• Convert direct cremations to cremations with services to increase the average revenue per cremation service.

• Manage costs and expenses lower.

The impact of these initiatives is discussed in Results of Operations.
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 21,568 in 2005 to 20,900 in 2008 (compound annual decline of 1.0%) consistent with a period of weak death rates nationally and the loss of market share in certain markets. We experienced a dramatic decline of 9.9% in volumes in comparing the first quarter of 2009 to the first quarter of 2008 because the strong flu season in the 2008 period did not repeat itself in 2009. Our same store funeral operations have increased revenue steadily from $109.4 million in 2005 to $115.7 million in 2008 (compound annual increase of 1.9%) because we have been able to increase the average revenue per funeral through expanded service offerings and packages. Same store revenues for the three months ended March 31, 2009 were down 6.3% compared to the three months ended March 31, 2008. The percentage of funeral

services involving cremations has increased from 33.1% for 2005 to 39.8% for 2008, an average increase of 223 basis points per year, and to 41.4% for the first three months of 2009. 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 53% 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. The current environment of high unemployment and low consumer confidence represents a formidable challenge to the cemetery sales staff. 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 2005 through 2008 was characterized by fluctuating revenues and slightly declining field level profit margins. Revenues and profits on a same store basis have increased for the first three months of 2009 compared to the same period of 2008 and to the fourth quarter 2008 primarily due to increases in preneed property sales. 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 2009 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 and to differentiate the price we are willing to pay. 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 did not acquire any businesses in 2008 or to date in 2009. 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 March 31, 2009 totaled $2.4 million, equal to $0.13 per diluted share, compared to net income from continuing operations for the first quarter of 2008 of $3.3 million, or $0.17 per diluted share. The first quarter of 2008 benefitted from an unusually strong flu season, which increased death rates and resulted in strong financial results. Because there was virtually no flu season in the first quarter of 2009, revenues declined $1.3 million, or 2.8%, and operating income declined $1.4 million.
No businesses were sold during the first quarter of 2009. Discontinued operations presented in the results for the first quarter of 2008 relate to funeral home businesses that were sold during the second quarter of 2008 and reclassified as of March 31, 2008 in accordance with our Discontinued Operations policy.
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 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 identifiable net assets of funeral home businesses acquired in business combinations is recorded as goodwill. Goodwill has not historically been recorded in connection with the acquisition of cemetery businesses. Goodwill is tested for impairment by assessing the fair value of each of our reporting units. The funeral segment reporting units consist of our East, Central and West regions in the United States. We performed our annual impairment test of goodwill in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") using information as of August 31, 2008. In addition, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to significant adverse changes in the business climate which may be indicated by a decline in the Company's market capitalization or decline in operating results. We updated the test as of December 31, 2008 because the market valuation of the Company declined during the fourth quarter of 2008.
Our goodwill impairment test involves estimates and management judgment. In the first step of our goodwill testing, we compare the fair value of each reporting unit to its carrying value, including goodwill. We determine fair value for each reporting unit using both a market approach, weighted 70%, and an income approach, weighted 30%. Funeral home selling prices are typically quoted in the marketplace as a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). Our methodology for determining a market approach fair value utilized recent sales transactions in the industry, which ranged from 6.5 to 9.6 times EBITDA. Our methodology for determining an income-based fair value is based on discounting projected future cash flows. The projected future cash flows include assumptions concerning future operating performance that may differ from actual future cash flows using a weighted average cost of capital for Carriage and other public deathcare companies. Goodwill impairment is not recorded where the fair value of the reporting unit exceeds its carrying amount. If the fair value of the reporting unit is less than its carrying value, the implied fair value of goodwill (as defined in SFAS 142) is compared to the carrying amount of the reporting units goodwill and if the carrying amount exceeds the implied value, an impairment charge would be recorded in an amount equal to that excess. We conducted a review of the funeral home reporting units using March 31, 2009 data, and concluded that there was no impairment of goodwill.
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.
FASB issued FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48") which 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 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. Our policy with respect to potential penalties and interest is to record them as "other" expense and interest expense, respectively.
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. Preneed funeral and cemetery trust investments are reduced by the trust investment earnings (realized and unrealized) that we have been allowed to withdraw in certain states prior to maturity. These earnings are recorded in Deferred preneed funeral and cemetery revenues until the service is performed or the merchandise is delivered.
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.
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. We adopted the statement effective January 1, 2009 and it will be applied on businesses acquired after the effective date.
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.
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for the three month period ended March 31, 2008 and 2009. 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 months ended March 31, 2008 compared to the three months ended March 31, 2009.

Three months ended March 31, 2008 compared to three months ended March 31, 2009 (dollars in thousands):

                                                       Three Months Ended
                                                           March 31,                         Change
                                                      2008             2009           Amount            %
Total same-store revenue                           $   31,303        $ 29,455        $ (1,848 )         (5.9 )%
Acquired                                                4,961           4,797            (164 )         (3.3 )%
Preneed insurance commissions revenue                     752             588            (164 )            *

Revenues from continuing operations                $   37,016        $ 34,840        $ (2,176 )         (5.9 )%

Revenues from discontinued operations              $      235        $      -        $   (235 )            *


Total same-store operating profit                  $   13,195        $ 11,855        $ (1,340 )        (10.2 )%
Acquired                                                1,739           1,610            (129 )         (7.4 )%
Preneed insurance gross profit                            381              74            (307 )            *

Operating profit from continuing operations        $   15,315        $ 13,539        $ (1,776 )        (11.6 )%

Operating profit from discontinued operations      $       56        $      -        $    (56 )            *

* not meaningful

Funeral same-store revenues for the three months ended March 31, 2009 decreased $1.8 million, or 5.9%, when compared to the three months ended March 31, 2008 as we experienced a 9.9% decrease in the number of contracts and an increase of 4.5% to $5,647 in the average revenue per contract for those existing operations. The number of burial contracts similarly decreased 9.9% while the average per burial contract increased 3.5% to $7,910. The cremation rate for the same-store businesses rose from 37.5% to 38.8% and the average revenue per cremation contract increased 3.1%.
Total same-store operating profit for the three months ended March 31, 2009 decreased $1.3 million, or 10.2% from the comparable three months of 2008, and as a percentage of funeral same-store revenue, decreased from 42.1% to 40.2% as a function of the fixed cost nature of the business applied against lower revenues. Same-store controllable expenses, such as salaries and wages, transportation, bad debts, administrative and promotional expenses declined $0.6 million or 5.2%, for the three month ended March 31, 2009, when compared to the three months ended March 31, 2008, as the location managing partners focused on managing their costs and expenses lower. The gains from managing the controllable costs were offset in part by increases in costs outside of their control, such as insurance and property taxes which increased $0.5 million.
Funeral acquired revenues for the three months ended March 31, 2009 decreased $0.2 million, or 3.3%, when compared to the three months ended March 31, 2008 as we experienced a 4.7% decrease in the number of contracts and an increase of 1.5% to $4,028 in the average revenue per contract for those acquired operations. The cremation rate for the acquired businesses was 52.9% for the first quarter of 2009, up from 52.5% in the prior year period, as these businesses are located in higher cremation areas compared to the existing locations. Although the number of cremation contracts declined 4.0%, the average revenue per cremation contract increased 12.7% to $2,276 for the first quarter of 2009 compared to the prior year quarter.
Cremations with services have risen from 36.8% of total cremation contracts in the first quarter of 2008 to 40.4% in the first quarter of 2009.
Acquired operating profit for the three months ended March 31, 2009 decreased $0.1 million, or 7.4%, from the comparable three months of 2008, and as a percentage of revenue from acquired businesses, was 33.6% for the first quarter of 2009 compared to 35.1% for the first quarter of 2008 similarly due to the fixed cost nature of the business applied against lower revenues. In total, controllable expenses were managed five percent lower than last year. 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 months ended March 31, 2008 compared to the three months ended March 31, 2009.

Three months ended March 31, 2008 compared to three months ended March 31, 2009 (dollars in thousands):

                                                       Three Months Ended
                                                           March 31,                         Change
                                                      2008             2009          Amount            %
Total same-store revenue                           $    8,422        $  9,443        $ 1,021           12.1 %
Acquired                                                1,705           1,520           (185 )        (10.9 )%

Revenues from continuing operations                $   10,127        $ 10,963        $   836            8.3 %
. . .