• 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.

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, inventories, 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, because 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. 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 FAS 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 our 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. A more complete discussion of the 2008 goodwill impairment testing is included later in Item 7 of this Form 10-K.

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.
In June 2006, FASB issued FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006 and was adopted by the Company as of January 1, 2007. We have reviewed our income tax positions and identified certain tax deductions, primarily related to business acquisitions that are not certain. The cumulative effect of adopting FIN 48 has been recorded as a reduction to the 2007 opening balance of Retained Earnings and an increase in noncurrent liabilities in the amount of $0.2 million which includes accrued interest and penalties totaling $0.1 million. Our policy with respect to potential penalties and interest is to record them as "other" expense and interest expense, respectively.
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 SFAS 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. 123 applies to all transactions involving issuance of equity by a company in exchange for goods and services, including employee services.
Preneed Funeral and Cemetery Trust Funds The Company's preneed and perpetual care trust funds are reported in accordance with FASB Interpretation No. 46, as revised, ("FIN 46R"), "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51". The investments of such trust funds are classified as available-for-sale and are reported at market value; therefore, an allocation of unrealized gains and losses, income and gains and losses are recorded to Deferred preneed receipts held in trust and Care trusts' corpus in the Company's consolidated balance sheet. The Company's future obligations to deliver merchandise and services are reported at estimated settlement amounts. Unrealized gains and losses and attributable to the Company, but that have not been earned through the performance of services or delivery of merchandise are allocated to Deferred revenues.
Although FIN 46R requires consolidation of preneed and perpetual care trusts, it did not change the legal relationships among the trusts, the Company and its customers. In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, the Company does not have a right to access the corpus in the perpetual care trusts. For these reasons, the Company has recognized financial interests of third parties in the trust funds in our financial statements as Deferred preneed funeral and cemetery receipts held in trust and Care trusts' corpus.
Business Combinations
Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any difference between the price of the acquisition and our fair value determination. We customarily estimate our purchase costs and other related transactions known at closing. To the extent that information not available to us at the closing date subsequently becomes available during the allocation period we may adjust goodwill, assets, or liabilities associated with the acquisition.
Discontinued Operations
In accordance with the Company's strategic portfolio optimization model, non-strategic businesses are reviewed to determine whether the business 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 location are reclassified as held for sale 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.
Fair Value Measurements
Effective January 1, 2008, we apply FAS 157 which defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 requires disclosure of the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date.
FASB Staff Position No. FAS 157-2 (FSP 157-2), issued in February 2008, delayed the effective date of FAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. We adopted FAS No. 157 effective January 1, 2008, with the exceptions allowed under FSP 157-2, the adoption of which has not affected our financial position or results of operations but did result in additional required disclosures, which are provided in Note 11.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115" ("FAS No. 159"). FAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. FAS No. 159 was effective for fiscal years beginning after November 15, 2007. We have not elected to apply the provisions of Statement No. 159 to any additional financial instruments; therefore, the adoption of Statement No. 159 effective January 1, 2008 has not affected our financial position or results of operations.
RECENT ACCOUNTING PRONOUNCMENTS AND ACCOUNTING CHANGES
Business Combinations
In December 2007, the FASB issued FAS No. 141 (revised 2007), "Business Combinations" ("FAS No. 141R"). FAS No. 141R requires the acquiring entity to recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date, measured at the fair values as of that date. Goodwill is measured as a residual of the fair values at acquisition date. Acquisition related costs are recognized separately from the acquisition. The Company is currently evaluating the impact, if any, that adoption of FAS No. 141R will have on its consolidated financial statements.
Non-controlling Interests
In December 2007, the FASB issued SFAS No 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" (SFAS 160), which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as unconsolidated investment, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. The provisions of SFAS 160 are effective for us on January 1, 2009. The adoption of this statement is not expected to have a material impact on our consolidated financial statements.
During our examination of SFAS 160 and its impact on our current accounting, we determined that balances historically designated as "non-controlling interest" in our consolidated preneed funeral and cemetery trusts and our cemetery perpetual care trusts do not meet the criteria for non-controlling interest as prescribed by SFAS 160. SFAS 160 indicates that only a financial instrument classified as equity in the trusts' financial statements can be a non-controlling interest in the consolidated financial statements. The interest related to our merchandise and service trusts is classified as a liability because the preneed contracts underlying these trusts are unconditionally redeemable upon the occurrence of an event that is certain to occur. Since the earnings from our cemetery perpetual care trusts are used to support the maintenance of our cemeteries, we believe the interest in these trusts also retains the characteristics of a liability. Accordingly, effective December 31, 2008, the amounts historically described as "Non-controlling interest in funeral and cemetery trusts" are characterized as either "Deferred preneed funeral receipts held in trust" or "Deferred preneed cemetery receipts held in trust", as appropriate. The amounts historically described as "Non-controlling interest in cemetery perpetual care trusts" are characterized as "Care trusts' corpus".

SELECTED INCOME AND OPERATIONAL DATA
   The following table sets forth certain income statement data for Carriage
expressed as a percentage of net revenues for the periods presented:

                                                     Year Ended December 31,
                                                  2006        2007        2008
          Total revenues                          100.0 %     100.0 %     100.0 %
          Total gross profit                       23.0        27.3        24.3
          General and administrative expenses       8.0         9.6        10.2
          Operating income                         15.0        17.7        14.1
          Interest expense                         12.4        11.0        10.4

The following table sets forth the number of funeral homes and cemeteries owned and operated by us for the periods presented:

                                                                  Year Ended December 31,
                                                            2006            2007           2008
Funeral homes at beginning of period                          133            131            139
Acquisitions                                                    1             14              -
Divestitures, mergers or closures of existing
funeral homes                                                   3              6              3

Funeral homes at end of period                                131            139            136


Cemeteries at beginning of period                              29             28             32
Acquisitions                                                    -              4              -
Divestitures                                                    1              -              -

Cemeteries at end of period                                    28             32             32

The following is a discussion of our results of operations for 2006, 2007, and 2008. The term "same-store" or "existing operations" refers to funeral homes and cemeteries owned and operated for the entirety of each period being compared. Funeral homes and cemeteries purchased after January 2005 (date of refinancing our Senior Debt) are referred to as "acquired."
YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007
The following is a discussion of our results of operations for the years ended December 31, 2007 and 2008.
Net income from continuing operations for the year ended December 31, 2008 totaled $1.8 million, equal to $0.09 per diluted share as compared to $7.4 million for the year ended December 31, 2007, or $0.38 per diluted share. The variance between the two periods was primarily due to a decline in the results of our cemetery businesses, an increase in corporate costs and expenses and a litigation charge related to a tentative class action settlement. Our cemetery businesses suffered a $3.5 million decline in pre-tax operating profit, equal to $(0.09) per diluted share. Corporate costs and expenses increased $2.1 million from 2007 primarily due to increases in legal costs and severance expenses. The Company reserved $3.3 million in conjunction with the litigation charge, which is currently pending court approval of the settlement (Note 15). Offsetting a portion of these results was improvement in operating profit from funeral homes, particularly acquired funeral homes, of $1.2 million.
Loss from discontinued operations for the year ended December 31, 2008 totaled $1.6 million, equal to ($0.08) per diluted share. Two funeral home businesses were sold during 2008 for approximately $1.0 million from which a pre-tax loss of $2.4 million was recorded. Income from discontinued operations for the year ended December 31, 2007 totaled $0.9 million, equal to $0.05 per diluted share. During 2007, we sold four funeral home businesses for approximately $3.2 million and recognized pre-tax gains of $1.2 million.

Funeral Home Segment. The following table sets forth certain information regarding our revenues and operating profit from the funeral home operations for the year ended December 31, 2007 compared to the year ended December 31, 2008.

                                                           Year Ended
                                                          December 31,                        Change
                                                     2007             2008            Amount         Percent
                                                                     (dollars in thousands)
Total same-store revenue                           $ 111,092        $ 113,034        $  1,942             1.7 %
Acquired                                              10,549           18,542           7,993            75.8 %
Preneed insurance commissions revenue                  2,198            2,670             472            21.5 %

Revenues from continuing operations                $ 123,839        $ 134,246        $ 10,407             8.4 %

Revenues from discontinued operations              $   1,598        $     476        $ (1,122 )             *


Total same-store operating profit                  $  42,582        $  41,357        $ (1,225 )          (2.9 )%
Acquired                                               3,852            5,705           1,853            48.1 %
Preneed insurance                                        369              982             613           166.1 %

Operating profit from continuing operations        $  46,803        $  48,044        $  1,241             2.7 %

Operating profit from discontinued operations      $     267        $     145        $   (122 )             *

* not meaningful

Funeral same-store revenues for the year ended December 31, 2008 increased $1.9 million, or 1.7%, when compared to the year ended December 31, 2007 as we experienced an increase of 1.0% in the average revenue per service for those existing operations and the number of services increased by 138, or 0.7%. The growth in contract volume was exclusively in cremation contracts. The increase in the average revenue per contract was the highest for burial customers at 2.6%. Performance was strongest in the Eastern Region, where the number of contracts increased 0.4% and the contract average increased 1.9%. The Western Region experienced an increase in the number of contracts equal to 3.1% while the contract average decreased 2.4%. The number of contracts in the Central Region declined 1.8% while the contract average increased 3.8%.
Total same-store operating profit for the year ended December 31, 2008 decreased $1.2 million, or 2.9 % from 2007, and as a percentage of funeral same-store revenue, decreased from 38.3% to 36.6%. Higher salaries, wages and related benefit costs were the primary cause for the same-store operating profit decline. Regionally, pretax earnings decreased the most in the Western Region where those businesses suffered a decline of $0.8 million, or 7.2%, equal to $0.02 per diluted share. The Central and Eastern Regions each experienced a decline in pretax earnings of $0.1 million, or less than 1%.
As previously discussed, we completed seven acquisitions in 2007 involving twelve new funeral homes. Because of the timing of the acquisitions in 2007, the two funeral homes in Corpus Christi, Texas had the largest impact on acquired revenue and operating profit for 2007 and 2008. Of the acquired revenue in 2007 and 2008, those two funeral homes provided 43.3% and 29.1%, respectively and of the acquired operating profit, provided 52.3% and 46.6%, respectively. The . . .