SERVICE CORPORATION INTERNATIONAL - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-6402-1

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SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)

TEXAS 74-1488375
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1929 ALLEN PARKWAY 77019
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
713/522-5141

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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

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 [X] No [ ]

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. [ ]

The aggregate market value of the common, stock held by non-affiliates of
the registrant (assuming that the registrant's only affiliates are its officers
and directors) is $1,581,052,618 based upon a closing market price of $5.47 on
March 21, 2002 of a share of common stock as reported on the New York Stock
Exchange -- Composite Transactions Tape.

The number of shares outstanding of the registrant's common stock as of
March 21, 2002 was 293,156,506 (net of treasury shares).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement in connection with its 2002
Annual Meeting of Shareholders (Part III)

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SERVICE CORPORATION INTERNATIONAL

INDEX

1

PART I

ITEM 1. BUSINESS

(DOLLARS IN THOUSANDS)

Service Corporation International is the largest funeral and cemetery
company in the world. The terms SCI or the Company includes the registrant and
its subsidiaries, unless the context indicates otherwise. As of December 31,
2001, the Company operated 3,099 funeral service locations, 475 cemeteries and
177 crematoria located in 11 countries. The Company also has minority interest
investments in funeral and cemetery operations in three countries outside of
North America. As of December 31, 2001, the Company's North America operations
represented approximately 71% of the Company's consolidated revenues, 78% of
consolidated operating income before non-recurring items and 53% of the
Company's total operating locations. For financial information about the
Company's reportable segments, see note thirteen to the consolidated financial
statements in Item 8 of this Form 10-K. For further information about the
Company's non-recurring financial items for all periods presented in this Form
10-K, see the Non-recurring Items and Definitions and Descriptions of Pro Forma
Financial Information section included in Item 7 of this Form 10-K.

The Company's operations consist of funeral service locations, cemeteries,
crematoria and related businesses. The Company's funeral service locations
provide all professional services related to funerals, including the use of
funeral facilities and motor vehicles. Funeral service locations sell caskets,
coffins, burial vaults, cremation receptacles, flowers, burial garments and
other ancillary products and services. The Company's cemeteries sell interment
rights associated with cemetery property (including mausoleum spaces, lots and
lawn crypts) and cemetery merchandise (including stone and bronze memorials,
burial vaults, caskets and cremation memorialization products). The Company's
cemeteries also 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 also owns 188 funeral service/cemetery combination
locations and 46 flower shops engaged principally in the design and sale of
funeral floral arrangements.

The Company was incorporated in Texas in July of 1962. The Company's
principal corporate offices are located at 1929 Allen Parkway, Houston, Texas
77019 and its telephone number is (713) 522-5141.

FUNERAL AND CEMETERY OPERATIONS

The funeral and cemetery operations consist of the Company's funeral
service locations, cemeteries, crematoria and related businesses. As of December
31, 2001, the operations are organized into a North America division covering
the United States and Canada, a European division responsible for all operations
in Europe, and an Other Foreign division relating to operations managed in the
Pacific Rim and South America. Each division is under the direction of
divisional executive management with substantial industry experience. Local
funeral service location and cemetery managers, under the direction of the
divisional management, receive support and resources from the Company's
headquarters in Houston, Texas and have substantial autonomy with respect to the
manner in which services are conducted.

The majority of the Company's funeral service locations and cemeteries are
managed in groups called "clusters". Clusters are geographical groups of funeral
service locations and cemeteries that lower their individual overhead costs by
sharing common resources such as operating personnel, preparation services,
clerical and accounting staff, limousines, hearses and preneed sales activities.
Personnel costs, the largest operating expense for the Company, is the cost
component most beneficially affected by clustering. The sharing of employees, as
well as the other costs mentioned, allows the Company to more efficiently
utilize its operating facilities due to the traditional fluctuation in the
number of funeral services and cemetery interments performed in a given period.

The Company has multiple funeral service locations and cemeteries in a
number of metropolitan areas. Within individual metropolitan areas, the funeral
service locations and cemeteries operate under various names because most
operations were acquired as existing businesses. Some of the Company's funeral
service

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locations in its international operations operate under certain brand names
specific for a general area or country. The Company has branded its funeral
operations in North America under the name Dignity Memorial(TM). While this
process is intended to emphasize the Company's seamless national network of
funeral service locations and cemeteries in North America, the original names
associated with acquired operations with their inherent goodwill and heritage
will generally remain the same.

FUNERAL SERVICE LOCATIONS

The Company's 3,099 funeral service locations provide all professional
services relating to funerals, including the use of funeral facilities and motor
vehicles. Funeral service locations sell caskets, coffins, burial vaults,
cremation receptacles, flowers, burial garments, and other ancillary products
and services. The Company's funeral service locations generally experience a
greater demand for their services in the winter months primarily related to
higher incidents of deaths from pneumonia and influenza.

In addition to selling its products and services to client families at the
time of need, the Company also sells prearranged funeral services in most of its
service markets. Funeral prearrangement is a means through which a customer
contractually agrees to the terms of a funeral to be performed in the future.
All or a portion of the funds collected from prearranged funeral contracts are
placed in trust accounts, pursuant to applicable law, or are used to pay
premiums on life insurance policies from third party insurers. In certain
situations pursuant to applicable laws, the Company will post a surety bond as
financial assurance for a certain amount of the preneed funeral contract in lieu
of placing certain funds in trust accounts. See the Financial Assurances section
included in Financial Condition, Liquidity and Capital Resources in Item 7 of
this Form 10-K for further details on the Company's practice of posting such
surety bonds. At December 31, 2001, the Company's Deferred prearranged funeral
contract revenues amounted to approximately $4.6 billion. For additional
information regarding prearranged funeral activities, see the Prearranged
Funeral and Cemetery Activities section in Financial Condition, Liquidity and
Capital Resources in Item 7 and notes two, three and four to the consolidated
financial statements in Item 8 of this Form 10-K.

CEMETERIES

The Company's cemeteries sell interment rights associated with cemetery
property such as mausoleum spaces, lots and lawn crypts, and sells cemetery
merchandise such as stone and bronze memorials, burial vaults, caskets and
cremation memorialization products. The Company's 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.

Cemetery sales are often made on a preneed basis pursuant to installment
contracts providing for monthly payments. A portion of the proceeds from
cemetery contracts is generally required by law to be paid into perpetual care
trust funds. Earnings from perpetual care trust funds are used to defray the
maintenance costs of cemeteries. Additionally, all or a portion of the proceeds
from the sale of preneed cemetery merchandise and services may be required by
law to be paid into merchandise and services trusts until the merchandise is
purchased or the service is provided. In certain situations pursuant to
applicable laws, the Company will post a surety bond as financial assurance for
a certain amount of the preneed cemetery contract in lieu of placing certain
funds into trust accounts. See the Financial Assurances section included in
Financial Condition, Liquidity and Capital Resources in Item 7 of this Form 10-K
for further details on the Company's practice of posting such surety bonds. At
December 31, 2001, the Company's Deferred preneed cemetery contract revenue
amounted to approximately $1.8 billion. For additional information regarding
cemetery preneed activities, see the Prearranged Funeral and Cemetery Activities
section in Financial Condition, Liquidity and Capital Resources in Item 7 and
notes two, three and five to the consolidated financial statements in Item 8 of
this Form 10-K.

COMBINED FUNERAL SERVICE LOCATIONS AND CEMETERIES

The Company currently owns 188 funeral service/cemetery combination
locations in North America in which a funeral service location is physically
located within or adjoining a Company cemetery. Combination

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locations allow certain facility, personnel and equipment costs to be shared
between the funeral service location and cemetery and typically have a higher
gross margin than if the funeral and cemetery operations were operated
separately. Combination locations also create synergies between funeral and
cemetery sales force personnel and give consumers added convenience to purchase
both funeral and cemetery products and services at a single location.

DEATH CARE INDUSTRY

In North America and in most international markets in which the Company
currently operates, the funeral and cemetery industry is characterized by a
large number of locally owned, independent operations. Since the Company's
inception in the 1960's, the Company had been focused on the acquisition and
consolidation of independent funeral homes and cemeteries in the very fragmented
death care industry. During the 1990's, the Company also expanded its operations
through acquisitions in Europe, Australia, South America and the Pacific Rim.

In 1999, the Company, as well as other consolidators in the death care
industry, significantly reduced the level of acquisition activity. The Company
is now focused on a series of growth initiatives designed to organically
increase revenues as well as to identify and address underperforming businesses.
During 2001, the Company completed joint ventures of its operations in
Australia, Spain and Portugal and divested of its operations in the Netherlands,
Norway and Belgium. The Company also implemented a plan in 2000 to sell over 500
funeral service locations and cemeteries in North America as going concerns or
as real estate. In February 2002, the Company announced the completion of a
joint venture transaction with its United Kingdom operations. The Company is
currently in discussions with various third parties concerning the joint
venturing of its remaining international operations and intends to operate a
core business of high quality funeral service locations and cemeteries in North
America.

To compete successfully, the Company's funeral service locations and
cemeteries must maintain good reputations and high professional standards in the
industry, as well as offer attractive products and services at competitive
prices. The Company believes it has an unparalleled network of funeral service
locations and cemeteries that offer high quality products and services at prices
that are competitive with competing funeral homes, cemeteries and retail
locations. Some of the Company's international funeral service locations operate
under certain brand names specific to a general area or country. The Company has
also branded its network of funeral service locations in North America under the
Dignity Memorial(TM) brand name. A national brand name is new and unique to the
death care industry in North America and will provide many advantages to the
Company, as discussed in more detail in the Future Revenue Growth section in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of this Form 10-K.

In the death care industry in recent years, there has been a growing trend
in the number of cremations performed in North America as an alternative to
traditional funeral service dispositions. The west coast of the United States
and the State of Florida have the highest concentration of cremation consumers
in North America. While cremations performed by the Company in North America
typically have higher gross profit margins than traditional funeral services,
cremations usually result in lower revenue and gross profit dollars to the
Company than traditional funeral services. In North America during 2001, 37.0%
of all funeral services performed by the Company were cremation cases, compared
to 36.3% performed in 2000. The Company has expanded its cremation
memorialization products and services in several North American markets, which
has resulted in higher average sales for cremation cases compared to historical
levels. The Company also continues to expand its nationally branded cremation
service locations called National Cremation Service(TM) (NCS). NCS currently
operates in fourteen high cremation states and has plans to expand to nineteen
states by the end of 2003. The Company believes that the NCS consumer would not
have chosen traditional funeral service locations as an alternative to NCS, and
therefore is considered an incremental customer to the Company.

With the aging of the population in North America, the Company continues to
believe the death care industry possesses attractive characteristics, and the
Company is uniquely positioned, with its unparalleled network of funeral service
locations and cemeteries, to benefit from these demographic trends.

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DISCONTINUED OPERATIONS

The Company formerly owned two insurance companies a French life insurance
company (Auxia) and a U.S. life insurance company (American Memorial Life
Insurance Company or AMLIC). These insurance operations assisted in the funding
of prearranged funeral contracts sold by Company-owned or affiliated funeral
service locations. During 2000, the Company completed the sales of both
insurance companies. Accordingly, the consolidated financial statements in this
Form 10-K have been reclassified to reflect these operations as discontinued.
Operating results from Auxia have been included through August 31, 2000 and the
operating results from AMLIC have been included through September 30, 2000, the
disposition dates of the respective companies.

EMPLOYEES

At December 31, 2001, the Company employed 24,006 (15,275 in the United
States) individuals on a full time basis and 9,424 (7,543 in the United States)
individuals on a part time basis. Of the full time employees, 23,296 were in the
funeral and cemetery operations and 710 were in corporate or other overhead
activities and services. All of the Company's eligible United States employees
who so elect are covered by the Company's group health and life insurance plans.
Eligible United States employees are participants in retirement plans of the
Company or various subsidiaries, while foreign employees are covered by other
Company defined or government mandated benefit plans. Although labor disputes
are experienced from time to time, relations with employees are generally
considered favorable.

REGULATION

The Company's operations are subject to regulations, supervision and
licensing under various U.S. federal, state, local and foreign statutes,
ordinances and regulations. The Company believes that it is in substantial
compliance with the significant provisions of such statutes, ordinances and
regulations. Since 1984, the Company has operated 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. From time to time in
connection with the Company's former strategy of growth through acquisitions,
the Company entered into consent orders with the FTC that required the Company
to dispose of certain operations in order to proceed with such acquisitions, or
limited the Company's ability to make acquisitions in specified areas. The trade
regulation rule and the various consent orders have not had a material adverse
effect on the Company's operations.

The French funeral services industry has undergone significant regulatory
change in recent years. Historically, the French funeral services industry has
been controlled, as provided by national legislation, either (i) directly by
municipalities through municipality-operated funeral establishments (Municipal
Monopoly), or (ii) indirectly by the remaining municipalities that have
contracted for funeral service activities with third party providers, such as
the Company's French funeral operations (Exclusive Municipal Authority).
Legislation was passed that has generally ended municipal control of the French
funeral service business and has allowed free competition among funeral service
providers. Under such legislation, the Exclusive Municipal Authority was
abolished in January 1996, and the Municipal Monopoly was eliminated in January
1998. Cemeteries in France are currently controlled by municipalities and
religious organizations. The Company sells cemetery merchandise such as markers
and monuments to consumers for use in these cemeteries.

ITEM 2. PROPERTIES

(DOLLARS IN THOUSANDS)

The Company's executive headquarters are located at 1929 Allen Parkway,
Houston, Texas 77019, in a 12-story office building. A wholly owned subsidiary
of the Company owns an undivided one-half interest in the building and parking
garage. The other undivided one-half interest is owned by an unrelated third
party. The Company will acquire the building at the end of the lease in July
2005 for $2,000. The property consists of

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approximately 127,000 square feet of office space and 185,000 square feet of
parking space. The Company leases all of the office space in the building for
$59 per month. The Company pays all operating expenses. One half of the rent is
paid to the wholly owned subsidiary and the other half is paid to the owners of
the remaining undivided one-half interest. The Company owns and utilizes two
additional buildings located in Houston, Texas for corporate activities
containing a total of approximately 167,000 square feet of office space.

At December 31, 2001, the Company owned approximately 64% of the real
estate and buildings used by its 3,751 funeral service locations, cemeteries and
crematoria, and 36% of such facilities are leased. In addition, the Company
leased two aircraft pursuant to cancelable operating leases. At December 31,
2001, the Company operated 12,076 vehicles, of which 23% were owned and 77% were
leased. For additional information regarding leases, see the Contractual,
Commercial and Contingent Commitments section in Financial Condition, Liquidity
and Capital Resources in Item 7 and note ten to the consolidated financial
statements in Item 8 of this Form 10-K.

At December 31, 2001, the Company's 475 cemeteries contained a total of
approximately 30,290 acres, of which approximately 53% was developed.

The specialized nature of the Company's businesses requires that its
facilities be well-maintained and kept in good condition and management of the
Company believes that these standards are met.

ITEM 3. LEGAL PROCEEDINGS

The following discussion describes certain litigation and proceedings as of
March 21, 2002.

In Re Service Corporation International; Cause No. H-99-0280; In the United
States District Court for the Southern District of Texas, Houston Division (the
Consolidated Lawsuit). The Consolidated Lawsuit was filed in January 1999 and
includes numerous separate lawsuits that were filed in various United States
District Courts in Texas. The Consolidated Lawsuit has been certified as a class
action and names as defendants the Company and three of the Company's current or
former executive officers or directors (the Individual Defendants).

The Consolidated Lawsuit has been brought on behalf of all persons and
entities who (i) acquired shares of Company common stock in the merger of a
wholly-owned subsidiary of the Company into Equity Corporation International
(ECI); (ii) purchased shares of Company common stock in the open market during
the period from July 17, 1998 through January 26, 1999 (the Class Period); (iii)
purchased Company call options in the open market during the Class Period; (iv)
sold Company put options in the open market during the Class Period; (v) held
employee stock options in ECI that became options to purchase Company common
stock pursuant to the merger; and (vi) held Company employee stock options to
purchase Company common stock under a stock plan during the Class Period.
Excluded from the class definition categories are the Individual Defendants, the
members of their immediate families and all other persons who were directors or
executive officers of the Company or its affiliated entities at any time during
the Class Period (with one amendment by the Court to include James P. Hunter,
III as a class member). Mr. Hunter was the Chairman, President and Chief
Executive Officer of ECI at the time of its merger with a wholly-owned
subsidiary of the Company.

The plaintiffs in the Consolidated Lawsuit allege that defendants violated
federal securities laws by making materially false and misleading statements and
failing to disclose material information concerning the Company's prearranged
funeral business. The Consolidated Lawsuit seeks to recover an unspecified
amount of monetary damages. Since the litigation is in its preliminary stages
and no discovery has occurred, the Company cannot quantify its ultimate
liability, if any, for the payment of damages or predict the outcome of the
litigation. However, the Company believes that the allegations in the
Consolidated Lawsuit do not provide a basis for the recovery of damages because
the Company made all required disclosures on a timely basis. The Company intends
to aggressively defend this lawsuit. At the Court's direction, meetings were
held in 2001 between the parties and their insurers to discuss possible
resolution of the case, but no progress was made. A Motion to Dismiss the
Consolidated Lawsuit filed by the Company and the Individual Defendants is
pending before the Court.

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Several other lawsuits have been filed against the Company, the Individual
Defendants and other defendants, including, in the second and third lawsuits
listed below, the Company's independent accountants, PricewaterhouseCoopers,
LLP, in Texas state courts by former ECI shareholders, officers and directors.
These lawsuits include the following matters:

No. 32548-99-11; James P. Hunter, III, et al. v. Service Corporation
International, et al.; In the District Court of Angelina County, Texas
("Hunter" matter);

No. 2000-63917; Jack T. Hammer v. Service Corporation International,
et al.; In the 165th Judicial District Court of Harris County, Texas
("Hammer" matter);

No. 33701-01-01; Jack D. Rottman v. Service Corporation International,
et al.; In the District Court of Angelina County, Texas ("Rottman" matter);
and

No. 31820-99-2; Charles Fredrick, Individually, and as a
Representative of the Class v. Service Corp. International; In the District
Court of Angelina County, Texas.

These lawsuits allege, among other things, violations of Texas securities
law and statutory and common law fraud, and seek unspecified compensatory and
exemplary damages. Since these lawsuits are in their preliminary stages and no
discovery has occurred, the Company cannot quantify its ultimate liability, if
any, for the payment of damages or predict the outcome of these lawsuits.
However, the Company believes the allegations in these lawsuits, like those in
the Consolidated Lawsuit, do not provide a basis for the recovery of damages
because all required disclosures were made on a timely basis. The Company
intends to aggressively defend this litigation. The Company is seeking
arbitration in the Hunter, Hammer, and Rottman matters.

In the Hunter matter, the Texas state district court denied the motion to
compel arbitration filed by the Company and the Individual Defendants. This
decision is currently on appeal to the Texas Supreme Court (Cause No. 01-0650;
In re Service Corporation International, et al.). In the Hammer matter, the
Texas state district court ordered the case to arbitration.

Copies of certain pleadings in these cases are filed as exhibits to this
Form 10-K.

Certain insurance policies held by the Company to cover potential director
and officer liability may reduce cash outflows with respect to an adverse
outcome of these lawsuits. If an adverse decision in these matters exceeds the
insurance coverage or if the insurance coverage is deemed not to apply to these
matters, an adverse decision could have a material adverse effect on the
Company, its financial condition, its results of operations and its future
prospects.

Shareholder Derivative Demand; The Company received a letter dated January
14, 2002, addressed to the Board of Directors, from a law firm stating that it
represented a shareholder of the Company. The letter asserts a shareholder
derivative demand that the Company take legal action against its directors and
officers based upon alleged conduct that is the subject of:

(1) a putative class action lawsuit filed on December 19, 2001, in
Broward Country, Florida against the Company and one of its subsidiaries;

(2) a lawsuit filed against the Company by former employees of the
Company in Atlanta, Georgia; and

(3) certain events described in newspaper articles referred to in the
plaintiffs' consolidated complaint in the Consolidated Lawsuit (described
above).

The Board of Directors has responded to the letter by forming a committee
of certain independent directors to conduct an inquiry into the allegations in
the letter. The committee has retained independent counsel to assist it in its
inquiry. The letter does not seek a specified amount of legal damages. Since the
inquiry is in its preliminary stages, the Company cannot quantify its ultimate
liability, if any, for the payment of damages or predict the outcome of the
inquiry.

Joan Light, Shirley Eisenbert and Carol Prisco v. SCI Funeral Services of
Florida, Inc. d/b/a Menorah Gardens & Funeral Chapels, and Service Corporation
International; Case No. 01-21376 CA 08; In the Circuit
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Court of the 17th Judicial Circuit in and for Broward County, Florida, General
Jurisdiction Division (the Consumer Lawsuit). The Consumer Lawsuit was filed
December 19, 2001 and names the Company and a subsidiary as defendants. It is a
putative class action which has not been certified. A hearing on the Motion for
Class Certification is currently scheduled to be heard on May 28, 2002.

The Consumer Lawsuit has been brought on behalf of all persons with burial
plots or family members buried at Menorah Gardens & Funeral Chapels in Florida.
Excluded from the class definition are persons whose claims have been reduced to
judgment or have been settled as of the date of class certification.

The plaintiffs allege that defendants have failed to exercise reasonable
care in handling remains by secretly: (i) dumping remains in a wooded area; (ii)
burying remains in locations other than the ones purchased; (iii) crushing
vaults to make room for other vaults; (iv) burying remains on top of the other
or head to foot rather than side-by-side; (v) moving remains; and (vi)
co-mingling remains.

The plaintiffs in the Consumer Lawsuit allege that the above conduct
constitutes negligence, tortious interference with the handling of dead bodies,
infliction of emotional distress, and violation of industry specific state
statutes, as well as the state's Deceptive and Unfair Trade Practices Act. The
plaintiffs seek an unspecified amount of compensatory and punitive damages. They
also seek equitable/injunctive relief in the form of a permanent injunction
requiring defendants to fund a court supervised program that provides for
monitoring and studying of the cemetery and any disturbed remains to insure
their proper disposition.

Since the litigation is in its preliminary stages and discovery has just
commenced, the Company cannot quantify its ultimate liability, if any, for the
payment of damages or predict the outcome of the litigation. The Company intends
to continue its investigation and to aggressively defend itself in this lawsuit
as well as continue to cooperate with state officials in resolving the issues
presented.

In addition to the Consumer Lawsuit described above, the Florida Attorney
General and State Comptroller filed an action against the Company on March 1,
2002 styled Office of the Attorney General, Department of Legal Affairs, State
of Florida and Office of the Comptroller, Department of Banking and Finance,
State of Florida v. Service Corporation International, a Texas Corporation and
S.C.I. Funeral Services of Florida, Inc., a Florida Corporation doing business
as Menorah Gardens & Funeral Chapels; Case No. CA 02-02666AG; In the Circuit
Court of the 15th Judicial Circuit in and for Palm Beach County, Florida (the AG
Lawsuit).

The AG Lawsuit alleges similar claims as the Consumer Lawsuit including
that defendants conducted their business through the willful use of false and
deceptive representations regarding: (i) the certainty of plot location and
size; (ii) the permanence of interment; and (iii) the nature and quality of the
care that defendants intended to provide.

The AG Lawsuit alleges that defendants violated Florida statutes by
engaging in the above referenced conduct. The AG Lawsuit seeks: (i) the
appointment of a receiver or administrator to manage and correct the operations
of the defendants' Florida Menorah Gardens facilities; (ii) a full accounting of
all plots sold and offered for sale by defendants at their Florida Menorah
Gardens facilities; (iii) an award of unspecified actual damages sustained by
consumers; (iv) an award of unspecified punitive damages pursuant to Florida
statue; (v) imposition of civil penalties for each violation of the Florida
statutes; (vi) an award of attorneys' fees and costs; and (vii) a permanent
injunction against the defendants prohibiting them from (a) engaging in the
funeral and/or cemetery business at their Florida Menorah Gardens facilities;
(b) using false or misleading representations in their advertising and sales
materials directed to the State of Florida; and (c) violating the Florida
Statutes.

As with the Consumer Lawsuit, since the litigation is in its preliminary
stages, the Company cannot quantify its ultimate liability, if any, for the
payment of damages or predict the outcome of the litigation. The Company has
insurance policies which are intended to limit the Company's outflows in the
event of a decision adverse to the Company in the Consumer Lawsuit and the AG
Lawsuit. If an adverse decision in these matters exceeds the Company's insurance
coverage or if the insurance coverage is deemed not to apply to these matters,
an adverse decision could have a material adverse effect on the Company, its
financial condition, its results of operations and its future prospects.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

EXECUTIVE OFFICERS OF THE COMPANY

Pursuant to General Instruction G to Form 10-K, the information regarding
executive officers of the Company called for by Item 401 of Regulation S-K is
hereby included in Part I of this report.

The following table sets forth as of March 25, 2002 the name and age of
each executive officer of the Company, the office held, and the date first
elected an officer.

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(1) Indicates the year a person was first elected as an officer although there
were subsequent periods when certain persons ceased being officers of the
Company.

Unless otherwise indicated below, the persons listed above have been
executive officers or employees for more than five years.

Mr. Hunter was appointed Vice Chairman of the Board in January 2000. For
more than five years, Mr. Hunter has been the Chairman of Huntco, Inc., an
intermediate steel processor, and was also its Chief Executive Officer prior to
May 2000. In February 2002, Huntco, Inc., filed a petition for bankruptcy under
Chapter 11 of the United States Bankruptcy Code. Mr. Hunter has been a director
of the Company since 1986 and also served as Vice Chairman of the Board of the
Company from September 1986 to May 1989.

Mr. Curtiss joined the Company as Senior Vice President and Chief Financial
Officer in January 2000. From January 1992 until July 1999, Mr. Curtiss served
as Senior Vice President and Chief Financial Officer of Browning-Ferris
Industries, Inc., a waste services company.

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Mr. Gerner joined the Company in January 1999 in connection with the
acquisition of ECI and in March 1999 was promoted to Vice President Corporate
Controller. Before the acquisition, Mr. Gerner had been Senior Vice President
and Chief Financial Officer of ECI since March 1995. Prior thereto, Mr. Gerner
was a partner with Ernst & Young LLP.

Mr. Hundley joined the Company as Vice President Treasurer in March 2000.
Prior thereto, Mr. Hundley served for more than five years in various capacities
at Banc of America Securities, LLC, its predecessors and affiliates, including
as Managing Director.

Mr. Uthoff joined the Company as Vice President Chief Information Officer
in January 2000. From June 1994 through July 1999, Mr. Uthoff served as Vice
President-Planning & Analysis of Browning-Ferris Industries, Inc., a waste
services company.

Each officer of the Company is elected by the Board of Directors and holds
his office until his successor is elected and qualified or until his earlier
death, resignation or removal in the manner prescribed in the Bylaws of the
Company. Each officer of a subsidiary of the Company is elected by the
subsidiary's board of directors and holds his office until his successor is
elected and qualified or until his earlier death, resignation or removal in the
manner prescribed in the bylaws of the subsidiary.

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock has been traded on the New York Stock Exchange
since May 14, 1974. On December 31, 2001, there were 7,136 holders of record of
the Company's common stock.

In October 1999, the Company suspended payment of regular quarterly cash
dividends on its outstanding common stock in order to focus on improving cash
flow and reducing existing debt. For the year ended December 31, 1999 dividends
per share were $.27.

The table below shows the Company's quarterly high and low common stock
prices for the two years ended December 31, 2001:

SRV is the New York Stock Exchange ticker symbol for the common stock of
the Company. Options in the Company's common stock are traded on the
Philadelphia Stock Exchange under the symbol SRV.

ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following selected consolidated financial data for the years December
31, 1997 through 2001 is derived from the Company's audited consolidated
financial statements. This data should be read in conjunction with the Company's
consolidated financial statements and accompanying notes to the consolidated
financial statements included in Item 8 of this Form 10-K.

In 2000, the Company implemented Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB No. 101). See note three to
the consolidated financial statements in Item 8 of this Form 10-K for more
details on the implementation of SAB No. 101. As a result of this
implementation, the Company changed certain of its accounting policies regarding
prearranged sales activities. The Company recorded a one time, non-cash charge
of $909,315 as of January 1, 2000 representing the cumulative effect of this
accounting change. The selected consolidated financial data presented below for
2000 reflects the
10

implementation of SAB No. 101 on January 1, 2000. The selected consolidated
statement of operations data presented below for 1999 and 1998 are reported on a
pro forma basis to reflect the application of SAB No. 101 to the financial data
for those years. The selected consolidated statement of operations data
presented below for 1997 is reported on a historical basis, as it was
impractical for the Company to obtain the amounts on a pro forma basis prior to
1998. Further, results of operations have been reclassified for all periods
presented to separately reflect results of discontinued operations. See note
seventeen to the consolidated financial statements of Item 8 of this Form 10-K
for further discussion of discontinued operations.

SELECTED CONSOLIDATED FINANCIAL DATA

11

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

(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES AND PER SHARE DATA)

INTRODUCTION

The Company is the largest provider of funeral and cemetery services in the
world. As of December 31, 2001, the Company operated 3,099 funeral service
locations, 475 cemeteries and 177 crematoria located in 11 countries. The
Company also has minority interest investments in funeral and cemetery
operations in three countries outside of North America. As of December 31, 2001,
the Company's largest markets were North America and France, which, when
combined, represented approximately 88% of the Company's consolidated revenues,
87% of consolidated income from operations before non-recurring items and 84% of
the Company's total operating locations.

As of December 31, 2001, the funeral and cemetery operations are organized
into a North America division covering the United States and Canada, a European
division responsible for all operations in Europe and an Other Foreign division
relating to operations in the Pacific Rim and South America. The majority of the
Company's operations throughout the world are managed in groups called clusters.
Clusters are geographical groups of funeral service locations and cemeteries
that lower their individual overhead costs by sharing common resources such as
operating personnel, preparation services, clerical staff, limousines, hearses
and preneed sales personnel. Personnel costs, the largest operating expense of
the Company, are the cost components most beneficially affected by clustering.
The sharing of employees, as well as the other costs mentioned, allow the
Company to more efficiently utilize its operating facilities. Additionally, the
Company implemented Central Processing Centers throughout North America to
further gain accounting and back-office efficiencies.

STRATEGIC INITIATIVES

Historically, the Company's growth has been largely attributable to
acquiring funeral and cemetery businesses. This acquisition program created the
world's largest network of funeral service locations and cemeteries. During the
mid-1990s, the funeral and cemetery acquisition market became extremely
competitive resulting in increased acquisition prices and substantially reduced
returns on invested capital. In early 1999, the Company announced plans to
significantly reduce the level of its acquisition activity and pursue other
means to create growth from its existing operations. As a result, the Company's
strategic plan in 2000 and 2001 was focused on reducing overhead costs,
increasing cash flow and reducing debt, while at the same time developing key
revenue initiatives designed to drive future organic growth in the Company's
core funeral and cemetery operations.

The Company's objectives in 2002 remain consistent with those established
in 1999 and focus on continued stabilization of the Company's capital structure
through continued cash flow improvement, asset divestitures and debt reduction.
The Company believes its goal of stabilizing its capital structure will be
achieved by having a debt to recurring operating free cash flow ratio of 10:1 or
less. Management believes this ratio is consistent with a stable "BB" credit
rating from Standard & Poor's and "Ba2" from Moody's, with general access to the
capital markets. To achieve these goals, the Company will continue to
concentrate on cost reduction initiatives and will use its total operating free
cash flow and proceeds from assets sales/joint ventures to reduce debt.
Management's incentive compensation plan is aligned with the execution of these
elements of its strategic plan.

The Company intends to operate a core business of high quality funeral
service locations and cemeteries in North America. During 2000, the Company sold
its wholly owned insurance operations in France and in the United States. During
2001, the Company completed joint ventures of its operations in Australia, Spain
and Portugal and divested of its operations in the Netherlands, Norway and
Belgium. The Company also implemented a plan in 2000 to sell over 500 funeral
service locations or cemeteries in North America. In February 2002, the Company
announced the completion of a joint venture transaction with its United Kingdom
operations. The Company is currently in discussions with various third parties
concerning the sales or joint ventures of its remaining international operations
outside of North America. The timing of the

12

completion of international and certain North America asset sales/joint ventures
to achieve the Company's core North America businesses strategy is not easily
predictable. The Company does believe the execution of asset sales/joint
ventures for certain North America and European businesses is probable in 2002,
but believes the completion of the marketing program for the disposition of its
South America operations could be of a longer duration.

Cost Reductions

The Company's overhead costs include corporate general and administrative
expenses, regional field overhead costs and other home office costs related to
functions directly supporting field operations. As a result of the Company's
continued focus on overhead reduction, total overhead costs for 2001 decreased
approximately 9.7% compared to 2000. The Company's corporate general and
administrative expenses decreased approximately 12.0% in 2001 compared to 2000
as a result of general cost reductions at the corporate level and the completion
of the implementation of its North America proprietary point of sale systems in
2000.

Operating Free Cash Flow

Recurring operating free cash flow is calculated by adjusting cash flows
provided by operating activities to exclude (i) cash payments associated with
the Company's restructuring and non-recurring charges and (ii) other cash
receipts or payments (included in cash flows provided by operating activities)
which are of a non-recurring operational nature, and then subtracting
maintenance capital expenditures. Total operating free cash flow is calculated
in the same manner as above except the amount includes all non-recurring cash
payments and receipts and non-recurring or growth capital expenditures. The
Company's total operating free cash flow does not include proceeds from business
sales or joint ventures. Maintenance capital expenditures are considered
expenditures reasonably necessary to maintain the Company's funeral service
locations, cemeteries, crematoria and other facilities in a condition conducive
for normal business practices. Non-recurring or growth capital expenditures are
considered expenditures made for the purpose of generating additional or
incremental revenues (i.e. building combination facilities).

Included in total operating free cash flow of $331,965 for the year ended
2001 is $161,495 of net non-recurring funds comprised of an approximate $116,300
income tax refund and the collection of receivables from funeral and cemetery
trust funds of approximately $79,800, offset by non-recurring payments of
approximately $27,900 related to the Company's curtailed pension plans and
$6,705 of other non-recurring cash payments. The improvement in recurring
operating free cash flow in 2001 of $108,445 is primarily a result of (i)
working capital improvement, (ii) reductions in capital expenditures, (iii)
decreases in cash interest, (iv) reductions in net cash taxes, and (v) the
acceleration of customer cash receipts as a result of expanding the Company's
surety bonding programs for prearranged funeral and preneed cemetery activities.
The Company's surety bonding programs increased recurring operating free cash
flow by $34,700 in 2001 compared to 2000 by accelerating customer cash receipts
to the Company in which a portion would have otherwise been required to be
placed into trust funds until the related merchandise is delivered or service is
performed.

The Company's operating free cash flow goals for 2002 relate to the
Company's businesses it expects to retain in 2002, namely its core North America
businesses and its current South America businesses. These retained businesses
are expected to generate recurring operating free cash flow in 2002 that is
comparable with 2001 levels, despite increases in expected cash tax payments of
$50,000-$60,000 and the net loss of recurring operating free cash flow from
actual and potential sales/joint ventures of international operations over and
above assumed cash interest savings. The Company's goal is to produce recurring
operating free cash flow of $200,000 in 2003. These recurring operating free
cash flow targets assume the Company is successful in executing its business
plan creating revenue and earnings growth. These targets also assume the Company

13

continues to access the surety market to procure bonds for prearranged funeral
and preneed cemetery activities in those states that allow such bonds. If such
access to the surety markets is curtailed or interrupted, the Company might have
to reassess its recurring operating free cash flow targets. See further
discussion of the Company's use of surety bonds in the Financial Assurances
section included in Financial Condition, Liquidity and Capital Resources in this
Form 10-K.

Debt Reduction

Peak debt at September 30, 1999............................. $4,200,023
Debt at December 31, 1999................................... $4,060,016
Debt at December 31, 2000................................... $3,268,102
Debt at December 31, 2001................................... $2,534,613
Targeted debt balance at December 31, 2002.................. $1,800,000

Debt at December 31, 2001 included approximately $113,500 of currently
maturing debt associated with the financial restructuring of the Company's
French subsidiary, which is expected to be satisfied with non-cash French assets
in 2002. Funds available to achieve the Company's debt reduction in 2001 were
primarily generated from (i) the Company's total operating free cash flow, (ii)
proceeds from joint ventures of Australia, Spain and Portugal operations, (iii)
proceeds from the sale of the Company's operations in Norway, the Netherlands
and Belgium, (iv) proceeds from the sale of the Company's equity interest in a
Canadian funeral and cemetery company, and (v) proceeds from sales of certain
non-strategic funeral and cemetery operations in North America.

Future Revenue Growth

The Company intends to operate a core business of high quality funeral
services locations and cemeteries in North America. The Company and its Dignity
Memorial(TM) affiliates currently have the largest network of funeral service
locations and cemeteries in North America with estimated coverage of
approximately 70% of the major population areas. This network forms the
foundation of the Company's business strategy to generate revenue growth without
the outlay of significant additional capital.

The following details events that can positively affect revenues. The
Company refers to these events as revenue drivers to its funeral and cemetery
businesses.

REVENUE DRIVERS

FUNERAL

- Funeral services performed.

- Average revenue per funeral service.

CEMETERY

- Interments performed.

- Delivery of cemetery property and merchandise.

- Development of cemetery inventory.

- Cash receipts and down payments on preneed cemetery property sales.

The Company has several revenue growth initiatives, which are designed to
positively affect these revenue drivers and increase revenues. Some of the
Company's most important revenue growth initiatives are listed and described
below.

- Creation of a seamless, national brand of funeral service locations under
the Dignity Memorial(TM) brand name.

14

- Increase in the population coverage of the Dignity Memorial(TM) branded
network through third party franchise relationships.

- Establishment of exclusive, national, branded affinity relationships with
employers, social, fraternal and charitable groups or institutions.

- Implementation of Dignity Memorial(TM) funeral and cremation packages.

- Improvement of standards in customer service.

- Continued commitment to funeral and cemetery prearrangement.

- Expansion of cremation marketing, merchandising and services.

- Modification of sales commission and incentive compensation structures.

- Focus on sales of deliverable cemetery property and merchandise.

- Growth capital expenditures.

The development of the Dignity Memorial(TM) brand name is a unique
opportunity the Company believes only it can pursue because of its size and
geographic diversity. This opportunity creates the first national brand in the
death care industry in North America that is recognized and portable on a
national basis and can potentially affect the Company's funeral services
performed revenue driver. A national network with national portability of
products and services is important to the Company's current and prospective
affinity partners. The Dignity Memorial(TM) provider network will also be
developed through a franchise program by offering non-SCI funeral service
locations, primarily in markets where the Company does not currently have
coverage, the opportunity to join the Dignity Memorial(TM) provider network and
have access to the Dignity Memorial(TM) branded products and services, marketing
and referral programs, training programs, prearranged funeral funding services
and merchandising expertise.

The Company is continuing its efforts to execute agreements with affinity
partners on national, regional and local levels which provide exclusive, direct
access through mail or other agreed upon media to large groups of individuals
who meet the Company's ideal customer profile. The company believes the ability
to enter into these national relationships due to the expansive network coverage
the Company enjoys is one of its most compelling competitive advantages in the
death care industry. The Company believes this is one of its most powerful
revenue initiatives that can positively affect its funeral services performed
revenue driver. This program is focused on local relationships in a community as
well as on national relationships (i.e., Veterans of Foreign Wars).

The Company completed the implementation of Dignity Memorial(TM) branded
funeral and cremation packages in North America in 2001. The Dignity
Memorial(TM) funeral and cremation packages are designed to simplify customer
decision making and include new products and services which have traditionally
not been available through funeral service locations. Examples of these new
products and services include legal services, estate organizing and planning,
grief counseling, bereavement discounted airfares and virtual family archiving
services on the Internet. These new products and services are designed to
increase customer satisfaction while also positively affecting the Company's
average revenue per funeral service revenue driver.

The Company has implemented comprehensive continuous customer surveys in
North America to provide valuable feedback from consumers in order to enhance
customer service and provide insight into consumer preferences for additional
products and services. The Company received responses from 45% of all families
serviced in 2001 in North America funeral service locations, which is considered
to be a very high survey return rate. The customer surveys give the Company a
98.7% approval rating which is a key indicator of customer satisfaction
affecting the Company's funeral services and cemetery interments performed
revenue drivers.

The Company remains committed to prearrangement programs with consumers for
funeral and cemetery products and services. The Company believes these programs
can increase future market share in its funeral and cemetery markets. Funeral
and cemetery prerrangment is one of the most important revenue growth

15

initiatives of the Company as this initiative can positively affect several
revenue drivers such as funeral services and cemetery interments performed,
average revenue per funeral service, delivery of cemetery products and services
and cash receipts and down payments on preneed cemetery property sales. With the
reduction of marketing costs, the refinement of the sales commission structure,
the shift to insurance funding of prearranged funeral sales creating general
agency commissions and cash overrides, the use of direct-to-consumer prearranged
marketing and the use of surety bonding programs, the Company has greatly
improved the cash flow characteristics and economics of this important revenue
growth initiative. The Company also initiated sales of Dignity Memorial(TM)
packaged funeral and cremation plans in late 2001 on a prearranged basis which
can positively affect the average revenue per funeral service revenue driver at
the time the contract matures and the service is performed.

The Company currently has a backlog of prearranged funeral contracts of
approximately $4.6 billion and of preneed cemetery contracts of approximately
$1.8 billion. These backlogs represent future revenues to the Company. For a
complete discussion of these activities, see the Prearranged Funeral and
Cemetery Activities section included in Financial Condition, Liquidity and
Capital Resources and notes four and five to the consolidated financial
statements in Item 8 of this Form 10-K. Additionally, see the Financial
Assurance section included in Financial Condition, Liquidity and Capital
Resources for a complete discussion on the Company's use of surety bonds in its
funeral and cemetery prearrangement activities.

The Company believes there are significant opportunities to increase market
share in the cremation segment of its business through more effective marketing
of cremation products and services. While the Company will continue to expand
cremation memorialization products and services at its traditional funeral
service locations and cemeteries, the Company also plans to expand its National
Cremation Service(TM) operations, the largest single provider of cremation
services in North America, from its existing base in fourteen states into five
additional states by the end of 2003.

The Company has modified the sales commission and incentive compensation
structures to focus on cash collections and receipts. While this is one of the
Company's key cash flow initiatives, cash receipts and down payments are also
key revenue drivers that can generate revenue recognition for preneed cemetery
sales of constructed cemetery property. The Company has also incented its
preneed cemetery sales force to focus on sales of deliverable cemetery property
and merchandise. While this can avoid funds being trusted under applicable state
laws and is also a key cash flow initiative, revenues are recognized upon
evidence of delivery of cemetery property and merchandise.

The Company has plans in 2002 to invest $25,000 to $35,000 of free cash
flow in growth capital expenditures mainly comprising of the construction of
funeral service locations and additional development of cemetery inventory. The
Company believes construction of certain funeral service locations, including
combination facilities, can meet the Company's requirement of a cash return
exceeding its weighted average cost of capital. With a cash receipt or down
payment of 10% or more, the development or construction of cemetery property can
generate revenue recognition from preneed cemetery property sales.

Outlook for 2002

The Company's objectives in 2002 remain consistent with those established
in prior years and focus on continued stabilization of the Company's capital
structure through continued cash flow improvement, asset divestitures and debt
reduction. The Company believes its goal of stabilizing its capital structure
will be achieved by having a debt to recurring operating free cash flow ratio of
10:1 or less, which management believes is consistent with a stable "BB" credit
rating from Standard & Poor's and "Ba2" from Moody's, with general access to the
capital markets. To achieve these goals, the Company will continue to use its
total operating free cash flow and proceeds from asset sales/joint ventures to
reduce debt. The Company's targeted debt balance is $1,800,000 or less by the
end of 2002.

As previously disclosed, the Company intends to operate a core business of
high quality funeral service locations and cemeteries in North America. The
timing of the completion of international and certain North America asset
sales/joint ventures to achieve the Company's core North America business
strategy is not easily predictable. The Company does believe execution of asset
sales/joint ventures for its European
16

businesses is probable in 2002, but believes the completion of the marketing
program for the disposition of its South America operations could be of a longer
duration. The Company's outlook for 2002 for operating free cash flow is made
with the assumption the Company's 2002 financial results will contain only the
core North America network and current South America businesses (currently owned
European businesses are excluded in their entirety for 2002 guidance).

The retained businesses of 2002 are expected to generate recurring
operating free cash flow between $160,000 and $180,000 in 2002, which is
comparable with $170,470 generated in 2001, despite increases in expected cash
tax payments of $50,000 to $60,000 and the net loss of recurring operating free
cash flow from actual and potential sales/joint ventures of international
operations over and above assumed cash interest savings. The Company's goal is
to produce recurring operating free cash flow of $200,000 in 2003.

The retained businesses discussed above currently have an annual run-rate
of EBITDA (excluding gains from dispositions) of approximately $400,000,
consisting of $390,000 from the core North America network and $10,000 from
South America operations. The Company calculates EBITDA for each period by
adding interest, tax, depreciation and amortization expense to net income before
non-recurring items. In 2002, the Company will exclude gains from dispositions
from EBITDA. The Company has several revenue growth initiatives in place
designed to organically grow funeral and cemetery revenues as well as EBITDA.
These initiatives are designed to affect revenue drivers for both the funeral
and cemetery businesses resulting in increases in revenues. See the Future
Revenue Growth section included in Strategic Initiatives for a detailed
discussion of these revenue initiatives designed to positively affect funeral
and cemetery revenue drivers.

Comparable North America funeral revenues are expected to grow in the low
single digit percentage range in 2002 based on equivalent funeral services
performed and low single digit percentage growth in the average revenue per
funeral service. Comparable North America cemetery revenues in 2002 are expected
to be similar to 2001. Increases in the sales of deliverable cemetery property
and merchandise and the development of cemetery property inventory in 2002 will
be offset by less revenues in 2002 compared to 2001 levels from changes in
estimates of the Company's deferred preneed cemetery contract revenues. The
Company has an ongoing review program of its obligations for delivery of
cemetery merchandise and services to customers in order to collect funds from
applicable cemetery trust funds. Revenue recognition is triggered upon evidence
of delivery of such merchandise and services.

Comparable North America gross margin percentages are expected to improve
for funeral and cemetery operations in 2002 as a result of the execution of the
Company's business plan and the elimination of approximately $41,800 ($37,500
after tax) of amortization of North America goodwill under new accounting
standards. Comparable North America funeral gross margin percentages are
expected to be in the 18%-23% range for the full year of 2002 and comparable
North America cemetery gross margin percentages are expected to be in the
11%-16% range for the full year of 2002.

The Company needs to execute its strategic plan and accomplish several
important and challenging tasks to meet its financial goals for 2002. Some of
these are listed below and are not intended to be an all inclusive listing.

- The Company must complete is assets sales/joint ventures programs both
internationally and in North America creating cash proceeds for the
reduction of debt.

- Continue to manage operating and overhead costs.

- Continue to assess asset rationalization programs in needed areas.

- Successfully execute revenue growth initiatives to create revenue and
EBITDA growth.

- Retain key relationships with client families, vendors and regulators to
allow the Company's operations to operate in the ordinary course of
business for the benefit of the Company's shareholders.

- Retain key relationships with surety bonding companies. The Company's
recurring operating free cash flow targets assume the Company continues
to access the surety market to procure bonds for prearranged funeral and
preneed cemetery activities in those states that allow such bonds. If
such

17

access to the surety markets is curtailed or interrupted, the Company might
have to reassess its future recurring operating free cash flow targets.

CRITICAL ACCOUNTING POLICIES AND ACCOUNTING CHANGES

The Company's consolidated financial statements are impacted by the
accounting policies used and the estimates and assumptions made by management
during their preparation. The following is a discussion of the Company's
critical accounting policies pertaining to revenue recognition, the impairment
of long-lived assets and for long-lived assets to be disposed of, and the use of
estimates.

REVENUE RECOGNITION

Funeral revenue is recognized when funeral services are performed. The
Company's trade receivables primarily consist of funeral services already
performed. The Company sells price guaranteed prearranged funeral contracts
through various programs providing for future funeral services at prices
prevailing when the agreements are signed. Revenues associated with sales of
prearranged funeral contracts, which include accumulated trust earnings and
increasing insurance benefits, are deferred until such time that the funeral
services are performed (see note four to the consolidated financial statements
in Item 8 of this Form 10-K).

Sales of atneed cemetery interment rights, merchandise and services are
recognized when the service is performed or merchandise delivered. Preneed
cemetery interment sales of constructed cemetery burial property are not
recognized until a minimum percentage (10%) of the sales price has been
collected. Once 10% of the sales price is collected, all of the constructed
interment sale revenue is recognized. Revenues related to the preneed sale of
unconstructed cemetery burial property will be deferred until such property is
constructed and the minimum percentage of the sales price has been collected.
Further, the Company defers certain direct obtaining costs (selling and
commissions incurred to obtain preneed contracts) associated with these sales
which are expensed when revenue is recognized (see notes three and five to the
consolidated financial statements in Item 8 of this Form 10-K).

Costs related to the sales of interment rights are the accumulation of
property costs and development costs specifically identified by project. At the
completion of the project, costs are charged to operations as revenue is
recognized. Costs related to sales of merchandise and services are based on
actual costs incurred.

IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF

The Company reviews its long-lived assets for impairment when changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable, in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of." SFAS No. 121 requires that long-lived
assets and certain intangibles to be held and used be reported at the lower of
their carrying amount or fair value. Assets to be disposed of and assets not
expected to provide any future service potential to the Company are recorded at
the lower of their carrying amount or fair value less estimated cost to sell.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions affect the carrying values of
assets and liabilities and disclosures of contingent assets and liabilities at
the balance sheet date and the amounts of revenues and expenses recognized
during the period. Actual results could differ from such estimates. Key
estimates used by management, among others, include:

Allowance for doubtful accounts -- The Company estimates its allowance
for doubtful accounts based on analysis of historical collection activity.
These estimates could be impacted by changes in the economy, among other
things.

18

Depreciation of long-lived assets -- The Company depreciates its
long-lived assets over their remaining estimated useful lives. These
estimates of the remaining useful lives may be affected by such factors as
changing market conditions or changes in regulatory requirements.

Amortization of deferred funeral obtaining costs -- The Company
amortizes its prearranged funeral obtaining costs over 20 years, a period
representing the estimated life of the prearranged funeral contracts. This
estimate could be impacted by changes in mortality rates and changes in the
demographics of the Company's customers. Preneed cemetery obtaining costs
are not amortized and are expensed at the time the applicable contract
revenues are recognized.

Taxes -- The Company's ability to realize the benefit of its deferred
tax assets requires the Company to achieve certain future earnings levels.
The Company has established a valuation allowance against a portion of its
deferred tax assets and could be required to further adjust that valuation
allowance if market conditions change materially and future earnings are,
or are projected to be, significantly different from its current estimates.

Preneed cemetery revenues -- The Company recognizes revenues
associated with preneed cemetery merchandise and services upon evidence of
delivery of such merchandise and services. The Company has an ongoing
review program of its obligations for delivery of cemetery merchandise and
services. Included in the Company's backlog of preneed cemetery contract
revenues of approximately $1.8 billion are estimates made by management
related to the status of delivery of cemetery merchandise and services. Any
changes in these estimates in future periods and resulting revenue
recognition of these obligations will vary and depend upon the outcome of
such obligation reviews.

ACCOUNTING CHANGES

In 2000, the Company implemented SAB No. 101 which changed the Company's
accounting policies regarding the manner in which the Company records
prearranged sales activities. The implementation of SAB No. 101 had no effect on
the consolidated cash flows of the Company. The accounting change, which
occurred as a result of the required implementation of SAB No. 101, has been
treated as a change in accounting principle effective as of the beginning of
2000. For a more detailed discussion of these changes, see note three to the
consolidated financial statements in Item 8 of this Form 10-K. The cumulative
effect of these changes resulted in an after tax charge of $909,315 or $3.34 per
diluted share.

In 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain
Derivatives Instruments and Certain Hedging Activities: An Amendment of FASB
Statement No. 133." In accordance with these pronouncements, the Company
recognized a cumulative effect of a change in accounting principles, net of
applicable taxes, of $7,601. The charge primarily relates to the recognition of
net deferred charges from interest rate gains and losses realized in the
termination of swap agreements designated as cash flow hedges. These charges
were previously amortized into interest expense over the terms of the swap
agreements, whereas the new standards require recognition as the derivative
gains and losses are incurred.

RESULTS OF OPERATIONS

The following is a discussion of the Company's results of operations for
the years ended December 31, 2001, 2000 and 1999. Most of the financial analysis
in this section relates to comparable financial information, which the Company
believes provides a more meaningful discussion of results of operations.
Comparable results in all periods represent financial results excluding
operations that have been acquired or constructed after January 1, 2000 or
operations that have been divested by the Company prior to December 31, 2001. As
a result, some acquisitions entered into in 1999 may not be included for the
full year, depending on the timing of the acquisition. As previously disclosed,
the Company implemented SAB No. 101 in 2000, which primarily changed the
Company's accounting policies regarding the manner in which it records preneed
cemetery sales activities. For purposes of the following discussion, 1999
financial information is presented on a pro forma basis as if SAB No. 101 had
been implemented at the beginning of 1999. All comparisons in this results of
operations section will be discussed using the pro forma 1999 amounts. The
Company has excluded the results
19

of its discontinued insurance operations from the following discussions for all
years presented. During 2000, the Company completed the sale of its discontinued
insurance operations to third parties. For further discussion see Non-recurring
items and Definitions and Descriptions of Pro Forma Financial Information in
this Form 10-K.

Consolidated Results

For the year ended December 31, 2001, the Company reported total revenues
from continuing operations of $2,510,343, representing a 2.1% decrease compared
to total revenues from continuing operations for 2000 of $2,564,730. Gross
profit from continuing operations improved 9.7% to $359,386 and the gross margin
percentage increased in 2001 to 14.3% from 12.8% in 2000. The decline in
revenues is primarily attributable to operations disposed in 2001, while the
improvement in gross profit and margin percentage is the result of the cost
reduction initiatives and changes in estimates of previously deferred cemetery
revenue during the year. See note two to the consolidated financial statements
in Item 8 of this Form 10-K.

Results for the Company's comparable, continuing operations by geographic
segment are detailed in the following tables:

Funeral

Comparable North America funeral revenues remained relatively flat in 2001
compared to 2000 despite a slight decline in the comparable number of funeral
services performed over the same period. This decline in the number of funeral
services performed was offset by an increase in the average revenue per funeral
service to $3,934 in 2001 from $3,898 in 2000. The average revenue per funeral
service continues to increase as a result of the Company's growth initiatives,
such as Dignity Memorial TM packaged funeral plans.

Comparable international funeral revenues remained stable in 2001 despite a
3.2% decline in the number of funeral services performed. Increases in monument
sales and the average revenue per funeral service in the Company's French
operations had the effect of offsetting the decline in the number of funeral
services performed. Monument sales, which are not a component of the number of
funeral services performed, were a significant factor attributing to the
stabilized revenues. Additionally, the average revenue per funeral service
increased as a result of additional products and services and inflationary
adjustments. This growth was offset by the negative effect of foreign currency
translation of $21,400 resulting from the weakened euro relative to the U.S.
dollar during the year.

Comparable North America gross profit and margin percentage declined in
2001 compared to 2000 as the result of increased costs related to training,
compensation and facilities. The Company has committed to expanding personnel
training programs and improving customer satisfaction, and as a result of this
commitment, has experienced increased personnel costs in 2001 compared to 2000.
These training initiatives are targeted at expanding market share and future
revenue growth from the Company's North America funeral operations. Facility
costs increased as a result of higher utility and building maintenance costs.
These increased costs were offset in the fourth quarter of 2001 by an
approximate $4,000 reduction in the Company's allowance for doubtful accounts
and approximately $4,500 recognized in general agency commissions. The reduction
in the allowance for doubtful accounts is due to ongoing successful cash flow
initiatives, which have resulted in improved collection of trade receivables.
The recognition of general agency commissions is the result of commissions paid
to the Company for insurance funded prearranged funeral contracts in excess of
prearranged funeral deferred net obtaining costs.

Comparable international gross profit and margin percentage improved in
2001 compared to 2000 as a result of improved margins in the Company's European
segment. The European segment has been positively

21

impacted in 2001 from cost rationalization programs. Additionally, revenue
enhancement initiatives have resulted in an increase in the average revenue per
funeral service in 2001 over 2000.

Comparable North America funeral revenues in 2000 increased compared to pro
forma 1999 as a result of an increase in the average revenue per funeral service
to $3,898 in 2000 from $3,859 in 1999. This increase is attributable to the
Company's ongoing revenue growth initiatives, such as the introduction of
Dignity Memorial(TM) funeral package plans.

Comparable international funeral revenue in 2000 compared to pro forma 1999
decreased as a result of a 7.0% decrease in volume as well as a $93,000 negative
impact of foreign currency translation. The decline in volume is primarily
attributable to a reduction in the number of deaths in the Company's European
market and from losses in market share in the Company's French funeral service
locations as a result of increased and new competition from the deregulation of
the funeral industry in France. For further information on the deregulation of
the funeral industry in France, see the section Regulation in Item 1 of this
Form 10-K.

Funeral gross profits decreased 5.5% in 2000 compared to pro forma 1999.
The decrease is related to a reduction in the number of deaths in Europe in 2000
as discussed above. North America gross profit and margin percentage remained
stable in 2000 compared to pro forma 1999.

Cemetery

Comparable North America cemetery revenues increased 16.5% in 2001 compared
to 2000 as a result of increases in completed, cemetery property development
projects; increases in the amount of cash receipts and down payments received
from preneed property sales; and changes in estimates of deferred preneed
cemetery revenues. In connection with the Company's ongoing review of
obligations to deliver cemetery merchandise and services to customers in order
to collect funds due to the Company from applicable cemetery trust funds, the
Company recognized revenues of approximately $68,500 in 2001 as a change in
estimate of previously deferred preneed cemetery contract revenues. As part of
its ongoing cash flow initiatives, the Company intends to continue the review of
these obligations; however, the impact recognized in 2002 is expected to be less
than 2001.

Comparable international cemetery revenues increased 11.9% in 2001 compared
to 2000 as a result of improvements in preneed sales in the Company's United
Kingdom operations and lower cancellations in the Company's South America
operations in 2001, offset by the negative effect of foreign currency on
comparable cemetery results of $5,800 in 2001.

Comparable North America cemetery gross profit and margin percentage
increased in 2001 compared to 2000 as a result of recognition of previously
deferred preneed cemetery contract revenues discussed above that could be
delivered to customers under applicable laws. This change in estimate increased
comparable North America gross profit by $54,900 in 2001.

Comparable international cemetery gross profit and margin percentage
increased in 2001 compared to 2000 as a result of improved preneed sales in the
Company's United Kingdom operations and lower cancellations in the Company's
South America operations.

Comparable cemetery revenues in the Company's North America cemetery
segment decreased 9.2% in 2000 compared to pro forma 1999 results due to
significant changes to cemetery employee compensation plans, which began to be
implemented in late 1999. The Company changed the cemetery employee compensation
plans in 2000 to focus on cemetery property sales, which are more difficult to
sell and had the effect of adversely impacting cemetery revenues in 2000
compared to 1999.

Comparable international cemetery revenues decreased 18.3% in 2000 compared
to pro forma 1999 as a result of lower revenue from higher cancellations in the
Company's Argentina operations. Argentina had increased cancellations as a
result of a weakened economy over the last several years.

Comparable North America cemetery gross profit increased in 2000 compared
to pro forma 1999 as a result of changes in the Company's cemetery employee
compensation plans; which, although adversely affecting cemetery revenues,
positively impacted gross margin in 2000 compared to 1999.
22

Comparable international cemetery gross profit and margin percentage
decreased in 2000 compared to 1999 as a result of lower sales in the Company's
Argentina operations coupled with higher cancellations from the deterioration of
the Argentina economy.

Other Income and Expenses

The Company's general and administrative expenses decreased to $70,309 in
2001 from $79,932 in 2000. The decrease in general and administrative expenses
was the result of the reduction in costs after implementing the Company's North
America proprietary point of sale systems as well as completing the initial roll
out of the Company's Central Processing Centers in its North America operating
clusters in 2000. General and administrative expenses in 2000 were lower than
1999 as a result of year 2000 (Y2K) preparation, implementation of EVA(R) base
incentive compensation models, and increased costs related to the proprietary
point of sale systems. Expressed as a percentage of revenue from continuing
operations, general and administrative expenses were 2.8%, 3.1%, and 2.7% for
the years ended December 31, 2001, 2000, and 1999, respectively.

Interest expense decreased to $211,626 in 2001 compared to $281,548 in 2000
and $238,185 in 1999. The decrease reflects lower financing costs as the Company
successfully reduced outstanding debt. The Company has also experienced improved
interest rates in 2001 with a weighted average interest rate of 6.72% at
December 31, 2001, compared to 7.08% and 6.97% at December 31, 2000 and 1999,
respectively.

Other income was $15,044 in 2001 compared to $17,455 in 2000 and $12,007 in
1999. Other income primarily consists of income from various notes receivable
and cash investments, equity from earnings of investments in certain companies
and cash overrides from prearranged funeral sales with the Company's divested
insurance operations in North America and France (see Discontinued Operations
discussion in Item 1 of this Form 10-K).

Gains from dispositions were $16,224 in 2001 compared to $17,181 in 2000
and $19,752 in 1999. Included in gains from dispositions are asset sales not
associated with previously recognized impairment charges. Also included in gains
from dispositions is a $2,062 gain recognized on the sale of 85% of the
Company's Spain and Portugal operations in August 2001.

Restructuring and Non-Recurring Charges

Restructuring and non-recurring charges recorded in 2001 were $644,147 and
consisted of $663,548 in charges related to (i) the loss on joint venturing the
Company's Australian operations, (ii) losses from the disposition of operations
in the Netherlands, Norway and Belgium, and (iii) international operations held
for sale. These charges were offset by $19,401 consisting of favorable changes
in estimates of previously recorded charges of certain divested North America
funeral homes and cemeteries and the Company's equity investment in a Canadian
funeral home and cemetery company. In 2000, the Company recorded restructuring
and non-recurring charges of $461,072 which consisted of (i) $351,159 related to
the planned divestitures of certain North America businesses, (ii) $83,256
related to the reduction in the carrying value of the Company's equity
investment in a Canadian funeral and cemetery company, and (iii) $26,657 in
changes in estimates of previously recorded charges. In 1999, the Company
recorded restructuring and non-recurring charges totaling $362,428 which
consisted of (i) $207,432 in severance costs, (ii) $73,728 impairment for assets
held for sale, (iii) $18,245 impairment for loans made by the Company's lending
subsidiary, and (iv) $63,023 in other cost initiative programs. For further
information detailing these non-recurring items, see note sixteen to the
consolidated financial statements in Item 8 of this Form 10-K.

The Company recorded certain additional non-recurring items during 2001,
2000 and 1999, related to extraordinary gains on early extinguishments of debt,
net losses associated with the sales of the Company's discontinued operations
and cumulative effects of accounting changes. For a detailed discussion of these
and other non-recurring items, see Non-recurring Items and Definitions and
Description of Pro forma Financial Information included in this Management's
Discussion and Analysis of Financial Condition and Results of Operations of this
Form 10-K.

23

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

In February 2002, the Company completed a joint venture transaction related
to its funeral, cemetery and crematoria operations in the United Kingdom. This
transaction resulted in the Company purchasing a 20% minority interest in the
joint venture and receiving cash proceeds of approximately $273,000 on a pretax
basis. These cash proceeds have resulted in the Company having a cash balance of
approximately $300,000 as of February 28, 2002. The Company's debt balances at
February 28, 2002 and December 31, 2001 also included approximately $110,900 and
$113,500, respectively, of current maturing debt associated with the financial
restructuring of the Company's French subsidiary, which is expected to be
satisfied with non-cash French assets in 2002. The Company's objectives in 2002
remain consistent with those established in prior years and focus on continued
stabilization of the Company's capital structure through continued cash flow
improvement, asset divestitures and debt reduction. The Company believes its
goal of stabilizing its capital structure will be achieved by having a debt to
recurring operating free cash flow ratio of 10:1 or less. Management believes
this ratio is consistent with a stable "BB" credit rating from Standard & Poor's
and "Ba2" from Moody's with general access to the capital markets. The Company's
financial goals in 2002 are to complete asset sales/joint venture transactions
to produce approximately $550,000 in net pretax cash proceeds, produce recurring
operating free cash flow of $160,000 to $180,000 and to use these funds to
reduce the Company's outstanding debt to $1,800,000 by December 31, 2002.

The Company calculates recurring operating free cash flow by adjusting cash
flows provided by operating activities to exclude (i) cash payments associated
with the Company's restructuring and non-recurring charges and (ii) other cash
receipts or payments (included in cash flows provided by operating activities)
which are of a non-recurring operational nature, and then subtracting
maintenance capital expenditures. Total operating free cash flow is calculated
in the same manner as above except the amount includes all non-recurring cash
payments and receipts and non-recurring or growth capital expenditures. The
Company's total operating free cash flow does not include proceeds from business
sales or joint ventures. Maintenance capital expenditures are considered
expenditures reasonably necessary to maintain the Company's funeral service
locations, cemeteries, crematoria and other facilities in a condition conducive
for normal business practices. Non-recurring or growth capital expenditures are
considered expenditures made for the purpose of generating additional or
incremental revenues (i.e. building combination facilities). The following table
details the calculation described above for the Company's total and recurring
operating free cash for 2001.

24

An income statement approach calculating the Company's recurring and total
operating free cash flow for the twelve months ended December 31, 2001 is
detailed below.

The $161,495 of net non-recurring cash receipts includes an approximate
$116,300 income tax refund and the collection of receivables from funeral and
cemetery trust funds of approximately $79,800, offset by non-recurring payments
of approximately $27,900 related to the Company's curtailed pension plans and
$6,705 of other non-recurring cash payments. For further discussions and details
related to the Company's operating free cash flow in 2001 and in prior periods,
see Operating Free Cash Flow included in Strategic Initiatives in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations of this Form 10-K.

As has occurred in recent years, the Company substantially reduced its
total debt in 2001.

Peak debt at September 30, 1999............................. $4,200,023
Debt at December 31, 1999................................... $4,060,016
Debt at December 31, 2000................................... $3,268,102
Debt at December 31, 2001................................... $2,534,613
Target debt range at December 31, 2002...................... $1,800,000

Funds available to achieve the Company's debt reduction in 2001 were
primarily generated from (i) the Company's total operating free cash flow, (ii)
proceeds from joint ventures of Australia, Spain and Portugal operations, (iii)
proceeds from the sale of the Company's operations in Norway, the Netherlands
and Belgium, (iv) proceeds from the sale of the Company's equity interest in a
Canadian funeral and cemetery company, and (v) proceeds from sales of certain
non-strategic funeral and cemetery operations in North America.

At December 31, 2001, the Company had current maturities of long-term debt
of $220,640 and $181,343 at February 28, 2002. Current maturities of long-term
debt at December 31, 2001 and February 28, 2002 include approximately $113,500
and $110,900, respectively, of currently maturing debt associated with the
financial restructuring of the Company's French subsidiary, which is expected to
be satisfied with non-cash French assets in 2002. The Company had a cash balance
of approximately $300,000 at February 28, 2002, and will use these funds to
retire the cash portion of its currently maturing debt in 2002.

At December 31, 2001 the Company had primary bank credit agreements
consisting of two committed facilities -- a 2-year term loan and a 5-year,
multi-currency revolving credit agreement. Both of these bank credit agreements
are primarily used for general corporate purposes and will mature in June 2002.
The 2-year term loan allowed for borrowings up to $29,061 and the 5-year,
multi-currency revolving credit agreement allowed for borrowings up to $400,000
as of December 31, 2001. The amount outstanding under these bank credit
agreements was $29,061 at December 31, 2001 and was borrowed under the 2-year
term loan. This amount outstanding was paid off by February 28, 2002,
eliminating any credit availability to the Company from the 2-year term loan.

25

The bank credit agreements include terms requiring the Company to reduce
commitment amounts on these bank credit agreements based upon net cash proceeds
generated from asset sales/joint ventures completed after November 2000. Under
these terms, the availability of borrowings under the 5-year, multi-currency
revolving credit agreement has been reduced from $400,000 at December 31, 2001
to approximately $250,000 at February 28, 2002, primarily as a result of the
completion of the joint venture transaction in February 2002 related to the
Company's United Kingdom operations. In March 2002, the Company amended the
terms of the 5-year multi-currency revolving credit agreement, which, among
other things, reduced the borrowing availability to $150,000 (see Exhibits
included in this Form 10-K).

The Company is currently in discussions with various parties concerning a
new bank credit facility to replace the current 5-year, multi-currency revolving
credit agreement expiring in June 2002. In all likelihood, a new bank credit
facility would be secured by Company assets and would range from $200,000 to
$300,000 in credit availability.

CONTRACTUAL, COMMERCIAL AND CONTINGENT COMMITMENTS

The Company has assumed various financial obligations and commitments in
the ordinary course of conducting its business. The Company has contractual
obligations requiring future cash payments under existing contractual
arrangements, such as management, consultative and non-competition agreements.
The Company also has commercial and contingent obligations which result in cash
payments only if certain contingent events occur requiring the Company's
performance pursuant to a funding commitment.

The following table details the Company's known future cash payments (on an
undiscounted basis) related to various contractual obligations as of December
31, 2001.

- ---------------

(1) The Company's outstanding indebtedness contains standard provisions
including defaults on scheduled principal and interest payments and changes
of control clauses. In addition, the Company's bank credit agreements
contain a maximum leverage ratio, a minimum fixed-charge ratio, and a
minimum net worth requirement. At December 31, 2001, approximately $29,061
was outstanding under the Company's bank credit agreements, which was paid
off subsequent to year end. For further information see note seven to the
consolidated financial statements in Item 8 of this Form 10-K. Current
maturities of long-term debt also include $113,500 associated with the
financial restructuring of the Company's French subsidiary, which is
expected to be satisfied with non-cash French assets during 2002.

(2) The Company has a purchase agreement with a major casket manufacturer for
its North American operations with an original minimum commitment of
$750,000 over a six-year period expiring in 2004. The agreement contains
provisions to increase the minimum annual purchase commitment for normal
price increases. Additionally, the contract provides for a one-year
extension period to 2005 in which the Company is allowed to purchase any
remaining commitment that exists at the end of the original term. Currently,
the amount that would be due in 2005 is estimated to be $30,000.

26

(3) The majority of the Company's operating leases contain options to (i)
purchase the property at fair value on the exercise date, (ii) purchase the
property for a value determined at the inception of the leases, or (iii)
renew for the fair rental value at the end of the primary lease term. The
Company's operating leases primarily relate to funeral service locations,
automobiles, limousines, hearses, cemetery operating and maintenance
equipment and two aircraft. The Company has residual value exposures related
to certain operating leases of approximately $7,500. The Company believes it
is unlikely that it will have to make future cash payments related to these
residual value exposures.

(4) In connection with certain acquisitions related to the Company's South
America operations, the Company entered into contingent purchase obligations
with certain former owners of those businesses. These obligations require
the Company to pay additional consideration if cumulative EBIT thresholds,
as defined in such agreements, are met between 2003 and 2005. As of December
31, 2001, the contingent consideration is estimated to be approximately
$50,000. This additional consideration can be paid partially in stock at the
discretion of the former owners.

(5) The Company has entered into forward exchange contracts that require it to
exchange foreign currency at some future date at a fixed exchange rate.

(6) The Company has entered into management employment, consultative and
non-competition agreements which contractually require the Company to make
cash payments over the contractual period. The agreements have been
primarily entered into with certain officers and employees of the Company
and former owners of businesses acquired. The contractual obligation amounts
pertain to the total commitment outstanding under these agreements and may
not be indicative of future expenses to be incurred related to these
agreements due to cost rationalization programs completed by the Company.
See note sixteen to the consolidated financial statements in Item 8 of this
Form 10-K for further discussion regarding these cost rationalization
program.

The following table details the Company's known potential or possible
future cash payments (on an undiscounted basis) related to various commercial
and contingent obligations as of December 31, 2001.

- ---------------

(1) In support of the Company's operations, the Company has entered into
arrangements with certain high quality surety companies whereby such
companies agree to issue surety bonds on behalf of the Company, as financial
assurance and/or as required by existing state and local regulations. The
surety bonds are used for various business purposes, however, the majority
of the surety bonds issued and outstanding have been issued to support the
Company's prearranged funeral and preneed cemetery activities. The
underlying obligations these surety bonds assure are appropriately recorded
on the Company's consolidated balance sheet as Deferred prearranged funeral
contract revenues and Deferred preneed cemetery contract revenues. The total
surety bonds outstanding at December 31, 2001 was $296,115 ($283,094 related
to prearranged funeral and preneed cemetery obligations). In the event all
of the high quality surety companies cancelled or did not renew the
Company's outstanding surety bonds (generally renewed on a rolling
twelve-month basis), the Company would be required to obtain replacement
assurance or fund an estimate of $202,653 as of December 31, 2001, primarily
into state mandated trust accounts. At this time, the Company does not
believe it will be required to fund material future amounts related to these
surety bonds.

27

(2) The Company is occasionally required to post letters of credit, issued by a
financial institution, to secure certain insurance programs or other
obligations. Letters of credit generally authorize the financial institution
to make a payment to the beneficiary upon the satisfaction of a certain
event or the failure of the Company to satisfy an obligation. The letters of
credit are generally posted for 1-year terms and are usually automatically
renewed upon maturity until such time as the Company has satisfied the
commitment secured by the letter of credit. The Company is obligated to
reimburse the issuer only if the beneficiary collects on the letter of
credit. The Company believes that it is unlikely it will be required to fund
a claim under its outstanding letters of credit. In 2001, the full amount of
the letters of credit were collateralized by interest-bearing cash
investments included in Deferred charges and other assets in the
consolidated balance sheet.

(3) The Company's lending subsidiary has previously participated in a syndicated
credit facility that continues to be outstanding through June 2004. The
borrower, Carriage Services, Inc., has the ability to draw upon this credit
line at any time through maturity, and the Company is required to provide
the funding requested up to its total commitment amount.

(4) In addition to letters of credit described above, the Company currently has
contingent obligations of $29,486 related to the Company's asset sale/joint
venture transactions. The Company has agreed to guarantee certain
representations and warranties associated with such disposition transactions
with letters of credit or interest bearing cash investments. The Company has
interest bearing cash investments of $20,971 included in Deferred charges
and other assets collateralizing these contingent obligations. The Company
does not believe it will ultimately be required to fund to third parties any
claims against these representations and warranties.

(5) The Company has entered into a remarketing agreement with a financial
institution to remarket, under certain terms, the Company's 6.3% notes due
in 2020 that are putable to the Company in 2003. The remarketing agreement
requires the Company to deposit cash collateral to secure the options that
are associated with the remarketing agreement if the Company's senior credit
ratings decline below certain thresholds. Due to the Company's current
senior credit ratings, the Company has interest bearing cash investments
equal to the full value of the corresponding contingent liabilities to the
financial institution under the terms of this remarketing agreement.

SOURCES AND USES OF CASH

Net cash provided by operating activities was $383,335 in 2001 compared to
$368,240 in 2000. Included in this total in 2000 is $144,640 of net cash
provided by discontinued operations. From continuing operations, net cash
provided by operating activities was $223,600 in 2000. Net cash provided by
continuing operations increased by $159,735 in 2001 primarily as a result of (i)
approximately $116,300 of cash received from certain income tax refunds (ii)
increases in funds received from the Company's surety bonding programs for
prearranged funeral and preneed cemetery activities of $34,700, (iii) general
increases in the Company's cash flow generated from its funeral and cemetery
operations as a result of the Company's working capital improvement initiatives
of $90,300 (iv) less cash taxes and cash interest paid of $5,000 and $26,200,
respectively, offset by (i) less funds received related to the collection of
receivables from funeral and cemetery trust funds of approximately $84,600, and
(ii) $27,900 in payments to the Company's curtailed pension plans.

Net cash provided by investing activities was $325,410 in 2001 compared to
$193,068 in 2000. Included in the $193,068 in 2000 was $122,966 of net cash used
in investing activities by discontinued operations. Excluding discontinued
operations in 2000, net cash provided by investing activities was $316,034. The
increase in cash provided by investing activities of $9,376 relates to an
increase in proceeds received from asset sales and joint venturing programs from
certain of the Company's international operations and reduced maintenance
capital expenditure levels.

Net cash used in financing activities was $727,438 in 2001 compared to
$564,463 in 2000. Included in the $564,463 is a source of cash of $143,498
related to the cross-currency components of certain swaps the Company terminated
in the first quarter of 2000. Excluding the $143,498 source of cash, net cash
used in financing activities was $707,961 in 2000. Net cash used in financing
activities in 2001 and 2000 is related to

28

the Company's debt reduction activities. The Company primarily used funds from
income tax refunds, collections of receipts from funeral and cemetery trust
funds, proceeds from sales of property and equipment, proceeds from the
completion of joint ventures and sales of certain international operations and
its cash flow from operations to reduce its debt in both periods.

PREARRANGED FUNERAL AND CEMETERY ACTIVITIES

The Company believes an active funeral and cemetery prearrangement program
can increase future market share in the markets in which the Company operates,
and is one of the Company's important revenue growth initiatives in North
America.

For purposes of discussion in this section, the use of the term
"prearranged" or "prearrangement" refers to funeral programs specifically or
funeral and cemetery programs generally. The use of the term "preneed" refers to
cemetery programs specifically. Prearrangement is a means through which a
customer contractually agrees to the terms of a funeral and/or cemetery burial
to be performed or provided in the future. Revenues associated with prearranged
contracts are deferred until such time that the funeral or cemetery services are
performed or merchandise is delivered. Preneed sales of cemetery interment
rights (cemetery burial property) are not recognized until a minimum percentage
(10%) of the sales price has been collected and the property has been
constructed. The Company incurs sales and marketing costs to procure these
prearrangement contracts. These costs include compensation associated with
maintaining a sales force, telemarketing and lead procurement costs, brochures
and marketing materials, advertising and administrative costs. Those costs
incurred that vary with and are primarily related to the acquisition of new
prearranged contracts (net obtaining costs) are deferred (principally
commissions and related fringe benefits). The remaining costs are expensed as
incurred. When the Company sells a prearranged funeral contract to be funded by
life insurance, the Company receives a general agency commission from the
insurance company, which is also deferred against the net obtaining costs. To
the extent the general agency commission exceeds the net obtaining costs
incurred and deferred, the excess is recorded as a reduction to the sales and
marketing costs expensed. Additionally, the Company may receive cash overrides
related to prearranged funeral contracts to be funded by life insurance as a
result of marketing agreements entered in connection with the sale of its
insurance subsidiaries in 2000. These overrides are recorded in Other income in
the consolidated statement of operations. Funeral net obtaining costs are
amortized over 20 years, a period representing the estimated life of prearranged
funeral contracts. Cemetery net obtaining costs are expensed as the specific
revenue is recognized. For purposes of determining EBITDA, funeral net obtaining
costs included in the consolidated statement of operations are included in the
amortization add back whereas cemetery net obtaining costs are not considered
amortization since it is a specifically identifiable expense associated with the
revenue recognized.

The table below details the North America results of funeral and cemetery
prearranged production for the years ended December 31, 2001 and 2000, including
production from previously owned insurance companies and the related sales and
marketing costs incurred to procure the prearrangements. Additionally, the table
reflects revenues recognized and previously deferred net obtaining costs
recognized in the

29

consolidated statements of operations associated with previously prearranged
production for the years ended December 31, 2001 and 2000.

Prearranged contracts can be funded through several alternatives. With
regards to either prearranged funeral or preneed cemetery contracts, all or a
certain portion of the funds collected are generally required to be placed in
trust accounts pursuant to applicable law. In certain situations, the Company
can post a surety bond as financial assurance pursuant to applicable law in an
amount that would otherwise be required to be trusted. Finally, the funds
collected from prearranged funeral contracts can be used to pay premiums on life
insurance or annuity contracts. Realized investment earnings on funds placed in
trust accounts and increasing death benefits associated with life insurance
contracts are accumulated and deferred until the maturity of each prearranged
contract.

The funds collected on the prearranged contracts that are not required to
be placed in trust accounts or where the Company has posted a surety bond may be
retained by the Company, creating a source of working capital cash flow
generated from operating activities during the period of time before the
prearranged contract matures. Additionally, the Company is allowed in certain
states to distribute a portion of the realized investment earnings which
accumulate in the trust accounts before the prearranged contract matures. When a
prearranged contract matures, the Company receives the funds from trust
(principal and previously undistributed trust income) and any remaining
receivable due from the customer, or the proceeds from the third party insurance
companies (original contract amount and increasing death benefits). The deferred
prearranged funeral or cemetery contract revenue is recognized in the
consolidated statement of operations. For trust or bonded contracts, the revenue
recognized is generally greater than the cash received by the Company at the
time a prearranged contract matures, and creates a negative effect on working
capital cash flow generated from operating activities.

The cash flow activity from originating funeral production until the
maturity of a prearranged funeral contract is captured in the line item Net
effect of prearranged funeral production and maturities in the consolidated
statement of cash flows. Cash flow is provided by funds collected from the
customer which is retained by the Company, and distributed trust fund earnings.
This is reduced by the payment of deferred net obtaining costs and the negative
effect of contract maturities.

The cash flow activity from originating the preneed cemetery contract until
recognition of the deferred revenue is reflected through Changes in receivables
and Changes in other assets in the consolidated statement of cash flows. Changes
in receivables is affected by cash flow provided by funds collected from the
customer which is retained by the Company and distributed trust earnings,
reduced by the negative effect of preneed cemetery contract revenue recognition.
Changes in other assets is affected by the cash use associated with the

30

payment of deferred net obtaining costs when the preneed cemetery contracts are
originated, offset by the reduction in deferred net obtaining costs associated
with recognition of the preneed cemetery revenue.

The Company believes its funeral and cemetery prearrangement program will
continue to be cash flow positive because of the cash flow initiatives which
have been previously discussed.

The following table reflects the total North American backlog of deferred
prearranged contract revenues and the prearranged assets associated with the
contracts at December 31, 2001 and 2000:

The deferred prearranged contract revenue associated with prearranged
funeral contracts and preneed cemetery contracts are reflected separately in the
consolidated balance sheet. Both funeral and cemetery deferred net obtaining
costs (net of an estimated allowance for cancellation) are included as a
component of Deferred charges and other assets. Prearranged assets associated
with prearranged funeral contracts, which consist of amounts due from trusts,
customer receivables or third party insurance receivables (net of an estimated
allowance for cancellations), are reflected as Prearranged funeral contracts
separately in the consolidated balance sheet. Prearranged assets associated with
preneed cemetery contracts, which consist of amounts due from trusts and
customer receivables (net of an estimated allowance for cancellation) are
reflected in Current and Long term receivables in the consolidated balance
sheet.

The Company estimates that deferred revenue and deferred net obtaining
costs to be recognized in 2002 for North America funeral and cemetery operations
are $320,000 and $7,000 for funeral, and $296,000 and $41,000 for cemetery,
respectively.

CREMATIONS

In the death care industry in recent years, there has been a growing trend
in the number of cremations performed in North America as an alternative to
traditional funeral service dispositions. The west coast of the United States
and the state of Florida have the highest concentration of cremation consumers
in North America. While cremations performed by the Company in North America
typically have higher gross profit margins than traditional funeral services,
cremations usually result in lower revenue and gross profit dollars to the
Company than traditional funeral services. In North America during 2001, 37.0%
of all funeral services performed by the Company were cremation cases, compared
to 36.3% performed in 2000. In recent years the Company has continued to expand
its cremation memorialization products and services in several North America
markets which has resulted in higher average sales for cremation cases compared
to historical levels. The Company's cremation memorialization products and
services include providing memorial services, several options in memorialization
gardens built in certain sections of the Company's cemeteries, urns, and niches
in mausoleums or columbariums in which to place remains. The Company also
continues to expand its nationally branded cremation service company called
National Cremation Service(TM) (NCS). NCS currently operates in fourteen high
cremation states and has plans to continue to expand to nineteen states by the
end of 2003. The Company believes that the NCS consumer would not have chosen
the Company's traditional funeral service locations as an alternative to NCS,
and therefore is considered an incremental customer to the Company.

31

FINANCIAL ASSURANCES

In support of the Company's operations, the Company has entered into
arrangements with certain high quality surety companies whereby such companies
agree to issue surety bonds on behalf of the Company as financial assurance
and/or as required by existing state and local regulations. The surety bonds are
used for various business purposes; however, the majority of the surety bonds
issued and outstanding have been used to support the Company's prearranged
funeral and preneed cemetery activities. The underlying obligations these surety
bonds assure are appropriately recorded on the Company's consolidated balance
sheet as Deferred prearranged funeral contract revenues and Deferred preneed
cemetery contract revenues (see notes four and five to the consolidated
financial statements in Item 8 and Prearranged Funeral and Cemetery Activities
in this Financial Condition, Liquidity and Capital Resources of this Form 10-K
for further details regarding the Company's prearranged funeral and preneed
cemetery activities). The breakdown of bonds between funeral and cemetery
prearrangements, as well as surety bonds for other activities, at December 31,
is as follows:

As the Company sells prearranged funeral contracts and preneed cemetery
contracts, the Company intends to post surety bonds where allowed by applicable
law. The Company posts the surety bond in lieu of trusting a certain amount of
funds received from the customer. The amount of the bond posted is determined by
the total amount of the prearranged contract that would otherwise be required to
be trusted, in accordance with applicable state law. Bond premiums are paid
annually and are automatically renewable until maturity of the underlying
prearranged contracts. Except for cemetery preconstruction bonds (which are
irrevocable), the surety companies generally have the right to cancel the surety
bonds at any time with appropriate notice. In the event a surety company were to
cancel the surety bond, the Company would be required to obtain replacement
assurance or fund a trust for an amount generally less than the posted bond
amount, unless the customer's prearranged contract has been paid in full. A
quantitative detail of this subject is discussed in the Contractual, Commercial
and Contingent Commitments section included in this Financial Condition,
Liquidity and Capital Resources.

NON-RECURRING ITEMS AND DEFINITIONS AND DESCRIPTIONS OF PRO FORMA FINANCIAL
INFORMATION

Non-recurring items are excluded from certain financial information in this
Form 10-K related to discontinued operations, non-recurring charges for
restructuring activities or planned sales of businesses, cumulative effects of
accounting changes and extraordinary gains on early extinguishments of debt. The
Company has further defined certain items for consistent presentation and
understanding throughout the financial statements.

COMPARABLE AND PRO FORMA REVENUES

Comparable results in all periods presented in this Form 10-K represent
financial results excluding operations that have been acquired or constructed
after January 1, 2000, or operations that have been divested by the Company
prior to December 31, 2001. As a result, some acquisitions entered into in 1999
may not be included for the full year, depending on the timing of the
acquisition.

32

Pro forma 1999 results include the effect of SAB No. 101 as if it had
occurred January 1, 1999. These results have been included for consistency in
analysis between all years presented. The Company has made all adjustments for
the effect of 1999 SAB No. 101 results on a comparable basis as adjustments to
acquired, constructed or divested operations would not materially change those
results.

For further discussion of divestitures, see note thirteen to the
consolidated financial statements in Item 8 of this Form 10-K.

EBITDA

The Company calculates EBITDA for each period by adding interest and tax
expense back to net income before non-recurring items and then adding back
depreciation and amortization expense. Reported EBITDA before non-recurring
items for the years ended December 31, 2001 and 2000 is $514,282 and $506,377
respectively.

EARNINGS BEFORE NON-RECURRING ITEMS

Non-recurring items are reconciling differences between accounting
principles generally accepted in the United States and pro forma financial
information that the Company considers to be outside the scope of its recurring
operating activities. Such non-recurring items relate to earnings from
discontinued operations, losses on the sales of discontinued operations,
restructuring and non-recurring charges and losses on sales of investments,
extraordinary gains on early extinguishments of debt, and cumulative effects of
accounting changes. The following table reconciles net losses in 2001, 2000, and
1999 to earnings before non-recurring items, net of tax:

OTHER MATTERS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 addresses financial accounting and reporting
for business combinations and establishes the purchase method for accounting for
such transactions. SFAS No. 142 addresses accounting for goodwill and other
intangible assets and redefines useful lives, amortization periods and
impairment of goodwill. Under the new standard, goodwill will no longer be
amortized, but must be tested for impairment annually. Currently, the Company
has $1,409,309 in Goodwill in its consolidated balance sheet. For the years
ended December 31, 2001, 2000, and 1999 amortization of goodwill from continuing
operations was $59,237, $65,541, and $66,367, respectively. SFAS No. 142
requires goodwill to be tested for impairment by assessing the fair value of
reporting units, generally one level below reportable segments. The Company has
estimated the adoption of SFAS No. 142 will result in a non-cash charge up to
$150,000 for goodwill associated with the Company's North America cemetery
reporting segment. The Company does not expect to incur a charge upon adoption
of SFAS No. 142 related to the goodwill associated with its North America
funeral reporting unit. In December 2001, the Company reported a pretax charge
of $573,394 in accordance with SFAS No. 121 related to its international
operations in connection with its decision to joint venture or dispose of these
businesses. The amount of goodwill written off in connection with this charge
was $489,871. As a result, the Company does not anticipate the adoption of SFAS
No. 142 to have a material impact on its international reporting units. The
Company is required to adopt SFAS No. 141 for any acquisitions subsequent to
June 30, 2001 and will adopt SFAS No. 142 effective January 1, 2002.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. Under the new standard, the fair value of a liability for an asset
retirement obligation should be recognized in the period in which it is
incurred, if a reasonable estimate can be made. The associated costs are
capitalized as part of the carrying amount of the long-lived asset and allocated
to expense over the useful life of the asset. The Company does not expect the
adoption of SFAS No. 143 to have a significant effect on the Company's
consolidated financial position, results of operations, or cash flows. The
Company is required to adopt SFAS No. 143 during the first quarter of the year
ending December 31, 2003.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, and addresses the impairment or disposal of long-lived assets. The Company
is currently assessing the impact of this statement on its consolidated
financial position and results of operations; however, it does not believe the
new standard will have a significant impact on the consolidated statement of
cash flows. The Company is required to adopt SFAS No. 144 effective January 1,
2002.

34

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

The statements in this Form 10-K that are not historical facts are
forward-looking statements made in reliance on the "safe harbor" protections
provided under the Private Securities Litigation Reform Act of 1995. These
statements may be accompanied by words such as "believe," "estimate," "project,"
"expect," "anticipate" or "predict," that convey the uncertainty of future
events or outcomes. These statements are based on assumptions that the Company
believes are reasonable; however, many important factors could cause the
Company's actual consolidated results in the future to differ materially from
the forward-looking statements made herein and in any other documents or oral
presentations made by, or on behalf of, the Company. These factors are discussed
below. The Company assumes no obligation to publicly update or revise any
forward-looking statements made herein or any other forward-looking statements
made by the Company, whether as a result of new information, future events or
otherwise.

RISKS RELATED TO THE COMPANY'S BUSINESS

The Company's ability to execute its strategic plan depends on many factors,
many of which are beyond the Company's control.

The Company's strategic plan is focused on reducing overhead costs,
increasing cash flow, asset redeployment, and reducing debt while at the same
time developing key revenue initiatives designed to generate future internal
growth in its core funeral and cemetery operations without the outlay of
significant additional capital. Many of the factors necessary for the Company's
execution of its strategic plan are beyond the Company's control. The Company
can give no assurance that it will be able to execute any or all of its
strategic plan. Failure to execute any or all of the strategic plan could have a
material adverse effect on the Company, its financial condition, its results of
operations and its future prospects.

The Company's indebtedness limits funds available for its operations.

As of December 31, 2001, the Company had approximately $2.5 billion in
debt. The Company's indebtedness may limit its ability to obtain additional
financing, limit its flexibility in planning for, or reacting to, changes in its
markets, require the sale of assets which it would otherwise want to retain and
require the dedication of more cash flow to service its debt than it desires.
The Company's ability to satisfy its indebtedness in a timely manner will be
dependent on the successful execution of its long-term strategic plan and the
resulting improvements in its operating performance.

The Company's bank credit agreements and indentures contain covenants that may
prevent the Company from engaging in certain transactions.

The Company's bank credit agreements and indentures contain, among other
things, various affirmative and negative covenants that may prevent the Company
from engaging in certain transactions that might otherwise be considered
beneficial to the Company. These covenants limit, among other things, the
ability of the Company and its subsidiaries to:

- borrow money;

- pay dividends or distributions;

- purchase or redeem stock;

- make investments;

- engage in transactions with affiliates;

- engage in sale-leaseback transactions; and

- consummate certain liens on assets.

The credit agreements also require the Company to maintain certain
financial ratios and satisfy other financial condition tests. Although the
maturity of the Company's bank credit agreements and indentures also

35

brings an end to the restrictions created by them, any future credit agreements
or indentures may contain terms and conditions that are more or less restrictive
than those of the existing bank credit agreements and indentures.

If the Company lost the ability to use surety bonding to support its
prearranged funeral and preneed cemetery activities, the Company could have to
make material cash payments to fund certain trust funds.

The Company has entered into arrangements with certain high quality surety
companies whereby such companies agree to issue surety bonds on behalf of the
Company, as financial assurance and/or as required by existing state and local
regulations. The surety bonds are used for various business purposes; however,
the majority of the surety bonds issued and outstanding have been issued to
support the Company's prearranged funeral and preneed cemetery activities. In
the event the surety companies canceled or did not renew the outstanding surety
bonds, the Company could have to obtain replacement assurance or fund certain
trust funds, which could result in material cash outflows. Furthermore, the
Company's future cash flows could be materially affected if the Company lost
access to using surety bonds for financial assurance in its normal course of
business.

The funeral home and cemetery industry is highly competitive.

In North America and most international markets in which the Company
operates, the funeral and cemetery industry is characterized by a large number
of locally owned, independent operations. To compete successfully, the Company's
funeral service locations and cemeteries must maintain good reputations and high
professional standards in the industry, as well as offer attractive products and
services at competitive prices. In addition, the Company must market itself in
such a manner as to distinguish itself from its competitors. If it is unable to
successfully compete, the Company, its financial condition, its results of
operations and its future prospects could be materially adversely effected.

The Company's affiliated funeral and cemetery trust funds own investments in
equity securities and mutual funds, which are affected by financial market
conditions that are beyond the Company's control.

In connection with the Company's prearranged funeral operations and preneed
cemetery merchandise sales, affiliated funeral and cemetery trust funds own
investments in equity securities and mutual funds. The Company's earnings and
investment gains and losses on these equity securities and mutual funds are
affected by financial market conditions that are beyond the Company's control.
If the Company's earnings from perpetual care trust funds decline, the Company
would experience a decline in current revenues. If the Company's earnings from
other trust funds decline, the Company would likely experience a decline in
future revenues. In addition, if the trust funds experienced investment losses,
there would likely be insufficient funds in the trusts to cover the costs of
delivering services and merchandise or maintaining cemeteries in the future. The
Company would have to cover any such shortfall with cash flows, which could have
a material adverse effect on the Company, its financial condition, its results
of operations and its future prospects.

As of December 31, 2001, net unrealized depreciation in the prearranged
funeral and cemetery merchandise and services trust funds amounted to $13,817
and $23,823 respectively. The perpetual care trust funds had net unrealized
appreciation of $3,664 as of December 31, 2001. See notes four and five to the
consolidated financial statements in Item 8 of this Form 10-K. The following
table summarizes the investment returns on the Company's trust funds for the
last three years.

36

Increasing insurance benefits related to prearranged funeral contracts funded
through life insurance or annuity contracts may not cover future increases in
the cost of providing a price guaranteed funeral service.

The Company sells price guaranteed prearranged funeral contracts through
various programs providing for future funeral services at prices prevailing when
the agreements are signed. For prearranged funeral contracts funded through life
insurance or annuity contracts, the Company receives in cash a general agency
commission of approximately 14% of the total sale from the third party insurance
company. Additionally, the Company accrues an increasing insurance benefit
associated with the contract of approximately 1% per year to be received in cash
by the Company at the time the funeral service is performed. There is no
guarantee that the increasing insurance benefit will cover future increases in
the cost of providing a price guaranteed funeral service, which could materially
adversely affect the Company's future cash flows, revenues and profit margins.

The Company may not be able to joint venture or sell its international
operations on acceptable terms or at all.

The Company's long-term strategic plan includes the joint venture or sale
of its remaining international operations outside of North America in order to
create cash proceeds to reduce debt. If the Company is unable to joint venture
or sell these operations on acceptable terms or otherwise, it could adversely
affect the Company's ability to achieve its strategic plan.

The Company's foreign operations and investments involve special risks.

The Company's activities in areas outside the United States are subject to
risks inherent in foreign operations, including:

- Loss of revenue, property and equipment as a result of hazards such as
expropriation, nationalization, wars, insurrection and other political
risks;

- The effects of currency fluctuations and exchange controls, such as
devaluation of foreign currencies and other economic problems; and

- Changes in laws, regulations and policies of foreign governments,
including those associated with changes in the governing parties.

The Company is the subject of lawsuits in Florida that, if decided against it,
could have a negative effect on its financial condition, results of operations
and future prospects.

Within the last four months, private plaintiffs and the state of Florida
have sued the Company for, among other things, allegedly deceiving customers by
destroying caskets and remains and overselling space in two of its south Florida
cemeteries. The private lawsuit is a purported class action which has not been
certified. The state lawsuit asks the court, among other things, to place the
two cemeteries in the control of a receiver. The ultimate outcome of these cases
cannot be determined at this time. The Company has insurance policies which are
designed to limit the Company's cash outflows in the event of a decision adverse
to the Company in these matters. If an adverse decision in these matters exceeds
the Company's insurance coverage or if the insurance coverage is deemed not to
apply to these matters, an adverse decision could have a material adverse effect
on the Company, its financial condition, its results of operations and its
future prospects.

The Company is the subject of class action lawsuits that, if decided against
it, could have a negative effect on its financial condition, results of
operations and future prospects.

In January 1999, 23 putative class-action lawsuits were filed in the United
States District Courts for the Southern and Eastern Districts of Texas, on
behalf of persons and entities who (1) acquired shares of the Company's common
stock in the merger with Equity Corporation International, or ECI; (2) purchased
shares of the Company's common stock in the open market during the period from
July 17, 1998 through January 26, 1999 (referred to herein as the class period);
(3) purchased call options in the open market during the class period; (4) sold
put options in the open market during the class period; (5) held employee stock
options in
37

ECI that became options to acquire the Company's stock pursuant to the ECI
merger; and (6) held employee stock options to purchase the Company's common
stock under a plan during the class period. These actions have been consolidated
into one lawsuit in the federal court in Houston, Texas. The consolidated
complaint alleges that the Company and three of its current or former executive
officers and directors violated sections of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder, allegedly by issuing false and misleading
statements and failing to disclose material information concerning the Company's
prearranged funeral business and other financial matters, including in
connection with the ECI merger. The consolidated complaint also alleges that the
Company violated Section 11 and Section 12 of the Securities Act of 1933 in
connection with the ECI merger related claims. Plaintiffs allege damages based
on the market loss, during the class period, of the outstanding shares,
including those exchanged in the ECI merger. The case is subject to the Private
Securities Litigation Reform Act of 1995 (PSLRA). Under the PSLRA, all discovery
is currently stayed pending the court's resolution of a motion to dismiss. In
October 1999, the Company filed a motion to dismiss the consolidated complaint
that has not been ruled on by the court.

Four similar cases were also brought in the state courts of Texas by former
officers, directors and shareholders of ECI alleging violations of Texas
securities laws and statutory and common law fraud in connection with the ECI
merger.

The ultimate outcome of the stockholder class-action and employee cases
cannot be determined at this time. The plaintiffs have not been required to
quantify their claim of damages. Certain insurance policies held by the Company
to cover potential director and officer liability may limit the Company's cash
outflows in the event of a decision adverse to the Company in these matters. If
an adverse decision in these matters exceeds the insurance coverage or if the
insurance coverage is deemed not to apply to these matters, an adverse decision
to the Company in this matter could have a material adverse effect on the
Company, its financial condition, its results of operations and its future
prospects.

RISKS RELATED TO THE DEATH CARE INDUSTRY

If the number of deaths in the Company's markets declines, its cash flows and
revenues may decrease.

The United States Bureau of the Census estimates that the number of deaths
in the United States will increase by approximately 1 percent per year from 2000
to 2010. However, longer lifespans could reduce the number of deaths. If the
number of deaths declines, the number of funeral services and interments
performed by the Company will decrease and the Company, its financial condition,
its results of operations and its future prospects may be materially adversely
effected.

The growing trend in the number of cremations performed in North America could
result in lower revenue and gross profit dollars.

In the death care industry in recent years, there has been a growing trend
in the number of cremations performed in North America as an alternative to
traditional funeral service dispositions. While cremations performed by the
Company in North America typically have higher gross profit margins than
traditional funeral services, cremations usually result in lower revenue and
gross profit dollars to the Company than traditional funeral services. In North
America during 2001, 37.0% of all funeral services performed by the Company were
cremation cases compared to 36.3% performed in 2000. In recent years the Company
has continued to expand its cremation memorialization products and services in
several North American markets, which has resulted in higher average sales for
cremation cases compared to historical levels. The Company also continues to
expand its nationally branded cremation service locations called National
Cremation Service(R). If the Company is unable to successfully expand its
cremation memorialization products and services or its nationally branded
cremation service locations, the Company, its financial condition, its results
of operations and its future prospects could be materially adversely effected.

The funeral home and cemetery businesses are high fixed-cost businesses.

The majority of the Company's operations throughout the world are managed
in groups called "clusters". Clusters are geographical groups of funeral service
locations and cemeteries that lower their individual
38

overhead costs by sharing common resources such as operating personnel,
preparation services, clerical staff, motor vehicles and preneed sales
personnel. Personnel costs, the largest of the operating expenses for the
company, are the costs components most beneficially affected by clustering. The
Company must incur many of these costs no matter the number of funeral services
or interments performed. Because the Company cannot necessarily decrease these
costs when it experiences declines in sales, declines in sales can cause
margins, profits and cash flows to decline at a greater rate than the decline in
revenues.

The funeral home and cemetery industry is highly regulated.

The Company's operations are subject to regulation, 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. The impact of such regulations varies depending on the location
of the Company's funeral and cemetery operations. Violations of applicable laws
could result in fines or other sanctions to the Company.

In addition, from time to time, governments and agencies propose to amend
or add regulations, which could increase costs and decrease cash flows. For
example, foreign, federal, state, local and other regulatory agencies have
considered and may enact additional legislation or regulations that could affect
the death care industry. Some 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 the ability of the Company 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 the Company operates, these and other possible proposals
could have a material adverse effect on the Company, its financial condition,
its results of operations and its future prospects.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information presented below should be read in conjunction with notes
eight and nine to the consolidated financial statements in Item 8 of this Form
10-K.

The Company historically used derivatives primarily in the form of interest
rate swaps and cross-currency interest rate swaps in combination with local
currency borrowings in order to manage its mix of fixed and floating rate debt
and to hedge the Company's net investment in foreign assets. The Company
generally does not participate in derivative transactions that are leveraged or
considered speculative in nature.

At December 31, 2001, 99% of the Company's total debt consisted of fixed
rate debt at a weighted average rate of 6.75%. At December 31, 2000, the
Company's total debt consisted of approximately 76% of fixed-rate debt at a
weighted average rate of 6.81%. The Company's floating-rate debt at December 31,
2001, had a weighted average interest rate of 4.93%, of which approximately 6%
was based in foreign markets. Comparatively, the Company had approximately 24%
of floating-rate debt at December 31, 2000, at a weighted average interest rate
of 7.94%, of which 35% was based in foreign markets.

The Company does not have a significant investment in foreign operations
that are in highly inflationary economies. Approximately 16% of the Company's
net investment and 26% of its operating income are denominated in foreign
currencies at December 31, 2001. At December 31, 2000, approximately 24% of the
Company's net investment and 26% of its operating income were denominated in
foreign currencies.

MARKETABLE EQUITY AND DEBT SECURITIES -- PRICE RISK

In connection with the Company's prearranged funeral operations and preneed
cemetery merchandise and service sales, the related funeral and cemetery trust
funds own investments in equity securities and mutual funds, which are sensitive
to current market prices. Cost and market values as of December 31, 2001 and
2000 are presented in notes four and five to the consolidated financial
statements in Item 8 of this Form 10-K.

39

MARKET-RATE SENSITIVE INSTRUMENTS -- INTEREST RATE AND CURRENCY RISK

In addition to debt instruments, the Company was a party to two derivative
instruments that were subject to interest rate and currency exchange rate
exposures at December 31, 2001. The Company performs a sensitivity analysis to
assess the impact of these risks on earnings. This analysis determines the
effect of a hypothetical 10% adverse change in market rates. In actuality,
market rate volatility is dependent on many factors that are impossible to
forecast. Therefore, the adverse changes described below could differ
substantially from the hypothetical 10% change.

Although the derivative instruments outstanding at December 31, 2001 were
sensitive to market rates, they have been excluded from this analysis since they
qualify and are designated as effective hedges of net foreign investments. Given
this, the changes in the market values of these instruments, caused by market
rates, do not affect interest expense. There were no derivative instruments
outstanding at December 31, 2000. Therefore, the effect of the sensitivity
analysis described below results solely from the Company's debt instruments.

A sensitivity analysis of debt instruments with variable interest rate
components was modeled to assess the impact that changing interest rates could
have on pretax earnings. The sensitivity analysis assumes an instantaneous 10%
adverse change to the then prevailing interest rates with all other variables
held constant. Given this model, the Company's pretax earnings, on an annual
basis, would be negatively impacted by approximately $153 on December 31, 2001,
and $6,301 on December 31, 2000.

A similar model was used to assess the impact of changes in exchange rates
for foreign currencies on interest expense. At December 31, 2001, the Company's
debt exposure was primarily associated with the British pound. At December 31,
2000, in addition to exposure associated with the British pound, the Company was
also subject to exposure with the Canadian dollar and Australian dollar. A 10%
adverse change in the strength of the U.S. dollar would have negatively affected
the Company's interest expense, on an annual basis, by approximately $834 and
$1,998 on December 31, 2001, and 2000, respectively.

40

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE

All other schedules have been omitted because the required information is
not applicable or is not present in amounts sufficient to require submission or
because the information required is included in the consolidated financial
statements or the related notes thereto.

41

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
Service Corporation International

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Service Corporation International at December 31, 2001 and December
31, 2000, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. As discussed in note three to the consolidated
financial statements, effective January 1, 2001, the Company changed its method
of accounting for derivative financial instruments and hedging activities and,
effective January 1, 2000, changed its method of accounting for prearranged
sales activities.

PricewaterhouseCoopers LLP
Houston, Texas
March 27, 2002

42

SERVICE CORPORATION INTERNATIONAL

CONSOLIDATED STATEMENT OF OPERATIONS

(See notes to consolidated financial statements)
43

SERVICE CORPORATION INTERNATIONAL

CONSOLIDATED BALANCE SHEET

(See notes to consolidated financial statements)
44

SERVICE CORPORATION INTERNATIONAL

CONSOLIDATED STATEMENT OF CASH FLOWS

(See notes to consolidated financial statements)
45

SERVICE CORPORATION INTERNATIONAL

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(See notes to consolidated financial statements)
46

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE ONE

NATURE OF OPERATIONS

Service Corporation International (SCI or the Company) is the largest
provider of death care services in the world through its funeral service and
cemetery operations. At December 31, 2001, the Company operated 3,099 funeral
service locations, 475 cemeteries and 177 crematoria located in 11 countries.

The funeral service locations and cemetery operations consist of the
Company's funeral service locations, cemeteries, crematoria and related
businesses. Company personnel at the funeral service locations provide all
professional services relating to funerals, including the use of funeral
facilities and motor vehicles. Funeral related merchandise is sold at funeral
service locations and certain funeral service locations contain crematoria. The
Company sells prearranged 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 interment rights (including mausoleum spaces, lots
and lawn crypts) and sell cemetery related merchandise. Cemetery items are sold
on an atneed or preneed basis. Company personnel at cemeteries perform interment
services and provide management and maintenance of cemetery grounds. Certain
cemeteries also operate crematoria. There are 188 combination locations that
contain a funeral service location within a Company owned cemetery.

NOTE TWO

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of SCI and all
majority-owned subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
years to conform to current period presentation with no effect on the
consolidated financial position, results of operations or cash flows.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. As a result, actual results could differ from these
estimates.

In 2001 several of the Company's strategic initiatives focused on
increasing cash flows. These initiatives included reviewing obligations to
deliver cemetery merchandise and services to customers in order to collect funds
due to the Company from the applicable cemetery trust funds and improving
collection of trade receivables. In connection with the review of obligations to
deliver cemetery merchandise and services, the Company recognized a change in
estimate which had the effect of increasing cemetery revenues and gross profit
in 2001 by $68,500 and $54,900, respectively. The Company intends to continue
the review of these obligations; however, the impact recognized in future
periods will depend on the outcome of such reviews. The Company also recognized
a reduction of approximately $4,000 of its allowance for doubtful accounts as a
result of improved collections of funeral receivables.

Cash Equivalents

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
47

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Inventories and Cemetery Property

Funeral merchandise and cemetery burial property and merchandise are stated
at the lower of average cost or market.

Property, Plant and Equipment, net

Property, plant and equipment are recorded at cost. Maintenance and repairs
are charged to expense whereas renewals and major replacements are capitalized.
Costs of property sold or retired and the related accumulated depreciation are
removed from the consolidated balance sheet; resulting gains and losses are
included in the consolidated statement of operations.

Goodwill

The excess of purchase price over the fair value of identifiable net assets
acquired in transactions accounted for as purchases are included in Goodwill and
generally amortized on a straight line basis over 40 years which, in the opinion
of management, is not necessarily the maximum period benefited. Fair values
determined at the date of acquisition are determined by management or
independent appraisals. Many of the Company's acquired funeral service locations
have been providing high quality service to client families for many years. Such
loyalty often forms the basic valuation of the funeral business. Additionally,
the death care industry has historically exhibited stable cash flows.
Accumulated amortization of goodwill from continuing operations as of December
31, 2001 and 2000 was $321,426 and $311,826, respectively.

Depreciation and Amortization

Depreciation of property, plant and equipment is provided using the
straight line method over the estimated useful lives of the various classes of
assets. Property and plant are depreciated over a period ranging from seven to
fifty years, equipment is depreciated over a period from five to twenty years
and leasehold improvements are depreciated over a range of five to fifty years.
For the years ended December 31, 2001, 2000, and 1999 depreciation expense from
continuing operations was $100,263, $109,995, and $130,121, respectively. In
conjunction with the write down of the Company's international operations being
held for sale, all property, plant, and equipment will cease being depreciated
while those assets are held for sale. (See note sixteen to the consolidated
financial statements.)

For the years ended December 31, 2001, 2000, and 1999 amortization expense
of goodwill from continuing operations was $59,237, $65,541, and $66,367,
respectively. See Recent Accounting Pronouncements within in this footnote for
further information regarding goodwill.

Prepaid management, consultative and non-competition agreements, primarily
with former owners and key employees of businesses acquired, are amortized on a
straight-line basis over the lives (generally from five to ten years) of the
respective contracts. Amortization expense associated with these agreements for
the years ended December 31, 2001, 2000, and 1999 was $19,715, $21,527, and
$26,659, respectively.

Net obtaining costs incurred pursuant to the sales of trust funded and
third party insurance funded prearranged funeral contracts are deferred and
amortized over 20 years, a period representing the estimated life of the
prearranged funeral contracts. In connection with the change in accounting
associated with Staff Accounting Bulletin No. 101 (SAB No. 101) effective as of
January 1, 2000, (see note three to the consolidated financial statements), the
Company wrote off certain previously deferred net obtaining costs. Amortization
associated with net obtaining costs for the years ended December 31, 2001, 2000,
and 1999 were $7,318, $7,116, and $21,904, respectively.

Other miscellaneous amortization from continuing operations for the years
ended December 31, 2001, 2000, and 1999 was $7,404, $19,852, and $1,039,
respectively.

48

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of

The Company reviews its long-lived assets for impairment when changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of." SFAS No. 121 requires that long-lived
assets and certain intangibles to be held and used be reported at the lower of
carrying amount or fair value. Assets to be disposed of and assets not expected
to provide any future service potential to the Company are recorded at the lower
of carrying amount or fair value less estimated cost to sell. See Recent
Accounting Pronouncements within this footnote for impairment reviews subsequent
to December 31, 2001.

Foreign Currency Translation

All assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at exchange rates in effect as of the end of the
reporting period. Revenue and expense items are translated at the average
exchange rates for the reporting period. The resulting translation adjustments
are included in stockholders' equity as a component of Accumulated other
comprehensive income (loss) in the consolidated statement of stockholders'
equity.

With respect to transactions denominated in currencies other than the
functional currencies of the Company's operations, both realized and unrealized
currency gains and losses associated with these transactions are recorded
through the consolidated statement of operations.

As a result of recent economic events, the Argentine government halted
trading of its currency in late December 2001. Although the official exchange
rate between the Argentine peso and the U.S. dollar remained at an exchange rate
of one to one through the end of the year, as of December 31, 2001, there was no
exchangeability between the peso and dollar. Subsequent to year end, the
Argentine government announced the creation of a dual-currency system in which
certain qualifying transactions would be settled at a fixed rate of 1.4 pesos to
the U.S. dollar while other transactions would be settled based on a
free-floating market exchange rate. Exchangeability between the Argentine peso
and the U.S. dollar was re-established on January 11, 2002. As a result of the
above situation, the Company has converted the ending balance sheet of its
Argentine subsidiary at the closing rate established on the first day exchange
houses reopened, 1.6750 pesos to the U.S. dollar. The official exchange rate in
existence during 2001 of one Argentine peso to one U.S. dollar was used to
translate transactions that occurred throughout the year.

Funeral Operations

Funeral revenue is recognized when funeral services are performed. The
Company's trade receivables consist of amounts due for funeral services already
performed. An allowance for doubtful accounts has been provided based on
historical experience. The Company sells price guaranteed prearranged funeral
contracts through various programs providing for future funeral services at
prices prevailing when the agreements are signed. Revenues associated with sales
of prearranged funeral contracts (which include accumulated trust earnings and
increasing insurance benefits) are deferred until such time that the funeral
services are performed (see note four to the consolidated financial statements).

In 2000, the net effect of prearranged funeral production and maturities
was reclassified from cash flows from investing activities to cash flows from
operating activities. While cash flows related to these price guaranteed
prearranged funeral contracts have characteristics of both cash flows from
operating and investing activities, the predominant characteristics are those of
cash flows from operating activities. For comparative purposes, the
reclassification was made to the 1999 consolidated statement of cash flows.

49

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Cemetery Operations

Sales of atneed cemetery interment rights, merchandise and services are
recognized when the service is performed or merchandise delivered. Preneed
cemetery interment right sales of constructed cemetery burial property are not
recognized until a minimum percentage (10%) of the sales price has been
collected. Revenues related to the preneed sale of unconstructed cemetery burial
property are deferred until such property is constructed and the minimum
percentage of the sales price has been collected. Further, the Company defers
certain direct obtaining costs associated with these sales which are expensed as
revenue is recognized (see notes three and five to the consolidated financial
statements). Prior to the change in accounting related to SAB No. 101, all
cemetery interment right sales, together with associated merchandise and
services, were recorded as income at the time contracts were signed.

Costs related to the sales of interment rights are the accumulation of
property costs and development costs specifically identified by project. At the
completion of the project, costs are charged to operations as revenue is
recognized. Costs related to sales of merchandise and services are based on
actual costs incurred.

Allowances for customer cancellations are provided at the date of sale
based upon historical experience. Pursuant to state law, all or a portion of the
proceeds from cemetery merchandise or services sold on a preneed basis may be
required to be paid into trust funds. Merchandise and services funds trusted at
December 31, 2001 and 2000 were $915,127 and $942,896, respectively. The Company
defers realized investment earnings related to these merchandise and services
trusts until the associated merchandise is delivered or services are performed.

A portion of the proceeds from the sale of cemetery property is required by
state law to be paid into perpetual care trust funds. Realized investment
earnings from these trusts are recognized in current cemetery revenues and are
intended to defray cemetery maintenance costs, which are expensed as incurred.
Perpetual care funds trusted at December 31, 2001 and 2000 were $543,893 and
$516,885, respectively. The principal of such perpetual care trust funds
generally cannot be withdrawn by the Company and therefore is not included in
the consolidated balance sheet. See note six to the consolidated financial
statements regarding preneed cemetery activity.

Derivatives

Derivative instruments are recognized in the consolidated balance sheet at
their fair values. For derivatives that qualify and are designated as hedges of
future cash flows or net foreign investments, the changes in fair values are
recorded in Other comprehensive income of the consolidated statement of
stockholders equity. For derivatives that qualify and are designated as hedges
of fair value, the changes in fair values are recorded in earnings, offset by
the changes in fair values of the underlying asset or liability. The changes in
fair values of derivatives that do not qualify for hedge accounting and the
ineffective portion of derivatives that do qualify for hedge accounting are
recorded in earnings.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 addresses financial accounting and reporting
for business combinations and establishes the purchase method for accounting for
such transactions. SFAS No. 142 addresses accounting for goodwill and other
intangible assets and redefines useful lives, amortization periods and
impairment of goodwill. Under the new standard, goodwill will no longer be
amortized, but must be tested for impairment annually. Currently, the Company
has $1,409,309 in Goodwill in the consolidated balance sheet. For the years
ended December 31, 2001, 2000, and 1999 amortization of goodwill from continuing
operations was $59,237, $65,541, and $66,367, respectively. SFAS No. 142
requires goodwill to be tested for impairment by assessing the fair value of
reporting units,

50

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

generally one level below reportable segments. The Company has estimated the
adoption of SFAS No. 142 will result in a non-cash charge up to $150,000 for
goodwill associated with the Company's North America cemetery reporting segment.
The Company does not expect to incur a charge upon adoption of SFAS No. 142
related to the goodwill associated with its North America funeral reporting
unit. In December 2001, the Company reported a pretax charge of $573,394 in
accordance with SFAS No. 121 related to its international operations in
connection with its decision to joint venture or dispose of these businesses.
The amount of goodwill written off in connection with this charge was $489,871.
As a result, the Company does not anticipate incurring a charge upon adoption of
SFAS No. 142 related to its international reporting units. The Company is
required to adopt SFAS No. 141 for any acquisitions subsequent to June 30, 2001
and will adopt SFAS No. 142 effective January 1, 2002.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. Under the new standard, the fair value of a liability for an asset
retirement obligation should be recognized in the period in which it is
incurred, if a reasonable estimate can be made. The associated costs are
capitalized as part of the carrying amount of the long-lived asset and allocated
to expense over the useful life of the asset. The Company does not expect the
adoption of SFAS No. 143 to have a significant effect on the Company's
consolidated financial position, results of operations, or cash flows. The
Company is required to adopt SFAS No. 143 during the first quarter of the year
ending December 31, 2003.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, and addresses the impairment or disposal of long-lived assets. The Company
is currently assessing the impact of this statement on its consolidated
financial position and results of operations; however, it does not believe the
new standard will have a significant impact on the consolidated statement of
cash flows. The Company is required to adopt SFAS No. 144 effective January 1,
2002.

NOTE THREE

ACCOUNTING CHANGES

In 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities: An Amendment of FASB
Statement No. 133." The change in the Company's accounting policies resulting
from the implementation of SFAS 133 has been treated as a change in accounting
principle effective January 1, 2001. In accordance with these pronouncements,
the Company recognized a cumulative effect of a change in accounting principle,
net of applicable taxes, of $7,601. It was impractical for the Company to obtain
the amounts on a pro forma basis for the years ended December 31, 2000 and 1999.

In September 2001, the FASB Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue 01-5 entitled "Application of FASB Statement No. 52 to
an Investment Being Evaluated for Impairment that Will Be Disposed Of." This
consensus requires the inclusion of accumulated foreign currency translation
amounts in the assessments of impairment of long-lived assets expected to be
disposed of. Prior to issuance of the consensus, related accumulated foreign
currency translation amounts were included in results of operations at the time
of disposal. The Company applied this consensus in connection with impairment
assessments of assets to be disposed of performed after July 19, 2001, the
effective date of the consensus. See footnote sixteen to the consolidated
financial statements for further discussion on impairment charges recorded in
2001 related to the Company's foreign investments.

51

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 2000, the Company implemented SAB No. 101 "Revenue Recognition in
Financial Statements" which changes the Company's accounting policies regarding
the manner in which the Company records preneed sales activities. The
implementation of SAB No. 101 had no effect on the consolidated cash flows of
the Company. As a result of the required change, the Company's prearranged sales
activities are affected as follows:

- Preneed sales of cemetery interment rights (cemetery burial
property) -- revenue and all costs associated with the sales of preneed
cemetery interment rights are recognized in accordance with the retail
land sales provisions of SFAS No. 66 "Accounting for the Sales of Real
Estate". Under SFAS No. 66, revenue and associated costs from constructed
cemetery property are not recognized until a minimum percentage (10%) of
the sales price has been collected. Revenues related to the preneed sale
of unconstructed cemetery property will be deferred until such property
is constructed and meets the criteria of SFAS No. 66 described above.
Previously, the preneed interment rights revenue and associated costs
were recognized at the time the contract was signed with the customer.

- Preneed sales of cemetery merchandise (primarily markers and
vaults) -- revenue and all costs associated with the sales of preneed
cemetery merchandise are deferred until the merchandise is delivered.
Previously, the preneed cemetery merchandise revenue and associated costs
were recognized at the time the contract was signed with the customer.

- Preneed sales of cemetery services (primarily merchandise delivery and
installation fees and burial opening and closing fees) -- revenue and all
costs associated with the sales of preneed cemetery services are deferred
until the services are performed. Previously, the revenue and associated
costs were recognized at the time the contract was signed with the
customer.

- Prearranged funeral and preneed cemetery customer obtaining
costs -- costs incurred related to obtaining new preneed cemetery and
prearranged funeral business are accounted for under the provisions of
SFAS No. 60 "Accounting and Reporting by Insurance Enterprises". Under
SFAS No. 60, obtaining costs, which include only costs that vary with and
are primarily related to the acquisition of new preneed cemetery and
prearranged funeral business, are deferred. As a result, the Company's
policy is to defer only commission and related fringes of prearranged
funeral and preneed cemetery business. Previously, deferred obtaining
costs for prearranged funeral business included variable and fixed direct
obtaining costs as well as direct marketing costs; and, obtaining costs
for preneed cemetery business were previously expensed as incurred.

- Cemetery merchandise and services trust investment earnings -- investment
earnings generated by assets included in merchandise and services trusts
are deferred until the associated merchandise is delivered or services
performed. Previously, the trust earnings were recognized as earned in
the trust.

The change in the Company's accounting policies resulting from
implementation of SAB No. 101 has been treated as a change in accounting
principle effective as of January 1, 2000. The cumulative effect of the
accounting change through December 31, 1999 resulted in a charge to net income
of $909,315 (net of a $552,491 tax benefit), or $3.34 per diluted share recorded
on January 1, 2000.

52

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table shows the unaudited pro forma effects of retroactive
application using the SAB No. 101 accounting policies compared to historical
results for the year ended December 31, 1999.

NOTE FOUR

PREARRANGED FUNERAL ACTIVITIES

The Company sells price guaranteed prearranged funeral contracts through
various programs providing for future funeral services at prices prevailing when
the agreements are signed. Payments under these contracts generally are used to
pay premiums on life insurance or annuity contracts, or are placed into trust
accounts, pursuant to applicable law.

The balance in Prearranged funeral contracts represents amounts due from
trust funds, customer receivables or third party insurance companies related to
unperformed, price guaranteed prearranged funeral contracts. A corresponding
credit is recorded to Deferred prearranged funeral contract revenues.
Previously, this amount excluded prearranged funeral contracts funded through
the Company's discontinued insurance operations. However, upon disposal of these
operations in the third quarter of 2000, the amounts associated with those
contracts to be funded by the Company's discontinued insurance operations were
recorded consistent with contracts funded by other third party insurance
companies.

Funeral revenue is recognized on prearranged funeral contracts at the time
the funeral service is performed. Trust earnings and increasing insurance
benefits are accrued and deferred until the services are performed, at which
times these funds are also recognized in funeral revenues. Such amounts are
intended to cover future increases in the cost of providing a price guaranteed
funeral service. Net obtaining costs incurred pursuant to the sales of
prearrangements are included in Deferred charges and other assets. These
obtaining costs, which include sales commissions and certain other direct costs
that vary with and are primarily related to the acquisition of new prearranged
funeral business, are deferred and amortized over 20 years, a period
representing the estimated life of the prearranged funeral contracts. The
aggregate net costs deferred as of December 31, 2001 and 2000 were $99,245 and
$107,905, respectively (see note three to the consolidated financial
statements).

Prearranged Funeral Contracts

As previously mentioned, the balance in prearranged funeral contracts
represents amounts due from trust funds, customer receivables or third party
insurance companies related to unperformed, price guaranteed

53

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

prearranged funeral contracts. The components of prearranged funeral contracts
in the consolidated balance sheet at December 31 are as follows:

The allowance for cancellation is based on historical experience and is
equivalent to approximately 8.9% of the total balance at December 31, 2001 and
8.6% of prearranged funeral contracts at December 31, 2000. Accumulated earnings
from trust funds and increasing insurance benefits of third party insurance
companies have been included to the extent that they have been accrued through
December 31, 2001 and 2000, respectively. The cumulative trust funded total has
been reduced by allowable cash withdrawals for trust earnings and amounts
retained by the Company pursuant to various state laws.

The activity in prearranged funeral contracts for the years ended December
31 is as follows:

The cost and market value of the assets held in the trust funds underlying
the Company's prearranged funeral contracts at December 31 are as detailed
below. In addition to these assets held in trust funds, the

54

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company has net receivables due from third party insurance companies of
$2,808,744 and $2,618,467 at December 31, 2001 and 2000, respectively.

Deferred Prearranged Funeral Contract Revenues

Deferred prearranged funeral contract revenues represent the original
contract price, trust earnings and increasing insurance benefits on unperformed
funeral contracts generally funded by trust or third party insurance companies.
The total amounts associated with unperformed prearranged funeral contracts
consists of two components: (i) contracts funded by trust or third party
insurance companies and (ii) contracts funded by the Company's discontinued
insurance operations. Upon disposal of the Company's discontinued insurance
operations, the Company recorded the amounts associated with unperformed funeral
contracts to be funded by these discontinued operations consistent with
contracts funded by other third party insurance companies.

55

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes for the years ended December 31 the activity
in deferred prearranged funeral contract revenues:

NOTE FIVE

PRENEED CEMETERY ACTIVITIES

The Company sells price guaranteed preneed cemetery contracts providing for
future merchandise, services or property at prices prevailing when the
agreements are signed. A portion of the payments under these contracts may be
required to be placed into trust accounts, pursuant to applicable law.

Cemetery revenue is recognized on preneed cemetery contracts when the
service is performed or merchandise is delivered. The Company defers certain
direct obtaining costs associated with preneed cemetery sales which are
deferred, and expenses such costs when the corresponding revenue is recognized.
Net obtaining costs related to preneed cemetery contracts of $213,414 and
$213,157 as of December 31, 2001 and 2000, respectively, were included in
Deferred charges and other assets in the consolidated balance sheet.

56

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Merchandise and Services Trusts

Amounts paid into cemetery merchandise and services trusts are included in
long-term receivables, at cost. The cost and market values associated with the
assets held in the cemetery merchandise and services trust funds underlying the
Company's long-term receivables at December 31 were as follows:

As a result of implementing SAB No. 101 (see note three to the consolidated
financial statements), all realized investment earnings related to these
cemetery merchandise and services trust funds are deferred until the associated
merchandise is delivered or service is performed. Prior to 2000, the realized
investment earnings were recognized as earned in the trusts. The realized
investment earnings recognized in the consolidated statement of operations
related to these cemetery merchandise and services trust funds were $15,081,
$19,947, and $39,930 for the years ended December 31, 2001, 2000 and 1999,
respectively.

Deferred Preneed Cemetery Contract Revenues

Pursuant to the implementation of SAB No. 101 in 2000, the Company changed
its accounting policies regarding the manner in which the Company records
preneed sales activities. As discussed in detail in note three to the
consolidated financial statements, the Company is now deferring revenues
associated with certain preneed cemetery sales activities until cemetery burial
property is constructed and meets the minimum down

57

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

payment requirement (10%), merchandise is delivered or services are performed.
The activity in deferred preneed cemetery contract revenues for the years ended
December 31 is as follows:

In 2001, non-cash reclassifications were made between Current and Long-term
receivables and Deferred preneed cemetery contract revenues in the consolidated
balance sheet as a result of adjustments in foreign Deferred preneed cemetery
contract revenue with no effect on results of operations or cash flows.

Perpetual Care Trusts

A portion of the proceeds from the sale of cemetery property is required by
state law to be paid into perpetual care trust funds. The principal of such
perpetual care trust funds generally cannot be withdrawn by the Company and
therefore is not included in the consolidated balance sheet. The cost and market
values associated with the assets held in perpetual care trust funds at December
31 were as follows:

58

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Realized investment earnings from these perpetual care trust funds are
recognized in current cemetery revenues and are intended to defray cemetery
maintenance costs, which are expensed as incurred. The realized investment
earnings related to these perpetual care trust funds were $29,926, $26,660, and
$25,950 for the years ended December 31, 2001, 2000, and 1999, respectively.

NOTE SIX

INCOME TAXES

The provision or benefit for income taxes includes United States federal
income taxes, determined on a consolidated return basis, foreign, state and
local income taxes.

Loss from continuing operations before income taxes, extraordinary gains
and cumulative effect of an accounting change for the years ended December 31 is
as follows:

Income tax provision (benefit) for the years ended December 31 consisted of
the following:

The Company made income tax payments on continuing operations of
approximately $22,423, $56,007, and $24,500, excluding income tax refunds of
$122,522, $35,032 and $8,488, for the years ended December 31, 2001, 2000, and
1999, respectively. In 2001, net tax refunds of $100,099 includes a one time
refund of approximately $116,300 related to losses on sales of investments.

59

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The differences between the U.S. federal statutory income tax rate and the
Company's effective tax rate for the years ended December 31 were as follows:

Deferred taxes are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted marginal tax rates. The tax effects of temporary differences and
carry-forwards that give rise to significant portions of deferred tax assets and
liabilities as of December 31 consisted of the following:

Current refundable income taxes and current deferred tax assets are
included in Other current assets, long-term deferred tax assets are included in
Deferred charges and other assets, with current taxes payable and current
deferred tax liabilities being reflected as Income taxes on the consolidated
balance sheet.

At December 31, 2001 and 2000, United States income taxes had not been
provided on $88,261 and $264,379, respectively, of undistributed earnings of
foreign subsidiaries since it is the Company's intention not to remit these
earnings. Although it is not practicable to determine the deferred tax liability
on the unremitted

60

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

earnings, credits for income taxes paid by the Company's foreign subsidiaries
will be available to reduce any U.S. tax if these foreign earnings are remitted.

Various subsidiaries have international, federal and state operating loss
carry-forwards of $886,406 with expiration dates through 2019. The Company
believes that some uncertainty exists with respect to future realization of
these loss carry-forwards, therefore a valuation allowance has been established
for those carry-forwards where uncertainty exists. The increase in the valuation
allowance is primarily attributable to the U.S. capital loss recorded in
connection with the financial statement writedown of assets held for sale.

The loss carry-forwards will expire as follows:

2002........................................................ $ 3,364
2003........................................................ 14,189
2004........................................................ 9,574
2005........................................................ 16,843
2006........................................................ 37,375
Thereafter.................................................. 805,061
--------
Total..................................................... $886,406
========

61

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE SEVEN

DEBT

Debt as of December 31 was as follows:

The Company's consolidated debt had a weighted average interest rate of
6.72% at December 31, 2001, compared to 7.08% at December 31, 2000.
Approximately 99% and 76% of the total debt had a fixed interest rate at
December 31, 2001 and 2000, respectively.

The Company's primary bank credit agreements consist of two committed
facilities -- a 2-year term loan and a 5-year, multi-currency revolving credit
agreement. Both of these facilities are primarily used for general corporate
purposes and will mature June 2002. The credit agreements contain certain
covenants, including a maximum leverage ratio, a minimum interest coverage
ratio, and a minimum net worth requirement. Additionally, the bank credit
agreements restrict the Company from paying dividends and making other
distributions, as defined. The covenants will continue to be calculated using
ongoing financial results based on accounting principles generally accepted in
the United States in effect when the credit facilities originated.

Interest rates for these facilities are based on various indices as
determined by the Company. The weighted average interest rate on the two
committed facilities was 4.75% and 7.95% at December 31, 2001 and 2000,
respectively. For each facility, a quarterly fee is paid on the total commitment
amount ranging from

62

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

0.25% to 0.50% based on the Company's senior debt ratings. The facility fee was
0.50% at December 31, 2001 and 2000.

The 2-year term loan allowed for borrowings up to $29,061 and $296,486 and
the 5-year, multi-currency revolving credit agreement allowed for borrowings up
to $400,000 and $691,801 as of December 31, 2001 and 2000, respectively. Under
the 5-year multi-currency revolving credit agreement, the Company was permitted
to borrow in foreign currencies up to $285,714 and $500,000 at December 31, 2001
and 2000, respectively. The Company had foreign-denominated borrowings of $0 and
$271,263 drawn under the multi-currency revolving credit agreement at December
31, 2001 and 2000, respectively. All of the $29,061 outstanding at December 31,
2001 was borrowed on the 2-year term loan. Subsequent to year end, the 2-year
term loan was paid off and the Company amended the terms of the 5-year
multi-currency revolving credit agreement which, among other things, reduced the
borrowing availability to $150,000.

Total debt at December 31, 2001 includes approximately $113,500 of
currently maturing debt associated with the financial restructuring of the
Company's French subsidiary which is expected to be satisfied with non-cash
French assets in 2002.

In accordance with the stated maturities, the Company retired the 6.75%
senior notes on June 1, 2001 and the 6.375% senior notes on October 2, 2000 in
the amounts of $123,000 and $70,710, respectively.

In June 2001, the Company issued $345,000 of convertible subordinated
notes. The notes are convertible into common stock at an initial conversion
price of $6.92 and have an interest rate of 6.75%. The notes are callable after
June 2004 and mature in June 2008. The proceeds from the convertible
subordinated notes were used to refinance the Company's debt, including
borrowings under the Company's bank credit agreements.

During the year ended December 31, 2001, the Company repurchased $35,720 of
the medium-term notes due through 2019 and $127,580 of the 7.00% senior notes
due 2015 (putable 2002) in the open market. In addition, the Company exchanged
15,200 shares of its common stock for $48,716 of the 6.30% senior notes due 2020
(putable 2003), $22,000 of the 7.375% senior notes due 2004, $10,000 of the
6.00% senior notes due 2005 and $2,995 of other notes. As a result of these
transactions, the Company recognized extraordinary gains on early
extinguishments of debt totaling $4,731 (net of tax of $3,024).

During the year ended December 31, 2000, the Company repurchased $79,290 of
the 6.375% senior notes due 2000, $27,000 of the 6.75% senior notes due 2001,
$113,960 of the 7.00% senior notes due 2015 (putable 2002), and $8,450 of the
6.00% senior notes due 2005. The repurchase resulted in extraordinary gains on
early extinguishments of debt totaling $21,973 (net of tax of $12,630).

The Company had deposited $81,627 and $68,753 in restricted
interest-bearing accounts that were held as security for various credit
instruments at December 31, 2001 and 2000, respectively, included in Deferred
charges and other assets in the consolidated balance sheet. At December 31,
2001, approximately $19,229 was related to two embedded options associated with
the Company's 6.30% senior notes due 2020 (putable 2003), $44,094 was related to
letters of credit, and the remaining $18,304 was used to secure various other
obligations.

At December 31, 2001 and 2000 the Company had approximately $25,363 and
$22,983, respectively, of assets pledged as collateral for the mortgages and
other notes payable.

Cash interest payments for the three years ending December 31, 2001 totaled
$218,429; $244,638; and $237,682, respectively.

63

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The aggregate maturities of debt for the five years subsequent to December
31, 2001, are as follows:

2002........................................................ $ 220,640
2003........................................................ 270,033
2004........................................................ 298,141
2005........................................................ 607,891
2006........................................................ 178,112
2007 and thereafter......................................... 959,796
----------
Total....................................................... $2,534,613
==========

NOTE EIGHT

DERIVATIVES

The Company occasionally participates in hedging activities using various
derivative instruments including interest rate and cross-currency swap
agreements, and forward currency exchange contracts. These instruments are used
to hedge potential exposures in the interest rate and foreign exchange rate
markets. The Company has documented policies and procedures to monitor and
control the use of derivative instruments and only enters into transactions with
a limited group of creditworthy financial institutions. The Company generally
does not engage in derivative transactions for speculative or trading purposes,
nor is it a party to leveraged derivatives.

In 2001, the Company executed certain forward currency exchange contracts
to hedge its net foreign investments. At December 31, 2001 the outstanding
hedges had notional values of L70,000 and E40,000, equivalent to an aggregate
notional value of approximately $130,761. The contracts were recorded at fair
value, equaling $5,326 in Accounts payable and accrued liabilities on the
consolidated balance sheet with a corresponding entry in Foreign currency
translation adjustment in the consolidated statement of stockholder's equity. At
December 31, 2000 the Company was not a party to any derivative transactions.

Subsequent to year end, the Company joint ventured its operations in the
United Kingdom (see note sixteen to the consolidated financial statements), and
as a result, terminated its hedge of those assets. At February 28, 2002, the
remaining euro-denominated forward exchange contract represented a loss of $698.

In conjunction with adopting SFAS No. 133, the Company reclassified
deferred losses of $23,195 related to the interest rate losses incurred upon
termination of the fair value hedges of the Company's debt. These deferred
losses previously recorded in Deferred charges and other assets, have been
reclassified to Long-term debt in the consolidated balance sheet and are being
amortized over the life of the underlying bonds.

NOTE NINE

CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial
instruments has been determined using available market information and
appropriate valuation methodologies. The carrying amounts of cash and cash
equivalents, trade receivables and accounts payable approximate fair values due
to the short-term maturities of these instruments. It is not practicable to
estimate the fair value of receivables due on cemetery contracts or prearranged
funeral contracts (other than prearranged funeral trust funds and cemetery
merchandise and services trust funds; see notes four and five to the
consolidated financial statements) without incurring excessive costs because of
the large number of individual contracts with varying terms. The carrying value
of other notes receivable approximates fair value as the Company regularly
reviews the loans for impairment. At December 31, 2001 and 2000, other notes
receivable included in Current and Long-term receivables in the

64

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

consolidated balance sheet was $132,060 and $172,686, respectively. The Company
also had $13,269 and $10,494 in outstanding undrawn commitments at December 31,
2001 and 2000, respectively. See note eight to the consolidated financial
statements regarding the Company's derivative financial instruments.

The fair market value of the Company's debt at December 31 was as follows:

The fair value of the fixed rate long-term borrowings and convertible
securities was estimated by discounting the future cash flows, including
interest payments, using rates currently available for debt of similar terms and
maturity, based on the Company's credit standing and other market factors. The
Company has historically reported the market value of its bank credit agreements
at book value since such agreements have variable interest rates. However, at
December 31, 2001 and 2000, the fair market value of these credit agreements is
less than book value based upon existing market pricing and terms for comparable
bank credit agreements.

The Company grants credit in the normal course of business, and the credit
risk with respect to funeral, cemetery and prearranged funeral and preneed
cemetery receivables due from customers is generally considered minimal because
of the diversification of the customers served. Bad debts have not been
significant in relation to the volume of deferred revenues. Customer payments on
prearranged funeral or preneed cemetery contracts that are placed into state
regulated trusts or are used to pay premiums on life insurance contracts
generally do not subject the Company to collection risk. Insurance funded
contracts are subject to supervision by state insurance departments and are
protected in the majority of states by insurance guaranty acts.

65

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's cash deposits, some of which exceed insured limits, were
distributed among various regional and national banks in the jurisdictions in
which the Company operates as of December 31, 2001. In addition, the Company had
commercial paper, money-market funds, and Eurodollar time deposits at December
31, 2001 with a variety of financial institutions and corporations with high
quality credit ratings. As a result, the Company believes that the associated
credit risk in such instruments is not material.

NOTE TEN

COMMITMENTS AND CONTINGENCIES

Leases

The Company's operating leases principally relate to funeral home
facilities, transportation equipment and two aircraft. The majority of these
operating leases contain options to (i) purchase the property at fair value on
the exercise date, (ii) purchase the property for a value determined at the
inception of the leases, or (iii) renew for the fair rental value at the end of
the primary lease term. Rental expense for these leases was $92,895, $94,629,
and $88,437 for the years ended December 31, 2001, 2000, and 1999, respectively.

As of December 31, 2001, future minimum lease payments for leases exceeding
one year are as follows:

2002........................................................ $ 68,547
2003........................................................ 53,798
2004........................................................ 43,852
2005........................................................ 31,435
2006........................................................ 17,866
2007 and thereafter......................................... 52,399
--------
Subtotal............................................... 267,897
Less: Subleases............................................. (3,606)
--------
Total.................................................. $264,291
========

Purchase Commitments

The Company has a minimum purchase agreement with a major casket
manufacturer for its North American operations with an original commitment of
$750,000 over a six-year period expiring in 2004. The agreement contains
provisions to increase the minimum annual purchases for normal price increases.
Additionally, the contract provides for a one-year extension period to 2005 in
which the Company is allowed to purchase any remaining commitment that exists at
the end of the original term. Based on current estimates, the remaining
commitment is as follows:

2002........................................................ $130,000
2003........................................................ 145,000
2004........................................................ 165,000
2005........................................................ 30,000
--------
Total.................................................. $470,000
========

66

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Management, Consultative and Non-Competition Agreements

The Company has entered into management, employment, consultative and
non-competition agreements, generally for five to ten years, with certain
officers and employees of the Company and former owners of businesses acquired.
The Company has modified several of the above agreements as part of cost
rationalization programs; see note sixteen to the consolidated financial
statements. During the years ended December 2001, 2000, and 1999, the Company
recognized expense of $70,758, $75,141, and $104,650, respectively, related to
these agreements. The Company has estimated the maximum future cash commitment
under these agreements; as a result, this commitment is not indicative of the
future expense to be recognized due to amounts recorded in restructuring as a
result of cost rationalization programs. At December 31, 2001, the maximum
estimated future cash commitment under agreements with remaining commitment
terms was as follows:

2002........................................................ $ 90,096
2003........................................................ 45,419
2004........................................................ 37,552
2005........................................................ 29,090
2006........................................................ 19,749
2007 and thereafter......................................... 26,058
--------
Total.................................................. $247,964
========

Contingent Purchase Obligations

In connection with certain acquisitions made with the Company's South
America operations, the Company entered into contingent purchase obligations
with certain former owners of those businesses. These obligations require the
Company to pay additional consideration if cumulative EBIT thresholds, as
defined in such agreements, are met between 2003 and 2005. As of December 31,
2001, the contingent consideration is estimated to be $50,000. This additional
consideration may be paid partially in common stock at the discretion of the
former owners.

Litigation

The Company is a party to various litigation matters, investigations and
proceedings. The Company reserves for estimated losses relating to these
contingencies if amounts can be reasonably estimated and are probable to occur.
While litigation can contain a high degree of uncertainty and the risk of an
unfavorable outcome, management believes the eventual outcome of these
contingencies is not expected to have a material adverse effect on the financial
position, liquidity, or results of operations.

NOTE ELEVEN

STOCKHOLDERS' EQUITY

The Company is authorized to issue 1,000,000 shares of preferred stock, $1
per share par value. No shares were issued as of December 31, 2001 and 2000. At
December 31, 2001 and 2000, 500,000,000 common shares of $1 par value were
authorized and the Company had 292,153,765 and 272,507,010, respectively, shares
issued and outstanding, net of 2,502,190 shares held in treasury at par.

The Board of Directors has adopted a preferred share purchase rights plan
and has declared a dividend of one preferred share purchase right for each share
of common stock outstanding. The rights become exercisable in the event of
certain attempts to acquire 20% or more of the common stock of the Company and
entitle the

67

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 extended.

Stock Benefit Plans

The Company has benefit plans whereby shares of the Company's common stock
may be issued pursuant to the exercise of stock options 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 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 then current market price of the Company's common stock. 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. At December 31, 2001, 5,215,623 options were outstanding with
alternative vesting methods. Under the alternative vesting methods, partial or
full accelerated vesting will occur when the price of Company common stock
reaches pre-determined prices. If the pre-determined stock prices are not met in
the required time period, the options will fully vest in periods ranging from
eight to ten years from date of grant. At December 31, 2001 and 2000, 7,349,923
and 11,187,894 shares, respectively, were reserved for future option grants
under all stock option plans.

The following tables set forth certain stock option information:

68

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For the years ended December 31, 2001, 2000 and 1999, respectively,
110,000, 33,000 and 30,000 shares of restricted stock were awarded at average
fair values of $5.86, $4.03 and $19.06, respectively.

If the Company had elected to recognize compensation cost for its option
plans based on the fair value at the grant dates for awards under those plans,
net loss and loss per share would have been changed for the years ended December
31 to the pro forma amounts indicated below:

The fair value of the Company's stock options used to compute the pro forma
net loss and loss per share disclosures is determined by calculating the
estimated present value at grant date using the Black-Scholes option-pricing
model with the following weighted average assumptions:

In 2001, the Company replaced its 1995 Stock Plan for Non-Employee
Directors, which expired, with its 2001 Stock Plan for Non-Employee Directors.
Under this new plan, non-employee directors automatically receive yearly awards
of restricted stock through the year 2005. Each award will not exceed 15,000
shares of common stock per director per year and vests after one year of
service. In 2001, each non-employee director was awarded 10,000 shares of common
stock. Further in 2001, the Company voted to create a Director Fee Plan to allow
for partial payment of compensation to Non-Employee Directors through common
stock. In 2001, 36,784 shares of common stock was granted under the Director Fee
Plan.

69

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Other Comprehensive Income (Loss)

The Company's components of other comprehensive income (loss) at December
31 are as follows:

Reflected in Foreign currency translation adjustment are net losses of
$189,613 and an associated deferred tax asset of $51,581 related to the
Company's international operations held for sale. Accordingly, when these
transactions are consummated, Foreign currency translation adjustment and
Accumulated other comprehensive income (loss) will increase by this amount. The
Minimum pension liability adjustment is net of deferred taxes of $18,585.

NOTE TWELVE

RETIREMENT PLANS

The Company has a non-contributing, defined benefit pension plan covering
substantially all United States employees (US Pension Plan), a supplemental
retirement plan for certain current and former key employees (SERP), a
supplemental retirement plan for officers and certain key employees (Senior
SERP), and a retirement plan for non-employee directors (Directors' Plan). In
2000, the Company also established a 401(k) employee savings plan.

Effective January 1, 2001, the Company curtailed its US Pension Plan, SERP,
Senior SERP and Directors' Plan and recognized a curtailment loss of $3,572 in
2001.

Retirement benefits for the US Pension Plan are generally based on years of
service and compensation. This contribution is an actuarially determined amount
consistent with the funding requirements of the Employee Retirement Income
Security Act of 1974. Assets of the pension plan consist primarily of bank money
market funds, fixed income investments and marketable equity securities. The
marketable equity securities include shares of Company common stock with a value
of $6,603 and $578 at December 31, 2001 and 2000, respectively.

Retirement benefits under the SERP are based on years of service and
average monthly compensation, reduced by benefits under the pension plan and
Social Security. The Senior SERP provides retirement benefits based on years of
service and position. The Directors' Plan provides for an annual benefit to
directors following their retirement, based on a vesting schedule. The Company
purchased various life insurance policies on the participants in the SERP,
Senior SERP and Directors' Plan with the intent to use the proceeds or any cash
value buildup from such policies to assist in funding, at least to the extent of
such assets, the plans' funding requirements.
70

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's United Kingdom operation has a defined benefit pension plan
(UK Plan). The Company and employees contribute to the plan consistent with
United Kingdom funding requirements. Most other foreign employees are covered by
various foreign government mandated or defined contribution plans which are
adequately funded and are not considered significant to the financial condition
or results of operations of the Company. The plans' liabilities and their
related costs are computed in accordance with the laws of the individual
countries and appropriate actuarial practices.

The components of net periodic benefit cost for the years ended December 31
were as follows:

The plans' funded status at December 31 were as follows (based on
valuations as of September 30):

71

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The plans' weighted-average assumptions were as follows:

The assumed rate of compensation increase for the year ended December 31,
2001 reflects the assumptions for the UK Plan only as all other plans subject to
this disclosure were curtailed effective January 1, 2001.

During 2000, the Company established an employee savings plan that
qualifies under section 401(k) of the Internal Revenue Code for the exclusive
benefit of their United States employees. Under the plan, participating
employees may contribute a portion of their pretax and/or after tax income in
accordance with specified guidelines up to a maximum of 15%. The Company then
matches a percentage of the employee contributions through contributions of the
Company's common stock. For 2001, the Company match was based upon the
following:

72

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The total value of Company matched common stock contributions in 2001 and
2000 were $12,635 and $812, respectively.

NOTE THIRTEEN

SEGMENT REPORTING

The Company's operations are product based and geographically based, and
primary reportable operating segments presented below include funeral and
cemetery operations. The Company's geographic segments include North America,
Europe and Other Foreign. The Company conducts funeral and cemetery operations
in all geographical regions. In 2000, the Company completed sales of its wholly
owned insurance operations. As such, these operations have been reclassified and
reported as discontinued operations (see note seventeen to the consolidated
financial statements).

The Company's reportable segment information is as follows:

Subsequent to the sale of substantially all remaining loans held by the
Company's lending subsidiary, results of operations from remaining loans are
included in Other income in the consolidated statement of

73

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

operations and assets have been consolidated with corporate assets. The
following table reconciles certain reportable segment amounts to the Company's
corresponding consolidated amounts:

- ---------------

(1) Total assets in 1999 include the net assets of discontinued operations as a
component of corporate assets.

(2) Consolidated capital expenditures include $11,830, $14,425, and $1,159,929
for the years ended December 31, 2001, 2000, and 1999, respectively, for
purchases of property, plant and equipment, cemetery property, and goodwill
of acquired businesses. The 2001 amount relates to assets previously held by
the Company's lending subsidiary exchanged for collateral in bankruptcy
proceedings. The 2000 amount above related to the Company acquiring by deed
in lieu of foreclosure the collateral underlying certain loans from the
Company's lending subsidiary. Excluding these capital expenditures related
to acquired businesses which are included in Acquisitions, net of cash
acquired in the Cash flows from investing activities in the consolidated
statement of cash flows, the Company had consolidated capital expenditures
of $74,164, $83,370, and $207,131 for the years ended December 31, 2001,
2000, and 1999, respectively.

74

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table reconciles income (loss) from operations shown above to
the Company's consolidated income (loss) before income taxes and extraordinary
items:

Although total amounts reported have not changed, the Company has made
certain reclassifications within geographic segments in order to more accurately
reflect the results in all years with alignment of current management
objectives.

75

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company geographic segment information was as follows:

- ---------------

(1) Operating income (loss) includes $644,147, $461,072 and $362,428 in
restructuring and non-recurring charges for the years ended December 31,
2001, 2000, and 1999, respectively. In 2001, 2000, and 1999, respectively,
$17,658, $439,632, and $279,078 relates to North America; $370,232, $20,424,
and $75,898 relates to Europe; and, $256,257, $1,016, and $7,452 relates to
Other Foreign.

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

Included in the European figures above are the following French amounts:

76

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- ---------------

(2) Operating income (loss) includes $27,154, $345,917, and $278,121 in
restructuring and non-recurring charges in the United States and $126,612,
$8,913, and $50,044 in France for the years ended December 31, 2001, 2000,
and 1999, respectively.

During 2001, the Company divested of certain North America and
international funeral service locations and cemeteries not considered part of
its core operations. Results of operations for Australia have been included
through April 2001; the Netherlands, Norway, Spain and Portugal through July
2001; and Belgium through September 2001. All other divestitures occurred
throughout the year. Summary operating results of the Company's divested
operations are as follows.

77

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE FOURTEEN

SUPPLEMENTARY INFORMATION

The detail of certain balance sheet accounts was as follows:

Interest rates on cemetery contracts and loans and other notes receivable
range from 3.5% to 14.5% at December 31, 2001 and 2000. Included in Loans and
other notes receivable in the consolidated balance sheet

78

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

is $354 and $445 of notes with officers, employees and former employees of the
Company, and $4,712 and $4,786 of notes with other related parties at December
31, 2001 and 2000, respectively.

NON-CASH TRANSACTIONS

79

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE FIFTEEN

EARNINGS PER SHARE

The basic and diluted per share amounts were the same in all periods
presented because the Company reported a loss from continuing operations before
extraordinary gains and cumulative effect of accounting changes for the three
years ending December 31, 2001.

The computation of diluted earnings per share excludes outstanding stock
options and convertible debentures because the inclusion of such options and
debentures would be antidilutive in the periods presented. Total options and
convertible debentures that could impact dilutive earnings per share are as
follows:

NOTE SIXTEEN

RESTRUCTURING AND NON-RECURRING CHARGES

The activity related to restructuring and non-recurring charges was as
follows:

80

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company recorded restructuring and non-recurring charges in 2001, 2000,
and 1999. Additionally, the Company established reserves in 1999 on loans
previously made by the Company's lending subsidiary (Impaired Loans) and has
adjusted estimates of certain items included in the original charges, as better
estimates become available.

The Company's 2001 charge relates primarily to impairment charges
associated with international businesses sold or held for sale. The total charge
recorded in 2001 of $663,548 consists of $51,780 related to the joint venture of
the Company's Australia operations; $26,519 related to the sales of the
Company's operations in the Netherlands, Norway and Belgium; $573,394 related to
the planned joint venture or disposition of its remaining investments outside
the United States; and $11,855 of severance and asset write downs related to
on-going cost rationalization programs.

In connection with the dispositions of the international operations
recorded in Restructuring and non-recurring charges, the Company received net
pretax proceeds of approximately $148,807 and securities with a face value of
$24,400, which includes a 20% equity interest in the Australia operations and a
12% subordinated convertible note. Also included in this charge, the Company
recognized $38,781 of the cumulative foreign currency translation effect into
earnings, previously included as a separate component of Accumulated other
comprehensive loss in the Company's stockholders' equity.

In August 2001, the Company sold 85% of its operations in Spain and
Portugal. In connection with this transaction, the Company received net pretax
proceeds of $101,082 and recorded a gain of $2,062 which is included in Gains
from dispositions in the consolidated statement of operations. Included in the
gain, the Company recognized $209 of the cumulative foreign currency effect into
earnings, previously included as a separate component of Accumulated other
comprehensive loss in the Company's stockholders' equity.

The $573,394 write down relates to assets held for sale in the Company's
remaining international jurisdictions. As part of computing the write down, the
Company included the $189,613 debit balance related to the cumulative foreign
currency translation effect included in accumulated other comprehensive income.
This amount will be removed from accumulated other comprehensive income when the
asset sales are completed. See note three to the consolidated financial
statements regarding accounting changes and note eleven to the consolidated
financial statements regarding Other comprehensive losses.

The charge consists of the following:

81

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The $11,855 consists of $7,597 for severance costs related to the
termination of 123 employees in North America and 63 employees in Argentina.
Nineteen individuals under employment, consultant and/or
covenants-not-to-compete contractual agreements have been relieved from their
obligations or restrictions under such agreements. Individuals will continue to
be paid by the Company pursuant to such contractual terms, the majority of which
will be paid by 2005. The remaining $4,258 related to assets impaired as a
result of changes in the Company's technology strategy and termination of lease
obligations related to facility closures.

In 2001, the Company has recognized $19,401 as a reduction from changes in
estimates of previously recorded charges of certain divested North American
funeral homes and cemeteries and its equity investment in a Canadian funeral
home and cemetery company. These changes in estimates are the result of better
than anticipated market values as these previously impaired properties have been
sold. The Company will continue to make adjustments as actual divestitures are
consummated or better estimates become available. The Company received pretax
proceeds of $35,799 related to the sale of its equity investment in the Canadian
funeral home and cemetery company.

The 2000 Charges totaled $434,415 related to the planned divestitures as a
result of a North American facility review and the reduction of the carrying
value of an equity investment in North America. Of the total 2000 Charges,
$351,159 of charges related to the planned divestitures of 230 funeral service
locations anticipated to be sold as funeral businesses, 174 funeral service
locations anticipated to be sold as real estate and 105 cemeteries and $83,256
of charges to reduce the carrying value of the Company's equity investment in
the Canadian funeral home and cemetery company.

In 2000, the Company also recognized $26,657 related to changes in
estimates for certain items originally included in the Fourth Quarter 1999
Charge. The changes primarily related to increasing the provision for asset
impairment by $27,989 to further write down to estimated fair value loans made
by the Company's lending subsidiary; $12,000 to write down to fair value assets
held in the Company's European operations; offset by reductions of $8,969 for
assets previously written down to their fair value, which were no longer being
held for sale; and $4,363 in previously estimated severance costs in the
Company's international operations.

The First Quarter 1999 Charge totaled $89,884 relating to a cost
rationalization program initiated in 1999 and consisted of the following: (1)
severance costs of $56,757; (2) a charge of $19,123 of which $2,153 related to
terminated projects representing costs associated with certain construction
projects that have been cancelled and $16,970 related to costs associated with
acquisition due diligence which will no longer be pursued; (3) a $7,245 charge
for business and facility closures, primarily in the Company's European
operations; and (4) a remaining charge of $6,759 consisting of various other
cost initiatives.

The $56,757 for severance costs is related to the termination of five
executive contractual relationships and the involuntary termination of
approximately 100 employees in North America (of which approximately 20 were
located in the corporate office), 600 employees in France, 85 employees in other
European operations and 10 employees in other foreign operations. The positions
terminated were both operational and administrative in nature. The severance
costs related to the executive contractual relationships will be paid out
according to the terms of the respective agreements and will extend through
2005.

The Fourth Quarter 1999 Charge totaled $272,544 relating to additional cost
rationalization programs, as well as initiatives required to enhance cash flow
and reduce debt. The Fourth Quarter 1999 Charge consisted of the following: (1)
severance costs of $150,675; (2) asset impairment of $73,728 associated with
assets held for sale which were written down to estimated fair value; (3) asset
impairment of $18,245 associated with loans made by the Company's lending
subsidiary held for sale which were written down to estimated fair value; (4)
$12,719 of informational technology costs associated with projects that will no
longer be pursued by the Company; (5) $6,554 of costs to terminate certain lease
obligations related to facility closures; and (6) $10,623 of various other
items.

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SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The $150,675 of severance costs is related to the involuntary termination
of 1,141 employees of the Company. Included in this total are 715 employees in
the Company's international operations, 385 employees in North America, 33
employees in the Company's corporate home office and 8 executive officers of the
Company. Of the 715 employees in the Company's international operations, 290 are
additional involuntary terminations in France pursuant to the Company's First
Quarter Charge. In the North America total, 316 individuals were former owners
of independent funeral homes and cemeteries that were purchased by the Company
and represent approximately $92,180 of the $150,675 of severance costs. These
individuals were under employment, consultant and/or covenant-not-to-compete
contractual agreements and have been relieved from their obligations or
restrictions under their agreements. Such individuals will continue to be paid
by the Company pursuant to such contractual terms, the majority of which will be
paid by 2007. The other positions terminated were both operational and
administrative in nature and the severance costs are expected to be paid out
through 2001. The severance costs associated with the executive officers will be
paid in accordance with the terms of the respective agreements and will extend
through 2005.

The $73,728 of charges related to assets held for sale consists of
approximately $59,655 in the Company's North American operations, approximately
$11,645 in the Company's international operations and approximately $2,428 of
corporate assets. The $59,655 of charges in North America include approximately
50 funeral homes or cemeteries and approximately 45 individual parcels of
undeveloped cemetery property or excess land that are held for sale and being
reduced to their estimated fair values. The Company believes it is a prudent
strategy to hold these underperforming assets for sale and redeploy the proceeds
from such sales to reduce debt.

The asset impairment associated with the lending subsidiary's loans
represents the estimated amount necessary to sell 205 loans with a fair value of
$176,272. The Company decided, except for existing commitments, to indefinitely
suspend the operations of its lending subsidiary and to sell a portion of the
loan portfolio in 2000. In connection with selling the portfolio of loans
discussed above, the Company was also relieved of all but certain loan
commitments to extend credit (see note nine to the consolidated financial
statements).

The Impaired Loans charge in 1999 totaled $38,608 and related to loans not
being held for sale by the Company's lending subsidiary. The face value of the
47 loans subject to the reserve was $61,315 at December 31, 1999. In 2000, the
Company acquired by deed in lieu of foreclosure the collateral underlying these
loans previously on non-accrual status. Subsequent to acquiring those locations,
the Company sold the majority of these locations during the year.

At December 31, 2001, approximately $68,277 of the remaining total
restructuring charge balance relates to severance costs. Further of the $105,230
remaining reserves, $71,916 is included in Accounts payable and accrued
liabilities and $33,314 is included in Other liabilities in the consolidated
balance sheet based on the expected timing of payment.

In October of 2000, the Company executed the sale of a 21% minority
interest in the stock of the Company's United Kingdom operations to local
management for $100. As a result, the Company recognized a pretax loss on the
sale of investment of $56,704 in 2000.

Subsequent to December 31, 2001, the Company completed several transactions
with respect to its United Kingdom operations. To expedite and simplify the sale
of the operations, the Company purchased the 21% minority interest in the United
Kingdom operations for $150 and then capitalized substantially all indebtedness
associated with the operations. Subsequent to the purchase and additional
capitalization, the Company consummated the sale of its United Kingdom
operations, receiving net pretax proceeds of approximately $273,000 and
securities with a face value of $21,600, which includes a 20% equity interest in
the United Kingdom operations and a 12% subordinated note.

83

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE SEVENTEEN

DISCONTINUED OPERATIONS

In the third quarter of 2000, the Company completed the sales of its wholly
owned insurance operations, Auxia and American Memorial Life Insurance Company
(AMLIC). The financial statements have been reclassified to reflect these
operations as discontinued. The operating results for Auxia have been included
through August 31, 2000 and the operating results for AMLIC have been included
through September 30, 2000, the dates of dispositions of the respective
companies. In the fourth quarter of 2001, the Company recognized the partial
release of a contingent liability associated with the sale of its insurance
operations in income from discontinued operations.

Summary operating results of discontinued operations:

84

SERVICE CORPORATION INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE EIGHTEEN

QUARTERLY FINANCIAL DATA (UNAUDITED)

Income (loss) from continuing operations before extraordinary gains and
cumulative effects of accounting changes includes the following restructuring
and non-recurring charges and changes in estimates:

For a more detailed discussion of the Restructuring and non-restructuring
charges, see note sixteen to the consolidated financial statements. For a more
detailed discussion of the changes in estimates, see note two to the
consolidated financial statements.

85

SERVICE CORPORATION INTERNATIONAL

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2000

- ---------------

(1) Uncollected receivables written off, net of recoveries.

(2) Primarily cumulative effect of accounting change and acquisitions and
dispositions of operations.

86

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information called for by PART III (Items 10, 11, 12 and 13) has been
omitted as the Company intends to file with the Commission not later than 120
days after the close of its fiscal year a definitive Proxy Statement pursuant to
Regulation 14A. Such information is set forth in such Proxy Statement (i) with
respect to Item 10 under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance", (ii) with respect to Items 11 and 13
under the captions "Certain Information with Respect to Officers and Directors",
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" and (iii) with respect to Item 12 under the caption "Voting
Securities and Principal Holders." The information as specified in the preceding
sentence is incorporated herein by reference; provided however, notwithstanding
anything set forth in this Form 10-K, the information under the captions
"Compensation Committee Report on Executive Compensation" and "Performance
Graph" in such Proxy Statement, and the information in the paragraphs under the
caption "Audit Committee Report" in such Proxy Statement, are not incorporated
by reference into this Form 10-K.

The information regarding the Company's executive officers called for by
Item 401 of Regulation S-K has been included in PART I of this report.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)-(2) Financial Statements and Schedule:

The financial statements and schedule are listed in the accompanying
Index to Financial Statements and Related Schedule on page 41 of this
report.

(3) Exhibits:

The exhibits listed on the accompanying Exhibit Index on pages 90-93
are filed as part of this report.

(b) Reports on Form 8-K

During the quarter ended December 31, 2001, the Company did not file
any reports on Form 8-K.

(c) Included in (a) above.

(d) Included in (a) above.

87

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Service Corporation International, has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

SERVICE CORPORATION INTERNATIONAL

By: /s/ JAMES M. SHELGER
------------------------------------
(James M. Shelger,
Senior Vice President, General
Counsel and Secretary)

Dated: March 27, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

89

EXHIBIT INDEX

PURSUANT TO ITEM 601 OF REG. S-K

In the above list, the management contracts or compensatory plans or
arrangements are set forth in Exhibits 10.1 through 10.31.

Pursuant to Item 601(b)(4) of Regulation S-K, there are not filed as
exhibits to this report certain instruments with respect to long-term debt under
which the total amount of securities authorized thereunder does not exceed 10
percent of the total assets of Registrant and its subsidiaries on a consolidated
basis. Registrant agrees to furnish a copy of any such instrument to the
Commission upon request.

93