OVERVIEW
General
We operate two types of businesses: funeral homes, which account for approximately 75% of our revenues, and cemeteries, which account for approximately 25% of our revenues. Funeral homes are principally service businesses that provide funeral services (burial and cremation) and sell related merchandise, such as caskets and urns. Cemeteries are primarily a sales business that sells interment rights (grave sites and mausoleums) and related merchandise, such as markers and outer burial containers. As of September 30, 2008, we operated 136 funeral homes in 25 states and 32 cemeteries in 11 states within the United States. Substantially all administrative activities are conducted or coordinated through our home office in Houston, Texas.
We have implemented several significant long-term initiatives in our operations designed to improve operating and financial results by growing market share and increasing profitability. We introduced a more decentralized, entrepreneurial and local operating model that included operating and financial standards developed from our best operations, along with an incentive compensation plan to reward business managers for successfully meeting or exceeding the standards. The model essentially eliminated the use of financial budgets in favor of the standards. The operating model and standards, which we refer to as "Being the Best," focus on the key drivers of a successful operation, organized around three primary areas - market share, people and operating and financial metrics. The model and standards are the measures by which we judge the success of each business. To date, the "Being the Best" operating model and standards have driven significant changes in our organization, leadership and operating practices.
Funeral Operations
Factors affecting our funeral operating results include: demographic trends in terms of population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by packaging complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our at-need business to increase average revenues per contract. In simple terms, volume and price are the two variables that affect funeral revenues. The average revenue per contract is influenced by the mix of traditional and cremation services because our average cremation service revenue is approximately one-third of the average revenue earned from a traditional burial service. Funeral homes have a relatively fixed cost structure. Thus, small changes in revenues, up or down, normally cause significant changes to our profitability.
Our same store volumes have declined gradually each year from 21,588 in 2004 to 20,716 in 2007 (compound annual decline of 1.4%) consistent with a period of weak death rates nationally and the loss of market share in certain markets. We experienced higher volumes equal to 1.8% during the first three quarters of 2008 compared to the first three quarters of 2007. Our same store funeral operations have increased revenue steadily from $106.5 million in 2004 to $113.0 million in 2007 (compound annual increase of 2.0%) because we have been able to increase the average revenue per funeral through expanded service offerings and packages. Continuing that trend into 2008, same store revenues for the nine months ended September 30, 2008 were up 2.3% compared to the nine months ended September 30, 2007. The percentage of funeral services involving cremations has increased from 30.7% for 2003 to 35.8% for 2007, an average increase of 1.3% per year, and 39.9% for the first nine months of 2008. We expect our average revenue per funeral to increase over time as we seek to provide increased services to our cremation families in order to offset higher cremation rates.
Cemetery Operations
The cemetery operating results are affected by the size and success of our sales organization. Approximately 50% of our cemetery revenues relate to preneed sales of interment rights and mausoleums and related merchandise and services. We believe that changes in the level of consumer confidence (a measure of whether consumers will spend for discretionary items) also affect the amount of cemetery revenues. Approximately 10% of our cemetery revenues are attributable to investment earnings on trust funds and finance charges on installment contracts. Changes in the capital markets and interest rates affect this component of our cemetery revenues.
Our same store cemetery financial performance from 2003 through 2007 was characterized by increasing revenues but slightly declining field level profit margins. Revenues and profits on a same store basis have declined for the first nine months of 2008 compared to the same period of 2007 in part, we believe, from the negative impact of the economy on the consumer and in part due to turnover in sales personnel at certain large parks. Our goal is to build broader and deeper teams of sales leaders and counselors in our larger and more strategically located cemeteries that can sustain consistent, modest growth in preneed property sales over time and to diversify and substantially increase our cemetery operating and financial results. Additionally, a portion of our capital expenditures in 2008 is designed to expand our cemetery product offerings.

Acquisitions
Our growth strategy includes the execution of the Strategic Portfolio Optimization Model. The goal of that model is to build concentrated groups of businesses in ten to fifteen strategic markets. We assess acquisition candidates using six strategic ranking criteria. These criteria enable us to determine the price we are willing to pay for a particular acquisition candidate. Those criteria are:
• Size of business

• Size of market

• Competitive standing

• Demographics

• Strength of brand

• Barriers to entry

In general terms, our price expectations range from four to five times pre-tax earnings before depreciation for "tuck-ins" to six to seven times pre-tax earnings before depreciation for businesses that rank very high in the ranking criteria. We derive the pre-tax earnings amounts used in the pricing based primarily on the size and product mix of the target business applied to our standards-based operating model. During 2007 we completed seven acquisitions. The consideration paid in each of the acquisitions was cash. We have not incurred any debt to buy these businesses. The number of completed acquisitions during 2007 was greater than expected. We have not acquired any businesses to date in 2008. Our five year goal is to acquire approximately $10 million of annualized revenue each year.
Financial Highlights
Net income from continuing operations for the three months ended September 30, 2008 totaled $0.2 million, equal to $0.01 per diluted share, compared to net income from continuing operations for the third quarter of 2007 of $0.7 million, or $0.04 per diluted share. The negative variance between the two periods was primarily due to pre-tax declines of $0.4 million in gross profit from our same store funeral operations and $0.6 million from our same store cemetery operations, along with an increase of $0.4 million in corporate general and administrative expenses. These three areas combined to reduce diluted earnings per share by $0.05. Acquired businesses provided an increase in pre-tax gross profit of $0.5 million, equal to approximately $0.02 per diluted share.
We sold two funeral homes at a loss during the three months ended June 30, 2008. The loss from discontinued operations attributable to those two funeral homes for the nine months ended September 30, 2008 was $1.4 million, equal to $0.07 per diluted share. During the nine months ended September 30, 2007, the Company completed the sale of three funeral home businesses, resulting in a pre-tax gain of $0.7 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate estimates and judgments, including those related to revenue recognition, realization of accounts receivable, intangible assets, property and equipment and deferred tax assets. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance the margins, operating income and net earnings as a percentage of revenues will be consistent from year to year.
Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements presented herewith, which have been prepared in accordance with accounting principles generally accepted in the United States excluding certain year end adjustments because of the interim nature of the consolidated financial statements. Our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Funeral and Cemetery Operations
We record the sales of funeral and cemetery merchandise and services when the merchandise is delivered or service is performed. Sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions of Statement of Financial Accounting Standards (FAS) No. 66, "Accounting for Sales of Real Estate". This method generally provides for the recognition of revenue in the period in which the customer's cumulative payments exceed 10% of the contract price related to the real estate. Costs related to the sales of interment rights, which include property and other costs related to cemetery development activities, are charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. Revenues to be recognized and cash flow from the delivery of merchandise and performance of services related to preneed contracts that were acquired in acquisitions are typically lower than those originated by us.
Allowances for bad debts and customer cancellations are provided at the date that the sale is recognized as revenue. In addition, we monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted.
When preneed funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions earned by the Company are recognized as revenues when the commission is no longer subject to refund, which is usually one year after the policy is issued. Preneed selling costs consist of sales commissions that we pay our sales counselors and other direct related costs of originating preneed sales contracts and are expensed as incurred.
Goodwill
The excess of the purchase price over the fair value of net identifiable assets acquired, as determined by management in transactions accounted for as purchases, is recorded as goodwill. Many of the acquired funeral homes have provided high quality service to families for generations. The resulting loyalty often represents a substantial portion of the value of a funeral business. Goodwill is typically not associated with or recorded for the cemetery businesses. In accordance with SFAS No. 142, "Goodwill and Other Tangible Assets", we review the carrying value of goodwill at least annually on reporting units (aggregated geographically) to determine if facts and circumstances exist which would suggest that this intangible asset might be carried in excess of fair value. Fair value is determined by discounting the estimated future cash flows of the businesses in each reporting unit at the Company's weighted average cost of capital less debt allocable to the reporting unit and by reference to recent sales transactions of similar businesses. The calculation of fair value can vary dramatically with changes in estimates of the number of future services performed, inflation in costs, and the Company's cost of capital, which is impacted by long-term interest rates. If impairment is indicated, then an adjustment will be made to reduce the carrying amount of goodwill to fair value. Income Taxes
The Company and its subsidiaries file a consolidated U.S. Federal income tax return and separate income tax returns in the states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities, in accordance with SFAS 109, "Accounting for Income Taxes" and account for uncertain tax positions in accordance with FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes-an interpretation of FASB No. 109". The Company records a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.

Stock Compensation Plans
The Company has stock-based employee compensation plans in the form of restricted stock, performance unit, stock option and employee stock purchase plans. The Company accounts for stock-based compensation under Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" ("FAS No. 123R"). FAS No. 123R requires companies to recognize compensation expense in an amount equal to the fair value of the share-based payment issued to employees over the period of vesting. The fair value of stock options and awards containing options is determined using the Black-Scholes valuation model. FAS No. 123R applies to all transactions involving issuance of equity by a company in exchange for goods and services, including employee services. Discontinued Operations
In accordance with the Company's strategic portfolio policy, non-strategic businesses are reviewed to determine whether the businesses should be sold and the proceeds redeployed elsewhere. A marketing plan is then developed for those locations which are identified as held for sale. When the Company receives a letter of intent and financing commitment from the buyer and the sale is expected to occur within one year, the location is no longer reported within the Company's continuing operations. The assets and liabilities associated with the held for sale location are reclassified on the balance sheet and the operating results, as well as impairments, are presented on a comparative basis in the discontinued operations section of the Consolidated Statements of Operations, along with the income tax effect.
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for the three and nine month periods ended September 30, 2007 and 2008. Funeral homes and cemeteries owned and operated for the entirety of each period being compared are referred to as "same-store" or "existing operations." Funeral homes and cemeteries purchased after January 2005 (date of refinancing our Senior Debt) are referred to as "acquired".
Funeral Home Segment. The following table sets forth certain information regarding the revenues and gross profit of the Company from its funeral home operations for the three and nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2008.
Three months ended September 30, 2007 compared to three months ended September 30, 2008 (dollars in thousands):

                                               Three Months Ended
                                                  September 30,                Change
                                                2007          2008       Amount        %
 Total same-store revenue                    $   25,884     $ 26,657     $   773        3.0 %
 Acquired                                         3,092        4,313       1,221          *
 Preneed insurance commissions revenue              502          626         124       24.7 %

 Revenues from continuing operations         $   29,478     $ 31,596     $ 2,118        7.2 %

 Revenues from discontinued operations       $      297     $      -     $  (297 )        *


 Total same-store gross profit               $    6,450     $  6,048     $  (402 )     (6.2 %)
 Acquired                                         1,064        1,101          37          *
 Preneed insurance gross profit                      46          145          99          *

 Gross profit from continuing operations     $    7,560     $  7,294     $  (266 )     (3.5 %)

 Gross profit from discontinued operations   $        7     $      -     $    (7 )        *

* not meaningful

Funeral same-store revenues for the three months ended September 30, 2008 increased $0.8 million, or 3.0%, when compared to the three months ended September 30, 2007 as we experienced a 0.9% increase in the number of contracts and an increase of 2.1% to $5,422 in the average revenue per contract for those existing operations. The average per contract for at need burial services declined slightly, an indication that the economy may be affecting the consumer. The cremation rate for the same-store businesses rose from 35.9% to 37.7%. The growth in total contracts was concentrated in cremation contracts which increased 5.8%.
Total same-store gross profit for the three months ended September 30, 2008 decreased $0.4 million, or 6.2% from the comparable three months of 2007, and as a percentage of funeral same-store revenue, decreased from 24.9% to 22.7% as we experienced higher costs and expenses. Salaries and benefits at our same-store funeral businesses increased $0.3 million or 4.1%, year over year, while self-insurance costs increased $0.4 million.

As previously disclosed, we completed seven acquisitions in 2007 involving twelve new funeral homes. Acquired revenue and gross profit is related primarily to the businesses acquired during 2007. The cremation rate for the acquired businesses was 49.8% for the third quarter of 2008 as these businesses are located in higher cremation areas compared to the existing locations. The average revenue per contract for the third quarter of 2008 was $4,116, a slight decline compared to the prior year quarter.
Gross profit for acquired businesses as a percentage of revenue from acquired businesses was 25.5% for the third quarter of 2008 compared to 34.4% for the third quarter of 2007. As a percentage of revenues, salaries and benefits increased year over year from 29.7% to 32.3%.
Nine months ended September 30, 2007 compared to nine months ended September 30, 2008 (dollars in thousands):

                                               Nine Months Ended
                                                 September 30,                Change
                                               2007         2008         Amount        %
 Total same-store revenue                    $ 83,066     $  84,685     $  1,619        1.9 %
 Acquired                                       6,805        14,026        7,221          *
 Preneed insurance commissions revenue          1,754         2,053          299       17.0 %

 Revenues from continuing operations         $ 91,625     $ 100,764     $  9,139       10.0 %

 Revenues from discontinued operations       $  1,341     $     477     $   (864 )        *


 Total same-store gross profit               $ 24,214     $  23,179     $ (1,035 )     (4.3 %)
 Acquired                                       2,198         3,863        1,665          *
 Preneed insurance gross profit                   366           824          458          *

 Gross profit from continuing operations     $ 26,778     $  27,866     $  1,088        4.1 %

 Gross profit from discontinued operations   $    173     $     146     $    (27 )        *

* not meaningful

Funeral same-store revenue for the nine months ended September 30, 2008 increased $1.6 million, or 1.9%, when compared to the nine months ended September 30, 2007 as we experienced a 1.8% increase in the number of contracts and the average revenue per contract increased 0.1% to $5,363. The cremation rate for the first nine months of 2008 was 37.4% compared to 34.6% for the first nine months of 2007.
The number of same-store burial contracts declined 2.4% in comparison to the prior year period and the average revenue for those burial contracts was $7,572. The number of same-store cremation contracts increased by 543, or 10.1%, and the average revenue for those cremation contracts was $3,013.
Funeral same-store gross profit for the nine months ended September 30, 2008 declined $1.0 million, or 4.3%, when compared to the nine months ended September 30, 2007, due to higher costs. Our largest area of costs in the funeral homes is salaries and benefits for the location personnel. Year to date, those labor costs have risen $1.0 million to 27.4% of same-store funeral revenues. The next largest area of cost increase is the cost of maintaining the funeral home facilities, which increased $0.5 million to 4.4% of same-store revenues.
Acquired funeral homes generated $14.0 million in revenue, equal to 13.9% of our funeral home revenue, and $3.9 million in gross profit, equal to 13.9% of our funeral home gross profit. Year to date, the average revenue per contract in our acquired businesses is $4,028, and the cremation rate is 51.2%.

Cemetery Segment. The following table sets forth certain information regarding the revenues and gross profit of the Company from its cemetery operations for the three and nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2008.
Three months ended September 30, 2007 compared to three months ended September 30, 2008 (dollars in thousands):

                                               Three Months Ended
                                                  September 30,                Change
                                                2007          2008       Amount         %
 Total same-store revenue                    $    9,681     $  9,923     $   242         2.5 %
 Acquired                                         1,243        1,693         450        36.2 %

 Revenues from continuing operations         $   10,924     $ 11,616     $   692         6.3 %

 Revenues from discontinued operations       $        -     $      -     $     -           *

. . .