SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q/A
(Amendment No. 1)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                          to                                         

SERVICE CORPORATION INTERNATIONAL

(Exact name of registrant as specified in charter)

Texas (State or other jurisdiction of incorporation or organization)		74-1488375 (I. R. S. employer identification number)
1929 Allen Parkway, Houston, Texas (Address of principal executive offices)		77019 (Zip code)

713-522-5141
(Registrant’s telephone number, including area code)

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (check one).

Large Accelerated Filer þ                    Accelerated Filer o                    Non-accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

YES o                    NO þ

The number of shares outstanding of the registrant’s common stock as of May 4, 2006 was 295,753,231 (net of treasury shares).

 

 

Explanatory Note:

The Company is amending its March 31, 2006 Form 10-Q filed May 10, 2006 to restate its condensed consolidated statement of operations and consolidated statement of cash flows for the three months ended March 31, 2006 and 2005, and its condensed consolidated balance sheet at March 31, 2006 and December 31, 2005. Included in this amended Form 10-Q are certain adjustments to correct errors related to 1) the miscalculation of the Company’s actuarially determined pension benefit obligation, 2) the accounting for certain leases related to funeral home properties which were previously accounted for as operating leases, but should have been accounted for as capital leases, and 3) other out-of-period adjustments previously identified by the Company but deemed to be not material either individually or in the aggregate. All applicable amounts relating to this restatement have been reflected in the condensed consolidated financial statements and disclosed in the notes to the condensed consolidated financial statements in this amended Form 10-Q. For a discussion of the individual restatement adjustments, see Item 1. Financial Statements-note two. Restatement of Financial Statements. Additionally, see Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

SERVICE CORPORATION INTERNATIONAL
INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Statement of Operations — Three Months Ended March 31, 2006 and 2005 (Restated)			4
Unaudited Condensed Consolidated Balance Sheet — March 31, 2006 and December 31, 2005 (Restated)			5
Unaudited Condensed Consolidated Statement of Cash Flows — Three Months Ended March 31, 2006 and 2005 (Restated)			6
Unaudited Condensed Consolidated Statement of Stockholders’ Equity — Three Months Ended March 31, 2006 (Restated)			7
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General			22
Competitive Strengths			23
Opportunity for Growth			24
Key Performance Indicators			24
Other Matters			27
Critical Accounting Policies			27
Accounting Changes			27
Results of Operations — Three Months Ended March 31, 2006 and 2005			28
Financial Condition, Liquidity and Capital Resources			32
Cautionary Statement on Forward-Looking Statements			34
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			35
Part II. Other Information
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 6. Exhibits			36
Signature			38
Ratio of Earnings to Fixed Charges
Certification of CEO in Satisfaction of Section 302
Certification of Principal Financial Officer in Satisfaction of Section 302
Certification of CEO in Satisfaction of Section 906
Certification of Principal Financial Officer in Satisfaction of Section 906

GLOSSARY

The following terms are common to the deathcare industry, are used throughout this report and have the following meanings:

Atneed — Funeral and cemetery arrangements after the death has occurred.

Burial Vaults — A reinforced outer burial container intended to protect the casket against the weight of the earth.

Cash Overrides — Funds received based on achieving certain dollar volume targets of life insurance policies.

Cremation — The reduction of human remains to bone fragments by intense heat.

General Agency (GA) Revenues — Commissions earned as the general agent for an insurance company on preneed funeral life insurance or annuity policies. These commissions are based on a percentage per contract sold, are dependent on the type of product sold and are recognized as funeral revenues when the insurance purchase transaction between the customer and third party insurance provider is completed.

Interment — The burial or final placement of human remains in the ground.

Lawn Crypt — An underground outer burial receptacle constructed of concrete and reinforced steel which is usually pre-installed in predetermined designated areas.

Marker — A method of identifying the occupant of a particular grave or crypt. Permanent grave markers are usually of bronze or stone.

Maturity — At the time of death. This is the point at which preneed contracts are converted to atneed contracts.

Mausoleum — An above ground structure that is designed to house one to several hundred caskets and cremation urns.

Perpetual Care or Endowment Care Fund — A trust fund used for the maintenance and upkeep of burial spaces within a cemetery.

Preneed — Funeral and cemetery arrangements made prior to the time of death.

Preneed Backlog — Future revenues from unfulfilled preneed funeral and cemetery sales.

Production — Sales of preneed and/or atneed contracts.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)

		Three months ended
		March 31,
		2006				2005
		(Restated) note 2				(Restated) note 2
Revenues		$	441,798			$	447,442
Costs and expenses			(354,191	)			(349,642	)
Gross profit			87,607				97,800
General and administrative expenses			(22,007	)			(19,707	)
Gains (losses) on dispositions and impairment charges, net			(4,510	)			(5,741	)
Operating income			61,090				72,352
Interest expense			(26,728	)			(25,005	)
Loss on early extinguishment of debt			—				(1,207	)
Interest income			5,981				4,056
Other income (expense), net			2,414				(1,208	)
			(18,333	)			(23,364	)
Income from continuing operations before income taxes and cumulative effect of accounting change			42,757				48,988
Provision for income taxes			(15,776	)			(17,520	)
Income from continuing operations before cumulative effect of accounting change			26,981				31,468
(Loss) income from discontinued operations (net of income tax benefit (provision) of $35 and $(1,155), respectively)			(55	)			1,175
Cumulative effect of accounting change (net of income tax benefit of $117,428)			—				(187,538	)
Net income (loss)		$	26,926			$	(154,895	)
Basic earnings (loss) per share:
Income from continuing operations before cumulative effect of accounting change		$	.09			$	.10
Income from discontinued operations, net of tax			—				—
Cumulative effect of accounting change, net of tax			—				(.59	)
Net income (loss)		$	.09			$	(.49	)
Diluted earnings (loss) per share:
Income from continuing operations before cumulative effect of accounting change		$	.09			$	.10
Income from discontinued operations, net of tax			—				—
Cumulative effect of accounting change, net of tax			—				(.59	)
Net income (loss)		$	.09			$	(.49	)
Basic weighted average number of shares			294,308				313,490
Diluted weighted average number of shares			298,678				317,751
Dividends declared per share		$	.025			$	.025

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In thousands, except share amounts)

		March 31,				December 31,
		2006				2005
		(Restated) note 2				(Restated) note 2
Assets
Current assets:
Cash and cash equivalents		$	490,408			$	446,782
Receivables, net			76,400				97,747
Inventories			67,256				68,327
Other			31,017				37,527
Total current assets			665,081				650,383
Preneed funeral receivables and trust investments			1,227,556				1,226,192
Preneed cemetery receivables and trust investments			1,307,832				1,288,515
Cemetery property, at cost			1,366,323				1,355,654
Property and equipment, at cost, net			1,043,073				950,174
Deferred charges and other assets			264,366				249,581
Goodwill			1,122,205				1,123,888
Cemetery perpetual care trust investments			697,871				700,382
		$	7,694,307			$	7,544,769
Liabilities & Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities		$	213,961			$	231,693
Current maturities of long-term debt			35,996				20,716
Income taxes			18,203				20,359
Total current liabilities			268,160				272,768
Long-term debt			1,271,857				1,186,485
Deferred preneed funeral revenues			535,489				535,384
Deferred preneed cemetery revenues			783,520				792,485
Deferred income taxes			157,481				138,677
Other liabilities			317,778				326,985
Non-controlling interest in funeral and cemetery trusts			2,060,380				2,015,811
Non-controlling interest in cemetery perpetual care trust investments			695,456				694,619
Commitments and contingencies (note 9)
Stockholders’ equity:
Common stock, $1 per share par value, 500,000,000 shares authorized, 295,454,597 and 294,808,872, issued and outstanding (net of 48,606,563 and 48,962,063 treasury shares, at par)			295,455				294,809
Capital in excess of par value			2,174,541				2,182,745
Unearned compensation			—				(3,593	)
Accumulated deficit			(935,979	)			(962,905	)
Accumulated other comprehensive income			70,169				70,499
Total stockholders’ equity			1,604,186				1,581,555
		$	7,694,307			$	7,544,769

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)

		Three months ended
		March 31,
		2006				2005
		(Restated) note 2				(Restated) note 2
Cash flows from operating activities:
Net income (loss)		$	26,926			$	(154,895	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net loss (income) from discontinued operations, net of tax			55				(1,175	)
Loss on early extinguishment of debt			—				1,207
Premiums paid on early extinguishment of debt			—				(542	)
Cumulative effect of accounting change, net of tax			—				187,538
Depreciation and amortization			25,091				20,645
Provision for doubtful accounts			2,356				2,347
Provision for deferred income taxes			13,555				16,064
(Gains) losses on dispositions and impairment charges, net			4,510				5,741
Share-based compensation			2,145				447
Other non-cash adjustments			—				(1,950	)
Change in assets and liabilities, net of effects from acquisitions and dispositions:
Decrease (increase) in receivables			7,407				(8,835	)
Decrease in other assets			3,591				28,740
Decrease in payables and other liabilities			(27,566	)			(5,532	)
Net effect of preneed funeral production and maturities			3,833				12,470
Net effect of cemetery production and deliveries			18,365				23,289
Other			(54	)			102
Net cash provided by operating activities from continuing operations			80,214				125,661
Net cash provided by operating activities from discontinued operations			—				1,453
Net cash provided by operating activities			80,214				127,114
Cash flows from investing activities:
Capital expenditures			(19,049	)			(20,559	)
Proceeds from divestitures and sales of property and equipment			7,463				8,236
Proceeds from dispositions of foreign operations, net of cash retained			—				21,597
Proceeds from sale of investments			5,900				—
Acquisitions, net of cash acquired			(14,662	)			(5	)
Net (deposits) withdrawals of restricted funds and other			(3,353	)			6,194
Net cash (used in) provided by investing activities from continuing operations			(23,701	)			15,463
Net cash used in investing activities from discontinued operations			—				(54	)
Net cash (used in) provided by investing activities			(23,701	)			15,409
Cash flows from financing activities:
Payments of debt			(1,182	)			(1,951	)
Principal payments on capital leases			(5,437	)			(71	)
Early extinguishment of debt			—				(7,131	)
Proceeds from exercise of stock options			1,219				3,904
Purchase of Company common stock			—				(103,570	)
Payments of dividends			(7,371	)			—
Purchase of subsidiary stock			—				(844	)
Net cash used in financing activities			(12,771	)			(109,663	)
Effect of foreign currency			(116	)			(152	)
Net increase in cash and cash equivalents			43,626				32,708
Cash and cash equivalents at beginning of period			446,782				287,785
Cash and cash equivalents at end of period		$	490,408			$	320,493

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands)

																											Accumulated
											Treasury				Capital in												other
		Outstanding					Common				stock, par				excess of				Unearned				Accumulated				comprehensive
		Shares					stock				value				par value				Compensation				deficit				income
																							(Restated) note 2
Balance at December 31, 2005			294,809				$	343,771			$	(48,962	)		$	2,182,745			$	(3,593	)		$	(962,905	)		$	70,499
Net income																								26,926
Dividends declared on common stock ($.025 per share)																(7,329	)
Total other comprehensive income																												(330	)
Share based compensation earned																2,145
Reclassification of unearned compensation for restricted stock																(3,593	)			3,593
Stock option exercises and other			290					290								929
Restricted stock award			356									356				(356	)
Balance at March 31, 2006			295,455				$	344,061			$	(48,606	)		$	2,174,541			$	—			$	(935,979	)		$	70,169

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

1. Nature of Operations

Service Corporation International (SCI or the Company) is a provider of deathcare products and services, with a network of funeral service locations and cemeteries primarily operating in the United States and Canada. The Company also owns a 25 percent equity interest in funeral operations of an entity in France. Additionally, the Company owns Kenyon International Emergency Services (Kenyon), a wholly owned subsidiary that specializes in providing disaster management services in mass fatality incidents. Kenyon’s results are included in the Company’s funeral operations segment.

     Funeral service locations provide all professional services relating to atneed funerals, including the use of funeral facilities and motor vehicles, and preparation and embalming services. Funeral related merchandise (including caskets, burial vaults, cremation receptacles, flowers, and other ancillary products and services) is sold at funeral service locations. Certain funeral service locations contain crematoria. The Company also sells preneed funeral services whereby a customer contractually agrees to the terms of a funeral to be performed in the future. The Company’s cemeteries provide cemetery property interment rights (including mausoleum spaces, lots, and lawn crypts) and sell cemetery related merchandise (including stone and bronze memorials, markers, and cremation memorialization products) and services (primarily merchandise installations and burial openings and closings). Cemetery items are sold on an atneed or preneed basis. Personnel at cemeteries perform interment services and provide management and maintenance of cemetery grounds. Certain cemeteries operate crematoria, and certain cemeteries contain gardens specifically for the purpose of cremation memorialization.

The Company has restated herein its previously issued condensed consolidated statement of operations and condensed consolidated statement of cash flows for the three months ended March 31, 2006 and 2005, and its condensed consolidated balance sheet as of March 31, 2006 and December 31, 2005. This restatement corrects errors related to 1) the miscalculation of the Company’s actuarially determined pension benefit obligation, 2) the accounting for certain leases related to funeral home properties which were previously accounted for as operating leases, but should have been accounted for as capital leases, and 3) other out-of-period adjustments previously identified by the Company but deemed to be not material either individually or in the aggregate. All applicable amounts related to this restatement have been reflected in the Company’s condensed consolidated financial statements and disclosed in the notes to the condensed consolidated statements in this amended Form 10-Q.

As previously disclosed in the Company’s 2004 Form 10-K, effective January 1, 2004, the Company adopted a new accounting policy related to the accounting for actuarial gains and losses in its pension plan. Under the new accounting policy, the Company began to recognize such gains and losses in its consolidated statement of operations as they occurred. Previously, the Company amortized the difference between actual and expected investment returns and other actuarial gains and losses over seven years (except to the extent that settlements with employees required earlier recognition). As a result of this accounting change, the Company initially recognized an after tax charge in its 2004 financial statements, representing the cumulative effect of this accounting change, of $33,599 ($54,873 before tax). This amount represented the accumulated unrecognized net losses related to the pension plan assets and liabilities as of January 1, 2004.

     During the second quarter of 2006, the Company discovered that its actuarially determined pension benefit obligation (PBO) had been incorrectly calculated for the years ended December 31, 2005, 2004, 2003, and 2002 as the impact of pending lump sum cash settlements in the PBO calculation at the end of each respective year had been inadvertently omitted. The net aggregate pre-tax impact of this error over the four-year period ended December 31, 2005 was $4,233. Had this PBO calculation been correct at the time the Company adopted its new accounting policy effective January 1, 2004, the Company would have recognized an additional cumulative effect of accounting change of $4,961 ($3,037 after tax) in its December 31, 2004 consolidated statement of operations, as the vast majority of the impact of previously unrecognized pending lump sum settlements for 2002 and 2003 would have been recognized in connection with the accounting policy change.

     In addition, in connection with the preparation of its second quarter 2006 condensed consolidated financial statements; the Company also identified an actuarial calculation error that resulted in an understatement of pension expense of $1,940 in the fourth quarter of 2005.

Lease Accounting

As previously disclosed in the Company’s initial first quarter 2006 Form 10-Q filing, the Company determined, in the first quarter of 2006, that certain of its leases related to funeral home properties that were previously accounted for as operating leases should have been accounted for as capital leases. The aggregate pre-tax adjustment to the Company’s previously issued consolidated financial statements is $2,677, of which $657 relates to the three-year period ended December 31, 2005. The remaining $2,020 relates to periods prior to January 1, 2003.

Other Out-of-Period Adjustments

The Company has also included other adjustments that were previously identified but deemed to be not material either individually or in the aggregate and therefore corrected in a subsequent period. Such adjustments impacted the timing of expense items, including income tax expenses previously recognized in the first quarter of 2006. The cumulative amount of such out-of-period adjustments was a net aggregate decrease to pre-tax income of $1,079 and an additional $496 of income tax expense for the year ended December 31, 2005.

Materiality Assessment

The Company evaluated the materiality of these adjustments to its previously issued interim and annual financial statements including its interim financial statements as of and for the three months ended March 31, 2006. The Company determined that the impact of these errors was not material to its previously issued consolidated financial statements; however, the Company has determined that the cumulative correction of the errors in the second quarter of 2006 would have been material to the current period. Therefore, in accordance with paragraph 29 of Accounting Principles Board Opinion No. 28 and the SEC’s Staff Accounting Bulletin (SAB) Topic 5-F, the Company is restating its previously issued financial statements to reflect the corrections of the errors in each of the periods affected. As a result, the Company has restated its condensed consolidated statements of operations and cash flows for the three months ended March 31, 2006 and 2005 and its condensed consolidated balance sheet at March 31, 2006 and December 31, 2005. The effect of the adjustments to the Company’s condensed consolidated statement of operations for the three months ended March 31, 2006 and 2005 is as follows:

		For the three months ended								For the three months ended
		March 31, 2006								March 31, 2005
		As								As
		previously				As				previously				As
		reported				restated				reported				restated
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Costs and expenses			(355,995	)			(354,191	)			(350,215	)			(349,642	)
Gross profit			85,803				87,607				97,227				97,800
General and administrative expenses			(22,007	)			(22,007	)			(19,716	)			(19,707	)
Other operating expense			(2,884	)			—				—				—
Operating income			56,402				61,090				71,770				72,352
Interest expense			(26,724	)			(26,728	)			(24,656	)			(25,005	)
Income from continuing operations before income taxes and cumulative effects of accounting changes			38,073				42,757				48,755				48,988
Provision for income taxes			(13,824	)			(15,776	)			(17,338	)			(17,520	)
Income from continuing operations before cumulative effects of accounting changes			24,249				26,981				31,417				31,468
Net income (loss)			24,194				26,926			$	(154,946	)		$	(154,895	)
Earnings per share:
Basic			0.08				0.09			$	(.49	)		$	(.49	)
Diluted			0.08				0.09			$	(.49	)		$	(.49	)

     The effect of the above restatement on the Company’s previously reported condensed consolidated balance sheet as of March 31, 2006 and December 31, 2005 is as follows:

		March 31, 2006								December 31, 2005
		As								As
		previously				As				previously				As
		reported				restated				reported				restated
		(unaudited)				(unaudited)
Selected condensed consolidated balance sheet data:
Property and equipment, at cost, net		$	1,043,544			$	1,043,073			$	942,229			$	950,174
Deferred charges and other assets			264,234				264,366				249,449				249,581
Total assets			7,694,646				7,694,307				7,536,692				7,544,769
Accounts payable and accrued liabilities			215,196				213,961				231,129				231,693
Current maturities of long-term debt			36,055				35,996				20,468				20,716
Long-term debt			1,271,828				1,271,857				1,175,463				1,186,485
Deferred income taxes			158,527				157,481				141,676				138,677
Other liabilities			311,607				317,778				320,812				326,985
Stockholders’ equity			1,608,385				1,604,186				1,588,486				1,581,555
Total liabilities and stockholders’ equity			7,694,646				7,694,307			$	7,536,692			$	7,544,769

     The effect of the above restatement on the Company’s previously reported condensed consolidated statement of cash flows for the three months ended March 31, 2005 is as follows:

The restatement had no impact to the Company’s net cash provided by operating activities or net cash used in financing activities for the three months ended March 31, 2006.

The Company has also reflected the effects of this restatement in notes four, five, six, seven, eight and ten to these condensed financial statements.

3. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The condensed consolidated financial statements for the three months ended March 31, 2006 and 2005 include the accounts of SCI and all majority-owned subsidiaries. These statements also include the accounts of the funeral trusts, cemetery merchandise and services trusts and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The interim condensed consolidated financial statements are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments, which management considers necessary for a fair presentation of the results for these periods. These condensed consolidated financial statements have been prepared in a manner consistent with the accounting policies described in the Company’s amended Annual Report on Form 10-K, for the year ended December 31, 2005, unless otherwise disclosed herein, and should be read in conjunction therewith. The accompanying year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period.

The Company has reclassified certain prior period amounts to conform to the current period financial presentation with no effect on previously reported results of operations, financial condition or cash flows.

Use of Estimates in the Preparation of Financial Statements

8

Compensation”, and supersedes Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees”. Among other items, SFAS 123R eliminates the use of the intrinsic value method of accounting, and requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The Company adopted SFAS 123R on January 1, 2006 and utilizes the modified-prospective transition method.

     Prior to January 1, 2006, the Company accounted for share-based payments using the intrinsic value recognition method prescribed by APB 25. Because all of the Company’s stock options were granted at market value on the date of each grant, no stock-based compensation expense related to stock options was reflected in net income prior to adopting SFAS 123R.

     Under the modified-prospective transition method, the Company recognizes compensation expense on a straight-line basis in its condensed consolidated financial statements issued subsequent to the date of adoption for all share-based payments granted, modified or settled after December 31, 2005, as well as for any awards that were granted prior to December 31, 2005 for which requisite service will be provided after December 31, 2005. The compensation expense on awards granted prior to December 31, 2005 is recognized using the fair values determined for the pro forma disclosures on stock-based compensation included in prior filings. The amount of compensation expense recognized on awards that were not fully vested at the date of SFAS 123R adoption excludes the compensation expense cumulatively recognized in the pro forma disclosures on stock-based compensation. Further, the Company assumed no forfeitures on restricted shares granted prior to the adoption of SFAS 123R due to the nature of the employees to whom the shares were granted, thus the Company recorded no cumulative effect of accounting change upon the adoption of SFAS 123R.

Stock Benefit Plans

     The Company maintains benefit plans whereby shares of its common stock may be issued pursuant to the exercise of stock options or restricted stock granted to officers and key employees. The Company’s Amended 1996 Incentive Plan reserves 24,000,000 shares of common stock for outstanding and future awards of stock options, restricted stock and other stock based awards to officers and key employees of the Company. The Company’s 1996 Non-qualified Incentive Plan reserves 8,700,000 shares of common stock for outstanding and future awards of nonqualified stock options to employees who are not officers of the Company.

     The benefit plans allow for options to be granted as either non-qualified or incentive stock options. The options are granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. The options are generally exercisable at a rate of 33 1/3% each year unless alternative vesting methods are approved by the Company’s Compensation Committee of the Board of Directors. Restricted stock awards generally vest at a rate of 33 1/3% each year. The Company issues new shares for option exercises and treasury shares for restricted stock awards. At March 31, 2006 and December 31, 2005, 2,800,550 and 4,856,459 shares, respectively, were reserved for future option and restricted stock grants under these stock benefit plans.

     Options of 1,868,163 and 1,959,283, respectively, were outstanding with alternative vesting methods at March 31, 2006 and December 31, 2005. These shares were fully vested prior to the implementation of FAS 123R and as such compensation expense for these options is not included in the Statement of Operations for the period ended March 31, 2006.

     The Company utilizes the Black-Scholes option valuation model for estimating the fair value of its stock options. This model allows the use of a range of assumptions related to volatility, the risk-free interest rate, the expected life, and the dividend yield. The expected volatility utilized in the valuation model is based on implied volatilities from traded options on the Company’s stock and the historical volatility of the Company’s stock price. The decrease in expected volatility from the three months ended March 31, 2005 to the three months ended March 31, 2006 is primarily the result of a lower implied volatility. Similarly, the dividend yield and the expected holding period are both based on historical experience and management’s estimate of future events. The risk-free interest rate is derived from the U.S. Treasury yield curve based on the expected life of the grant in effect at the time of grant. The fair values of the Company’s stock options are calculated using the following weighted average assumptions based on the methods described above for the three months ended March 31, 2006 and 2005:

		Three months ended
		March 31,
Assumptions		2006				2005
Dividend yield			1.3	%			1.5	%
Expected volatility			37.9	%			43.3	%
Risk-free interest rate			4.5	%			3.7	%
Expected holding period		5.6 years				5.5 years

     As a result of the adoption of SFAS 123R, income from continuing operations before income taxes was reduced by $1,433, income from continuing operations and net income were both reduced by $931 and basic and diluted earnings per share were both reduced by less than $.01 for the three months ended March 31, 2006.

     Results for the first quarter of 2005 have not been restated for SFAS 123R. If, prior to January 1, 2006, the Company had elected to recognize compensation expense for its stock option plans, based on the fair value of awards at the grant dates, net loss and loss per share would have changed for the three months ended March 31, 2005 to the following pro forma amounts:

		Three months ended
		March 31, 2005
		(Restated)
		note 2
Net loss, as reported		$	(154,895	)
Deduct: Total pro forma stock-based employee compensation expense determined under fair value based method, net of related tax expense			(391	)
Pro forma net loss		$	(155,286	)
Basic loss per share:
Net loss, as reported		$	(.49	)
Deduct: Total pro forma stock-based employee compensation expense determined under fair value based method, net of related tax expense			—
Pro forma basic loss per share		$	(.49	)
Diluted loss per share:
Net loss, as reported		$	(.49	)
Deduct: Total pro forma stock-based employee compensation expense determined under fair value based method, net of related tax expense			—
Pro forma diluted loss per share		$	(.49	)

The tax benefit associated with this additional compensation expense would have been $211 for the three months ended March 31, 2005.

     Prior to the implementation of SFAS 123R, the Company computed stock-based compensation cost for employees eligible to retire over the three-year standard vesting period of the grants. Upon adoption of SFAS 123R, the Company amortizes new option grants to such retirement-eligible employees immediately upon grant, consistent with the retirement vesting acceleration provisions of these grants. If the Company had historically computed stock-based compensation cost for these employees under this accelerated method, $559 or less than $.01 per diluted share of after-tax compensation cost would have been accelerated and cumulatively included in the pro forma expense above through March 31, 2005.

     The following table shows a summary of information with respect to stock option and restricted share compensation for 2006 and restricted share compensation for 2005, which are included in the condensed consolidated statement of operations for those respective periods:

		For the Three Months
		Ended March 31,
		2006				2005
Total pretax share-based compensation expense included in net income (loss)		$	2,145			$	447
Income tax benefit related to share-based compensation included in net income (loss)		$	778			$	156

Stock Options

The following tables set forth certain stock option information:

(Shares reported in whole numbers)

						Weighted Average
		Options				Exercise Price
Outstanding at December 31, 2005			24,250,429			$	9.21
Granted			1,602,800				8.24
Exercised			(298,653	)			4.31
Forfeited			(11,150	)			6.88
Expired			(557,253	)			21.56
Outstanding at March 31, 2006			24,986,173			$	8.93
Exercisable at March 31, 2006			22,436,321			$	9.07

     As of March 31, 2006, the aggregate intrinsic value for stock options outstanding and exercisable was $51,198 and $50,328, respectively.

(Shares reported in whole numbers)

		Options outstanding												Options exercisable
						Weighted-
		Number				Average				Weighted-				Number				Weighted-
Range of		Outstanding at				Remaining				Average				Exercisable at				Average
Exercise Price		March 31, 2006				Contractual Life				Exercise Price				March 31, 2006				Exercise Price
$0.00 — 3.00			2,068,212				2.3			$	2.61				2,068,212			$	2.61
3.01 — 4.00			5,641,334				2.9				3.74				5,641,334				3.74
4.01 — 6.00			4,374,512				3.6				4.96				4,374,512				4.96
6.01 — 9.00			6,414,017				4.6				7.11				3,864,165				6.70
9.01 — 15.00			2,898,003				1.3				13.73				2,898,003				13.73
15.01 — 21.00			2,285,160				1.4				19.18				2,285,160				19.18
21.01 — 38.00			1,304,935				0.5				35.05				1,304,935				35.05
$0.00 — 38.00			24,986,173				2.9			$	8.93				22,436,321			$	9.07

     Other information pertaining to option activity during the three months ended March 31 was as follows:

		For the Three Months
		Ended March 31,
		2006				2005
Weighted average grant-date fair value of stock options granted		$	3.11			$	2.71
Total fair value of stock options vested		$	1,987			$	6,003
Total intrinsic value of stock options exercised		$	1,112			$	3,098

     The Company calculated its historical pool of windfall tax benefits by comparing the book expense for individual stock grants and the related tax deduction for options granted after January 1, 1995. Adjustments were made to exclude windfall tax benefits which were not realized due to the Company’s net operating loss position. The Company has completed this calculation and has determined an additional paid in capital pool of $2,140.

     For the three months ended March 31, 2006, cash received from the exercise of stock options was $1,219. As of March 31, 2006, the unrecognized compensation expense related to stock options of $6,415 is expected to be recognized over a weighted average period of 2.1 years.

Restricted Shares

     Restricted shares awarded under the Amended 1996 Incentive Plan were 355,500 in the first quarter of 2006 and 498,800 in the first quarter of 2005. The weighted average fair market value per share at the date of grant for shares granted during the first quarter of 2006 and 2005 was $8.24 and $6.90, respectively. The fair market value of the stock, as determined on the grant date, is being amortized and charged to income (with similar credits to capital in excess of par value) generally over the average period during which the restrictions lapse. At March 31, 2006, unrecognized compensation expense related to restricted shares totaling $5,811 is expected to be recognized over a weighted average period of 1.8 years. The Company recognized compensation cost of $712 in the first quarter of 2006 and $447 in the first quarter of 2005 related to the restricted shares of this Plan.

     Restricted share activity for the three months ended March 31, 2006 was as follows:

						Weighted Average
		Restricted				Grant-Date
(Shares reported in whole numbers)		Shares				Fair Value
Nonvested restricted shares at December 31, 2005			779,850			$	6.87
Granted			355,500				8.24
Vested			(308,867	)			6.86
Nonvested restricted shares at March 31, 2006			826,483			$	7.46

Share Authorization

     The Company is authorized to issue 1,000,000 shares of preferred stock, $1 per share par value. No preferred shares were issued as of March 31, 2006. At March 31, 2006 and December 31, 2005, 500,000,000 common shares of $1 par value were authorized. The Company had 295,454,597 and 294,808,872 common shares issued and outstanding, net of 48,606,563 and 48,962,063 common shares held in treasury at par at March 31, 2006 and December 31, 2005, respectively.

Share Purchase Rights Plan

     The Company’s preferred share purchase rights plan declares a dividend of one preferred share purchase right for each share of common stock outstanding. The rights are exercisable in the event certain investors attempt to acquire 20% or more of the common stock of the Company and entitle the rights holders to purchase certain securities of the Company or the acquiring company. The rights, which are redeemable by the Company for $.01 per right, expire in July 2008 unless otherwise extended.

Accumulated Other Comprehensive Income

The components of Accumulated other comprehensive income are as follows:

		Foreign currency								Accumulated other
		translation				Unrealized gains				comprehensive
		adjustment				and losses				income
Balance at December 31, 2005		$	70,499			$	—			$	70,499
Activity in 2006			(330	)			—				(330	)
Increase in net unrealized gains associated with available-for-sale securities of the trusts			—				16,210				16,210
Reclassification of net unrealized gains activity attributable to the non-controlling interest holders			—				(16,210	)			(16,210	)
Balance at March 31, 2006		$	70,169			$	—			$	70,169

     The assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. The U.S. dollar amount that arises from such translation, as well as exchange gains and losses on intercompany balances of a long-term investment nature, are included in the cumulative currency translation adjustments in Accumulated other comprehensive income. Income taxes are generally not provided for foreign currency translation.

     The components of Comprehensive income (loss) are as follows for the three months ended March 31, 2006 and 2005:

		Three months ended
		March 31,
		2006				2005
			(Restated) note 2				(Restated) note 2
Comprehensive income (loss):
Net income (loss)		$	26,926			$	(154,895	)
Total other comprehensive (loss) income			(330	)			65,301
Comprehensive income (loss)		$	26,596			$	(89,594	)

Cash Dividends

On January 31, 2006, the Company paid a cash dividend of $7,371 to shareholders of record at the close of business on January 16, 2006. In the first quarter of 2006, the Company’s Board of Directors approved a cash dividend of $.025 per common share that was paid on April 28, 2006 based on the Company’s fourth quarter 2005 financial results. At March 31, 2006, this dividend totaling $7,329 was recorded in Accrued Liabilities and Capital in Excess of Par Value in the condensed consolidated balance sheet. Subsequent to March 31, 2006, the company’s Board of Directors approved a cash dividend of $.025 per common share based on the company’s first quarter 2006 financial results.

5. Debt

Debt as of March 31, 2006 and December 31, 2005 was as follows:

		March 31, 2006				December 31, 2005
		(Restated)				(Restated)
		note 2				note 2
7.2% notes due June 2006		$	10,698			$	10,698
6.875% notes due October 2007			13,497				13,497
6.5% notes due March 2008			195,000				195,000
7.7% notes due April 2009			341,635				341,635
7.875% debentures due February 2013			55,627				55,627
6.75% notes due April 2016			250,000				250,000
7.0% notes due June 2017			300,000				300,000
Convertible debentures, maturities through 2013, fixed interest rates from 4.75% to 5.25%, conversion prices from $13.02 to $50.00 per share			22,213				22,213
Obligations under capital leases			110,998				11,425
Mortgage notes and other debt, maturities through 2050			28,406				29,588
Unamortized pricing discounts and other			(20,221	)			(22,482	)
Total debt			1,307,853				1,207,201
Less current maturities			(35,996	)			(20,716	)
Total long-term debt		$	1,271,857			$	1,186,485

     Current maturities of debt at March 31, 2006 were comprised primarily of the 7.2% notes due June 2006, convertible debentures and capital leases. The Company’s consolidated debt had a weighted average interest rate of 7.21% at March 31, 2006 and 7.11% at December 31, 2005. Approximately 95% and 99% of the total debt had a fixed interest rate at March 31, 2006 and December 31, 2005, respectively.

Capital Leases

In the first quarter of 2006, the Company acquired $105,085 of transportation equipment utilizing capital leases, of which $102,322 were classified as operating leases in prior periods. See additional information regarding these leases in note nine to these condensed consolidated financial statements.

Bank Credit Agreements

The Company’s bank credit facility matures in August of 2007 and provides a total lending commitment of $200,000, including a sublimit of $175,000 for letters of credit. The Company will commence negotiations on an amendment or a new credit facility during 2006. As of March 31, 2006, the Company has no cash borrowings under this credit facility, but has used it to support $51,193 of letters of credit. The credit facility provides the Company with flexibility for acquisitions, dividends, and share repurchases. It is secured by the stock of the Company’s domestic subsidiaries and these domestic subsidiaries have guaranteed the Company’s indebtedness associated with this credit facility. The subsidiary guarantee is a guarantee of payment of the outstanding amount of the total lending commitment. It covers the term of the credit facility, including extensions of our letters of credit, and totaled a maximum potential amount of $51,193 and $54,727 at March 31, 2006 and December 31, 2005, respectively. The credit facility contains certain financial covenants, including a minimum interest coverage ratio, a maximum leverage ratio, maximum capital expenditure limitations, minimum net worth requirements and certain cash distribution restrictions. As of March 31, 2006, the Company was in compliance with all of its debt covenants. Interest rates for the outstanding borrowings are based on various indices as determined by the Company. The Company also pays a quarterly fee on the unused commitment that ranges from 0.25% to 0.50%.

Early Extinguishment

In the first quarter of 2005, the Company purchased $7,131 aggregate principal amount of its 7.70% notes due in the open market. As a result of this transaction, the Company recognized a loss of $1,207 recorded in loss on early extinguishment of debt in its condensed consolidated statement of operations.

6. Retirement Plans

The components of net periodic pension plan benefit cost for the three months ended March 31 were as follows:

		Three months ended
		March 31,
		2006				2005
		Restated (note 2)				Restated (note 2)
Interest cost on projected benefit obligation		$	1,973			$	2,027
Actual return on plan assets			(1,038	)			(1,806	)
Actuarial loss			—				305
Amortization of prior service cost			46				46
		$	981			$	572

7. Segment Reporting

The Company’s operations are both product based and geographically based. The Company’s reportable segments include its funeral operations and its cemetery operations and collectively represent 100% of the Company’s revenues.

     The Company’s reportable segment information is as follows:

										Reportable
		Funeral				Cemetery				segments
Revenues from external customers:
Three months ended March 31,
2006		$	302,984			$	138,814			$	441,798
2005		$	319,451			$	127,991			$	447,442
Gross profit:
Three months ended March 31,
2006 (Restated — note 2)		$	65,396			$	22,211			$	87,607
2005 (Restated — note 2)		$	80,126			$	17,674			$	97,800

     The following table reconciles gross profit from reportable segments to the Company’s consolidated income from continuing operations before income taxes and cumulative effect of accounting change:

		Three months ended
		March 31,
		2006				2005
			(Restated) note 2				(Restated) note 2
Gross profit from reportable segments		$	87,607			$	97,800
General and administrative expenses			(22,007	)			(19,707	)
Gains (losses) on dispositions and impairment charges, net			(4,510	)			(5,741	)
Operating income			61,090				72,352
Interest expense			(26,728	)			(25,005	)
Loss on early extinguishment of debt, net			—				(1,207	)
Interest income			5,981				4,056
Other income (expense), net			2,414				(1,208	)
Income from continuing operations before income taxes and cumulative effect of accounting change		$	42,757			$	48,988

     The Company’s geographic areas include North America and Other Foreign. North America includes funeral and cemetery operations in the United States and Canada. Other Foreign consists of the Company’s operations in Singapore and Germany. Results from the Company’s funeral and cemetery businesses in Argentina, Uruguay, and Chile, which were sold in 2005, are classified as

discontinued operations for all periods presented. The Company conducts both funeral and cemetery operations in North America and funeral operations in Other Foreign geographic areas.

     The Company’s geographic area information is as follows:

		North
		America				Other Foreign				Total
Revenues from external customers:
Three months ended March 31,
2006		$	438,890			$	2,908			$	441,798
2005		$	444,177			$	3,265			$	447,442
Gains (losses) on dispositions and impairment charges, net:
Three months ended March 31,
2006		$	(4,510	)		$	—			$	(4,510	)
2005		$	(5,741	)		$	—			$	(5,741	)
Operating income:
Three months ended March 31,
2006 (Restated — note 2)		$	60,485			$	605			$	61,090
2005 (Restated — note 2)		$	71,835			$	517			$	72,352
Depreciation and amortization:
Three months ended March 31,
2006 (Restated — note 2)		$	25,077			$	14			$	25,091
2005 (Restated — note 2)		$	20,577			$	68			$	20,645

     Included in the North America figures above are the following United States amounts:

		Three months ended
		March 31,
		2006				2005
Revenues from external customers		$	410,482			$	416,699
Operating income (Restated — note 2)		$	55,995			$	65,176
Depreciation and amortization (Restated — note 2)		$	23,474			$	19,391

8. Supplementary Information

Prior to the fourth quarter of 2005, certain costs, specifically salaries and facility costs, were allocated based upon each of the respective segments’ revenue components within goods and services.

     Beginning in the fourth quarter of 2005, the Company refined its allocation of the costs described above to more accurately reflect the cost of goods and services for its funeral and cemetery segments. Such costs are now allocated based on an hourly factor, which represents the average amount of time spent by employees when selling or providing goods and services to a consumer. The Company has made certain disclosure reclassifications to comparative prior periods to conform to the current period presentation. The disclosure reclassifications made to these prior periods to conform to the current period presentation have no effect on the Company’s condensed consolidated financial position, results of operations or statement of cash flows.

     The detail of certain income statement accounts is as follows for the three months ended March 31:

		2006				2005
		(Restated) note 2				(Restated) note 2
North America goods and services revenues
Goods
Funeral		$	120,173			$	140,334
Cemetery			89,452				82,768
Total goods			209,625				223,102
Services
Funeral			171,920				169,198
Cemetery			41,215				36,287
Total services			213,135				205,485
North America goods and services revenues			422,760				428,587
International revenues			2,908				3,265
Other revenues			16,130				15,590
Total revenues		$	441,798			$	447,442
North America goods and services costs
Goods
Funeral		$	56,100			$	53,502
Cemetery			37,343				34,605
Total cost of goods			93,443				88,107
Services
Funeral			88,856				92,491
Cemetery			23,477				23,877
Total cost of services			112,333				116,368
North America goods and services costs			205,776				204,475
International costs and expenses			2,303				2,748
Overhead and other expenses			146,112				142,419
Total costs and expenses		$	354,191			$	349,642

9. Commitments and Contingencies

Leases

The Company’s leases principally relate to funeral home facilities and transportation equipment. Rental expense for operating leases was $7,375 and $14,043 for the quarters ended March 31, 2006 and 2005, respectively. As of March 31, 2006, future minimum lease payments for non-cancelable operating and capital leases exceeding one year are as follows:

		Operating				Capital
		(Restated) note 2				(Restated) note 2
Remainder of 2006		$	6,456			$	19,695
2007			7,581				23,004
2008			7,116				18,878
2009			6,791				15,179
2010			5,617				37,745
2011 and thereafter			54,995				30,525
Subtotal			88,556				145,026
Less: Subleases			(1,644)				—
Total		$	86,912			$	145,026
Less: Interest on capital leases							(34,028	)
Total principal payable on capital leases						$	110,998

     To eliminate the variable interest rate risk in the Company’s operating margins and improve the transparency of our financial statements, we amended certain of our transportation lease agreements in the first quarter of 2006. Based on the amended terms, these leases have been classified as capital leases as of March 31, 2006 and are presented as such in the table above. For additional information, see note five to these condensed consolidated financial statements.

Representations and Warranties

As of March 31, 2006, the Company has contingent obligations of $33,177 resulting from the Company’s international asset sales and joint venture transactions. In some cases, the Company has agreed to guarantee certain representations and warranties made in such disposition transactions with letters of credit or interest-bearing cash investments. The Company has interest-bearing cash investments of $5,908 included in Deferred charges and other assets collateralizing certain of these contingent obligations. The Company believes it is remote that it will ultimately be required to fund to third parties claims against these representations and warranties above the carrying value of the liability.

     In March 2004, the Company disposed of its funeral operations in France to a newly formed, third party company. As a result of this sale, the Company recognized $35,768 of contractual obligations related to representations, warranties, and other indemnifications in accordance with the provisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” During the first quarter of 2006, the Company paid $481 to settle certain tax and litigation matters. The remaining obligation of $23,657 at March 31, 2006 represents the following:

		Original						Maximum potential
		contractual						amount of future				Carrying value as
		obligation				Time limit		payments				of March 31, 2006
Tax reserve liability		$	18,610			December 31, 2007		2006 €30 million				$	10,000
Litigation provision			7,765			Until entire resolution of (i) the relevant claims or (ii) settlement of the claim by the purchaser at the request of the vendor			(1	)			4,264
Employee litigation provision			6,512			December 31, 2006 (for all claims other than those relating to tax and social security matters) one month after expiration of the statutory period of limitations for tax and social security matters.			(2	)			6,512
VAT taxes			3,882			One month after the expiration of statutory period of limitations			(1	)			3,882
Other			3,381			Until entire resolution of (i) the relevant claims or (ii) settlement of the claim by the purchaser at the request of the vendor			(2	)			3,381
Total		$	40,150									$	28,039
Less: Deductible of majority equity owner			(4,382	)									(4,382	)
		$	35,768									$	23,657

Litigation

The Company is a party to various litigation matters, investigations and proceedings. For each of its outstanding legal matters, the Company evaluates the merits of the case, its exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. The Company intends to defend itself in the lawsuits described herein, however, if the Company determines that an unfavorable outcome is probable and can be reasonably estimated, it establishes the necessary accruals. Certain insurance policies held by the Company may reduce cash outflows with respect to an adverse outcome of certain of these litigation matters. The Company accrues such insurance recoveries when they become probable of being paid and can be reasonably estimated.

     Conley Investment Counsel v. Service Corporation International, et al; Civil Action 04-MD-1609; In the United States District Court for the Southern District of Texas, Houston Division (the 2003 Securities Lawsuit). The 2003 Securities Lawsuit resulted from the transfer and consolidation by the Judicial Panel on Multidistrict Litigation of three lawsuits—Edgar Neufeld v. Service Corporation International, et al; Cause No. CV-S-03-1561-HDM-PAL; In the United States District Court for the District of Nevada; and Rujira Srisythemp v. Service Corporation International, et. al.; Cause No. CV-S-03-1392-LDG-LRL; In the United States District Court for the District of Nevada; and Joshua Ackerman v. Service Corporation International, et. al.; Cause No. 04-CV-20114; In the United States District Court for the Southern District of Florida. The 2003 Securities Lawsuit names as defendants the Company and several of the Company’s current and former executive officers or directors. The 2003 Securities Lawsuit is a purported class action alleging that the defendants failed to disclose the unlawful treatment of human remains and gravesites at two cemeteries in Fort Lauderdale and West Palm Beach, Florida. Since the action is in its preliminary stages, no discovery has occurred, and the Company cannot quantify its ultimate liability, if any, for the payment of damages.

     David Hijar v. SCI Texas Funeral Services, Inc., SCI Funeral Services, Inc., and Service Corporation International; In the County Court of El Paso, County, Texas, County Court at Law Number Three; Cause Number 2002-740, with an interlocutory appeal pending in the El Paso Court of Appeals, No. 08-05-00182-CV, and a mandamus proceeding which has been denied by the El Paso Court of Appeals, No. 08-05-00335-CV (collectively, the Hijar Lawsuit). The Hijar Lawsuit involves a state-wide class action brought on behalf of all persons, entities and organizations who purchased funeral services from the Company or its subsidiaries in Texas at any time since March 18, 1998. Plaintiffs allege that federal and Texas funeral related regulations and/or statutes (Rules) required the Company to disclose its markups on all items obtained from third parties in connection with funeral service contracts and that the failure to make certain disclosures of markups resulted in breach of contract and other legal claims. The Plaintiffs seek to recover an unspecified amount of monetary damages. The plaintiffs also seek attorneys’ fees, costs of court, pre- and post-judgment interest, and unspecified “injunctive and declaratory relief.” The Company denies that the plaintiffs have standing to sue for violations of the Texas Occupations Code or the Rules; denies that plaintiffs have standing to sue for violations under the relevant regulations and statutes; denies that any breaches of contractual terms occurred; and on other grounds denies liability on all of the plaintiffs’ claims. Finally, the Company denies that the Hijar Lawsuit satisfies the requirements for class certification.

     In May 2004, the trial court heard summary judgment cross-motions filed by the Company and Plaintiff Hijar (at that time, the only plaintiff). The trial court granted Hijar’s Motion for partial summary judgment and denied the Company’s motion. In its partial summary judgment order, the trial court made certain findings to govern the case, consistent with its summary judgement ruling. The Company’s request for rehearing was denied.

     During the course of the Hijar Lawsuit, the parties have disputed the proper scope and substance of discovery. Following briefing by both parties and evidentiary hearings, the trial court entered three orders against the Company that are the subject of appellate review: (a) a January 2005 discovery sanctions order; (b) an April 2005 discovery sanctions order; and (c) an April 2005 certification order, certifying a class and two subclasses. On April 29, 2005, the Company filed an appeal regarding the certification order and, concurrently with its initial brief in that appeal, filed a separate mandamus proceeding regarding the sanctions orders. In the certification appeal, briefing has concluded, and the court of appeals heard oral arguments on April 4, 2006. In the mandamus proceeding, the court of appeals denied the mandamus petition in January 2006, and denied rehearing on March 15, 2006. The Company is considering further steps, including the option of pursuing mandamus relief from the Supreme Court of Texas.

     Mary Louise Baudino, et al v. Service Corporation International, et al; the plaintiffs’ counsel in the Hijar Lawsuit initiated an arbitration claim raising similar issues in California and filed in November 2004 a case styled Mary Louise Baudino, et al v. Service Corporation International, et al; in Los Angeles County Superior Court; Case No. BC324007 (Baudino Lawsuit). The Baudino Lawsuit makes claims similar to those made in the Hijar lawsuit. However, the Baudino Lawsuit seeks a nation-wide class of plaintiffs. The Baudino Lawsuit is in its early stages and discovery is in its infancy.

     The Company is a defendant in three related class action antitrust cases filed in 2005. The first case is Cause No 4:05-CV-03394; Funeral Consumers Alliance, Inc. v. Service Corporation International, et al; In the United States District Court for the Southern District of Texas — Houston (Funeral Consumers Case). This is a purported class action on behalf of casket consumers throughout the United States alleging that the Company and several other companies involved in the funeral industry violated federal antitrust laws and state consumer laws by engaging in various anti-competitive conduct associated with the sale of caskets. A related class action lawsuit (Leoncio Solis v. Service Corporation International; In the United States District Court for the Southern District of Texas — Houston Division) was consolidated into the Funeral Consumers Case in the fourth quarter of 2005.

     The Company is also currently a defendant in Ralph Lee Fancher v. Service Corporation International, et al; In the United States District Court for the Southern District of Texas — Houston Division, and Cause No. 4:05-CV-00246. This lawsuit, which was previously consolidated with the Funeral Consumers Case, makes the same allegations as the Funeral Consumers Case and is also brought against several other companies involved in the funeral industry. The case is a purported class action on behalf of casket consumers throughout the United States and alleges that the Company violated the Tennessee Trade Practices Act. On May 4, 2006, plaintiffs in the Fancher case filed a Notice of Voluntary Dismissal requesting that the case be dismissed without prejudice.

     The Company is also a defendant in Cause No. 4:05-CV-03399; Pioneer Valley Casket, et al v. Service Corporation International, et al. In the United States District Court for the Southern District of Texas — Houston Division. This lawsuit makes the same allegations as the Funeral Consumers Case and is also brought against several other companies involved in the funeral industry. Unlike the Funeral Consumers Case, this case is a purported class action on behalf of all independent casket distributors that are in the business or were in the business any time between July 18, 2001 to the present.

     The funeral and casket antitrust lawsuits seek injunctions, unspecified amounts of monetary damages, and treble damages. In the Funeral Consumers Case, plaintiffs are seeking the Court’s permission to add a claim to enjoin the Company and the Alderwoods Group, Inc. from closing the proposed merger discussed on pages 22 and 23 herein. Since the litigation is in its preliminary stages, the Company cannot quantify its ultimate liability, if any, for the payment of damages.

     In addition to the funeral and casket antitrust lawsuits, the Company has received Civil Investigative Demands, dated in August 2005 and February 2006, from the Attorney General of Maryland on behalf of itself and other state attorneys general, who have commenced an investigation of alleged anti-competitive practices in the funeral industry. The Company has also received similar Civil Investigative Demands from the Attorneys General of Florida and Connecticut.

     The ultimate outcome of the matters described above under the caption Litigation cannot be determined at this time. The Company intends to aggressively defend all of the above lawsuits; however, an adverse decision in one or more of such matters could have a material adverse effect on the Company, its financial condition, results of operation and cash flows.

10. Earnings Per Share

Basic earnings (loss) per common share (EPS) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common shares that then shared in the Company’s earnings (losses).

     A reconciliation of the numerators and denominators of the basic and diluted EPS computations is presented below:

		Three months ended
		March 31,
		2006				2005
		(Restated) note 2				(Restated) note 2
Income from continuing operations before cumulative effect of accounting change (numerator):
Income from continuing operations before cumulative effect of accounting change — basic		$	26,981			$	31,468
After tax interest on convertible debt			—				12
Income from continuing operations before cumulative effect of accounting change — diluted		$	26,981			$	31,480
Net income (loss) (numerator):
Net income (loss) — basic		$	26,926			$	(154,895	)
After tax interest on convertible debt			—				12
Net income (loss) — diluted		$	26,926			$	(154,883	)
Weighted average shares (denominator):
Weighted average shares — basic			294,308				313,490
Stock options			4,251				4,086
Restricted stock			119				54
Convertible debt			—				121
Weighted average shares — diluted			298,678				317,751
Income from continuing operations before cumulative effect of accounting change per share:
Basic		$	.09			$	.10
Diluted		$	.09			$	.10
Cumulative effect of accounting change per share, net of tax:
Basic		$	—			$	(.59	)
Diluted		$	—			$	(.59	)
Net income (loss) per share:
Basic		$	.09			$	(.49	)
Diluted		$	.09			$	(.49	)

     The computation of diluted EPS excludes outstanding stock options and convertible debt in certain periods in which the inclusion of such options and debt would be antidilutive in the periods presented. Total options and convertible debentures not currently included in the computation of dilutive EPS are as follows:

		Three months ended
		March 31,
		2006				2005
Antidilutive options			7,479				8,912
Antidilutive convertible debentures			659				859
Total common stock equivalents excluded from computation			8,138				9,771

11. Gains (Losses) on Dispositions and Impairment Charges, Net

As dispositions occur in the normal course of business, gains or losses on the sale of such businesses are recognized in the income statement line item Gains (losses) on dispositions and impairment charges, net. Additionally, as dispositions occur pursuant to the Company’s ongoing asset sale programs, adjustments are made through this income statement line item to reflect the difference between actual proceeds received from the sale compared to the original impairment estimates.

     Gains (losses) on dispositions and impairment charges, net for the three months ended March 31, consists of the following:

		Three months ended
		March 31,
		2006				2005
Gains on dispositions		$	1,432			$	889
Impairment losses for assets held for sale			(5,942	)			(7,118	)
Changes to previously estimated impairment losses			—				488
		$	(4,510	)		$	(5,741	)