions that are not within our control. Earnings are also affected by the mix of fixed-income and equity securities that we choose to maintain in the trusts, and we may not choose the optimal mix for any particular market condition. The size of the trusts depends upon the level of preneed sales and maturities, the amount of ordinary income and investment gains or losses and funds added through acquisitions, if any. Declines in earnings from cemetery perpetual care trusts would cause a decline in current revenues, while declines in earnings from other trusts and escrow accounts could cause a decline in future cash flows and revenues. In addition, any significant or sustained investment losses could result in there being insufficient funds in the trusts to cover the cost of delivering services and merchandise or maintaining cemeteries in the future. Any such deficiency would have to be covered by cash flow, which could have a material adverse effect on our financial position and results of operations.

     Unrealized gains and losses in the preneed funeral and cemetery merchandise and services trusts have no immediate impact on our revenues, margins, earnings or cash flow, unless the fair market value of the trusts were to decline below the estimated costs to deliver the underlying products and services. If that were to occur, we would record a charge to earnings to record a liability for the expected losses on the delivery of the associated contract. Over time, gains and losses realized in the trusts are allocated to underlying preneed contracts and affect the amount of the trust earnings we record when we deliver the underlying products or services. Accordingly, if current market conditions do not improve, the trusts may eventually realize losses, and our revenues, margins, earnings and cash flow would be negatively affected by the reduced revenue when we deliver the underlying products and services. This factor adversely affected our results in fiscal year 2004 and did so again in the first nine months of fiscal year 2005. Unrealized gains and losses in the cemetery perpetual care trusts do not affect earnings but could limit the capital gains available to us and could result in lower returns and lower current revenues than we have historically achieved.

Increased preneed sales may have a negative impact on cash flow and earnings.

See Explanatory Note on page 2 for important information.

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     Preneed sales of cemetery property and funeral and cemetery products and services are generally cash flow negative initially, primarily due to the commissions and other costs to acquire the sale, the portion of the sales proceeds required to be placed into trusts or escrow accounts and the terms of the particular contract, such as the size of the down payment required and the length of the contract. We will continue to invest a significant portion of cash flow in preneed acquisition costs, which reduces cash flow available for other activities, and, to the extent preneed activities are increased, cash flow would be further reduced, and our ability to service debt could be adversely affected. With the change in accounting for preneed funeral and cemetery merchandise and service sales, preneed selling costs will be expensed as incurred. Therefore, increases in preneed spending would increase our costs and decrease earnings. Conversely, decreases in preneed spending would decrease costs and increase earnings.

Increased costs may have a negative impact on earnings and cash flows.

     During fiscal year 2004, we reduced funeral, cemetery and corporate general and administrative expenses, primarily through a reduction in our workforce. While we intend to continue to control costs, we do not anticipate any further significant cost cuts. We may not be successful in maintaining our margins and may incur additional costs. For example, we are experiencing increased costs, at least in the near tern, as a result of Hurricane Katrina.

     Insurance costs, in particular, have increased substantially in recent years. The terrorist attacks in the United States on September 11, 2001 and related subsequent events have resulted in higher insurance premiums. The volume of claims made in such a short span of time resulted in liquidity challenges that many insurers have passed on to their policyholders. Insurers have increased premiums to offset losses in equity markets due to recent economic conditions. Additionally, we have experienced increases in health insurance costs. Additional increases in insurance costs cannot be predicted.

Our ability to dispose of our businesses at prices consistent with our expectations depends on several factors, many of which are beyond our control. Any changes in expected sales prices or carrying values of these businesses could result in additional impairment charges or could adversely affect our ability to sell these businesses at prices we are willing to accept.

     In December 2003, we announced plans to close or sell a number of small businesses, primarily small funeral homes, most of which were acquired as part of a group of facilities, that were performing below acceptable levels or no longer fit our operating profile. We believe that the closing or sale of those businesses will enable management to focus on our most productive operations where our operating initiatives may bring about the greatest benefits in increased revenues. As of July 31, 2005, we had closed on or entered into preliminary agreements to sell 73 businesses for approximately $30.0 million and have 4 additional business we will continue to market. We can give no assurance that we will be able to dispose of these businesses or that buyers will accept our terms, nor can we give any assurance that the selling prices of these businesses will not be materially different from our expectations. Any variance between the anticipated and actual sale prices or changes in the carrying values of these businesses would result in additional impairment charges in the future and did result in gains on dispositions, net of impairment losses, recorded in 2004.

Our Chairman Emeritus may have a significant and disproportionate influence on the outcome of election of directors and other matters presented for a vote of shareholders and this control may be exercised in a manner that may conflict with the interests of shareholders.

     As of July 31, 2005, our Chairman Emeritus, Frank B. Stewart, Jr., held 7,235,310 shares (or approximately 6.9 percent) of our outstanding Class A common stock and all of the 3,555,020 outstanding shares of our Class B common stock. Because each share of Class B common stock is entitled to 10 votes on all matters presented for a vote by our shareholders, Mr. Stewart controls approximately 30.4 percent of our total voting power, while holding approximately 9.9 percent of our outstanding equity. Accordingly, Mr. Stewart may have a significant and disproportionate influence over the election of directors and other matters requiring the affirmative vote of our shareholders and this control may be exercised in a manner that may conflict with the interest of shareholders. Additionally, because Louisiana law and our articles of incorporation require the affirmative vote of two-thirds of the voting power present to approve certain major transactions and any amendments to our articles of incorporation, Mr. Stewart may have the ability to prevent the consummation of such actions, even if they are recommended by our Board of Directors and favored by a substantial majority of our shareholders.

See Explanatory Note on page 2 for important information.

94

Servicing our debt will require a significant amount of cash, and our ability to generate sufficient cash depends on many factors, some of which are beyond our control.

     Our ability to make payments on and to refinance our debt depends on our ability to generate cash flow. This, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, our ability to borrow funds in the future to make payments on our debt will depend on our meeting the financial covenants in our senior secured credit facility and other debt agreements we may have in the future. Our business may not generate cash flow from operations, and future borrowings may not be available to us under our senior secured credit facility or otherwise in an amount sufficient to enable us to pay our debt or to fund other liquidity needs. As a result, we may need to refinance all or a portion of our debt on or before maturity. We may not be able to refinance any of our debt on favorable terms, or at all. Any inability to generate sufficient cash flow or refinance our debt on favorable terms could have a material adverse effect on our financial condition.

Increases in interest rates would increase interest costs on our variable-rate long-term debt and could have a material adverse effect on our net income and earnings per share.

     Amounts borrowed under the senior secured credit facility are subject to variable interest rates. Any significant increase in interest rates could increase our interest costs on our variable-rate long-term debt or indebtedness incurred in the future, which could decrease our net income and earnings per share materially.

Covenant restrictions under our senior secured credit facility and our 6.25 percent senior note indenture may limit our ability to operate our business.

     Our senior secured credit facility and the indenture governing the 6.25 percent senior notes contain, among other things, covenants that restrict our and our subsidiaries’ activities. Our senior secured credit facility limits, among other things, our and the guarantors’ ability to: borrow money; pay dividends or distributions; purchase or redeem stock; make investments; engage in transactions with affiliates; engage in sale and leaseback transactions; consummate specified asset sales; effect a consolidation or merger or sell, transfer, lease, or otherwise dispose of all or substantially all of our assets; and create liens on our assets. In addition, our senior secured credit facility contains specific limits on capital expenditures. Furthermore, our senior secured credit facility requires us to maintain specified financial ratios and satisfy financial condition tests. The indenture governing the 6.25 percent senior notes restricts our and the guarantors’ ability to create liens on assets, enter into sale and leaseback transactions and merge or consolidate with other companies. Our and our subsidiaries’ future indebtedness may contain similar or even more restrictive covenants.

     These covenants may require that we take action to reduce our debt or to act in a manner contrary to our business objectives. In addition, events beyond our control, including changes in general economic and business conditions, may affect our ability to satisfy these covenants. We might not meet those covenants, and the lenders might not waive any failure to meet those covenants. A breach of any of those covenants could result in a default under such indebtedness. If an event of default under our senior secured credit facility occurs, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. Any such declaration would also result in an event of default under the indenture governing the 6.25 percent senior notes.

Our projections do not include any earnings from acquisition activity. Several important factors, among others, may affect our ability to consummate acquisitions.

     Although we have not made any significant acquisitions in recent years, we may in the future. Any such acquisitions have risks. We may fail to identify suitable acquisition candidates, and even if we do, acquisitions may not be completed on acceptable terms or successfully integrated into our existing business. We may not be able to find businesses for sale at prices we are willing to pay. Acquisition activity, if any, will also depend on our ability to enter new markets. Due in part to our lack of experience operating in new areas and to the presence of competitors who have been in certain markets longer than we have, such entry may be more difficult or expensive than we anticipate.

See Explanatory Note on page 2 for important information.

95

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our internal control over financial reporting, which could impact the market price of our common stock and our access to capital.

     We are in the process of completing our documentation and beginning the testing of our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires management’s assessments of the effectiveness of internal controls over financial reporting as of the end of our fiscal year 2005 and a report by our independent registered public accounting firm addressing management’s assessments and the effectiveness of the internal controls as of that date. During the course of testing, we may identify deficiencies and weaknesses. The timing of the identification of any deficiencies or weaknesses could cause management to be unable to conclude that our internal controls are effective as of the end of fiscal year 2005 or our auditors to be unable to give a favorable report on management’s assessments. This could have a material adverse effect on the market price of our common stock and possibly on our access to capital.

     A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Although we have not yet been required to assess and report on the effectiveness of our internal control over financial reporting, as a result of the restatement described above, we concluded that the material weakness described below existed as of October 31, 2004 and through July 31, 2005.

     We did not maintain effective controls over the determination of operating and reportable segments in accordance with accounting principles generally accepted in the United States of America with regard to identifying our segments and reporting units for purposes of assessing goodwill impairments. This control deficiency resulted in the restatement of our interim and annual consolidated financial statements for 2004 and 2003, the annual consolidated financial statements for 2002, and adjustments to the consolidated financial statements of the first and second quarters of 2005. Additionally, this control deficiency could result in further misstatements to our goodwill, deferred taxes, equity and disclosures that would result in a material misstatement in the annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness in internal control over financial reporting.

     In connection with our deferred revenue project discussed in Note 19 to the condensed consolidated financial statements included herein, we are also evaluating whether there could be a material weakness in internal control related to our deferred preneed revenue.

Risks Related to the Death Care Industry

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

     Declines in the number of deaths could cause at-need sales of funeral and cemetery services, property and merchandise to decline, which could decrease revenues. This factor adversely affected our results in fiscal year 2004. Although the United States Bureau of the Census estimates that the number of deaths in the United States will increase by approximately 1 percent per year from 2000 to 2010, longer lifespans could reduce the rate of deaths. Changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in the number of deaths in our markets or from quarter to quarter are not predictable. However, generally the number of deaths fluctuates with the seasons with more deaths occurring during the winter months primarily resulting from pneumonia and influenza. These variations can cause revenues to fluctuate.

     Our comparisons of the change in the number of families served to the change in the number of deaths reported by the Centers for Disease Control and Prevention (“CDC”) from time to time may not necessarily be meaningful. The CDC receives weekly mortality reports from 122 cities and metropolitan areas in the United States within two to three weeks from the date of death and reports the total number of deaths occurring in these areas each week based on the reports received from state health departments. The comparability of our funeral calls to the CDC data is limited, as reports from the state health departments are often delayed, and the 122 cities reporting to the CDC are not necessarily comparable with the markets in which we operate.

See Explanatory Note on page 2 for important information.

96

The increasing number of cremations in the United States could cause revenues to decline because we could lose market share to firms specializing in cremations. In addition, basic cremations produce no revenues for cemetery operations and lesser funeral revenues and, in certain cases, lesser profit margins than traditional funerals.

     Our traditional cemetery and funeral service operations face competition from the increasing number of cremations in the United States. Industry studies indicate that the percentage of cremations has steadily increased and that cremations will represent approximately 35 percent of the deaths in the United States by the year 2010, compared to 28 percent in 2002. In fiscal years 2002, 2003, 2004 and the nine months ended July 31, 2005, 35 percent, 36 percent, 37 percent and 37 percent, respectively, of the funeral services we performed in our continuing operations were cremations. The trend toward cremation could cause cemeteries and traditional funeral homes to lose market share and revenues to firms specializing in cremations. In addition, basic cremations (with no funeral service, casket, urn, mausoleum niche, columbarium niche or burial) produce no revenues for cemetery operations and lower revenues than traditional funerals and, when delivered at a traditional funeral home, produce lower profit margins as well.

Because the funeral and cemetery businesses are high fixed-cost businesses, positive or negative changes in revenue can have a disproportionately large effect on cash flow and profits.

     Funeral homes and cemetery businesses must incur many of the costs of operating and maintaining facilities, land and equipment regardless of the level of sales in any given period. For example, we must pay salaries, utilities, property taxes and maintenance costs on funeral homes and maintain the grounds of cemeteries regardless of the number of funeral services or interments performed. Because we cannot decrease these costs significantly or rapidly when we experience declines in sales, declines in sales can cause margins, profits and cash flow to decline at a greater rate than the decline in revenues.

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

     The death care industry is subject to extensive regulation and licensing requirements under federal, state and local laws. For example, the funeral home industry is regulated by the Federal Trade Commission, which requires funeral homes to take actions designed to protect consumers. State laws impose licensing requirements and regulate preneed sales. Embalming facilities are subject to stringent environmental and health regulations. Compliance with these regulations is burdensome, and we are always at risk of not complying with the regulations.

     In addition, from time to time, governments and agencies propose to amend or add regulations, which could increase costs or decrease cash flows. For example, federal, state, Puerto Rican and other regulatory agencies have considered and may enact additional legislation or regulations that could affect the death care industry. Several jurisdictions and regulatory agencies have considered or are considering regulations that could require more liberal refund and cancellation policies for preneed sales of products and services, limit or eliminate our ability to use surety bonding, impose or increase trust requirements and prohibit the common ownership of funeral homes and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions in which we operate, these and other possible proposals could have a material adverse effect on us, our financial condition, our results of operations, our cash flows and our future prospects.

See Explanatory Note on page 2 for important information.

97

Item 6. Exhibits

(a)	Exhibits
3.1	Amended and Restated Articles of Incorporation of the Company, as amended and restated as of May 7, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2003)
3.2	By-laws of the Company, as amended and restated as of November 19, 2004 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated November 22, 2004)
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 4.2 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (Registration No. 33-42336) filed with the Commission on October 7, 1991)
4.3	Rights Agreement, dated as of October 28, 1999, between Stewart Enterprises, Inc. and ChaseMellon Shareholder Services, L.L.C. as Rights Agent (incorporated by reference to Exhibit 1 to the Company’s Form 8-A dated November 3, 1999)
4.4	Credit Agreement dated June 29, 2001 by and among the Company, Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America, N.A., as Administrative Agent, Collateral Agent and as a Lender, Deutsche Banc Alex. Brown, Inc., as Syndication Agent, Bankers Trust Company, as a Lender and the other Lenders party thereto from time to time (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 29, 2001) and Amendment No. 1 to the Credit Agreement dated April 25, 2003 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 1, 2003) and Amendment No. 2 to the Credit Agreement dated February 18, 2004 (incorporated by reference to Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2004)
4.5	Amended and Restated Credit Agreement dated November 19, 2004 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 dated November 22, 2004)
4.6	Indenture dated June 29, 2001 by and among Stewart, the Guarantors named therein and Firstar Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form S-4 dated August 14, 2001) and First Supplemental Indenture, dated as of February 2, 2005 by and among Stewart Enterprises, Inc., the Guarantors thereunder and U.S. Bank National Association, as Trustee, supplementing the Indenture (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated February 2, 2005) and Second Supplemental Indenture, dated as of February 28, 2005 by and among The Lincoln Memorial Park Cemetery Association, a subsidiary of Stewart Enterprises, Inc., Stewart Enterprises, Inc., the other Guarantors and U.S. National Bank Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2005)
4.7	Form of 10.75 percent Senior Subordinated Note due 2008 (incorporated by reference to Exhibit 4.2 to the Company’s Form S-4 dated August 14, 2001)
4.8	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 dated February 11, 2005)

See Explanatory Note on page 2 for important information.

98

4.9	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 dated February 11, 2005)
10.1	Amendment No. 1 to Appendix A to Employment Agreement dated October 11, 2005, effective July 14, 2005, between the Company and Everett N. Kendrick
10.2	Amendment No. 1 to Appendix A to Employment Agreement dated October 11, 2005, effective July 14, 2005, between the Company and Brent F. Heffron
10.3	Amendment No. 1 to Appendix A to Employment Agreement dated October 11, 2005, effective July 14, 2005, between the Company and G. Kenneth Stephens, Jr.
10.4	Amendment No. 1 to Appendix A to Employment Agreement dated October 11, 2005, effective July 14, 2005, between the Company and Randall L. Stricklin
10.5	Separation Agreement by and between the Company and Michael K. Crane dated October 11, 2005
12	Calculation of Ratio of Earnings to Fixed Charges

See Explanatory Note on page 2 for important information.

99

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.
October 24, 2005	/s/ THOMAS M. KITCHEN
	Thomas M. Kitchen
	Executive Vice President and
	Chief Financial Officer
October 24, 2005	/s/ MICHAEL G. HYMEL
	Michael G. Hymel
	Vice President
	Corporate Controller
	Chief Accounting Officer

100

Exhibit Index

3.1	Amended and Restated Articles of Incorporation of the Company, as amended and restated as of May 7, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2003)
3.2	By-laws of the Company, as amended and restated as of November 19, 2004 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated November 22, 2004)
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 4.2 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (Registration No. 33-42336) filed with the Commission on October 7, 1991)
4.3	Rights Agreement, dated as of October 28, 1999, between Stewart Enterprises, Inc. and ChaseMellon Shareholder Services, L.L.C. as Rights Agent (incorporated by reference to Exhibit 1 to the Company’s Form 8-A dated November 3, 1999)
4.4	Credit Agreement dated June 29, 2001 by and among the Company, Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America, N.A., as Administrative Agent, Collateral Agent and as a Lender, Deutsche Banc Alex. Brown, Inc., as Syndication Agent, Bankers Trust Company, as a Lender and the other Lenders party thereto from time to time (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 29, 2001) and Amendment No. 1 to the Credit Agreement dated April 25, 2003 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 1, 2003) and Amendment No. 2 to the Credit Agreement dated February 18, 2004 (incorporated by reference to Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2004)
4.5	Amended and Restated Credit Agreement dated November 19, 2004 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 dated November 22, 2004)
4.6	Indenture dated June 29, 2001 by and among Stewart, the Guarantors named therein and Firstar Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form S-4 dated August 14, 2001) and First Supplemental Indenture, dated as of February 2, 2005 by and among Stewart Enterprises, Inc., the Guarantors thereunder and U.S. Bank National Association, as Trustee, supplementing the Indenture (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated February 2, 2005) and Second Supplemental Indenture, dated as of February 28, 2005 by and among The Lincoln Memorial Park Cemetery Association, a subsidiary of Stewart Enterprises, Inc., Stewart Enterprises, Inc., the other Guarantors and U.S. National Bank Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2005)
4.7	Form of 10.75 percent Senior Subordinated Note due 2008 (incorporated by reference to Exhibit 4.2 to the Company’s Form S-4 dated August 14, 2001)
4.8	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 dated February 11, 2005)

4.9	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 dated February 11, 2005)
10.1	Amendment No. 1 to Appendix A to Employment Agreement dated October 11, 2005, effective July 14, 2005, between the Company and Everett N. Kendrick
10.2	Amendment No. 1 to Appendix A to Employment Agreement dated October 11, 2005, effective July 14, 2005, between the Company and Brent F. Heffron
10.3	Amendment No. 1 to Appendix A to Employment Agreement dated October 11, 2005, effective July 14, 2005, between the Company and G. Kenneth Stephens, Jr.
10.4	Amendment No. 1 to Appendix A to Employment Agreement dated October 11, 2005, effective July 14, 2005, between the Company and Randall L. Stricklin
10.5	Separation Agreement by and between the Company and Michael K. Crane dated October 11, 2005
12	Calculation of Ratio of Earnings to Fixed Charges