The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with our MD&A and Risk Factors contained in our Form 10-K for the fiscal year ended October 31, 2008 (the "2008 Form 10-K"), and in conjunction with our consolidated financial statements included in this report and in our 2008 Form 10-K.
This report contains forward-looking statements that are generally identifiable through the use of words such as "believe," "expect," "intend," "plan," "estimate," "anticipate," "project," "will" and similar expressions. These forward-looking statements rely on assumptions, estimates and predictions that could be inaccurate and that are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that may cause our actual results to differ materially from expectations reflected in our forward-looking statements include those described in Risk Factors in our 2008 Form 10-K. Forward-looking statements speak only as of the date of this report, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. Overview
General
We are the second largest provider of funeral and cemetery products and services in the death care industry in the United States. As of July 31, 2009, we owned and operated 220 funeral homes and 140 cemeteries in 24 states within the United States and Puerto Rico. 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, finance charges and trust management fees. We also earn commissions on the sale of insurance-funded preneed funeral contracts that will be funded by life insurance or annuity contracts issued by third-party insurers when we act as an agent on the sale. For a more detailed discussion of our accounting for preneed sales and trust and escrow account earnings, see MD&A included in Item 7 in our 2008 Form 10-K. Financial Summary
For the third quarter of fiscal year 2009, net earnings increased $1.7 million to $10.8 million from $9.1 million for the third quarter of fiscal year 2008. Net earnings for the third quarter of 2009 included an $8.5 million pre-tax gain on the early extinguishment of debt related to our open market repurchases of $35.7 million aggregate principal amount of our senior convertible notes during the quarter. Revenue decreased $12.7 million to $117.7 million for the quarter ended July 31, 2009. Funeral revenue decreased $2.5 million to $66.0 million in the third quarter of 2009. During the third quarter of 2009, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 3.2 percent and an increase in average revenue per cremation service of 4.2 percent. These increases were partially offset by a quarter-over-quarter decrease in funeral trust earnings resulting in an overall increase in the same-store average revenue per funeral service of 2.3 percent. The increases in same-store average revenue were offset by a 6.3 percent, or 884 event, decrease in same-store funeral services performed. The decline in events is due in part to a 313 event decrease, or 35 percent of the total decline, in our West Coast operations, due in part to a decrease in low-end cremation events. The remaining decrease in funeral services is primarily due to a decrease in deaths in our markets, when compared to the comparable prior year period. We experienced a $1.1 million decrease in funeral earnings related to trust activities. Cemetery revenue decreased $10.2 million to $51.7 million for the quarter ended July 31, 2009. This decrease is due primarily to a $3.7 million, or 13.5 percent, decrease in cemetery property sales, net of discounts, due in part to current economic conditions. While cemetery property sales have increased in some of our operations, approximately 75 percent of the decline is occurring in two states where the current economic environment is having the largest impact. In addition, we experienced a $2.8 million decrease in cemetery merchandise delivered and services performed, a $2.4 million decrease in construction on various cemetery projects and a $1.5 million decrease in cemetery earnings related to trust activities. Consolidated gross profit decreased $8.7 million to $19.3 million primarily due to an $8.1 million decrease in cemetery gross profit and a $0.6 million decrease in funeral gross profit.

Interest expense decreased $0.7 million to $5.3 million during the third quarter of 2009 primarily due to the repurchase of our senior convertible notes on the open market. We believe that this is an attractive use of our cash and have taken advantage of the current market discounts to achieve some deleveraging. The effective tax rate for the three months ended July 31, 2009 was 26.4 percent compared to 37.0 percent for the same period in 2008. The decreased rate in the current quarter is primarily due to a tax benefit of $1.0 million attributable to a decrease in our valuation allowance on our capital loss carryforward established at October 31, 2008 and a lower effective state tax rate primarily attributable to the gain on early extinguishment of debt.
Current economic conditions have continued to negatively impact our ability to close preneed sales. For the third quarter of 2009, preneed cemetery property sales, net of discounts, declined 13.5 percent compared to the same period of last year, which decreased our cemetery revenue as described above. In contrast, our net preneed funeral sales increased 4.3 percent during the third quarter of 2009 compared to the third quarter of 2008, despite current economic conditions. Preneed funeral sales are deferred until a future period and have no impact on current revenue.
For the nine months ended July 31, 2009, net earnings decreased $2.2 million to $29.8 million from $32.0 million for the same period in fiscal year 2008. Net earnings for the first nine months of 2009 included a $17.2 million pre-tax gain on the early extinguishment of debt related to our open market repurchases of $58.3 million principal amount of our senior convertible notes. Revenue decreased $33.9 million to $363.7 million for the nine months ended July 31, 2009. Funeral revenue decreased $9.9 million to $209.0 million in the first nine months of 2009. During the nine months ended July 31, 2009, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 3.8 percent and an increase in average revenue per cremation service of 7.0 percent. These increases were partially offset by a decrease in funeral trust earnings resulting in an overall increase in the same-store average revenue per funeral service of 3.6 percent. The increases in same-store average revenue were partially offset by a 7.5 percent, or 3,400 event, decrease in same-store funeral services performed. The decline is due to several factors. We experienced a 1,384 call decline, or 40.7 percent of the total decline, in our West Coast operations, due in part to a decrease in low-end cremation events. In addition, we experienced a 222 call decline, or 6.5 percent of the total decline, in funeral services due to an additional day in the second quarter of 2008 due to leap year. Finally, the remaining decrease in funeral services is primarily due to a decrease in deaths in our markets, when compared with the comparable prior year period. For the nine months ended July 31, 2009, we experienced a $2.8 million decrease in funeral earnings related to trust activities. Cemetery revenue decreased $24.0 million to $154.7 million for the nine months ended July 31, 2009. This decrease is due primarily to a $13.2 million, or 16.8 percent, decrease in cemetery property sales, net of discounts, due to current economic conditions, a $5.8 million decrease in cemetery merchandise delivered and services performed and a $4.1 million decrease in cemetery earnings related to trust activities. For the nine months ended July 31, 2009, consolidated gross profit decreased $22.7 million to $68.0 million primarily due to an $18.3 million decrease in cemetery gross profit, coupled with a $4.4 million decrease in funeral gross profit. For the nine months ended July 31, 2009, we recorded a $3.2 million charge in cemetery costs for our estimated probable obligation to restore the net realized losses in certain of our cemetery perpetual care trusts, which contributed in part to the decline in gross profit.
Corporate general and administrative expenses decreased $1.6 million to $22.6 million for the nine months ended July 31, 2009 primarily due to a $1.6 million decrease in professional fees due in part to the resolution of the SEC investigation in 2008. Interest expense decreased $0.9 million to $17.1 million during the first nine months of fiscal 2009 primarily due to the repurchase of our senior convertible notes on the open market. Our weighted average diluted shares outstanding decreased to 91.9 million shares for the nine months ended July 31, 2009 compared to 94.7 million shares for the same period of 2008, yielding a positive impact on earnings per share.
For the first nine months of 2009, preneed cemetery property sales, net of discounts, declined 16.8 percent compared to the same period of last year, which decreased our cemetery revenue as described above. In addition, net preneed funeral sales decreased 3.6 percent for the nine months ended July 31, 2009 compared to the same period of last year, which does not impact current revenue, but reduces our backlog and could reduce our future revenues.

During the third quarter of fiscal 2009, we experienced positive trends in regards to the overall market and in our preneed and perpetual care trusts. For the quarter ended July 31, 2009, our preneed funeral and cemetery merchandise and services trusts experienced a total return, including both realized and unrealized losses, of 13.6 percent, and our cemetery perpetual care trusts experienced a total return, including both realized and unrealized losses, of 16.2 percent.
We defer all dividends and interest earned and net capital gains and losses realized by our preneed trusts until the underlying service or merchandise is delivered. Unrealized capital gains and losses are not allocated to contracts. When a contract is delivered, the earned interest, dividends and net realized capital gain or loss which have been allocated to the contract are recognized as components of revenue along with the original contract sales price.
As of July 31, 2009 and October 31, 2008, the fair market value of the investments in our funeral and cemetery merchandise and services trusts were $211.2 million and $253.6 million, respectively, lower than our cost basis. We review our investment portfolio quarterly, and as part of that review during the quarter ended July 31, 2009, we determined that we no longer had the intent to hold certain securities until they recovered their value. In addition, there were certain securities that we deemed were practically worthless as of October 31, 2008 that further declined in value during fiscal year 2009. As a result, for the first nine months of fiscal 2009, we realized additional losses of $11.7 million in our funeral and cemetery merchandise and services trusts, of which less than $0.1 million was realized in the third quarter of fiscal 2009. These losses were allocated to the underlying contracts and will affect the amount of future revenue recognized, and cash withdrawn, at the time the specific contract is performed.
The preneed contracts we manage are long-term in nature, and we believe that the trust investments will appreciate in value over the long-term. We continue to monitor our investment portfolio closely. As of July 31, 2009 and October 31, 2008, we had $224.3 million and $240.9 million, respectively, in earnings that have been realized and allocated to contracts that will be recognized in the future as the underlying contracts are performed.
In our cemetery perpetual care trusts, as of July 31, 2009 and October 31, 2008, the fair market value of our investments were $61.4 million and $81.0 million, respectively, lower than our cost basis. In addition, during the first nine months of fiscal 2009, we realized losses of $3.2 million in our cemetery perpetual care trusts, of which less than $0.1 million was realized in the third quarter of fiscal 2009. This loss resulted in the recording of an additional funding obligation of $3.2 million included in cemetery costs in the statement of earnings for the first nine months of fiscal 2009. See Note 5 to the condensed consolidated financial statements for further information on the estimated probable funding obligation.
The sectors in which our trust investment portfolio is invested in have not materially changed from that disclosed in our 2008 Form 10-K.
We anticipate that a sustained decline in the value of our trust investments could have several negative impacts on our Company in the future. Unless the market values of our trusts increase substantially, we expect to report lower earnings from our trusts which will reduce future revenue. In addition, our trust management fees are based on the fair market value of the assets managed; therefore, we expect to report lower trust management fees. In fiscal year 2008, cemetery perpetual care trust earnings, funeral and cemetery merchandise and services trust earnings and trust management fees comprised 7 percent of our revenue and 36 percent of our gross profit. In our 2008 Form 10-K, we disclosed that based on then current market conditions and then current realized losses, we believed the decrease in revenue from trust earnings recognized on delivery of preneed services and merchandise, cemetery perpetual care trust earnings and trust management fees for fiscal year 2009 could be as much as $10 million, or approximately 2 percent, of fiscal year 2008 revenue and approximately 10 percent of fiscal year 2008 gross profit. During the first nine months of fiscal 2009, we realized a $6.9 million decrease in earnings related to trust activities, of which $2.8 million related to the funeral segment and $4.1 million related to the cemetery segment. This decrease is consistent with our previously announced expectations of a reduction in revenue of approximately $10 million on an annual basis, and we continue to believe that an approximate $10 million decline in revenue related to trust activities can be expected based on current market conditions and current realized losses. If market conditions further deteriorate and our investment portfolio experiences additional realized losses or we conclude we are no longer able, or intend to hold our investments until they recover in value, it is likely the decrease in revenue and gross profit could be significantly higher. Approximately two-thirds of our funeral revenue and

nearly 80 percent of our cemetery revenue, or approximately 70 percent of our consolidated revenue, is not impacted by declines in the value of our trust investments.
In addition, each quarter we perform an analysis to determine whether our preneed contracts are in a loss position, which would necessitate a charge to earnings. When we review our backlog for potential loss contracts, we consider the impact of the market value of our trust assets. We look at unrealized gains and losses based on current market prices quoted for the investments, but we do not include anticipated future returns on the investments in our analysis. If a deficiency were to exist, we would record a charge to earnings and a corresponding liability for the expected loss on the delivery of those contracts in our backlog. Due to the positive margins of our preneed contracts and the trust portfolio returns we have experienced in prior years and deferred on our consolidated balance sheet until delivery, currently there is capacity for additional market depreciation before a contract loss would result.
For additional information regarding our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts, see Notes 3, 4 and 5 to the condensed consolidated financial statements included in this report.
The following table presents our trust portfolio returns including realized and unrealized gains and losses.

                                                                   Funeral and Cemetery
                                                                      Merchandise and            Cemetery Perpetual
                                                                      Services Trusts               Care Trusts
For the quarter ended July 31, 2009                                           13.6 %                      16.2 %
For the nine months ended July 31, 2009                                       11.2 %                      15.5 %
For the last three years ended July 31, 2009                                  (2.8 )%                      (.8 )%
For the last five years ended July 31, 2009                                     .8 %                       1.4 %

Our operations provided cash of $63.6 million for the nine months ended July 31, 2009, compared to $52.3 million for the corresponding period in 2008. The increase in operating cash flow is primarily due to a $12.0 million tax refund received in the third quarter of 2009 due to effective planning strategies. We paid $11.8 million in net tax payments in the first nine months of 2008 compared to $8.2 million in net tax refunds received in the first nine months of 2009. In addition, the increase is partially due to collections on prior period sales exceeding receivables for new sales. These increases were partially offset by $1.2 million of cash outflows related to Hurricane Ike paid in the first nine months of 2009, coupled with the timing of payments to vendors and the timing of payroll payments.
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions (see Note 1(d) to the condensed consolidated financial statements). Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgment. These critical accounting policies are discussed in MD&A in our 2008 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2008 Form 10-K. Results of Operations
Effective during the second quarter of fiscal year 2009, we have three operating and reportable segments consisting of a funeral segment, cemetery segment and a corporate trust management segment. For a discussion of our segments, see Note 9 to the condensed consolidated financial statements included herein. Prior period data has been retrospectively adjusted to conform to the new segment presentation. As there have been no material acquisitions or construction of new locations in fiscal years 2009 and 2008, results essentially reflect those of same-store locations.

Three Months Ended July 31, 2009 Compared to Three Months Ended July 31, 2008

Funeral Operations

                                                Three Months Ended July 31,
                                                                           Increase
                                        2009               2008           (Decrease)
                                                       (In millions)
     Funeral Revenue:
     Funeral Home Locations           $    62.5       $          63.9     $      (1.4 )
     Corporate Trust Management (1)         3.5                   4.6            (1.1 )

     Total Funeral Revenue            $    66.0       $          68.5     $      (2.5 )


     Funeral Costs:
     Funeral Home Locations           $    51.4       $          53.3     $      (1.9 )
     Corporate Trust Management (1)          .2                    .2               -

     Total Funeral Costs              $    51.6       $          53.5     $      (1.9 )


     Funeral Gross Profit:
     Funeral Home Locations           $    11.1       $          10.6     $        .5
     Corporate Trust Management (1)         3.3                   4.4            (1.1 )

     Total Funeral Gross Profit       $    14.4       $          15.0     $       (.6 )

     Same-Store Analysis for the Three Months Ended July 31, 2009 and 2008

   Change in Average Revenue   Change in Same-Store
      Per Funeral Service        Funeral Services       Same-Store Cremation Rate
                                                          2009             2008
           2.3% (1)                   (6.3)%             41.8%            39.9%



(1)   Corporate
      trust
      management
      consists of
      the trust
      management
      fees and
      funeral
      merchandise
      and services
      trust
      earnings
      recognized
      with respect
      to preneed
      contracts
      delivered
      during the
      period. Trust
      management
      fees are
      established
      by the
      Company at
      rates
      consistent
      with industry
      norms based
      on the fair
      market value
      of assets
      managed and
      are paid by
      the trusts to
      our
      subsidiary,
      Investors
      Trust, Inc.
      The trust
      earnings
      represent the
      amount of
      earnings
      realized by
      the trusts
      over the life
      of the
      preneed
      contracts and
      allocated to
      those
      products and
      services
      delivered
      during the
      relevant
      periods. See
      Notes 3 and 6
      to the
      condensed
      consolidated
      financial
      statements
      included
      herein for
      information
      regarding the
      cost basis
      and market
      value of the
      trust assets
      and current
      performance
      of the trusts
      (i.e.,
      current
      realized
      gains and
      losses,
      interest
      income and
      dividends).
      Trust
      management
      fees included
      in funeral
      revenue for
      the three
      months ended
      July 31, 2009
      and 2008 were
      $1.0 million
      and
      $1.3 million,
      respectively.
      As corporate
      trust
      management is
      considered a
      separate
      operating
      segment,
      trust
      earnings are
      included in
      the total
      average
      revenue per
      funeral
      service
      presented.
      Funeral trust
      earnings
      recognized
      with respect
      to preneed
      contracts
      delivered
      included in
      funeral
      revenue for
      the three
      months ended
      July 31, 2009
      and 2008 were
      $2.5 million
      and
      $3.3 million,
      respectively.

Funeral revenue decreased $2.5 million, or 3.6 percent, from $68.5 million in the third quarter of 2008 to $66.0 million in the third quarter of 2009. The decrease in funeral revenue is primarily due to a $1.1 million decrease in funeral earnings related to trust activities and a 6.3 percent, or 884 event, decrease in our same-store funeral services performed, to 13,173 events. The decline in events is due in part to a 313 event decrease, or 35 percent of the total decline, in our West Coast operations, due in part to a decrease in low-end cremation events. The remaining decrease in funeral services is primarily due to a decrease in deaths in our markets, when compared to the comparable prior year period. These decreases were partially offset by an increase in average revenue per traditional funeral service of 3.2 percent and an increase in average revenue per cremation service of 4.2 percent. These increases were partially offset by a quarter-over-quarter decrease in funeral trust earnings resulting in an overall increase in our same-store average revenue per funeral service of 2.3 percent. The cremation rate for

our same-store operations was 41.8 percent for the third quarter of 2009 compared to 39.9 percent for the third quarter of 2008.
Funeral gross profit decreased $0.6 million to $14.4 million for the third quarter of 2009 compared to $15.0 million for the same period of 2008, primarily due to the decrease in revenue, noted above, partially offset by a $1.9 million decrease in expenses. The decrease in expenses is primarily due to a decrease in merchandise costs resulting from decreased volume and a reduction in salaries and wages due to effective labor management.

Cemetery Operations

                                               Three Months Ended July 31,
                                        2009               2008            Decrease
                                                       (In millions)
     Cemetery Revenue:
     Cemetery Locations               $    49.8       $          59.6     $     (9.8 )
     Corporate Trust Management (1)         1.9                   2.3            (.4 )

     Total Cemetery Revenue           $    51.7       $          61.9     $    (10.2 )


     Cemetery Costs:
     Cemetery Locations               $    46.6       $          48.7     $     (2.1 )
     Corporate Trust Management (1)          .2                    .2              -

     Total Cemetery Costs             $    46.8       $          48.9     $     (2.1 )


     Cemetery Gross Profit:
     Cemetery Locations               $     3.2       $          10.9     $     (7.7 )
     Corporate Trust Management (1)         1.7                   2.1            (.4 )

     Total Cemetery Gross Profit      $     4.9       $          13.0     $     (8.1 )

(1) Corporate trust management consists of trust management fees and cemetery merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of earnings realized by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 4 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for the three months ended July 31, 2009 and 2008 were $1.0 million and $1.3 million, respectively, and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for the three months ended July 31, 2009 and 2008 were $0.9 million and $1.0 million, respectively. Perpetual . . .