UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

þ		Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

For The Fiscal Year Ended December 31, 2008

o		Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

CARRIAGE SERVICES, INC.

Delaware		76-0423828
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3040 Post Oak Blvd., Suite 300, Houston, Texas		77056
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (713) 332-8400

Common Stock, $.01 Par Value Series G Preferred Stock Purchase Rights (Title Of Class)		New York Stock Exchange New York Stock Exchange (Name of Exchange on which registered)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
Yes o No þ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company as defined by Rule 12b-2 of the Securities Exchange Act of 1934. Yes o No þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2008 was approximately $116.8 million based on the closing price of $6.60 per share on the New York Stock Exchange.

The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of February 27, 2009 was 17,927,776.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be delivered in connection with the 2009 annual meeting of stockholders are incorporated in Part III of this Report.

 

 

CAUTIONARY NOTE

     This annual report contains forward-looking statements of our management regarding factors that we believe may affect our performance in the future. Such statements typically are identified by terms expressing our future expectations or projections of revenues, earnings, earnings per share, cash flow, market share, capital expenditures, effects of operating and acquisition initiatives, gross profit margin, debt levels, interest costs, tax benefits and other financial items. All forward-looking statements, although made in good faith, are based on assumptions about future events and are therefore inherently uncertain, and actual results may differ materially from those expected or projected. Important factors that may cause our actual results to differ materially from expectations or projections include those described under the heading “Forward-Looking Statements” in Item 7. 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.

PART I

ITEM 1. BUSINESS

GENERAL

     We are a leading provider of death care services and merchandise in the United States. We operate two types of businesses: funeral homes, which currently account for approximately 75% of our total revenue, and cemeteries, which currently account for approximately 25% of our total revenue. As of December 31, 2008, we operated 136 funeral homes in 25 states and 32 cemeteries in 11 states. We primarily serve suburban and rural markets, where we primarily compete with smaller, independent operations, and believe we are a market leader (first or second) in most of our markets. We provide funeral and cemetery services and products on both an “at-need” (time of death) and “preneed” (planned prior to death) basis.

     Our operations are reported in two business segments:

•

Funeral Home Operations. Funeral homes are principally service businesses that provide burial and cremation services and sell related merchandise, such as caskets and urns. Given the high fixed cost structure associated with funeral home operations, we believe the following are key factors affecting our profitability:

	•		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 complimentary service and merchandise;
	•		controlling salary and merchandise costs; and
	•		exercising pricing leverage related to our at-need business to increase average revenues per contract.

•

Cemetery Operations. Cemeteries are primarily a sales business providing interment rights (grave sites and mausoleums) and related merchandise, such as markers and memorials. Our cemetery operating results are impacted by the size and success of our sales organization because approximately 39% of our cemetery revenues during the year ended December 31, 2008 was generated from preneed sales of interment rights. We believe that changes in the level of consumer confidence (a measure of whether consumers will spend money on discretionary items) may impact the amount of such preneed sales. Cemetery revenues generated from at-need service and merchandise sales generally are subject to many of the same key profitability factors as our funeral home business. Approximately 9% of our cemetery revenues during the year ended December 31, 2008 was 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 business strategy is based on strong, local leadership and entrepreneurial principles that we believe drive market share, revenue growth, and profitability in our local markets. To date our Standards Operating Model has driven significant changes in our organization, leadership and operating practices. We use the Standards Operating Model to measure the sustainable revenue growth and earning power of our portfolio of deathcare businesses. The standards based model emphasizes growing market share and improving long-term profitability by employing leadership and entrepreneurial principles that fit the nature of our local, personal service, high value business. This model also requires our local and corporate leaders to change our focus from short-term profitability to the drivers of success that create long-term profitability and value for our stockholders. Our operating model emphasizes:

	•		decentralized management of our local businesses;
	•		financial and operational standards based upon key drivers of success of our best businesses;
	•		variable compensation that rewards our managers as if they were owners;
	•		finding, developing and retaining the best people in our industry; and
	•		information technology designed to support local businesses and corporate management decisions, measure performance of our businesses against our financial and operational standards, and ensure adherence to established internal control procedures.

     Our business objectives include:

	•		growing market share, creating new heritage, producing consistent, modest revenue growth and sustainable increasing earnings and cash flow;
	•		continuing to improve our operating and financial performance by executing our Standards Operating Model;
	•		upgrading the leadership in our businesses, as necessary; and
	•		executing our Strategic Portfolio Optimization Model, a disciplined program that will guide our acquisition and disposition strategies, to change the sustainable earning power profile of our portfolio.

RECENT DEVELOPMENTS

     Two funeral home businesses were sold during 2008 for approximately $1.0 million from which a loss of $2.4 million was recorded (Note 5). The Company continually reviews locations to optimize the sustainable earning power and return on invested capital of the Company. The Company’s strategy, the Strategic Portfolio Optimization Model, uses strategic ranking criteria to identify disposition candidates. The execution of this strategy entails selling non-strategic businesses.

HISTORY

     Carriage Services, Inc. (“Carriage” or the “Company”) was incorporated in the state of Delaware in December of 1993. Prior to 2001, Carriage grew dramatically through acquisitions of funeral homes and cemeteries. A significant amount of debt was incurred in financing these acquisitions. Our business strategy during the four years ended December 31, 2004 focused on increasing operating cash flow and improving our financial condition by reducing debt to lower our interest expense and improve our credit profile. During that same period we initiated a process to identify underperforming businesses and, where appropriate, sold those businesses to reduce our debt. We sold 36 funeral homes and 12 cemeteries along with 20 parcels of excess real estate. We reduced our debt and contingent obligations by approximately $87 million during the period January 1, 2001 through December 31, 2004. During January 2005, we refinanced our senior debt by issuing $130 million of Senior Notes due in 2015. This refinancing represented a milestone. The refinancing was the culmination of the effort to reaccess the capital markets and to extend the maturities of our senior debt and to gain the flexibility to reinvest our cash flow in our core business. We used the net cash proceeds from the offering and our cash flow to grow the Company through selective acquisitions. During 2005, we acquired a funeral business consisting of two chapels in northern Florida, the first acquisition since 2002. During 2007, we completed seven acquisitions. See Note 4 to the Consolidated Financial Statements for information related to the 2007 acquisitions. Today, we are focused on being a great operating company and acquiring funeral homes and cemeteries that meet the criteria in our Strategic Portfolio Optimization Model.

DEATH CARE INDUSTRY

     Death care companies provide products and services to families in three principal areas: (i) ceremony and tribute, generally in the form of a funeral or memorial service; (ii) disposition of remains, either through burial or cremation; and (iii) memorialization, generally through monuments, markers or inscriptions. The death care industry in the United States is characterized by the following fundamental attributes (the statistics included in this report are based on public reports from financial research firms or public websites):

Death Rates

     Death rates in the United States have been relatively stable on a long-term historical basis. The number of deaths in the United States increased at an annual rate of approximately 1% for the period from 1980 to 2000. Beginning in 2001, death rates have trended

lower very slightly as the general population is living longer and because of low birth rates in the period from early 1930’s to mid 1940’s during the depression and World War II. The number of deaths per year in the United States is expected to increase from approximately 2.4 million in 2006 to 2.6 million in 2010 according to the United States Bureau of the Census. In addition, the segment of the United States population over 65 years of age is expected to increase by over 10% from approximately 36.7 million in 2005 to 40.2 million in 2010.

Cremation

     In recent years, there has been a steady, gradual increase in the number of families in the United States that have chosen cremation as an alternative to traditional methods of burial. According to industry studies, cremations represented approximately 35% of the U.S. burial market in 2007. That number is expected to increase to 39% by 2010 and 59% by 2025. Cremation rates can vary significantly based upon geographic, religious and cultural traditions. Historically, direct cremation has been offered as a less costly alternative to a traditional burial. However, cremation is being increasingly accepted as part of a package of funeral services that includes memorials, merchandise and options for the interment of cremated remains.

Highly Fragmented Ownership

     We understand that there are approximately 22,000 funeral homes and 10,500 cemeteries in the United States and that the domestic funeral service industry generates approximately $15 billion of revenue annually. The largest public operators, in terms of revenue, of both funeral homes and cemeteries in the United States are Service Corporation International, Stewart Enterprises, Inc., StoneMor Partners L.P., Keystone North America, Inc., and Carriage Services, Inc. We believe these five companies collectively represent approximately 20% of death care revenues in the United States. Independent businesses represent the remaining amount of industry revenue, accounting for an estimated 80% share. Within the independent businesses, there are a number of privately-owned consolidators. Service Corporation International acquired what was the second largest public company in the industry, Alderwoods Group in the latter half of 2006. During 2007, we acquired three businesses from Service Corporation International and four independent businesses.

Heritage and Tradition

     Death care businesses have traditionally been family-owned businesses that have built a local heritage and tradition through successive generations, providing a foundation for ongoing business opportunities from established client family relationships and related referrals. Given the sensitive nature of our business, we believe that relationships fostered at the local level build trust in the community and are a key driver of market share. While new entrants may enter any given market, the time and resources required to develop local heritage and tradition serve as important barriers to entry.

BUSINESS STRATEGY

     Key elements of our overall business strategy include the following:

     Implement Operating Initiatives. On January 1, 2004, we introduced our Standards Operating Model, a more decentralized and entrepreneurial financial operating model for our funeral homes. On January 1, 2006 we implemented a similar model to our cemetery business. These models are based on standards designed to grow market share and increase profitability 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. 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 Standards Operating Model has driven significant changes in our organization, leadership and operating practices. Most importantly, the Standards Operating Model allowed us to measure the sustainable revenue growth and earning power of our portfolio of deathcare businesses, which then led to development of a Strategic Portfolio Optimization Model during 2006 that will guide our acquisition and disposition strategies in the future. Both models, when executed effectively, should drive longer term, sustainable increases in market share, revenue, earnings and free cash flow. The standards are not designed to produce maximum short term earnings because we do not believe such performance is sustainable without ultimately stressing the business, which often leads to declining market share, revenues and earnings.

     Our managing partners participate in a variable bonus plan in which they earn a percentage of their business’ earnings based upon the actual standards achieved. We believe our managing partners have the opportunity to be compensated at close to the same level as if they owned the business.

     Presentation and Packaging of Services and Merchandise. We believe packaging funeral services and merchandise offers both simplicity and convenience for our client families. Well-conceived and thoughtful packages eliminate much of the effort and discomfort experienced by client families concerning matters about which they do not have much knowledge during a very stressful and emotional time. We also anticipate that our packaging strategy will result in increased revenue per cremation service over time as

more families select packages that provide services and merchandise. The percentages of funeral services conducted by us for which cremation was chosen as the manner in which to dispose of remains was 35.8 % for the year ended December 31, 2007 and 39.8% for the year ended December 31, 2008. For the year ended December 31, 2008, 63.9% of the number of our total cremation services was direct cremations (where no viewing, visitation, or merchandise is involved, although a memorial service may be held) and 36.1% included additional services and merchandise. One of our training initiatives throughout the Company focuses on increasing the percentage of our cremation customers that choose additional services and merchandise.

     Preneed Funeral Sales Program. We operate under a local, decentralized preneed sales strategy whereby each business location customizes its preneed program to its local needs. We emphasize insurance-funded contracts over trusted contracts in most markets, as insurance products allow us to earn commission income to improve our cash flow and offset a significant amount of the up-front costs associated with preneed sales. In addition, the cash flow and earnings from insurance contracts are more stable than traditional trust fund investments. In markets that depend on preneed sales for market share, we supplement the arrangements written by funeral directors with sales sourced by sales counselors and third party sellers.

     Preneed Cemetery Sales Program. A significant portion of our historical cemetery revenues are represented by sales of cemetery property sold by the counselors on a preneed basis and finance charges earned on preneed installment contracts. The current economy and the related declines in consumer confidence and discretionary income have dramatically reduced the preneed sales success rate and increased the level of bad debts. As a counter measure, we are increasing the number of sales counselors and working with our customers so that they do not default on their obligations to us.

     Cost and Expense Management. In an effort to improve earnings and cash flow in the current difficult economic environment, we have implemented several cost and expense initiatives. In December 2008, we froze the salaries and wages of all employees and reprioritized our capital expenditures to reduce the capital costs for 2009. We are evaluating cost reduction plans and ideas across the Company.

     Renewed Corporate Development Efforts. We believe that our capital structure positions us to pursue a strategy of disciplined growth, affording us the flexibility to redeploy our cash and cash flow toward selective acquisitions that meet our criteria. We expect to continue to improve our earning power as we invest in businesses that will contribute incremental revenues, earnings and cash flow. Our Strategic Portfolio Optimization Model is a primary driver of our acquisition strategy. We use strategic ranking criteria to assess acquisition candidates in order to optimize the sustainable earning power of our deathcare portfolio. As we execute this strategy, we will acquire larger, higher margin strategic businesses and sell smaller, lower margin non-strategic businesses.

     Ideal candidates would be those that are demonstrated market leaders, have strong local management, have owners and family members whose objectives are aligned with ours, and have field-level operating margins consistent with our best performing properties. In our quest to find ideal candidates, we have analyzed and projected key statistics in the deathcare industry and believe the following will be true by 2015:

	•		The number of national deaths will begin a long-term rise as the death rate among the baby boomer generation accelerates, notwithstanding a longer life expectancy.
	•		The aging baby boomers will possess sufficient wealth and the financial flexibility to migrate to attractive retirement and part time second career areas primarily in the Southern and Western states and other select markets.
	•		The general population of the United States will continue to grow and migrate to attractive urban and suburban centers in the southern and western states.
	•		Cremation rates will continue to increase and migrate eastward. The accelerating cremation rate will have a significant impact on the revenue base of more traditional deathcare businesses in the Central and Eastern regions of the United States and a lesser impact on the already high cremation states in the West.

     With the above considerations in mind, our vision over the next ten years is to change the profile of our business to be heavily weighted in about 10-15 major markets that have an especially attractive demographic profile and where, over time, we could acquire or build up operations in each of these markets by doing one to three thousand calls annually. We believe there are large enough markets for us to increase our presence in existing markets by acquisition or enter a new market with a substantial acquisition while leveraging our strong local franchise brands and entrepreneurial leadership. We will use our Standards Operating Model to evaluate acquisition candidates to ensure they can be readily integrated into our portfolio.

OUR STRENGTHS

     Market Leader in Our Suburban and Rural Markets. Our operations are located in principally suburban and rural markets, where we primarily compete with smaller, independent operators. Most of our suburban markets have populations of 100,000 or more. In over 70% of our funeral home markets, we believe that we are either first or second in local market share.

     Partnership Culture. Our funeral homes and cemeteries are managed by individuals that we refer to as Managing Partners, with extensive death care experience, often within their local markets. Our Managing Partners have responsibility for day-to-day operations but are required to follow operating and financial standards that are custom designed for each of four groupings using size of business and cremation rate as specific grouping criteria. This strategy allows each local business to maintain its unique identity within its local market and to capitalize on its reputation and heritage while our senior management maintains supervisory controls and provides support services from our corporate headquarters. We believe our culture is very attractive to owners of premier independent businesses that fit our profile of suitable acquisition candidates.

     Flexible Capital Structure. We have no near-term debt maturity issues. We believe that our capital structure provides us with financial flexibility by allowing us to invest our cash flow in growth initiatives, such as business acquisitions and inventory. Currently, we have four primary components in our capital structure:

	•		the $130 million senior notes which have a 2015 maturity;
	•		a currently undrawn $35 million revolving credit facility, described under the heading “Liquidity and Capital Resources” in Item 7;
	•		our convertible junior subordinated debenture payable to our affiliate trust, which has the ability to defer payments of interest, and a 2029 maturity; and
	•		our common stock.

     Stable Cash Flow. We have demonstrated the ability to generate stable cash flow. Prior to 2005, our primary use of cash flow was to repay debt. Free cash flow (cash flow from operations less maintenance capital expenditures) for 2008 totaled $13.5 million. We intend to use cash flow to repurchase common stock, to acquire funeral home and cemetery businesses and to fund internal growth projects, such as cemetery inventory development. Our growth strategy is the primary way we expect to increase stockholder value. We will reassess our capital allocation strategy annually, but at this point we believe that our financial goals will best be achieved by continuing to improve the operating and financial performance of our existing portfolio of businesses while selectively investing our free cash flow in growth opportunities that generate a return on invested capital in excess of our weighted average cost of capital.

     Strong Field-Level Operating Margins. We believe that our field-level operating margins are among the highest reported by the public companies in the death care industry and that this performance is a testament to the success of our business strategies. These strong margins and the ability to control costs are important advantages in a business such as ours that is characterized by a high fixed-cost structure. We will continue to seek ways to improve our financial performance, and we believe that our standards-based operating model will continue to yield long-term improvement in our financial results.

     Effective Management of Funeral Preneed Sales. We believe our local, decentralized strategy allows us to adapt our preneed sales selectively to best address the competitive situation in our markets. In highly competitive markets, we execute a more aggressive preneed sales program. In less competitive markets where we have a strong market position, we deploy a more passive preneed sales program. In certain of our markets, we do not deploy a formal preneed program. This approach allows us to target the investment in preneed sales to markets where we have the opportunity to reinforce our market share. Since approximately 80% of our revenues are generated from at-need sales, we retain significant pricing leverage in our funeral business.

     Integrated Information Systems. We have implemented information systems to support local business decisions and to monitor performance of our businesses compared to financial and performance standards. All of our funeral homes and cemeteries are connected to our corporate headquarters, which allows us to monitor and assess critical operating and financial data in order to analyze the performance of individual locations on a timely basis. Furthermore, our information system infrastructure provides senior management with a critical tool for monitoring and adhering to our established internal controls, which is critical given our decentralized model and the sensitive nature of our business operations.

     Proven Management Team. Our management team, headed by our founder and Chief Executive Officer (CEO) Melvin C. Payne, is characterized by a dynamic culture that reacts quickly and proactively to address changing market conditions and emerging trends. We believe this culture has been critical to our recent successful efforts and will provide an important advantage as the death care industry evolves. We are committed to continue operating an efficient corporate organization and strengthening our corporate and local business leadership. We believe that our Being the Best Standards Operating Model will ensure this commitment at all levels of

the organization. At mid-year 2006, we reorganized our funeral and cemetery divisions into three Regions, each headed by a Regional
Partner. This change promotes more cooperation and synergy between our funeral and cemetery operations and supports the goal of market-share and volume growth in our most significant markets.

OPERATIONS

     We conduct our funeral and cemetery operations only in the United States. Our operations are reported in two segments: funeral operations and cemetery operations. Information for each of our segments is presented below and in our financial statements set forth herein.

Funeral Home Operations

     At December 31, 2008, we operated 136 funeral homes in 25 states. Funeral home revenues currently account for approximately 75% of our total revenues. The funeral home operations are managed by a team of experienced death care industry professionals and selected region-level individuals with substantial management experience in our industry. See Note 22 to the Consolidated Financial Statements for the year ended December 31, 2008, for segment data related to funeral home operations.

     Our funeral homes offer a complete range of services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and worship, and transportation services. Most of our funeral homes have a non-denominational chapel on the premises, which permits family visitation and religious services to take place at one location and thereby reduces our transportation costs and inconvenience to the family.

     Funeral homes are principally a service business that provides burial and cremation services and sells related merchandise, such as caskets and urns. Given the high fixed cost structure associated with funeral home operations, we believe the following are key factors affecting our profitability:

	•		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 complimentary services and merchandise;
	•		controlling salary and merchandise costs; and
	•		exercising pricing leverage related to our at-need business to increase average revenues per contract.

Cemetery Operations

     As of December 31, 2008, we operated 32 cemeteries in 11 states. The cemetery operations are managed by a team of experienced death care industry and sales professionals. Cemetery revenues currently account for approximately 25% of our total revenues. See Note 22 to the Consolidated Financial Statements for the year ended December 31, 2008, for segment data related to cemetery operations.

     Our cemetery products and services include interment services, the rights to interment in cemetery sites (including grave sites, mausoleum crypts and niches) and related cemetery merchandise such as memorials and vaults. Cemetery operations generate revenues through sales of interment rights and memorials, installation fees, fees for interment and cremation services, finance charges from installment sales contracts and investment income from preneed cemetery merchandise and perpetual care trusts.

     Our cemetery operating results are impacted by the success of our sales organization because 39% of our cemetery revenues was generated from preneed sales of interment rights during the year ended December 31, 2008. An additional 13% of our 2008 cemetery revenues was generated from deliveries of merchandise and services previously sold on preneed contracts. We believe that changes in the level of consumer confidence (a measure of whether consumers will spend money on discretionary items) impact the amount of cemetery revenues and are currently having a significant negative impact on our sales and the industry as a whole. Cemetery revenues generated from at-need services and merchandise sales generally are subject to many of the same key profitability factors as in our funeral home business. Approximately 9% of our cemetery revenues was attributable to investment earnings on trust funds and finance charges on installment contracts during the year ended December 31, 2008. Changes in the capital markets and interest rates affect this component of our cemetery revenues and in 2008 the decline in the capital markets hurt the Company’s earnings.

Preneed Programs

     In addition to sales of funeral merchandise and services, cemetery interment rights and cemetery merchandise and services at the time of need, we also market funeral and cemetery services and products on a preneed basis. Preneed funeral or cemetery contracts enable families to establish, in advance, the type of service to be performed, the products to be used and the cost of such products and services. Preneed contracts permit families to eliminate issues of making death care plans at the time of need and allow input from other family members before the death occurs.

     Preneed funeral contracts are usually paid on an installment basis. The performance of preneed funeral contracts is usually secured by placing the funds collected in trust for the benefit of the customer or by the purchase of a life insurance policy, the proceeds of which will pay for such services at the time of need. Insurance policies, intended to fund preneed funeral contracts, cover the original contract price and generally include an element of growth (earnings) designed to offset future inflationary cost increases. Revenue from preneed funeral contracts, along with accumulated earnings, is not recognized until the time the funeral service is performed. The commission income is recognized as revenue when the period of refund expires (generally one year), which helps us defray the costs we incur to originate the preneed contract (primarily commissions we pay to our sales counselors). Additionally, we generally earn a commission from the insurance company from the sale of insurance-funded policies.

     In addition to preneed funeral contracts, we also offer “preplanned” funeral arrangements whereby a client determines in advance substantially all of the details of a funeral service without any financial commitment or other obligation on the part of the client until the actual time of need. Preplanned funeral arrangements permit a family to avoid issues of making death care plans at the time of need and enable a funeral home to establish relationships with a client that may eventually lead to an at-need sale.

     Preneed sales of cemetery interment rights are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years. In substantially all cases, we receive an initial down payment at the time the contract is signed. The interest rates generally range between 12% and 14%. Preneed sales of cemetery interment rights are generally recorded as revenue when 10% of the contract amount related to the interment right has been collected. Merchandise and services may similarly be sold on an installment basis, but revenue is recorded when delivery has occurred. Allowances for customer cancellations and refunds are recorded at the date that the contract is executed and periodically evaluated thereafter based upon historical experience.

     We sold 5,161 and 4,916 preneed funeral contracts during the years ended December 31, 2007 and 2008, respectively. At December 31, 2008, we had a backlog of 69,575 preneed funeral contracts to be delivered in the future. Approximately 21% and 17% of the funeral revenues recognized during each of the last two years ended December 31, 2007 and during the twelve months ended December 31, 2008, respectively, originated through preneed contracts. Cemetery revenues that originated from preneed contracts represented approximately 52% of our net cemetery revenues for both 2007 and 2008.

     As of December 31, 2008, we employed a staff of 178 advance-planning and family service representatives for the sale of preneed products and services.

TRUST FUNDS AND INSURANCE CONTRACTS

     We have established a variety of trusts in connection with funeral home and cemetery operations as required under applicable state law. Such trusts include (i) preneed funeral trusts; (ii) preneed cemetery merchandise and service trusts; and (iii) perpetual care trusts. These trusts are typically administered by independent financial institutions selected by the Company. Independent financial advisors are also used for investment management and advisory services.

     Preneed funeral sales generally require deposits to a trust or purchase of a third-party insurance product. Trust fund income earned and the receipt and recognition of any insurance benefits are deferred until the service is performed, while trust fund holdings and deferred revenue are reflected currently on our balance sheet. In most states, we are not permitted to withdraw principal or investment income from such trusts until the funeral service is performed. Some states, however, allow for the retention of a percentage (generally 10%) of the receipts to offset any administrative and selling expenses. The aggregate balance of our preneed funeral contracts held in trust, insurance contracts and receivables from customers was approximately $262.9 million as of December 31, 2008.

     We are generally required under applicable state laws to deposit a specified amount (which varies from state to state, generally 50% to 100% of selling price) into a merchandise and service trust fund for cemetery merchandise and services preneed sales. The related trust fund income earned is recognized when the related merchandise and services are delivered. We are generally permitted to withdraw the trust principal and accrued income when the merchandise is actually purchased, when the service is provided or when the contract is cancelled. Cemetery merchandise and service trust fund balances, in the aggregate, totaled approximately $44.4 million as of December 31, 2008.

     In most states, regulations require a portion (generally 10%) of the sale amount of cemetery property and memorials to be placed in a perpetual care trust. The income from these perpetual care trusts provides a portion of the funds necessary to maintain cemetery property and memorials in perpetuity. This trust fund income is recognized, as earned, in cemetery revenues. While we are entitled to withdraw the income from perpetual care trusts to provide for maintenance of cemetery property and memorials, we are restricted from withdrawing any of the principal balances of the trust fund. Perpetual care trust balances totaled approximately $26.3 million at December 31, 2008.

     For additional information with respect to our trusts, see Notes 7, 8, and 10 to the Consolidated Financial Statements for the year ended December 31, 2008.

COMPETITION

     The operating environment in the death care industry has been highly competitive. Publicly traded companies operating in the United States are Service Corporation International, Stewart Enterprises, Inc., Keystone North America, Inc. and StoneMor Partners L.P. In addition, a number of smaller, non-public companies have been active in acquiring and operating funeral homes and cemeteries.

     Our funeral home and cemetery operations usually face competition in the markets that they serve. Our primary competition in most of our markets is from local independent operators. We have observed new start-up competition in certain areas of the country, which in any one market may have impacted our profitability because of the high fixed cost nature of funeral homes. Market share for funeral homes and cemeteries is largely a function of reputation and heritage, although competitive pricing, professional service and attractive, well-maintained and conveniently located facilities are also important. Because of the importance of reputation and heritage, market share increases are usually gained over a long period of time. The sale of preneed funeral services and cemetery property has increasingly been used by many companies as a marketing tool to build market share.

     There has been increasing competition from providers specializing in specific services, such as cremations, who offer minimal service and low-end pricing. We also face competition from companies that market products and related merchandise over the Internet and non-traditional casket stores in certain markets. These competitors have been successful in capturing a portion of the low-end market and product sales.

REGULATION

     Our operations are subject to regulations, supervision and licensing under numerous foreign, federal, state and local laws, ordinances and regulations, including extensive regulations concerning trust funds, preneed sales of funeral and cemetery products and services and various other aspects of our business. We believe that we comply in all material respects with the provisions of these laws, ordinances and regulations. We operate in the United States under the Federal Trade Commission (FTC) comprehensive trade regulation rule for the funeral industry. The rule contains requirements for funeral industry practices, including extensive price and other affirmative disclosures and imposes mandatory itemization of funeral goods and services.

     We are subject to the requirements of the federal Occupational Safety and Health Act (“OSHA”) and comparable state statutes. The OSHA hazard communication standard, the United States Environmental Protection Agency community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and similar state statutes require us to organize information about hazardous materials used or produced in our operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens.

     Our operations, including our preneed sales activities and the management and administration of preneed trust funds, are also subject to regulation, supervision and licensing under state laws and regulations. We believe that we are in substantial compliance with all such laws and regulations.

EMPLOYEES

     As of December 31, 2008, we and our subsidiaries employed 1,822 employees, of whom 892 were full-time and 930 part-time. All of our funeral directors and embalmers possess licenses required by applicable regulatory agencies. We believe that our relationship with our employees is good. None of our employees are represented by unions.

AVAILABLE INFORMATION

     We file annual, quarterly and other reports, and any amendments to those reports, and information with the United States Securities and Exchange Commission (“SEC”). You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain additional information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

     Our website address is www.carriageservices.com. Available on this website under “Investor Relations-Investor Relations Menu — SEC Filings,” free of charge, are Carriage’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, insider reports on Forms 3, 4 and 5 filed on behalf of directors and officers and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC.

     Also posted on our website, and available in print upon request, are charters for the Company’s Audit Committee, Compensation Committee and Corporate Governance Committee. Copies of the Code of Business Conduct and Ethics and the Corporate Governance Guidelines are also posted on the Company’s website under the “Corporate Governance” section. Within the time period required by the SEC and the New York Stock Exchange, Inc., we will post on our website any modifications to the Codes and any waivers applicable to senior officers as defined in the applicable Code, as required by the Sarbanes-Oxley Act of 2002.

ITEM 1A. RISK FACTORS

RISKS RELATED TO OUR BUSINESS

Marketing and sales activities by existing and new competitors could cause us to lose market share and lead to lower revenues and margins.

     We face competition in all of our markets. Most of our competitors are independently owned, and some are relatively recent market entrants. Certain of the recent entrants are individuals who were formerly employed by us or by our competitors and have relationships and name recognition within our markets. As a group, independent competitors tend to be aggressive in distinguishing themselves by their independent ownership, and they promote their independence through advertising, direct mailings and personal contact. Increasing pressures from new market entrants and continued advertising and marketing by competitors in local markets could cause us to lose market share and revenues. In addition, competitors may change the types or mix of products or services offered. These changes may attract customers, causing us to lose market share and revenue as well as to incur costs in response to competition to vary the types or mix of products or services offered by us.

Our ability to generate preneed sales depends on a number of factors, including sales incentives and local and general economic conditions.

     Declines in preneed sales would reduce our backlog and revenue and could reduce our future market share. On the other hand, a significant increase in preneed sales can have a negative impact on cash flow as a result of commissions and other costs incurred without corresponding revenues.

     As we have localized our preneed sales strategies, we are continuing to refine the mix of service and product offerings in both our funeral and cemetery segments, including changes in our sales commission and incentive structure. These changes could cause us to experience declines in preneed sales in the short-run. In addition, economic conditions at the local or national level has caused declines in preneed sales either as a result of less discretionary income or lower consumer confidence. Declines in preneed cemetery property sales reduces current revenue, and declines in other preneed sales would reduce our backlog and future revenue and could reduce future market share.

     Preneed sales of cemetery property and funeral and cemetery merchandise and services are generally cash flow negative initially, primarily due to the commissions paid on the sale, the portion of the sales proceeds required to be placed into trust or escrow and the terms of the particular contract such as the size of the down payment required and the length of the contract. As a result, preneed sales reduce cash flow available for other activities, and, to the extent preneed activities are increased, cash flow will be further reduced.

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

     We have historically experienced price competition primarily from independent funeral home and cemetery operators, and from monument dealers, casket retailers, low-cost funeral providers and other non-traditional providers of services or products. New market entrants tend to attempt to build market share by offering lower cost alternatives. In the past, this price competition has resulted in our losing market share in some markets. In other markets, we have had to reduce prices thereby reducing profit margins in order to retain or recapture market share. Increased price competition in the future could further reduce revenues, profit margins and our backlog.

Our ability to execute our growth strategy is highly dependent upon our ability to successfully identify suitable acquisition candidates and negotiate transactions on favorable terms.

     There is no assurance that we will be able to continue to identify candidates that meet our criteria or that we will be able to reach terms with identified candidates for transactions that are acceptable to us. We intend to apply standards established under our Strategic Portfolio Optimization Model to evaluate acquisition candidates, and there is no assurance that we will continue to be successful in doing so or that we will find attractive candidates that satisfy these standards.

Increased or unanticipated costs, such as insurance, taxes or litigation, may have a negative impact on our earnings and cash flow.

     We have experienced material increases in certain costs during the previous years, such as insurance, taxes or legal fees, which result from external factors difficult to estimate. These costs may impair our ability to achieve earnings growth in excess of revenue growth. Our 2009 plan assumes that we will be successful in increasing earnings at a rate that is greater than revenue growth. We can give no assurance that we will be successful in achieving such increases.

Improved performance in our funeral and cemetery segments is highly dependent upon successful execution of our Standards Operating Model.

     We have implemented our Standards Operating Model to improve and better measure performance in our funeral and cemetery operations. We developed standards according to criteria, each with a different weighting, designed around market share, people, and operational and financial metrics. We also incentivise our location Managing Partners by giving them the opportunity to earn a fixed percentage of the field-level earnings before interest, taxes, depreciation and amortization based upon the number and weighting of the standards achieved. Our expectation is that, over time, the Standards Operating Model will result in our maintaining or improving field-level margins, market share, customer satisfaction and overall financial performance, but there is no assurance that these goals will be met. We have learned that success using the model is highly dependent on having the right leader in the business.

The success of our businesses is typically dependent upon one or a few key employees for success because of the localized and personal nature of our business.

     Death care businesses have built local heritage and tradition through successive generations, providing a foundation for ongoing business opportunities from established client family relationships and related referrals. We believe these relationships build trust in the community and are a key driver to market share. Our businesses, which tend to serve small local markets, usually have one or a few key employees that drive our relationships. We can give no assurance that we can retain these employees or that these relationships will drive market share.

Earnings from and principal of trust funds and insurance contracts could be reduced by changes in financial markets and the mix of securities owned.

     Earnings and investment gains and losses on trust funds and insurance contracts are affected by financial market conditions and the mix of fixed-income and equity securities that we choose to maintain in the funds. We may not choose the optimal mix for any particular market condition. Declines in earnings from perpetual care trust funds would cause a decline in current revenues, while declines in earnings from other trust funds could cause a decline in future cash flows and revenues.

Covenant restrictions under our debt instruments may limit our flexibility in operating and growing our business.

     The terms of our credit facility and the indenture governing our Senior Notes may limit our ability and the ability of our subsidiaries to, among other things:

	•		incur additional debt;
	•		pay dividends or make distributions or redeem or repurchase stock;
	•		make investments;
	•		grant liens;
	•		make capital expenditures;
	•		enter into transactions with affiliates;
	•		enter into sale-leaseback transactions;
	•		sell assets; and
	•		acquire the assets of, or merge or consolidate with, other companies.

     Our credit facility also requires us to maintain certain financial ratios. Complying with these restrictive covenants and financial ratios, as well as those that may be contained in any future debt agreements, may impair our ability to finance our future operations or capital needs or to take advantage of other favorable business opportunities. Our ability to comply with these restrictive covenants and financial ratios will depend on our future performance, which may be affected by events beyond our control. Our failure to comply with any of these covenants or restrictions when they apply will result in a default under the particular debt instrument, which could permit acceleration of the debt under that instrument and, in some cases, the acceleration of debt under other instruments that contain cross-default or cross-acceleration provisions. In the case of an event of default, or in the event of a cross-default or cross-acceleration, we may not have sufficient funds available to make the required payments under our debt instruments. If we are unable to repay amounts owed under the terms of our amended senior secured credit facility, the lenders thereunder may be entitled to sell certain of our funeral assets to satisfy our obligations under the agreement.

Continued economic crisis and financial and stock market declines could reduce future potential earnings and cash flows and could result in future goodwill impairments.

     In addition to an annual review, 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, a significant decline in the market value of our stock or debt values, significant underperformance relative to historical or projected future operating results, and significant negative industry or economic trends. If these factors occur, we may have a triggering event, which could result in impairment to our goodwill. Based on the results of our annual goodwill impairment test and the interim goodwill impairment test we performed using December 31, 2008 fair value information, we concluded that there was no impairment of our goodwill. However, if current economic conditions worsen causing deterioration in our operating revenues, operating margins and cash flows, we may have another triggering event that could result in an impairment of our goodwill.

RISKS RELATED TO THE DEATH CARE INDUSTRY

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

     Declines in the number of deaths could cause at-need sales of funeral and cemetery services, property and merchandise to decline, which could decrease revenues. Although the United States Bureau of the Census estimates that the number of deaths in the United States will increase through 2010, longer life spans could reduce the rate of deaths. In addition, changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in the number of deaths in our markets or from quarter to quarter are not predictable. These variations may cause our revenues to fluctuate and our results of operations to lack predictability.

The increasing number of cremations in the United States could cause revenues to decline because we could lose market share to firms specializing in cremations. In addition, direct cremations produce minimal revenues for cemetery operations and lower funeral revenues.

     Our traditional cemetery and funeral service operations face competition from the increasing number of cremations in the United States. Industry studies indicate that the percentage of cremations has steadily increased and that cremations will represent approximately 39% of the U.S. burial market by the year 2010, compared to approximately 32% in 2005. The trend toward cremation could cause cemeteries and traditional funeral homes to lose market share and revenues to firms specializing in cremations. In addition, direct cremations (with no funeral service, casket, urn, mausoleum niche, columbarium niche or burial) produce no revenues

for cemetery operations and lower revenues than traditional funerals and, when delivered at a traditional funeral home, produce lower profit margins as well.

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

     Future market share, revenues and profits will depend in part on our ability to anticipate, identify and respond to changing consumer preferences. In past years, we have implemented new product and service strategies based on results of customer surveys that we conduct on a continuous basis. However, we may not correctly anticipate or identify trends in consumer preferences, or we may identify them later than our competitors do. In addition, any strategies we may implement to address these trends may prove incorrect or ineffective.

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

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

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

     None.

ITEM 2. PROPERTIES

     At December 31, 2008, we operated 136 funeral homes in 25 states and 32 cemeteries in 11 states. We own the real estate and buildings for 82% of our funeral homes and lease facilities for the remaining 18%. We own 27 cemeteries and operate five cemeteries under long-term contracts with municipalities and non-profit organizations at December 31, 2008. Eleven funeral homes are operated in combination with cemeteries as these locations are physically located on the same property or very close proximity and under same management. The 32 cemeteries operated by us have an inventory of unsold developed lots totaling approximately 118,000 and 124,000 at December 31, 2007 and 2008, respectively. In addition, approximately 496 acres are available for future development. We anticipate having a sufficient inventory of lots to maintain our property sales for the foreseeable future. The specialized nature of our business requires that our facilities be well-maintained. Management believes this standard is met.

     The following table sets forth certain information as of December 31, 2008, regarding Carriage’s properties used by the funeral homes segment and by the cemeteries segment identified by state:

		Number of
		Funeral Homes								Number of Cemeteries
State		Owned				Leased(1)				Owned				Managed
California			21				2				4				0
Connecticut			6				2				0				0
Florida			6				3				6				3
Georgia			3				0				0				0
Idaho			5				1				3				0
Illinois			1				4				1				0
Kansas			7				0				0				0
Kentucky			8				3				1				0
Maryland			1				0				0				0
Massachusetts			12				0				0				0
Michigan			3				0				0				0
Montana			1				0				0				0
Nevada			2				0				2				1
New Jersey			4				1				0				0
New Mexico			1				0				0				0
New York			1				0				0				0
North Carolina			0				2				1				0
Ohio			4				2				0				1
Oklahoma			1				0				1				0
Rhode Island			4				0				0				0
Tennessee			3				0				0				0
Texas			13				1				7				0
Virginia			3				1				1				0
Washington			1				1				0				0
West Virginia			1				1				0				0
Total			112				24				27				5

     Our corporate headquarters occupy approximately 37,000 square feet of leased office space in Houston, Texas. At December 31, 2008, we owned and operated 581 vehicles. No vehicles were leased.

ITEM 3. LEGAL PROCEEDINGS

     We and our subsidiaries are parties to a number of legal proceedings that arise from time to time in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on the financial statements. Information regarding litigation is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 15 of this Form 10-K.

     We self-insure against certain risks and carry insurance with coverage and coverage limits for risks in excess of the coverage amounts consistent with our assessment of risks in our business and of an acceptable level of financial exposure. Although there can be no assurance that self-insurance reserves and insurance will be sufficient to mitigate all damages, claims or contingencies, we believe that the reserves and our insurance provides reasonable coverage for known asserted or unasserted claims. In the event we sustained a loss from a claim and the insurance carrier disputed coverage or coverage limits, we may record a charge in a different period than the recovery, if any, from the insurance carrier.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of our stockholders during the fourth quarter of 2008.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

     Our Common Stock is traded on the New York Stock Exchange under the symbol “CSV”. The following table presents the quarterly high and low sale prices as reported by the New York Stock Exchange:

2008		High				Low
First Quarter		$	9.45			$	6.81
Second Quarter		$	9.25			$	6.10
Third Quarter		$	6.80			$	3.20
Fourth Quarter		$	3.67			$	1.66

2007		High				Low
First Quarter		$	8.37			$	5.04
Second Quarter		$	8.93			$	7.50
Third Quarter		$	9.42			$	7.65
Fourth Quarter		$	11.09			$	8.12

     As of February 27, 2009, there were 17,927,776 shares of our Common Stock outstanding and the closing price as reported by the New York Stock Exchange was $2.40 per share. The Common Stock shares outstanding are held by approximately 250 stockholders of record. Each share is entitled to one vote on matters requiring the vote of stockholders. We believe there are approximately 5,000 beneficial owners of the Common Stock.

     We have never paid a cash dividend on our Common Stock. We currently intend to retain earnings to fund the growth and development of our business. Any future change in our policy will be made at the discretion of our Board of Directors in light of our financial condition, capital requirements, earnings prospects and any limitations imposed by lenders or investors, as well as other factors the Board of Directors may deem relevant.

     We have a compensation policy for fees paid to our directors under which the directors may choose to receive their fees either in the form of cash or equity based on the fair market value of our Common Stock calculated at the closing price published by the New York Stock Exchange on the date the fees are earned. Prior to May 2006, the shares issued to directors were unregistered. In connection with our Annual Meeting of Stockholders in May 2006, the stockholders approved our 2006 Long Term Incentive Plan and we registered the shares available for future issuance for this compensation policy and other corporate purposes. We issued 3,003 unregistered shares of Common Stock to directors in lieu of payment in cash for their fees for the year ended December 31, 2006, the value of which was charged to operations. No underwriter was used in connection with these issuances. We relied on the Section 4(2) exemption from the registration requirements of the Securities Act of 1933, as amended.

Purchases of Equity Securities by the Issuer

     During June 2008 and November 2008, the Board of Directors approved share repurchase programs authorizing the Company to purchase up to $5 million of the our Common Stock. The repurchases are executed in the open market and through privately negotiated transactions subject to market conditions, normal trading restrictions and other relevant factors. Through December 31, 2008, we repurchased 1,730,969 shares of Common Stock at an aggregate cost of $5,740,442 and an average cost per share of $3.32. The program approved in June was completed in October 2008. The repurchased shares are held as treasury stock. Pursuant to the program, we repurchased the following shares during the second, third and fourth quarter of 2008:

														Dollar Value
										Total Number of				of Shares That
		Total				Average				Shares Purchased as				May Yet Be
		Number of Shares				Price Paid				Part of Publicly				Purchased Under the
Period		Purchased				Per Share				Announced Program				Program
April 1, 2008 — April 30, 2008			—				—				—				—
May 1, 2008 — May 31, 2008			—				—				—				—
June 1, 2008 — June 30, 2008			17,900			$	6.80				17,900			$	4,878,234
Total for quarter ending June 30, 2008			17,900								17,900
July 1, 2008 — July 30, 2008			—								—			$	4,878,234
August 1, 2008 — August 31, 2008			208,900			$	4.50				208,900			$	3,931,725
September 1, 2008 — September 30, 2008			627,900			$	3.65				627,900			$	1,618,369
Total for quarter ending September 30, 2008			836,800								836,800
October 1, 2008 — October 31, 2008			492,769			$	3.25				492,769			$	—
November 1, 2008 — November 30, 2008			40,800			$	2.18				40,800			$	4,910,947
December 1, 2008 — December 31, 2008			342,700			$	1.87				342,700			$	4,259,558
Total for quarter ending December 31, 2008			876,269								876,269
Total for year ended December 31, 2008			1,730,969								1,730,969

Shareholder Return Index

     The graph below matches Carriage Services, Inc.’s cumulative 5-year total stockholder return on Common Stock with the cumulative total returns of the Russell MicroCap index, the Peer Group index and a customized peer group of three companies that includes: Service Corporation International, Stewart Enterprises Inc. and StoneMor Partners L.P. The graph tracks the performance of a $100 investment in our Common Stock, in each index and in the peer group (with the reinvestment of all dividends) from December 31, 2003 to December 31, 2008.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Carriage Services, Inc., The Russell MicroCap Index
And A Peer Group

		12/03				12/04				12/05				12/06				12/07				12/08
Carriage Services, Inc.			100.00				133.51				135.14				137.57				237.84				54.32
Russell MicroCap			100.00				114.14				117.07				136.44				125.52				75.59
Peer Group			100.00				134.16				138.98				174.17				239.99				88.09

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

PEER GROUP

Service Corporation International

Stewart Enterprises Inc.

StoneMor Partners L.P.

ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth selected consolidated financial information for us that has been derived from the audited Consolidated Financial Statements of Carriage Services, Inc. as of and for each of the years ended December 31, 2004, 2005, 2006, 2007 and 2008. These historical results are neither indicative of our future performance, nor necessarily comparable as a result of changes in accounting methods discussed below.

     We adopted FASB Interpretation No. 46, as revised (“FIN 46R”), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51”, as of March 31, 2004. The adoption of FIN 46R resulted in the consolidation of funeral and cemetery merchandise and service, and perpetual care trusts in our consolidated balance sheet at fair value. We do not consolidate certain funeral trusts for which we do not recognize a majority of their expected losses and, therefore, are not considered a primary beneficiary of these funeral trusts under FIN 46R. The adoption of FIN 46R also resulted in the deconsolidation of Carriage Services Capital Trust, the issuer of TIDES preferred securities. We now report as a liability the junior subordinated debenture payable to the Trust.

     We changed our method of accounting for preneed selling costs, which are direct costs incurred for the origination of prearranged funeral and cemetery service and merchandise sales contracts, effective January 1, 2005. The change affects the comparability of the operating results in the following table. Prior to this change, commissions and other direct selling costs related to originating preneed funeral and cemetery service and merchandise sales contracts were deferred and amortized with the objective of recognizing the selling costs in the same period that the related revenue is recognized. Under the new accounting method, the commissions and other direct selling costs, which are current obligations and use operating cash flow, are expensed as incurred. Our results of operations for the four years ended December 31, 2008 are reported on the basis of our changed method, but 2004 is reported using the prior accounting method.

     Effective January 1, 2006, we adopted Statement Financial Accounting Standards No. 123 (Revised), “Share-Based Payment” (“FAS No. 123R”), which requires, among other things, entities to recognize in the income statement the grant-date fair value of stock options and other stock-based awards over the service periods the awards are expected to vest. Pursuant to the provisions of FAS No. 123R, we applied the modified-prospective transition method. Under this method, the fair value provision of FAS No. 123R is applied to new employee stock-based awards granted after December 31, 2005. Measurement and recognition of compensation cost for unvested awards at December 31, 2005, granted prior to the adoption of FAS No. 123R, are recognized under the provisions of FAS No. 123, “Accounting for Stock-Based Compensation” (“FAS No. 123”), after adjustments for estimated forfeiture. FAS No. 123R no longer permits pro-forma disclosure for income statement periods after December 31, 2005 and compensation expense is recognized for all stock-based awards based on grant-date fair value. Our results of operations for the three years ended December 31, 2008 are reported on the basis of our changed method, but the periods prior to 2006 are reported using the prior accounting method. See Note 1 of Notes to Consolidated Financial Statements for the year ended December 31, 2008.

     You should read this historical financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report and our Consolidated Financial Statements and notes thereto included elsewhere in this report.

Selected Consolidated Financial Information

		Year ended December 31,
		2004				2005				2006				2007				2008
		(dollars in thousands, except per share amounts)
INCOME STATEMENT DATA:
Revenues:
Funeral		$	108,102			$	109,737			$	113,198			$	123,839			$	134,246
Cemetery			36,115				37,555				36,159				43,017				42,682
Total revenues			144,217				147,292				149,357				166,856				176,928
Gross profit:
Funeral			28,387				28,694				30,508				36,170				37,170
Cemetery			8,578				6,525				3,943				9,355				5,873
Total gross profit			36,965				35,219				34,451				45,525				43,043
General and administrative expenses			10,113				12,383				12,023				16,015				18,112
Other charges (income)			495				(822	)			—				—				—
Operating income			26,357				23,658				22,428				29,510				24,931
Interest expense			(16,896	)			(18,591	)			(18,508	)			(18,344	)			(18,331	)
Litigation settlement			—				—				—				—				(3,300	)
Additional interest and other costs of senior debt refinancing			—				(6,933	)			—				—				—
Interest and other income (expense)			940				(73	)			1,922				1,151				229
Income (loss) before income taxes			10,401				(1,939	)			5,842				12,317				3,529
(Provision) benefit for income taxes			(80	)			640				(2,239	)			(4,959	)			(1,725	)
Net income (loss) from continuing operations			10,321				(1,299	)			3,603				7,358				1,804
Income (loss) from discontinued operations			(1,087	)			2,186				(5,019	)			921				(1,546	)
Cumulative effect of the change in accounting, net of taxes			—				(22,756	)			—				—				—
Preferred Stock Dividend			—				—				—				—				10
Net income (loss)		$	9,234			$	(21,869	)		$	(1,416	)		$	8,279			$	248
Earnings (loss) per share
Basic:
Continuing operations		$	0.58			$	(0.07	)		$	0.19			$	0.39			$	0.09
Discontinued operations			(0.06	)			0.12				(0.28	)			0.05				(0.08	)
Cumulative effect of the change in accounting principle			—				(1.24	)			—				—				—
Basic earnings (loss) per share		$	0.52			$	(1.19	)		$	(0.09	)		$	0.44			$	0.01
Diluted:
Continuing operations		$	0.57			$	(0.07	)		$	0.19			$	0.38			$	0.09
Discontinued operations			(0.06	)			0.12				(0.27	)			0.05				(0.08	)
Cumulative effect of the change in accounting principle			—				(1.24	)			—				—				—
Diluted earnings (loss) per share		$	0.51			$	(1.19	)		$	(0.08	)		$	0.43			$	0.01
Weighted average number of common and common equivalent shares outstanding:
Basic			17,786				18,334				18,545				19,020				19,054
Diluted			18,260				18,334				18,912				19,507				19,362
OPERATING AND FINANCIAL DATA:
Funeral homes at end of period			135				133				131				139				136
Cemeteries at end of period			30				29				28				32				32
Funeral services performed			22,673				22,792				22,468				23,545				25,531
Preneed funeral contracts sold			4,936				4,877				4,998				5,075				4,916
Backlog of preneed funeral contracts			60,309				58,531				56,719				68,909				69,575
Average revenue per funeral contract		$	4,890			$	4,965			$	5,120			$	5,207			$	5,154
Cremation rate			31.4	%			33.1	%			34.4	%			35.8	%			39.8	%
Depreciation and amortization		$	10,560			$	9,053			$	8,624			$	9,488			$	10,372
BALANCE SHEET DATA:
Total assets		$	565,156			$	570,640			$	564,996			$	610,807			$	560,293
Working capital			4,933				26,915				35,755				11,647				9,100
Long-term debt, net of current maturities			102,714				134,572				133,841				132,994				132,345
Convertible junior subordinated debenture			93,750				93,750				93,750				93,750				93,750
Stockholders’ equity		$	116,438			$	96,374			$	96,373			$	106,900			$	103,510

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

     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 a service business 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 December 31, 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 in our home office in Houston, Texas.

     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

     The cemetery operating results are affected by the size and success of our sales organization. Approximately 52% of our 2008 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 9% 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.

     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

     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.

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	)			*

     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 Acquired businesses have a product mix that is 51.3% cremation services.

     Cremation services represented 39.8% of the number of funeral services during 2008, compared to 35.8% for 2007. The average revenue for all burial contracts increased 2.3% to $7,550, while the average revenue for cremation contracts decreased 1.4% to $2,710. We have addressed the growing demand for cremation by training the funeral directors to present multiple merchandise and service options to families, resulting in choices that produce higher revenues. The average revenue for “other” contracts, which make up approximately 8.5% of the number of contracts, increased slightly to $1,971. Other contracts consist of charges for merchandise or services for which we do not perform a funeral service for the deceased during the period.

     Cemetery Segment. The following table sets forth certain information regarding our revenues and gross profit from the cemetery 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		$	38,825			$	36,449			$	(2,376	)			(6.1	)%
Acquired			4,192				6,233				2,041				48.7	%
Revenues from continuing operations		$	43,017			$	42,682			$	(335	)			(0.8	)%
Revenues from discontinued operations		$	—			$	—			$	—				*
Total same-store operating profit		$	13,468			$	9,567			$	(3,901	)			(29.0	)%
Acquired			1,054				1,465				411				39.0	%
Operating profit from continuing operations		$	14,522			$	11,032			$	(3,490	)			(24.0	)%
Operating profit from discontinued operations		$	—			$	—			$	—				*

     Cemetery same-store revenues for the year ended December 31, 2008 decreased $2.4 million, or (6.1)% compared to the year ended December 31, 2007, the majority ($1.5 million) of which was due to lower revenues at our largest business, Rolling Hills Memorial Park, and secondarily to broadly lower performance in our other cemetery businesses within the Western Region. Same-store at-need revenues decreased $0.7 million, same-store revenue from preneed property sales decreased $0.9 million, preneed revenues from merchandise and service deliveries declined $0.1 million and same-store financial revenues declined $0.8 million. Our cemetery operations struggled against a backdrop of sales leadership changes in the second half of 2008, a weakening economy in which consumers deferred purchases of property on a preneed basis and the collapse of the financial markets.

     Cemetery same-store operating profit for the year ended December 31, 2008 decreased $3.9 million, or (29.0)%. As a percentage of revenues, cemetery same store operating profit decreased from 34.7% to 30.3%, primarily due to higher bad debts and increased salaries and wages. General economic weakness had a negative impact on collection efforts on outstanding contracts.

     Acquired revenue and gross profit represents the results of Seaside Memorial Park in Corpus Christi, Texas which was acquired in January 2007, Conejo Mountain Memorial Park in Camarillo, California, which was acquired in April 2007 and Cloverdale Park, Inc. which was acquired in June 2007. The increase in acquired revenue and operating profit was due to full year results in 2008 versus partial year results in 2007.

     Financial revenues (trust earnings and finance charges on installment contracts) decreased $0.9 million. Earnings from perpetual care trust funds are included in financial revenues and totaled $1.5 million for the year ended December 31, 2008 compared to $2.4 million for the year ended December 31, 2007. The year over year decline was largely due to market conditions and to the Company repositioning its trust portfolio in the fourth quarter to achieve higher earnings and cash flow in the future.

     Other. General and administrative expenses increased $1.9 million for the year ended December 31, 2008 primarily related to three areas: unusually high legal costs; higher employee matching contributions under our 401K program; and severance for the former Chief Financial Officer.

     Interest income and other, net for the year ended December 31, 2008 is primarily interest income on the short-term investments. Interest income declined during the year as a direct result of our investments maturing and cash was used to repurchase common stock.

     Income taxes. See Note 16 to the Consolidated Financial Statements for a discussion of the income taxes for 2008 and 2007.

YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006

     The following is a discussion of our results of operations for the years ended December 31, 2006 and 2007. Amounts are not restated for discontinued operations occurring in 2008.

     Net income from continuing operations for the year ended December 31, 2007 totaled $7.5 million, equal to $0.39 per diluted share as compared to $3.7 million for the year ended December 31, 2006, or $0.20 per diluted share. The variance between the two periods was primarily due to the positive results of acquired businesses, improved results from Rolling Hills Memorial Park and improved results from existing funeral homes in the Central Region. Acquired businesses provided an increase in pre-tax gross profit of $4.5 million, equal to $0.14 per diluted share. Improved results at Rolling Hills Memorial Park provided an increase in pre-tax gross profit of $2.4 million, equal to $0.07 per diluted share, primarily on the strength of higher preneed revenues and the absence of $0.7 million in environmental remediation costs incurred in 2006. The existing funeral homes in the Central Region generated $1.7 million in additional earnings equal to $0.09 per diluted share. Offsetting a portion of improvement in gross profit from the funeral home and cemetery operations was an increase in corporate costs and expenses of $4.0 million, equal to $0.12 per diluted share.

     Income from discontinued operations for the year ended December 31, 2007 totaled $0.8 million, equal to $0.04 per diluted share. During 2007, we sold four funeral home businesses for approximately $3.2 million and recognized gains of $1.2 million. Loss from discontinued operations for the year ended December 31, 2006 totaled $5.1 million, equal to $(0.28) per diluted share, and consisted primarily of proceeds of $6.5 million and impairment charges of $8.4 million, related to specifically identified goodwill, recorded for four funeral home businesses and a combination funeral home and cemetery business. Two of these businesses were sold in 2007.

     Funeral Home Segment. The following table sets forth certain information regarding our revenues and gross profit from the funeral home operations for the year ended December 31, 2006 compared to the year ended December 31, 2007.

		Year Ended
		December 31,								Change
		2006				2007				Amount				Percent
		(dollars in thousands)
Total same-store revenue		$	110,581			$	111,900			$	1,319				1.2	%
Acquired			1,339				10,710				9,371				*
Preneed insurance commissions revenue			2,267				2,198				(69	)			(3.0	%)
Revenues from continuing operations		$	114,187			$	124,808			$	10,621				9.3	%
Revenues from discontinued operations		$	3,669			$	628			$	(3,041	)			*
Total same-store gross profit		$	39,729			$	43,023			$	3,294				8.3	%
Acquired			313				3,724				3,411				*
Preneed insurance			826				369				(457	)			(55.3	%)
Gross profit from continuing operations		$	40,868			$	47,116			$	6,248				15.3	%
Gross profit from discontinued operations		$	736			$	(8	)		$	(744	)			*

     Funeral same-store revenues for the year ended December 31, 2007 increased $1.3 million, or 1.2%, when compared to the year ended December 31, 2006 as we experienced an increase of 3.9% in the average revenue per service for those existing operations and the number of services declined by $0.5 million, or 2.6%. Performance was strongest in the Central Region, where the number of contracts increased 1.5% and the contract average increased 5.1%. The Western Region experienced a decrease in the number of contracts equal to 5.3% while the contract average increased 2.1%. The number of contracts in the Eastern Region declined 1.6% while the contract average increased 3.1%.

     Total same-store gross profit for the year ended December 31, 2007 increased $3.3 million, or 8.3% from 2006, and as a percentage of funeral same-store revenue, increased from 35.9% to 38.4%. The revenue increases were leveraged into pretax earnings growth across all three regions. Pretax earnings increased significantly in the Central Region at $4.5 million or 39.7%, equal to $0.14 per diluted share. Additionally, Western and Eastern Regions each increased pretax earnings $1.1 million, or 9.5% and 6.3%, respectively.

     As previously discussed, we completed seven acquisitions in 2007 involving twelve new funeral homes. Because of the timing of the acquisitions, the two funeral homes in Corpus Christi, Texas had the largest impact on acquired revenue and gross profit as they were acquired in January 2007. Of the acquired revenue and gross profit, those two funeral homes provided 2.7% and 1.0%.

     Cremation services represented 35.8% of the number of funeral services during 2007, compared to 34.4% for 2006. The average revenue for burial contracts increased 4.6% to $7,384, and the average revenue for cremation contracts increased 7.4% to $2,734. We addressed the growing demand for cremation by training the funeral directors to present multiple merchandise and service options to families, resulting in choices that produce higher revenues. The average revenue for “other” contracts, which make up

approximately 9.5% of the number of contracts, declined $0.3 million to $1,971. Other contracts consist of charges for merchandise or services for which we do not perform a funeral service for the deceased during the period.

     Cemetery Segment. The following table sets forth certain information regarding our revenues and gross profit from the cemetery operations for the year ended December 31, 2006 compared to the year ended December 31, 2007:

		Year Ended
		December 31,								Change
		2006				2007				Amount				Percent
		(dollars in thousands)
Total same-store revenue		$	36,159			$	38,825			$	2,666				7.4	%
Acquired			—				4,192				4,192				*
Revenues from continuing operations		$	36,159			$	43,017			$	6,858				19.0	%
Revenues from discontinued operations		$	778			$	—			$	(778	)			*
Total same-store gross profit		$	9,438			$	13,468			$	4,030				42.7	%
Acquired			—				1,054				1,054				*
Gross profit from continuing operations		$	9,438			$	14,522			$	5,084				53.9	%
Gross profit from discontinued operations		$	117			$	—			$	(117	)			*

     Cemetery same-store revenues for the year ended December 31, 2007 increased $2.7 million, or 7.4% compared to the year ended December 31, 2006, the majority ($2.4 million) of which was due to higher revenues at our largest business, Rolling Hills Memorial Park, and secondarily to broadly higher performance in our Central Region cemeteries. Same-store at need revenues increased from $13.1 million to $13.7 million. Same-store revenue from preneed property sales increased $2.0 million while revenues from merchandise and service deliveries declined $0.5 million.

     Cemetery same-store gross profit for the year ended December 31, 2007 increased $4.0 million, or 42.7%. As a percentage of revenues, cemetery same store gross profit increased from 26.1% to 34.7%, the primary reason was the $3.4 million improvement at Rolling Hills in part due to the absence of an environmental remediation charge in the amount of $0.7 million during the 2006 period. Improved collection efforts on preneed receivables resulted in $0.9 million less bad debt expense in 2007 compared to 2006.

     Acquired revenue and gross profit for the year ended December 31, 2007 represents the results of Seaside Memorial Park in Corpus Christi, Texas which was acquired in January 2007, Conejo Mountain Memorial Park in Camarillo, California, which was acquired in April 2007 and Cloverdale Park, Inc. which was acquired in June 2007.

     Financial revenues (trust earnings and finance charges on installment contracts) increased $0.8 million on the strength of higher trust earnings. Earnings from perpetual care trust funds are included in financial revenues and totaled $2.4 million for the year ended December 31, 2007 compared to $1.9 million for the year ended December 31, 2006. The year over year improvements were largely due to realized gains in equity investments which appreciated in line with the corresponding markets.

     Other. General and administrative expenses increased $4.0 million for the year ended December 31, 2007 primarily because we upgraded our consolidation platform systems, infrastructure and people. During 2007, we made significant improvements in numerous home office departments including Strategic Development, Legal, Human Resources and Training, all of which were under new leadership compared to prior years. We view any controllable overhead above our individual businesses as a support cost that needs to be value added to our field operating leadership, our employees and to our client families. Other increases related primarily to four areas: unusually high litigation costs in four cases; higher employee matching contributions under our 401K program; higher recruiting fees related to successful operating leadership searches; and incentive compensation based on performance. We paid out more incentive compensation during 2007 than at any time in our history and have converted 100% of our Managing Partner Incentive Compensation to Standards Achievement.

     Interest income and other, net for the year ended December 31, 2007 was primarily interest income on the short-term investments. Interest income declined during the year as a direct result of our investments maturing and cash was used for the acquisitions.

     Income taxes. See Note 16 to the Consolidated Financial Statements for a discussion of the income taxes for 2007 and 2006.

GOODWILL IMPAIRMENT TESTING

     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 annually for impairment by assessing the fair value of each of our reporting units. For the year 2008, our funeral segment reporting units consisted 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.

     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. Based on our impairment test performed using August 31, 2008 data, we concluded that there was no impairment of goodwill.

     In addition to our annual review, 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. The market capitalization of the Company consists of the common stock, senior notes and convertible trust preferred securities all of which declined in market value during the fourth quarter of 2008. The decline in market capitalization may have resulted from the decline in the Company’s operating profits compared to the prior year. We performed an additional impairment test based on December 31, 2008 information and concluded that there was no impairment of goodwill. Additionally, we researched the other public companies in our industry for evidence of goodwill impairment in their funeral reporting units and found that there were none. The decline in operating profits was due to the decline in operating profits from the cemetery segment which is much more sensitive to economic conditions because it is reliant on preneed sales which are impacted by consumer discretionary income. As previously discussed, goodwill is not recorded on cemeteries. The earnings and cash flow from the funeral segment was not negatively impacted by the economy in 2008 and is not cyclical in nature. The number of deaths in the United States is relatively stable year to year and is projected to increase with the aging of the baby boomers. The number of funeral services provided and the average price realized per service by Carriage increased year over year. If economic conditions worsen causing deterioration in our financial operating results, we may have another triggering event that could result in an impairment of our goodwill in 2009.

LIQUIDITY AND CAPITAL RESOURCES

     While the impact has not been dramatic yet, we believe the adverse economic conditions in the U.S. will continue to effect our business and may impair our ability to access the capital markets, if needed. Carriage began 2008 with $3.4 million in cash and other liquid investments and ended the year with $5.0 million in cash and an undrawn $35 million line of credit. The elements of cash flow for 2008 consisted of the following (in millions):

Cash and liquid investments at beginning of year		$	3.4
Cash flow from operations			19.5
Cash flow from discontinued operations			0.2
Proceeds from sales of businesses			1.0
Cash used for maintenance capital expenditures			(6.0	)
Cash used for growth capital expenditures — funeral homes			(3.5	)
Cash used for growth capital expenditures — cemeteries			(3.4	)
Other investing and financing activities			(6.2	)
Cash at end of year		$	5.0

     The outstanding principal of senior debt at December 31, 2008 totaled $137.7 million and consisted of $130.0 million in Senior Notes, described below, and $7.7 million in acquisition indebtedness and capital lease obligations. Additionally, $0.1 million in letters of credit were issued and outstanding under the credit facility at December 31, 2008.

     In January 2005, we issued $130 million of 7.875% unsecured Senior Notes at par. Interest is payable quarterly in January and July. The Senior Notes are due in 2015.

     The Company has a $35 million senior secured revolving credit facility that matures in April 2010 and is collateralized by all personal property and funeral home real property in certain states. Borrowings under the credit facility bear interest at either prime or LIBOR options. At December 31, 2008, the LIBOR option was set at LIBOR plus 275 basis points. The facility is undrawn, except for the letters of credit referred to above, at December 31, 2008.

     A total of $93.8 million was outstanding at December 31, 2008 on the convertible junior subordinated debenture. Amounts outstanding under the debenture are payable to our affiliate trust, Carriage Services Capital Trust, bear interest at 7.0% and mature in 2029. Substantially all the assets of the Trust consist of the convertible junior subordinated debentures. In 1999, the Trust issued 1.875 million shares of term income deferrable equity securities (“TIDES”). The rights of the debentures are functionally equivalent to those of the TIDES.

     The convertible junior subordinated debenture payable to the affiliated trust, and the TIDES, each contain a provision for the deferral of interest payments and distributions for up to 20 consecutive quarters. During any period in which distribution payments are deferred, distributions will continue to accumulate at the 7% annual rate. Also, the deferred distributions themselves accumulate distributions at the annual rate of 7%. During any deferral period, Carriage is prohibited from paying dividends on Common Stock or repurchasing Common Stock, subject to limited exceptions. The Company currently expects to continue paying the distributions as due.

     The Company intends to use its cash, cash flow and proceeds from the sale of businesses, to repurchase Common Stock, acquire funeral home and cemetery businesses and for internal growth projects, such as cemetery inventory development. As discussed in Note 18 to the consolidated financial statements, we have an active share repurchase program for which the Board of Directors approved for the Company to purchase up to $5.0 million of its Common Stock. At December 31, 2008, approximately $4.2 million was still available to spend under the program. The Company also has the ability to draw on our revolving credit facility, subject to customary terms and conditions of the credit agreement.

     We believe our cash on hand, cash flow from operations, and the available capacity under our credit facility described above will be adequate to meet our working capital needs and other financial obligations over the next twelve month. However, should the current economic crisis continue for a significant period of time or if the economic crisis worsens significantly, conditions may negatively affect our ability to refinance our long-term debt in future periods.

Balance Sheet Obligations

     The following table summarizes the future payments required for the debt on our balance sheet as of December 31, 2008. Where appropriate we have indicated the footnote to our annual Consolidated Financial Statements where additional information is available.

										Payments By Period
										(in millions)
		Note																												After
		Reference				Total				2009				2010				2011				2012				2013				5 Years
Long-term debt			13			$	133.0			$	0.7			$	0.4			$	0.4			$	0.4			$	0.4			$	130.7
Capital lease obligations, including interest			15				9.6				0.6				0.7				0.7				0.7				0.4				6.5
Convertible junior subordinated debenture (a)			14				93.8				—				—				—				—				—				93.8
Total contractual obligations						$	236.5			$	1.4			$	1.1			$	1.1			$	1.1			$	0.8			$	231.0

Off-Balance Sheet Arrangements

     The following table summarizes our off-balance sheet arrangements as of December 31, 2008. Where appropriate we have indicated the footnote to our annual Consolidated Financial Statements where additional information is available.

										Payments By Period
										(in millions)
		Note																												After
		Reference				Total				2009				2010				2011				2012				2013				5 Years
Operating leases			15			$	10.9			$	2.3			$	1.9			$	1.6			$	1.5			$	1.0			$	2.6
Interest payments on long-term debt			13				69.7				10.8				10.7				10.7				10.7				10.6				16.2
Noncompete agreements			15				2.9				0.9				0.7				0.5				0.4				0.3				0.1
Consulting agreements			15				0.8				0.4				0.1				0.1				0.1				0.1				—
Executive management compensation agreements			15				3.3				2.0				1.4				—				—				—				—
Total contractual cash obligations						$	87.6			$	16.4			$	14.8			$	12.9			$	12.7			$	12.0			$	18.9

     The obligations related to our off-balance sheet arrangements are significant to our future liquidity; however, although we can provide no assurances, we anticipate that these obligations will be funded from cash provided from our operating activities. If we are not able to meet these obligations with cash provided for by our operating activities, we may be required to access the capital markets or draw down on our credit facilities both of which may be more likely and more difficult to access due to the current economic crisis.

SEASONALITY

     Our business can be affected by seasonal fluctuations in the death rate. Generally, the rate is higher during the winter months because the incidences of death from influenza and pneumonia are higher during this period than other periods of the year.

INFLATION

     Inflation has not had a significant impact on our results of operations.

FORWARD-LOOKING STATEMENTS

     In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include any projections of earnings, revenues, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operation; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “project”, “forecast”, “plan”, “anticipate” and other similar words. Forward-looking statements are not guarantees of performance. Important factors that could cause actual results to differ materially from our expectations reflected in our forward-looking statements include those risks related to our business and our industry set forth in Item 1A. Risk Factors.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to changes in market values related to outstanding debts and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate and when available for a reasonable price. We are not exposed to any other significant market risks including commodity price risk, nor foreign currency exchange risk.

     We monitor current and forecasted interest rate risk in the ordinary course of business and seek to maintain optimal financial flexibility, quality and solvency. As of December 31, 2008, our outstanding debt is comprised of entirely fixed rate obligations.

     We do not currently have any floating rate long-term borrowings outstanding under our $35 million floating rate line of credit. If we borrow against the line of credit, any change in the floating rate would cause a change in interest expense.

     The 7.875% Senior Notes were issued to the public at par and are carried at a cost of $130 million. At December 31, 2008, these securities were typically trading at a price of approximately $78.625.

     The convertible junior subordinated debentures, payable to Carriage Services Capital Trust, pay interest at the fixed rate of 7% and are carried on our balance sheet at a cost of approximately $93.8 million. The estimated fair value of these securities is estimated to be $51.6 million at December 31, 2008 based on available broker quotes of the corresponding preferred securities issued by the Trust.

     Increases in market interest rates may cause the value of these debt instruments to decrease but such changes will not affect our interest costs. The remainder of the our long-term debt and leases consist of non-interest bearing notes and fixed rate instruments that do not trade in a market, nor otherwise have a quoted market value. Any increase in market interest rates causes the fair value of those liabilities to decrease.

     Securities subject to market risk consist of investments held by our preneed funeral, cemetery merchandise and services and perpetual care trust funds. See Notes 7, 8 and 10 to our Consolidated Financial Statements for the estimated fair values of those securities. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates causes an approximate 1.09% change in the value of the fixed income securities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CARRIAGE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm		34
Consolidated Balance Sheets as of December 31, 2007 and 2008		35
Consolidated Statements of Operations for the Years Ended December 31, 2006, 2007 and 2008		36
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2006, 2007 and 2008		37
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2007 and 2008		38
Notes to Consolidated Financial Statements		39

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Carriage Services, Inc.:

We have audited the accompanying consolidated balance sheets of Carriage Services, Inc. and subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carriage Services, Inc. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008 in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. Also as discussed in Note 1 to the consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Carriage Services, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 2009 expressed an unqualified opinion on the effectiveness of internal control over financial reporting.

/s/ KPMG LLP

Houston, Texas
March 9, 2009

CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

		December 31,
		2007				2008
ASSETS
Current assets:
Cash and cash equivalents		$	3,446			$	5,007
Accounts receivable, net of allowance for bad debts of $1,142 in 2007 and $833 in 2008			16,421				14,637
Inventories and other current assets			13,686				15,144
Total current assets			33,553				34,788
Preneed cemetery trust investments			61,114				44,375
Preneed funeral trust investments			68,292				55,150
Preneed receivables, net of allowance for bad debts of $1,159 in 2007 and $847 in 2008			18,333				13,783
Receivables from preneed funeral trusts			15,012				12,694
Property, plant and equipment, net of accumulated depreciation of $53,304 in 2007 and $59,324 in 2008			125,608				126,164
Cemetery property			68,028				70,213
Goodwill			167,263				164,515
Deferred charges and other non-current assets			16,402				12,293
Cemetery perpetual care trust investments			37,202				26,318
Total assets		$	610,807			$	560,293
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and obligations under capital leases		$	1,256			$	815
Accounts payable and accrued			6,091				5,128
Accrued liabilities			14,559				20,732
Total current liabilities			21,906				26,675
Senior long-term debt, net of current portion			132,994				132,345
Convertible junior subordinated debenture due in 2029 to an affiliated trust			93,750				93,750
Obligations under capital leases, net of current portion			4,663				4,572
Deferred preneed cemetery revenue			50,610				49,527
Deferred preneed funeral revenue			34,277				24,111
Deferred preneed cemetery receipts held in trust			61,114				44,375
Deferred preneed funeral receipts held in trust			68,292				55,150
Total liabilities			467,606				430,505
Commitments and contingencies
Care trusts’ corpus			36,301				26,078
Redeemable Preferred Stock			—				200
Stockholders’ equity:
Common Stock, $.01 par value; 80,000,000 shares authorized; 19,216,000 and 17,835,000 issued and outstanding in 2007 and 2008, respectively			192				196
Additional paid-in capital			193,006				195,104
Accumulated deficit			(86,298	)			(86,050	)
Treasury stock, at cost; 1,731,000 shares at December 31, 2008			—				(5,740	)
Total stockholders’ equity			106,900				103,510
Total liabilities and stockholders’ equity		$	610,807			$	560,293

The accompanying notes are an integral part of these Consolidated Financial Statements.

CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

		For the years ended December 31,
		2006				2007				2008
Revenues:
Funeral		$	113,198			$	123,839			$	134,246
Cemetery			36,159				43,017				42,682
			149,357				166,856				176,928
Field costs and expenses:
Funeral			72,544				77,036				86,202
Cemetery			26,721				28,495				31,650
Depreciation and amortization			8,338				8,103				8,757
Regional and unallocated funeral and cemetery costs			7,303				7,697				7,276
			114,906				121,331				133,885
Gross profit			34,451				45,525				43,043
Corporate costs and expenses:
General, administrative and other			10,591				14,629				16,496
Home office depreciation and amortization			1,432				1,386				1,616
			12,023				16,015				18,112
Operating income			22,428				29,510				24,931
Interest expense			(18,508	)			(18,344	)			(18,331	)
Litigation settlement			—				—				(3,300	)
Interest income and other, net			1,922				1,151				229
Total interest and other			(16,586	)			(17,193	)			(21,402	)
Income from continuing operations before income taxes			5,842				12,317				3,529
Provision for income taxes			(2,239	)			(4,959	)			(1,725	)
Net income from continuing operations			3,603				7,358				1,804
Income (loss) from discontinued operations, net of tax			(5,019	)			921				(1,546	)
Preferred stock dividend			—				—				10
Net income (loss)		$	(1,416	)		$	8,279			$	248
Basic earnings (loss) per common share:
Continuing operations		$	0.19			$	0.39			$	0.09
Discontinued operations			(0.28	)			0.05				(0.08	)
Net income (loss)		$	(0.09	)		$	0.44			$	0.01
Diluted earnings (loss) per common share:
Continuing operations		$	0.19			$	0.38			$	0.09
Discontinued operations			(0.27	)			0.05				(0.08	)
Net income (loss)		$	(0.08	)		$	0.43			$	0.01
Weighted average number of common and common equivalent shares outstanding:
Basic			18,545				19,020				19,054
Diluted			18,912				19,507				19,362