SERVICE CORPORATION INTERNATIONAL - 10-Q Quarterly Report

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

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 charter)

TEXAS 74-1488375
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)

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

----------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to the filing
requirements for the past 90 days.

YES X NO
----- -----

The number of shares outstanding of the registrant's common stock as of
November 6, 2002 was 296,320,928 (net of treasury shares).

SERVICE CORPORATION INTERNATIONAL

INDEX

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF OPERATIONS

(See notes to consolidated financial statements)

3

SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET

(See notes to consolidated financial statements)

4

SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS

(See notes to consolidated financial statements)

5

SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

The Company's comprehensive income for the nine months ended September 30, 2001
of $58,927 consisted of a net loss of $6,039, a foreign currency translation
gain adjustment of $25,976 and a reclassification adjustment for realized loss
on foreign currency translation of $38,990.

The Company's comprehensive income for the three months ended September 30,
2002 of $8,501 consisted of a net income of $4,061 and a foreign currency
translation gain adjustment of $4,440. The Company's comprehensive income for
the three months ended September 30, 2001 of $110,745 consisted of net income of
$4,281, a foreign currency translation gain adjustment of $88,304 and a
reclassification adjustment for realized loss on foreign currency translation of
$18,160.

(See notes to consolidated financial statements)

6

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

1. NATURE OF OPERATIONS

Service Corporation International (SCI or the Company) is the largest provider
of funeral and cemetery services in the world through its funeral service and
cemetery operations. At September 30, 2002, the Company operated 2,444 funeral
service locations, 456 cemeteries and 155 crematoria located in eight countries.
The Company also has minority interest investments in funeral and cemetery
operations in four countries outside of North America.

The funeral service 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 187 combination locations that
contain a funeral service location within a Company owned cemetery.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements for the three
and nine months ended September 30, 2002 and 2001 include the accounts of the
Company and all majority-owned subsidiaries and are unaudited but include all
adjustments, consisting of normal recurring accruals and any other adjustments
which management considers necessary for a fair presentation of the results for
these periods. These consolidated financial statements have been prepared in a
manner consistent with the accounting policies described in the annual report on
Form 10-K filed with the U. S. Securities and Exchange Commission for the year
ended December 31, 2001, unless otherwise disclosed herein, and should be read
in conjunction therewith. The accompanying year-end consolidated balance sheet
was derived from the audited consolidated financial statements but does not
include all disclosures required by accounting principles generally accepted in
the United States of America. Operating results for interim periods are not
necessarily indicative of the results that may be expected for the full year
period.

In 2002, the Company began recognizing revenues associated with delivered
caskets previously prearranged on cemetery contracts as part of funeral
operations. Previously, such casket revenue was recognized in cemetery
operations. The Company has reclassified the prior year operating results to
conform to the current period presentation with no effect on previously reported
results of operations, financial condition or cash flows.

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

The Company has an ongoing review program of its obligations to deliver
cemetery merchandise and services to customers in order to collect funds from
applicable cemetery trust funds. As a result of this ongoing review, the Company
has recognized changes in estimates of Deferred preneed cemetery contract
revenues which had the effect of increasing revenues and gross profits during
the third quarter of 2002 by $9,400 and $8,800, respectively, compared to
$27,600 and $23,100, respectively, in the third quarter of 2001. For the nine
months ended September 30, 2002, the changes in estimates increased revenues and
gross profits by $19,700 and $14,800, respectively, compared to $55,000 and
$44,100, respectively, in the nine months ended September 30, 2001. The Company
intends to continue to review these obligations; however, the impact recognized
in future periods will depend on the outcome of such reviews.

7

In the first quarter of 2002, the Company changed the amortization period
related to deferred prearranged funeral obtaining costs from 20 years to 12
years. This change in estimate was made in order to more accurately reflect
current trends regarding the timeframe from when a prearranged funeral contract
is sold to when it is serviced atneed. This change in estimate reduced funeral
gross profit by approximately $1,800 and $5,100 and net income by approximately
$1,200 and $3,300 for the three and nine months ended September 30, 2002,
respectively.

In addition, in the first quarter of 2002, the Company changed its
allocation methodology of overhead costs in North America to be based on funeral
and cemetery reporting unit revenues. The change in overhead allocation has not
impacted the Company's reported results of operations, financial condition or
cash flows.

During the second quarter of 2002, the Company decided to implement new
information technology systems, including a new North America point of sale
system and an upgraded general ledger system. As a result of this decision, the
Company accelerated amortization of its existing capitalized systems costs
beginning in the second quarter of 2002 in order to reflect the estimated
remaining useful lives of these systems. The Company recognized approximately
$4,400 of additional amortization related to this change in estimate in the
third quarter of 2002 and approximately $8,900 for the nine months ended
September 30, 2002.

3. ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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 one
method - the purchase method - for accounting for such transactions. SFAS No.
142 addresses goodwill and other intangible assets and redefines useful lives,
amortization periods and impairment of goodwill. Under the new pronouncement,
goodwill is no longer amortized, but will be tested for impairment annually.
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 identified North America, France, Germany, Singapore and Argentina
as reporting units for its funeral operations and North America, Argentina,
Chile and Uruguay as reporting units for its cemetery operations. Prior to
disposition, the Company also identified United Kingdom funeral, United Kingdom
cemetery and Italy funeral as reporting units. In order to assess impairment of
goodwill, the Company determined the fair value of its reporting units based on
a combination of present value of expected future cash flows and multiples of
revenues and operating earnings. As a result of the adoption of SFAS No. 142 in
the first quarter of 2002, the Company recognized a charge reflected as a
cumulative effect of accounting change of $135,560 (net of a tax benefit of
$11,234) related to the write-off of goodwill in its North America cemetery
reporting unit.

The following table shows the historical results compared to unaudited pro
forma effects of SFAS No. 142 for the three and nine months ended September 30,
2001 had goodwill not been amortized during that period.

8

The changes in the carrying amounts of goodwill for the nine months ended
September 30, 2002 are as follows:

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 associated asset retirement costs.
Under the provisions of SFAS No. 143, 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 are
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 results of operations, financial condition or cash flows. The Company
is required to adopt SFAS No. 143 during the first quarter of 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 impairment or disposal of long-lived assets. The Company
adopted SFAS No. 144 during the first quarter of 2002 with no impact on the
current results of operations, financial condition or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates the requirement that gains and losses from
the extinguishment of debt be aggregated and classified as extraordinary items
as well as certain other items. When the pronouncement is adopted, gains and
losses from early extinguishments of debt will be included in Other income in
the consolidated statement of operations. The Company is required to adopt SFAS
No. 145 during the first quarter of 2003 as it relates to the classification of
extinguishments of debt. The other provisions of SFAS No. 145 are generally
effective for transactions occurring after May 15, 2002.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit and Activity (Including
Certain Costs Incurred in a Restructuring)." The principal difference between
this pronouncement and Issue 94-3 is that the statement follows FASB Concepts
Statement No. 6 in that a liability for a cost associated with an exit or
disposal activity is recognized when the liability is incurred, not at the
entity's commitment to an exit plan. The Company does not anticipate a
significant impact on its results of operations, financial condition or cash
flows as a result of adopting this pronouncement. The Company is required to
adopt SFAS No. 146 for exit or disposal activities that are initiated after
December 31, 2002.

During the first quarter of 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." In accordance with these
pronouncements, the Company recognized a cumulative effect of a change in
accounting principle, net of applicable taxes, of $7,601.

9

4. DEBT

The Company's consolidated debt had a weighted average interest rate of
6.86% at September 30, 2002, compared to 6.72% at December 31, 2001.

In July 2002, the Company entered into a new bank credit agreement that
will mature in July 2005. The new credit facility provides a total commitment of
$185,000, including a sublimit of $125,000 to support letters of credit, and is
secured by the stock, inventory and receivables of certain of the Company's
domestic subsidiaries. These domestic subsidiaries have guaranteed the Company's
debt associated with this facility. The bank credit agreement contains certain
financial covenants, including a minimum interest coverage ratio, a maximum
leverage ratio and limits on capital expenditures. Additionally, the Company is
restricted from paying dividends and making other distributions.

At September 30, 2002, the Company had no borrowings and $85,845 in letters
of credit outstanding under the bank credit agreement. Interest rates for
outstanding borrowings are based on various indices as determined by the
Company. The Company also pays a quarterly fee on the unused commitment, ranging
from 0.50% to 0.75%, based on the percentage of the facility used, and was
0.625% at September 30, 2002.

At December 31, 2001, the Company had two primary bank credit agreements,
which were used for general corporate purposes: a 5-year multi-currency revolver
and a 2-year term loan. At December 31, 2001, the 5-year multi-currency revolver
allowed for borrowings up to $400,000 of which $285,714 could be denominated in
foreign currencies. No borrowings were outstanding under the 5-year revolver at
December 31, 2001, or at its maturity in June 2002. The 2-year term loan had an
outstanding balance of $29,061 at December 31, 2001, which was repaid in
February 2002.

Interest rates for the multi-currency revolver and the term loan were based
on various indices as determined by the Company. The weighted average rate of
these borrowings at December 31, 2001, was 4.75%. A quarterly fee was paid on
the total commitment

10

amount, ranging from 0.25% and 0.50%, which was based on the Company's senior
unsecured credit rating and was 0.50% at December 31, 2001.

At December 31, 2001, total debt included approximately $110,000 of debt
that matured in the second quarter of 2002 associated with the financial
restructuring of the Company's French subsidiary. In May 2002, the Company's
French subsidiary satisfied this debt with non-cash French financial assets.

On June 1, 2002, substantially all of the holders of the 7.00% senior notes
due 2015 (putable 2002) presented the notes for payment pursuant to the terms of
the embedded put option. The Company paid the holders in compliance with the
terms of the agreement.

In September 2002, the Company completed an exchange of $172,183 of its
existing 6.00% senior notes due 2005 for an equivalent principal amount of 7.70%
senior notes due 2009. The new notes issued in the exchange have not been
registered under the Securities Act of 1933, as amended, and may not be offered
or sold in the United States absent registration or an applicable exemption from
registration requirements. The Company anticipates filing the necessary
registration statement with the Securities and Exchange Commission within ninety
days of the exchange date. Upon settlement of the exchange offer, the Company
paid approximately $11,480 in closing fees, incentive payments and accrued
interest. Also during the nine months ended September 30, 2002, the Company
purchased the following notes in the open market: $2,825 of the 7.00% senior
notes due 2015 (putable 2002); $159,683 of the 6.30% senior notes due 2020
(putable 2003); $111,500 of the 7.375% senior notes due 2004; $3,151 of the
6.00% senior notes due 2005; $14,237 of the 6.75% convertible subordinated notes
due 2008; and $1,000 of the 7.70% senior notes due 2009. As a result of these
transactions, the Company recognized extraordinary gains on early
extinguishments of debt totaling $2,731 (net of a $1,570 tax benefit).

In connection with the purchase of the 6.30% senior notes due 2020 (putable
2003), the Company terminated the options embedded in the extinguished
securities by exchanging them for new options with economically equivalent
terms. These new options represented an original liability of $15,306, recorded
with the early extinguishment of debt in Accounts payable and accrued
liabilities in the consolidated balance sheet. Through the nine months ending
September 30, 2002, the Company has recognized a charge of $19,627 to adjust
the liability to fair market value in Impairment losses and other operating
expenses in the consolidated statement of operations. At September 30, 2002, the
options represented a liability of $34,933, recorded in Accounts payable and
accrued liabilities in the consolidated balance sheet. Subsequent to September
30, 2002, the Company paid $57,000 in full settlement of the options associated
with the 6.30% senior notes due 2020 (putable 2003). This settlement resulted in
a charge of $21,160, which will be recognized in Impairment losses and other
operating expenses in the consolidated statement of operations during the fourth
quarter of 2002. The remaining $35,840 represents the satisfaction of the
previously recognized liability. As the Company has settled all options
associated with the 6.30% senior notes due 2020 (putable 2003), these bonds will
be presented hereafter as the 6.30% senior notes due 2003.

The Company had deposited $79,062 and $81,627 in restricted
interest-bearing accounts that were held as security for various credit
instruments included in Deferred charges and other assets in the consolidated
balance sheet at September 30, 2002 and December 31, 2001, respectively.
Subsequent to September 30, 2002, the Company settled the options, as noted
above, and as a result surrendered $57,000 previously deposited as collateral in
restricted interest-bearing accounts. The Company had $27,724 remaining in
restricted interest-bearing accounts at November 1, 2002, held as security for
various other credit instruments.

Also subsequent to September 30, 2002, the Company purchased in the open
market $6,800 of the 6.30% senior notes due 2003; $5,310 of the 7.375% senior
notes due 2004; $1,043 of the 8.375% senior notes due 2004; $2,975 of the 6.0%
senior notes due 2005; and $758 of the 6.75% convertible subordinated notes due
2008.

5. SEGMENT REPORTING

The Company's operations are both product and geographically based, and the
reportable operating segments presented below include funeral and cemetery
operations. The Company's geographic segments include North America, Europe and
Other Foreign. As of September 30, 2002, the Company conducts funeral and
cemetery operations in its North America and Other Foreign segments and conducts
funeral operations in its European segment. In the first quarter of 2002, the
Company completed a joint venture with its

11

United Kingdom operations (see note eight to the consolidated financial
statements), which conducted both funeral and cemetery operations in its
European segment.

In 2002, the Company began recognizing revenues associated with delivered
caskets previously prearranged on cemetery contracts as part of funeral
operations. Previously, such casket revenue was recognized in cemetery
operations. The Company has reclassified the prior year operating results to
conform to the current period presentation with no effect on previously reported
results of operations, financial condition or cash flows.

In addition, during the first quarter of 2002, the Company changed its
allocation methodology of overhead costs in North America to be based on funeral
and cemetery reporting unit revenues. The change in overhead allocation has not
impacted the Company's consolidated results of operations, financial condition
or cash flows.

The Company's reportable segment information is as follows:

The following table reconciles gross profit from reportable segments to the
Company's consolidated income before income taxes, extraordinary items and
cumulative effects of accounting changes:

12

The Company's geographic segment information is as follows:

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

13

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

During the nine months ended September 30, 2002 and throughout 2001, the Company
has divested certain North America and international funeral service locations
and cemeteries not considered part of its core operations. These divested
operations were held for sale prior to 2002 in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and therefore have not been classified as discontinued
operations under more recent accounting pronouncements. Summary operating
results of the Company's divested operations for the three and nine months ended
September 30, 2002 and 2001 have been included below:

14

The net assets of the Company's United Kingdom subsidiary (divested in the first
quarter of 2002) at December 31, 2001, were as follows:

6. CONTINGENCIES

The Company is a party to various litigation matters, investigations and
proceedings. The Company reserves for estimated losses relating to the
contingencies if amounts can be reasonably estimated and are probable to occur.

The following discussion describes certain litigation and proceedings as of
November 11, 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.

15

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.

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. On review
by appeal, the Texas Supreme Court reversed the finding of the Texas state
district court and granted the motion to compel arbitration against Hunter and
remanded the issue of whether the Hunter Family Trust must also arbitrate. Cause
No. 01-0650, In Re Service Corporation International, et al, 85 S.W. 3d 171
(Tex. 2002). The Texas state trial court in Hunter has not issued a further
order on this matter. In the Hammer matter, the Texas state district court
ordered the case to arbitration.

On November 5, 2002, Hunter and the Hunter Family Trust filed a demand for
arbitration styled Case No. ____; James P. Hunter, III and the James P. Hunter,
III Family Trust v. Service Corporation International, Robert l. Waltrip, L.
William Heiligbrodt, and George R. Champagne; before the American Arbitration
Association in Houston, Texas. The Hunter plaintiffs' arbitration demand also
asserts claims against the Company and the Individual Defendants with respect to
the Company's acquisition of ECI. Hunter also individually asserts claims that
he was instructed to resign as an officer of the Company several months after
the merger and suffered lost income as a result.

Since the arbitration is in its preliminary stages and no discovery has
occurred, the Company and the Individual Defendants cannot quantify their
ultimate liability, if any, for the payment of damages or predict the outcome of
the arbitration. However, the Company and the Individual Defendants believe that
the allegations in the Hunter arbitration do not provide a basis for recovery of
damages on several legal grounds. The Company and the Individual Defendants
intend to aggressively defend this arbitration action.

Copies of certain pleadings in these cases are filed as exhibits to this
report.

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 the above 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, results of operations or cash flows.

16

Thomas G. Conway et al v. Service Corporation International, et al; Cause
No. CV-02-2818; In the United States District Court for the Eastern District of
New York, filed May 10, 2002 and Demand for Arbitration, No. 13 168 02061 02,
before the American Arbitration Association ("AAA")("Conway" action). The Conway
action was filed against the Company and two former officers of the Company who
were also former officers of ECI, James P. Hunter III ("Hunter") and Jack D.
Rottman ("Rottman"). On August 28, 2002, the Conway plaintiffs filed a Demand
for Arbitration and Statement of Claim against the Company, ECI and SCI Delaware
Funeral Services, Inc., a subsidiary of the Company ("SCI Delaware"), in New
York City. The Company, SCI Delaware and ECI have objected to venue for the
arbitration in New York City and requested that the AAA transfer it to Houston,
Texas. This request for a transfer of the arbitration is pending before the AAA.

The plaintiffs in the Conway action owned funeral homes in Queens County and
Suffolk County, New York, which were sold and merged into a subsidiary of ECI in
January, 1998. The plaintiffs are also included in the definition of class
members in the Consolidated Lawsuit described above. In the Conway action,
plaintiffs assert that ECI failed to disclose that ECI was negotiating the
merger with the Company in breach of covenants in the agreements between ECI and
the plaintiffs. ECI purchased the plaintiffs' funeral homes with ECI stock and
cash, and the Plaintiffs' ECI stock was exchanged for stock in the Company in
the merger of January 1999. Plaintiffs allege damages from the loss in value of
the Company's stock from 1999 to the present. The plaintiffs seek to recover
compensatory damages alleged at a minimum of $8 million and punitive damages
alleged at a minimum of $14 million. The plaintiffs allege that SCI and SCI
Delaware are liable as the alleged "successor" entities to ECI.

Since the arbitration is in its preliminary stages and no discovery has
occurred, the Company cannot quantify the ultimate liability of the Company or
its subsidiaries, if any, for the payment of damages or predict the outcome of
the litigation. However, the Company and its subsidiaries believe that the
allegations in the Conway action do not provide a basis for recovery of damages
on several legal grounds. The Company and its subsidiaries intend to
aggressively defend this lawsuit.

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 County, 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 responded to the letter by forming a committee of
certain independent directors to conduct an inquiry into the allegations in the
letter. The committee retained independent counsel to assist it in its inquiry.
The letter does not seek a specified amount of legal damages. Based on its
investigation, the Committee determined that a lawsuit or derivative proceeding
against the directors or officers of SCI is not in the best interest of SCI. The
Committee reported its decision to the Executive Committee of the Board of
Directors on September 11, 2002.

Maurice Levie, Derivatively on behalf of Nominal Defendant, Service
Corporation International v. R. L. Waltrip, et al and Service Corporation
International; No. 2002-42417; In the 164th Judicial District Court of Harris
County, Texas, Filed August 20, 2002 ("Levie" action). The Levie action was
filed against the Company and the members of its Board of Directors individually
as a result of the Shareholder Derivative Demand of January 14, 2002, described
above. In response to the filing of the lawsuit before the conclusion of the
Committee's investigation, the Company and the individual directors filed an
answer denying the allegations in the lawsuit and a motion to dismiss.

Since the litigation is in its preliminary stages and no discovery has
occurred, the Company cannot quantify its ultimate liability or that of its
individual directors, if any, for the payment of damages or predict the outcome
of the litigation. However, the Company and the individual directors believe
that the allegations in the Levie action do not provide a basis for recovery of
damages on several legal grounds. The Company and the individual directors
intend to aggressively defend this lawsuit. The Company filed the motion to
dismiss the entire lawsuit against it and individual directors based on the
results of the investigation and determination of the Committee in response to
the shareholder demand letter. This motion is currently pending before the trial
court.

17

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 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 began on August 28, 2002 but did not conclude and was recessed.
The hearing is currently scheduled to be resumed on November 13, 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.

On April 21, 2002, additional plaintiffs filed a lawsuit styled Sol
Guralnick, Linda Weiner, Joan Nix, Gilda Schwartz, Paul Schwartz, Ann Ferrante,
Steve Schwartz, Nancy Backlund, Jamie Osit, Corey King, Marc King, Barbara
Feinberg Clark v. SCI Funeral Services of Florida, Inc. d/b/a Menorah Gardens
and Funeral Chapels and Service Corporation International; In the Circuit Court
in the 15th Judicial Circuit, Palm Beach County, Florida; Case number CA024815AE
(the Guralnick Lawsuit), making essentially the same allegations as the Consumer
Lawsuit with the exception that it does not contain class allegations.

Since the Consumer and Guralnick Lawsuits, and related discovery, are in
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
intends to continue its investigation and to aggressively defend itself in the
litigation as well as continue to cooperate with state officials in resolving
the issues presented.

In addition to the litigation 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 statute; (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
agreed to the appointment of an examiner who is charged with overseeing the
remapping and burial processes at the cemeteries. The Company has insurance
policies which are

18

intended to limit the Company's outflows in the event of a decision adverse to
the Company in the Consumer Lawsuit, the Guralnick 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.

In connection with the allegations in the Consumer and AG Lawsuits, the
Florida Department of Law Enforcement caused a search warrant to be issued to
investigate possible criminal activity. The Company is continuing to fully
cooperate in the investigation.

7. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations is presented below:

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

8. IMPAIRMENT LOSSES AND OTHER OPERATING EXPENSES

The Company has recorded impairment losses and other operating expenses in 2002,
2001, 2000 and 1999. As actual dispositions occur or better estimates become
available, the Company adjusts existing charges.

19

The activity related to impairment losses and other operating expenses
during the nine months ended September 30, 2002 was as follows:

The Company's 2002 Charges total $246,444 and relate primarily to $158,481
for certain funeral and cemetery operations being held for sale, $39,327 from
relieving certain individuals from their consulting and/or
covenant-not-to-compete contractual obligations, $16,873 as a reduction in the
value of certain equity investments, $19,627 to adjust to market value certain
options associated with the Company's senior notes due 2003, $5,211 of severance
costs for former employees and $6,925 as realized disposal losses for long-lived
assets. The Company also recorded $18,066 as changes in estimates of charges
previously recorded in 1999, 2000 and 2001, of which $16,237 was related to
additional estimated reductions in the value of the Company's Argentina business
due to continued economic decline. The remaining 2002 reserve is primarily
related to the terminated consulting and/or covenant-not-to-compete contractual
obligations which will be paid out according to the terms of the agreements, the
majority of which will be paid by 2012.

The $158,481 for certain funeral and cemetery operations being held for sale
in North America represent 80 funeral service locations, 38 cemeteries and 22
businesses being sold for their real estate values.

The Company's 2001 Charges primarily relate to impairment charges
associated with international businesses sold or held for sale. In the first
quarter of 2002, the Company joint ventured its United Kingdom operations,
receiving pretax proceeds of approximately $273,000 (which included
approximately $9,000 in retained cash) 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.

The Fourth Quarter 2000 Charge primarily relates to planned divestitures of
certain North America funeral service and cemetery locations, the reduction of
the carrying value of an equity investment in North America and certain
additional changes to estimates in the Company's restructuring and non-recurring
charges recorded in 1999.

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 remaining reserve is related to severance costs associated
with terminated contractual relationships of former owners and other executive
officers and will be paid in accordance with the terms of the respective
agreements, the majority of which will be paid by 2007.

The First Quarter 1999 Charge totaled $89,884 relating to a cost
rationalization program initiated in 1999. The remaining reserve relates to
severance costs associated with terminated executive contractual relationships
which will be paid out according to the terms of the respective agreements and
will extend through 2005.

Of the $102,347 remaining liability at September 30, 2002, $45,974 is
included in Accounts payable and accrued liabilities and $56,374 is included in
Other liabilities in the consolidated balance sheet based on the expected timing
of payments.

20

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

The Company is the largest provider of funeral and cemetery services in the
world. As of September 30, 2002, the Company operated 2,444 funeral service
locations, 456 cemeteries and 155 crematoria located in eight countries. The
Company also has minority interest investments in funeral and cemetery
operations in four countries outside of North America. For the nine months ended
September 30, 2002, the Company's largest markets were North America and France,
which, when combined, represent approximately 97% of the Company's consolidated
revenues, 96% of consolidated operating income before non-recurring items and
99% of the Company's total operating locations. The funeral and cemetery
operations are organized into two North American divisions (Eastern and Western)
covering the United States and Canada, a European division primarily responsible
for operations in France and an Other Foreign division primarily relating to
operations in South America.

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 it is in compliance in all
material respects with the significant provisions of such statutes, ordinances
and regulations.

OVERVIEW OF BUSINESS STRATEGY

The Company's objectives focus on continued stabilization of the Company's
capital structure through cost reductions, 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 the majority of its operating free cash flow and proceeds from
asset sales and 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. In the second quarter of
2002, the Company announced a plan to sell an additional 140 funeral service
locations and cemeteries in North America. The Company expects to receive net
pretax cash proceeds of approximately $50 to $60 million from the sale of these
funeral and cemetery operations through July 2003. These North America
operations being held for sale represent 80 funeral service locations, 38
cemeteries and 22 businesses being sold for their real estate values which
collectively represent aggregate annual EBITDA before non-recurring items of
approximately $8 million.

The timing of the completion of international and certain North America
asset sales and joint ventures to achieve the Company's core North America
business strategy is not easily predictable. The Company does not expect the
completion of the marketing program for the disposition of its South America
operations to be completed in 2002. In July 2002, the Company announced its
decision to defer the joint venture transaction of its funeral operations in
France until after 2002. While the Company believes it could have completed this
joint venture transaction in 2002, the Company also believes it is more valuable
to its shareholders to benefit from the strong improvements in cash flows and
EBITDA from its French operations in 2002. The Company believes the continued
improvement of these operations will result in the execution of a joint venture
transaction at a future date on more favorable terms than are currently
available, ultimately delivering more value to its shareholders.

Revenue Growth Initiatives

The Company's business objectives in 2002 are to grow revenues, gross profits
and cash flows and to further stabilize its capital structures. This growth will
be accomplished through a series of revenue and cost reduction initiatives.

The Company's revenue growth initiatives are discussed in detail in the
Company's Form 10-K for the year ended December 31, 2001. Some of the most
important revenue initiatives that the Company believes could positively affect
revenues in the near term are listed below.

o Implementation and penetration of Dignity Memorial(R) funeral and
cremation packages.

o Improvement of standards in customer service.

21

o Continued commitment to funeral and cemetery prearrangement.

o Focus on sales and delivery of cemetery property and merchandise.

Some of the revenue initiatives that the Company believes could positively
affect revenues over the longer term are listed below.

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

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

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

o Expansion of cremation marketing, merchandising and services.

o Growth capital expenditures.

The Company's annual 2002 guidance expects comparable North America funeral
revenues to grow in the low single-digit percentage range in 2002 based on an
equivalent number of funeral services performed and low single-digit percentage
growth in the average revenue per funeral service (the term comparable is
defined as locations excluding operations that were acquired or constructed
after January 1, 2001 and divested by the Company prior to September 30, 2002).
Through the nine months ended September 30, 2002, the Company has experienced a
decrease of 0.75% in funeral services performed, offset by an increase of 1.6%
in the average revenue per funeral service in comparable North America funeral
service locations compared to the same period in 2001. Although the number of
funeral services performed has declined in the nine months ended 2002, the
Company has experienced higher than anticipated increases in the average revenue
per funeral service. Based on mortality information accumulated by the Company,
the decline in the number of funeral services performed is consistent with
trends experienced throughout the United States.

The Company's annual 2002 guidance expects comparable North America
cemetery revenues to be similar to 2001. Through the nine months ended September
30, 2002, the Company has experienced an increase of 4.8% in comparable North
America cemetery revenues. In 2002, increases in the sales of deliverable
cemetery property and merchandise and the development of cemetery property
inventory have been offset by lower revenues compared to 2001 levels due to
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 is recognized 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 strategy and the elimination of approximately $41.8 million
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. Through September 30, 2002, the Company has experienced a
comparable North America funeral gross margin percentage of 21.4% and a
comparable North America cemetery gross margin percentage of 12.9%. While the
comparable North America cemetery gross margin percentage of 12.9% is within the
Company's full year targeted range, the Company's comparable North America
cemetery results in the first three quarters of 2002 contain a higher than
normal amount of revenue from completion of cemetery property development
projects. Preneed cemetery property revenues are recognized upon completion of
the development of the property coupled with customer payment of at least ten
percent of the total contract amount. The Company anticipates that its cemetery
segment revenue will contain more normalized levels of completed cemetery
property development projects beginning in the fourth quarter of 2002, which
could lead to cemetery gross margin percentages below the fourth quarter of
2001. See Results of Operations included in this Management's Discussion and
Analysis of Financial Condition and Results of Operations for further discussion
of the Company's operating results for the three and nine months ended September
30, 2002.

Cost Structure

The majority of the Company's operations are managed in groups called clusters.
Clusters are geographical groups of funeral service locations and cemeteries
that may lower their individual overhead costs by sharing common resources such
as operating personnel, preparation services, clerical staff, limousines,
hearses and prearranged 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

22

mentioned, allow the Company to more efficiently utilize its operating
facilities. Additionally, the Company has implemented 25 Central Processing
Centers and 20 Accounting Centers throughout North America to further gain
accounting and back-office efficiencies.

The Company has three components of overhead costs in North America:
general and administrative expenses, home office overhead and field overhead.
Home office and field overhead costs are allocated to funeral and cemetery
operations in North America while general and administrative expenses are
disclosed as a separate line item of the consolidated statement of operations.

In 2002, the Company decided to implement new information technology
systems in North America. As a result of this decision, the Company will
accelerate amortization of existing capitalized systems costs to reflect the
estimated useful lives of these systems. Excluding this accelerated
amortization, the sum of all three overhead components decreased $8.1 million or
5.8% in the first nine months of 2002 compared to the same period of 2001. The
Company has plans to continue to reduce its overhead cost structure resulting in
future cash savings to the Company.

Another focus of cost reductions is centered upon the Company's preneed
sales and delivery cost structure. The Company is currently eliminating or
reducing certain forms of lead procurement and incentive travel, and changing
the compensation structure of the Company's sales functions. While this cost
containment process could have a potential negative impact on the Company's
revenues in the near term, the Company believes these actions will ultimately
enhance the Company's gross profits and cash flows.

Cremations

There has been a growing trend over the last several years in the number of
cremations performed in North America as an alternative to traditional funeral
service dispositions. Outside of North America, the cremation rate is more
stable. While cremations performed by the Company in North America typically
have higher gross profit margins than traditional funeral services, cremations
usually result in lower revenues and gross profits to the Company. In North
America, for the three and nine months ended September 30, 2002, 38.5% and
38.1%, respectively, of comparable funeral services performed by the Company
were cremation cases, compared to 37.2% in both the three and nine months ended
September 30, 2001. The Company's strategy for cremation trends in North America
is to continue the movement toward performing cremations with memorialization
services as well as to offer enhanced and additional cremation products and
services to North American cremation consumers. This is being accomplished
through programs such as the Company's Dignity Memorial(R) cremation
memorialization packaged funeral plans, which offer the consumer a broad array
of choices of products and services for memorialization. The Company is also
considering expanding National Cremation(TM) Service, the Company-owned largest
single provider of cremation services in North America, to nineteen states by
the end of 2003.

CRITICAL ACCOUNTING POLICIES, ACCOUNTING CHANGES AND NEW ACCOUNTING
PRONOUNCEMENTS

The Company's consolidated financial statements are impacted by the accounting
policies used and the estimates and assumptions made by management during their
preparation. These critical accounting policies should be read in conjunction
with the annual report filed on Form 10-K for the year ended December 31, 2001.
In 2002, the Company changed certain of its critical accounting policies as
follows:

IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

Effective January 1, 2002, the Company reviews long-lived assets for impairment
when changes in circumstances indicate that the carrying amount of the asset or
asset group may not be recoverable, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 requires that long-lived assets to be held
and used be written down to fair value when it is concluded that the carrying
value of such assets are not recoverable on an undiscounted cash flow basis.
Assets to be disposed of by sale are required to be recorded at the lower of
their carrying amount or fair value less estimated cost to sell.

23

USE OF ESTIMATES

Amortization of Deferred Obtaining Costs

In the first quarter of 2002, the Company changed its amortization period for
prearranged funeral obtaining costs from 20 years to 12 years, a period that the
Company believes more accurately reflects current trends regarding the timeframe
from selling a prearranged funeral contract to when it is serviced atneed. This
change in estimate reduced funeral gross profit by approximately $1.8 million
and $5.1 million and net income by approximately $1.2 million and $3.3 million
in the three and nine months ended September 30, 2002, respectively. The Company
expects amortization expense to increase by approximately $6.8 million in 2002
as a result of changing the amortization period. 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 but are expensed
at the time the specific contract revenues are recognized.

Overhead Allocations

The Company changed its allocation methodology of overhead costs in North
America to be based on funeral and cemetery reporting unit revenues. The Company
believes this new methodology better reflects results of operations at the North
America reporting unit level. The change in overhead allocation has not impacted
the Company's consolidated results of operations, financial condition or cash
flows.

ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS

Goodwill

In the first quarter of 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 addresses 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 will
be tested for impairment annually. SFAS No. 142 requires goodwill to be tested
for impairment by assessing the fair value of reporting units, generally one
level below reportable segments. As a result of the adoption of SFAS No. 142 in
the first quarter of 2002, the Company recognized a cumulative effect of
accounting change of $135.6 million (net of a tax benefit of $11.2 million)
related to the write-off of goodwill in its North America cemetery segment. Had
goodwill not been amortized during 2001, income before extraordinary items and
cumulative effects of accounting changes would have been $14.7 million and $30.4
million and diluted earnings per share before extraordinary items and cumulative
effects of accounting changes would have been $.05 ($.05 basic) and $.11 ($.11
basic) in the three and nine months ended September 30, 2001, respectively.

New Accounting Pronouncements

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 associated asset retirement costs. Under the
provisions of SFAS No. 143, 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 are
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 results of operations, financial condition or cash flows. The Company
is required to adopt SFAS No. 143 during the first quarter of 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 impairment or disposal of long-lived assets. The Company
adopted SFAS No. 144 during the first quarter of 2002 with no impact on the
current results of operations, financial condition or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates the requirement that gains and losses from
the extinguishment of debt be aggregated and classified as extraordinary items
as well as certain other items. When the pronouncement is adopted, gains and
losses from early extinguishments of debt will be included in Other income and
expense in the consolidated statement of operations. The Company is required to
adopt SFAS No. 145 during the first quarter of 2003 as it relates to the

24

classification of extinguishments of debt. The other provisions of SFAS No. 145
are generally effective for transactions occurring after May 15, 2002.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit and Activity (Including
Certain Costs Incurred in a Restructuring)." The principal difference between
this pronouncement and EITF Issue 94-3 is that the statement follows FASB
Concepts Statement No. 6 in that a liability for a cost associated with an exit
or disposal activity is recognized when the liability is incurred not at the
entity's commitment to an exit plan. The Company does not anticipate a
significant impact on its results of operations, financial condition or cash
flows as a result of adopting this pronouncement. The Company is required to
adopt SFAS No. 146 for exit or disposal activities that are initiated after
December 31, 2002.

RESULTS OF OPERATIONS

For the quarter ended September 30, 2002, the Company reported revenues of
$543.8 million compared to $583.0 million in the same quarter of 2001. The
decrease in revenues was primarily the result of joint ventures and dispositions
of operations during 2002 and 2001. Gross profit in the third quarter of 2002
was $75.4 million or 13.9% compared to $67.0 million or 11.5% in the third
quarter of 2001. For the three months ended September 30, 2002, the Company
reported a loss before extraordinary items and cumulative effects of accounting
changes of $0.8 million, net income of $4.1 million, diluted loss per share
before extraordinary items and cumulative effects of accounting changes of $.00
($.00 basic) and diluted net income per share of $.01 ($.01 basic). The Company
reported income before extraordinary items and cumulative effects of accounting
changes of $4.2 million, net income of $4.3 million, diluted income per share
before extraordinary items and cumulative effects of accounting changes of $.02
($.02 basic) and diluted net income per share of $.02 ($.02 basic) for the third
quarter of 2001.

In the first quarter of 2002, the Company ceased amortization of goodwill
as required by SFAS No. 142; changed the amortization period of deferred
prearranged funeral obtaining costs from 20 to 12 years; changed the allocation
methodology of overhead costs in North America to be based on funeral and
cemetery reporting unit revenues; began recognizing revenues associated with
delivered caskets previously prearranged on cemetery contracts as part of
funeral operations instead of cemetery operations; and ceased depreciation of
operating assets held for sale in 2002. In the third quarter of 2002, the
Company determined transactions to sell or joint venture certain assets would be
delayed until after 2002. As a result, the Company resumed normal depreciation
of those assets held in France and Chile in the third quarter of 2002. For
purposes of the following discussion, the Company has presented the financial
information for 2001 on a pro forma basis as if these changes had been
implemented on January 1, 2001. Further, results in all periods presented are
representative of the Company's comparable locations, which exclude operations
that were acquired or constructed after January 1, 2001 and divested by the
Company prior to September 30, 2002. For further information, refer to
Non-Recurring Items and Pro Forma Financial Information in Management's
Discussion and Analysis of Financial Condition and Results of Operations in this
Form 10-Q. The following is a discussion of the Company's results of comparable
operations for the three and nine months ended September 30, 2002 compared to
the comparable pro forma results for the three and nine months ended September
30, 2001.

25

THREE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001

The following factors contributed to the results for the third quarter of 2002.

o Comparable worldwide funeral revenues increased 5.0% in 2002 compared to
2001 as a result of increases in the average revenue per funeral service in
the United States and France and growth in monument sales in the Company's
French operations. Total worldwide funeral revenues were below the same
period in the prior year as a result of dispositions and joint ventures
completed by the Company, both domestically and internationally.

o Comparable cemetery revenues remained stable in the third quarter of 2002
compared to the same period of 2001 as a result of completed cemetery
development projects in the United States offset by declines in the
Company's cemetery operations in South America. Revenue on cemetery
development projects is deferred until the project is completed and a
minimum of 10% of the contract price has been collected.

o The Company experienced a positive effect of foreign currency translation
of approximately $3.5 million on comparable revenues and $0.5 million on
gross profits for the three months ended September 30, 2002 compared to the
same period in 2001 as a result of the strengthening of the euro offset by
the decline in value of the Argentine peso.

26

Funeral

Comparable North America funeral revenues increased 2.0% in the third
quarter of 2002 primarily as a result of an increase in the average revenue per
funeral service. The comparable average revenue per funeral service increased
2.2% to $4,062 in the third quarter of 2002 compared to 2001 primarily as a
result of selling Dignity Memorial(R) packaged funeral plans. This increase in
the average revenue per funeral service was slightly offset by a decline of 0.7%
in the number of funeral services performed. Based on mortality information
accumulated by the Company, the decline in the number of funeral services
performed is consistent with trends experienced throughout the United States.

Comparable North America gross profits and margin percentage increased in
the third quarter of 2002 compared to the third quarter of 2001 due to the
Company's efforts to reduce costs despite the high fixed cost nature of the
Company's funeral network. The gross margin percentage was below the Company's
annual 2002 targeted range of 18% to 23% due to the traditionally lower number
of deaths in the third quarter of each year.

Comparable international revenues increased in the third quarter of 2002
compared to the third quarter of 2001 as a result of the favorable effect of
foreign currency and increases in the average revenue per funeral service and
burial monuments in France. Currency translation had a favorable effect of $9.4
million on international funeral revenue in the third quarter of 2002 as the
euro continued to strengthen relative to the U.S. dollar, partially offset by
the continued degradation of the Argentine peso.

The gross profits and margin percentage in the Company's international
operations increased in the third quarter of 2002 compared to 2001 as a result
of the positive impact of the increases in the average revenue per funeral
service and burial monuments in France.

Cemetery

Comparable North America cemetery revenues increased in the third quarter of
2002 compared to 2001 as a result of an increase in completed cemetery property
development projects and an increase in the mix of developed versus undeveloped
cemetery property sold on a preneed basis. Revenue on cemetery development
projects is recognized when the development projects are completed and customer
payments are at least 10% of the total contract amount. These increases were
partially offset by a decrease in cemetery merchandise revenues as a result of
changes in estimates of Deferred preneed cemetery contract revenues from
obligations to deliver cemetery merchandise and services to customers.

While the comparable North America gross profits increased in the third
quarter of 2002 compared to 2001, the margin percentage declined to 12.8% from
15.7%. The third quarter 2002 margin percentage is within the Company's annual
targeted range of 11% to 16%; however, it is below the same period in the prior
year as a result of lower revenues recognized from changes in estimates of
Deferred preneed cemetery contract revenues which carry a high gross margin
percentage. As a result of the Company's ongoing reviews of Deferred preneed
cemetery contract revenues, the Company recognized changes in estimates in
revenues and gross profits in the third quarter of 2002 of $9.4 million and $8.8
million, respectively, compared to $27.6 million and $23.1 million,
respectively, in the third quarter of 2001. The Company will continue to review
these obligations to deliver cemetery merchandise and services to customers,
however, the impact recognized in 2002 is expected to be below 2001 levels.

Comparable international cemetery revenues declined in the third quarter of
2002 compared to 2001 as a result of the negative effect of foreign currency
translation of $5.8 million. In January 2002, the Argentine peso, which was
previously exchanged at a rate of one peso to one U.S. dollar, was converted to
a free floating currency. As a result, the Company's South America operations
have experienced significant negative adjustments in foreign currency
translation. The remaining decline is a result of lower sales due to the
weakened economy in South America. International cemetery gross profits were
also negatively impacted by an increase of $1.5 million in the third quarter of
2002 in the allowance for doubtful accounts in the Company's South America
cemetery operations.

27

Other Income and Expenses

Corporate general and administrative expenses increased $5.4 million to
$22.5 million in the third quarter of 2002 compared to the same period of 2001.
The increase is primarily related to the Company's decision to implement new
information systems, including a new North America point of sale system and an
upgraded general ledger system. As a result, the Company accelerated the
amortization of existing capitalized system costs and recorded $4.4 million of
additional amortization in the third quarter of 2002. The remaining increase of
$1.0 million is primarily attributable to costs associated with the Company's
efforts to redevelop operating processes and implement new information systems.

Impairment losses and other operating expenses, previously disclosed as
Restructuring and non-recurring charges, was $27.9 million in the third quarter
of 2002 compared to $6.2 million in the same period of 2001. The third quarter
2002 expenses primarily relate to a $19.6 million adjustment to the market value
of certain options associated with the Company's 6.3% senior notes due 2003,
$5.2 million of severance costs for former employees and $3.1 million in changes
in estimates of previously impaired operations. The third quarter 2001 expenses
relate to impairment losses from the disposition of operations in Netherlands,
Norway and Belgium, partially offset by reductions related to changes in
estimates of previously recorded charges and impaired operations. The changes in
estimates of previously recorded charges are the result of better than
anticipated market values when these previously impaired properties were sold.
The Company will continue to make adjustments as actual divestitures are
consummated or better estimates become available. (See note 8 to the
consolidated financial statements in Item 1 of this Form 10-Q.)

In October 2002, the Company fully settled all options associated with the
Company's 6.3% senior notes due 2003. The Company expects to recognize an
additional pretax charge of approximately $22 million in the fourth quarter of
2002 as a result of the final settlement of these derivative financial
instruments.

Interest expense decreased $11.2 million or 22.7% to $38.2 million in the
third quarter of 2002 compared to the same period of 2001. The decrease in
interest expense reflects the decline in the Company's long term debt balance.
For the three months ended September 30, 2002, the average outstanding debt was
$2.0 billion compared to $2.7 billion for the three months ended September 30,
2001.

Other income was $9.5 million in the third quarter of 2002 compared to $5.0
million in the same period of 2001. Other income primarily consists of interest
income from various investments, prearranged funeral sales overrides received
from insurance companies and transactional foreign currency gains and losses.

The provision for income taxes before non-recurring items (non-recurring
items are defined as gains from dispositions, impairment losses and other
operating expenses) reflects an effective tax rate of 32.2% for the three months
ended September 30, 2002 compared to 35.2% in the same period of 2001. The lower
tax rate in 2002 is the result of the elimination of non-deductible goodwill
expense. Tax expense for non-recurring items is often specifically calculated
based on the relative tax basis to sales price, therefore, rates will vary for
each transaction. After considering these transactions, the effective benefit
for the three months ended September 30, 2002 is 12.9% compared to an effective
tax rate of 14.0% for the same period of 2001.

28

NINE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001

The following factors contributed to the results for the nine months ended
September 30, 2002.

o Comparable funeral revenues increased in the nine months ended September
30, 2002 over the same period of 2001 as a result of an increase in the
average revenue per funeral service. Total worldwide funeral services
performed were below the same period in the prior year as a result of
dispositions and joint ventures completed by the Company, both domestically
and internationally.

o Comparable cemetery revenues increased in the first nine months of 2002
compared to 2001 as a result of the completion of cemetery development
projects offset by reductions in changes in estimates of Deferred cemetery
contract revenues.

o The Company experienced a negative effect of foreign currency translation
of approximately $7.9 million on comparable revenues and $0.4 million on
comparable gross profits in the nine months ended September 30, 2002
compared to the same period of 2001 primarily as a result of the decline in
value of the Argentine peso.

29

Funeral

In the nine months ended September 30, 2002, comparable North America
funeral revenues, gross profits and margin percentage increased over the same
period of 2001 as a result of an increase in the average revenue per funeral
service offset by a decline in the number of funeral services performed. The
average revenue per funeral service increased $64 to $4,034 in 2002 compared to
2001 as a result of revenue growth initiatives, particularly Dignity Memorial(R)
packaged funeral plans partially offset by an increase in the mix of cremations.
Cremation sales carry a lower average revenue per funeral service than
traditional funeral services.

Comparable international funeral revenues, gross profits and margin
percentage increased in the nine months ended September 30, 2002 compared to the
same period of 2001 as a result of the favorable effect of foreign currency and
increases in the average revenue per funeral service and burial monuments in
France. Foreign currency translation had a favorable effect of $7.7 million on
comparable international funeral revenues and $0.5 million in funeral gross
profit in the nine months of 2002 compared to 2001 as the euro strengthened
relative to the U.S. dollar. The increase in the euro was offset by the
continued degradation of the Argentine peso during 2002.

Cemetery

Comparable North America cemetery revenues increased in the nine months ended
September 30, 2002 compared to the same period in 2001 as a result of an
increase in completed cemetery property development projects. Preneed cemetery
property revenues are recognized when development of the property is completed
and customer payments are at least 10% of the total contract amount.

Comparable North America gross profit and margin percentage declined in the
nine months ended September 30, 2002 compared to the same period of 2001 as a
result of reductions in changes in estimates of Deferred cemetery contract
revenues. The Company has ongoing reviews of its obligations to deliver cemetery
merchandise and services to customers. As a result of these reviews, the Company
recognized revenue related to changes in estimates of previously Deferred
preneed cemetery contract revenues. In the nine months ended September 30, 2002,
the change in estimate recognized in revenues and gross profits was $19.7
million and $14.8 million, respectively, compared to $55.0 million and $44.1
million, respectively, in the first nine months of 2001. The Company will
continue to review these obligations to deliver cemetery merchandise and
services to customers, however, the impact recognized in 2002 is expected to be
below 2001 levels.

Comparable international cemetery revenues and gross profits declined in
the first nine months of 2002 compared to the first nine months of 2001
primarily as a result of the negative effect of foreign currency translation of
approximately $15.6 million on revenues and $0.9 million on gross profits. In
January 2002, the Argentine peso, which previously exchanged at a rate of one
peso to one U.S. dollar, was converted to a free floating currency. As a result,
the Company's South America operations have experienced significant negative
adjustments in foreign currency translation.

Other Income and Expenses

Corporate general and administrative expenses increased $4.4 million to $57.8
million primarily as a result of the Company's decision to implement new
information systems, including a North America point of sale system and an
upgraded general ledger system. As a result, the Company accelerated the
amortization of existing capitalized system costs and recorded $8.9 million of
additional amortization in the first nine months of 2002. This increase is
offset by the positive impact of the Company's cost reduction programs.

30

Impairment losses and other operating expenses, previously disclosed as
Restructuring and non-recurring charges, were $264.5 million for the nine months
of 2002 compared to $57.4 million for the nine months of 2001. The 2002 charges
primarily relate to an impairment charge of $158.5 million for certain funeral
and cemetery operations being held for sale, $39.3 million as a result of
relieving certain individuals from their consulting and/or
covenant-not-to-compete contractual obligations, $16.2 million related to
additional estimated reductions in the value of the Company's businesses in
Argentina due to the continued economic decline, $16.9 million related to the
reduction in the value of equity investments in North America companies, $19.6
million to adjust the market value of certain options associated with the
Company's 6.3% senior notes due 2003, $5.2 million of severance costs for former
employees and $8.8 million related to changes in estimates of previous recorded
charges and impaired operations. The Company will continue to make adjustments
as actual divestitures are consummated or better estimates become available.
(See note eight to the consolidated financial statements in Item 1 of this Form
10-Q.)

In October 2002, the Company fully settled all options associated with the
Company's 6.3% senior notes due 2003. The Company expects to recognize an
additional pretax charge of approximately $22 million in the fourth quarter of
2002 as a result of the final settlement of these derivative financial
instruments.

The nine months of 2001 expenses relate to impairment losses as a result of
the Company joint venturing its Australia operations and disposing of operations
in Netherlands, Norway and Belgium, partially offset by changes in estimates of
previously recorded charges and impaired operations. The changes in estimates of
previously recorded charges are the result of better than anticipated market
values when these previously impaired properties were sold.

Interest expense decreased $41.4 million or 25.2% in the nine months ended
September 30, 2002 compared to the same period of 2001. The decrease in interest
expense reflects the decline in the Company's debt balance. For the nine months
ended September 30, 2002, the average outstanding debt was $2.3 billion compared
to $2.9 billion for the nine months ended September 30, 2001.

Other income was $19.2 million in the nine months of 2002 compared to $12.6
million in the same period of 2001. Other income primarily consists of interest
income from various investments, prearranged funeral sales overrides received
from insurance companies and transactional foreign currency gains and losses.

The provision for income taxes reflects an effective tax rate of 28.4% for
the nine months of 2002 compared to 123.6% for the same period in 2001. The
lower tax rate is the result of tax expense on non-recurring items in 2001,
which is often specifically calculated based on the relative tax basis to sales
price and varies for each transaction, the elimination in 2002 of non-deductible
goodwill expense and the reversal of valuation allowances related to net
operating loss carry forwards utilized by the Company in conjunction with its
international operations. Valuation allowances were required to be recorded at
December 31, 2001 as a result of the decision to hold for sale the assets of the
Company's remaining international operations.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Company's debt balance at December 31, 2001 included approximately $110.0
million of debt associated with the financial restructuring of the Company's
French subsidiary, which was satisfied with non-cash French financial assets in
the second quarter of 2002. The Company completed a joint venture transaction
relating to its operations in the United Kingdom during the first quarter of
2002, which generated approximately $273.0 million in net pretax cash proceeds
and resulted in a substantial cash balance that has been primarily used to
repurchase public debt in the open markets. In July 2002, the Company announced
the completion of a new $185 million credit facility that matures in July 2005
and, when coupled with current cash balances, gives the Company substantial
liquidity. As of November 7, 2002, the Company has liquidity of approximately
$240.2 million, comprised of a cash balance of $141.0 million (as of September
30, 2002) and $99.2 million availability under the Company's new $185 million
credit facility. The

31

Company has no cash borrowings under this new credit facility, but has issued
$85.8 million of letters of credit under this new facility as of November 7,
2002.

In the third quarter of 2002, the Company completed an exchange of $172.2
million of the Company's 6.0% Senior Notes due 2005 for 7.7% Senior Notes due
2009. In addition to extending $172.2 million of debt maturities an additional
four years, this transaction had the non-cash effect of reducing the Company's
net debt by approximately $21.1 million. Overall, the Company reduced its net
debt by $145.9 million in the third quarter of 2002 and $643.7 million since the
beginning of 2002. In addition to the $21.1 million non-cash reduction in net
debt, the net debt reduction of $145.9 million was primarily a result of sources
of cash in the third quarter of 2002 from $44.7 million of recurring operating
free cash flow, $36.8 million of cash received from the substitution of letters
of credit for cash collateral on deposit, $16.3 million of proceeds from asset
sales and $29.3 million of net non-recurring cash receipts, primarily tax
refunds.

As of September 30, 2002, the Company had current maturities of long-term
debt of $103.1 million consisting primarily of $91.6 million of 6.3% senior
notes due 2003. Based on the Company's current cash balances, its expectations
of additional asset sales proceeds discussed below and the Company's new $185
million credit facility, the Company believes it has adequate means to meet
current maturities of long-term debt. As of November 7, 2002, the Company's
maturity schedule for certain of its outstanding senior public notes due in the
near term is as follows:

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 originally expected proceeds from asset sales and joint venture
transactions to be approximately $550 million in 2002. In July 2002, the Company
announced its decision to defer the joint venture transaction of its funeral
operations in France until after 2002. Approximately $225 million of net pretax
cash proceeds were originally anticipated in 2002 from its French joint venture
transaction. In the second quarter of 2002, the Company announced 140 additional
funeral and cemetery operations in North America being held for sale. The
Company expects to receive net pretax cash proceeds of $50 to $60 million from
the sale of these funeral and cemetery operations through July 2003. As a result
of the above, the Company now expects net pretax cash proceeds from asset sales
and joint venture transactions to be between $300 and $400 million in 2002, and
has received approximately $315 million on a pretax basis through September 30,
2002.

The Company's annual guidance for 2002 for recurring operating free cash
flow is $160 to $180 million. The Company's goal is to produce annual recurring
operating free cash flow of $200 million in 2003. While the Company's 2002
annual goal of recurring operating free cash flow remains $160 to $180 million,
the Company has adjusted the components of the 2002 targeted range. First, the
Company received approval from the Internal Revenue Service to change certain
tax accounting methods. The Company requested this change after adopting Staff
Accounting Bulletin No. 101 in 2000 related to the Company's financial reporting
revenue recognition policies. This approval was originally expected to defer
approximately $115 million of cash taxes over several future years. Now the
Company believes this approval will defer approximately $180 million of cash
taxes over 2002 and several future years. The Company originally expected to pay
cash taxes of approximately $65 to $75 million in 2002, but now expects to pay
only $10 million or less in cash taxes for the full year of 2002. Second, the
Company now expects to have a recurring operating free cash flow benefit for the
year of approximately $15 million from the inclusion of recurring operating free
cash flow from the Company's French

32

operations over and above the cash interest savings previously anticipated due
to the Company's decision in July 2002 to defer the joint venture of its funeral
operations in France until after 2002. Third, the Company originally expected to
incur approximately $60 million in maintenance capital expenditures in 2002.
With the decision to defer the French joint venture transaction, the Company now
expects to incur maintenance capital expenditures of $70 to $75 million in 2002.
This additional $10 to $15 million in maintenance capital expenditures has been
considered when calculating the overall cash flow benefit of keeping the French
operations described above. Offsetting these net positive changes are potential
lower levels from the EBITDA and working capital components of recurring
operating free cash flow compared to the Company's expectations. As a result,
the Company remains comfortable with its annual 2002 recurring operating free
cash flow targeted range of $160 to $180 million.

These recurring operating free cash flow targets also assume the Company
continues to access the surety markets 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 the 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-Q.

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 consistent
with the Company's standards. Growth capital expenditures are considered
expenditures made for the purpose of generating additional or incremental
revenues. The following table details the calculation described above for the
Company's total and recurring operating free cash flow for the first nine months
of 2002 and 2001.

33

An income statement approach calculating the Company's recurring and total
operating free cash flow for the three and nine months ended September 30, 2002
and 2001 is detailed below.

(1) Net non-recurring receipts for the third quarter of 2002 primarily
consisted of $35.4 million of non-recurring tax refunds offset by $4.2
million of growth or non-recurring capital expenditures. In the third
quarter of 2001, net non-recurring receipts primarily consisted of
$16.4 million of non-recurring funeral and cemetery trust receipts
offset by $21.0 million of non-recurring payments related to Company
benefit plans. For the nine months of 2002, net non-recurring receipts
primarily consisted of $57.1 million of non-recurring tax refunds
offset by $16.1 million of growth or non-recurring capital
expenditures. Net non-recurring receipts for the nine months of 2001
consisted of $116.3 million of non-recurring tax refunds, $41.1
million of non-recurring funeral and cemetery trust receipts offset by
$27.9 million of non-recurring payments related to Company benefit
plans.

(2) Adjusted changes in working capital is defined as consolidating
changes in working capital from the consolidated statement of cash
flows adjusted for changes in interest and tax accruals and net
non-recurring cash receipts or payments (included in cash flows
provided by operating activities) which are of a non-recurring
operational nature.

(a) Changes in working capital from the consolidated statement of
cash flows is comprised of Changes in assets and liabilities and
the Net effect of prearranged funeral production and maturities
included in Cash flows from operating activities.

The $8.2 million increase in the third quarter of 2002 in the use of cash for
working capital purposes is primarily a result of the timing of cash receipts
related to prearranged funeral contracts that were performed during the third
quarter of 2002. The $38.9 million increase in the nine months ended September
30, 2002 in the use of cash for working capital purposes is primarily a result
of significant decreases in cash receipts of distributable earnings from
prearranged funeral trust funds, increases in the negative cash flow effect to
working capital from prearranged funeral contracts becoming atneed and the $8.2
million negative cash flow effect in the third quarter of 2002 discussed above.

In addition to the Company's cash and cash equivalents on hand of $141.0
million, the Company had cash collateral on deposit of $79.1 million at
September 30, 2002 related to Company obligations. The cash collateral is
included in Deferred charges and other assets on the Company's consolidated
balance sheet. As previously mentioned, the Company had a net reduction in the
third quarter of

34

2002 in the amount of cash collateral on deposit of $36.8 million resulting from
the Company substituting letters of credit under the Company's credit facility
for cash collateral on deposit, offset by increases in cash collateral related
to certain options associated with the Company's 6.3% senior notes due 2003. In
October 2002, the Company paid $57.0 million of cash to an outside party that
was previously collateralized in full settlement of these options. As this
settlement liability was continually collateralized with cash, the $57.0 million
did not affect the Company's recurring operating free cash flow in 2002.

EBITDA Before Non-Recurring Items

The Company calculates EBITDA before non-recurring items for each period
presented by adding interest, tax, depreciation and amortization expenses back
to earnings before non-recurring items. Descriptions of non-recurring items for
both periods are discussed in Non-Recurring Items and Pro Forma Financial
Information in Management's Discussion and Analysis of Financial Condition and
Results of Operations in this Form 10-Q. Reductions in EBITDA before
non-recurring items in 2002 compared to 2001 are primarily related to the
Company's asset divestiture and joint venture transactions that have occurred.
Calculations for EBITDA before non-recurring items for the three and nine months
of 2002 and 2001 are as follows:

(1) 2001 Depreciation and amortization and earnings before non-recurring
items is presented in these tables on a pro forma basis. See
Non-recurring Items and Pro Forma Financial Information in this
Management's Discussion and Analysis of Financial Condition and
Results of Operation in this Form 10-Q for further discussion.

Sources and Uses of Cash

Net cash provided by operating activities was $252.2 million for the nine months
ended September 30, 2002 compared to $332.3 million for the same period of 2001,
a decrease of $80.1 million. The decrease is primarily the result of lower
non-recurring tax refunds of $59.1 million, reduced cash from certain
non-recurring cemetery and funeral trust funds of $40.7 million, and reductions
in the Company's cash from operating activities as a result of divested
locations, offset by lower cash interest and tax payments. Included in net cash
provided by operating activities is approximately $73.0 million and $68.6
million of cash receipts from the Company's surety bonding program for the nine
months ended September 30, 2002 and 2001, respectively. See the 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-Q. Trust fund receipts from the collection of receivables from certain
funeral and cemetery trust funds were $10.0 million and $50.7 million for the
first nine months of 2002 and 2001, respectively. For the nine months ended
September 30, 2002 and 2001, cash interest payments were $105.0 million and
$151.0 million, respectively, and recurring net cash tax payments were $2.9
million and $15.8 million, respectively.

Net cash provided by investing activities was $259.1 million for the nine
months ended September 30, 2002 compared to $298.4 million for the same period
of 2001, a decrease of $39.3 million. The decrease is primarily related to an
increase in capital expenditures of $7.7 million, and lower proceeds from sales
and joint ventures of operations of $56.0 million, offset by reduced cash
collateral requirements of $22.7 million as a result of issuing letters of
credit for such obligations under the Company's new credit facility.

Net cash used in financing activities was $395.5 million for the nine
months ended September 30, 2002 compared to $636.4 million in the same period of
2001. The net cash used in financing activities in both periods is related to
the Company's continued debt reduction initiatives.

35

Financial Assurances

In support of 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
sales activities. The underlying obligations these surety bonds assure are
recorded on the Company's consolidated balance sheet as Deferred prearranged
funeral contract revenues and Deferred preneed cemetery contract revenues. The
Company has approximately $303.4 million and $290.0 million of surety bonds
outstanding attributable to prearranged funeral and cemetery activities at
September 30, 2002 and December 31, 2001, respectively.

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 surety bonds 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. For the nine months ended
September 30, 2002 and 2001, the Company had $73.0 million and $68.6 million,
respectively, of cash receipts attributable to bonded sales. These amounts do
not consider reductions associated with taxes, obtaining costs, or other costs.

Surety bond premiums are paid annually and are automatically renewable,
unless prior notice of cancellation, 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
surety 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.
The Company does not believe it will be required to fund material future amounts
related to these surety bonds.

The applicable Florida law which allows posting of surety bonds for
prearranged contracts will expire December 31, 2004. Unless the law is otherwise
amended, the Company plans to shift from bonding to either trust or insurance
funding for prearranged funeral and cemetery programs in the state of Florida in
the year 2005. Prearranged contracts entered into prior to December 31, 2004
where the Company posts surety bonds will be allowed to continue to be bonded
for the remaining life of those contracts. Of the total bonding proceeds
received by the Company for the nine months ended September 30, 2002 and 2001,
approximately $52.9 million and $49.6 million, respectively, were attributable
to the state of Florida. Assuming the Company's prearranged funeral and cemetery
sales production in Florida in 2005 is consistent with production for the full
year of 2001, the pre-tax forecasted cash flow impact of shifting to trusting is
expected to be approximately $20 to $25 million lower in that year before
considering the cash flow impact of contracts going atneed. This forecast
reduction in pre-tax cash flow involves assumptions about the mix of preneed
sales among property, merchandise and services and the appropriate levels of
trusting required by Florida law. Using the same general assumptions, there
would also be expected an estimated cash flow decrease in years 2006 through
2009 of approximately $2 to $6 million per year.

PREARRANGED FUNERAL AND PRENEED 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, 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,
principally commissions and related fringe benefits, are deferred as net
obtaining costs. The remaining costs are expensed as incurred.

36

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 into 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 a period representing the
estimated life of prearranged funeral contracts. Prior to 2002, the amortization
period was 20 years. As of January 1, 2002, the Company changed the estimated
period to 12 years to more accurately reflect current trends regarding the
timeframe from selling a preneed contract to when it is serviced atneed. The
amount of funeral net obtaining costs amortized in the consolidated statement of
operations was approximately $10.9 million in the nine months ended September
30, 2002 and $5.0 million in the nine months ended September 30, 2001. Had the
Company changed the amortization period in 2001 from 20 to 12 years, the
amortization expense would have been $9.2 million for the nine months of 2001.
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 they
are specifically identifiable expenses associated with the revenue recognized.
The amount of cemetery net obtaining costs expensed in the consolidated
statement of operations was approximately $30.2 million and $28.3 million for
the nine months ended September 30, 2002 and 2001, respectively.

The table below details North America funeral and cemetery prearranged
production for the nine months ended September 30, 2002 and 2001, and the
related deferred net obtaining costs incurred to procure the prearrangements.
Additionally, the table reflects revenues recognized and previously deferred net
obtaining costs recognized in the consolidated statement of operations
associated with previously prearranged production for the nine months ended
September 30, 2002 and 2001 (i.e. maturities).

(1) The amortization for funeral net obtaining costs reflects the historical
amount recorded in 2001. If the amortization period was changed from 20 to
12 years as of January 1, 2001, the amortization would have been $9.2
million.

Prearranged contracts can be funded through several alternatives. For
prearranged funeral or preneed cemetery contracts funded through trusts,
generally all or a certain portion of the funds collected are required to be
placed into trust accounts, pursuant to applicable law. Funds not required to be
placed into trust accounts are retained by the Company and used for working
capital purposes, generally to help alleviate the current cost of those
prearrangement programs. Realized investment earnings on funds placed into trust
accounts are generally accumulated and deferred until the maturity of each
prearranged contract. However, in certain states the Company is allowed

37

to distribute a portion of the realized investment earnings before the
prearranged contract matures. When a prearranged trust contract matures, the
Company receives the principal and previously undistributed trust fund income
and any remaining receivable due from the customer. 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. Funds collected on
prearranged contracts 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 before the prearranged contract matures. When the
prearranged contract matures, the Company receives any remaining receivable due
from the customer. Finally, funds collected from prearranged funeral contracts
can be used to pay premiums on life insurance or annuity contracts. Increasing
death benefits associated with life insurance contracts are accumulated and
deferred until the maturity of each prearranged contract. When a prearranged
insurance contract matures, the company receives the proceeds from the third
party insurance companies consisting of the original contract amount and any
increasing death benefits.

Deferred prearranged funeral or cemetery contract revenue is recognized in
the consolidated statement of operations at the time the contract matures. 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 the amount retained from funds
collected from the customer and distributed trust fund earnings. This is reduced
by the payment of deferred net obtaining costs and the use of funds to service
matured contracts.

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 the amount
retained from funds collected from the customer and distributed trust earnings,
reduced by use of funds to service preneed cemetery contracts. Changes in other
assets is affected by the cash use associated with the 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 following table reflects the total North American backlog of deferred
prearranged contract revenues and the prearranged assets associated with the
contracts are as follows:

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

38

receivables (net of an estimated allowance for cancellation) are reflected in
Current and Long term receivables in the consolidated balance sheet.

NON-RECURRING ITEMS AND PRO FORMA FINANCIAL INFORMATION

Pro forma financial information is being presented by the Company in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations to enhance the comparability of financial information and results of
operations from period to period. To create the pro forma financial information,
the Company has excluded certain non-recurring items for all periods presented.
The Company has also adjusted the results of operations in 2001 to be consistent
with the accounting presentation in 2002.

In 2002 and 2001, non-recurring items excluded to create pro forma
financial information consists of charges included in Impairment losses and
other operating expenses, related to sales of businesses or joint venture
transactions, severance costs, market adjustments to certain derivative
financial instruments and the termination of certain contractual agreements;
gains from dispositions; extraordinary gains and losses on early extinguishments
of debt; and cumulative effects of accounting changes. The cumulative effects of
accounting changes primarily relate to the adoption in 2002 of SFAS No. 142,
"Goodwill and Other Intangible Assets". This standard requires goodwill to no
longer be amortized but instead tested for impairment annually. As a result of
the adoption of SFAS No. 142, the Company recognized a charge in the first
quarter of 2002 reflected as a cumulative effect of accounting change of $146.8
million on a pretax basis and $135.6 million on an after tax basis.

The results for the three and nine months ended September 30, 2001 are also
presented in this Management's Discussion and Analysis of Financial Condition
and Results of Operations in a pro forma format as if certain changes were
implemented on January 1, 2001 to provide a more relevant comparison to the 2002
results. Such changes include (1) discontinuing amortization of goodwill
pursuant to new accounting standards, (2) changing the amortization period
related to deferred prearranged funeral obtaining costs from 20 to 12 years, (3)
revising its estimated allocation of overhead costs between the funeral and
cemetery segments, (4) recognizing as part of funeral operations instead of
cemetery operations, those revenues associated with delivered caskets previously
prearranged on cemetery contracts, and (5) discontinuing the depreciation of
certain operating assets held for sale in 2002.

Pro Forma Reconciliations

The following two tables reconcile net income (loss) and diluted earnings (loss)
per share under generally accepted accounting principles to earnings before
non-recurring items and diluted EPS before non-recurring items.

Comparable Revenues

Comparable revenues for 2002 and 2001 represent revenues excluding operations
that have been acquired or constructed after January 1, 2001 and operations that
have been divested by the Company prior to September 30, 2002.

2001 Pro Forma Revenues and Gross Profits

The following tables reconcile funeral and cemetery revenues and gross profits
previously reported in 2001 to pro forma amounts used in this Management's
Discussion and Analysis of Financial Condition and Results of Operations for
comparison purposes.

40

REVENUES

GROSS PROFITS

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

The statements in this Form 10-Q 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 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. Important factors which
could cause actual results of the Company to differ materially from those in
forward-looking statements include, among others, the following:

1) Changes in general economic conditions, both domestically and
internationally, impacting financial markets (e.g., marketable security
values, as well as currency and interest rate fluctuations) that could
negatively affect the Company, particularly, but not limited to, levels of
interest expense and negative currency translation effects.

2) Changes in credit relationships impacting the availability of credit and
the general availability of credit in the marketplace.

3) The Company's ability to successfully implement its strategic plan as
defined in the Company's Form 10-K for the year ended December 31, 2001,
including:

41

o the interest of third parties to enter into and consummate alliances
and joint ventures with the Company, including with respect to its
operations in France,

o the continuation of cost reduction initiatives,

o the continuation of actions to improve operating free cash flow,

o the continuation of debt reduction initiatives, including the sale of
certain funeral and cemetery operations,

o the implementation of strategic revenue and marketing initiatives
resulting in increased volume through its existing facilities, and

o the continuation of operating improvements in France.

4) Changes in consumer demand and/or pricing for the Company's products and
services caused by several factors, such as changes in local number of
deaths, cremation rates, competitive pressures and local economic
conditions.

5) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including potential changes in
tax and accounting policies.

6) The Company's ability to successfully access at a reasonable cost surety
and insurance markets.

7) The Company's ability to successfully exploit its substantial purchasing
power with certain of the Company's vendors.

8) The outcomes of pending lawsuits against the Company involving alleged
violations of securities laws.

9) The outcomes of pending lawsuits in Florida involving certain cemetery
locations, including the possibility of criminal charges or other civil
claims being filed against the Company, its subsidiaries or its employees.

For further information on these and other risks and uncertainties, see the
Company's 2001 Annual Report on Form 10-K. 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding the Company's exposure to certain market risks, see
Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the
Company's Form 10-K for the year ended December 31, 2001. Except as noted below,
there have been no material changes to the disclosure on this matter in such
Form 10-K.

Assets associated with the Company's prearranged funeral operations and
preneed cemetery merchandise and service sales are maintained in funeral and
cemetery trust funds, which own investments in equity securities and mutual
funds, among other types of investments. These funeral and cemetery trust funds
are sensitive to current market prices and fluctuate with market conditions. As
a result of recent volatility in the stock market, the market value of
prearranged funeral assets held in trust funds was approximately 88.5% of the
cost basis and the market value of cemetery merchandise and service assets held
in trust funds was approximately 90.8% of the cost basis, as of September 30,
2002.

ITEM 4. DISCLOSURES AND CONTROLS

(a) Evaluation of Disclosure Controls and Procedures

The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"). Based on such evaluation,
such officers have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in alerting
them on a timely basis to material information relating to the Company
(including its consolidated subsidiaries) required to be included in
the Company's periodic filings under the Exchange Act.

42

(b) Changes in Internal Controls

Since the Evaluation Date, there have not been any significant changes
in the Company's internal controls or in other factors that could
significantly affect such controls.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information regarding legal proceedings is set forth in note six to the
consolidated financial statements in Item 1 of this Form 10-Q, which information
is hereby incorporated by reference herein.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

12.1 Ratio of earnings to fixed charges for the nine months ended
September 30, 2002 and 2001.

99.1 Consolidated Class Action Complaint filed September 3, 1999 in
Civil Action No. H-99-280, In re Service Corporation
International. (Incorporated by reference to Exhibit 99.1 to
Form 10-Q for the fiscal quarter ended September 30, 1999).

99.2 Defendants' Answer to the Consolidated Class Action Complaint
filed September 17, 1999 in Civil Action No. H-99-280, In re
Service Corporation International. (Incorporated by reference to
Exhibit 99.2 to Form 10-Q for the fiscal quarter ended September
30, 1999).

99.3 Defendants' motion to Dismiss the Consolidated Class Action
Complaint filed October 8, 1999 in Civil Action No. H-99-280, In
re Service Corporation International. (Incorporated by reference
to Exhibit 99.3 to Form 10-Q for the fiscal quarter ended
September 30, 1999).

99.4 Plaintiffs' Opposition to Defendants' Motion to Dismiss the
Consolidated Class Action Complaint filed November 5, 1999 in
Civil Action No. H-99-280, In re Service Corporation
International. (Incorporated by reference to Exhibit 99.4 to
Form 10-Q for the fiscal quarter ended September 30, 1999).

99.5 Defendant's Reply to Plaintiffs' Opposition to Defendants'
Motion to Dismiss the Consolidated Class Action Complaint filed
November 24, 1999 in Civil Action No. H-99-280, In re Service
Corporation International. (Incorporated by reference to Exhibit
99.12 to Form 10-K for the fiscal year ended December 31, 1999).

99.6 Plaintiffs' Original Petition filed November 10, 1999 in Cause
No. 32548-99-11, James P. Hunter, III and James P. Hunter, III
Family Trust v. Service Corporation International, Robert L.
Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair
Waltrip, James M. Shelger, Wesley T. McRae and
PricewaterhouseCoopers LLP; in the Judicial District Court of
Angelina County, Texas. (Incorporated by reference to Exhibit
99.5 to Form 10-Q for the fiscal quarter ended September 30,
1999).

99.7 Defendants' Original Answer in response to the Original Petition
referred to in Exhibit 99.6. (Incorporated by reference to
Exhibit 99.14 to Form 10-K for the fiscal year ended December
31, 1999).

99.8 Plaintiff's Original Petition filed December 28, 2000 in Cause
No. 33701-01-01, Jack D. Rottman vs. Service Corporation
International, Robert L. Waltrip, L. William Heiligbrodt, George
R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T.
McRae and PricewaterhouseCoopers LLP; in the __________ Judicial
District Court of Angelina County, Texas. (Incorporated by
reference to Exhibit 99.16 to Form 10-K for the fiscal year
ended December 31, 2000).

99.9 Defendants' Motion to Transfer Venue and Original Answer in
response to the Original Petition referred to in Exhibit 99.8.
(Incorporated by reference to Exhibit 99.17 to Form 10-K for the
fiscal year ended December 31, 2000).

43

99.10 Plaintiff's Original Petition filed December 15, 2000, in Cause
No. 2000-63917, Jack T. Hammer v. Service Corporation
International, Robert L. Waltrip, L. William Heiligbrodt, George
R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T.
McRae and PricewaterhouseCoopers LLP; in the 165th Judicial
District Court of Harris County, Texas. (Incorporated by
reference to Exhibit 99.18 to Form 10-K for the fiscal year
ended December 31, 2000).

99.11 Defendants' Original Answer to the Original Petition referred to
in Exhibit 99.10. (Incorporated by reference to Exhibit 99.19 to
Form 10-K for the fiscal year ended December 31, 2000).

99.12 Plaintiffs' Demand for Arbitration and Complaint for Damages
filed November 5, 2002 in Case No. _____, James P. Hunter, III
and the James P. Hunter, III Family Trust v. Service Corporation
International, Robert L. Waltrip, L. William Heiligbrodt, and
George R. Champagne, before the American Arbitration Association
in Houston, Texas.

99.13 Certification of Periodic Financial Reports by Robert L. Waltrip
in satisfaction of Section 906 of the Sarbanes-Oxley Act of
2002.

99.14 Certification of Periodic Financial Reports by Jeffrey E.
Curtiss in satisfaction of Section 906 of the Sarbanes-Oxley Act
of 2002.

(b) Reports on Form 8-K

During the quarter ended September 30, 2002, the Company filed a report
on Form 8-K dated July 12, 2002 reporting (i) under "Item 5. Other
Events" that the Company issued a press release announcing the
resignation of Jerald L. Pullins, President and Chief Operating Officer,
and (ii) under "Item 7. Financial Statements and Exhibits" that a copy
of the referenced press release was attached as an exhibit. The Company
filed a report on Form 8-K dated July 17, 2002 reporting (i) under "Item
5. Other Events" that the Company issued a press release announcing a
management succession plan and the election of Thomas L. Ryan as
President and Chief Operating Officer and Michael R. Webb as Executive
Vice President, and (ii) under "Item 7. Financial Statements and
Exhibits" that a copy of the referenced press release was attached as an
exhibit. The Company filed a report on Form 8-K dated July 25, 2002
reporting (i) under "Item 5. Other Events" the announcement of the
completion of a new $185 million credit facility and the deferral of its
French joint venture transaction, (ii) under "Item 7. Financial
Statements and Exhibits" that filed as exhibits were a press release
concerning the referenced announcement and a copy of the new credit
agreement, and (iii) under "Item 9. Regulation FD Disclosure" that the
Company issued a press release concerning the above referenced matters.
The Company filed a report on Form 8-K dated August 7, 2002 reporting
(i) under "Item 7. Financial Statements and Exhibits" that a press
release was attached as an exhibit, and (ii) under "Item 9. Regulation
FD Disclosure" that the Company issued the press release announcing its
second quarter earnings. On August 14, 2002, the Company filed a report
on Form 8-K dated August 14, 2002 reporting (i) under "Item 7. Financial
Statements and Exhibits" that a slide presentation, a press release and
a Statement Under Oath by each of Robert L. Waltrip and Jeffrey E.
Curtiss were filed as exhibits, and (ii) under "Item 9. Regulation FD
Disclosure" that the Company issued two press releases concerning the
above referenced matters.

44

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

November 11, 2002 SERVICE CORPORATION INTERNATIONAL

By: /s/ Jeffrey E. Curtiss
-------------------------------------
Jeffrey E. Curtiss
Senior Vice President
Chief Financial Officer and Treasurer
(Principal Financial Officer)

45

Service Corporation International
a Texas corporation
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Section 302 Certification

I, Robert L. Waltrip, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Service
Corporation International, a Texas corporation (the "registrant");

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: November 11, 2002

/s/ Robert L. Waltrip
---------------------------------
Robert L. Waltrip
Chairman of the Board and
Chief Executive Officer

46

Service Corporation International
a Texas corporation
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Section 302 Certification

I, Jeffrey E. Curtiss, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Service
Corporation International, a Texas corporation (the "registrant");

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: November 11, 2002

/s/ Jeffrey E. Curtiss
-----------------------------------
Jeffrey E. Curtiss
Senior Vice President
Chief Financial Officer and
Treasurer
(Principal Financial Officer)

47

EXHIBIT INDEX