10-Q

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 June 30, 2004
	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

SERVICE CORPORATION INTERNATIONAL

(Exact name of registrant as specified in charter)

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

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

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

YES (X) NO ( )

Indicate by check mark whether the registrant is an accelerated filer (as defined in the Securities Exchange Act of 1934 Rule 12b-2).

YES (X) NO ( )

The number of shares outstanding of the registrant’s common stock as of August 9, 2004 was 337,781,119 (net of treasury shares).

1

SERVICE CORPORATION INTERNATIONAL
INDEX

	Page
Part I. Financial Information
Item 1. Financial Statements
Unaudited Consolidated Statement of Operations - Three and Six Months Ended June 30, 2004 and 2003	3
Unaudited Consolidated Balance Sheet - June 30, 2004 and December 31, 2003	4
Unaudited Consolidated Statement of Cash Flows - Six Months Ended June 30, 2004 and 2003	5
Unaudited Consolidated Statement of Stockholders’ Equity - Six Months Ended June 30, 2004	6
Notes to Unaudited Consolidated Financial Statements	7-36
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction	36
Strengths and Challenges	36-37
The Path to Growth	37-39
Critical Accounting Policies and Accounting Changes	39-42
Results of Operations	42-49
Financial Condition, Liquidity and Capital Resources	49-52
Preneed Funeral and Cemetery Activities	52-59
Cautionary Statement on Forward-Looking Statements	59-60
Item 3. Quantitative and Qualitative Disclosures about Market Risk	60-61
Item 4. Controls and Procedures	61
Part II. Other Information
Item 1. Legal Proceedings	61
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	61-62
Item 4. Submission of Matters to a Vote of Security Holders	62
Item 5. Other Information	63
Item 6. Exhibits and Reports on Form 8-K	63-64
Signature	65
Bylaws, as amended
Registration Rights Agreement dated 3/30/2004
Ratio of earnings to fixed charges
Certification of CEO in satisfaction of Section 302
Certification of PFO in satisfaction of Section 302
Certification of CEO in satisfaction of Section 906
Certification of PFO in satisfaction of Section 906
Amended and Restated Revolving Credit Agreement

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SERVICE CORPORATION INTERNATIONAL

CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)

	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
				(Restated) note 17						(Restated) note 17
Revenues	$	432,057		$	584,050		$	1,018,174		$	1,162,876
Costs and expenses		358,673			489,418			831,693			953,286
Gross profit		73,384			94,632			186,481			209,590
General and administrative expenses		(24,028	)		(36,268	)		(75,049	)		(57,679	)
Gains and impairment (losses) on dispositions, net		696			(2,469	)		36,299			6,865
Other operating income (expense)		6,932			(1,724	)		6,932			(1,724	)
Operating income		56,984			54,171			154,663			157,052
Interest expense		(32,982	)		(35,763	)		(66,780	)		(73,133	)
(Loss) gain on early extinguishment of debt		(16,770	)		(419	)		(16,770	)		1,903
Other income, net		625			3,093			8,189			5,372
		(49,127	)		(33,089	)		(75,361	)		(65,858	)
Income from continuing operations before income taxes and cumulative effects of accounting changes		7,857			21,082			79,302			91,194
(Benefit) provision for income taxes		(4,166	)		7,008			(8,547	)		33,146
Income from continuing operations before cumulative effects of accounting changes	$	12,023		$	14,074		$	87,849		$	58,048
Income from discontinued operations (net of income tax (benefit) expense of ($49,096), $386, ($48,956) and $224, respectively)		34,337			1,234			35,091			1,346
Cumulative effects of accounting changes (net of income tax benefit of $21,274)		—			—			(48,061	)		—
Net income	$	46,360		$	15,308		$	74,879		$	59,394
Basic earnings (loss) per share:
Income from continuing operations before cumulative effects of accounting changes	$	.04		$	.05		$	.29		$	.19
Income from discontinued operations, net of tax		.11			—			.12			—
Cumulative effects of accounting changes, net of tax		—			—			(.16	)		—
Net income	$	.15		$	.05		$	.25		$	.19
Diluted earnings (loss) per share:
Income from continuing operations before cumulative effects of accounting changes	$	.04		$	.05		$	.27		$	.19
Income from discontinued operations, net of tax		.11			—			.10			—
Cumulative effects of accounting changes, net of tax		—			—			(.14	)		—
Net income	$	.15		$	.05		$	.23		$	.19
Basic weighted average number of shares		307,988			299,351			305,290			298,563
Diluted weighted average number of shares		312,725			299,844			353,438			344,139

(See notes to unaudited consolidated financial statements)

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SERVICE CORPORATION INTERNATIONAL

CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In thousands, except share amounts)

	June 30,			December 31,
	2004			2003
Assets
Current assets:
Cash and cash equivalents	$	340,884		$	239,431
Receivables, net		118,535			229,839
Inventories		75,462			136,807
Other		173,981			61,146
Total current assets		708,862			667,223
Preneed funeral receivables and trust investments		1,276,791			1,229,765
Preneed cemetery receivables and trust investments		1,382,359			1,083,035
Cemetery property, at cost		1,546,662			1,524,847
Property, plant and equipment, at cost, net		962,420			1,277,583
Assets of discontinued operations		8,868			9,318
Deferred charges and other assets		692,865			738,011
Goodwill		1,160,341			1,195,422
Cemetery perpetual care trust investments		699,591			—
	$	8,438,759		$	7,725,204
Liabilities & Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	410,179		$	449,497
Current maturities of long-term debt		58,810			182,682
Income taxes		10,484			29,576
Total current liabilities		479,473			661,755
Long-term debt		1,238,792			1,519,189
Deferred preneed funeral revenues		491,628			1,612,347
Deferred preneed cemetery revenues		878,125			1,575,352
Deferred income taxes		306,414			418,375
Liabilities of discontinued operations		76,949			61,530
Other liabilities		365,743			349,698
Non-controlling interest in funeral and cemetery trusts		2,050,973			—
Commitments and contingencies (note 12)
Non-controlling interest in perpetual care trusts		674,204			—
Stockholders’ equity:
Common stock, $1 per share par value, 500,000,000 shares authorized, 337,368,804 and 302,039,871, issued and outstanding (net of 2,469,445 treasury shares, at par)		337,369			302,040
Capital in excess of par value		2,476,263			2,274,664
Unearned compensation		(2,507	)		—
Accumulated deficit		(863,184	)		(938,063	)
Accumulated other comprehensive loss		(71,483	)		(111,683	)
Total stockholders’ equity		1,876,458			1,526,958
	$	8,438,759		$	7,725,204

(See notes to unaudited consolidated financial statements)

4

SERVICE CORPORATION INTERNATIONAL

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)

	Six months ended
	June 30,
	2004			2003
				(Restated) note 17
Cash flows from operating activities:
Net income	$	74,879		$	59,394
Adjustments to reconcile net income to net cash provided by operating activities:
Net income from discontinued operations		(35,091	)		(1,346	)
Loss (gains) on early extinguishments of debt		16,770			(1,903	)
Cumulative effects of accounting changes, net of tax		48,061			—
Depreciation and amortization		71,200			80,322
(Benefit) provision for deferred income taxes		(9,973	)		21,189
(Gains) and impairment losses on dispositions, net		(36,299	)		(6,865	)
Other operating (income) expenses		(6,932	)		1,724
Change in assets and liabilities, net of effects from acquisitions and dispositions:
Decrease in receivables		26,362			15,966
Decrease in other assets		7,255			82,943
Decrease in payables and other liabilities		(4,244	)		(7,814	)
Net effect of preneed funeral production and maturities		(19,509	)		(12,240	)
Net effect of cemetery production and deliveries		(3,664	)		2,544
Other		1,703			10,701
Net cash provided by operating activities from continuing operations		130,518			244,615
Net cash provided by (used in) operating activities from discontinued operations		2,278			(965	)
Net cash provided by operating activities		132,796			243,650
Cash flows from investing activities:
Capital expenditures		(41,289	)		(47,553	)
Proceeds from divestitures and sales of property and equipment		19,477			34,232
Proceeds and distributions from joint ventures and equity investments, net of cash retained		337,049			30,802
Net deposits of restricted funds and other		(158,632	)		(37,336	)
Net cash provided by (used in) investing activities from continuing operations		156,605			(19,855	)
Net cash used in investing activities from discontinued operations		(117	)		(125	)
Net cash provided by (used in) investing activities		156,488			(19,980	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		242,850			—
Payments of debt		(121,139	)		(83,469	)
Early extinguishments of debt		(313,527	)		(175,515	)
Proceeds from exercise of stock options		5,254			—
Bank overdrafts and other		—			(11,201	)
Net cash used in financing activities		(186,562	)		(270,185	)
Effect of foreign currency		(1,269	)		3,878
Net increase (decrease) in cash and cash equivalents		101,453			(42,637	)
Cash and cash equivalents at beginning of period		239,431			200,625
Cash and cash equivalents at end of period	$	340,884		$	157,988

(See notes to unaudited consolidated financial statements.)

5

SERVICE CORPORATION INTERNATIONAL

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands)

			Capital in excess		Unearned						Accumulated other
	Common Stock		of par value		Compensation			Accumulated deficit			comprehensive loss			Total
Balance at December 31, 2003	$	302,040	$	2,274,664	$	—		$	(938,063	)	$	(111,683	)	$	1,526,958
Net income									74,879						74,879
Other comprehensive income:
Foreign currency translation												(42,405	)		(42,405	)
Minimum pension liability												33,599			33,599
Reclassification adjustment for realized loss on foreign currency translation												49,006			49,006
Total other comprehensive income															40,200
Contributions to employee 401(k) plan		1,428		8,417											9,845
Stock option exercises and other		1,439		5,579											7,018
Debt conversion		32,034		185,120											217,154
Restricted stock award		428		2,483		(2,911	)								—
Restricted stock amortization						404									404
Balance at June 30, 2004	$	337,369	$	2,476,263	$	(2,507	)	$	(863,184	)	$	(71,483	)	$	1,876,458

(See notes to unaudited consolidated financial statements)

6

SERVICE CORPORATION INTERNATIONAL

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

1. Nature of Operations

Service Corporation International (SCI or the Company) is the world’s largest provider of funeral and cemetery services. At June 30, 2004, the Company operated 1,238 funeral service locations, 412 cemeteries and 143 crematoria. Of these locations, fourteen properties were classified as discontinued at June 30, 2004. The Company also has a minority interest equity investment in funeral operations in France.

     The funeral service and cemetery operations consist of funeral service locations, cemeteries, crematoria and related businesses. Personnel at the funeral service locations provide all professional services relating to funerals, including the use of funeral facilities and motor vehicles, and preparation and embalming services. Funeral related merchandise (including caskets, coffins, burial vaults, cremation receptacles, flowers and other ancillary products and services) is sold at funeral service locations. Certain funeral service locations contain crematoria. The Company sells preneed funeral services whereby a customer contractually agrees to the terms of a funeral to be performed in the future. The Company’s cemeteries provide cemetery property interment rights (including mausoleum spaces, lots and lawn crypts) and sell cemetery related merchandise (including stone and bronze memorials, burial vaults, casket and cremation memorialization products) and services (primarily merchandise installations and burial openings and closings). Cemetery items are sold on an atneed or preneed basis. Personnel at cemeteries perform interment services and provide management and maintenance of cemetery grounds. Certain cemeteries operate crematoria, and certain cemeteries contain gardens specifically for the purpose of cremation memorialization. At June 30, 2004, there were 183 combination locations that contained a funeral service location within a Company owned cemetery.

2. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The consolidated financial statements for the three and six months ended June 30, 2004 and 2003 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, 2003, 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.

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

Use of Estimates in the Preparation of Financial Statements

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 expenses during the reporting period. As a result, actual results could differ from these estimates.

     The effective tax rate in the three months ended June 30, 2004 was a benefit of 53.0% compared to an expense of 33.2% in the three months ended June 30, 2003. The effective tax rate in the first six months of 2004 was a benefit of 10.8% compared to an expense of 36.3% in the first six months of 2003. The unusual tax rates in 2004 are due to non-cash tax benefits recognized from the joint venture of the French operations consummated in March 2004 and the sale of the Company’s equity investment in the United Kingdom in the second quarter of 2004. For more information, see note fifteen to the consolidated financial statements.

7

Equity Investments

At June 30, 2004, the Company had a minority investment in certain funeral operations in France. The Company accounts for this investment using the equity method of accounting for investments recorded in Deferred charges and other assets on the Company’s consolidated balance sheet.

3. Accounting Changes and New Accounting Pronouncements

In June 2004, the Emerging Issues Task Force of the Financial Accounting Standards Board (FASB) published Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-01). EITF 03-01 provides guidance on the recognition and measurement of other-than-temporary impairments of debt and equity investments and requires certain disclosures related to unrealized losses. The recognition and measurement provisions of EITF 03-01 are effective for reporting periods beginning after June 15, 2004. The adoption of EITF 03-01 will not have a material impact on the Company’s consolidated financial statements.

Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51.” This interpretation clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB revised FASB Interpretation No. 46 (FIN 46R).

     Under the provisions of FIN 46R, the Company is required to consolidate certain cemeteries and trust assets. Merchandise and service trusts and cemetery perpetual care trusts are considered variable interest entities because the trusts meet the conditions of paragraphs 5(a) and 5(b)(1) of FIN 46R. That is, as a group, the equity investors (if any) do not have sufficient equity at risk and do not have the direct or indirect ability through voting or similar rights to make decisions about the trusts’ activities that have a significant effect on the success of the trusts. FIN 46R requires the Company to consolidate merchandise and service trusts and cemetery perpetual care trusts for which the Company is the primary beneficiary (i.e., those for which the Company absorbs a majority of the trusts’ expected losses). The Company is the primary beneficiary of a trust whenever a majority of the assets of the trust are attributable to deposits of customers of the Company.

Consolidation of Trusts: The Company implemented FIN 46R as of March 31, 2004, which resulted in the consolidation of the Company’s preneed funeral and cemetery merchandise and service trusts and the Company’s cemetery perpetual care trusts. No cumulative effect of an accounting change was recognized by the Company as a result of the implementation of FIN 46R as it relates to the consolidation of the trusts. The implementation of FIN 46R affects certain line items on the Company’s consolidated balance sheet and statement of operations as described below; however, there is no impact to net income in the statement of operations as a result of the implementation. Additionally, the implementation of FIN 46R did not result in any net changes to the Company’s consolidated statement of cash flows; however it does require certain financing and investing activities to be disclosed. See notes four through six to the consolidated financial statements.

     Although FIN 46R requires consolidation of most of merchandise and service and perpetual care trusts, it does not change the legal relationships among the trusts, the Company and its customers. In the case of merchandise and service trusts, the customers are the legal beneficiaries. In the case of cemetery perpetual care trusts, the Company does not have a legal right to the perpetual care trust assets. For these reasons, upon consolidation of the trusts, the Company recognizes non-controlling interests in its financial statements to reflect third party interests in these trusts in accordance with FASB Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity” (SFAS 150). The Company classifies deposits to merchandise and service trusts as non-controlling liability interests and classifies deposits to cemetery perpetual care trusts as non-controlling equity interests.

8

     The Company records cash received from customers, which have not been deposited in trusts as restricted cash in Deferred charges and other assets in its consolidated balance sheet. At June 30, 2004, these pending deposits totaled $18,020. The Company continues to account for amounts received from customers prior to delivery of merchandise or services that are not required to be deposited in merchandise and service trusts as deferred revenue.

     Beginning March 31, 2004, the Company recognizes net realized investment earnings of the merchandise and service trusts and perpetual care trusts, as well as the related trustee investment expenses and taxes, within Other income, net. The Company then recognizes a corresponding expense within Other income, net representing the net realized earnings of those trusts that are attributable to the non-controlling interest holders. The corresponding credit for this expense is reflected in the Company’s consolidated balance sheet in Non-controlling interest in funeral and cemetery trusts for merchandise and service trusts or Non-controlling interest in perpetual care trusts for cemetery perpetual care trusts. The sum of these expenses recorded in Other income, net offset the net realized earnings of such trusts also recognized within Other income, net. Accordingly, the Company’s net income in the consolidated statement of operations is not affected by consolidation of the trusts in accordance with FIN 46R.

     To the extent the earnings of the trusts are distributed prior to the delivery of merchandise and/or services, a corresponding amount of non-controlling interest is reclassified to deferred revenue until the corresponding revenues are recognized. In the case of merchandise and service trusts, the Company recognizes as revenues, amounts previously attributed to non-controlling interests and deferred revenues upon the performance of services and delivery of merchandise, including earnings accumulated in these trusts. In the case of the cemetery perpetual care trusts, distributable earnings are recognized in cemetery revenues to the extent of qualifying cemetery maintenance costs.

     Prior to the implementation of FIN 46R and the consolidation of the trusts, monies received from customers and deposited into merchandise and service trusts until maturity of the preneed contract were recorded as receivables due from trust assets. Upon implementation of FIN 46R, the Company replaced receivables due from trust assets with the trust assets, at market, to the extent the Company was required to consolidate the trusts.

     An allowance for contract cancellation is provided based on historical experience. However, the amount has decreased since the implementation of FIN 46R. An allowance is no longer provided on the monies associated with the preneed contract that are held in trust, currently recorded as trust assets, but previously recorded as receivables due from trust assets.

     Both the merchandise and services trusts and the cemetery perpetual care trusts hold investments in marketable securities that are classified as available-for-sale by the Company under the requirements of Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115). In accordance with SFAS 115, available-for-sale securities of the trusts are recorded at fair value, with unrealized gains and losses excluded from earnings and initially recorded as a component of Accumulated other comprehensive loss in the Company’s consolidated balance sheet. Using the guidance in EITF Topic D-41, Adjustments in Assets and Liabilities for Holding Gains and Losses as Related to the Implementation of FASB Statement No. 115 (“Topic D-41”), unrealized gains and losses on available-for-sale securities of the trusts attributable to the non-controlling interest holders are not recorded as Accumulated other comprehensive income (loss), but are recorded as an adjustment to either Non-controlling interest in funeral and cemetery trusts or Non-controlling interest in perpetual care trusts. Therefore, unrealized gains and losses attributable to the non-controlling interest holders are reclassified from Accumulated other comprehensive income (loss) to either Non-controlling interest in funeral and cemetery trusts or Non-controlling interest in perpetual care trusts. The gross effect from applying Topic D-41 on the Company’s Accumulated other comprehensive income (loss) is disclosed in note fourteen of the consolidated financial statements. However, the Company’s Accumulated other comprehensive income (loss) on the face of the balance sheet is ultimately not affected by consolidation of the trusts.

     For additional discussion of the Company’s accounting policies after the implementation of FIN 46R, see notes four through seven to the consolidated financial statements.

9

Consolidation of Certain Cemeteries: Effective as of March 31, 2004, the Company consolidated certain cemeteries managed by the Company in accordance with FIN 46R. The Company recognized a pretax and after tax charge of $14,462, representing the cumulative effect of an accounting change, as a result of consolidating these cemeteries. The results of operations and cash flows of these cemeteries are included in the Company’s consolidated statements of operations and cash flows beginning March 31, 2004. Excluding the cumulative effect of accounting change, the effect of consolidating these entities did not have a significant effect on the Company’s reported results of operations.

Insurance Funded Preneed Insurance Contracts

The Company has changed its method of accounting for insurance funded preneed contracts as the Company has concluded that its insurance funded preneed funeral contracts are not assets and liabilities as defined by Statement of Financial Accounting Concepts No. 6, “Elements in Financial Statements.” Therefore, the Company has removed from its consolidated balance sheet amounts relating to insurance funded preneed funeral contracts previously recorded in Preneed funeral receivables and trust investments and Deferred preneed funeral revenues, which at December 31, 2003, were $3,505,094, respectively. The removal of these amounts did not have an impact on the Company’s consolidated stockholders’ equity, results of operations or cash flows. See note four to the consolidated financial statements for additional information on insurance related preneed funeral balances.

Pension Plans

In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (SFAS 132R). SFAS 132R requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The Company has adopted the revised disclosure requirements. The Company’s pension plans are frozen with no cost benefits accreting to participants except interest.

     Effective January 1, 2004, the Company changed its accounting for gains and losses on its pension plan assets and liabilities. The Company now recognizes such gains and losses in its consolidated statement of operations as such gains and losses are incurred under pension accounting. Prior to January 1, 2004, the Company amortized the difference between actual and expected investment returns and actuarial gains and losses over seven years (except to the extent that settlements with employees required earlier recognition). The Company believes the new method of accounting better reflects the economic nature of the Company’s pension plans and recognizes gains and losses on the pension plan assets and liabilities in the year the gains or losses occur. As a result of this accounting change, the Company recognized a charge for the cumulative effect of an accounting change of $33,599 (net of tax) as of January 1, 2004. This amount represents accumulated unrecognized net losses related to the pension plan assets and liabilities. In addition, for interim periods, the Company records net pension expense reflecting estimated returns on plan assets and obligations. Upon completion of the annual remeasurement during the fourth quarter, the Company will recognize actual gains and losses on plan assets and obligations. Therefore, pension expense during the fourth quarter could be different than amounts recorded in interim periods.

     The three and six months ended June 30, 2003 pro forma amounts in the table below reflect the new policy to recognize gains and losses on the pension plans as incurred and reflect interim estimates as mentioned above.

	Three months ended				Six months ended
	June 30, 2003				June 30, 2003
	Historical		Pro forma		Historical		Pro forma
	(Restated) note 17				(Restated) note 17
Income from continuing operations before cumulative effect of accounting change	$	14,074	$	16,288	$	58,048	$	61,792
Net income	$	15,308	$	17,522	$	59,394	$	63,138
Amounts per common share:
Net income - basic	$	.05	$	.06	$	.19	$	.21
Net income - diluted	$	.05	$	.06	$	.19	$	.20

10

4. Preneed Funeral Activities

The Company sells price-guaranteed preneed funeral contracts through various programs. Because the services or merchandise will not be provided until the future, most states and provinces require that all or a portion of the customer payments under these contracts be protected for the benefit of the customers pursuant to applicable law. Some or all of the funds may be required to be placed into trust accounts or a surety bond may be posted in lieu of trusting (collectively “trust funded preneed funeral contracts”). Alternatively, where allowed, customers may purchase a life insurance or annuity policy from third party insurance companies to fund their preneed funeral (“insurance funded preneed funeral contracts”). The insurance policy proceeds, which include increasing insurance benefits, will be used to pay the Company for the funeral goods and services selected at the time of contract origination. Under either customer funding option, the Company enters into a preneed funeral contract with the customer to provide funeral services in the future. The contract amounts associated with unfulfilled insurance funded preneed funeral contracts are not reflected on the consolidated balance sheet. Effective March 31, 2004, the Company changed certain aspects of its accounting for preneed funeral contracts upon implementation of FIN 46R. For additional information, see note three to the consolidated financial statements. After the change, when a trust funded preneed funeral contract is consummated, the Company records an asset (included in Preneed funeral receivables and trust investments) and corresponding liability (included in Deferred preneed funeral revenues) for the contract price. When the Company receives payments from the customer, the Company deposits the amount required by law into the trust and reclasses the corresponding amount from Deferred preneed funeral revenues into Non-controlling interest in funeral and cemetery trusts. The Company deposited $24,228 into trusts and withdrew $20,308 from trusts during the three months ended June 30, 2004.

     Direct selling costs related to trust funded preneed funeral contracts are deferred and included in Deferred charges and other assets in the Company’s consolidated balance sheet. The deferred selling costs are expensed in proportion to the corresponding trust funded preneed funeral contract revenue when recognized. Deferred selling costs associated with trust funded preneed funeral contracts were $110,155 and $113,920 at June 30, 2004 and at December 31, 2003, respectively. Direct selling costs incurred pursuant to the sales of insurance funded preneed funeral contracts are expensed as incurred.

     In connection with insurance funded preneed funeral contracts, the customer purchases a life insurance policy and the Company earns a commission as the agent in the transaction between the customer and the third party insurance company. Such general agency (GA) revenues are based on a percentage per insurance policy sold and are recognized when the insurance purchase transaction between the customer and the third party insurance company is complete. GA revenues recognized by the Company totaled $8,043 and $8,075 for the three months ended June 30, 2004 and 2003, and $15,966 and $15,980 for the six months ended June 30, 2004 and 2003. Direct selling costs expensed by the Company totaled $8,372 and $6,797 for the three months ended June 30, 2004 and 2003 and $13,623 and $11,801 for the six months ended June 30, 2004 and 2003, respectively, in connection with sales of insurance funded preneed funeral contracts.

Preneed Funeral Receivables and Trust Investments

Preneed funeral receivables and trust investments, net of allowance for cancellation, represent trust assets and customer receivables related to unperformed, price-guaranteed trust funded preneed funeral contracts. The components of Preneed funeral receivables and trust investments in the Company’s consolidated balance sheet at June 30, 2004 and December 31, 2003 are as follows:

	June 30, 2004			December 31, 2003
Receivables due from trust assets, at cost	$	—		$	1,201,059
Trust investments, at market		1,124,398			—
Receivables from customers		167,471			190,332
		1,291,869			1,391,391
Allowance for cancellation		(15,078	)		(161,626	)
Preneed funeral receivables and trust investments	$	1,276,791		$	1,229,765

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     An allowance for contract cancellation is provided based on historical experience. However, the amount has decreased since the implementation of FIN 46R. An allowance is no longer provided on the monies associated with the preneed contract that are held in trust, currently recorded as trust investments, but previously recorded as receivables due from trust investments.

     Upon cancellation of a trust funded preneed funeral contract, a customer is generally entitled to receive a refund of the funds held in trust. In many jurisdictions, the Company may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust including investment income in many cases. As a result, when realized or unrealized losses of a trust result in trust funded preneed funeral contracts being under-funded, the Company assesses such contracts to determine whether a loss provision should be recorded. No loss amounts have been required to be recognized as of June 30, 2004 or December 31, 2003.

     Preneed funeral receivables and trust investments are reduced by the trust investment earnings the Company has been allowed to withdraw in certain states prior to maturity and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws. These earnings are recorded in Deferred preneed funeral revenues until the service is performed or the merchandise is delivered.

     The cost and market values associated with funeral trust investments at June 30, 2004 are detailed below. The market value of funeral trust investments was based primarily on quoted market prices at June 30, 2004. The Company periodically evaluates investments for other-than-temporary impairment and as a result of it’s most recent review believes the unrealized losses of $25,496 related to trust investments are temporary in nature. At June 30, 2004, the Company’s unrealized losses greater than one year in duration, primarily related to certain private equity and other investments.

	Cost		Unrealized Gains		Unrealized Losses			Market
Cash and cash equivalents	$	71,464	$	—	$	—		$	71,464
Fixed income securities:
U.S. Treasury		74,440		834		(2,891	)		72,383
Foreign government		69,202		536		(82	)		69,656
Corporate		14,318		160		(636	)		13,842
Mortgage-backed		92,997		552		(4,510	)		89,039
Insurance-backed		270,194		—		—			270,194
Asset-backed and other		6,116		47		(351	)		5,812
Equity securities:
Common stock		327,078		31,276		(5,464	)		352,890
Mutual funds:
Equity		60,265		7,151		(145	)		67,271
Fixed income		47,050		342		(239	)		47,153
Private equity and other		75,545		327		(11,178	)		64,694
Trust investments	$	1,108,669	$	41,225	$	(25,496	)	$	1,124,398
Market value as of a percentage of cost									101.42	%

     Maturities of fixed income securities at June 30, 2004 are estimated as follows:

	Market
Due in one year or less.	$	103,612
Due in one to five years		175,482
Due in five to ten years		153,155
Thereafter		88,677
	$	520,926

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     During the three months ended June 30, 2004, purchases and sales of available-for-sale securities included in trust investments were $244,048 and $284,379, respectively. These transactions resulted in $16,031 and $6,645 of realized gains and losses, respectively. The Company uses the FIFO method to determine the cost of funeral trust available-for-sale securities sold during the period.

Deferred Preneed Funeral Revenues

At June 30, 2004, Deferred preneed funeral revenues, net of allowance for cancellation, represent future funeral service revenues, including distributed trust investment earnings associated with unperformed trust funded preneed funeral contracts, that are not held in trust accounts. Future funeral service revenues and net trust investment earnings that are held in trust accounts are included in Non-controlling interest in funeral and cemetery trusts. At December 31, 2003 and prior to the implementation of FIN 46R, Deferred preneed funeral revenues represent the original price of a trust funded preneed funeral contract plus the net trust investment earnings.

     An allowance for contract cancellation is provided based on historical experience. However, the amount has decreased since the implementation of FIN 46R, as the Company no longer provides an allowance for the deferred preneed funeral revenues now included in Non-controlling interest in funeral and cemetery trusts.

Insurance Funded Preneed Funeral Contracts

Not included in the consolidated balance sheet are insurance funded preneed funeral contracts that will be funded by life insurance or annuity contracts issued by third party insurers. The net amount of these contracts that have not been fulfilled at June 30, 2004 and December 31, 2003, including increasing insurance benefits and reduced by an allowance for cancellation, was approximately $2,075,712 and $3,505,094 (of which $1,515,984 related to the Company’s French operations at December 31, 2003), respectively, and were previously included in Preneed funeral receivables and trust investments with a corresponding liability in Deferred preneed funeral revenues. The proceeds of the life insurance policies or annuity contracts will be reflected in funeral revenues as these funerals are performed by the Company.

5. Preneed Cemetery Activities

The Company sells price-guaranteed preneed cemetery contracts providing for future property interment rights, merchandise or services in advance of need at prices prevailing when the agreements are signed. Some or all of the funds received under these contracts for merchandise or services may be required to be placed into trust accounts, or a surety bond may be posted in lieu of trusting, pursuant to applicable law. Effective March 31, 2004, the Company changed certain aspects of its accounting for preneed cemetery contracts upon implementation of FIN 46R. For additional information, see note three to the consolidated financial statements. When the Company receives payments from the customer, the Company deposits the amount required by law into the trust and reclasses the corresponding amount from Deferred preneed cemetery revenues into Non-controlling interest in funeral and cemetery trusts. The Company deposited $32,838 and withdrew $33,324 during the three months ended June 30, 2004.

     Direct selling costs related to preneed cemetery contracts are deferred and included in Deferred charges and other assets in the consolidated balance sheet. The deferred selling costs are expensed in proportion to the corresponding revenue when recognized. Deferred selling costs related to preneed cemetery contracts were $203,068 and $205,123 as of June 30, 2004 and December 31, 2003, respectively.

Preneed Cemetery Receivables and Trust Investments

Preneed cemetery receivables and trust investments, net of allowance for cancellation, represent trust investments and customer receivables (net of unearned finance charges) for contracts sold in advance of when the property interment rights, merchandise or services are needed. The components of Preneed cemetery receivables and trust investments in the consolidated balance sheet at June 30, 2004 and December 31, 2003 are as follows:

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	June 30, 2004			December 31, 2003
Receivables due from trust assets, at cost	$	—		$	862,265
Trust investments, at market		995,611			—
Receivables from customers		518,149			522,079
Unearned finance charges		(75,820	)		(75,785	)
		1,437,940			1,308,559
Allowance for cancellation		(55,581	)		(225,524	)
Preneed cemetery receivables and trust investments	$	1,382,359		$	1,083,035

     Interest rates on cemetery contracts range from 3.5% to 15.7%. The average term of a financed preneed cemetery contract is approximately 4.6 years.

     An allowance for contract cancellation is provided based on historical experience with a corresponding decrease in Deferred preneed cemetery revenues. However, the amount has decreased since the implementation of FIN 46R. An allowance is no longer provided on the monies associated with the preneed contract that are held in trust, currently recorded as trust investments, but previously recorded as receivables due from trust investments.

     The cost and market value associated with the cemetery merchandise and service trust investments at June 30, 2004 are detailed below. The market value of cemetery trust investments was based primarily on quoted market prices at June 30, 2004. The Company periodically evaluates investments for other-than-temporary impairment and as a result of it’s most recent review believes the unrealized losses of $20,910 related to trust investments are temporary in nature. At June 30, 2004, the Company’s unrealized losses greater than one year in duration, primarily related to private equity and other investments.

	Cost		Unrealized Gains		Unrealized Losses			Market
Cash and cash equivalents	$	85,968	$	—	$	—		$	85,968
Fixed income securities:
U.S. Treasury		94,060		1,013		(355	)		94,718
Foreign government		15,037		75		(25	)		15,087
Corporate		14,135		11		(143	)		14,003
Mortgage-backed		197,269		1,970		(2,702	)		196,537
Asset-backed and other		23,206		414		(143	)		23,477
Equity securities:
Common stock		302,926		55,527		(9,417	)		349,036
Mutual funds:
Equity		104,683		21,032		(89	)		125,626
Fixed income		37,676		194		(278	)		37,592
Private equity and other		61,239		86		(7,758	)		53,567
Trust investments	$	936,199	$	80,322	$	(20,910	)	$	995,611
Market value as a percentage of cost									106.35	%

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     Maturities of fixed income securities at June 30, 2004 are estimated as follows:

	Market
Due in one year or less.	$	19,542
Due in one to five years		59,942
Due in five to ten years		57,442
Thereafter		206,896
	$	343,822

     During the three months ended June 30, 2004, purchases and sales of available-for-sale securities included in trust investments were $284,363 and $284,296, respectively. These sale transactions resulted in $16,726 and $8,540 of realized gains and losses, respectively. The Company uses the FIFO method to determine the cost of cemetery trust available-for-sale securities sold during the period.

Deferred Preneed Cemetery Revenues

At June 30, 2004, Deferred preneed cemetery revenues, net of allowance for cancellation, represent future preneed cemetery revenues including distributed trust investment earnings associated with unperformed trust funded preneed cemetery contracts that are not held in trust accounts. Future contract revenues and net trust investment earnings that are held in trust accounts are included in Non-controlling interest in funeral and cemetery trusts. At December 31, 2003 and prior to the implementation of FIN 46R, Deferred preneed cemetery revenues represent the original price of a trust funded preneed cemetery contract plus the net trust investment earnings.

     An allowance for contract cancellation is provided based on historical experience. However, the amount has decreased since the implementation of FIN 46R, as the Company no longer provides an allowance for the deferred preneed cemetery revenues now included in Non-controlling interest in funeral and cemetery trusts.

6. Cemetery Perpetual Care Trusts

The Company is required by state or provincial law to pay into perpetual care trusts a portion of the proceeds from the sale of cemetery property interment rights. As a result of the implementation of FIN 46R, the Company has consolidated the perpetual care trust investments with a corresponding amount recorded as Non-controlling interest in perpetual care trusts. During the three months ended June 30, 2004, the Company deposited into and withdrew from the trusts $6,214 and $5,665, respectively.

     The cost and market value associated with trust investments held in perpetual care trusts at June 30, 2004 are detailed below. The market value of perpetual care trusts was based primarily on quoted market prices at June 30, 2004. The Company periodically evaluates investments for other-than-temporary impairments and as a result of it’s most recent review believes the unrealized losses of $10,144 related to trust assets are temporary in nature. There were no significant investments with unrealized losses at June 30, 2004 greater than one year in duration.

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	Cost		Unrealized Gains		Unrealized Losses			Market
Cash and cash equivalents	$	52,067	$	—	$	—		$	52,067
Fixed income securities:
U.S. Treasury		18,484		1,038		(149	)		19,373
Foreign government		27,794		1,870		(78	)		29,586
Corporate		84,434		4,124		(2,235	)		86,323
Mortgage-backed		114,421		503		(1,283	)		113,641
Asset-backed		53,751		463		(933	)		53,281
Equity securities:
Preferred stock		11,939		962		(384	)		12,517
Common stock		82,284		10,378		(1,317	)		91,345
Mutual funds:
Equity		33,719		6,114		(174	)		39,659
Fixed income		149,722		1,475		(3,103	)		148,094
Private equity and other		50,932		3,261		(488	)		53,705
Perpetual care trust investments	$	679,547	$	30,188	$	(10,144	)	$	699,591
Market value as a percentage of cost									102.95	%

     Maturities of fixed income securities at June 30, 2004 are estimated as follows:

	Market
Due in one year or less.	$	4,150
Due in one to five years		88,551
Due in five to ten years		58,443
Thereafter		151,060
	$	302,204

     During the three months ended June 30, 2004, purchases and sales of available-for-sale securities in the perpetual care trust were $286,169 and $276,519, respectively. These sale transactions resulted in $3,587 and $3,682 of realized gains and losses, respectively. The Company uses the FIFO method to determine the cost of perpetual care trust available-for-sale securities sold during the period.

     Distributable earnings from these perpetual care trust investments are recognized in current cemetery revenues to the extent of qualifying cemetery maintenance costs. Recognized earnings related to these perpetual care trust investments were $4,643 and $6,538 for the three months ended June 30, 2004 and 2003, and $12,804 and $13,247 for the six months ended June 30, 2004 and 2003 respectively.

7. Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual Care Trusts

Non-Controlling Interest in Funeral and Cemetery Trusts

Effective March 31, 2004, the Company consolidated the merchandise and service trusts associated with its preneed funeral and cemetery activities as a result of the implementation of FIN 46R. Although FIN 46R requires the consolidation of the merchandise and service trusts, it does not change the legal relationships among the trusts, the Company and its customers. The customers are the legal beneficiaries of these merchandise and service trusts, and therefore, their interests in these trusts represent a non-controlling interest in subsidiaries. For additional information, see note three to the consolidated financial statements.

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Non-Controlling Interest in Perpetual Care Trusts

The Non-controlling interest in perpetual care trusts reflected in the consolidated balance sheet represents the cemetery perpetual care trusts, net of the accrued expenses and other long-term liabilities of the perpetual care trusts. For additional information, see note three to the consolidated financial statements.

     The components of Non-controlling interest in funeral and cemetery trusts and Non-controlling interest in perpetual care trusts in the Company’s consolidated balance sheet at June 30, 2004 are detailed below.

							Cemetery perpetual
	Preneed funeral		Preneed cemetery		Total		care
Trust investments, at market value	$	1,124,398	$	995,611	$	2,120,009	$	699,591
Less:
Debt associated with certain trust investments		32,129		27,669		59,798		18,713
Accrued trust operating payables, deferred taxes and other		7,510		1,728		9,238		6,674
		39,639		29,397		69,036		25,387
Non-controlling interest	$	1,084,759	$	966,214	$	2,050,973	$	674,204

Debt Associated with Certain Trusts Consolidated by the Company

Certain trusts, consolidated with the adoption of FIN 46R and recorded in Preneed funeral receivables and trust investments, Preneed cemetery receivables and trust investments and Cemetery perpetual care trust investments, have indirect interests in real estate partnerships. These partnerships have incurred indebtedness of $78,511 that is included in Other liabilities in the consolidated balance sheet at June 30, 2004. The trusts’ obligation on this indebtedness is limited to their investment in the respective partnerships. The debt has interest rates ranging from 5.0% to 8.5% and maturities between 2011 and 2019.

Other income, net

     As discussed in notes three through six, the components of Other income, net in the Company’s consolidated statement of operations for the three months ended June 30, 2004 are detailed below.

	Funeral			Cemetery			Cemetery perpetual			Other,
	trusts			trusts			care trusts			net		Total
Realized gains	$	16,031		$	16,726		$	3,587		$	—	$	36,344
Realized losses		(6,645	)		(8,540	)		(3,682	)		—		(18,867	)
Interest, dividend and other ordinary income		5,248			5,786			9,520			—		20,554
Trust expenses and income taxes		(2,177	)		(2,437	)		(2,617	)		—		(7,231	)
Net trust investment income		12,457			11,535			6,808			—		30,800
Interest expense related to non- controlling interest in funeral and cemetery trust investments		(12,457	)		(11,535	)		—			—		(23,992	)
Interest expense related to non- controlling interest in perpetual care trust investments		—			—			(6,808	)		—		(6,808	)
Total non-controlling interest		—			—			—			—		—
Other income		—			—			—			625		625
Total other income, net	$	—		$	—		$	—		$	625	$	625

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     Amounts included in Other income within Other income, net primarily relate to foreign currency gains and losses, interest income on notes receivable and general agency commissions from third party insurance companies.

8. Debt

Debt was as follows:

	June 30, 2004			December 31, 2003
7.375% notes due April 2004	$	—		$	111,190
8.375% notes due December 2004		50,797			50,797
6.0% notes due December 2005		63,801			272,451
7.2% notes due 2006		150,000			150,000
6.875% notes due 2007		143,475			143,475
6.5% notes due 2008		195,000			195,000
6.75% convertible subordinated notes due 2008, conversion price of $6.92 per share		—			312,694
7.7% notes due 2009		358,266			358,266
7.875% debentures due 2013		55,627			55,627
6.75% notes due 2016		250,000			—
Convertible debentures, maturities through 2013, fixed interest rates from 4.75% to 5.5%, conversion prices from $13.02 to $50.00 per share		32,369			38,368
Mortgage notes and other debt, maturities through 2050		42,986			63,597
Deferred charges		(44,719	)		(49,594	)
Total debt		1,297,602			1,701,871
Less current maturities		(58,810	)		(182,682	)
Total long-term debt	$	1,238,792		$	1,519,189

     The Company’s consolidated debt had a weighted average interest rate of 7.08% and 6.95% at June 30, 2004 and December 31, 2003, respectively. Approximately 99% of the total debt had a fixed interest rate at June 30, 2004 and December 31, 2003.

Bank Credit Agreements

The Company’s bank credit agreement, which matures in July 2005, provides a total lending commitment of $185,000, including a sublimit of $125,000 for letters of credit. The credit facility is secured by the stock, inventory and receivables of certain of the Company’s domestic subsidiaries and these domestic subsidiaries have guaranteed the Company’s debt obligation 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 prohibited from paying cash dividends and restricted from making certain other distributions. The Company had no borrowings under the bank credit agreement at either June 30, 2004 or December 31, 2003; however, the Company used the credit agreement sublimit to issue letters of credit in the amount of $79,242 and $69,815 at June 30, 2004 and December 31, 2003, respectively. Interest rates for the outstanding borrowings are based on various indices as determined by the Company. The Company also pays a quarterly fee on the unused commitment, which ranges from 0.50% to 0.75% based on the percentage of the facility used, and was 0.625% at June 30, 2004 and December 31, 2003.

     Subsequent to June 30, 2004, the Company executed a new bank credit agreement, which matures August 2007, and replaces the bank credit agreement existing at June 30, 2004. The new agreement provides a total lending commitment of $200,000, including a sublimit of $175,000 for letters of credit. Upon closing, the Company transferred $72,456 of letters of credit, which were originally issued under the bank credit agreement existing at June 30, 2004. The facility is secured by the stock of the Company’s domestic subsidiaries and these domestic subsidiaries have guaranteed the Company’s indebtedness associated with this facility. The bank credit agreement contains certain financial covenants, including a minimum interest coverage ratio, a maximum leverage ratio, maximum

18

capital expenditure limitations, minimum net worth requirements and certain cash distribution restrictions. Interest rates for the outstanding borrowings will be based on various indices as determined by the Company. The Company also will pay a quarterly fee on the unused commitment, which ranges from 0.25% to 0.50%.

Debt Issuances and Additions

Upon implementation of FIN 46R, the Company recorded an additional $6,200 to the mortgage notes and other debt in connection with the consolidation of certain cemeteries managed by the Company.

     On April 14, 2004, the Company issued $250,000 of senior unsecured 6.75% notes due April 1, 2016, which pay interest semi-annually beginning October 1, 2004. The Company used the net proceeds to retire existing indebtedness, including the tender offer for the 6.00% notes due 2005, as described below, the redemption of its 6.75% convertible subordinated notes due 2008, and for general corporate purposes. The notes are subject to the provisions of the Company’s Senior Indenture dated as of February 1, 1993, which includes certain covenants limiting, among other things, the creation of liens securing indebtedness and sale-leaseback transactions. The Company is entitled to redeem the notes at any time by paying a make-whole premium.

     The Company issued the new notes in an unregistered offering and expects to file a registration statement with the Securities and Exchange Commission pursuant to a Registration Rights Agreement. Until the registration statement is filed, the notes may be resold by the initial purchasers pursuant to Rule 144A and Regulation S under the Securities Act of 1933. In accordance with the terms of the Registration Rights Agreement, the interest rate on the new notes increases 0.25% after each ninety-day period that the Company fails to file the registration statement, as intended, up to a maximum increase of 1.00% over the original interest rate of the notes. On July 14, 2004, the interest rate on the notes increased to 7.00%. Upon filing a registration statement, the interest rate will revert to the stated rate of 6.75%.

Debt Extinguishments and Reductions

In March 2004, in connection with the joint venture of the Company’s operations in France, mortgage notes and other debt was reduced by approximately $24,194 for capital lease obligations related to vehicles used in the France operations.

     In the second quarter of 2004, in connection with the pending sale of the Company’s Argentina operations, mortgage notes and other debt was reduced by approximately $9,347 and $9,694 at June 30, 2004 and December 31, 2004, respectively. This balance is included in the Liabilities of discontinued operations in the consolidated balance sheet. For additional information regarding this matter, please refer to note sixteen to the consolidated financial statements.

     On April 15, 2004, as required by the terms of the agreement, the Company repaid the remaining $111,190 of the 7.375% notes due 2004.

     On April 22, 2004, the Company extinguished $200,000 aggregate principal amount of the 6.00% notes due 2005, pursuant to the Offer to Purchase, dated March 24, 2004. The Company paid $214,233 to the tendering holders, including a premium and accrued interest. As a result of the transaction, the Company recognized a loss on the early extinguishment of debt of $10,831, recorded in (Loss) gain on early extinguishment of debt, in the consolidated statement of operations for the quarter and six months ended June 30, 2004. In early May 2004, the Company also purchased $8,650 aggregate principal amount of the 6.00% notes due 2005 in the open market. As a result of these transactions, the Company recognized a loss of $333, recorded in (Loss) gain on early extinguishment of debt, in the consolidated statement of operations for the quarter ended June 30, 2004.

     The holders of $221,633 of the Company’s 6.75% convertible subordinated notes due 2008 converted their holdings to equity on June 22, 2004, pursuant to the terms of the notes. The Company paid $7,480 in accrued interest to the holders. Simultaneously, the Company exercised its option by redeeming the remaining outstanding $91,061 of the notes. The Company paid a total of $97,649, including interest and premium, to the holders of the redeemed notes and recognized a $5,606 loss on the early extinguishment of debt, recorded in (Loss) gain on early extinguishment of debt, in the consolidated statement of operations during the quarter ended June 30, 2004.

19

Additional Debt Disclosures

At June 30, 2004 and December 31, 2003, the Company had deposited $220,524 and $95,325, respectively, in restricted, interest- bearing accounts that were pledged as collateral for various credit instruments and commercial commitments, including $135,000 held in escrow for settlement of certain litigation. Such amounts are included in Other current assets and Deferred charges and other assets in the consolidated balance sheet. In July 2004, the Company received $27,424 related to certain commercial commitments, reducing the restricted cash balance to $211,120 at August 5, 2004.

9. Derivatives

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

     The Company was not a party to any derivative instruments at December 31, 2003. During the first quarter of 2004, the Company executed certain forward exchange contracts, having an aggregate notional value of EUR 240,000 and a corresponding notional value of $300,011 to hedge its net foreign investment in France. Upon receipt of the net proceeds from the joint venture transaction, the Company settled these derivative instruments and recorded a gain of $8,919 in Other comprehensive income (loss) in the consolidated statement of stockholders’ equity, which was then recognized pursuant to the sale of France in Gains and impairment (losses) on dispositions, net in the consolidated statement of operations.

     The Company also executed certain forward exchange contracts during the first half of 2004, having an aggregate notional value of GBP 22,436 and a corresponding notional value of $41,334, relating to the ultimate sale of its minority investment in and the repayment of its note receivable from a funeral and cemetery company in the United Kingdom. On April 8, 2004, the Company received the expected proceeds and settled these derivative instruments, recognizing a gain of $198, which was recorded in Other income, net, in the consolidated statement of operations for the three and six months ended June 30, 2004.

10. Retirement Plans

The Company has a non-contributory, defined benefit pension plan covering approximately 40% of United States employees (US Pension Plan), a supplemental retirement plan for certain current and former key employees (SERP), a supplemental retirement plan for officers and certain key employees (Senior SERP) and a retirement plan for certain non-employee directors (Directors’ Plan). The Company also has a 401(k) employee savings plan.

     Effective January 1, 2004, the Company changed the accounting for gains and losses on its pension plan assets and obligations. The Company will recognize such gains and losses in its consolidated statement of operations in the year such gains and losses are incurred. Prior to January 1, 2004, the Company amortized the difference between actual and expected investment returns and actuarial gains and losses over seven years (except to the extent that settlements with employees required earlier recognition). For additional discussion of this accounting change, see note three to the consolidated financial statements.

     Effective January 1, 2001, the Company curtailed its US Pension Plan, SERP, Senior SERP and Directors’ Plan. As these plans have been frozen, the participants do not earn additional benefit from additional years of service and the Company does not incur new service cost.

     Retirement benefits for the US Pension Plan are generally based on years of service and compensation. Required contributions are actuarially determined amounts consistent with the funding requirements of the Employee Retirement Income Security Act of 1974. Assets of the pension plan consist primarily of bank money market funds, fixed income investments and marketable equity securities.

     Retirement benefits under the SERP are based on years of service and average monthly compensation, reduced by benefits under the pension plan and Social Security. The Senior SERP provides retirement benefits based on years of service and position. The Directors’ Plan provides for an annual benefit to directors following their retirement, based on a vesting schedule.

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     Most foreign employees are covered by their respective foreign government mandated or defined contribution plans that are adequately funded and are not considered significant to the financial condition or results of operations of the Company. The plans’ liabilities and their related costs are computed in accordance with the laws of the individual countries and appropriate actuarial practices.

     The components of net periodic pension plan benefit cost for the three and six months ended June 30 were as follows:

	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
Service cost - - benefits earned during the period	$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation		2,245			2,474			4,490			4,948
Return on plan assets		(1,790	)		(1,702	)		(3,580	)		(3,404	)
Settlement/curtailment charge		—			88			—			176
Amortization of prior service cost		45			46			90			92
Amortization of unrecognized net loss		—			1,896			—			3,793
	$	500		$	2,802		$	1,000		$	5,605

     As a result of our previously mentioned accounting change, the Company is recording net pension expense, for the interim periods, based on estimated returns on plan assets and obligations. Due to the write off of the $54,873 unrecognized net loss associated with the change in accounting principle on January 1, 2004, the Company’s amortization of unrecognized net loss is $0 for the three and six months ended June 30, 2004 compared to $1,896 and $3,793 for the same periods of 2003.

     The plans’ weighted-average assumptions used to determine the net pension expense for the three and six months ended June 30, 2004 and 2003 were as follows. Interim 2004 rates are estimates. Due to the curtailment of the plans in 2001, the assumed rate of compensation increase is $0.

	June 30, 2004			June 30, 2003
Discount rate used to determine obligations and related interest cost		6.25	%		6.25	%
Assumed rate of return on plan assets		8.00	%		9.00	%

SERP, Senior SERP and Directors Plan

The retirement benefits under the SERP, Senior SERP and Directors’ Plan are unfunded obligations of the Company. As of December 31, 2003, the benefit obligation of the SERP, Senior SERP and Directors’ Plan was $33,764; however, the Company holds various life insurance policies with the intent to use the proceeds or any cash value buildup from such policies to assist in meeting, at least to the extent of such assets, the Senior SERP’s funding requirements. The face value of these insurance policies is approximately $51,082 while the cash surrender value of these insurance policies is approximately $22,087, net of a $11,383 loan, as of June 30, 2004. In July 2004, the Company paid the $11,383 loan and $517 in associated interest.

U.S. Pension Plan

In March 2004, the Company infused a voluntary contribution of $20,000 to the frozen U.S. Pension Plan. The fair value of the plan assets as of June 30, 2004 is $91,757, compared to a projected benefit obligation of $110,649 at December 31, 2003. As a result of the previously mentioned accounting change, the minimum pension liability adjustment included in Accumulated other comprehensive loss was $0 as of June 30, 2004 compared to $33,599 at December 31, 2003.

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     The plan’s weighted-average asset allocations by asset category are as follows:

	June 30, 2004			December 31, 2003
Core diversified and market neutral hedge funds		52	%		—
Equity securities		37	%		74	%
Fixed income investments		11	%		26	%
Total		100	%		100	%

     Equity securities included shares of Company common stock in the amounts of $0 and $7,138 (nine percent of plan assets) at June 30, 2004 and December 31, 2003, respectively. On March 31, 2004, the plan assets were rebalanced to include investments in core diversified and market neutral hedge funds.

     The primary investment objective of the plan is to achieve a rate of investment return over time that will allow the plan to achieve a fully funded status, while maintaining prudent investment return volatility levels. In 2004, the investment strategy was revised to have a lower percentage invested in traditional equity securities and fixed income securities and instead include investments in hedge funds allowing for reduced volatility with limited reduction of returns. The Company has an asset allocation strategy of 35% traditional equity, 15% fixed income and 50% hedge funds. The investment strategy is managed within ranges that are centered at specific allocation targets. The specific allocations within the strategy, as well as individual asset class ranges are as follows:

	Ranges
Large cap equity (value)		10% - 25	%
Small cap growth (value)		5% - 10	%
International equity		5% - 10	%
Fixed income core bond		0% - 25	%
Hedge funds:
Core diversified		15% - 35	%
Market neutral		15% - 35	%
Money market		0% - 1	%

11. 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 areas include North America, Europe and Other Foreign. Other Foreign consists of the Company’s operations in Singapore and South America. Europe includes operations in Germany and France. The Company conducts both funeral and cemetery operations in its North America, Europe and Other Foreign segments.

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

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     The Company’s reportable segment information is as follows:

					Reportable
	Funeral		Cemetery		segments
Revenues from external customers:
Three months ended June 30,
2004	$	279,502	$	152,555	$	432,057
2003 (Restated) - note 17	$	426,722	$	157,328	$	584,050
Six months ended June 30,
2004	$	715,433	$	302,741	$	1,018,174
2003 (Restated) - note 17	$	865,374	$	297,502	$	1,162,876
Gross profits:
Three months ended June 30,
2004	$	50,311	$	23,073	$	73,384
2003 (Restated) - note 17	$	68,844	$	25,788	$	94,632
Six months ended June 30,
2004	$	138,271	$	48,210	$	186,481
2003 (Restated) - note 17	$	157,450	$	52,140	$	209,590

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

	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
				(Restated) note 17						(Restated) note 17
Gross profits from reportable segments	$	73,384		$	94,632		$	186,481		$	209,590
General and administrative expenses		(24,028	)		(36,268	)		(75,049	)		(57,679	)
Gains and impairment (losses) on dispositions, net		696			(2,469	)		36,299			6,865
Other operating income (expense)		6,932			(1,724	)		6,932			(1,724	)
Operating income		56,984			54,171			154,663			157,052
Interest expense		(32,982	)		(35,763	)		(66,780	)		(73,133	)
(Loss) gain on early extinguishment of debt, net		(16,770	)		(419	)		(16,770	)		1,903
Other income, net		625			3,093			8,189			5,372
Income from continuing operations before income taxes and cumulative effects of accounting changes	$	7,857		$	21,082		$	79,302		$	91,194

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     The Company’s geographic area information is as follows:

	North
	America			Europe			Other foreign			Total
Revenues from external customers:
Three months ended June 30,
2004	$	422,360		$	1,524		$	8,173		$	432,057
2003 (Restated) - note 17	$	434,570		$	142,037		$	7,443		$	584,050
Six months ended June 30,
2004	$	871,066		$	130,491		$	16,617		$	1,018,174
2003 (Restated) - note 17	$	870,367		$	279,295		$	13,214		$	1,162,876
Gains and impairment (losses) on dispositions, net:
Three months ended June 30,
2004	$	891		$	—		$	(195	)	$	696
2003	$	(469	)	$	(1,050	)	$	(950	)	$	(2,469	)
Six months ended June 30,
2004	$	36,402		$	92		$	(195	)	$	36,299
2003	$	10,191		$	(2,376	)	$	(950	)	$	6,865
Other operating income (expense):
Three months ended June 30,
2004	$	6,932		$	—		$	—		$	6,932
2003	$	(1,724	)	$	—		$	—		$	(1,724	)
Six months ended June 30,
2004	$	6,932		$	—		$	—		$	6,932
2003	$	(1,724	)	$	—		$	—		$	(1,724	)
Operating income (expense):
Three months ended June 30,
2004	$	55,467		$	(190	)	$	1,707		$	56,984
2003 (Restated) - note 17	$	36,944		$	16,247		$	980		$	54,171
Six months ended June 30,
2004	$	139,212		$	11,580		$	3,871		$	154,663
2003 (Restated) - note 17	$	120,906		$	33,946		$	2,200		$	157,052
Depreciation and amortization:
Three months ended June 30,
2004	$	35,262		$	—		$	148		$	35,410
2003 (Restated) - note 17	$	41,019		$	—		$	596		$	41,615
Six months ended June 30,
2004	$	70,184		$	—		$	1,016		$	71,200
2003 (Restated) - note 17	$	79,529		$	—		$	793		$	80,322
Total assets at:
June 30, 2004	$	8,290,877		$	7,810		$	140,072		$	8,438,759
December 31, 2003	$	7,034,062		$	543,141		$	148,001		$	7,725,204

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

	Three months ended					Six months ended
	June 30,					June 30,
	2004		2003			2004		2003
			(Restated) note 17					(Restated) note 17
Revenues from external customers	$	400,369	$	414,910		$	820,493	$	832,180
Other operating income (expense)	$	8,030	$	(1,724	)	$	8,030	$	(1,724	)
Operating income	$	52,576	$	30,923		$	126,910	$	111,031
Depreciation and amortization	$	33,702	$	38,672		$	66,099	$	76,023
Total assets (a)	$	8,011,193	$	6,801,492		$	8,011,193	$	6,801,492

     (a) Prior year amounts are as of December 31, 2003.

     Included in the Europe figures above are the following France amounts:

	Three months ended				Six months ended
	June 30,				June 30,
	2004		2003		2004		2003
Revenues from external customers	$	—	$	140,215	$	127,282	$	275,649
Operating income	$	—	$	16,083	$	11,664	$	33,503
Total assets (a)	$	—	$	535,222	$	—	$	535,222

     (a) Prior year amounts are as of December 31, 2003.

12. Commitments and Contingencies

Litigation

The Company is a party to various litigation matters, investigations and proceedings. For each of its outstanding legal matters, the Company evaluates the merits of the case, its exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. If the Company determines that an unfavorable outcome is probable and can be estimated, it establishes the necessary accruals. Certain insurance policies held by the Company may reduce cash outflows with respect to an adverse outcome of these litigation matters. The Company accrues such insurance recoveries when they become probable of being paid and can be reasonably estimated. The following discussion describes certain litigation and proceedings as of August 13, 2004.

     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

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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.

     The plaintiffs in the Consolidated Lawsuit alleged that defendants violated federal securities laws by making materially false and misleading statements and failing to disclose material information concerning the Company’s preneed funeral business and other financial matters, including in connection with the ECI merger. The Consolidated Lawsuit sought recovery of an unspecified amount of monetary damages. A Motion to Dismiss the Consolidated Lawsuit filed by the Company and the Individual Defendants has been pending before the Court.

     On April 20, 2004, the Company announced that it had entered into a memorandum of understanding to settle the Consolidated Lawsuit. The terms of the proposed settlement call for the Company to cause to be created a settlement fund in May 2004 totaling $65 million in settlement of the claims. The Company and its insurance carriers have also entered into an agreement providing for the payment by the Company’s insurance carriers of $30 million towards this settlement, which resulted in direct payments made by the Company of approximately $35 million.

     As a result of this proposed settlement, the Company recognized litigation related expenses in General and administrative expenses, net of amounts to be funded into escrow by the insurance carriers, of approximately $35 million on a pretax basis in the first quarter of 2004. During the second quarter of 2004, the Company deposited $35 million into escrow for this proposed settlement. This amount is included in Other current assets with a corresponding liability in Accrued liabilities in the consolidated balance sheet. The proposed settlement is subject to court approval following notice to members of the class, an opportunity for class members to object or opt out of the proposed settlement and other conditions. The Company is not obligated to proceed with the proposed settlement if more than a specified percent of the class members opt out and elect to bring separate legal actions. Accordingly, if less than such specified percent of the class members opt out, the Company could have additional potential liability for such opt out claims and still be obligated to carry out the proposed settlement. The quantification of this additional potential liability is not able to be determined by the Company at this time.

     Several other related lawsuits have been filed against the Company and the Individual Defendants in Texas state courts by former SCI and ECI shareholders. These lawsuits include the following matters:

     No. 31820-99-2; Charles Fredrick v. Service Corp. International; In the District Court of Angelina County, Texas, filed February 16, 1999.

     No. 2004-28511; Thomas G. Conway, John T Conway and Trust U/W/O George M. Conway, Jr. v. Service Corporation International; In the 127^th Judicial District Court of Harris County, Texas, filed May 28, 2004.

     No. 2004-429637; T. Rowe Price Balanced Fund, Inc., et al. v. Service Corporation International, et al; In the 270th Judicial District Court, Harris County, Texas, filed June 7, 2004 (the T. Rowe Price Lawsuit).

     These lawsuits allege, among other things, violations of Texas securities law and statutory and common law fraud, and seek compensatory and exemplary damages. In these lawsuits, no discovery has occurred and the Company is unable to determine whether an adverse outcome is probable. The Company intends to aggressively defend the lawsuits.

     The plaintiffs in the T. Rowe Price Lawsuit consist of investment companies and trust funds who were former ECI and SCI shareholders. They allege that the Company and the Individual Defendants violated the Texas Securities Act by making materially false and misleading statements and failing to disclose material information concerning the Company’s business and other financial matters, including in connection with the ECI merger. The T. Rowe Price Lawsuit seeks recovery of at least $32 million in actual damages plus unspecified exemplary damages.

     The Conway plaintiffs in the second Texas securities lawsuit referenced above, previously filed an arbitration styled Thomas G. Conway et al v. Service Corporation International, et al; Cause No. 70 Y 168 00748 02 before the American Arbitration Association (AAA) (Conway action). The defendants in the Conway action are the Company, ECI and SCI Delaware Funeral Services, Inc., a subsidiary of the Company (SCI Delaware). The arbitration is scheduled to take place in February 2005 in Houston, Texas.

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     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 July 1998. 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. 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. 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 164^th 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, the Company and the individual directors filed an answer denying the allegations in the lawsuit and a motion to dismiss based on the results of the investigation and determination of the Committee in response to the shareholder demand letter.

     On April 23, 2004, the trial court granted the Company’s motion and the Levie action was dismissed. The dismissal also has the effect of terminating the Shareholder Derivative Demand of January 14, 2002.

     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 17^th Judicial Circuit in and for Broward County, Florida, General Jurisdiction Division (Consumer Lawsuit). The Consumer Lawsuit was filed December 19, 2001 and named the Company, a subsidiary and other related entities as defendants. On August 19, 2003, the Court certified a class comprising all persons with burial plots or family members buried at Menorah Gardens & Funeral Chapels in Florida. Excluded from the class definition were persons whose claims had been reduced to judgment or had been settled as of the date of class certification. The defendants appealed the trial court’s order regarding class certification.

     The plaintiffs alleged that defendants had 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 alleged that the above conduct constituted 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

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and Unfair Trade Practices Act. The plaintiffs sought an unspecified amount of compensatory and punitive damages. The Court granted plaintiffs’ motion for leave to amend their complaint to include punitive damages. Plaintiffs also sought 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.

     Counsel for plaintiffs in the Consumer Lawsuit also represented individuals who filed numerous separate lawsuits setting forth individual claims similar to those in the Consumer Lawsuit. These lawsuits include Sheldon Cohen, surviving son of Hymen Cohen, deceased v. SCI Funeral Services of Florida, Inc., d/b/a Menorah Gardens & Funeral Chapels and Service Corporation International; Case No. 02014679; In the Circuit Court of the 17^th Judicial Circuit in and for Broward County, Florida, and Marian Novins, surviving daughter of Harold Wells deceased v. SCI Funeral Services of Florida, Inc. d/b/a/ Menorah Gardens & Funeral Chapels, and Service Corporation International; Case No. 0307886; In the Circuit Court of the 17^th Judicial Circuit, in and for Broward County, Florida, General Jurisdiction Division.

     In December 2003, the Company entered into an agreement in principle to settle the Consumer Lawsuit and the above individual related lawsuits. A settlement agreement pertaining specifically to the Consumer Lawsuit was filed with the court on March 2, 2004 and the court preliminarily approved the settlement agreement in March 2004. A fairness hearing is scheduled in September 2004 at which time the court will hear any objections to the settlement and determine whether final approval will be granted. All claims under the Consumer Lawsuit will be dismissed if final court approval of the settlement is obtained and other conditions are met. The terms of the proposed settlement call for the Company to make payments totaling approximately $100 million in settlement of these claims. As of December 31, 2003, the Company had recorded reserves of $100 million relating to this matter. In the fourth quarter of 2003, the Company recognized a receivable of $25 million for expected recoveries under one primary layer of the Company’s insurance coverage related to the litigation. During the first quarter of 2004, the Company deposited $100 million into escrow for this proposed settlement. This amount is included in Other current assets with a corresponding liability in Accrued liabilities in the consolidated balance sheet.

     On April 21, 2002, additional plaintiffs filed a lawsuit styled Sol Guralnick, Linda Weinr, 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 15^th Judicial Circuit, Palm Beach County, Florida; Case number CA024815AE (Guralnick Lawsuit), making essentially the same allegations as the Consumer Lawsuit with the exception that it does not contain class allegations. In addition to the Guralnick Lawsuit, counsel filed a lawsuit containing cemetery mismanagement allegations styled Diane Wolff, Arlene Benowitz, Michael Wolff, Randee Wolff Blumstein, and Martha Freedberg v. SCI, Funeral Services of Florida, Inc. a Florida corporation d/b/a Menorah Gardens & Funeral Chapels, Service Corporation International, a Texas Corporation, Menorah Partnership, a Florida General Partnership, and Sharon Gardens Limited Partnership, a Florida Limited Partnership; In the Circuit Court in the Fifteenth Judicial Circuit in and for Palm Beach County, Florida, Case No. 2003CA013025 (Wolff Lawsuit).

     The Company intends to continue its investigation and to aggressively defend itself in the Guralnick and Wolff Lawsuits, as well as continue to cooperate with state officials in resolving the issues presented.

     Edgar Neufeld v. Service Corporation International, et.al,; Cause No. CV-S-03-1561-HDM-PAL; In the United States District Court for the District of Nevada, filed December 12, 2003; and Rujira Srisythemp v. Service Corporation International, et. al.; Cause No. CV-S-03-1392-LDG-LRL; In the United States District for the District of Nevada, filed November 10, 2003, (collectively, the Nevada actions). The Nevada actions are purported class actions filed in connection with the circumstances surrounding the Consumer Lawsuit. The plaintiffs in the Nevada actions allege that the Company failed to disclose, or falsely stated, material information relating to the circumstances surrounding the Consumer Lawsuit. Since the Nevada actions are in their preliminary stages, no discovery has occurred, and the Company cannot quantify its ultimate liability, if any, for the payment of damages. The Company intends to aggressively defend itself in the Nevada actions. On June 22, 2004, the Judicial Panel on Multidistrict Litigation transferred the Nevada actions to the United States District Court for the Southern District of Texas for pretrial proceedings.

     Joshua Ackerman v. Service Corporation International, et. al.; Cause No. 04-CV-20114; In the United States District Court for the Southern District of Florida court, filed January 15, 2004 (Miami action). The Miami action is a purported class action filed in connection with the circumstances surrounding the Consumer Lawsuit and is similar to the Nevada actions. The plaintiffs in the Miami

28

action allege that the Company failed to disclose, or falsely stated, material information relating to the circumstances surrounding the Consumer Lawsuit. Since the Miami action is in its preliminary stages, no discovery has occurred, and the Company cannot quantify its ultimate liability, if any, for the payment of damages. The Company intends to aggressively defend itself in the Miami action. On June 22, 2004, the Judicial Panel on Multidistrict Litigation transferred the Miami action to the United States District Court for the Southern District of Texas for pretrial proceedings.

     The Company has substantial face amount of insurance coverage which it believes is applicable to these litigation related matters. There are various unresolved coverage issues relative to such insurance, and the Company is currently involved in litigation with certain of its insurance carriers regarding these matters. For that reason, the Company has not accrued an estimated receivable for insurance recoveries other than the $25 million receivable recorded in the fourth quarter of 2003 as described above. Such receivables are recorded when they are probable of being paid and can be reasonably estimated.

     No assurance can be given regarding the ultimate outcome of these proceedings. Certain insurance policies held by the Company may reduce cash outflows with respect to an adverse outcome of these litigation related matters. If an adverse decision in these matters exceeds the insurance coverage or if the insurance coverage is deemed not to apply to these matters or if an insurance carrier is unable to pay, an adverse decision could have a material adverse effect on the Company, its financial condition, results of operations and cash flows.

13. Earnings Per Share

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

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

	Three months ended				Six months ended
	June 30,				June 30,
	2004		2003		2004		2003
			(Restated) note 17				(Restated) note 17
Income from continuing operations before cumulative effects of accounting changes (numerator):
Income from continuing operations before cumulative effects of accounting changes - basic	$	12,023	$	14,074	$	87,849	$	58,048
After tax interest on convertible debt		—		—		6,420		6,649
Income from continuing operations before cumulative effects of accounting changes - diluted	$	12,023	$	14,074	$	94,269	$	64,697
Net income (numerator):
Net income - basic	$	46,360	$	15,308	$	74,879	$	59,394
Interest on convertible debt		—		—		6,420		6,649
Net income - diluted	$	46,360	$	15,308	$	81,299	$	66,043
Shares (denominator):
Shares - basic		307,988		299,351		305,290		298,563
Stock options		4,684		493		4,459		381
Restricted stock		53		—		41		—
Convertible debt		—		—		43,648		45,195
Shares - diluted		312,725		299,844		353,438		344,139
Income from continuing operations per share before cumulative effects of accounting changes:
Basic	$	.04	$	.05	$	.29	$	.19
Diluted	$	.04	$	.05	$	.27	$	.19
Net income per share:
Basic	$	.15	$	.05	$	.25	$	.19
Diluted	$	.15	$	.05	$	.23	$	.19

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

	Three months ended				Six months ended
	June 30,				June 30,
	2004		2003		2004		2003
Antidilutive options		9,645		25,921		9,647		26,025
Antidilutive convertible debt		42,434		46,739		859		1,544
Total common stock equivalents excluded from computation		52,079		72,660		10,506		27,569

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14. Stockholders’ Equity

Stock Options

The Company accounts for employee stock-based compensation expense under the intrinsic value method. Under this method, no compensation expense is recognized on stock options if the grant price equals the market value on the date of grant.

     If the Company had elected to recognize compensation expense for its option plans based on the fair value method, net income and per share amounts would have changed to the pro forma amounts indicated below.

	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
				(Restated)						(Restated)
				note 17						note 17
Net income	$	46,360		$	15,308		$	74,879		$	59,394
Deduct: Total additional stock-based employee compensation expense determined under fair value based method for all awards, net of related tax expense		(822	)		(2,179	)		(1,601	)		(4,361	)
Pro forma net income	$	45,538		$	13,129		$	73,278		$	55,033
Basic earnings per share:
Net income	$	.15		$	.05		$	.25		$	.19
Deduct: Total additional stock-based employee compensation expense determined under fair value based method for all awards, net of related tax expense		—			(.01	)		(.01	)		(.01	)
Pro forma basic earnings per share	$	.15		$	.04		$	.24		$	.18
Diluted earnings per share:
Net income	$	.15		$	.05		$	.23		$	.19
Deduct: Total additional stock-based employee compensation expense determined under fair value based method for all awards, net of related tax expense		—			(.01	)		—			(.01	)
Pro forma diluted earnings per share	$	.15		$	.04		$	.23		$	.18

     The fair value of the Company’s stock options used to compute the pro forma net income and per share disclosures is determined by calculating the estimated fair value at grant date using the Black-Scholes option-pricing model.

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Accumulated Other Comprehensive Loss

The components of Accumulated other comprehensive loss are as follows:

	Foreign currency			Minimum pension
	translation			liability			Unrealized gains			Accumulated other
	adjustment			adjustment			and losses			comprehensive loss
Balance at December 31, 2003	$	(78,084	)	$	(33,599	)	$	—		$	(111,683	)
Activity in 2004		(42,405	)		33,599			—			(8,806	)
Reduction in net unrealized gains associated with available-for-sale securities of the trusts								(58,804	)		(58,804	)
Reclassification of net unrealized gains activity attributable to the non-controlling interest holders								58,804			58,804
Reclassification adjustment for realized loss on foreign currency translation		49,006			—			—			49,006
Balance at June 30, 2004	$	(71,483	)	$	—		$	—		$	(71,483	)
Balance at December 31, 2002	$	(170,591	)	$	(36,555	)	$	—		$	(207,146	)
Activity in 2003		45,562			—			—			45,562
Balance at June 30, 2003	$	(125,029	)	$	(36,555	)	$	—		$	(161,584	)

     Included in the Foreign currency translation adjustment at June 30, 2004 are net currency losses of $67,326 related to discontinued operations of the Company’s Argentina operations held for sale at June 30, 2004.

     The components of Comprehensive income are as follows:

	Three months ended					Six months ended
	June 30,					June 30,
	2004			2003		2004		2003
				(Restated)				(Restated)
				note 17				note 17
Comprehensive income:
Net income	$	46,360		$	15,308	$	74,879	$	59,394
Total other comprehensive income		(7,321	)		25,409		40,200		45,562
Comprehensive income	$	39,039		$	40,717	$	115,079	$	104,956

Share Repurchase Program

On August 16, 2004, the Company announced a share repurchase program authorizing the investment of up to $100 million to repurchase its common stock. The Company plans, subject to market conditions and normal trading restrictions, to make purchases from time to time in the open market or through privately negotiated transactions.

15. Gains and Impairment (Losses) on Dispositions and Other Operating Expenses

Gains and Impairment (Losses) on Dispositions for the Three and Six Months Ended June 30, 2004 and 2003

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

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     Gains and impairment (losses) on dispositions, net consists of the following:

	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
Gains on dispositions, net	$	16,882		$	9,110		$	58,411		$	13,340
Impairment losses for assets held for sale		(16,975	)		(12,056	)		(22,094	)		(14,379	)
Changes to previously estimated impairment losses		789			477			(18	)		7,904
	$	696		$	(2,469	)	$	36,299		$	6,865

     The $16,975 impairment loss for the three months ended June 30, 2004 is primarily a $6,219 purchase price adjustment for the sale of France and other impairment losses associated with the Company’s North America divestiture program.

Previous Years’ Charges

The Company’s previous years’ charges (in 2002, 2001 and 1999) included severance costs related to cost rationalization programs and terminated contractual relationships of former employees and executive officers, planned divestitures of certain North America and international funeral service and cemetery businesses, reductions in carrying values of equity investments, market value adjustments for certain options associated with the Company’s senior notes and relieving certain individuals from their consulting and/or covenant-not-to-compete contractual obligations.

     The majority of the remaining balance at June 30, 2004 of these original charge amounts related to severance costs on completed actions and terminated consulting and/or covenant-not-to-compete contractual obligations, which will be paid by 2012. Of the $37,734 remaining liability at June 30, 2004, $11,327 is included in Accounts payable and accrued liabilities and $26,407 is included in Other liabilities in the consolidated balance sheet based on the expected timing of payments. The Company continues to adjust the estimates of certain items included in the original charge amounts as better estimates become available or actual divestitures occur.

     The activity related to these previous years’ charges for the six months ended June 30, 2004 is detailed below. Any adjustments made during the three and six months ending June 30, 2004 and 2003 to the original impairment charge amounts were recognized in the income statement line item Gains and impairment (losses) on dispositions, net, as described above.

	Original charge		Balance at		Utilization for six months ended June 30, 2004					Balance at
	amount		December 31, 2003		Cash		Non-cash			June 30, 2004
Fourth Quarter 1999 Charge	$	272,544	$	18,282	$	3,633	$			$	14,649
2001 Charges		663,548		3,102		250		811			2,041
2002 Charges		292,979		24,395		3,365		(14	)		21,044
Total	$	1,229,071	$	45,779	$	7,248	$	797		$	37,734

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Sale of France

On March 11, 2004, the Company completed a joint venture transaction of its funeral operations in France. In addition to maintaining a 25% share of the total equity capital of the newly formed entity, the Company received net cash proceeds of $287,886, net of transactions costs, and a note receivable in the amount of EUR 10,000. The transaction resulted in a pretax gain of $12,639, recorded in Gains and impairment (losses) on dispositions, net, in the consolidated statement of operations, and a non-cash tax benefit of $24,929, which were recognized in the quarter ended March 31, 2004. Included in the pretax gain, the Company recognized $35,768 of contractual obligations related to representation and warranties and other indemnifications resulting from the joint venture contract. Goodwill in the amount of $23,467 was removed from the Company’s consolidated balance sheet as a result of this transaction. For further information regarding the sale of France, including pro forma financial information, see the Company’s Form 8-K filed on March 24, 2004.

     In July 2004, the Company paid $6,318, pursuant to the agreement, as a purchase price adjustment for the sale of France, which resulted in a cumulative pretax gain of $6,420. The Company’s liability for this payment was established in the second quarter of 2004 and recorded in Accounts payable and accrued liabilities in the consolidated balance sheet. The corresponding entry was recorded as a $6,219 loss in Gains and impairment (losses) on dispositions, net and $99 in Interest expense in the consolidated statement of operations for the quarter ended June 30, 2004.

Proceeds from Investment in United Kingdom Company

During the second quarter of 2004, the Company received proceeds of $53,839 from the sale of its minority interest equity investment in the United Kingdom and the prepayment of its note receivable, with accrued interest, following a successful public offering transaction of its United Kingdom company.

     The Company recognized income of $27,179, recorded in Gains and impairment (losses) on dispositions, net, in the consolidated statement of operations as of March 31, 2004, to adjust the carrying amount of the receivable to its realizable value. In addition, the Company recognized interest income on the receivable, in the amount of $4,478 recorded in Other income, net in the consolidated statement of operations as of March 31, 2004. In the second quarter of 2004, the Company recorded a pretax gain of $13,984 in Gains and impairment (losses) on dispositions, net, in the consolidated statement of operations, as a result of the sale and recognized a non-cash tax benefit of $8,000.

16. Discontinued Operations

In 1999, the Company began an initiative to identify and address non-strategic or underperforming businesses. As a result of the assessment, the Company committed to a plan during the second quarter of 2004, to divest the existing funeral and cemetery operations in Argentina and Uruguay. The Company is actively marketing these operations. The Company plans to have no continuing interest in these operations subsequent to disposal of the Argentina and Uruguay businesses. Therefore, these operations are classified as discontinued operations at June 30, 2004.

Impairment of Argentina

During the second quarter of 2004, the Company recorded an impairment of its funeral and cemetery operations in Argentina in the amount of $15,189 recorded in Loss from discontinued operations in the consolidated statement of operations. The new carrying amount reflects the estimated fair value based on current market conditions less costs to sell. Additionally, the Company recognized a non-cash tax benefit of $49,236 in discontinued operations in the three months ended June 30, 2004. This tax benefit represents the reduction of a previously recorded valuation allowance.

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     The results of the Company’s discontinued operations for the three and six months ended June 30, 2004 and 2003 were as follows:

	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
Revenues	$	3,809		$	3,547		$	7,309		$	6,230
Gains and impairment (losses) on dispositions, net		(15,189	)		950			(15,189	)		950
Other costs and expenses		(3,379	)		(2,877	)		(5,985	)		(5,610	)
(Loss) income from discontinued operations before income taxes		(14,759	)		1,620			(13,865	)		1,570
(Benefit) provision for income taxes		(49,096	)		386			(48,956	)		224
Income from discontinued operations	$	34,337		$	1,234		$	35,091		$	1,346

     Net liabilities of discontinued operations at June 30, 2004 and December 31, 2003 were as follows:

	June 30, 2004			December 31, 2003
Assets:
Receivables, net of allowances	$	3,494		$	4,096
Other current assets		2,402			2,005
Preneed cemetery receivables and trust investments		1,413			1,601
Property, plant and equipment, at cost, net		430			376
Deferred charges and other assets		1,129			1,240
Total assets		8,868			9,318
Liabilities:
Accounts payable		1,376			1,107
Accrued liabilities and other current liabilities		6,028			6,493
Long-term debt		9,347			9,694
Deferred income taxes		13,314			13,026
Other liabilities and deferred credits		46,884			31,210
Total liabilities		76,949			61,530
Net liabilities of discontinued operations		68,081			52,212
Foreign currency translation		(67,326	)		(71,001	)
Net liabilities of discontinued operations, net of foreign currency translation	$	755		$	(18,789	)

17. Restatement of Financial Statements

The Company restated its previously issued financial statements for the fiscal years ended December 31, 2000, 2001 and 2002, the interim quarters of 2000, 2001 and 2002, and the first three quarters of 2003, related to adjustments to Deferred preneed cemetery revenues and changes in the methodology for amortizing preneed funeral deferred selling costs. See the Company’s 2003 Form 10-K for complete disclosures relating to this restatement of the Company’s financial statements. All applicable amounts relating to these restatements have been reflected in the consolidated financial statements and notes to the consolidated financial statements.

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     The effect of the restatement on the Company’s previously reported consolidated statement of operations for the three and six months ended June 30, 2003 was as follows:

	Three months ended				Six months ended
	June 30,				June 30,
	As Reported		As Restated		As Reported		As Restated
2003
Revenues	$	582,695	$	584,050	$	1,160,105	$	1,162,876
Costs and expenses		489,579		489,418		955,001		953,286
Gross profits		93,116		94,632		205,104		209,590
Operating income		52,655		54,171		152,566		157,052
Income from continuing operations before income taxes and cumulative effects of accounting changes		19,564		21,082		86,707		91,194
Provision for income taxes		6,419		7,008		31,405		33,146
Net income		14,379		15,308		56,648		59,394
Earning per share:
Basic - EPS		.05		.05		.19		.19
Diluted - EPS		.05		.05		.18		.19

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Service Corporation International (SCI or the Company) is the world’s largest provider of funeral and cemetery services. At June 30, 2004, we operated 1,238 funeral service locations, 412 cemeteries and 143 crematoria located in seven countries. We also have a minority interest equity investment in funeral operations in France. For the quarter ended June 30, 2004, our North America operations represented approximately 98% of our consolidated revenues and consolidated gross profits.

     Our funeral and cemetery operations are organized into a North America division covering the United States and Canada, and a Foreign division including operations in South America, Germany and Singapore. Our operations in the North America division are organized into 32 major markets and 44 middle markets. Each market is led by a market director with responsibility for funeral and cemetery operations and preneed sales. Within each market, the funeral homes and cemeteries realize efficiencies by sharing common resources such as personnel, preparation services and vehicles. There are three market support centers in North America to assist market directors with financial, administrative and human resource needs. These support centers, commonly referred to as “hubs,” are located in Houston, New York and Los Angeles. The primary functions of the market support centers are to help facilitate the execution of corporate strategies, coordinate communications between the field and corporate offices and serve as liaisons for implementation of policies and procedures.

Strengths and Challenges

SCI is the leading provider of funeral, cremation and cemetery services in North America. While there are three other publicly-traded companies that operate in our industry, we have more funeral homes and cemeteries and serve more consumers than the rest of the public peer group combined. With that said, the industry remains highly fragmented. We estimate that the other three public companies and SCI combined generate approximately 20% of total industry revenues. The other 80% is generated by independent funeral and cemetery operators. In 2000, we launched the first national branding strategy in the funeral service industry in North America under the name Dignity Memorial®. While this branding process is intended to emphasize our seamless national network of funeral service locations and cemeteries, the original names associated with acquired locations generally remain the same. For example, Geo. H. Lewis & Sons Funeral Directors is now Geo. H. Lewis & Sons Funeral Directors, a Dignity Memorial® provider. We believe SCI is the only company in our industry to successfully implement a national brand. We believe that a national brand gives

36

us a competitive advantage and is discussed further in our strategies for growth described below.

     Our core business can be characterized as stable. It has favorable demographics and relatively predictable revenue and cash flow streams. These are further enhanced by a large backlog of deferred revenues associated with North America preneed funeral and cemetery sales.

     We and others in the industry face certain challenges in growing revenues. The primary external factors affecting revenue growth are a lack of near-term expansion in the number of deaths and an increasing trend toward cremation. Although the United States Census Bureau projects that the numbers of deaths will grow between 0.7% and 0.8% annually through 2010, modern advances in medicine and healthier lifestyles could reduce the numbers of deaths during this time.

     In North America, social trends, religious changes, environmental issues and cultural preferences are driving an increasing preference for cremation. SCI is the largest provider of cremation services in North America. Approximately 40% of the total funeral services we perform are cremation services as compared to the national average of approximately 30%. Our cremation mix is greater due to the high concentration of properties we own along the west coast of the United States, Florida, and Arizona where cremation rates exceed 45%. The rate of cremation in North America has been increasing approximately 100 to 150 basis points each year and we expect this trend to continue in the near term. A cremation service historically has generated less revenues and gross profit dollars than a traditional funeral service. Additionally, the cremation consumer may choose not to purchase cemetery property or merchandise. We believe we are well positioned to respond to this trend and have experienced initial success through the use of contemporary marketing strategies and unique product and service offerings that specifically appeal to cremation consumers. See further information regarding initiatives to address cremation as part of our overall revenue growth strategy described below.

The Path to Growth

With the significant progress made in reducing debt and increasing cash flow since 1999, we believe our current capital structure affords us improved financial flexibility. Our primary focus has shifted to initiatives that will grow revenues and earnings. In the near term, we believe that cost reduction efforts will be the main means to improve earnings. We believe strategies centered on our national brand, Dignity Memorial®, and other revenue growth initiatives will provide the framework that will drive sustainable growth over the longer term.

Improving the Infrastructure

     We have historically had an infrastructure that did not fully realize the inherent efficiencies in our large organization. As a result, we did not completely recognize the benefits of standardization, technology, process improvement and outsourcing programs. Some of the key actions taken to improve the infrastructure while reducing costs include redesigning our sales organization and improving business and financial processes. We also began to implement new information systems in our field locations.

     Having simplified our sales approach and redesigned our financial, technical and administrative infrastructure, we were able to make significant changes to the field management structure in late 2003. The former management structure consisted of multiple layers and two organizations (sales and operations). The new management structure is based on a major market and middle market concept with the understanding that our markets and businesses are not all the same and can benefit from different management approaches. We eliminated the dual management organizational structure, and now have one person responsible for each market who has the ability to lead in a multi-segment environment. This individual is charged with the responsibility of growing our business and maintaining a commitment to the Dignity Memorial® standards and brand.

Building the Brand

SCI has implemented the first national brand in the funeral service industry. This brand is called Dignity Memorial®. Internally, we are focused on ensuring that we have consistency in service standards and processes across our network of businesses. We want every customer interaction to be the standard “Dignity” interaction, which is based upon values of integrity, respect, enduring relationships and service excellence. Externally, we continue to enhance signage and local advertising efforts using the Dignity® name and logo, and we also sponsor several nationally recognized community programs. In 2003, we initiated a national advertising and marketing program to build awareness of the Dignity Memorial® brand. Through broadcast and cable television, newspapers, yellow pages and

37

direct mail media, this program focuses on the distinct benefits and values that set Dignity Memorial® apart from other providers.

     Based on our market studies, we believe today’s funeral consumers are less interested in buying traditional funeral products and more interested in creating a meaningful experience and receiving professional help to deal with the administrative and legal challenges which occur when a loved one dies. Through our Dignity® brand we are developing more contemporary and comprehensive products and services that we believe will help the consumer through the entire experience. Some of the exclusive items offered through Dignity providers include grief counseling services, legal services, internet memorial archive capabilities, and the Aftercare® Planner - a comprehensive organizing system that helps families manage the many business details that arise after a death occurs. Dignity benefits also include the Bereavement Travel Program, a unique feature that allows customers to obtain special rates on airfare, car rentals and hotel accommodations for family and friends who must travel from out of town to attend funeral, cremation or memorial services. Importantly, these products and services appeal to both burial and cremation consumers. We are also focusing on programs that offer consumers new ways to personalize funeral services and create meaning in the experience.

Growing Our Revenues

As described earlier, we believe improvements in our cost structure will drive near term earnings growth; however, we realize that to achieve sustainable long-term earnings growth, we must also increase our revenues. We believe we can be successful in this regard by developing the Dignity® brand and listening to our customers.

Enhancing Sales Opportunities

We believe we can grow core revenues by utilizing technology and contemporary marketing techniques to enhance our sales opportunities and strengthen the competitive advantage of our national brand, Dignity Memorial®. In this regard, particular focus is being placed on selling Dignity Memorial® packaged funeral and cremation plans. We are also developing product differentiation within our cemeteries, and enhancing our cremation strategies.

     Our national brand name, Dignity Memorial®, also represents a unique set of packaged funeral and cremation plans offered exclusively through our network on an atneed and preneed basis. These packages are designed to simplify customer decision-making and include the unique value-added products and services described earlier which have traditionally been unavailable through funeral service locations. Our customer satisfaction index, as measured by independent surveys completed by consumers three weeks following a funeral, continues to reach record levels which we believe is largely attributable to the value and savings consumers receive when they select a Dignity® package. We believe we can increase the selection rate of Dignity® packaged plans through improved merchandising strategies that place less emphasis on traditional funeral merchandise and more focus on the comprehensive product and service offerings unique to Dignity Memorial® providers.

     We are also beginning to use more contemporary marketing techniques within our cemetery segment. Initiatives are underway to employ a tiered-product model that emphasizes a wide range of product and service offerings. We are particularly focusing on the development of high-end cemetery property projects such as private family estates. As of July 31, 2004, this tiered-product strategy had been implemented in less than 20% of the more than 400 cemeteries that we own and we believe this initiative will be a key driver of cemetery revenue growth in the second half of 2004 and 2005.

     To grow core revenues and profits, we believe we must address the growing trend toward cremation. We believe a successful cremation strategy is built on product differentiation, personalization and simplicity. Along with the sale of Dignity Memorial® cremation plans, we are also developing new displays to be used in the arrangement process that clearly explain the products and services available to cremation consumers. Within the cemetery segment, we are promoting cremation gardens, which are separate sections located within certain of our cemeteries where cremated remains can be permanently placed and that contain other unique memorialization products. We continue to develop our national brand, National Cremation®, which targets the direct cremation consumer. And finally, comprehensive training programs are being developed to support and drive these key initiatives, as well as to focus on creating a personal and meaningful experience for the cremation consumer.

Increasing Market Share

We believe that SCI has opportunities to grow market share due to its size and geographic diversity. We believe that a national brand

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will provide us access to new customers over the long term given the increasingly mobile nature of individuals in North America. In addition, we will continue to capitalize on our nationwide network of providers to develop affinity relationships with large groups of individuals to whom we can market our products and services. Such relationships include employers, social organizations and insurance companies. Our most strategic affinity partnership today is with the Veterans of Foreign Wars and Ladies Auxiliary whose membership exceeds two million. Over the longer term, we believe such groups can be key influencers in the funeral home selection process.

     In late 2003, we eliminated the dual management structures of sales and operations and replaced them with a single-line business management structure. In addition to reducing costs, our new management structure is intended to have our strongest business leaders focused on producing results in each of our markets. Under the new structure, many of the administrative and financial functions are now handled by support centers. The geographical scope of responsibility and accountability for these business leaders has also been narrowed. We believe this allows our market leaders to have a greater focus on developing people, growing market share and improving profitability in their respective markets.

     We are also targeting expansion through acquisition or construction in the top 150 markets in North America where probable investment returns will exceed our cost of capital. We will focus future growth capital deployment in the major metropolitan markets where there are large population bases and where multiple businesses are more conducive to clustering and contemporary marketing strategies and where it is easier to attract quality management. Over the longer term, the potential for a franchise opportunity exists for further expansion in the smaller markets.

Critical Accounting Policies and Accounting Changes

Our consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. Estimates and assumptions affect the carrying values of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet date. Actual results could differ from such estimates due to uncertainties associated with the methods and assumptions underlying our critical accounting measurements. The following discussion of our critical accounting policies and estimates should be read in conjunction with our annual report filed on Form 10-K for the year ended December 31, 2003.

     In June 2004, the Emerging Issues Task Force of the FASB published Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-01). EITF 03-01 provides guidance on the recognition and measurement of other-than-temporary impairments of debt and equity investments and requires certain disclosures related to unrealized losses. The recognition and measurement provisions of EITF 03-01 are effective for reporting periods beginning after June 15, 2004. The adoption of EITF 03-01 will not have a material impact in the Company’s consolidated financial statements.

Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51.” This interpretation clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB revised FASB Interpretation No. 46 (FIN 46R).

     Under the provisions of FIN 46R, we are required to consolidate certain cemeteries and trusts. Merchandise and service trusts and cemetery perpetual care trusts are variable interest entities because the trusts meet the conditions of paragraphs 5(a) and 5(b)(1) of FIN 46R. That is, as a group, the equity investors (if any) do not have sufficient equity at risk and do not have the direct or indirect ability through voting or similar rights to make decisions about the trusts’ activities that have a significant effect on the success of the trusts. FIN 46R requires us to consolidate merchandise and service trusts and cemetery perpetual care trusts for which we are the primary beneficiary (i.e., those for which we absorb a majority of the trusts’ expected losses). We are the primary beneficiary of a trust whenever a majority of the assets of the trust are attributable to deposits of our customers.

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Consolidation of Trusts: We implemented FIN 46R as of March 31, 2004, which resulted in the consolidation of our preneed funeral and cemetery merchandise and service trusts and our cemetery perpetual care trusts. We did not recognize a cumulative effect of an accounting change as a result of the implementation of FIN 46R, as it relates to the consolidation of our trusts. The implementation of FIN 46R affects certain line items on our consolidated balance sheet and statement of operations as described below; however, there will be no impact to net income in the statement of operations as a result of the implementation. Additionally, the implementation of FIN 46R did not result in any net changes to our consolidated statement of cash flows; however, does require certain financing and investing activities to be disclosed.

     Although FIN 46R requires consolidation of most of the merchandise and service and perpetual care trusts, it does not change the legal relationships among the trusts, the company and our customers. In the case of merchandise and service trusts, the customers are the legal beneficiaries. In the case of cemetery perpetual care trusts, we do not have a legal right to the perpetual care trust assets. For these reasons, upon consolidation of the trusts, we recognize non-controlling interests in our financial statements to reflect third party interests in these trusts in accordance with FASB Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity” (SFAS 150). We classify deposits to merchandise and service trusts as non-controlling liability interests and classify deposits to cemetery perpetual care trusts as non-controlling equity interests.

     We record cash received from customers, which have not been deposited in trusts as restricted cash in Deferred charges and other assets in our consolidated balance sheet. At June 30, 2004, these pending deposits totaled $18,020. We continue to account for amounts received from customers prior to delivery of merchandise or services that are not required to be deposited in merchandise and service trusts as deferred revenue.

     Beginning March 31, 2004, we recognize net realized investment earnings of the merchandise and service trusts and perpetual care trusts, as well as the related trustee investment expenses and taxes, within Other income, net. We then recognize a corresponding expense within Other income, net representing the net realized earnings of those trusts that are attributable to the non-controlling interest holders. The corresponding credit for this expense is reflected in our consolidated balance sheet in Non-controlling interest in funeral and cemetery trusts for merchandise and service trusts or Non-controlling interest in perpetual care trusts for cemetery perpetual care trusts. The sum of these expenses recorded in Other income, net offset the net realized earnings of such trusts also recognized within Other income, net. Accordingly, net income in the consolidated statement of operations is not affected by consolidation of the trusts in accordance with FIN 46R.

     To the extent the earnings of the trusts are distributed prior to the delivery of merchandise and/or services, a corresponding amount of non-controlling interest is reclassified to deferred revenue, until the corresponding revenues are recognized. In the case of merchandise and service trusts, we recognize as revenues, amounts previously attributed to non-controlling interests and deferred revenues upon the performance of services and delivery of merchandise, including earnings accumulated in these trusts. In the case of the cemetery perpetual care trusts, distributable earnings are recognized in cemetery revenues to the extent of qualifying cemetery maintenance costs.

     Prior to the implementation of FIN 46R and the consolidation of the trusts, monies received from customers and deposited into merchandise and service trusts until maturity of the preneed contract were recorded as receivables due from trust assets. Upon implementation of FIN 46R, we replaced receivables due from trust assets with the trust assets, at market, to the extent we were required to consolidate the trusts.

     An allowance for contract cancellation is provided based on historical experience. However, the amount has decreased since the implementation of FIN 46R. An allowance is no longer provided on the monies associated with the preneed contract that are held in trust, currently recorded as trust assets, but previously recorded as receivables due from trust assets.

     Both the merchandise and services trusts and the cemetery perpetual care trusts hold investments in marketable securities that we classify as available-for-sale under the requirements of SFAS 115. In accordance with SFAS 115, available-for-sale securities of the trusts are recorded at fair value, with unrealized gains and losses excluded from earnings and initially recorded as a component of Accumulated other comprehensive loss in our consolidated balance sheet. Using the guidance in EITF Topic D-41, Adjustments in Assets and Liabilities for Holding Gains and Losses as Related to the Implementation of FASB Statement No. 115 (“Topic D-41”), unrealized gains and losses on available-for-sale securities of the trusts attributable to the non-controlling interest

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holders are not recorded as Accumulated other comprehensive income (loss), but are recorded as an adjustment to either Non-controlling interest in funeral and cemetery trusts or Non-controlling interest in perpetual care trusts. Therefore, unrealized gains and losses attributable to the non-controlling interest holders are reclassified from Accumulated other comprehensive income (loss) to either Non-controlling interest in funeral and cemetery trusts or Non-controlling interest in perpetual care trusts. The gross effect from applying Topic D-41 on our Accumulated other comprehensive income (loss) is disclosed in note fourteen in Item 1 of this Form 10-Q. However, our Accumulated other comprehensive income (loss) on the face of the balance sheet is ultimately not affected by consolidation of the trusts.

     For additional discussion of our accounting policies after the implementation of FIN 46R, see notes four through seven to the consolidated financial statements in Item 1 of this Form 10-Q.

Consolidation of Certain Cemeteries: Additionally, effective as of March 31, 2004, we consolidated certain cemeteries that we manage in accordance with FIN 46R. We recognized a pretax and after tax charge of $14.5 million, representing the cumulative effect of an accounting change, as a result of consolidating these cemeteries. The results of operations and cash flows of these cemeteries are included in our consolidated statements of operations and cash flows beginning March 31, 2004. Excluding the cumulative effect of accounting change, the effect of consolidating these entities did not have a significant effect on our reported results of operations.

Insurance Funded Preneed Insurance Contracts

We changed our method of accounting for insurance funded preneed contracts as we have concluded that our insurance funded preneed funeral contracts are not assets and liabilities as defined by Statement of Financial Accounting Concepts No. 6, “Elements in Financial Statements.” Therefore, we have removed from our consolidated balance sheet amounts relating to insurance funded preneed funeral contracts previously recorded in Preneed funeral receivables and trust investments and Deferred preneed funeral revenues, which at December 31, 2003, were $3.5 billion. The removal of these amounts did not have an impact on our consolidated stockholders’ equity, results of operations or cash flows. See note four to the consolidated financial statements in Item 1 of this Form 10-Q for additional information on insurance related preneed funeral balances.

Pension Plans

Effective January 1, 2004, we changed the accounting for gains and losses on our pension plan assets and liabilities. In 2004, we began recognizing such gains and losses in our consolidated statement of operations during the year in which they occur. Prior to January 1, 2004, we amortized the difference between actual and expected investment returns and actuarial gains and losses over seven years (except to the extent that settlements with employees required earlier recognition). We believe the change is preferable as the new method of accounting better reflects the economic nature of our pension plan and recognizes gains and losses on the pension plan assets and liabilities in the year the gains and losses occur. As a result of this accounting method change, we recorded a charge for the cumulative effect of the change in accounting principle of $33.6 million (net of $21.3 million of deferred taxes) as of January 1, 2004. This amount represents accumulated unrecognized net losses related to the pension plan assets and liabilities.

     Under our new accounting method, our pension expense in future periods may be more volatile as this method accelerates recognition of actual experience. In addition, for our interim financial statements, we are recording net pension expense reflecting estimated returns on plan assets and obligations. Upon completion of our annual remeasurement during the fourth quarter, we will recognize actual gains and losses on plan assets and obligations. Therefore, pension expense during the fourth quarter could be different than amounts recorded in interim periods.

     Our pension costs and liabilities are actuarially determined based on certain assumptions, including expected long-term rates of return on plan assets and the discount rate used to compute future benefit obligations. As our pension plans have been frozen, participants do not earn additional benefits from additional years of service and we do not incur new service costs subsequent to 2000. The key drivers of pension cost are the discount rate used to determine the projected benefit obligation, the related interest cost and the rate of return on plan assets.

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Discount Rate — It is our policy to use a discount rate comparable to rates of return on high-quality fixed income investments available and expected to be available during the period to maturity of the Company’s pension benefits. The discount rate used to determine the present value of the obligation is adjusted annually based on prevailing interest rates as of the measurement date, which is September 30. In 2003, we lowered the discount rate used to determine the pension obligation from 7.00% to 6.25% based on the lower interest rate environment. For our interim 2004 estimates, we are using a discount rate of 6.25%.

Return on Plan Assets — In 2003, we used a 9.0% assumed rate of return on plan assets as a result of a high allocation of equity securities within the plan assets. At December 31, 2003, 74% of the plan assets were equity securities with the remaining 26% of plan assets being represented by fixed income securities. After the $20 million voluntary infusion of funds into the plan in March 2004, we rebalanced the plan assets to have a lower percentage invested in traditional equity securities and fixed income securities and instead incorporate investments in market neutral hedge funds. As of June 30, 2004, approximately 52% of plan assets were invested in core diversified and market neutral hedge funds, 37% of the plan assets were equity securities and the remaining 11% of plan assets were fixed income securities. We believe that this reallocation will reduce the volatility with limited reduction of returns. For our interim 2004 estimates, we assumed an 8.0% rate of return on plan assets. Every one percentage point variance from the actual return to the assumed rate of 8.0% will generate an experience gain or loss of $0.9 million.

Results of Operations — Three Months Ended June 30, 2004 and 2003

In the following discussion of results of operations, certain prior year amounts have been reclassified to conform to the current period financial presentation with no effect on previously reported net income, financial condition or cash flows.

     Consolidated revenues and gross profits in the second quarter of 2004 declined $152.0 million and $21.2 million, respectively, primarily attributable to the disposition of our French funeral operations, which were joint ventured on March 11, 2004. In the three months ended June 30, 2003, revenues and gross profits from funeral operations in France were $140.2 million and $15.8 million, respectively.

     Net income was $46.4 million or $.15 per diluted share in the second quarter of 2004 compared to $15.3 million or $.05 per diluted share in the second quarter of 2003. Net income was impacted by the disposition of our funeral operations in France in March 2004. In the second quarter of 2003, net income included $7.8 million, or $.03 per diluted share, associated with these businesses in France.

     Results for the three month periods ended June 30, 2004 and 2003 were also affected by the following items:

     Three Months Ended June 30, 2004

• We recorded a loss on the early extinguishment of debt of $16.8 million ($10.5 million after tax) or $.03 per diluted share primarily related to the successful tender offer of our notes originally due 2005 and the redemption of our convertible notes originally due 2008.

• We recognized a net pretax gain on dispositions of $0.7 million ($7.1 million after tax including non-cash tax benefits recognized from the sale of our minority interest in the United Kingdom) or $.02 per diluted share.

• We recognized other operating income of $6.9 million ($4.7 million after tax) or $.02 per diluted share as a result of various reconciling activities and accounting matters regarding our trust accounts and preneed backlogs.

• We recognized expenses of $5.0 million ($3.1 million after tax) or $.01 per diluted share associated with outstanding litigation matters.

• We recognized a foreign currency transactional loss of $2.8 million ($2.3 million after tax) or $.01 per diluted share associated with the payment of a contingent purchase obligation in Chile.

• Discontinued operations reported a pretax loss of $14.8 million, but net income after tax of $34.3 million or $.11 per diluted share. Included in this net after tax amount is a tax benefit of $49.2 million, which is expected to reduce cash taxes in future years.

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     Three Months Ended June 30, 2003:

• We incurred litigation expenses of $15.0 million ($9.4 million after tax) or $.03 per diluted share related to a decision in an arbitration matter.

• We recognized a net pretax loss on dispositions of $2.5 million ($1.5 million after tax). We also recognized other operating expenses of $1.7 million ($1.1 million after tax) and a loss on the early extinguishment of debt of $0.4 million ($0.3 million after tax) or less than $.01 per diluted share. These combined items reduced net income by $2.9 million or $.01 per diluted share.

• Discontinued operations contributed $1.6 million ($1.2 million after tax) or less than $.01 per diluted share.

Other Operating Income and Expenses

We are in the process of implementing new information systems in our funeral and cemetery locations related to both preneed and at need activities. Also related to our preneed funeral and cemetery activities, we adopted the new accounting interpretation FIN 46R as of March 31, 2004. Our adoption of FIN 46R resulted in the consolidation of our preneed funeral and cemetery merchandise and service trust assets and our cemetery perpetual care trust assets. In addition, we initiated projects in 2003 to reconcile all of the consolidated trust assets and corresponding preneed deferred revenues. As a result of these reconciliation projects, certain adjustments have been made to our trust assets, preneed deferred revenues and the underlying preneed backlog records that relate to prior years and are not material to our historical results of operations or financial condition and had no effect on our cash flows. Included in other operating income for the second quarter and first six months of 2004 is approximately $7 million related to these reconciliation projects. We expect to conclude these reconciliation projects by the time we file our 2004 Form 10-K. While the final amount of any resulting adjustment will not be known until these projects are complete, we do not expect any material adjustments to our results of operations, financial condition or cash flows to result from the conclusion of these projects.

North America Comparable Operating Results — Three Months Ended June 30, 2004 and 2003

The following table summarizes the North America comparable operating results for the first three months of 2004 and 2003. Comparable North America operations represented approximately 98% of consolidated revenues and gross profits during the second quarter of 2004. Comparable financial information excludes operations that have been divested, acquired or constructed during the period January 1, 2003 to June 30, 2004, and are meant to be reflective of “same store” results of operations.

	Three months ended
	June 30,
							Increase
	2004			2003			(Decrease)			Percentage
Funeral
Revenues	$	275.3		$	276.5		$	(1.2	)		(0.4	)%
Gross Profits	$	50.3		$	52.0		$	(1.7	)		(3.3	)%
Gross Margin		18.3	%		18.8	%
Funeral Services Performed		61,869			63,789			(1,920	)		(3.0	)%
Average Revenue Per Funeral Service	$	4,294		$	4,170		$	124			3.0	%
Cemetery
Revenues	$	144.3		$	150.2		$	(5.9	)		(3.9	)%
Gross Profits	$	21.8		$	25.1		$	(3.3	)		(13.1	)%
Gross Margin		15.1	%		16.7	%

     In millions, except funeral services performed and average revenue per funeral service.

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North America Comparable Funeral

Funeral revenues were relatively flat quarter over quarter. Following a 3.5% increase in funeral volume in the first quarter, the number of funeral services performed in the second quarter declined 3.0%. On a year-to-date basis, the number of funeral services performed is slightly ahead of the first six months of 2003 and within management’s expectations for the year.

     The decline in funeral volume in the second quarter was partially offset by an increase in the average revenue per funeral service of 3.0%. This increase in average revenue continued to be positively affected by the expanded product and services offerings included in our Dignity Memorial® funeral and cremation plans. The Dignity® plans are focused on adding value for the consumer instead of relying on price increases. Dignity Memorial® funeral and cremation plans offer consumers unique products and services aimed at providing assistance with administrative and legal issues, travel needs, emotional support, and memorialization when a death occurs. Because of these comprehensive value-added offerings, the packages generate significant incremental revenue per funeral service compared to non-Dignity sales. During the second quarter of 2004, 17.5% of the total funeral consumers served selected a Dignity Memorial® plan compared to 16.8% in the second quarter of 2003. We are continuing to utilize technology and contemporary marketing techniques to enhance our sales opportunities and strengthen the competitive advantage of our national brand, Dignity Memorial®.

     During the second quarter of 2004, our results were impacted by an increase in the rate of cremation. Of the total comparable funeral services performed in the second quarter of 2004, 40.0% were cremation services versus 39.2% in the same period of 2003. In spite of this increased mix of cremation services, we are pleased with our continued ability to consistently deliver meaningful growth in the overall average revenue per funeral service.

     Funeral gross profits decreased $1.7 million to $50.3 million and the gross margin percentage was 18.3% compared to 18.8%. Increases in selling costs and facility expenses were partially offset by reductions in overhead costs.

North America Comparable Cemetery

North America cemetery revenue declined $5.9 million or 3.9% in the second quarter of 2004, primarily due to a $5.2 million decline in cemetery trust fund income. Cemetery operating revenues increased slightly during the period. Increases in at need revenues helped to offset declines in recognized preneed revenues primarily associated with fewer completed cemetery development projects. Revenue related to the preneed sale of unconstructed cemetery property is deferred until it is constructed and a minimum of 10% of the sales price is collected from the customer. In 2003, there were unusually high levels of revenues associated with these property development projects as a result of completing projects from a backlog created in 1999 and 2000 when our cash resources were limited. In 2004, we expect more normal levels of revenues related to completed construction projects.

     Cemetery gross profits for the quarter declined $3.3 million and the gross margin percentage was 15.1% compared to 16.7% predominantly due to lower levels of trust income as mentioned above. The decline in trust fund income was partially offset by reductions in overhead costs.

General and Administrative Expenses

In the second quarter of 2004, general and administrative expenses declined $12.2 million to $24.0 million, predominantly associated with a decrease in litigation expenses and reduced system amortization costs. We recognized legal expenses of $15.0 million in the second quarter of 2003 related to a decision in an arbitration matter. In the second quarter of 2004, we recognized $5.0 million of expenses for outstanding litigation matters. Included in the second quarter of 2003 was $4.6 million of accelerated amortization expense that is not included in 2004. In 2002, we made the decision to implement new information systems and, therefore, accelerated the amortization of the old systems. These accelerated amortization costs ceased in the third quarter of 2003 when amortization of the new systems commenced. The declines in litigation expenses and system amortization costs were partially offset by an increase of

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$1.4 million in non-cash long-term incentive compensation expenses primarily related to the appreciation of the Company’s common stock in 2004.

     In addition to general and administrative expenses, there are two other components of overhead costs that are allocated to funeral and cemetery operations in North America: home office overhead and field overhead. These two overhead categories totaled $29.6 million in the second quarter of 2004 compared to $39.0 million in the same period of 2003 representing a decrease of $9.4 million or 24.1%. This decline in costs is a direct result of initiatives undertaken in 2003 to improve the management structure and to reduce our fixed costs.

Other Income and Expenses

In the second quarter of 2004, we recognized a net pretax gain of $0.7 million associated with dispositions compared to a net pretax loss of $2.5 million in 2003. A gain on the sale of our equity and debt holdings in the United Kingdom was offset by net losses associated with various dispositions in North America and a purchase price adjustment related to the joint venture of France. For further information regarding gains and impairment losses on dispositions see footnote fifteen to the consolidated financial statements in Item 1 of this Form 10-Q.

     Other operating income in the second quarter of 2004 was a net credit of $6.9 million for various adjustments made related to our trust assets and preneed backlog. These adjustments had no impact on cash flow and were a result of reconciling activities undertaken primarily due to the implementation of the preneed component of our new information systems and the adoption of FIN 46R.

     Interest expense was $2.8 million lower in the second quarter of 2004 compared to the second quarter of 2003 as we made substantial progress in reducing outstanding debt.

     Other income, net declined $2.5 million in the second quarter of 2004 compared to the previous period. This decrease is due to a $2.8 million foreign currency transactional loss recorded in 2004 associated with the payment of a contingent purchase obligation in Chile.

     The consolidated effective tax rate in the second quarter of 2004 was a benefit of approximately 53.0% which included non-cash tax benefits recognized primarily from the sale of our minority interest in the United Kingdom.

Results of Operations — Six Months Ended June 30, 2004 and 2003

In the following discussion of results of operations, certain prior year amounts have been reclassified to conform to the current period financial presentation with no effect on previously reported net income, financial condition or cash flows.

     In the six months ended June 30, 2004, total consolidated revenues decreased $144.7 million to $1,018.2 million primarily as a result of the joint venture of our funeral operations in France completed on March 11, 2004 which resulted in lower revenues of $148.4 million. Consolidated gross profits declined $23.1 million to $186.5 million in the first six months of 2004 compared to same period in 2003 as the joint venture of our French businesses resulted in a decrease of $23.0 million.

     Net income was $74.9 million or $.23 per diluted share in the first six months of 2004 compared to $59.4 million or $.19 per diluted share in the first six months of 2003. Net income in the first six months of 2004 included $8.1 million or $.02 per diluted share, related to our French business compared to $19.4 million or $.06 per diluted share in the first six months of 2003.

     Results for the six month periods ended June 30, 2004 and 2003 were affected by the following items:

     Six Months Ended June 30, 2004

• We recorded a charge of $48.1 million (including an income tax benefit of $21.3 million) or $.14 per diluted share for the cumulative effect of accounting changes related to the implementation of FIN 46R and changes in pension accounting. For additional information regarding these accounting changes, see note three to the consolidated financial statements in Item 1 of this Form 10-Q.

• We recognized a loss on the early extinguishment of debt of $16.8 million ($10.5 million after tax) or $.03 per diluted share primarily related to the successful tender offer of our notes due 2005 and the redemption of our convertible notes due 2008.

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• We recognized a net pretax gain on dispositions of $36.3 million ($58.5 million after tax including tax benefits realized) or $.17 per diluted share. For further information, see note fifteen to the consolidated financial statements in Item 1 of this Form 10-Q.

• We recognized other operating income of $6.9 million ($4.7 million after tax) or $.01 per diluted share as a result of various reconciling activities regarding our trust accounts and preneed backlogs.

• We recognized expenses of $40.0 million ($25.2 million after tax) or $.07 per diluted share associated with outstanding litigation matters.

• Discontinued operations reported a pretax loss of $13.9 million, but net income after tax of $35.1 million or $.10 per diluted share. This includes a non-cash benefit of $49.2 million related to the proposed sale of these businesses.

• We recognized a foreign currency transactional loss of $2.8 million ($2.3 million after tax) or $.01 per diluted share associated with the payment of a contingent purchase obligation in Chile.

• We recognized other income of $4.5 million ($2.7 million after tax) or $.01 per diluted share related to interest income on a note receivable from the United Kingdom company in which we owned a minority interest.

     Six Months Ended June 30, 2003

• Income in the first six months of 2003 included gains on disposition of $6.9 million ($4.3 million after tax) or $.02 per diluted share.

• We incurred litigation expenses of $15.0 million ($9.4 million after tax) or $.03 per diluted share related to a decision in an arbitration matter.

• We recognized other operating expenses of $1.1 million after tax or less than $.01 per diluted share related to the termination of a lease contract.

• We recognized a gain on the early extinguishment of debt of $2.9 million ($1.2 million after tax) or less than $.01 per diluted share.

• Discontinued operations contributed $1.3 million after tax or less than $.01 per diluted share.

Other Operating Income and Expenses

We are in the process of implementing new information systems in our funeral and cemetery locations related to both preneed and atneed activities. Also related to our preneed funeral and cemetery activities, we adopted the new accounting interpretation FIN 46R as of March 31, 2004. Our adoption of FIN 46R resulted in the consolidation of our preneed funeral and cemetery merchandise and service trust assets and our cemetery perpetual care trust assets. In addition, we initiated projects in 2003 to reconcile all of the consolidated trust assets and corresponding preneed deferred revenues. As a result of these reconciliation projects, certain adjustments have been made to our trust assets, preneed deferred revenues and the underlying preneed backlog records that relate to prior years and are not material to our historical results of operations or financial condition and had no effect on our cash flows. Included in other operating income for the second quarter and first six months of 2004 is approximately $7 million related to these reconciliation projects. We expect to conclude these reconciliation projects by the time we file our 2004 Form 10-K. While the final amount of any resulting adjustment will not be known until these projects are complete, we do not expect any material adjustments to our results of operations, financial condition or cash flows to result from the conclusion of these projects.

North America Comparable Operating Results — Six Months Ended June 30, 2004 and 2003

The following table summarizes the North America comparable operating results for the first six months of 2004 and 2003. Comparable North America operations represented approximately 85% of consolidated revenues and approximately 93% of consolidated gross profits during the first six months of 2004. Comparable financial information excludes operations that have been divested, acquired or constructed during the period January 1, 2003 to June 30, 2004, and are meant to be reflective of “same store” results of operations.

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	Six months ended
	June 30,						Increase
	2004			2003			(Decrease)			Percentage
Funeral
Revenues	$	578.7		$	568.8		$	9.9			1.7	%
Gross Profits	$	127.0		$	121.7		$	5.3			4.4	%
Gross Margin		21.9	%		21.4	%
Funeral Services Performed		132,347			131,946			401			0.3	%
Average Revenue Per Funeral Service	$	4,231			4,146		$	85			2.1	%
Cemetery
Revenues	$	287.1		$	283.0		$	4.1			1.4	%
Gross Profits	$	45.5		$	50.7		$	(5.2	)		(10.3	)%
Gross Margin		15.8	%		17.9	%

          In millions, except funeral services performed and average revenue per funeral service

North America Funeral

Comparable North America funeral revenues increased $9.9 million or 1.7% in the first six months of 2004 compared to 2003 as a result of an increase in the average revenue per funeral service. Average revenue per funeral service increased by 2.1% in the first half of 2004 compared to 2003. The number of funerals performed increased by 401 or 0.3%. Of the total comparable funeral services performed, approximately 39.5% were cremation services in the first six months of 2004 compared to 39.1% in 2003. Other funeral revenue declined by $3.0 million primarily as a result of decreased activity in Kenyon, our disaster assistance subsidiary.

     During the first six months of 2004, approximately 17% of the total funeral consumers served selected a Dignity Memorial® plan compared to 16% in the first six months of 2003. Dignity Memorial® funeral and cremation plans are designed to simplify the customer decision-making process and provide savings and value to consumers through unique products and services which have traditionally not been available through funeral service locations. In addition to improving customer satisfaction levels as measured by independent surveys, these packages also generate significant incremental revenue per funeral service compared to non-Dignity sales due to the comprehensive value-added offerings they provide.

     Funeral gross profits increased $5.3 million or 4.4% during the first half of 2004. The gross margin percentage improved to 21.9% versus 21.4% in the prior year period and is within our targeted gross margin range for the full year 2004 of 20% to 24%. This improvement in gross profits is primarily due to the increase in higher average revenue per funeral service performed.

North America Cemetery

Comparable North America cemetery revenue increased $4.1 million or 1.5% in the first six months of 2004. An increase of approximately $15.3 million associated with increases in atneed cemetery revenue due to higher levels of property sales, marker deliveries and service fees and was partially offset by a decrease of approximately $6.9 million related to recognized preneed cemetery revenue (revenues recognized from contracts that were previously prearranged ) as declines in marker deliveries and services fees were

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offset by increases in property sales. Also offsetting the increase in atneed revenues was a $4.3 million decrease in non-operating revenue, primarily trust fund earnings.

     Cemetery gross profits for the six months declined $5.2 million or 10.3%. The cemetery gross margin percentage of 15.8% was above the midpoint of our guidance range for 2004 of 13% to 17%. The decrease in gross profits compared to the first half of 2003 is primarily due to temporary increases in selling costs related to the new compensation structure for preneed sales counselors. Sales counselors can now receive a portion of sales compensation through a draw with the opportunity to earn a bonus if certain sales targets are achieved versus the historical compensation model that was based solely on commissions. We believe this new program will help us to recruit and retain a higher quality sales force over the longer term. During the initial phases of this program, we are incurring more fixed costs compared to historical periods as we recruit and train new salespeople. As the program matures, we believe that our selling costs will correlate more favorably with preneed sales production levels.

International Operations

On March 11, 2004, we completed a joint venture transaction of our funeral operations in France. In addition to maintaining a 25% share of the total equity capital of the newly formed entity, we received net cash proceeds of $287.9 million and a note receivable in the amount of EUR 10 million. As a result of the transaction, we recognized a pretax gain of $6.4 million. Revenues and gross profits from funeral operations in France were $127.3 million and $11.6 million, respectively, in the first half of 2004 and $275.6 million and $34.5 million, respectively, in the first half of 2003. For further information regarding the sale of France, including pro forma financial information, see our Form 8-K filed on March 24, 2004.

     During the second quarter of 2004, we began to actively market our businesses in Argentina and Uruguay for sale. We plan to have no continuing interest in these operations subsequent to a sale. As a result, these operations have been classified as discontinued.

General and Administrative Expenses

In the first six months of 2004, general and administrative expenses were $75.0 million. This included $40.0 million of litigation expenses. The proposed settlement of the securities class action lawsuit pending against the Company since January 1999 resulted in $35.0 million of litigation expenses, net of $30.0 million funded directly into escrow by our insurance carriers. The remaining expense of $5.0 million related to accruals for other outstanding litigation matters. The first six months of 2003 included $15.0 million of litigation expenses related to a decision in an arbitration matter. Also included in the first half of 2003 was $9.2 million of accelerated system amortization expense that is not included in 2004. In 2002, we made the decision to implement new information systems and, therefore, accelerated the amortization of our existing systems. These accelerated amortization costs ceased in the third quarter of 2003 when amortization of the new systems commenced. Excluding these net litigation expenses in both periods and the amortization in 2003, general and administrative expenses were $35.0 million in the first six months of 2004 compared to $33.5 million in the first half of 2003. This increase primarily results from increases in long term incentive compensation plan non-cash expenses of $2.4 million due to our stock appreciation in 2004.

     In addition to general and administrative expenses, there are two other components of overhead costs in North America: home office overhead and field overhead. These overhead costs are allocated to funeral and cemetery operations in North America. Home office and field overhead costs totaled $60.3 million in the first six months of 2004 compared to $76.5 million in the same period of 2003 representing a decrease of $16.2 million or 21.2%. This decline in costs is due to an improved management structure, and reduced expenses associated with various outsourcing programs and new information systems.

Other Income and Expenses

In the first six months of 2004, we recognized a net pretax gain of $29.7 million predominantly related to gains from the joint venture of our French funeral operations and the sale of our minority interest in the United Kingdom company. This gain was partially offset by net losses associated with the dispositions of funeral and cemetery businesses and excess cemetery property in North America.

     Interest expense continued to decline during the period reflecting the success we have had in reducing outstanding debt. Interest expense was $6.4 million lower in the first half of 2004 compared to the first half of 2003 and will continue to decline due to the

48

extinguishment of the Company’s 6.75% convertible subordinated notes due 2008 following the conversion and redemption in June 2004.

     Other income, net increased $2.8 million in the first half of 2004 compared to the previous period. The increase is primarily related to interest income from a note receivable from the United Kingdom Company.

     The consolidated effective tax rate in the first half of 2004 was a benefit of 10.8% compared to an expense of 36.3% in the first half of 2003 due to tax benefits realized from the joint venture of our business in France in March 2004 and the United Kingdom transactions in the second quarter.

Financial Condition, Liquidity and Capital Resources

Our primary financial objectives are to capitalize on our financial flexibility and to continue generating strong operating cash flows. We believe that we are financially sound and have liquidity to consider internal opportunities to deploy capital and strategic acquisitions at reasonable market values. With a new credit agreement, we can now also consider a dividend, share repurchase program or further reductions in debt. We have a goal of achieving specific ratings with the credit rating agencies. At June 30, 2004, our long-term debt was rated “BB-” by Standard and Poor’s and “B1” by Moody’s Investors Service. In July 2004, Standard and Poor’s raised our credit rating to our targeted BB stable rating reflecting our cumulative success in strengthening our financial condition by using operating cash flow, asset sales and equity to reduce debt and extend our debt maturities. Our targeted rating from Moody’s Investors Service is a “Ba2”. Our financial condition continues to improve as demonstrated by the following trend in our cash and debt balances:

	June 30,		December 31,
(In millions)	2004		2003		2002		2001
Cash and cash equivalents	$	340.9	$	239.4	$	200.6	$	29.3
Total debt		1,297.6		1,701.9		1,974.4		2,522.0
Total debt less cash and cash equivalents	$	956.7	$	1,462.5	$	1,773.8	$	2,492.7

     Total debt less cash and cash equivalents at June 30, 2004 was $956.7 million, representing the lowest levels in our company since 1992. Total debt has been reduced by over $1.2 billion or 49% since December 31, 2001. This reduction is a result of strong operating cash flows including the receipt of tax refunds of approximately $152 million and a successful asset divestiture and joint venture program that produced over $800 million of net cash proceeds.

     In the first six months of 2004, we continued to increase our cash balance while simultaneously reducing our total debt. Our cash balance grew by approximately $100 million while our total debt declined by over $400 million resulting in a net reduction of over $500 million in total debt less cash and cash equivalents during 2004. Along with our operating cash flows, we received $287.9 million in net cash proceeds from our joint venture of our France operations in March 2004 and collected $53.8 million in the aggregate during the second quarter from liquidation of our debt and equity holdings in our former United Kingdom affiliate. The conversion into common stock of our convertible bonds in June 2004 reduced total debt by $221.7 million in principal. Our debt also declined due to a $24 million reduction in capital lease obligations associated and divested with our French operations. Partially offsetting these items was $135 million in payments into escrow to settle certain litigation matters in Florida and to establish a fund for certain securities litigation matters. Our cash balance at June 30, 2004 does not reflect a $25 million receivable from our insurance carriers related to the settlement of the litigation matters in Florida (See note twelve to the consolidated financial statements in Item 1 of this Form 10-Q).

Cash Flow

We believe our ability to generate cash from operations to reinvest in our business is one of our fundamental financial strengths. The following table summarizes our cash flow results for the six months ended June 30, 2004 and 2003:

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	Six months ended
	June 30,
(In millions)	2004			2003
Cash provided by operating activities	$	132.8		$	243.7
Cash provided by (used for) investing activities	$	156.5		($	20.0	)
Cash used for financing activities	($	186.6	)	($	270.2	)

     Highlights from our cash flow results for the six months ended June 30, 2004 and 2003 are as follows:

     Operating Activities — Cash flows from operating activities declined by approximately $110.9 million primarily due to the receipt of a $94.5 million tax refund in 2003 and a $20.0 million voluntary cash contribution to the pension plan in 2004. In addition, net trust deposits for Florida preneed business in 2004 and comparatively low trade payable disbursements in 2003 were offset by reductions in interest payments and other 2004 working capital improvements in North America operations.

     As previously mentioned, we made a $20 million voluntary cash contribution to our frozen cash balance pension plan in March 2004. This plan is frozen with no more benefits accreting to participants except interest. In March 2004, we began making net trust deposits in Florida for our new preneed business as we discontinued the use of bonding as a financial assurance mechanism. Our net trust deposits in Florida were approximately $6.5 million during 2004 while zero Florida trust deposits were made in 2003 as we used surety bonding as our financial assurance mechanism on new business in that year. Cash interest payments declined by $9.6 million from $61.8 million in the first six months of 2004 compared to $71.4 million during the first half of 2003.

     Cash flows from operating activities excluding France were $114.5 million and $225.4 million for the six months ended June 30, 2004 and 2003, respectively. Even though we operated France for only two and half months during 2004, operating cash flows from France for the six months ended 2004 and 2003 were identical at $18.3 million. For the full year 2003, operating cash flows from France were approximately $33 million.

     Investing Activities — Cash flows from investing activities improved by $176.5 million primarily due to an increase in proceeds of $306.2 million from sales of international businesses and equity investments partially offset by $135.0 million in escrow deposits related to certain litigation matters and $15.6 million in reduced proceeds from our North America divestiture program.

     In March 2004, we completed the joint venture of our funeral operations in France. In addition to maintaining a 25% share of the total equity capital of the newly formed entity, we received net cash proceeds of approximately $287.9 million. Following a successful public offering transaction of our former United Kingdom affiliate during the second quarter of 2004, we liquidated our debt and equity holding in our former United Kingdom affiliate and collected $53.8 million in aggregate of which $49.2 million is reported as an investing activity. During the second quarter of 2003, we sold our remaining equity investment in our operations in Spain and received $26.0 million in proceeds.

     In March 2004, we deposited $100 million into escrow related to certain litigation matters in Florida. On April 20, 2004, we announced that the Company had entered into a memorandum of understanding representing a proposal to settle our securities class action lawsuit originally filed in 1999. The terms of the proposed settlement call for the Company to cause to be created a settlement fund totaling approximately $65 million in settlement of the claims. We deposited $35 million into escrow in May 2004, as the Company and its insurance carriers also entered into an agreement providing for the payment by the Company’s insurance carriers of $30 million towards this settlement. Restricted cash deposits in 2003 resulted from our decision to replace certain letters of credit with cash collateral.

     The joint venture of our operations in France in March 2004 resulted in a decrease of $8.5 million in capital expenditures during the first six months of 2004 compared to the same period of 2003. Capital expenditures by our France operations were $2.8 million during 2004 compared to $11.3 million during the six months ended June 30, 2003.

     Financing Activities — Cash used for financing activities declined by $83.6 million primarily due to significant early retirements during the first half of 2003 compared with debt restructuring in 2004. Along with scheduled maturities of $83.5 million during the six months ended June 30, 2003, we used $175.5 million in 2003 to purchase debt in the open market with funds collected during that period from tax refunds, proceeds from asset sales and cash flow from operations.

     During the second quarter of 2004, we executed a series of transactions to further strengthen our capital structure. In April 2004, we successfully completed a private offering of $250 million principal amount of 6.75% notes due 2016 and received net cash proceeds of approximately $243 million. Including the premium, $219.0 million of the net cash proceeds was applied to the early retirement of $208.7 million in principal of our 6% notes

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due 2005. Also in April 2004, as required by the terms of the agreement, we repaid the remaining $111.2 million of our 7.375% notes due 2004. Immediately following the June 22, 2004 conversion into common stock of approximately 71% of our outstanding 6.75% bonds due 2008, we exercised our option to redeem the remaining outstanding $91.1 million of the bonds for $94.6 million in cash, including premium. With these transactions in the second quarter of 2004, we have significantly extended our debt maturity schedule.

Liquidity

We believe we have sufficient cash and cash equivalents and a strong trend of operating cash flows. This liquidity affords us the opportunity to consider internal opportunities to deploy capital, strategic acquisitions at reasonable prices and other considerations of potential uses of cash including a dividend, share repurchase program or additional debt reductions. In August 2004, we initiated a share repurchase program for up to $100 million.

     As of June 30, 2004, we had a cash balance of approximately $340.9 million plus approximately $106 million of availability under our $185 million bank credit facility in place at that time. We have no cash borrowing under this credit facility, but we have issued approximately $79 million of letters of credit under the facility as of June 30, 2004. The maturity schedule for outstanding senior public notes due in the near and intermediate term is as follows:

	Outstanding at
(In millions)	June 30, 2004
8.375% senior notes due December 2004	$	50.8
6.0% senior notes due December 2005	$	63.8
7.2% senior notes due June 2006	$	150.0

     Our cash and cash equivalents balance increased to $340.9 million at June 30, 2004 from $239.4 million at December 31, 2003. We currently have less than $145 million in debt maturing during the remainder of 2004 and 2005.

     In early August 2004, we executed a new bank credit agreement, which matures in August 2007. This new bank credit agreement has a total lending commitment of $200 million, including a sublimit of $175 million for letters of credit. In addition, this new agreement increases our acquisition capacity and permits the payment of dividends and the repurchase of shares, subject to financial covenants and other conditions.

     During the third quarter of 2004 to date, we completed the following disbursements. In July 2004, we paid $51.8 million to satisfy a contingent purchase obligation associated with the 1998 acquisition of our businesses in Chile. Also in 2004, we paid $6.3 million as a purchase price adjustment related to our March 2004 joint venture of French business, which brings our cash proceeds from such joint venture to an approximate $281.6 million. Also in July 2004, we repaid the entire $11.4 million of life insurance policy loans related to our SERP and Senior retirement SERP program. For additional information on our pension plans, see note ten to the consolidated financial statements in Item 1 of this Form 10‑Q.

     We are continuing our program to divest of our international investments and in June 2004 management committed to a plan to divest of our businesses in Argentina and Uruguay. In addition, our improved financial condition and credit profile is allowing us to receive cash collateral back related to various commercial commitments. As of June 30, 2004, we had deposited cash collateral of $84.3 million related to these commitments. During July and early August 2004, we have already received approximately $27 million of collateral back and expect to receive additional amounts back during the balance of the year.

     In addition to making significant reductions in debt balances, our focus on our core operations has led to strong cash flows from operations. We believe that our increasing trend in operating cash flows not only gives us adequate means to meet the near and intermediate term debt obligations but also allows us to explore other potential uses of cash. Excluding a tax refund of $94.5 million and disbursements of $27.1 million (net of insurance recoveries) related to the resolution of certain litigation matters in 2003, cash flows from operations for the full year 2003 were $306.7 million. This trend of strong operating cash flows continues in 2004 with

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operating cash flows of $132.8 million for the first half of 2004. Also, we are expecting our cash interest payments to continue to decline during the second half of 2004 due to the June 22, 2004 conversion and redemption of the $312.7 million in remaining principal of our 6.75% bonds due 2008. The annual interest expense on these bonds was $21 million resulting in an expected $10.5 million in interest savings during the balance of 2004. Furthermore, we do not expect to be a cash taxpayer through 2006. Based upon our year-to-date performance we believe we will be within our guidance range for operating cash flows for the full year 2004 of $270 million to $310 million.

     We expect to generate cash flows in the next several years above our operating and financing needs. We believe that this financial flexibility coupled with our liquidity now allows us to consider investments or capital structure related transactions that will enhance shareholder value. We believe that our initial deployment of capital should be for internal opportunities such as construction of new funeral homes and development of high-end cemetery inventory. Secondarily, we expect to make acquisitions if such acquisitions are available at reasonable market prices. Finally, we could consider a dividend, share repurchase or additional debt reductions depending on acceptable market conditions. On August 16, 2004, we announced a share repurchase program authorizing the investment of up to $100 million to repurchase our common stock. We plan, subject to market conditions and normal trading restrictions, to make purchases from time to time in the open market or through privately negotiated transactions.

Preneed Funeral and Cemetery Activities

In addition to selling our products and services to client families at the time of need, we believe an active funeral and cemetery preneed program, which complements our framework for long-term growth, can increase future market share in our service markets. Preneed arrangement is a means through which a customer contractually agrees to the terms of a funeral service, cremation service, and/or cemetery burial interment right, merchandise or cemetery service to be performed or provided in the future (that is, in advance of when needed or “preneed”).

Preneed Funeral Activities

Since preneed funeral services or merchandise will not be provided until some time in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed funeral contracts be protected for the benefit of the customer pursuant to applicable law. Some or all of the funds may be required to be placed into trust accounts, or a surety bond may be posted in lieu of trusting (collectively “trust funded preneed funeral contracts”). Alternatively, where allowed, customers may choose to purchase a life insurance or annuity policy from third party insurance companies to fund their preneed funeral (“insurance funded preneed funeral contract”). Only certain of these customer funding options may be applicable in any given market we serve.

     The contract amounts associated with unfulfilled insurance funded preneed funeral contracts are not reflected on our consolidated balance sheet. However, when customers enter into a trust funded preneed contract, we record an asset, Preneed funeral receivables and trust investments and a corresponding obligation, Deferred preneed funeral revenues in our consolidated balance sheet for the contract price. The funeral revenues are deferred and will not be recognized in the consolidated statement of operations until the funeral services are performed or the merchandise is delivered. When the Company receives payments on a trust funded preneed funeral contract from the customer, the Company deposits the amount required by law into the trust and reclasses the corresponding amount from Deferred preneed funeral revenues into Non-controlling interest in funeral and cemetery trusts. While some customers may pay for their contract in a single payment, most preneed funerals are sold on an installment basis over a period of one to seven years. On these installment contracts, we receive, on average, a down payment at the time of sale of approximately 11%. Historically, the majority of our preneed funeral trust contracts have not included a finance charge.

     Trust Funded Preneed Funeral Contracts: Where the applicable law requires that all or a portion of the funds collected from preneed funeral contracts be placed in trust accounts, the funds deposited into trust are invested by the independent trustees in accordance with the investment guidelines established by statute or, where the prudent investor rule is applicable, the guidelines established by our Investment Committee. The trustees utilize professional investment advisors to select and monitor the money managers that make the individual investment decisions in accordance with the guidelines. We retain any funds above the amounts required to be deposited into trust accounts and use them for working capital purposes, generally to offset the selling and administrative costs of the preneed programs. Applicable law governs the timing of the required deposits into the trust accounts, which

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generally ranges from five to 45 days after receipt of the funds from the customer.

     The trust investments are expected to generate earnings sufficient to offset the inflationary costs of providing the preneed funeral services and merchandise in the future for the prices that were guaranteed at the time of sale. As a result of the adoption of FIN 46R, the preneed funeral trust assets have been consolidated and are recorded in our consolidated balance sheet at market value in accordance with SFAS 115. Investment earnings on trust assets are generally accumulated in the trust and distributed as each preneed contract is either utilized upon the death of, or cancelled by, the customer. However, in certain states, the trusts are allowed to distribute a portion of the investment earnings to us prior to that date. See the Critical Accounting Policies and Accounting Changes of Item 2 of this Form 10-Q for additional information regarding the implementation of FIN 46R.

     Direct selling costs incurred pursuant to the sales of trust funded preneed funeral contracts are deferred and included in Deferred charges and other assets in the consolidated balance sheet. The deferred selling costs are expensed in proportion to the corresponding trust funded preneed funeral contract revenues when recognized. Other selling costs associated with the sales and marketing of preneed funeral contracts (e.g., lead procurements costs, brochures and marketing materials, advertising and administrative costs) are expensed as incurred. An allowance for cancellation is recorded for trust funded preneed funeral contract deferred selling costs based on historical contract cancellation experience.

     If a customer cancels the trust funded preneed funeral contract, applicable law determines the amount of the refund owed to the customer, including in certain situations the amount of the attributed investment earnings. Upon cancellation, we receive the amount of principal deposited to trust and previously undistributed net investment earnings and pay the customer the required refund. We retain any excess funds and recognize the amounts as funeral revenues in our consolidated statement of operations. In certain jurisdictions, we may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust. As a result, when realized or unrealized losses of a trust result in trust funded preneed funeral contracts being under-funded, we will assess those contracts to determine whether a loss provision should be recorded. We have not been required to recognize any loss amounts at June 30, 2004 and December 31, 2003.

     The cash flow activity over the life of a trust funded preneed funeral contract from the date of sale to its death maturity or cancellation is captured in the line item Net effect of preneed funeral production and maturities in the consolidated statement of cash flows. While the contract is outstanding, cash flow is provided by the amount retained from funds collected from the customer and any distributed investment earnings. This is reduced by the payment of trust funded preneed funeral deferred selling costs. The effect of amortizing trust funded preneed funeral deferred selling costs is reflected in Depreciation and amortization in the consolidated statement of cash flows. At the time of death maturity, we receive the principal and undistributed investment earnings from the trust and any remaining receivable due from the customer. This cash flow at the time of service is generally less than the revenue recognized, thus creating a negative effect on working capital cash flow from operating activities.

     In certain situations pursuant to applicable laws, we can post a surety bond as financial assurance for an amount that would otherwise be required to be deposited in trust accounts for trust funded preneed funeral contracts. See the Financial Assurances section within this Financial Condition, Liquidity and Capital Resources section for further details on our practice of posting such surety bonds. We believe the deferred revenues associated with preneed funeral bonded contracts exceed the expected cost of meeting our obligations to provide funeral services and merchandise for the outstanding preneed funeral bonded contracts, and our future operating cash flows will be sufficient to fulfill these contracts without use of the surety bonds.

     If a customer cancels the trust funded preneed funeral contract that has been bonded prior to death maturity, applicable law determines the amount of the refund owed to the customer. Because the funds have not been held in trust, there are no earnings to be refunded to the customer or us. We pay the customer refund out of our operating funds, which reduces working capital cash flow from operating activities.

     The cash flow activity over the life of a trust funded preneed funeral contract that has been bonded from the date of sale to its death maturity or cancellation is captured in the line item Net effect of preneed funeral production and maturities in the consolidated statement of cash flows. The payments received from our customers for their trust funded preneed funeral contracts that have been bonded are a source of working capital cash flow from operating activities until the contracts mature. This is reduced by the payment of deferred selling costs, the premiums to the surety companies for the bond coverage, and refunds on customer cancellations of contracts. When a trust funded preneed funeral contract that has been bonded matures upon the death of the beneficiary, there is no

53

additional cash flow to us unless the customer owed an outstanding balance, thus creating a negative effect on the cash flow from operating activities.

     Insurance Funded Preneed Funeral Contracts: Where permitted, customers arrange their funeral contract by purchasing a life insurance or annuity policy from third party insurance companies, for which we earn a commission for being the general agent for the insurance company. The policy amount of the insurance contract between the customer and the third party insurance company generally equals the amount of the preneed funeral contract. However, we do not reflect the unfulfilled insurance funded preneed funeral contract amounts in our consolidated balance sheet.

     The third party insurance company collects funds related to the insurance contract directly from the customer. The life insurance contracts include increasing death benefit provisions, which are expected to offset the inflationary costs of providing the preneed funeral services and merchandise in the future for the prices that were guaranteed at the time of the preneed sale. The customer/policy holder assigns the policy benefits to our funeral home to pay for the preneed funeral contract at the time of need. Approximately 70% of our 2004 North America preneed funeral production is insurance funded preneed funeral contracts.

     The commission we earn for being the general agent on behalf of the third party insurance companies is based on a percentage per contract sold. These general agency (GA) revenues are recognized as funeral revenues when the insurance purchase transaction between the customer and third party insurance provider is completed. Direct selling costs incurred pursuant to the sale of insurance funded preneed funeral contracts are expensed as incurred.

     Additionally, we may receive cash overrides based on achieving certain dollar volume targets of life insurance policies sold as a result of marketing agreements entered into in connection with the sale of our insurance subsidiaries in 2000. These overrides are recorded in Other income, net in the consolidated statement of operations.

     If a customer cancels the insurance funded preneed funeral contract prior to death maturity, the insurance company pays the cash surrender value under the insurance policy directly to the customer. If the contract was outstanding for less than one year, the insurance company charges back the GA revenues and overrides we received on the contract. An allowance for these chargebacks is included in the consolidated balance sheet based on our historical chargeback experience.

     The cash flow activity over the life of an insurance funded preneed funeral contract from the date of sale to its death maturity or cancellation is captured in the consolidated statement of cash flows as cash flows from operating activities within our funeral segment. While the unfulfilled insurance funded preneed funeral contracts are not included in the consolidated balance sheet, they are included in funeral trade accounts receivable and funeral revenues when the funeral service is performed. Proceeds from the life insurance policies are used to satisfy the receivables due. The cash flow activity associated with these contracts generally occurs at the time of sale, where the GA revenues received net of the direct selling costs provide a net source of cash flow, and at death maturity, where the insurance proceeds (including increasing death benefit) less the funds used to provide the funeral goods and services provide a net source of cash flow. If the cancellation occurs within the one year following the date of sale, our cash flow is reduced by the charge-back of GA revenues and overrides.

     The table below details the North America results of trust and insurance funded preneed funeral production for the six months ended June 30, 2004 and 2003, the related deferred selling costs incurred to obtain the trust funded preneed arrangements and the net selling activity associated with insurance funded preneed arrangements included in our consolidated statement of operations. Additionally, the table reflects revenues and previously deferred trust funded preneed funeral contract selling costs recognized in the consolidated statement of operations associated with death maturities of preneed funeral contracts for the six months ended June 30, 2004 and 2003.

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	North America
	Funeral
	Six months ended
	June 30,
(In millions)	2004		2003
Preneed Production:
Trust	$	57.4	$	50.3
Insurance (1)		132.1		123.8
Total	$	189.5	$	174.1
Trust funded preneed funeral deferred selling costs	$	8.3	$	6.8
Insurance funded preneed funeral selling activity:
GA revenue	$	15.9	$	15.9
Direct expenses		13.6		11.8
Net activity	$	2.3	$	4.1
Death Maturity:
Previous preneed production included in current period revenues:
Trust	$	66.6	$	71.0
Insurance		92.8		101.1
	$	159.4	$	172.1
Amortization/recognition of trust funded preneed funeral deferred selling costs in current period	$	4.8	$	4.5

(1) Amounts are not included in the consolidated balance sheet.

     The following table reflects the North America backlog of trust funded deferred preneed funeral contract revenues (including amounts related to Non-controlling interest in funeral and cemetery trusts) at June 30, 2004 and December 31, 2003. Additionally, we have reflected the North American backlog of unfulfilled insurance funded contracts (not included in our consolidated balance sheet) and total North American backlog of preneed funeral contract revenues at June 30, 2004 and December 31, 2003. The backlog amounts presented are reduced by an amount that we believe will cancel before maturity. The preneed funeral deferred selling costs associated with trust funded contracts (net of an estimated allowance for cancellation) are included with preneed cemetery deferred selling costs as a component of Deferred charges and other assets.

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	North America
	Funeral
(In millions)	2004		2003
Backlog of trust funded deferred preneed funeral revenues (1)	$	1,443.6	$	1,501.6
Backlog of insurance funded preneed funeral revenues (2)	$	2,075.7	$	2,018.4
Total backlog of preneed funeral revenues (total of (1) and (2))	$	3,519.3	$	3,520.0
Deferred selling costs associated with trust funded deferred preneed funeral revenues	$	97.3	$	95.4

(1) Includes amounts reflected as Non-controlling interest in funeral and cemetery trusts in the consolidated balance sheet, net of estimated cancellation reserve. Excludes unrealized gains/losses.

(2) Insurance funded preneed funeral contracts are not included in the consolidated balance sheet.

Preneed Cemetery Activities

When purchasing cemetery property interment rights, merchandise, and services on a preneed basis, approximately 30% of our consumers choose to pay 100% of the contract at the time of sale. The remaining customers choose to pay for their contracts on an installment basis generally over a period of one to seven years. On these installment contracts, we receive an average down payment at the time of sale of approximately 14%. Historically, the installment contracts have included a finance charge ranging from 3.5% to 15.7% depending on the date sold, the payment period selected, state laws and the payment method (i.e., monthly statement billing or automated bank draft). Unlike trust funded preneed funeral contracts, where the entire purchase price is deferred and the revenue is recognized as one event at the time of death maturity, the revenues associated with a preneed cemetery contract can be recognized as different contract events occur. Preneed sales of cemetery interment rights (cemetery burial property) are recognized when a minimum of 10% of the sales price has been collected and the property has been constructed or is available for interment. With the customer’s direction, which is generally obtained at the time of sale, we can choose to order, store, and transfer title to the customer of their personalized marker merchandise. Upon the earlier of vendor storage of these items or delivery in our cemetery, we recognize the associated revenues and record the cost of sale. For services, personalized marker merchandise where the customer chooses not to elect vendor storage or early delivery to our cemetery, and non-personalized merchandise (such as vaults), we defer the revenues until the services are performed and the merchandise is delivered.

     Because the services or merchandise will not be provided until some time in the future, all or a portion of the proceeds from the sale of preneed cemetery merchandise and services may be required by law to be paid into merchandise and services trusts until the merchandise is delivered or the service is provided. As with trust funded preneed funeral contracts, the funds deposited into trust are invested by the independent trustees in accordance with the investment guidelines established by statute or, where the prudent investor rule is applicable, the guidelines as established by our Investment Committee. The trustees utilize professional investment advisors to select and monitor the money managers that make the investment decisions in accordance with the guidelines. We retain any funds above the amounts required to be deposited into trust accounts and use them for working capital purposes, generally to offset the selling and administrative costs of the preneed programs. Applicable law governs the timing of the required deposits into the trust accounts, which

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generally ranges from five to 45 days after receipt of the funds from the customer. In certain situations pursuant to applicable laws, we post a surety bond as financial assurance for a certain amount of the preneed cemetery contract in lieu of placing funds into trust accounts. See the Financial Assurances section within this Financial Condition, Liquidity and Capital Resources section for further details on our practice of posting such surety bonds.

     The trust investments are expected to generate earnings sufficient to offset the inflationary costs of providing the preneed cemetery services and merchandise in the future for the prices that were guaranteed at the time of sale. As a result of the adoption of FIN 46R, the preneed cemetery trust investments have been consolidated in our balance sheet and are recorded at market value in accordance with SFAS 115. Investment earnings on trust assets are generally accumulated in the trust and distributed as each preneed contract item is delivered or cancelled. However, in certain states, the trustees are allowed to distribute a portion of the investment earnings to us before the preneed cemetery service or merchandise item is delivered (“distributable states”). Until delivered or cancelled, any investment earnings are attributed to the individual contract items. Recognition of the net investment earnings is independent of the timing of the receipt of the related cash flows, but generally will be the same in states that are not distributable states.

     Direct selling costs incurred pursuant to the sales of preneed cemetery contracts are deferred and included in Deferred charges and other assets in the consolidated balance sheet. The deferred selling costs are expensed in proportion to the corresponding revenues when recognized. Other selling costs associated with the sales and marketing of preneed cemetery contracts (e.g., lead procurements costs, brochures and marketing materials, advertising and administrative costs) are expensed as incurred. An allowance for cancellation is recorded for cemetery deferred selling costs based on historical contract cancellation experience.

     If a preneed cemetery contract is cancelled prior to delivery, applicable law determines the amount of the refund owed to the customer, if any, including the amount of the attributed investment earnings. Upon cancellation, we receive the amount of principal deposited to trust and previously undistributed investment earnings and, where required, issue a refund to the customer. We retain any excess funds and recognize the attributed investment earnings (net of any investment earnings payable to the customer) in our consolidated statement of operations. Based on our historical experience, we have included an allowance for cancellation for preneed cemetery contracts in Preneed cemetery receivables and trust investments and Deferred preneed cemetery revenues in our consolidated balance sheet.

     As the preneed cemetery contract merchandise and service items for which we were required to deposit funds to trust are delivered and recognized as revenues, we receive the principal and previously undistributed investment earnings from the trust. There is generally no remaining receivable due from the customer, as our policy is to deliver preneed cemetery merchandise and service items only upon payment of the contract balance in full. This cash flow at delivery is generally less than the revenue recognized, thus creating a negative effect on working capital cash flow from operating activities, especially if we posted a surety bond in lieu of trusting for the preneed cemetery contract merchandise and service items, as there are no funds in trust available for withdrawal.

     The cash flow activity from the date of sale of a preneed cemetery contract (origination) to the date of the recognition of the deferred revenue upon its delivery or cancellation (maturity) is reported in the Net effect of cemetery production and deliveries line item in the consolidated statement of cash flows. Net effect of preneed cemetery production and deliveries is affected by cash flows provided by the amount retained from funds collected from the customer and distributed trust earnings, reduced by the use of funds for the payment of deferred selling costs when the preneed cemetery contracts are originated. The amortization of the cemetery deferred selling costs is included in Depreciation and amortization in the consolidated statement of cash flows.

     The table below details the North America results of total cemetery sales production and the amounts that have been deferred for the six months ended June 30, 2004 and 2003 and the related deferred selling costs incurred to obtain the contract items. Additionally, the table reflects previously deferred revenues and previously deferred selling costs recognized in the consolidated statements of operations associated with deliveries/services of cemetery contract items for the six months ended June 30, 2004 and 2003.

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	North America
	Cemetery
	Six months ended
	June 30,
(In millions)	2004			2003
Deferral:
Total preneed cemetery production	$	174.1		$	174.3
Total atneed cemetery production		100.0			80.6
Total cemetery sales production		274.1			254.9
Less: Preneed property revenue recognized at date of sale (constructed cemetery interment rights where down payment was at least 10% of the sales price)		(60.3	)		(54.3	)
Less: Preneed property revenue accounted for as deposits held (cemetery interment rights where the down payment was less than 10%)		(21.0	)		(18.1	)
Less: Atneed property, merchandise and service revenue recognized at time of sale		(71.7	)		(66.6	)
Deferred preneed cemetery revenues	$	121.1		$	115.9
Deferred selling costs	$	23.7		$	22.9
Recognition:
Previously deferred revenue included in current period revenues	$	105.8		$	108.9
Amortization/recognition of deferred selling costs in current period	$	18.1		$	18.8

     The following table reflects the total North America backlog of Deferred cemetery contract revenues (including amounts related to Non-controlling interests in funeral and cemetery trusts) and the related preneed cemetery deferred selling costs included in our consolidated balance sheet at June 30, 2004 and December 31, 2003. The backlog amount presented is reduced by an amount that we believe will cancel before maturity. The preneed cemetery deferred selling costs (net of an estimated allowance for cancellation) are included with preneed funeral deferred selling costs as a component of Deferred charges and other assets.

	North America
	cemetery
(In millions)	2004		2003
Backlog of deferred cemetery revenues (1)	$	1,635.4	$	1,574.2
Deferred selling costs	$	212.8	$	204.9

(1) Includes amounts reflected as Non-controlling interest in funeral and cemetery trusts in the consolidated balance sheet, except for unrealized gains or losses. Additionally, upon implementation of FIN 46R as of March 31, 2004, the Company recorded an increase of $43.5 million to Deferred preneed cemetery revenues in connection with the

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consolidation of certain cemeteries managed but not owned by the Company.

Financial Assurances

In support of operations, we have entered into arrangements with certain surety companies whereby such companies agree to issue surety bonds on our behalf 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 our preneed funeral and cemetery sales activities. The underlying obligations these surety bonds assure are recorded on the consolidated balance sheet as Deferred preneed funeral revenues and Deferred preneed cemetery revenues. The breakdown of surety bonds between funeral and cemetery preneed arrangements, as well as surety bonds for other activities, is as follows:

	June 30,		December 31,
(In millions)	2004		2003
Preneed funeral	$	142.8	$	125.6
Preneed cemetery:
Merchandise and services		183.8		179.6
Preconstruction		11.2		18.1
Bonds supporting preneed funeral and cemetery obligations		337.8		323.3
Bonds supporting preneed business permits		4.8		4.8
Other bonds		6.8		4.7
Total surety bonds outstanding	$	349.4	$	332.8

     When selling preneed funeral and cemetery contracts, we intend to post surety bonds where allowed by applicable law, except as noted below for Florida. We post the surety bonds in lieu of trusting a certain amount of funds received from the customer. The amount of the bond posted is generally determined by the total amount of the preneed contract that would otherwise be required to be trusted, in accordance with applicable state law. For the six months ended June 30, 2004 and 2003, we had $19.7 million and $29.7 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 until maturity of the underlying preneed contracts, unless we are given prior notice of cancellation. 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 was to cancel the surety bond, we are required to obtain replacement surety assurance from another surety company or fund a trust for an amount generally less than the posted bond amount. Management does not expect it will be required to fund material future amounts related to these surety bonds because of lack of surety capacity.

     The applicable Florida law that allows posting of surety bonds for preneed contracts expires December 31, 2004; however, it allows for preneed contracts entered into prior to December 31, 2004 to continue to be bonded for the remaining life of those contracts. Of the total bonding proceeds we received for the six months ended June 30, 2004 and 2003, approximately $13.6 million and $22.9 million, respectively, were attributable to the state of Florida. On February 1, 2004, we elected to begin trusting as a financial assurance mechanism in Florida, rather than surety bonding, on new Florida business. Our net trust deposits attributable to these five months of new Florida business were $6.5 million. No trust deposits were made in 2003 in Florida as we used surety bonding as our financial assurance mechanism on new business in that year.

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 we believe are reasonable; however, many important factors could cause our actual results in

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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, us. Important factors, which could cause actual results to differ materially from those in forward-looking statements include, among others, the following:

• 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 us, particularly, but not limited to, levels of trust fund income, interest expense, pension expense and negative currency translation effects.

• The outcomes of pending lawsuits and proceedings against us involving alleged violations of securities laws and the possibility that insurance coverage is deemed not to apply to these matters or that an insurance carrier is unable to pay any covered amounts to us.

• Our ability to consummate the previously disclosed proposed settlement of our Consolidated Lawsuit (as defined within our Form 10-Q) involving allegations of violations of federal securities laws, which is subject to court approval following notice to members of the class, an opportunity for class members to object or opt out, and other conditions.

• Our ability to consummate the settlement of lawsuits in Florida as described in the agreement in principle with respect thereto, and the possibility that insurance coverage is deemed not to apply to these matters or that an insurance carrier is unable to pay any covered amounts to us.

• Amounts payable by us with respect to our outstanding legal matters exceeding reserves established by us.

• Our ability to successfully implement our strategic plan related to producing operating improvements, strong cash flows and further deleveraging.

• Our ability to successfully implement our plan to reduce costs and increase cash flows associated with significant changes being made to our organization structure, process and quality of our sales efforts.

• Changes to net income as a result of our ongoing reconciliation processes regarding our trust assets and preneed backlogs.

• Changes in consumer demand and/or pricing for our products and services due to several factors, such as change in local number of deaths, cremation rates, competitive pressures and local economic conditions.

• Changes in domestic and international political and/or regulatory environments in which we operate, including potential changes in tax, accounting and trusting policies.

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

• Our ability to successfully complete our ongoing process improvement and system implementation projects, including our replacement of our North America point-of-sale information technology systems.

• Our ability to successfully access surety and insurance markets at a reasonable cost.

• Our ability to successfully exploit our substantial purchasing power with certain of our vendors.

• The outcome of a pending Internal Revenue Service audit and future tax deductions resulting from potential asset sales.

For further information on these and other risks and uncertainties, see our Securities and Exchange Commission filings, including our 2003 Annual Report on Form 10-K. Copies of this document as well as other SEC filings can be obtained from our website at www.sci-corp.com. We assume no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by us, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For information regarding our exposure to certain market risks, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk in our Form 10-K for the year ended December 31, 2003. Approximately $315.9 million, or 21%, of our net assets at December 31, 2003, are denominated in Euros related to our French operations. At June 30, 2004, less than 1% of our net assets related to our equity investment in France after consummation of a joint venture transaction. There have been no other material changes to the disclosure on this matter made in such Form 10-K.

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     We occasionally use derivative instruments, primarily in the form of forward exchange contracts, to hedge our net investment in foreign assets and for other hedging activities. We generally do not participate in derivative transactions that are leveraged or considered speculative in nature. During the first quarter 2004, we executed certain forward exchange contracts as hedges of our net foreign investment in our France operations and related to our expected proceeds from the sale of a portion of our equity interest in and the prepayment of a note receivable from a United Kingdom company.

     At June 30, 2004, the above derivative instruments had expired with the sale of France and the receipt of the proceeds from the United Kingdom. We were not a party to any derivative transactions at June 30, 2004.

Item 4. Controls and Procedures

As required by Rules 13a-15 and 15d-15 under the Securities Act of 1934, as amended (the “Exchange Act”), Robert L. Waltrip, the Company’s Chief Executive Officer, and Jeffrey E. Curtiss, the Company’s Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the Company’s second fiscal quarter of 2004 (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.

     Management has determined there was a deficiency in the Company’s internal controls and procedures as of December 31, 2003. This deficiency related to revenue recognition transactions specifically associated with the timely recording of the delivery and performance of cemetery goods and services sold on a preneed basis. The Company has improved its controls and procedures with respect to these matters since the adoption of SAB 101, effective January 1, 2000, and continues to enhance these controls and procedures.

     Additionally, management has determined there were significant deficiencies in the Company’s internal controls and procedures as of June 30, 2004, related to our preneed funeral and cemetery activities. The identification of these significant deficiencies resulted from ongoing reconciliation projects initiated to reconcile the Company’s preneed backlog records, consolidated trust fund assets and corresponding preneed deferred revenues. The projects have indicated the need to adjust such preneed items for additional contract cancellations and maturities. The Company is implementing improvements to its controls and procedures with respect to its preneed funeral and cemetery activities and continues to enhance such controls and procedures. Most notably, the Company is in the process of implementing new point-of-sale information systems that contain enhanced controls and procedures related to both preneed and atneed activities in its funeral and cemetery locations. The Company also expects to conclude the reconciliation projects described above by the time it files its 2004 Form 10-K.

     Additionally, the Public Company Accounting Oversight Board recently adopted stringent standards governing management’s required evaluation of its internal controls over financial reporting and the independent auditors’ review of those controls and management’s evaluation thereof. The items referenced in the preceding paragraphs, if left unremediated, could preclude the independent auditors from delivering an unqualified opinion on internal controls under Section 404 of Sarbanes-Oxley.

Change in Internal Controls

There were no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2004, that have materially affected or are reasonably likely to materially affect its internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

On May 13, 2004, the Company issued 9,798 shares of common stock (or deferred common stock equivalents) to each of eleven non-employee directors pursuant to the Director Fee Plan. The Company did not receive any monetary consideration for the issuances.

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These issuances were unregistered because they did not constitute a “sale” within the meaning of Section 2(3) of the Securities Act of 1933, as amended.

     In June 2004, holders of $221.6 million of the Company’s 6.75% convertible subordinated notes due 2008 converted their notes into an aggregate of 32 million shares of common stock pursuant to the terms of the notes. The Company paid cash in lieu of fractional shares. Holders of record on June 7, 2004 received accrued interest of $33.75 per $1,000 principal amount of notes. The shares of common stock issued upon conversion of the notes constituted exempt securities under Section 3(a)(9) of the Securities Act of 1933, as amended. The Company did not receive any cash proceeds upon conversion.

     In June 2004, the Company redeemed $91.1 million of its 6.75% convertible subordinated notes due 2008. The redemption was made pursuant to the terms of the notes. The Company paid 103.86% per $1,000 principal amount of notes. Holders of record on June 7, 2004 received accrued interest of $33.75 per $1,000 principal amount of notes.

	Issuer purchases of equity securities
	(a)			(b)			(c)		(d)
									Maximum number (or
							Total number of		approximate dollar
							shares (or units)		value) of shares
							purchased as part		(or units) that may
	Total number of						of publicly		yet be purchased
	shares			Average price paid			announced plans or		under the plans or
Period	(or units) purchased			per share (or unit)			programs		programs
April 1, 2004 – April 30, 2004		—			—			—		—
May 1, 2004 – May 31, 2004		—			—			—		—
June 1, 2004 – June 30, 2004		91,061	(1)	$	1,038.60	(2)		—		—

⁽¹⁾  Relates to the redemption of 6.75% convertible subordinated notes due 2008

⁽²⁾  Price per $1,000 principal amount of 6.75% convertible subordinated notes due 2008

Item 4. Submission of Matters to a Vote of Security Holders

On May 13, 2004, the Company held its annual meeting of shareholders and elected six directors. The shares voting on the director nominees were cast as follows:

			Abstentions or
Nominee	Votes for		votes withheld
Alan R. Buckwalter, III		272,256,733		8,054,896
S. Malcolm Gillis		273,342,262		6,969,367
B. D. Hunter		271,253,623		9,058,006
Victor L. Lund		269,224,559		11,087,070
John W. Mecom, Jr.		272,704,639		7,606,990
Thomas L. Ryan		269,222,862		11,088,767

     In addition, the shareholders approved the selection of PricewaterhouseCoopers LLP as the Company’s independent accountants for 2004. The shares voting were cast as follows:

			Abstentions or		Broker
Votes for	Votes against		votes withheld		non-votes
272,075,003		7,828,982		407,644		0

     The shareholders also approved a proposal to amend and re-approve the Company’s Amended 1996 Incentive Plan, as follows:

			Abstentions or		Broker
Votes for	Votes against		votes withheld		non-votes
176,357,020		40,775,670		1,530,018		61,648,921

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Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

3.1	Bylaws, as amended.
10.1	Registration Rights Agreement dated as of March 30, 2004, among Service Corporation International and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, J.P. Morgan Securities Inc., Credit Lyonnais Securities (USA) Inc., Lehman Brothers Inc. and Raymond James & Associates, Inc.
12.1	Ratio of earnings to fixed charges for the six months ended June 30, 2004 and 2003.
31.1	Certification of Robert L. Waltrip as Chief Executive Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Jeffrey E. Curtiss as Principal Financial Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Periodic Financial Reports by Robert L. Waltrip as Chief Executive Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Periodic Financial Reports by Jeffrey E. Curtiss as Principal Financial Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.
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	Amended and Restated Revolving Credit Agreement dated as of August 11, 2004 among the Company, as Borrower, the lenders party thereto, JPMorgan Chase Bank, as Administrative Agent, Bank of America, N.A., as Syndication Agent, and Calyon New York Branch, Southwest Bank of Texas, N.A. and Merrill Lynch Capital Corporation, as Co-Documentation Agents, J.P. Morgan Securities, Inc., and Banc of America Securities LLC, as Joint Bookrunners and Joint Lead Arrangers.

           Undertaking

          We hereby undertake, pursuant to Regulation S-K, Item 601(b), paragraph (4) (iii), to furnish to the U.S. Securities and Exchange Commission, upon request, all constituent instruments defining the rights of holders of our long-term debt

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not filed herewith for the reason that the total amount of securities authorized under any of such instruments does not exceed 10 percent of our total consolidated assets.

     (b) Reports on Form 8-K

     The Company furnished a report on Form 8-K dated April 14, 2004 reporting under “Item 9. Regulation FD Disclosure” that attached as an exhibit was the Company’s press release dated April 14, 2004 which announced the Company’s completion of its offering of $250 million Senior Notes due 2016.

     The Company filed a report on Form 8-K dated April 14, 2004 reporting (i) under “Item 5. Other Events and Regulation FD Disclosure” that the Company announced the expiration of the early participation period of the Company’s tender offer for its 6% Notes due 2005, and (ii) under “Item 7. Financial Statements and Exhibits” that the related press release was attached as an exhibit.

     The Company furnished a report on Form 8-K dated April 20, 2004 reporting (i) under “Item 7. Financial Statements and Exhibits” that attached as an exhibit was the Company’s press release dated April 20, 2004 and (ii) under “Item 9. Regulation FD Disclosure” that such press release announced the Company had entered into a memorandum of understanding to settle the securities class action lawsuit filed against the Company and certain current and former officers in January 1999.

     The Company filed a report on Form 8-K dated April 22, 2004 reporting (i) under “Item 5. Other Events and Regulation FD Disclosure” that the Company announced the completion of its tender offer for up to $200 million of its 6% Notes due 2005, and (ii) under “Item 7. Financial Statements and Exhibits” that the related press release was attached as an exhibit.

     The Company furnished a report on Form 8-K dated May 10, 2004 reporting under “Item 12. Results of Operations and Financial Condition” that attached as an exhibit was the Company’s press release dated May 10, 2004 which disclosed the financial results for the first quarter of 2004.

     The Company filed a report on Form 8-K dated May 13, 2004 reporting (i) under “Item 5. Other Events” that S. Malcolm Gillis and Thomas L. Ryan were elected to the Company’s Board of Directors, and (ii) under “Item 7. Financial Statements and Exhibits” that the related press release was attached as an exhibit.

     The Company furnished a report on Form 8-K dated May 14, 2004 reporting under “Item 9. Regulation FD Disclosure” that attached as exhibits were two Company press releases dated May 13, 2004 which announced the Company’s call for redemption of all of its 6.75% Convertible Subordinated Notes due 2008.

     The Company furnished a report on Form 8-K dated June 22, 2004 reporting under “Item 9. Regulation FD Disclosures” that attached as an exhibit was the Company’s press release dated June 22, 2004 which announced the completion of the redemption of the Company’s $312.7 million aggregate principal amount of 6.75% Convertible Subordinated Notes due 2008.

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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.

August 16, 2004 SERVICE CORPORATION INTERNATIONAL

By:   /s/ Jeffrey E. Curtiss

Jeffrey E. Curtiss

Senior Vice President

Chief Financial Officer and Treasurer

(Principal Financial Officer)

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INDEX TO EXHIBITS

Exhibit
No.	Description
3.1	Bylaws, as amended.
10.1	Registration Rights Agreement dated as of March 30, 2004, among Service Corporation International and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, J.P. Morgan Securities Inc., Credit Lyonnais Securities (USA) Inc., Lehman Brothers Inc. and Raymond James & Associates, Inc.
12.1	Ratio of earnings to fixed charges for the six months ended June 30, 2004 and 2003.
31.1	Certification of Robert L. Waltrip as Chief Executive Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Jeffrey E. Curtiss as Principal Financial Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Periodic Financial Reports by Robert L. Waltrip as Chief Executive Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Periodic Financial Reports by Jeffrey E. Curtiss as Principal Financial Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.
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	Amended and Restated Revolving Credit Agreement dated as of August 11, 2004 among the Company, as borrower, the lenders party thereto, JPMorgan Chase Bank, as Administrative Agent, Bank of America, N.A., as Syndication Agent, and Calyon New York Branch, Southwest Bank of Texas, N.A. and Merrill Lynch Capital Corporation, as Co-Documentation Agents, J.P. Morgan Securities, Inc., and Banc of America Securities LLC, as Joint Bookrunners and Joint Lead Arrangers.

EX-3.1

Exhibit 3.1

BYLAWS
OF
SERVICE CORPORATION INTERNATIONAL

ARTICLE I

SHAREHOLDERS

     Section 1. Annual Meeting. The annual meeting of shareholders shall be held on the second Thursday in May of each year at ten o’clock in the morning, if not a legal holiday, and, if a legal holiday, then on the next succeeding business day, for the purpose of electing directors. Any business may be transacted at an annual meeting, except as otherwise provided by law or by these bylaws. The Board of Directors may alter or postpone the time of holding the annual meeting of shareholders as they shall deem advisable.

     Section 2. Special Meeting. A special meeting of shareholders may be called at any time by the holders of at least ten percent (10%) of the outstanding stock entitled to be voted at such meeting, by the Board of Directors, by the Chairman of the Board, by the Chief Executive Officer or by the President. Only such business shall be transacted at a special meeting as may be stated or indicated in the notice of such meeting.

     Section 3. Place. The annual meeting of shareholders may be held at any place within or without the State of Texas designated by the Board of Directors. Special meetings of shareholders may be held at any place within or without the State of Texas designated by the Chairman of the Board, if he shall call the meeting; by the Chief Executive Officer, if he shall call the meeting; by the President, if he shall call the meeting; or the Board of Directors, if they shall call the meeting. Meetings of shareholders shall be held at the principal office of the corporation unless another place is designated for meetings in the manner provided herein.

     Section 4. Notice. Written or printed notice stating the place, day and hour of each meeting of shareholders and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than fifty (50) days before the date of the meeting, either personally or by mail, to each shareholder of record entitled to vote at such meeting.

     Section 5. Quorum. The holders of a majority of the outstanding stock entitled to vote thereat, and present in person or by proxy, shall constitute a quorum. Once a quorum is constituted, the shareholders present or represented by proxy at any meeting may continue to transact business until adjournment, notwithstanding the subsequent withdrawal therefrom of such number of shareholders as to leave less than a quorum. The Chairman of the meeting or the holders of a majority of stock present at any meeting, though less than a quorum, may adjourn the meeting and any business may be transacted at the adjournment that could be transacted at the original meeting. No notice of adjournment, other than the announcement at the meeting, need be given.

     Section 6. Proxies. At all meetings of shareholders, a shareholder may vote either in person or by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Such proxies shall be filed with the Secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless expressly provided therein to be irrevocable or unless otherwise made irrevocable by law.

     Section 7. Votes Required for Action. Each outstanding share entitled to vote upon a matter submitted to a vote at a meeting of shareholders shall be entitled to one vote on such matter, unless otherwise provided in the articles of incorporation. Except as otherwise required by law, the articles of incorporation or these bylaws, the act of a majority of the stock at any meeting at which a quorum is present shall be the act of the shareholders’ meeting.

     Section 8. Officers. The Chairman of the Board shall preside at each meeting of shareholders, and in the absence of the Chairman, the Vice Chairman of the Board shall preside, or in the absence of the Vice Chairman, the Chief Executive Officer or the President shall preside. In the event that all of the foregoing officers shall be absent, some person appointed by the meeting shall preside. The Secretary shall keep records of each meeting of shareholders, and in the absence of the Secretary, his duties shall be performed by some person appointed by the meeting.

     Section 9. List of Shareholders. A complete list of shareholders entitled to vote at each shareholders’ meeting, arranged in alphabetical order, with the address of and number of shares held by each, shall be prepared by the Secretary and filed at the registered office of the corporation and subject to inspection by any shareholder during usual business hours for a period of ten (10) days prior to such meeting and shall be produced at such meeting and at all times during such meeting be subject to inspection by any shareholder.

     Section 10. Notice of Shareholder Business. Only such business shall be conducted at shareholder meetings and only such persons shall be eligible to serve on the Board of Directors as shall have been brought before the meeting or nominated, as applicable, (a) by or at the direction of the Board of Directors or (b) by any shareholder of the corporation who shall be entitled to vote at such meeting who complies with the notice procedures set forth in this Section 10 and who complies with all other requirements imposed by these Bylaws. For business to be properly brought before a shareholder meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder’s notice for nominations or other matters to be considered at an annual meeting must be delivered to, or mailed and received at, the principal executive offices of the corporation not more than 120 days and not less than 100 days prior to the first anniversary of the previous year’s annual meeting; provided, however, that if no annual meeting of shareholders was held in the previous year or if the date of the annual meeting is advanced by more than 30 days prior to, or delayed by more than 60 days after, such anniversary date, notice by the shareholder to be timely must be so delivered, or mailed and received, not later than the close of business on the 10th day following the day on which the date of such meeting has been first publicly disclosed. To be timely, a shareholder’s notice of the nomination of persons for election to the Board of Directors at a special shareholder meeting at which one or more directors is to be elected must be delivered to, or mailed and received at, the principal executive offices of the corporation not later than the close of business on the 10th day following the day on which the date of such meeting has been first publicly disclosed. Notwithstanding anything in this Article I, Section 10 of these Bylaws to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public disclosure naming all of the nominees for election or reelection to the Board of Directors or specifying the size of the increased Board of Directors made by the corporation at least 130 days prior to the first anniversary of the preceding year’s annual meeting, a shareholder’s notice of nomination shall be timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to, or mailed and received at, the principal executive offices of the corporation not later than the close of business on the 10th day following the day on which public disclosure of such increase in the number of directors to be elected to the Board of Directors is first made by the corporation. In no event shall the public announcement of an adjournment of a shareholder meeting commence a new time period for the giving of timely notice as described above. A shareholder’s notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the corporation’s books, of the shareholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the shareholder, (d) any material interest of the shareholder in such business, and (e) any such further information as shall be reasonably requested by the corporation. Additionally, a shareholder’s notice of the nomination of persons for election to the Board of Directors shall set forth as to each person whom the shareholder proposes to nominate for election or reelection to the Board of Directors (a) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-11 thereunder (including such person’s written consent to being named as a nominee and to serving as a director if elected) and (b) any such further information as shall be reasonably requested by the corporation. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at a shareholder meeting except in accordance with the procedures set forth in this Section 10. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of these Bylaws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 10, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder

with respect to the matters set forth in this Section. Nothing in the Section shall be deemed to affect any rights of (a) shareholders to request inclusion of proposals in the corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act or (b) the holders of any series of Preferred Stock to elect directors under specified circumstances. For purposes of these Bylaws, “publicly disclosed” or “public disclosure” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission.

ARTICLE II
BOARD OF DIRECTORS

     Section 1. Number and Term of Office. The business and property of the corporation shall be managed and controlled by the Board of Directors, and subject to restrictions imposed by law, by the articles of incorporation, or by these bylaws, they may exercise all the powers of the corporation.

     (a) Number. The Board of Directors shall consist of not less than nine (9) nor more than fifteen (15) Directors, as so determined from time to time by resolution of the Board of Directors. Within the above limits, the number of directors may be increased or decreased (provided that such decrease does not shorten the term of any incumbent director) from time to time by resolution of the Board of Directors. Directors need not be shareholders nor residents of Texas.

     (b) Election and Terms. At the 1982 Annual Meeting of Shareholders, the directors shall be divided into three classes, as nearly equal in number as possible, with the term of office of the first class to expire at the 1983 Annual Meeting of Shareholders, the term of office of the second class to expire at the 1984 Annual Meeting of Shareholders and the term of office of the third class to expire at the 1985 Annual Meeting of Shareholders; in each case, the term shall continue until the respective successors are elected and qualified. At each Annual Meeting of Shareholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding Annual Meeting of Shareholders and until their successors have been elected and qualified.

     (c) Vacancies and Increases of Directors. Any vacancy (other than by an increases in number) in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors. Any directors so elected by the Board of Directors to fill a vacancy shall hold office for the unexpired term of the director whose place he has been elected to fill, even though that term may extend beyond the next annual meeting of shareholders. In case of any increase in the number of directors (within the above limits), the additional directors shall be elected at an annual meeting or at a special meeting of shareholders called for that purpose.

     (d) Removal. Any director, or the entire Board of Directors, may be removed from office at any time, with or without cause, but only by the affirmative vote of the holders of at least four-fifths of all of the outstanding shares of capital stock of the corporation entitled to vote on election of directors at a meeting of shareholders called for that purpose, except that if the Board of Directors, by an affirmative vote of at least four-fifths of the entire Board of Directors, recommends removal of a director to the shareholders, such removal may be effected by the affirmative vote of the holders of at least a majority of the outstanding shares of capital stock of the corporation entitled to vote on the election of directors at a meeting of shareholders called for that purpose.

     Section 2. Meeting of Directors. The directors may hold their meetings and may have an office and keep the books of the corporation, except as otherwise provided by statute, in such place or places in the State of Texas, or outside the State of Texas, as the Board of Directors may from time to time determine.

     Section 3. First Meeting. Each newly elected Board of Directors may hold its first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately after and at the same place as the annual meeting of the shareholders, and no notice of such meeting shall be necessary.

     Section 4. Election of Officers. The Board of Directors, at its first meeting after each annual meeting of shareholders or such other time as may be determined by the Board of Directors, shall elect the officers of the corporation. The Board of Directors may elect such officers, including assistant officers and agents, as required by these bylaws and such other officers as may be deemed necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by these bylaws and the Board of Directors.

     Section 5. Regular Meeting. Regular meetings of the Board of Directors shall be held at such times and places as shall be designated, from time to time, by resolution of the Board of Directors. Notice of such regular meetings shall not be required.

     Section 6. Special Meetings. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, the Chief Executive Officer, the President or a majority of the directors.

     Section 7. Notice. The Secretary shall give notice of each special meeting in person, or by mail or by telegraph at least two (2) days before the meeting to each director. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called or convened. Neither the business to be transacted at nor the purpose of any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting, except as otherwise required by law, the articles of incorporation or these bylaws.

     At any meeting at which every director shall be present, even though without any notice, any business may be transacted.

     Section 8. Quorum. A majority of the directors fixed by these bylaws shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there be less than a quorum present, a majority of those present or any director solely present may adjourn the meeting from time to time without further notice. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless the act of a greater number is required by the articles of incorporation or by these bylaws.

     Section 9. Order of Business. At meetings of the Board of Directors, business shall be transacted in such order as from time to time the Board may determine.

     At all meetings of the Board of Directors, the Chairman of the Board shall preside, and in the absence of the Chairman, the Vice Chairman of the Board shall preside, and in the absence of the Vice Chairman, the Chief Executive Officer or the President shall preside. In the event that all of the foregoing persons shall be absent, a chairman shall be chosen by the Board from among the directors present.

     The Secretary of the corporation shall act as secretary of the meetings of the Board of Directors, but in the absence of the Secretary, the presiding officer may appoint any person to act as secretary of the meeting.

     Section 10. Compensation. Directors and members of any committee of the Board of Directors shall be entitled to such reasonable compensation for their services as directors and members of any such committee as shall be fixed from time to time by resolution of the Board of Directors, and shall also be entitled to reimbursement for any reasonable expenses incurred in attending such meetings. The compensation of directors may be on such basis as is determined in the resolution of the Board of Directors. Any director receiving compensation under these provisions shall not be barred from serving the corporation in any other capacity and receiving reasonable compensation for such other services.

     Section 11. Presumption of Assent. A director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall

forward such dissent by registered mail to the Secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.

     Section 12. Executive Committee and other Committees.

     (a) Designation of Executive Committee. The Board of Directors, by resolution adopted by a majority of the entire number of directors, from time to time may designate two or more directors to constitute an Executive Committee. The designation of such Executive Committee, and the delegation of authority thereto, shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. No member of the Executive Committee shall continue to be a member thereof after he ceases to be a director of the corporation. The Board of Directors shall have the power at any time to increase or decrease the number of members of the Executive Committee, to fill vacancies thereon, to change any member thereof, and to change the function or terminate the existence thereof.

     (b) Powers of the Executive Committee. During intervals between meetings of the Board of Directors, and subject to such limitations as may be imposed by resolutions of the Board of Directors, the Executive Committee shall have any and may exercise all of the powers and authority of the Board of Directors, including, but without limitation, the power to authorize the corporate seal to be affixed to any instruments executed on behalf of the corporation, and the power to authorize the issuance of shares of the corporation’s capital stock, except that no such committee shall have the authority of the Board of Directors in reference to amending the articles of incorporation, approving a plan of merger or consolidation, recommending to the shareholders the sale, lease, or exchange of all or substantially all of the property and assets of the corporation otherwise than in the usual and regular course of its business. Furthermore, in such circumstances, the Executive Committee may not recommend to shareholders a voluntary dissolution of the corporation or a revocation thereof, amend, alter, or repeal the bylaws of the corporation, or adopt new bylaws for the corporation, fill vacancies in or remove members of the Board of Directors or any such committee, elect or remove officers or members of any such committee, fix the compensation of any member of such committee, or alter or repeal any resolution of the Board of Directors which by its terms provides that it shall not be so amendable or repealable. All minutes of the meetings of the Executive Committee shall be submitted to the next succeeding meeting of Board of Directors; but failure to submit the same or to receive the approval thereof shall not invalidate any completed or incomplete action taken by the corporation upon authorization by the Executive Committee prior to the time at which the same has been, or was, submitted to the Board of Directors.

     (c) Procedure; Meetings; Quorum. Unless designated by the Board of Directors, the chairman of the Executive Committee shall be chosen by the Executive Committee, and the Secretary of the corporation, if present, shall act as Secretary of the meetings. In the absence of either, the Executive Committee shall appoint a chairman or secretary, as the case may be, of the meeting. The Executive Committee shall keep a record of its acts and proceedings. The Executive Committee shall fix its own rules of procedure (which need not be written) and shall meet from time to time on call of the Chairman of the Board, the Chief Executive Officer or the President or any two or more members of the Executive Committee. Notice of each such meeting, stating the place, day and hour thereof, shall be mailed, telegraphed or telephoned to each member’s business or residential address at least twenty-four hours before the meeting, but need not state the purpose of the meeting. Meetings may be held at any place within or without the State of Texas, specified in the notice of such meeting. Notice of any meeting may be waived in writing, signed by the member or members entitled to such notice, whether before or after the time stated therein, and shall be equivalent to the giving of such notice. Attendance of any members at a meeting shall constitute a waiver of notice of such meeting. A majority of the Executive Committee shall be necessary to constitute a quorum for the transaction of any business, and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the Executive Committee. The members of the Executive Committee shall act only as a Committee, and the individual members shall have no power as such, but the Executive Committee may vote the members of the Executive Committee a reasonable fee as compensation and also provide for reimbursement of expenses for attendance at meetings of such Committee.

     (d) Other Committees. The Board of Directors may by resolution provide for such other standing or special committees as it from time to time deems desirable, and discontinue the same at its pleasure. Each such committee shall have such powers and perform such duties, not inconsistent with law, as may be assigned to it by the Board of Directors. If provision be made for any such committee, the members

thereof shall be appointed by the Board of Directors and shall serve at the pleasure of the Board. Vacancies in such committees shall be filled by the Board of Directors.

     Section 13. Action Without A Meeting.

     (a) Written Consent. Any action required or permitted to be taken at a meeting of the Board of Directors or any committee thereof may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the members of the Board of Directors or Committee, as the case may be. Such consent shall have the same force and effect as a unanimous vote at a meeting, and may be stated as such in any document or instrument filed with the Secretary of State.

     (b) Telephonic Meetings. Members of the Board of Directors, or members of any committee designated by such board, may participate in and hold a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.

ARTICLE III
OFFICERS

     Section 1. Number, Titles and Term of Office. The officers of the corporation shall be a Chairman of the Board, a Vice Chairman of the Board, a Chief Executive Officer, a President, one or more Vice Presidents (including one or more Executive Vice Presidents and one or more Senior Vice Presidents if deemed appropriate by the Board of Directors), a Secretary, a Treasurer and such other officers as the Board of Directors may from time to time elect or appoint. Each officer shall hold office until his successor shall have been duly elected and qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. One person may hold more than one office, except that the President shall not hold the office of Secretary. None of the officers need be a director.

     Section 2. Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights.

     Section 3. Vacancies. A vacancy in the office of any officer may be filled by vote of a majority of the directors for the unexpired portion of the term.

     Section 4. Powers and Duties of the Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Board of Directors and shall have such other powers and duties as designated in these bylaws and as from time to time may be assigned to him by the Board of Directors.

     Section 5. Powers and Duties of the Vice Chairman of the Board. The Vice Chairman of the Board in the absence of the Chairman of the Board shall preside at all meetings of the Board of Directors and shall have such other powers and duties as from time to time may be assigned him by the Board of Directors.

     Section 6. Powers and Duties of the Chief Executive Officer. The Chief Executive Officer shall be the primary executive officer of the corporation and, subject to the Board of Directors and the Chairman of the Board, he shall have general executive charge, management and control of the properties and operations of the corporation in the ordinary course of its business with all such powers with respect to such properties and operations as may be reasonably incident to such responsibilities; in the absence of the Chairman of the Board and the Vice

Chairman of the Board, he may preside at all meetings of the Board of Directors; he may agree upon and execute all bonds, contracts and all other obligations in the name of the corporation; and he may sign all certificates for shares of capital stock of the corporation.

     Section 7. Powers and Duties of the President. The President shall be the chief administrative officer of the corporation and, subject to the Board of Directors, the Chairman of the Board and the Chief Executive Officer, he shall have general administrative charge, management and control of the properties and operations of the corporation in the ordinary course of its business with all such powers with respect to such properties and operations as may be reasonably incident to such responsibilities; in the absence of the Chairman of the Board, the Vice Chairman of the Board and the Chief Executive Officer, he may preside at all meetings of the Board of Directors; he may agree upon and execute all bonds, contracts and all other obligations in the name of the corporation; and he may sign all certificates for shares of capital stock of the corporation.

     Section 8. Vice Presidents. Each Vice President shall have such powers and duties as may be assigned to him by the Board of Directors and shall exercise the powers of the President during that officer’s absence or inability to act. Any action taken by a Vice President in the performance of the duties of the President shall be conclusive evidence of the absence or inability to act of the President at the time such action was taken.

     Section 9. Treasurer. The Treasurer shall have custody of all the funds and securities of the corporation which come into his hands. When necessary or proper, for collection he may, on behalf of the corporation, endorse checks, notes and other obligations and shall deposit the same to the credit of the corporation in such bank or banks or depositories as shall be designated in the manner prescribed by the Board of Directors, and he may sign all receipts and vouchers for payments made to the corporation, either alone or jointly with such other officer as is designated by the Board of Directors. Whenever required by the Board of Directors, he shall render a statement of his cash account; he shall enter or cause to be entered regularly in the books of the corporation to be kept by him for the purpose full and accurate accounts of all moneys received and paid out on account of the corporation; he shall perform all acts incident to the position of Treasurer subject to the control of the Board of Directors; and he shall, if required by the Board of Directors, give such bond for the faithful discharge of his duties in such form as the Board of Directors may require.

     Section 10. Assistant Treasurer. Each Assistant Treasurer shall have the usual powers and duties pertaining to his office, together with such other powers and duties as may be assigned to him by the Board of Directors. The Assistant Treasurers shall exercise the powers of the Treasurer during that officer’s absence or inability to act.

     Section 11. Secretary. The Secretary shall keep the minutes of all meetings of the Board of Directors and committees thereof and the minutes of all meetings of the shareholder, in books provided for that purpose. He shall attend to the giving and serving of all notices; he shall keep in safe custody the seal of the corporation, and, when authorized by the Board of Directors, affix the same to any instrument requiring it (when so affixed, such seal shall be attested by his signature or by the signature of the Treasurer or an Assistant Secretary); he shall have charge of the certificate books, transfer books and stock ledgers, and such other books and papers as the Board of Directors may direct, all of which shall at all reasonable times be open to inspection of any director upon application at the office of the corporation during business hours; and he shall in general perform all duties incident to the office of Secretary, subject to the control of the Board of Directors.

     Section 12. Assistant Secretaries. Each Assistant Secretary shall have the usual powers and duties pertaining to his office, together with such other powers and duties as may be assigned to him by the Board of Directors or the Secretary. The Assistant Secretaries shall exercise the powers of the Secretary during that officer’s absence or inability to act.

ARTICLE IV
INDEMNIFICATION

     Section 1. Indemnification by the Corporation. Each director and officer of the corporation and any person who may have served at the request of the corporation as a director or officer of another corporation in which it owns shares or of which it is a creditor shall be indemnified by the corporation against any costs and expenses, including counsel fees, actually and necessarily incurred in connection with the defense of any civil, criminal, administrative, or other claim, action, suit, or proceeding, whether by or in the right of the corporation or otherwise, in which he may become involved or with which he may be threatened by reason of his being or having been a director or officer of the corporation or by reason of his serving or having served at the request of the corporation as a director or officer of another corporation as aforesaid, provided that, in connection with such matter, the said director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceedings, had no reasonable cause to believe his conduct was unlawful. Costs and expenses indemnified shall include payments in settlement or in satisfaction of any judgment, fine or penalty.

     The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or equivalent shall not, of itself, create a presumption that the director, officer, or representative did not act in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that he had reasonable cause to believe his conduct was unlawful.

     Section 2. Procedure. A determination of whether or not indemnification is proper under this Article IV shall be made (a) by a majority vote of the directors who at the time of the vote are not named defendants or respondents in the proceeding, regardless of whether the directors not named defendants or respondents constitute a quorum; (b) by a majority vote of a committee of the board of directors, if: (i) the committee is designated by a majority vote of the directors who at the time of the vote are not named defendants or respondents in the proceeding, regardless of whether the directors not named defendants or respondents constitute a quorum; and (ii) the committee consists solely of one or more of the directors not named as defendants or respondents in the proceeding; (c) by special legal counsel selected by the board of directors or a committee thereof by a vote as set forth in subsection (a) or (b) of this Section 2, or if a vote as set forth in subsection (a) or (b) cannot be obtained, then by special legal counsel selected by the board of directors; or (d) by the shareholders in a vote that excludes the shares held by directors who are named defendants or respondents in the proceeding.

     Section 3. Scope of Indemnification. It is specifically intended to provide indemnification with regard to acts or omissions on the part of directors or officers which may be or are adjudged to constitute negligence, misrepresentations, slander, libel, misconduct, or other breach of duty, but only to the extent that such indemnification may be provided for under law, and only upon a determination under Section 2 hereof that such conduct was in good faith and reasonably believed to be in or not opposed to the best interest of the corporation and, with respect to any criminal action or proceeding, that there was not reasonable cause for belief that the conduct was unlawful.

     Section 4. Insurance. The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the corporation itself would have the power to indemnify him against such liability under law.

     Section 5. Expenses. To the extent permitted by law, expenses incurred in connection with a civil, criminal, administrative or investigative action, suit or proceeding, or threat thereof, may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided in Section 2 of this Article IV, upon receipt of a written affirmation by the director or officer of his good faith belief that he has met the applicable standard of conduct set forth in this Article IV and a written undertaking by or on behalf of the director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as authorized in this Article IV.

     Section 6. Severability. Should any of the indemnification rights provided for herein be declared invalid, such declaration shall not invalidate the indemnification provisions generally, and such of the indemnification rights provided for herein as are permissible under law shall remain effective.

     Section 7. Additional Indemnification. In furtherance of the provisions of this Article IV, it is the intent of the corporation that it indemnify any person entitled to indemnification under this Article IV, the Texas Business Corporation Act or other applicable law to the fullest extent that the corporation is permitted to grant indemnification to such person under the Texas Business Corporation Act or other applicable law, as the same exists or may hereafter be amended. The indemnification provided by this Article IV shall be in addition to, and should not be deemed exclusive of, any other rights to which any person seeking indemnification may be entitled under any law, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

     Section 8. Employee Benefit Plans.

     (a) In addition, and not in lieu of, any indemnity provided under the preceding sections of this Article IV, the corporation shall indemnify each director, officer or employee and each former director, officer or employee of the corporation against any costs and expenses, including counsel fees, actually and necessarily incurred in connection with the defense of any civil, criminal, administrative or other claim, action, suit or proceeding, whether by or in the right of the corporation or otherwise, in which he may become involved or with which he may be threatened with regard to any error or omission or breach of duty committed or alleged to have been committed in the discharge of his fiduciary duties, obligations or responsibilities with respect to any employee pension, deferred compensation, welfare benefit or other benefit plan, including specifically, but without limitation, plans covered under the Employee Retirement Income Security Act of 1974 (which plans are herein collectively called “employee benefit plan”), of the corporation or any other corporation in which it owns shares of capital stock, or of which it is a creditor (which entities are herein collectively called the “Company”) provided, that in connection with such matter, the said director, officer or employee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.

     The corporation shall be deemed to have requested a director, officer or employee of the corporation to serve an employee benefit plan where the performance by such person of his duties to the Company also imposes duties on or otherwise involves services by such person to such employee benefit plan or participants or beneficiaries thereof; excise taxes or taxes assessed on a person with respect to an employee benefit plan pursuant to said Act of Congress or the Internal Revenue Code of 1986 shall be deemed “fines”; and action taken or omitted by such a person with respect to an employee benefit plan in the performance of such person’s duties for a purpose reasonably believed by such person to be in the interest of the participants and beneficiaries of the employee benefit plan shall be deemed to be for a purpose which is not opposed to the best interest of the Company.

     Costs and expenses indemnified shall include payments in settlements or in satisfaction of any judgment, fine, penalty, excise tax or tax. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the director, officer, or employee did not act in good faith.

     (b) Any indemnification provided for herein, unless ordered by a court, shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer or employee is proper in the circumstances because he had met the applicable standard of conduct set forth in Section 8 (a) hereof. Such determination shall be made (a) by a majority vote of the directors who at the time of the vote are not named defendants or respondents in the proceeding, regardless of whether the directors not named defendants or respondents constitute a quorum; (b) by a majority vote of a committee of the board of directors, if: (i) the committee is designated by a majority vote of the directors who at the time of the vote are not named defendants or respondents in the proceeding, regardless of whether the directors not named defendants or respondents constitute a quorum; and (ii) the committee consists solely of one or more of the directors not named as defendants or respondents in the proceeding; (c) by special legal counsel selected by the board of directors or a committee thereof by a vote as set forth in subsection (a) or (b) of this Section 8(b), or if a vote as set forth in subsection (a) or (b) cannot be obtained, then by special legal

counsel selected by the board of directors; or (d) by the shareholders in a vote that excludes the shares held by directors who are named defendants or respondents in the proceeding.

     (c) It is specifically intended to provide indemnification with regard to acts or omissions on the part of directors, officers or employees which may be or are adjudged to constitute negligence, misrepresentations, slander, libel, misconduct, or other breach of duty, but only to the extent that such indemnification may be provided for under law, and only upon a determination under Section 8 (b) hereof that such conduct was in good faith.

     (d) The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise (and “other enterprise” shall in this Section 8 be deemed to include an employee benefit plan), against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the corporation itself would have the power to indemnify him against such liability under law.

     (e) To the extent permitted by law, expenses incurred in connection with a civil, criminal, administrative or investigative action, suit or proceeding, or threat thereof, may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided in Section 8(b) of this Article IV, upon receipt of a written affirmation by the director or officer of his good faith belief that he has met the applicable standard of conduct set forth in this Article IV and a written undertaking by or on behalf of the director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as authorized in this Article IV.

     (f) Should any of the indemnification rights provided for herein be declared invalid, such declaration shall not invalidate the indemnification provisions generally, and such of the indemnification rights provided for herein as are permissible under law shall remain effective.

     (g) The foregoing right of indemnification shall not be deemed exclusive of any other rights to which any director, officer, employee or representative may be entitled under any other bylaw, agreement, or vote of shareholders or disinterested directors, as a matter of law or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office or performing such of his duties and shall continue as to a person who has ceased to be a director, officer, employee or representative and shall inure to the benefit of the heirs, executors, and administrators of such a person.

ARTICLE V
CAPITAL STOCK

     Section 1. Certificates of Shares. The certificates for shares of the capital stock of the corporation shall be in such form as shall be approved by the Board of Directors. The certificates shall be signed by the Chief Executive Officer, President or a Vice President, and also by the Secretary or an Assistant Secretary or by the Treasurer or an Assistant Treasurer and may be sealed with the seal of this corporation or a facsimile thereof. Where any such certificate is countersigned by a transfer agent, or registered by a registrar, either of which is other than the corporation itself or an employee of the corporation, the signatures of any such Chief Executive Officer, President or Vice President and Secretary or Assistant Secretary or Treasurer or Assistant Treasurer may be facsimiles. They shall be consecutively numbered and shall be entered in the books of the corporation as they are issued and shall exhibit the holder’s name and the number of shares.

     Section 2. Transfer of Shares. The shares of stock of the corporation shall be transferable only on the books of the corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives, upon surrender and cancellation of certificates for a like number of shares.

     Section 3. Closing of Transfer Books. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, sixty (60) days. If stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the stock transfer books the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty (60) days and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which the notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders.

     Section 4. Regulations. The Board of Directors shall have power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration or the replacement of certificates for shares of the capital stock of the corporation.

ARTICLE VI
MISCELLANEOUS PROVISIONS

     Section 1. Offices. Until the Board of Directors otherwise determines, the registered office of the corporation required by the Texas Business Corporation Act to be maintained in the State of Texas shall be the principal place of business of the corporation, but such registered office may be changed from time to time by the Board of Directors in the manner provided by law and need not be identical to the principal place of business of the corporation.

     Section 2. Fiscal Year. The fiscal year of the corporation shall be such as the Board of Directors shall, by resolution, establish.

     Section 3. Seal. The seal of the corporation shall be such as from time to time may be approved by the Board of Directors.

     Section 4. Notice and Waiver of Notice. Whenever any notice whatever is required to be given under the provisions of these bylaws, said notice shall be deemed to be sufficient if given (a) by depositing the same in a post office box in a sealed postpaid wrapper addressed to the person thereto at his post office address, as it appears on the books of the corporation, (b) by transmitting to a facsimile number provided by the shareholder for the purpose of receiving notice, (c) by transmitting to an electronic mail address provided by the shareholder for the purpose of receiving notice, or (d) by posting on an electronic network and sending a message to the shareholder at the address provided by the shareholder for the purpose of alerting the shareholder of a posting; and such notice shall be deemed to have been given on the day of such mailing, transmission or posting. A waiver of notice, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

     Section 5. Resignations. Any director or officer may resign at any time. Such resignations shall be made in writing and shall take effect at the time specified therein, or, if no time be specified, at the time of its receipt by the Chief Executive Officer, President or Secretary. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation.

     Section 6. Securities of Other Corporation. The Chairman of the Board, the Chief Executive Officer, the President or any Vice President of the corporation shall have power and authority to transfer, endorse for transfer, vote, consent or take any other action with respect to any securities of another issuer which may be held or owned by the corporation and to make, execute and deliver any waiver, proxy or consent with respect to any such securities.

     Section 7. Interested Directors and Officers. An otherwise valid contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation or other entity in which one or more of its directors or officers are directors or officers or have a financial interest, shall be valid notwithstanding whether the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof that authorizes the contract or transaction, and notwithstanding whether his or their votes are counted for such purpose, if:

     (a) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or

     (b) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or

     (c) The contract or transaction is fair as to the corporation as of the time it is authorized, approved, or ratified by the Board of Directors, a committee thereof, or the shareholders.

     Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee that authorizes the contract or transaction.

ARTICLE VII
AMENDMENTS

     Except as set forth below, bylaws may be altered, amended or repealed, or new bylaws may be adopted, by the affirmative vote of the holders of a majority of the outstanding shares of capital stock entitled to vote thereon at any annual meeting, or at any special meeting if notice of the proposed amendment is contained in the notice of said special meeting, or by the affirmative vote of a majority of the full Board of Directors at any regular or special meeting, provided notice of said proposed amendment is contained in the notice of the meeting.

     Notwithstanding the provisions of the preceding paragraph, the affirmative vote of the holders of at least four-fifths of the outstanding shares of capital stock of the corporation entitled to vote thereon at a meeting called for that purpose shall be required to amend or repeal, or to adopt any provisions inconsistent with, Article VII or Section 1, Article II of the corporation’s Bylaws.

EX-10.1

EXHIBIT 10.1

REGISTRATION RIGHTS AGREEMENT

DATED AS OF MARCH 30, 2004

AMONG

SERVICE CORPORATION INTERNATIONAL

AND

MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED,

BANC OF AMERICA SECURITIES LLC
J.P. MORGAN SECURITIES INC.
CREDIT LYONNAIS SECURITIES (USA) INC.
LEHMAN BROTHERS INC.
AND
RAYMOND JAMES & ASSOCIATES, INC.

REGISTRATION RIGHTS AGREEMENT

     This Registration Rights Agreement (the “Agreement”) is made and entered into this 30th day of March, 2004, among Service Corporation International, a Texas corporation (the “Company”), and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, J.P. Morgan Securities Inc., Credit Lyonnais Securities (USA) Inc., Lehman Brothers Inc. and Raymond James & Associates, Inc. (collectively, the “Initial Purchasers”).

     This Agreement is made pursuant to the Purchase Agreement, dated March 30, 2004, among the Company and the Initial Purchasers (the “Purchase Agreement”), which provides for the sale by the Company to the Initial Purchasers of an aggregate of $250 million principal amount of the Company’s 6.75% Senior Notes due 2016 (the “Securities”). In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide to the Initial Purchasers and their direct and indirect transferees the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Purchase Agreement.

     In consideration of the foregoing, the parties hereto agree as follows:

     1. Definitions.

          As used in this Agreement, the following capitalized defined terms shall have the following meanings:

     “1933 Act” shall mean the Securities Act of 1933, as amended from time to time.

     “1934 Act” shall mean the Securities Exchange Act of 1934, as amended from time to time.

     “Closing Date” shall mean the Closing Time as defined in the Purchase Agreement.

     “Company” shall have the meaning set forth in the preamble and shall also include the Company’s successors.

     “Depositary” shall mean The Bank of New York, or any other depositary appointed by the Company, provided, however, that such depositary must have an address in the Borough of Manhattan, in the City of New York.

     “DTC” shall mean The Depository Trust Company.

     “Exchange Offer” shall mean the exchange offer by the Company of Exchange Securities for Registrable Securities pursuant to Section 2.1 hereof.

     “Exchange Offer Registration” shall mean a registration under the 1933 Act effected pursuant to Section 2.1 hereof.

     “Exchange Offer Registration Statement” shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another appropriate form), and all amendments and supplements to such registration statement, including the Prospectus contained therein, all exhibits thereto and all documents incorporated by reference therein.

     “Exchange Period” shall have the meaning set forth in Section 2.1 hereof.

     “Exchange Securities” shall mean the 6.75% Senior Notes due 2016, issued by the Company under the Indenture containing terms identical to the Securities in all material respects (except for references to certain interest rate provisions, restrictions on transfers and restrictive legends), to be offered to Holders of Securities in exchange for Registrable Securities pursuant to the Exchange Offer.

     “Holder” shall mean an Initial Purchaser, for so long as it owns any Registrable Securities, and each of its successors, assigns and direct and indirect transferees who become registered owners of Registrable Securities under the Indenture and each Participating Broker-Dealer that holds Exchange Securities for so long as such Participating Broker-Dealer is required to deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchange Securities.

     “Indenture” shall mean the Indenture relating to the Securities, dated as of February 1, 1993, between the Company and The Bank of New York, as trustee, as the same may be amended, supplemented, waived or otherwise modified from time to time in accordance with the terms thereof.

     “Initial Purchaser” or “Initial Purchasers” shall have the meaning set forth in the preamble.

     “Majority Holders” shall mean the Holders of a majority of the aggregate principal amount of Outstanding (as defined in the Indenture) Registrable Securities; provided that whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company and other obligors on the Securities or any Affiliate (as defined in the Indenture) of the Company shall be disregarded in determining whether such consent or approval was given by the Holders of such required percentage amount.

     “Participating Broker-Dealer” shall mean any of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, J.P. Morgan Securities Inc., Credit Lyonnais Securities (USA) Inc., Lehman Brothers Inc. and Raymond James & Associates, Inc. and any other broker-dealer which makes a market in the Securities and exchanges Registrable Securities in the Exchange Offer for Exchange Securities.

     “Person” shall mean an individual, partnership (general or limited), corporation, limited liability company, trust or unincorporated organization, or a government or agency or political subdivision thereof.

     “Private Exchange” shall have the meaning set forth in Section 2.1 hereof.

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     “Private Exchange Securities” shall have the meaning set forth in Section 2.1 hereof.

     “Prospectus” shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including any such prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein.

     “Purchase Agreement” shall have the meaning set forth in the preamble.

     “Registrable Securities” shall mean the Securities and, if issued, the Private Exchange Securities; provided, however, that Securities and, if issued, the Private Exchange Securities, shall cease to be Registrable Securities when (i) a Registration Statement with respect to such Securities shall have been declared effective under the 1933 Act and such Securities shall have been disposed of pursuant to such Registration Statement, (ii) such Securities have been sold to the public pursuant to Rule 144 (or any similar provision then in force, but not Rule 144A) under the 1933 Act, (iii) such Securities shall have ceased to be outstanding or (iv) the Exchange Offer is consummated (except in the case of Securities purchased from the Company and continued to be held by the Initial Purchasers).

     “Registration Expenses” shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including without limitation: (i) all SEC, stock exchange or National Association of Securities Dealers, Inc. (the “NASD”) registration and filing fees, including, if applicable, the fees and expenses of any “qualified independent underwriter” (and its counsel) that is required to be retained by any holder of Registrable Securities in accordance with the rules and regulations of the NASD, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws and compliance with the rules of the NASD (including reasonable fees and disbursements of counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Securities or Registrable Securities and any filings with the NASD), (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all fees and expenses incurred in connection with the listing, if any, of any of the Registrable Securities on any securities exchange or exchanges, (v) all rating agency fees, (vi) the fees and disbursements of counsel for the Company and of the independent public accountants of the Company, including the expenses of any special audits or “cold comfort” letters required by or incident to such performance and compliance, (vii) the fees and expenses of the Trustee, and any escrow agent or custodian, (viii) the reasonable fees and expenses of the Initial Purchasers in connection with the Exchange Offer, including the reasonable fees and expenses of counsel to the Initial Purchasers in connection therewith and (ix) any fees and disbursements of the underwriters customarily required to be paid by issuers or sellers of securities and the fees and expenses of any special experts retained by the Company in connection with any Registration Statement, but excluding

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underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a Holder.

     “Registration Statement” shall mean any registration statement of the Company which covers any of the Exchange Securities or Registrable Securities pursuant to the provisions of this Agreement, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein.

     “SEC” shall mean the Securities and Exchange Commission or any successor agency or government body performing the functions currently performed by the United States Securities and Exchange Commission.

     “Shelf Registration” shall mean a registration effected pursuant to Section 2.2 hereof.

     “Shelf Registration Statement” shall mean a “shelf” registration statement of the Company pursuant to the provisions of Section 2.2 of this Agreement which covers all of the Registrable Securities or all of the Private Exchange Securities on an appropriate form under Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein.

     “Trustee” shall mean the trustee with respect to the Securities under the Indenture.

     2. Registration Under the 1933 Act.

          2.1 Exchange Offer. The Company shall, for the benefit of the Holders, at the Company’s cost, (A) prepare and, as soon as practicable but not later than 90 days following the Closing Date, file with the SEC an Exchange Offer Registration Statement on an appropriate form under the 1933 Act with respect to a proposed Exchange Offer and the issuance and delivery to the Holders, in exchange for the Registrable Securities (other than Private Exchange Securities), of a like principal amount of Exchange Securities, (B) use its best efforts to cause the Exchange Offer Registration Statement to be declared effective under the 1933 Act within 180 days of the Closing Date, (C) use its best efforts to keep the Exchange Offer Registration Statement effective until the closing of the Exchange Offer and (D) use its best efforts to cause the Exchange Offer to be consummated not later than 210 days following the Closing Date. The Exchange Securities will be issued under the Indenture. Upon the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder eligible and electing to exchange Registrable Securities for Exchange Securities (assuming that such Holder (a) is not an affiliate of the Company within the meaning of Rule 405 under the 1933 Act, (b) is not a broker-dealer tendering Registrable Securities acquired directly from the Company for its own account, (c) acquired the Exchange Securities in the ordinary course of such Holder’s business and (d) has no arrangements or understandings with any Person to participate in the Exchange Offer for the purpose of distributing the Exchange Securities) to transfer such Exchange Securities from and

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after their receipt without any limitations or restrictions under the 1933 Act and under state securities or blue sky laws.

     In connection with the Exchange Offer, the Company shall:

          (a) mail as promptly as practicable to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents;

          (b) keep the Exchange Offer open for acceptance for a period of not less than 20 business days after the date notice thereof is mailed to the Holders (or longer if required by applicable law) (such period referred to herein as the “Exchange Period”);

          (c) utilize the services of the Depositary for the Exchange Offer;

          (d) permit Holders to withdraw tendered Registrable Securities at any time prior to 5:00 p.m. (Eastern Time), on the last business day of the Exchange Period, by sending to the Depositary, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Securities delivered for exchange, and a statement that such Holder is withdrawing such Holder’s election to have such Securities exchanged;

          (e) notify each Holder that any Registrable Security not tendered will remain outstanding and continue to accrue interest, but will not retain any rights under this Agreement (except in the case of the Initial Purchasers and Participating Broker-Dealers as provided herein); and

          (f) otherwise comply in all respects with all applicable laws relating to the Exchange Offer.

     If, prior to consummation of the Exchange Offer, the Initial Purchasers hold any Securities acquired by them and having the status of an unsold allotment in the initial distribution, the Company upon the request of any Initial Purchaser shall, simultaneously with the delivery of the Exchange Securities in the Exchange Offer, issue and deliver to such Initial Purchaser in exchange (the “Private Exchange”) for the Securities held by such Initial Purchaser, a like principal amount of debt securities of the Company on a senior basis, that are identical (except that such securities shall bear appropriate transfer restrictions) to the Exchange Securities (the “Private Exchange Securities”).

     The Exchange Securities and the Private Exchange Securities shall be issued under (i) the Indenture or (ii) an indenture identical in all material respects to the Indenture and which, in either case, has been qualified under the Trust Indenture Act of 1939, as amended (the “TIA”), or is exempt from such qualification and shall provide that the Exchange Securities shall not be subject to the transfer restrictions set forth in the Indenture but that the Private Exchange Securities shall be subject to such transfer restrictions. The Indenture or such indenture shall provide that the Exchange Securities, the Private Exchange Securities and the Securities shall vote and consent together on all matters as one class and that none of the Exchange Securities, the Private Exchange Securities or the Securities will have the right to vote or consent as a

5

separate class on any matter. The Private Exchange Securities shall be of the same series as and the Company shall use all commercially reasonable efforts to have the Private Exchange Securities bear the same CUSIP number as the Exchange Securities. The Company shall not have any liability under this Agreement solely as a result of such Private Exchange Securities not bearing the same CUSIP number as the Exchange Securities.

     As soon as practicable after the close of the Exchange Offer and/or the Private Exchange, as the case may be, the Company shall:

     (i) accept for exchange all Registrable Securities duly tendered and not validly withdrawn pursuant to the Exchange Offer in accordance with the terms of the Exchange Offer Registration Statement and the letter of transmittal which shall be an exhibit thereto;

     (ii) accept for exchange all Securities properly tendered pursuant to the Private Exchange;

     (iii) deliver to the Trustee for cancellation all Registrable Securities so accepted for exchange; and

     (iv) cause the Trustee promptly to authenticate and deliver Exchange Securities or Private Exchange Securities, as the case may be, to each Holder of Registrable Securities so accepted for exchange in a principal amount equal to the principal amount of the Registrable Securities of such Holder so accepted for exchange.

     Interest on each Exchange Security and Private Exchange Security will accrue from the last date on which interest was paid on the Registrable Securities surrendered in exchange therefor or, if no interest has been paid on the Registrable Securities, from the date of original issuance. The Exchange Offer and the Private Exchange shall not be subject to any conditions, other than (i) that the Exchange Offer or the Private Exchange, or the making of any exchange by a Holder, does not violate applicable law or any applicable interpretation of the staff of the SEC, (ii) the due tendering of Registrable Securities in accordance with the Exchange Offer and the Private Exchange, (iii) that each Holder of Registrable Securities exchanged in the Exchange Offer shall have represented that all Exchange Securities to be received by it shall be acquired in the ordinary course of its business and that at the time of the consummation of the Exchange Offer it shall have no arrangement or understanding with any person to participate in the distribution (within the meaning of the 1933 Act) of the Exchange Securities and shall have made such other representations as may be reasonably necessary under applicable SEC rules, regulations or interpretations to render the use of Form S-4 or other appropriate form under the 1933 Act available and (iv) that no action or proceeding shall have been instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer or the Private Exchange which, in the Company’s judgment, would reasonably be expected to impair the ability of the Company to proceed with the Exchange Offer or the Private Exchange. The Company shall inform the Initial Purchasers of the names and addresses of the Holders to whom the Exchange Offer is made, and the Initial Purchasers shall have the right to contact such Holders and otherwise facilitate the tender of Registrable Securities in the Exchange Offer.

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          2.2 Shelf Registration. (i) If, because of any changes in law, SEC rules or regulations or applicable interpretations thereof by the staff of the SEC, the Company is not permitted to effect the Exchange Offer as contemplated by Section 2.1 hereof, (ii) if for any other reason the Exchange Offer Registration Statement is not declared effective within 180 days following the original issue of the Registrable Securities or the Exchange Offer is not consummated within 210 days after the original issue of the Registrable Securities, (iii) upon the request of any of the Initial Purchasers or (iv) if a Holder is not permitted to participate in the Exchange Offer or does not receive fully tradeable Exchange Securities pursuant to the Exchange Offer, then in case of each of clauses (i) through (iv) the Company shall, at its cost:

          (a) As promptly as practicable, file with the SEC, and thereafter shall use its best efforts to cause to be declared effective as promptly as practicable but no later than 210 days after the original issue of the Registrable Securities, a Shelf Registration Statement relating to the offer and sale of the Registrable Securities by the Holders from time to time in accordance with the methods of distribution elected by the Majority Holders participating in the Shelf Registration and set forth in such Shelf Registration Statement.

          (b) Use its best efforts to keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders for a period of two years from the date the Shelf Registration Statement is declared effective by the SEC, or for such shorter period that will terminate when all Registrable Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement or cease to be outstanding or otherwise to be Registrable Securities (the “Effectiveness Period”); provided, however, that the Effectiveness Period in respect of the Shelf Registration Statement shall be extended to the extent required to permit dealers to comply with the applicable prospectus delivery requirements of Rule 174 under the 1933 Act and as otherwise provided herein.

          (c) Notwithstanding any other provisions hereof, use its best efforts to ensure that (i) any Shelf Registration Statement and any amendment thereto and any Prospectus forming part thereof and any supplement thereto complies in all material respects with the 1933 Act and the rules and regulations thereunder, (ii) any Shelf Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Shelf Registration Statement, and any supplement to such Prospectus (as amended or supplemented from time to time), does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading.

          The Company shall not permit any securities other than Registrable Securities to be included in the Shelf Registration Statement. The Company further agrees, if necessary, to supplement or amend the Shelf Registration Statement, as required by Section 3(b) below, and to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the SEC.

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          2.3 Expenses. The Company shall pay all Registration Expenses in connection with the registration pursuant to Section 2.1 or 2.2. Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder’s Registrable Securities pursuant to the Shelf Registration Statement.

          2.4 Effectiveness. (a) The Company will be deemed not have used its best efforts to cause the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, to become, or to remain, effective during the requisite period if the Company voluntarily takes any action that would, or omits to take any action which omission would, result in any such Registration Statement not being declared effective or in the Holders of Registrable Securities covered thereby not being able to exchange or offer and sell such Registrable Securities during that period as and to the extent contemplated hereby, unless such action is required by applicable law.

          (b) An Exchange Offer Registration Statement pursuant to Section 2.1 hereof or a Shelf Registration Statement pursuant to Section 2.2 hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that if, after it has been declared effective, the offering of Registrable Securities pursuant to an Exchange Offer Registration Statement or a Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have become effective during the period of such interference, until the offering of Registrable Securities pursuant to such Registration Statement may legally resume.

          2.5 Interest. The Securities will provide that in the event that either (a) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 90th calendar day following the date of original issue of the Securities, (b) the Exchange Offer Registration Statement has not been declared effective on or prior to the 180th calendar day following the date of original issue of the Securities or (c) the Exchange Offer is not consummated or a Shelf Registration Statement is not declared effective, in either case, on or prior to the 210th calendar day following the date of original issue of the Securities (each such event referred to in clauses (a) through (c) above, a “Registration Default”), the interest rate borne by the Securities shall be increased (“Additional Interest”) by one-quarter of one percent (0.25%) per annum upon the occurrence of each Registration Default, which rate will increase by one quarter of one percent (0.25%) each 90-day period that such Additional Interest continues to accrue under any such circumstance, provided that the maximum aggregate increase in the interest rate will in no event exceed one percent (1.0%) per annum. Upon the cure of all Registration Defaults the accrual of Additional Interest will cease and the interest rate will revert to the original rate.

          If the Shelf Registration Statement is unusable by the Holders for any reason, and the aggregate number of days in any consecutive twelve-month period for which the Shelf Registration Statement shall not be usable exceeds 30 days in the aggregate, then the interest rate borne by the Securities will be increased by one-quarter of one percent (0.25%) per annum of the principal amount of the Securities for the first 90-day period (or portion thereof) beginning on the 31st such date that such Shelf Registration Statement ceases to be usable, which rate shall be

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increased by an additional one-quarter of one percent (0.25%) per annum of the principal amount of the Securities at the beginning of each subsequent 90-day period, provided that the maximum aggregate increase in the interest rate will in no event exceed one percent (1.0%) per annum. Any amounts payable under this paragraph shall also be deemed “Additional Interest” for purposes of this Agreement. Upon the Shelf Registration Statement once again becoming usable, the interest rate borne by the Securities will be reduced to the original interest rate if the Company is otherwise in compliance with this Agreement at such time. Additional Interest shall be computed based on the actual number of days elapsed in each 90-day period in which the Shelf Registration Statement is unusable.

          The Company shall notify the Trustee within three business days after each and every date on which an event occurs in respect of which Additional Interest is required to be paid (an “Event Date”). Additional Interest shall be paid by depositing with the Trustee, in trust, for the benefit of the Holders of Registrable Securities, on or before the applicable semiannual interest payment date, immediately available funds in sums sufficient to pay the Additional Interest then due. The Additional Interest due shall be payable on each interest payment date to the record Holder of Securities entitled to receive the interest payment to be paid on such date as set forth in the Indenture. Each obligation to pay Additional Interest shall be deemed to accrue from and including the day following the applicable Event Date.

     3. Registration Procedures.

          In connection with the obligations of the Company with respect to Registration Statements pursuant to Sections 2.1 and 2.2 hereof, the Company shall:

          (a) prepare and file with the SEC a Registration Statement, within the relevant time period specified in Section 2, on the appropriate form under the 1933 Act, which form (i) shall be selected by the Company, (ii) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Securities by the selling Holders thereof, (iii) shall comply as to form in all material respects with the requirements of the applicable form and include or incorporate by reference all financial statements required by the SEC to be filed therewith or incorporated by reference therein, and (iv) shall comply in all respects with the requirements of Regulation S-T under the 1933 Act, and use its best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof;

          (b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary under applicable law to keep such Registration Statement effective for the applicable period; and cause each Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the 1933 Act and comply with the provisions of the 1933 Act, the 1934 Act and the rules and regulations thereunder applicable to them with respect to the disposition of all securities covered by each Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the selling Holders thereof (including sales by any Participating Broker-Dealer);

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          (c) in the case of a Shelf Registration, (i) notify each Holder of Registrable Securities, at least five business days prior to filing, that a Shelf Registration Statement with respect to the Registrable Securities is being filed and advising such Holders that the distribution of Registrable Securities will be made in accordance with the method selected by the Majority Holders participating in the Shelf Registration; (ii) furnish to each Holder of Registrable Securities and to each underwriter of an underwritten offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as such Holder or underwriter may reasonably request, including financial statements and schedules and, if the Holder so requests, all exhibits in order to facilitate the public sale or other disposition of the Registrable Securities; and (iii) hereby consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Registrable Securities in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto;

          (d) use its best efforts to register or qualify the Registrable Securities under all applicable state securities or “blue sky” laws of such jurisdictions as any Holder of Registrable Securities covered by a Registration Statement and each underwriter of an underwritten offering of Registrable Securities shall reasonably request by the time the applicable Registration Statement is declared effective by the SEC, and do any and all other acts and things which may be reasonably necessary or advisable to enable each such Holder and underwriter to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), or (ii) take any action which would subject it to general service of process or taxation in any such jurisdiction where it is not then so subject;

          (e) notify promptly each Holder of Registrable Securities under a Shelf Registration or any Participating Broker-Dealer who has notified the Company that it is utilizing the Exchange Offer Registration Statement as provided in paragraph (f) below and, if requested by such Holder or Participating Broker-Dealer, confirm such advice in writing promptly (i) when a Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of any request by the SEC or any state securities authority for post-effective amendments and supplements to a Registration Statement and Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) in the case of a Shelf Registration, if, between the effective date of a Registration Statement and the closing of any sale of Registrable Securities covered thereby, the representations and warranties of the Company contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to the offering cease to be true and correct in all material respects, (v) of the happening of any event or the discovery of any facts during the period a Shelf Registration Statement is effective which makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or which requires the making of any changes in such Registration Statement or Prospectus in order to make the statements therein not misleading, (vi) of the receipt by the Company of any notification with

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respect to the suspension of the qualification of the Registrable Securities or the Exchange Securities, as the case may be, for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (vii) of any determination by the Company that a post-effective amendment to such Registration Statement would be appropriate;

          (f) in the case of the Exchange Offer Registration Statement (i) include in the Exchange Offer Registration Statement a section entitled “Plan of Distribution” which section shall be reasonably acceptable to Merrill Lynch on behalf of the Participating Broker-Dealers, and which shall contain a summary statement of the positions taken or policies made by the staff of the SEC with respect to the potential “underwriter” status of any broker-dealer that holds Registrable Securities acquired for its own account as a result of market-making activities or other trading activities and that will be the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange Securities to be received by such broker-dealer in the Exchange Offer, whether such positions or policies have been publicly disseminated by the staff of the SEC or such positions or policies, in the reasonable judgment of Merrill Lynch on behalf of the Participating Broker-Dealers and its counsel, represent the prevailing views of the staff of the SEC, including a statement that any such broker-dealer who receives Exchange Securities for Registrable Securities pursuant to the Exchange Offer may be deemed a statutory underwriter and must deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchange Securities, (ii) furnish to each Participating Broker-Dealer who has delivered to the Company the notice referred to in Section 3(e), without charge, as many copies of each Prospectus included in the Exchange Offer Registration Statement, including any preliminary prospectus, and any amendment or supplement thereto, as such Participating Broker-Dealer may reasonably request, (iii) hereby consent to the use of the Prospectus forming part of the Exchange Offer Registration Statement or any amendment or supplement thereto, by any Person subject to the prospectus delivery requirements of the SEC, including all Participating Broker-Dealers, in connection with the sale or transfer of the Exchange Securities covered by the Prospectus or any amendment or supplement thereto, and (iv) include in the transmittal letter or similar documentation to be executed by an exchange offeree in order to participate in the Exchange Offer (x) the following provision:

“If the exchange offeree is a broker-dealer holding Registrable Securities acquired for its own account as a result of market-making activities or other trading activities, it will deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of Exchange Securities received in respect of such Registrable Securities pursuant to the Exchange Offer;” and

(y) a statement to the effect that by a broker-dealer making the acknowledgment described in clause (x) and by delivering a Prospectus in connection with the exchange of Registrable Securities, the broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the 1933 Act.

          (g) (i) in the case of an Exchange Offer, furnish counsel for the Initial Purchasers and (ii) in the case of a Shelf Registration, furnish counsel for the Holders of Registrable Securities copies of any comment letters received from the SEC or any other request

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by the SEC or any state securities authority for amendments or supplements to a Registration Statement and Prospectus or for additional information;

          (h) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment;

          (i) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities, and each underwriter, if any, without charge, at least one conformed copy of each Registration Statement and any post-effective amendment thereto, including financial statements and schedules (without documents incorporated therein by reference and all exhibits thereto, unless requested);

          (j) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders or the underwriters, if any, may reasonably request at least three business days prior to the closing of any sale of Registrable Securities;

          (k) in the case of a Shelf Registration, upon the occurrence of any event or the discovery of any facts, each as contemplated by Sections 3(e)(v) and 3(e)(vi) hereof, as promptly as practicable after the occurrence of such an event, use its best efforts to prepare a supplement or post-effective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities or Participating Broker-Dealers, such Prospectus will not contain at the time of such delivery any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or will remain so qualified. At such time as such public disclosure is otherwise made or the Company determines that such disclosure is not necessary, in each case to correct any misstatement of a material fact or to include any omitted material fact, the Company agrees promptly to notify each Holder of such determination and to furnish each Holder such number of copies of the Prospectus as amended or supplemented, as such Holder may reasonably request;

          (l) in the case of a Shelf Registration, a reasonable time prior to the filing of any Registration Statement, any Prospectus, any amendment to a Registration Statement or amendment or supplement to a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus after initial filing of a Registration Statement, provide copies of such document to the Initial Purchasers on behalf of such Holders; and make representatives of the Company as shall be reasonably requested by the Holders of Registrable Securities, or the Initial Purchasers on behalf of such Holders, available for discussion of such document;

          (m) obtain a CUSIP number for all Exchange Securities, Private Exchange Securities or Registrable Securities, as the case may be, not later than the effective date of a

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Registration Statement, and provide the Trustee with printed certificates for the Exchange Securities, Private Exchange Securities or the Registrable Securities, as the case may be, in a form eligible for deposit with DTC;

          (n) (i) cause the Indenture to be qualified under the TIA in connection with the registration of the Exchange Securities or Registrable Securities, as the case may be, (ii) cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA and (iii) execute, and use its best efforts to cause the Trustee to execute, all documents as may be required to effect such changes, and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner;

          (o) in the case of a Shelf Registration, enter into agreements (including underwriting agreements) and take all other customary and appropriate actions in order to expedite or facilitate the disposition of such Registrable Securities and in such connection whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration:

               (i) make such representations and warranties to the Holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in similar underwritten offerings as may be reasonably requested by them;

               (ii) enter into a securities sales agreement with the Holders and an agent of the Holders providing for, among other things, the appointment of such agent for the selling Holders for the purpose of soliciting purchases of Registrable Securities, which agreement shall be in form, substance and scope customary for similar offerings;

               (iii) if an underwriting agreement is entered into, cause the same to set forth indemnification provisions and procedures substantially equivalent to the indemnification provisions and procedures set forth in Section 4 hereof with respect to the underwriters and all other parties to be indemnified pursuant to said Section or, at the request of any underwriters, in the form customarily provided to such underwriters in similar types of transactions; and

               (iv) deliver such documents and certificates as may be reasonably requested and as are customarily delivered in similar offerings to the Holders of a majority in principal amount of the Registrable Securities being sold and the managing underwriters, if any.

The above shall be done at (i) the effectiveness of such Registration Statement (and each post-effective amendment thereto) and (ii) each closing under any underwriting or similar agreement as and to the extent required thereunder;

          (p) in the case of a Shelf Registration or if a Prospectus is required to be delivered by any Participating Broker-Dealer in the case of an Exchange Offer, make available for inspection by representatives of the Holders of the Registrable Securities, any underwriters participating in any disposition pursuant to a Shelf Registration Statement, any Participating

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Broker-Dealer and any counsel or accountant retained by any of the foregoing, all financial and other records, pertinent corporate documents and properties of the Company reasonably requested by any such persons, and cause the respective officers, directors, employees, and any other agents of the Company to supply all information reasonably requested by any such representative, underwriter, special counsel or accountant in connection with a Registration Statement, and make such representatives of the Company available for discussion of such documents as shall be reasonably requested by the Initial Purchasers;

          (q) (i) in the case of an Exchange Offer Registration Statement, a reasonable time prior to the filing of any Exchange Offer Registration Statement, any Prospectus forming a part thereof, any amendment to an Exchange Offer Registration Statement or amendment or supplement to such Prospectus, provide copies of such document to the Initial Purchasers and to counsel to the Holders of Registrable Securities and make such changes in any such document prior to the filing thereof as the Initial Purchasers or counsel to the Holders of Registrable Securities may reasonably request and, except as otherwise required by applicable law, not file any such document in a form to which the Initial Purchasers on behalf of the Holders of Registrable Securities and counsel to the Holders of Registrable Securities shall not have previously been advised and furnished a copy of or to which the Initial Purchasers on behalf of the Holders of Registrable Securities or counsel to the Holders of Registrable Securities shall reasonably object, and make the representatives of the Company available for discussion of such documents as shall be reasonably requested by the Initial Purchasers; and

               (ii) in the case of a Shelf Registration, a reasonable time prior to filing any Shelf Registration Statement, any Prospectus forming a part thereof, any amendment to such Shelf Registration Statement or amendment or supplement to such Prospectus, provide copies of such document to the Holders of Registrable Securities, to the Initial Purchasers, to counsel for the Holders and to the underwriter or underwriters of an underwritten offering of Registrable Securities, if any, make such changes in any such document prior to the filing thereof as the Initial Purchasers, the counsel to the Holders or the underwriter or underwriters reasonably request and not file any such document in a form to which the Majority Holders, the Initial Purchasers on behalf of the Holders of Registrable Securities, counsel for the Holders of Registrable Securities or any underwriter shall not have previously been advised and furnished a copy of or to which the Majority Holders, the Initial Purchasers of behalf of the Holders of Registrable Securities, counsel to the Holders of Registrable Securities or any underwriter shall reasonably object, and make the representatives of the Company available for discussion of such document as shall be reasonably requested by the Holders of Registrable Securities, the Initial Purchasers on behalf of such Holders, counsel for the Holders of Registrable Securities or any underwriter.

          (r) in the case of a Shelf Registration, use its best efforts to cause all Registrable Securities to be listed on any securities exchange on which similar debt securities issued by the Company are then listed if requested by the Majority Holders, or if requested by the underwriter or underwriters of an underwritten offering of Registrable Securities, if any;

          (s) in the case of a Shelf Registration, use its best efforts to cause the Registrable Securities to be rated by the appropriate rating agencies, if so requested by the

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Majority Holders, or if requested by the underwriter or underwriters of an underwritten offering of Registrable Securities, if any;

          (t) otherwise comply with all applicable rules and regulations of the SEC and make available to its security holders, as soon as reasonably practicable, an earnings statement covering at least 12 months which shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 thereunder;

          (u) cooperate and assist in any filings required to be made with the NASD and, in the case of a Shelf Registration, in the performance of any due diligence investigation by any underwriter and its counsel (including any “qualified independent underwriter” that is required to be retained in accordance with the rules and regulations of the NASD); and

          (v) upon consummation of an Exchange Offer or a Private Exchange, obtain a customary opinion of counsel to the Company addressed to the Trustee for the benefit of all Holders of Registrable Securities participating in the Exchange Offer or Private Exchange, and which includes an opinion that (i) the Company has duly authorized, executed and delivered the Exchange Securities and/or Private Exchange Securities, as applicable, and the related indenture, and (ii) each of the Exchange Securities and related indenture constitute a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its respective terms (with customary exceptions).

          In the case of a Shelf Registration Statement, the Company may (as a condition to such Holder’s participation in the Shelf Registration) require each Holder of Registrable Securities to furnish to the Company such information regarding the Holder and the proposed distribution by such Holder of such Registrable Securities as the Company may from time to time reasonably request in writing.

          In the case of a Shelf Registration Statement, each Holder agrees that, upon receipt of any notice from the Company of the happening of any event or the discovery of any facts, each of the kind described in Section 3(e)(v) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to a Registration Statement until such Holder’s receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(k) hereof, and, if so directed by the Company, such Holder will deliver to the Company (at its expense) all copies in such Holder’s possession, other than permanent file copies then in such Holder’s possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice.

          In the event that the Company fails to effect the Exchange Offer or file any Shelf Registration Statement and maintain the effectiveness of any Shelf Registration Statement as provided herein, the Company shall not file any Registration Statement with respect to any securities (within the meaning of Section 2(1) of the 1933 Act) of the Company other than Registrable Securities.

          If any of the Registrable Securities covered by any Shelf Registration Statement are to be sold in an underwritten offering, the underwriter or underwriters and manager or

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managers that will manage such offering will be selected by the Majority Holders of such Registrable Securities included in such offering and shall be acceptable to the Company. No Holder of Registrable Securities may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder’s Registrable Securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements.

     4. Indemnification; Contribution.

          (a) The Company agrees to indemnify and hold harmless the Initial Purchasers, each Holder, each Participating Broker-Dealer, each Person who participates as an underwriter (any such Person being an “Underwriter”) and each Person, if any, who controls any Holder or Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:

               (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment or supplement thereto) pursuant to which Exchange Securities or Registrable Securities were registered under the 1933 Act, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;

               (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 4(d) below) any such settlement is effected with the written consent of the Company; and

               (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by any indemnified party), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) above;

provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information

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furnished to the Company by the Holder or Underwriter expressly for use in a Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto).

          (b) Each Holder severally, but not jointly, agrees to indemnify and hold harmless the Company, the Initial Purchasers, each Underwriter and the other selling Holders, and each of their respective directors and officers, and each Person, if any, who controls the Company, the Initial Purchasers, any Underwriter or any other selling Holder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in Section 4(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Shelf Registration Statement (or any amendment thereto) or any Prospectus included therein (or any amendment or supplement thereto) in reliance upon and in conformity with written information with respect to such Holder furnished to the Company by such Holder expressly for use in the Shelf Registration Statement (or any amendment thereto) or such Prospectus (or any amendment or supplement thereto); provided, however, that no such Holder shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Registrable Securities pursuant to such Shelf Registration Statement.

          (c) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action or proceeding commenced against it in respect of which indemnity may be sought hereunder, but failure so to notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying party or parties be liable for the fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 4 (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.

          (d) If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 4(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45

17

days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement.

          (e) If the indemnification provided for in this Section 4 is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and the Holders and the Initial Purchasers on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.

     The relative fault of the Company on the one hand and the Holders and the Initial Purchasers on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, the Holders or the Initial Purchasers and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

     The Company, the Holders and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 4. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 4 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission.

     Notwithstanding the provisions of this Section 4, no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Securities sold by it were offered exceeds the amount of any damages which such Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.

     No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.

     For purposes of this Section 4, each Person, if any, who controls an Initial Purchaser or Holder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Initial Purchaser or Holder, and each director of the Company, and each Person, if any, who controls the Company within the meaning

18

of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The Initial Purchasers’ respective obligations to contribute pursuant to this Section 7 are several in proportion to the principal amount of Securities set forth opposite their respective names in Schedule A to the Purchase Agreement and not joint.

     5. Miscellaneous.

          5.1 Rule 144 and Rule 144A. For so long as the Company is subject to the reporting requirements of Section 13 or 15 of the 1934 Act, the Company covenants that it will file the reports required to be filed by it under the 1933 Act and Section 13(a) or 15(d) of the 1934 Act and the rules and regulations adopted by the SEC thereunder. If the Company ceases to be so required to file such reports, the Company covenants that it will upon the request of any Holder of Registrable Securities (a) make publicly available such information as is necessary to permit sales pursuant to Rule 144 under the 1933 Act, (b) deliver such information to a prospective purchaser as is necessary to permit sales pursuant to Rule 144A under the 1933 Act and it will take such further action as any Holder of Registrable Securities may reasonably request, and (c) take such further action that is reasonable in the circumstances, in each case, to the extent required from time to time to enable such Holder to sell its Registrable Securities without registration under the 1933 Act within the limitation of the exemptions provided by (i) Rule 144 under the 1933 Act, as such Rule may be amended from time to time, (ii) Rule 144A under the 1933 Act, as such Rule may be amended from time to time, or (iii) any similar rules or regulations hereafter adopted by the SEC. Upon the request of any Holder of Registrable Securities, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements.

          5.2 No Inconsistent Agreements. The Company has not entered into and the Company will not after the date of this Agreement enter into any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not and will not for the term of this Agreement in any way conflict with the rights granted to the holders of the Company’s other issued and outstanding securities under any such agreements.

          5.3 Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of Holders of at least a majority in aggregate principal amount of the outstanding Registrable Securities affected by such amendment, modification, supplement, waiver or departure.

          5.4 Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (a) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 5.4, which address initially is the address set forth in the Purchase Agreement with respect to the Initial Purchasers; and (b) if to the Company, initially at the

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Company’s address set forth in the Purchase Agreement, and thereafter at such other address of which notice is given in accordance with the provisions of this Section 5.4.

          All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; two business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery.

          Copies of all such notices, demands, or other communications shall be concurrently delivered by the person giving the same to the Trustee under the Indenture, at the address specified in such Indenture.

          5.5 Successor and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such person shall be entitled to receive the benefits hereof.

          5.6 Third Party Beneficiaries. The Initial Purchasers (even if the Initial Purchasers are not Holders of Registrable Securities) shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Holders, on the other hand, and shall have the right to enforce such agreements directly to the extent they deem such enforcement necessary or advisable to protect their rights or the rights of Holders hereunder. Each Holder of Registrable Securities shall be a third party beneficiary to the agreements made hereunder between the Company, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights hereunder.

          5.7 Specific Enforcement. Without limiting the remedies available to the Initial Purchasers and the Holders, the Company acknowledges that any failure by the Company to comply with its obligations under Sections 2.1 through 2.4 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it would not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company’s obligations under Sections 2.1 through 2.4 hereof.

20

          5.8 Restriction on Resales. Until the expiration of two years after the original issuance of the Securities and the Guarantees, the Company and the Guarantor will not, and will cause their “affiliates” (as such term is defined in Rule 144(a)(1) under the 1933 Act) not to, resell any Securities and Guarantees which are “restricted securities” (as such term is defined under Rule 144(a)(3) under the 1933 Act) that have been reacquired by any of them and shall immediately upon any purchase of any such Securities and Guarantees submit such Securities and Guarantees to the Trustee for cancellation.

          5.9 Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

          5.10 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

          5.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF.

          5.12 Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby.

21

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

SERVICE CORPORATION INTERNATIONAL
By:	/s/ Jeffrey E. Curtiss
	Name:	Jeffrey E. Curtiss
	Title:	Senior Vice President, Chief Financial Officer and Treasurer

Confirmed and accepted as
	of the date first above
	written:
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
BANC OF AMERICA SECURITIES LLC
J.P. MORGAN SECURITIES INC.
CREDIT LYONNAIS SECURITIES (USA) INC.
LEHMAN BROTHERS INC.
RAYMOND JAMES & ASSOCIATES, INC.
BY:	MERRILL LYNCH, PIERCE, FENNER & SMITH
	INCORPORATED
By:	/s/ Brad Bynum
Name:	Brad Bynum
Title:	Director

22

EX-12.1

Exhibit 12.1

SERVICE CORPORATION INTERNATIONAL
RATIO OF EARNINGS TO FIXED CHARGES
(In thousands, except ratio amounts)

	Six Months Ended June 30,
	2004		2003
			(Restated)
Earnings:
Income from continuing operations before income taxes and cumulative effects of accounting changes	$	79,302	$	91,194
Minority interest in income of majority owned subsidiaries that have not incurred fixed charges		310		286
Add fixed charges as adjusted (from below)		77,107		82,704
	$	156,719	$	174,184
Fixed charges:
Interest expense:
Corporate	$	61,838	$	68,459
Amortization of debt costs		4,942		4,674
1/3 of rental expense		10,327		9,571
Fixed charges		77,107		82,704
Less: Capitalized interest		—		—
Fixed charges as adjusted	$	77,107	$	82,704
Ratio (earnings divided by fixed charges)		2.03		2.11

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Robert L. Waltrip, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Service Corporation International (the “registrant”);
2.	Based on my knowledge, this 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 report;
3.	Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

     b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 16, 2004	/s/ Robert L. Waltrip
	Robert L. Waltrip
	Chairman of the Board and
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Jeffrey E. Curtiss, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Service Corporation International (the “registrant”);
2.	Based on my knowledge, this 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 report;
3.	Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

     b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 16, 2004	/s/ Jeffrey E. Curtiss
	Jeffrey E. Curtiss
	Senior Vice President
	Chief Financial Officer and
	Treasurer

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer

I, Robert L. Waltrip, of Service Corporation International, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 (the “Periodic Report”) which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)	the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Service Corporation International.

Dated: August 16, 2004

/s/ Robert L. Waltrip

Robert L. Waltrip

Chairman of the Board and

Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification of Principal Financial Officer

I, Jeffrey E. Curtiss, of Service Corporation International, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 (the “Periodic Report”) which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)	the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Service Corporation International.

Dated: August 16, 2004

/s/ Jeffrey E. Curtiss

Jeffrey E. Curtiss

Senior Vice President

Chief Financial Officer and

Treasurer

(Principal Financial Officer)

EX-99.6

Exhibit 99.6

$200,000,000

AMENDED AND RESTATED

REVOLVING CREDIT AGREEMENT

dated as of

August 11, 2004

among

SERVICE CORPORATION INTERNATIONAL
as Borrower,

The Lenders Party Hereto,

JPMORGAN CHASE BANK,
as Administrative Agent,

BANK OF AMERICA, N.A.,
as Syndication Agent,
and

CALYON NEW YORK BRANCH,

SOUTHWEST BANK OF TEXAS, N.A.,

and

MERRILL LYNCH CAPITAL CORPORATION,
as Co-Documentation Agents

J.P. MORGAN SECURITIES INC.,

and

BANC OF AMERICA SECURITIES LLC,
as Joint Bookrunners and Joint Lead Arrangers

Andrews Kurth LLP
Counsel to the Administrative Agent

TABLE OF CONTENTS

	Page
ARTICLE I — Definitions		1
SECTION 1.01 Defined Terms		1
SECTION 1.02 Classification of Loans and Borrowings		20
SECTION 1.03 Terms Generally		20
SECTION 1.04 Accounting Terms; GAAP		21
ARTICLE II — The Credits		21
SECTION 2.01 Commitments		21
SECTION 2.02 Loans and Borrowings		21
SECTION 2.03 Requests for Revolving Borrowings		22
SECTION 2.04 Swingline Loans		23
SECTION 2.05 Letters of Credit		24
SECTION 2.06 Funding of Borrowings		28
SECTION 2.07 Interest Elections		29
SECTION 2.08 Termination of Commitments; Reductions and Increases of Commitments		30
SECTION 2.09 Repayment of Loans; Evidence of Debt		32
SECTION 2.10 Prepayment of Loans		32
SECTION 2.11 Fees		33
SECTION 2.12 Interest		34
SECTION 2.13 Alternate Rate of Interest		35
SECTION 2.14 Increased Costs		35
SECTION 2.15 Break Funding Payments		36
SECTION 2.16 Taxes		37
SECTION 2.17 Payments Generally; Pro Rata Treatment; Sharing of Setoffs		38
SECTION 2.18 Mitigation Obligations; Replacement of Lenders		39
ARTICLE III — Representations and Warranties		40
SECTION 3.01 Organization; Powers		40
SECTION 3.02 Authorization; Enforceability		40
SECTION 3.03 Governmental Approvals; No Conflicts		40
SECTION 3.04 Financial Statements; No Material Adverse Change		40
SECTION 3.05 Properties		41
SECTION 3.06 Litigation and Environmental Matters		41
SECTION 3.07 Compliance with Laws and Agreements		41
SECTION 3.08 Investment and Holding Company Status		42
SECTION 3.09 Taxes		42
SECTION 3.10 ERISA		42
SECTION 3.11 Disclosure		42
SECTION 3.12 Subsidiaries		42
SECTION 3.13 Security Interests		42

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	Page
SECTION 3.14 Margin Stock		43
SECTION 3.15 Use of Proceeds		43
ARTICLE IV — Conditions		43
SECTION 4.01 Effective Date		43
SECTION 4.02 Each Credit Event		44
ARTICLE V — Affirmative Covenants		45
SECTION 5.01 Financial Statements and Other Information		45
SECTION 5.02 Notices of Material Events		47
SECTION 5.03 Existence; Conduct of Business		47
SECTION 5.04 Payment of Obligations		47
SECTION 5.05 Maintenance of Properties		48
SECTION 5.06 Books and Records; Inspection and Audit Rights		48
SECTION 5.07 Compliance with Laws		48
SECTION 5.08 Information Regarding Collateral		48
SECTION 5.09 Insurance		48
SECTION 5.10 Additional Subsidiaries		48
SECTION 5.11 Further Assurances		49
SECTION 5.12 Use of Proceeds and Letters of Credit		49
ARTICLE VI — Negative Covenants		49
SECTION 6.01 Indebtedness; Certain Equity Securities		49
SECTION 6.02 Liens		51
SECTION 6.03 Sale and Leaseback Transactions		51
SECTION 6.04 Fundamental Changes		52
SECTION 6.05 Investments, Loans, Advances, Guarantees and Acquisitions		52
SECTION 6.06 Asset Sales		54
SECTION 6.07 Swap Agreements		55
SECTION 6.08 Restricted Payments		55
SECTION 6.09 Transactions with Affiliates		56
SECTION 6.10 Restrictive Agreements		56
SECTION 6.11 Fiscal Year		57
SECTION 6.12 Interest Expense Coverage Ratio		57
SECTION 6.13 Leverage Ratio		57
SECTION 6.14 Capital Expenditures		58
SECTION 6.15 Net Worth		58
ARTICLE VII — Events of Default		58
ARTICLE VIII — The Agents		61
ARTICLE IX — Miscellaneous		63
SECTION 9.01 Notices		63
SECTION 9.02 Waivers; Amendments		64
SECTION 9.03 Expenses; Indemnity; Damage Waiver		65
SECTION 9.04 Successors and Assigns		66

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	Page
SECTION 9.05 Survival		70
SECTION 9.06 Counterparts; Integration; Effectiveness		70
SECTION 9.07 Severability		71
SECTION 9.08 Right of Setoff		71
SECTION 9.09 Governing Law; Jurisdiction; Consent to Service of Process		71
SECTION 9.10 WAIVER OF JURY TRIAL		72
SECTION 9.11 Headings		72
SECTION 9.12 Confidentiality		72
SECTION 9.13 Release of Guarantors and Collateral		73
SECTION 9.14 FINAL AGREEMENT OF THE PARTIES		73
SECTION 9.15 USA PATRIOT ACT		74

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SCHEDULES:

Schedule 1.01(a) — Non-Cash Recurring Charges
Schedule 1.01(b) — Material Subsidiaries
Schedule 2.01 — Commitments
Schedule 2.05 — Existing Letters of Credit
Schedule 3.12 — Subsidiaries
Schedule 6.01 — Existing Indebtedness
Schedule 6.02 — Existing Liens
Schedule 6.05 — Existing Investments
Schedule 6.10 — Existing Restrictions

EXHIBITS:

Exhibit A — Form of Assignment and Assumption
Exhibit B — Guarantee and Collateral Agreement

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AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
dated as of August 11, 2004, among
SERVICE CORPORATION INTERNATIONAL;
the LENDERS party hereto;
JPMORGAN CHASE BANK, as Administrative Agent;
BANK OF AMERICA, N.A., as Syndication Agent; and
CALYON NEW YORK BRANCH,
SOUTHWEST BANK OF TEXAS, N.A., and
MERRILL LYNCH CAPITAL CORPORATION,
as Co-Documentation Agents.

     The Borrower has requested the Lenders to modify and amend that certain Credit Agreement dated as of July 24, 2002, as amended by Amendment No. 1 dated as of December 6, 2002, as amended by Amendment No. 2 dated as of September 29, 2003 (the “Existing Credit Agreement”), among the Borrower, the financial institutions from time to time party thereto, JPMorgan Chase Bank, as administrative agent for the lenders and as collateral agent for the lenders, Bank of America, N.A., as syndication agent for the lenders and Credit Lyonnais New York Branch, Lehman Commercial Paper Inc. and Merrill Lynch Capital Corporation, as co-documentation agents for the lenders. The Lenders and Agents have agreed to do so and all parties have agreed to execute this Agreement as evidence thereof. Following the execution hereof, this Agreement shall amend and restate the Existing Credit Agreement in its entirety.

     The proceeds of the Loans will be used to refinance outstanding amounts under the Existing Credit Agreement and for general corporate purposes of the Borrower and the Subsidiaries. Letters of Credit will be used for general corporate purposes of the Borrower and the Subsidiaries.

     The parties hereto agree as follows:

ARTICLE I
Definitions

     SECTION 1.01 Defined Terms. As used in this Agreement, the following terms have the meanings specified below:

     “ABR”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate.

     “Accession Agreement” has the meaning set forth in Section 2.08(d).

     “Adjusted LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate.

     “Administrative Agent” means JPMorgan Chase Bank, in its capacity as administrative agent for the Lenders hereunder.

     “Administrative Questionnaire” means an Administrative Questionnaire in a form supplied by the Administrative Agent.

     “Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

     “Agents” means the Administrative Agent and the Collateral Agent.

     “Agreement” shall mean this Amended and Restated Revolving Credit Agreement, as the same may from time to time be amended, supplemented or otherwise modified.

     “Alternate Base Rate” means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively.

     “Applicable Percentage” means, with respect to any Lender, the percentage of the total Commitments represented by such Lender’s Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments.

     “Applicable Rate” means, for any day, with respect to any Alternate Base Rate Loan or Eurodollar Loan or with respect to the commitment fees payable hereunder, as the case may be, the applicable rate per annum set forth below under the caption “ABR Spread”, “Eurodollar Spread” or “Commitment Fee Rate”, as the case may be, based upon the Leverage Ratio as of the end of the most recent fiscal quarter of the Borrower for which financial statements shall have been delivered pursuant to Section 5.01(a) or (b) (or, prior to the delivery of any such financial statements, as of March 31, 2004):

Leverage Ratio	ABR Spread		Eurodollar Spread		Commitment Fee Rate
Category 1 Greater than or equal to 3.5 to 1.0		125.0		225.0		0.500	%
Category 2 < 3.5 to 1.0 and greater than or equal to 3.0 to 1.0		100.0		200.0		0.500	%

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Leverage Ratio	ABR Spread		Eurodollar Spread		Commitment Fee Rate
Category 3 < 3.0 to 1.0 and greater than or equal to 2.5 to 1.0		75.0		175.0		0.500	%
Category 4 <2.5 to 1.0 and greater than or equal to 2.0 to 1.0		50.0		150.0		0.375	%
Category 5 <2.0 to 1.0		25.0		125.0		0.250	%

     For purposes of the foregoing, each change in the Applicable Rate resulting from a change in the Leverage Ratio shall be effective during the period commencing on and including the date of delivery to the Administrative Agent of such consolidated financial statements indicating such change and ending on the date immediately preceding the effective date of the next such change; provided that the Leverage Ratio shall be deemed to be in Category 1 (a) at any time that an Event of Default has occurred and is continuing or (b) at the option of the Administrative Agent or at the request of the Required Lenders if the Borrower fails to deliver the consolidated financial statements required to be delivered by it pursuant to Section 5.01(a) or (b), during the period from the expiration of the time for delivery thereof until such consolidated financial statements are delivered.

     “Approved Fund” means (a) with respect to any Lender, a CLO managed by such Lender or by an Affiliate of such Lender and (b) with respect to any Lender that is a fund which invests in bank loans and similar extensions of credit, any other fund that invests in bank loans and similar extensions of credit and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor.

     “Assignment and Assumption” means an assignment and assumption entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent.

     “Attributable Debt” means, with respect to any Sale and Leaseback Transaction, the present value (computed in accordance with GAAP as if the obligations incurred in connection with such Sale and Leaseback Transaction were Capital Lease Obligations) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period for which such lease has been extended). In the case of any lease which is terminable by the lessee upon payment of a penalty, the Attributable Debt shall be the lesser of (i) the Attributable Debt determined assuming termination upon the first date such lease may be terminated (in which case the Attributable Debt shall also include the amount of the penalty, but no rent shall be considered as required to be paid under such lease subsequent to the first date upon which it may be so terminated) and (ii)

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the Attributable Debt determined assuming no such termination. Any determination of any rate implicit in the terms of the lease included in such Sale and Leaseback Transaction made in accordance with generally accepted financial practices by the Borrower shall be binding and conclusive absent manifest error.

     “Board” means the Board of Governors of the Federal Reserve System of the United States of America.

     “Borrower” means Service Corporation International, a Texas corporation.

     “Borrowing” means (a) Revolving Loans of the same Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect or (b) a Swingline Loan.

     “Borrowing Request” means a request by the Borrower for a Revolving Borrowing in accordance with Section 2.03.

     “Business Day” means any day that is not a Saturday, Sunday or other day on which commercial banks in Houston, Texas are authorized or required by law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term “Business Day” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market.

     “Capital Expenditures” means, for any period, (a) the additions to property, plant and equipment and other capital expenditures of the Borrower and the Subsidiaries that are (or would be) set forth in a consolidated statement of cash flows of the Borrower for such period prepared in accordance with GAAP and (b) Capital Lease Obligations incurred by the Borrower and the Subsidiaries during such period (other than any such Capital Lease Obligations that shall relate to assets acquired in transactions reflected in Capital Expenditures for any earlier period).

     “Capital Lease Obligations” of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.

     “Change in Control” means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934, as amended, and the rules of the United States Securities and Exchange Commission thereunder as in effect on the date hereof), of Equity Interests representing more than 25% of the aggregate ordinary voting power represented by the issued and outstanding Equity Interests of the Borrower; (b) occupation of a majority of the seats (other than vacant seats) on the board of directors of the Borrower by Persons who were neither (i) nominated by the board of directors of the Borrower nor (ii) appointed by directors so nominated; (c) any event that gives holders of preferred Equity Interests or other securities issued pursuant to any shareholders’ rights plan of the Borrower the right to purchase or to convert such securities into

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Equity Interests of the Borrower; or (d) the acquisition of direct or indirect Control of the Borrower by any Person or group.

     “Change in Law” means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender or any Issuing Bank (or, for purposes of Section 2.14(b), by any lending office of such Lender or by such Lender’s or such Issuing Bank’s holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement.

     “Class”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans or Swingline Loans.

     “CLO” means any entity (whether a corporation, partnership, trust or otherwise) that is engaged in making, purchasing, holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course of its business and is administered or managed by a Lender or an Affiliate of such Lender.

     “Code” means the Internal Revenue Code of 1986, as amended from time to time.

     “Collateral” has the meaning assigned to such term in the Guarantee and Collateral Agreement.

     “Collateral Agent” means JPMorgan Chase Bank, in its capacity as collateral agent for the Lenders under the Guarantee and Collateral Agreement and the other Security Documents.

     “Commitment” means, with respect to each Lender, the commitment of such Lender to make Revolving Loans and to acquire participations in Letters of Credit and Swingline Loans hereunder, expressed as an amount representing the maximum permitted aggregate amount of such Lender’s Revolving Credit Exposure hereunder, as such commitment may be (a) reduced or increased from time to time pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender’s Commitment is set forth on Schedule 2.01, in the Accession Agreement pursuant to which such Increasing Lender shall have extended or increased its Commitment or in the Assignment and Assumption pursuant to which such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the Lenders’ Commitments is $200,000,000.

     “Consolidated EBITDA” means, for any period, Consolidated Net Income for such period plus (a) without duplication and to the extent deducted in determining such Consolidated Net Income, the sum of (i) Consolidated Interest Expense for such period, (ii) consolidated income tax expense for such period, (iii) all amounts attributable to depreciation and amortization for such period, (iv) any losses attributable to the prepayment or repurchase of publicly traded Indebtedness of the Borrower for such period, and (v) any extraordinary or non-recurring non-cash charges for such period, and any recurring non-cash charges of the sort described in Schedule 1.01(a) for such period; provided, however, that cash expenditures in respect of charges referred to in this clause (v) that are required to be paid shall be deducted in

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determining Consolidated EBITDA for the period during which such expenditures are made, provided that those payments made in connection with (A) the earn-out provisions set forth in the Los Parques S.A. Stock Purchase and Transfer Agreement dated as of December 21, 1998 in an amount not to exceed $51,700,000, and (B) in connection with escrowed funds in an amount not to exceed $135,000,000 related to the Menorah Gardens litigation matter and the ECI shareholder litigation matter shall not be deducted, and minus (b) without duplication and to the extent included in determining such Consolidated Net Income, (i) any extraordinary or non-recurring non-cash gains for such period and (ii) any gains attributable to the prepayment or repurchase of publicly traded Indebtedness of the Borrower for such period, all determined on a consolidated basis in accordance with GAAP. Upon the consummation of any acquisition by any Person of the assets or Equity Interests of any other Person, or the Disposition by such Person of any of its assets or the Disposition of its Equity Interests of any other Person, in each case to the extent such acquisition or Disposition involves consideration having a value equal to or greater than $20,000,000, the Consolidated EBITDA of such Person shall be adjusted on a pro forma basis to include, in the case of an acquisition, or exclude, in the case of a Disposition, the historical financial results attributable to such Equity Interests or assets; such adjustment to be made in a manner consistent with the regulations and practices of the United States Securities and Exchange Commission (whether or not applicable).

     “Consolidated Interest Expense” means, for any period, the interest expense (including imputed interest expense in respect of Capital Lease Obligations) of the Borrower and the Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP.

     “Consolidated Net Income” means, for any period, the net income or loss of the Borrower and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP.

     “Consolidated Revenue” means, for any period, the consolidated revenues of the Borrower and the Subsidiaries for such period, determined in accordance with GAAP.

     “Consolidated Total Assets” means, on any date, the consolidated total assets of the Borrower and the Subsidiaries, as such amount would appear on a consolidated balance sheet of the Borrower prepared as of such date in accordance with GAAP.

     “Consolidated Total Indebtedness” means, on any date, the sum of all Indebtedness of the Borrower and the Subsidiaries as of such date.

     “Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.

     “Default” means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

     “Dispose” means with respect to any property, to sell, lease, engage in a sale and leaseback with respect thereto, assign, convey, transfer or otherwise dispose thereof. The term “Disposition” shall have a correlative meaning.

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     “dollars” or “$” refers to lawful money of the United States of America.

     “Domestic Subsidiary” means any Subsidiary that is not a Foreign Subsidiary.

     “Effective Date” means the date on which the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 9.02).

     “Environmental Laws” means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the presence, the management, Release of any Hazardous Material or to health and safety matters.

     “Environmental Liability” means all liabilities, obligations, damages, losses, claims, actions, suits, judgments, orders, fines, penalties, fees, expenses and costs, (including administrative oversight costs, natural resource damages and remediation costs), whether contingent or otherwise, arising out of or relating to (a) compliance or non-compliance with any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the Release of any Hazardous Materials or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.

     “Equity Interests” means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust (other than a Pre-Need Trust or a Perpetual Care Trust) or other equity ownership interests in a Person, and any warrants, options or other rights entitling the holder thereof to purchase or acquire any such equity interest.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

     “ERISA Affiliate” means any trade or business (whether or not incorporated) that, together with the Borrower or any Subsidiary, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.

     “ERISA Event” means (a) any “reportable event”, as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to any Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower, a Subsidiary or any ERISA Affiliate of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower, a Subsidiary or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower, any Subsidiary or any ERISA Affiliate of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower, any Subsidiary or any ERISA Affiliate of any notice, or the receipt by any

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Multiemployer Plan from the Borrower, any Subsidiary or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA.

     “Eurodollar”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate.

     “Event of Default” has the meaning assigned to such term in Article VII.

     “Excluded Taxes” means, with respect to the Administrative Agent, any Lender, the Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction described in clause (a) above and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.18(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office) or is attributable to such Foreign Lender’s failure to comply with Section 2.16(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.16(a).

     “Existing Issuing Bank” means JPMorgan Chase Bank, in its capacity as issuing bank in respect of an Existing Letter of Credit.

     “Existing Letters of Credit” means the outstanding letters of credit set forth on Schedule 2.05.

     “Federal Funds Effective Rate” means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it.

     “Financial Officer” means the chief financial officer, principal accounting officer, treasurer or controller of the Borrower.

     “Foreign Lender” means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.

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     “Foreign Subsidiary” means any Subsidiary organized under the laws of a jurisdiction other than the United States or any of its territories or possessions or any political subdivision thereof.

     “GAAP” means generally accepted accounting principles in the United States of America.

     “Governmental Authority” means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.

     “Guarantee” of or by any Person (the “guarantor”) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation (other than accounts payable of any Subsidiary incurred in the ordinary course of business) of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided, that the term Guarantee shall not include (i) endorsements for collection or deposit in the ordinary course of business or (ii) any guaranty or other contingent liability, direct or indirect, with respect to bonds, indemnity agreements and similar arrangements provided to assure that the Borrower and the Subsidiaries will fully perform their obligations in respect of prearranged funeral and cemetery services and goods and/or construction of burial facilities.

     “Guarantee and Collateral Agreement” means the Guarantee and Collateral Agreement among the Borrower, the Material Subsidiaries and the Collateral Agent, substantially in the form of Exhibit B.

     “Guarantee and Collateral Requirement” means, at any time, the requirement that:

          (a) the Administrative Agent shall have received from each Loan Party either (i) a counterpart of the Guarantee and Collateral Agreement duly executed and delivered on behalf of such Loan Party or (ii) in the case of any Person that becomes a Loan Party after the Effective Date, a supplement to the Guarantee and Collateral Agreement, in the form specified therein, duly executed and delivered on behalf of such Loan Party;

          (b) all outstanding Equity Interests of any Material Subsidiary directly owned by any Loan Party at such time shall have been pledged pursuant to the Guarantee and Collateral Agreement, and the Collateral Agent shall have received certificates representing all such Equity

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Interests (other than any uncertificated Equity Interests), together with undated stock powers or other instruments of transfer with respect thereto endorsed in blank; provided, however, that in no event shall more than sixty-six percent (66%) of the combined voting power of all classes of stock of an issuer entitled to vote of a Foreign Subsidiary be pledged pursuant to the Guarantee and Collateral Agreement;

          (c) all documents and instruments, including Uniform Commercial Code financing statements, required by law or reasonably requested by the Administrative Agent to be filed, registered or recorded to create the Liens intended to be created by the Guarantee and Collateral Agreement and perfect such Liens to the extent required by, and with the priority required by, the Guarantee and Collateral Agreement, shall have been filed, registered or recorded or delivered to the Administrative Agent for filing, registration or recording; and

          (d) each Loan Party shall have obtained all consents and approvals required to be obtained by it in connection with the execution and delivery of all Security Documents to which it is a party, the performance of its obligations thereunder and the granting by it of the Liens thereunder.

     “Hazardous Materials” means (a) petroleum products and byproducts, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, radon gas, chlorofluorocarbons and all other ozone-depleting substances; or (b) any chemical, material, substance, waste, pollutant or contaminant that is prohibited, limited or regulated by or pursuant to any Environmental Law.

     “Highest Lawful Rate” means, as to any Lender, the maximum non-usurious rate of interest, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the aggregate principal amount of all Loans under the laws of the United States of America and/or the laws of the State of Texas as may be applicable thereto and as applied in accordance with Section 9.09 and that are presently in effect or, to the extent allowed under such applicable law, which may hereafter be in effect and which allow a higher maximum non-usurious interest rate than applicable law now allows.

     “Increasing Lender” has the meaning set forth in Section 2.08(d).

     “Indebtedness” of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty, (j) all obligations, contingent or otherwise, of such Person in respect of bankers’ acceptances, (k) all obligations, contingent or

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otherwise, of such Person in respect of Securitization Transactions and (l) all Synthetic Lease Obligations of such Person. The Indebtedness of any Person (i) shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor, but (ii) shall not include any guaranty or other contingent liability, direct or indirect, with respect to bonds, indemnity agreements and similar arrangements provided to assure that the Borrower and the Subsidiaries will fully perform their obligations in respect of prearranged funeral and cemetery services and goods and/or construction of burial facilities.

     “Indemnified Taxes” means Taxes other than Excluded Taxes.

     “Indenture Basket Amount” means, on any date, an amount equal to 10% of consolidated net worth (as such term is defined in the Indentures) on such date minus the sum, without duplication, of (a) the aggregate amount of the Loans outstanding on such date, (b) the aggregate LC Exposure on such date and (c) the aggregate amount of all other indebtedness and other obligations (as such terms are defined in the Indentures) of the Borrower and the Subsidiaries secured by Liens on assets of the Borrower or any Subsidiary on such date (excluding, in the case of the foregoing clauses (b) and (c), indebtedness and other obligations permitted to be incurred under any carveout (other than any 10% consolidated net worth basket or 10% consolidated asset basket) set forth in the “limitation on liens” covenant (or any similar covenant) in each of the Indentures).

     “Indentures” means each indenture (including any supplemental indentures entered into pursuant to the terms thereof) to which the Borrower or any Subsidiary is a party governing the terms of any outstanding Indebtedness of the Borrower or any Subsidiary.

     “Information Memorandum” means the Confidential Information Memorandum dated July 2004 relating to the Borrower and the Transactions.

     “Interest Election Request” means a request by the Borrower to convert or continue a Revolving Borrowing in accordance with Section 2.07.

     “Interest Payment Date” means (a) with respect to any Alternate Base Rate Loan (other than a Swingline Loan), the last day of each March, June, September and December, (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months’ duration, each day prior to the last day of such Interest Period that occurs at intervals of three months’ duration after the first day of such Interest Period and (c) with respect to any Swingline Loan, the day that such Loan is required to be repaid.

     “Interest Period” means with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter (or seven or fourteen days thereafter if deposits of such maturity are available to all the Lenders), as the Borrower may elect; provided that (i) if any Interest Period would end on a day other than a Business Day, such

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Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (ii) any Interest Period pertaining to a Eurodollar Borrowing that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and, in the case of a Revolving Borrowing, thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.

     “Issuing Bank Agreement” means an agreement in form satisfactory to the Borrower and the Administrative Agent pursuant to which a Lender agrees to act as an Issuing Bank.

     “Issuing Banks” means JPMorgan Chase Bank and each other Lender that has entered into an Issuing Bank Agreement, each in its capacity as the issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.05(i). The term “Issuing Banks” shall also mean the Existing Issuing Bank solely as such term is used in reference to the Existing Letters of Credit. Each Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of such Issuing Bank, in which case the term “Issuing Bank” shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate.

     “Last Determined Minimum Net Worth” means the amount of the minimum Net Worth as required pursuant to Section 6.15 and determined from the most recently delivered compliance certificate delivered pursuant to Section 5.01(c). For purposes of the fiscal quarter ended June 30, 2004, the amount of the Last Determined Minimum Net Worth shall be $1,400,000,000.

     “LC Disbursement” means a payment made by any Issuing Bank pursuant to a Letter of Credit.

     “LC Exposure” means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the Borrower at such time. The LC Exposure of any Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time.

     “Lenders” means the Persons listed on Schedule 2.01 and any other Person that shall have become a party hereto pursuant to an Accession Agreement or an Assignment and Assumption, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Assumption. Unless the context otherwise requires, the term “Lenders” includes the Swingline Lender.

     “Letter of Credit” means the Existing Letters of Credit and any letter of credit issued pursuant to this Agreement.

     “Leverage Ratio” means, on any date, the ratio of (a) Consolidated Total Indebtedness as of such date (net of all unencumbered cash and Permitted Investments set forth on the consolidated balance sheet of the Borrower and the Subsidiaries as of such date in excess of

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$25,000,000) to (b) Consolidated EBITDA for the period of four consecutive fiscal quarters of the Borrower ended on such date.

     “LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Dow Jones Market Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the “LIBO Rate” with respect to such Eurodollar Borrowing for such Interest Period shall be the rate (rounded upwards, if necessary, to the next 1/100 of 1%) at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period.

     “Lien” means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.

     “Loan Documents” means this Agreement, any letter of credit applications referred to in Section 2.05(a) or (b), any promissory notes delivered pursuant to Section 2.09(e) and the Security Documents.

     “Loan Parties” means the Borrower and the Material Subsidiaries.

     “Loans” means the Revolving Loans and Swingline Loans made by the Lenders to the Borrower pursuant to this Agreement.

     “Margin Stock” means “margin stock” as defined in Regulation U of the Board.

     “Material Adverse Effect” means a material adverse effect on (a) the business, assets, operations, properties, prospects or condition, financial or otherwise, of the Borrower and the Subsidiaries, taken as a whole, (b) the ability of any Loan Parties, taken as a whole, to perform their material obligations under this Agreement and the other Loan Documents or (c) the rights of or benefits available to the Lenders under this Agreement or any other Loan Document.

     “Material Foreign Subsidiary” (collectively, “Material Foreign Subsidiaries”) means, at any time, a Foreign Subsidiary the aggregate revenues of which (determined on a consolidated basis) equal or exceed 10% of Consolidated Revenues, as of the end of the most recent fiscal quarter for which financial statements shall have been delivered pursuant to Section 5.01(a) or (b) (or, prior to the delivery of any such financial statements, as of March 31, 2004) and for the period of four fiscal quarters then ended.

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     “Material Indebtedness” means Indebtedness (other than the Loans and Letters of Credit), or obligations in respect of one or more Swap Agreements, of any one or more of the Borrower and the Subsidiaries in an aggregate principal amount exceeding $10,000,000. For purposes of determining Material Indebtedness, the “principal amount” of the obligations of the Borrower or any Subsidiary in respect of any Swap Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Borrower or such Subsidiary would be required to pay if such Swap Agreement were terminated at such time.

     “Material Subsidiaries” means all Domestic Subsidiaries and Material Foreign Subsidiaries.

     “Maturity Date” means August 31, 2007.

     “Multiemployer Plan” means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

     “Net Proceeds” means, with respect to any event (a) the cash proceeds received in respect of such event including (i) any cash received in respect of any non-cash proceeds, but only as and when received, (ii) in the case of a casualty, insurance proceeds, and (iii) in the case of a condemnation or similar event, condemnation awards and similar payments, net of (b) the sum of (i) all reasonable fees and out-of-pocket expenses paid by the Borrower and the Subsidiaries to Persons other than Affiliates in connection with such event, (ii) in the case of a sale, transfer or other disposition of an asset (including pursuant to a Sale and Leaseback Transaction or a casualty or a condemnation or similar proceeding), the amount of all payments required to be made by the Borrower and the Subsidiaries as a result of such event to repay Indebtedness (other than Loans) and other obligations secured by such asset or otherwise subject to mandatory prepayment as a result of such event and (iii) the amount of all taxes paid (or reasonably estimated to be payable) by the Borrower and the Subsidiaries, and the amount of any reserves established by the Borrower and the Subsidiaries to fund contingent liabilities reasonably estimated to be payable, in each case in respect of the year that such event occurred and that are directly attributable to such event (as determined in good faith by a Financial Officer). Notwithstanding the foregoing, any amounts referred to in subclauses (ii) and (iii) of clause (a) of the preceding sentence will be deemed to constitute Net Proceeds received by the Borrower or a Subsidiary only if such amounts shall not have been applied within 180 days to repair or replace the assets in respect of which such amounts shall have been paid or for related purposes.

     “Net Worth” means, in relation to the Borrower and its Subsidiaries, Consolidated Total Assets of the Borrower less total liabilities of the Borrower and its Subsidiaries, as determined on a consolidated basis in accordance with GAAP.

     “Obligations” has the meaning assigned to such term in the Guarantee and Collateral Agreement.

     “Other Taxes” means any and all present or future stamp, documentary, excise, recording, transfer, sales, property or similar taxes, charges or levies arising from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document.

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     “Participant” has the meaning set forth in Section 9.04.

     “PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions.

     “Permitted Acquisition” means any acquisition (by merger or otherwise) by the Borrower or a Material Subsidiary of all or substantially all the assets of, or all the Equity Interests in, a Person or division or line of business of a Person, if (a) immediately after giving effect thereto, no Default has occurred and is continuing or would result therefrom, (b) the business of such acquired Person, or such acquired business, is reasonably related to the business of the Borrower on the date hereof and ninety percent (90%) of such acquired Person’s revenues are derived from the United States of America or Canada (except that acquisitions outside the United States and Canada may constitute Permitted Acquisitions to the extent that the aggregate consideration paid by the Borrower and the Subsidiaries in all such acquisitions does not exceed $10,000,000), (c) the Guarantee and Collateral Requirement shall be satisfied within 30 days (or such longer period as may be acceptable to the Administrative Agent) after such acquisition with respect to each such Material Subsidiary (with the Material Subsidiaries being determined giving pro forma effect to such acquisition), (d) the Borrower and the Subsidiaries are in compliance, on a pro forma basis after giving effect to such acquisition, with Sections 6.12, 6.13, 6.14 and 6.15, to the extent then applicable, as if such acquisition had occurred on the first day of the relevant period for testing compliance with such Section, (e) such acquisition has been approved by all necessary corporate and other action by the Person so acquired or the Person selling the assets or other property so acquired by the Borrower or such Material Subsidiary and (f) in the case of any acquisition in which the aggregate consideration paid by the Borrower and the Subsidiaries exceeds $10,000,000, the Borrower has delivered to the Administrative Agent an officer’s certificate to the effect set forth in clauses (a), (b), (c), (d) and (e) above, together with all financial information requested by the Administrative Agent relating to the Person or assets acquired and reasonably detailed calculations demonstrating satisfaction of the requirement set forth in clause (d) above.

     “Permitted Asset Disposition” means any Disposition (including any loss, destruction or condemnation) of any property or asset of the Borrower, other than Dispositions permitted under paragraphs (a), (b), (c) and (d) of Section 6.06.

     “Permitted Encumbrances” means:

          (a) Liens imposed by law for taxes that are not yet due or are being contested in compliance with Section 5.04;

          (b) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.04;

          (c) pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations;

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          (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business;

          (e) judgment liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article VII; and

          (f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any Subsidiary;

provided that the term “Permitted Encumbrances” shall not include any Lien securing Indebtedness.

     “Permitted Investments” means:

          (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America or Canada (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America or Canada), in each case maturing within one year from the date of acquisition thereof;

          (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, a rating of A2 or better by S&P, P2 or better by Moody’s, or R1 “mid” or better by The Dominion Bond Rating Service;

          (c) investments in certificates of deposit, banker’s acceptances and time deposits (including eurodollar deposits) maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any Lender or any domestic office of any commercial bank organized under the laws of the United States of America or Canada or any State or Province thereof which has a combined capital and surplus and undivided profits of not less than $500,000,000;

          (d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above;

          (e) money market funds that (i) comply with the criteria set forth in Securities and Exchange Commission Rule 2a-7 under the Investment Company Act of 1940, (ii) are rated AAA by S&P or Aaa by Moody’s and (iii) have portfolio assets of at least $5,000,000,000;

          (f) investments in corporate debt securities (including loan participations) that (i) mature within 60 days from the date of acquisition, and (ii) are rated BBB or better by S&P or Baa2 or better by Moody’s at the date of acquisition;

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          (g) investments in municipal securities or auction rate securities that are rated AA or better by S&P or Aa or better by Moody’s, provided that the Borrower has the right to put such securities back to the issuer or seller thereof at least once every 60 days; and

          (h) other investments in an amount not to exceed $10,000,000 in the aggregate at any one time by Foreign Subsidiaries in certificates of deposit, banker’s acceptances and time deposits (or other substantially similar investments) maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts (or other substantially similar deposit accounts) issued or offered by, any foreign commercial bank that does not meet the capital, surplus and profit requirements set forth in clause (c) of this definition.

     “Perpetual Care Trust” means a trust established to provide perpetual care or maintenance for any cemetery, mausoleum or columbarium.

     “Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

     “Plan” means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV or Section 302 of ERISA or Section 412 of the Code, and in respect of which the Borrower, any Subsidiary or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

     “Pre-Need Trust” means a trust established to hold funds related to the purchase of funeral or cemetery goods or services on a pre-need basis.

     “Prime Rate” means the rate of interest per annum publicly announced from time to time by JPMorgan Chase Bank (or any successor Administrative Agent appointed or chosen pursuant to Article VIII hereof) as its prime rate in effect at its principal office in New York City. Each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective.

     “Related Parties” means, with respect to any specified Person, such Person’s Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person’s Affiliates.

     “Release” means any release, spill, emission, leaking, dumping, injection, pouring, deposit, disposal, discharge, dispersal, leaching or migration into or through the environment or within or upon any building, structure, facility or fixture.

     “Required Lenders” means, at any time, Lenders having Revolving Credit Exposures and unused Commitments representing more than 50% of the sum of the total Revolving Credit Exposures and unused Commitments at such time.

     “Restricted Payment” means any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking

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fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such Equity Interests or any option, warrant or other right to acquire any such Equity Interests.

     “Revolving Availability Period” means the period from and including the Effective Date to but excluding the earlier of (a) the Maturity Date and (b) the date of termination of the Commitments.

     “Revolving Borrowing” means a Borrowing consisting of Revolving Loans.

     “Revolving Credit Exposure” means, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender’s Revolving Loans plus its LC Exposure and Swingline Exposure at such time.

     “Revolving Loan” means a Loan made pursuant to Section 2.01.

     “Sale and Leaseback Transaction” means any arrangement whereby the Borrower or a Subsidiary shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereinafter acquired, and thereafter rent or lease from the buyer or transferee of the sold or transferred property that it intends to use for substantially the same purpose or purposes as the property sold or transferred; provided that any such sale of any fixed or capital assets that is made for cash consideration in an amount not less than the cost of such fixed or capital asset and is consummated within 90 days after the acquisition or completion of the fixed or capital asset shall not be deemed to be a Sale and Leaseback Transaction.

     “Secured Parties” has the meaning assigned to such term in the Guarantee and Collateral Agreement.

     “Securitization Transaction” means any transfer by the Borrower or any Subsidiary of accounts receivable or interests therein (a) to a trust, partnership, corporation or other entity, which transfer is funded in whole or in part, directly or indirectly, by the incurrence or issuance by the transferee or any successor transferee of Indebtedness or securities that are to receive payments from, or that represent interests in, the cash flow derived from such accounts receivable or interests, or (b) directly to one or more investors or other purchasers. The amount of any Securitization Transaction shall be deemed at any time to be the aggregate principal or stated amount of the Indebtedness or securities referred to in the preceding sentence or, if there shall be no such principal or stated amount, the uncollected amount of the accounts receivable transferred pursuant to such Securitization Transaction net of any such accounts receivable that have been written off as uncollectible.

     “Security Documents” means the Guarantee and Collateral Agreement and each other instrument or document delivered pursuant to Section 5.08, 5.10 or 5.11 to secure any of the Obligations.

     “Statutory Reserve Rate” means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is

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subject with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

     “subsidiary” means, with respect to any Person (the “parent”) at any date, any corporation, limited liability company, partnership, association, cooperative or other entity the accounts of which would be consolidated with those of the parent in the parent’s consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent.

     “Subsidiary” means any subsidiary of the Borrower; provided that no Person shall be deemed to be a Subsidiary if such Person is a subsidiary of the Borrower only because such Person’s accounts are consolidated with those of the Borrower in the Borrower’s consolidated financial statements because such Person is considered to be a “variable interest entity” (as such term is defined in Financial Accounting Standards Board Interpretation No. 46) with respect to the Borrower.

     “Swap Agreement” means any agreement with respect to any swap, forward, future or derivative transaction or option or similar agreement involving, or settled by reference to, one or more rates or prices for one or more currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions; provided that no phantom stock or similar plan providing for payments only on account of services provided by current or former directors, officers, employees or consultants of the Borrower or the Subsidiaries shall be a Swap Agreement.

     “Swingline Exposure” means, at any time, the aggregate principal amount of all Swingline Loans outstanding at such time. The Swingline Exposure of any Lender at any time shall be its Applicable Percentage of the total Swingline Exposure at such time.

     “Swingline Lender” means JPMorgan Chase Bank, in its capacity as lender of Swingline Loans hereunder.

     “Swingline Loan” means a Loan made pursuant to Section 2.04.

     “Syndication Agent” means Bank of America, N.A., in its capacity as syndication agent hereunder.

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     “Synthetic Lease” means any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product where the transaction is considered indebtedness for borrowed money for Federal income tax reporting purposes but is classified as an operating lease in accordance with GAAP for financial reporting purposes.

     “Synthetic Lease Obligations” means, with respect to any Synthetic Lease, at any time, an amount equal to the present value (computed in accordance with GAAP as if such Synthetic Lease Obligations were Capital Lease Obligations) of the sum of (a) all remaining rental or other payment obligations of the lessee or party obtaining financing under such Synthetic Lease and, without duplication, (b) all rental and purchase price payment obligations under such Synthetic Lease assuming the lessee or party obtaining financing exercises the option to purchase the leased property at the end of the lease term.

     “Taxes” means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority.

     “Transactions” means the execution, delivery and performance by the Borrower of this Agreement and the other Loan Documents, the borrowing of the Loans and the use of the proceeds thereof, the obtaining and use of the Letters of Credit, the creation of the Liens provided for in the Security Documents and the other transactions contemplated hereby.

     “Type”, when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate.

     “Uncertificated Subsidiaries” is defined in the Guarantee and Collateral Agreement.

     “Withdrawal Liability” means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.

     SECTION 1.02 Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a “Revolving Loan”) or by Type (e.g., a “Eurodollar Loan”) or by Class and Type (e.g., a “Eurodollar Revolving Loan”). Borrowings also may be classified and referred to by Class (e.g., a “Revolving Borrowing”) or by Type (e.g., a “Eurodollar Borrowing”) or by Class and Type (e.g., a “Eurodollar Revolving Borrowing”).

     SECTION 1.03 Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall”. Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person’s

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successors and assigns, (c) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.

     SECTION 1.04 Accounting Terms; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith.

ARTICLE II
The Credits

     SECTION 2.01 Commitments. Each Lender agrees to make Revolving Loans to the Borrower from time to time during the Revolving Availability Period in an aggregate principal amount that will not result in (i) such Lender’s Revolving Credit Exposure exceeding such Lender’s Commitment or (ii) the Indenture Basket Amount being less than zero. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans.

     SECTION 2.02 Loans and Borrowings.

          (a) Each Loan (other than a Swingline Loan) shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective Commitments. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments of the Lenders are several and no Lender shall be responsible for any other Lender’s failure to make Loans as required.

          (b) Subject to Section 2.13, each Revolving Borrowing shall be comprised entirely of Alternate Base Rate Loans or Eurodollar Loans as the Borrower may request in accordance herewith; provided that all Borrowings made on the Effective Date must be made as Alternate Base Rate Borrowings. Each Swingline Loan shall be an Alternate Base Rate Loan. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement.

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          (c) At the commencement of each Interest Period for any Eurodollar Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $10,000,000. At the time that each Alternate Base Rate Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000. Each Swingline Loan shall be in an amount that is an integral multiple of $500,000. Notwithstanding the foregoing, an Alternate Base Rate Revolving Borrowing or a Swingline Loan Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total applicable Commitments and, if in an amount not less than the applicable minimum amount specified above, may be in the amount that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.05(e), notwithstanding that such amount is not an integral multiple of $1,000,000 or $500,000, as applicable. Borrowings of more than one Type and Class may be outstanding at the same time; provided that there shall not at any time be more than a total of ten Eurodollar Borrowings outstanding.

          (d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date.

     SECTION 2.03 Requests for Revolving Borrowings. To request a Revolving Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., Houston, Texas time, three Business Days before the date of the proposed Borrowing or (b) in the case of an Alternate Base Rate Borrowing, not later than 11:00 a.m., Houston, Texas time, one Business Day before the date of the proposed Borrowing; provided that any such notice of an Alternate Base Rate Revolving Borrowing to finance the reimbursement of an LC Disbursement as contemplated by Section 2.05(e) may be given not later than 10:00 a.m., Houston, Texas time, on the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02:

     (i) the aggregate amount of the requested Borrowing;

     (ii) the date of such Borrowing, which shall be a Business Day;

     (iii) whether such Borrowing is to be an Alternate Base Rate Borrowing or a Eurodollar Borrowing;

     (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term “Interest Period”; and

     (v) the location and number of the Borrower’s account maintained with the Administrative Agent to which funds are to be disbursed, which shall comply with the requirements of Section 2.06.

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If no election as to the Type of Borrowing is specified, then the requested Borrowing shall be an Alternate Base Rate Borrowing. If no election as to the Class of Borrowing is specified, then the requested Borrowing shall be a Revolving Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender’s Loan to be made as part of the requested Borrowing.

     SECTION 2.04 Swingline Loans .

          (a) Subject to the terms and conditions set forth herein, the Swingline Lender agrees to make Swingline Loans to the Borrower from time to time during the Revolving Availability Period, in an aggregate principal amount at any time outstanding that will not result in (i) the aggregate principal amount of outstanding Swingline Loans exceeding $25,000,000; (ii) the aggregate amount of the Lenders’ Revolving Credit Exposures exceeding the aggregate Commitments; or (iii) the Indenture Basket Amount being less than zero; provided that the Swingline Lender shall not be required to make a Swingline Loan to refinance an outstanding Swingline Loan. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Swingline Loans.

          (b) To request a Swingline Loan, the Borrower shall notify the Administrative Agent of such request by telephone (confirmed by telecopy), not later than 1:00 p.m., Houston, Texas time, on the day of a proposed Swingline Loan. Each such notice shall be irrevocable and shall specify the requested date (which shall be a Business Day) and amount of the requested Swingline Loan. The Administrative Agent will promptly advise the Swingline Lender of any such notice received from the Borrower. The Swingline Lender shall make each Swingline Loan available to the Borrower by means of a credit to the general deposit account of the Borrower with the Swingline Lender (or, in the case of a Swingline Loan made to finance the reimbursement of an LC Disbursement as provided in Section 2.05(e), by remittance to the Issuing Bank) by 3:00 p.m., Houston, Texas time, on the requested date of such Swingline Loan.

          (c) The Swingline Lender may by written notice given to the Administrative Agent not later than 10:00 a.m., Houston, Texas time, on any Business Day require the Lenders to acquire participations on such Business Day in all or a portion of the Swingline Loans outstanding. Such notice shall specify the aggregate amount of Swingline Loans in which Lenders will participate. Promptly upon receipt of such notice, the Administrative Agent will give notice thereof to each Lender, specifying in such notice such Lender’s Applicable Percentage of such Swingline Loan or Loans. Each Lender hereby absolutely and unconditionally agrees, upon receipt of notice as provided above, to pay to the Administrative Agent, for the account of the Swingline Lender, such Lender’s Applicable Percentage of such Swingline Loan or Loans. Each Lender acknowledges and agrees that its obligation to acquire participations in Swingline Loans pursuant to this paragraph is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Lender shall comply with its obligation under this paragraph by wire transfer of immediately available funds,

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in the same manner as provided in Section 2.06 with respect to Loans made by such Lender (and Section 2.06 shall apply, mutatis mutandis, to the payment obligations of the Lenders), and the Administrative Agent shall promptly pay to the Swingline Lender the amounts so received by it from the Lenders. The Administrative Agent shall notify the Borrower of any participations in any Swingline Loan acquired pursuant to this paragraph, and thereafter payments in respect of such Swingline Loan shall be made to the Administrative Agent and not to the Swingline Lender. Any amounts received by the Swingline Lender from the Borrower (or other party on behalf of the Borrower) in respect of a Swingline Loan after receipt by the Swingline Lender of the proceeds of a sale of participations therein shall be promptly remitted to the Administrative Agent; any such amounts received by the Administrative Agent shall be promptly remitted by the Administrative Agent to the Lenders that shall have made their payments pursuant to this paragraph and to the Swingline Lender, as their interests may appear; provided that any such payment so remitted shall be repaid to the Swingline Lender or to the Administrative Agent, as applicable, if and to the extent such payment is required to be refunded to the Borrower for any reason. The purchase of participations in a Swingline Loan pursuant to this paragraph shall not relieve the Borrower of any default in the payment thereof.

     SECTION 2.05 Letters of Credit .

          (a) General. Subject to the terms and conditions set forth herein, the Borrower may request the issuance of Letters of Credit for its own account, in form reasonably acceptable to the Administrative Agent and the applicable Issuing Banks, at any time and from time to time during the Revolving Availability Period. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the Borrower to, or entered into by the Borrower with, any Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control. The Existing Letters of Credit will, for all purposes of this Agreement, be deemed to have been issued hereunder on the Effective Date and will, for all purposes of this Agreement, constitute Letters of Credit. On the Effective Date, (i) any fronting fees provided for in the agreements under which the Existing Letters of Credit were issued shall cease to accrue and shall be replaced by the fronting fee provided for in Section 2.11(b) (it being understood that any other fees referred to in Section 2.11(b) that shall have been agreed upon by the Borrower or a Subsidiary and the Existing Issuing Bank shall continue to apply, but that no new issuance fee will be charged in connection with the deemed issuance of any Existing Letter of Credit on the Effective Date), and (ii) any collateral that prior to the Effective Date shall have secured the obligations of the Borrower in connection with any Existing Letter of Credit (but not any Collateral securing such obligations under the Security Documents) shall be automatically released.

          (b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Banks) to the Issuing Banks and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension (which shall be a Business

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Day), the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. If requested by any Issuing Bank, the Borrower also shall submit a letter of credit application on such Issuing Bank’s standard form in connection with any request for a Letter of Credit; provided that any provisions in any such letter of credit application that create Liens securing the obligations of the Borrower thereunder or that are inconsistent with the provisions of this Agreement shall be of no force or effect. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure shall not exceed $175,000,000, (ii) the aggregate amount of the Lenders’ Revolving Credit Exposures shall not exceed the aggregate Commitments, and (iii) the Indenture Basket Amount shall not be less than zero. Notwithstanding anything to the contrary contained herein, no Existing Letter of Credit may be amended, renewed or extended.

          (c) Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the Maturity Date.

          (d) Participations. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Lenders, each Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from such Issuing Bank, a participation in such Letter of Credit equal to such Lender’s Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of each Issuing Bank, such Lender’s Applicable Percentage of each LC Disbursement made by such Issuing Bank and not reimbursed by the Borrower on the date due as provided in paragraph (e) of this Section, or of any reimbursement payment required to be refunded to the Borrower for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever.

          (e) Reimbursement. If any Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than 11:00 a.m., Houston, Texas time, on the date that such LC Disbursement is made, if the Borrower shall have received notice of such LC Disbursement prior to 9:00 a.m., Houston, Texas time, on such date, or, if such notice has not been received by the Borrower prior to such time on such date, then not later than 11:00 a.m., Houston, Texas time, on (i) the Business Day that the Borrower receives such notice, if such notice is received prior to 9:00 a.m., Houston, Texas time, on the day of receipt, or (ii) the Business Day immediately following the day that the Borrower receives such

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notice, if such notice is not received prior to such time on the day of receipt; provided that, if such LC Disbursement is not less than the applicable minimum borrowing amount, the Borrower may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.03 or 2.04 that such payment be financed with an Alternate Base Rate Revolving Borrowing or Swingline Loan in an equivalent amount and, to the extent so financed, the Borrower’s obligation to make such payment shall be discharged and replaced by the resulting Alternate Base Rate Revolving Borrowing or Swingline Loan. If the Borrower fails to make such payment when due, the Administrative Agent shall notify each Lender of the applicable LC Disbursement, the payment then due from the Borrower in respect thereof and such Lender’s Applicable Percentage thereof. Promptly following receipt of such notice, each Lender shall pay to the Administrative Agent its Applicable Percentage of the payment then due from the Borrower, in the same manner as provided in Section 2.06 with respect to Loans made by such Lender (and Section 2.06 shall apply, mutatis mutandis, to the payment obligations of the Lenders), and the Administrative Agent shall promptly pay to the applicable Issuing Bank the amounts so received by it from the Lenders. Promptly following receipt by the Administrative Agent of any payment from the Borrower pursuant to this paragraph, the Administrative Agent shall distribute such payment to such Issuing Bank or, to the extent that Lenders have made payments pursuant to this paragraph to reimburse such Issuing Bank, then to such Lenders and such Issuing Bank as their interests may appear. Any payment made by a Lender pursuant to this paragraph to reimburse any Issuing Bank for any LC Disbursement (other than the funding of Alternate Base Rate Revolving Loans or a Swingline Loan as contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such LC Disbursement.

          (f) Obligations Absolute. The Borrower’s obligation to reimburse LC Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by any Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower’s obligations hereunder. None of the Administrative Agent, the Lenders or the Issuing Banks, or any of their Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Banks; provided that the foregoing shall not be construed to excuse the Issuing Banks from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by any Issuing Bank’s failure to exercise care when

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determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or willful misconduct on the part of an Issuing Bank (as finally determined by a court of competent jurisdiction), each Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, each Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit.

          (g) Disbursement Procedures. Each Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. Each Issuing Bank shall promptly notify the Administrative Agent and the Borrower by telephone (confirmed by telecopy) of such demand for payment and whether such Issuing Bank has made or will make an LC Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse such Issuing Bank and the Lenders with respect to any such LC Disbursement.

          (h) Interim Interest. If any Issuing Bank shall make any LC Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to Alternate Base Rate Revolving Loans; provided that, if the Borrower fails to reimburse such LC Disbursement when due pursuant to paragraph (e) of this Section, then Section 2.12(c) shall apply. Interest accrued pursuant to this paragraph shall be for the account of such Issuing Bank, except that interest accrued on and after the date of payment by any Lender pursuant to paragraph (e) of this Section to reimburse such Issuing Bank shall be for the account of such Lender to the extent of such payment.

          (i) Replacement of the Issuing Bank. Each Issuing Bank may be replaced at any time by written agreement among the Borrower, the Administrative Agent, the replaced Issuing Bank and the successor Issuing Bank. The Administrative Agent shall notify the Lenders of any such replacement of such Issuing Bank. At the time any such replacement shall become effective, the Borrower shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 2.11(b). From and after the effective date of any such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of such Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to the term “Issuing Bank” shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the replacement of any Issuing Bank hereunder, the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit.

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          (j) Cash Collateralization. If any Event of Default shall occur and be continuing, on the earlier of (i) the third Business Day after the Borrower shall receive notice from the Administrative Agent or the Required Lenders demanding the deposit of cash collateral pursuant to this paragraph and (ii) the date on which the maturity of the Loans shall be accelerated, the Borrower shall deposit in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Lenders, an amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid interest thereon; provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower described in clause (h) or (i) of Article VII. Such deposit shall be held by the Administrative Agent as collateral for the payment and performance of the obligations of the Borrower under this Agreement. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investment shall be in Permitted Investments and shall be made in the discretion of the Administrative Agent and at the Borrower’s risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse each Issuing Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time or, if the maturity of the Loans has been accelerated (but subject to the consent of Lenders with LC Exposures representing greater than 50% of the total LC Exposure), be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral under this paragraph, then (i) if the maturity of the Loans has not been accelerated and the LC Exposure shall be reduced to an amount below the amount so deposited, the Administrative Agent will return to the Borrower any excess of the amount so deposited over the LC Exposure and (ii) such amount (to the extent not applied as provided above in this paragraph) shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived.

     SECTION 2.06 Funding of Borrowings.

          (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 11:00 a.m., Houston, Texas time to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders; provided that Swingline Loans shall be made as provided in Section 2.04. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Administrative Agent and designated by the Borrower in the applicable Borrowing Request; provided that Alternate Base Rate Revolving Loans made to finance the reimbursement of an LC Disbursement as provided in Section 2.05(e) shall be remitted by the Administrative Agent to the applicable Issuing Bank.

          (b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with

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paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrower, the interest rate applicable to Alternate Base Rate Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender’s Loan included in such Borrowing. It is agreed that no payment by the Borrower under this paragraph will be subject to any break-funding payment under Section 2.15.

     SECTION 2.07 Interest Elections .

          (a) Each Revolving Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. This Section shall not apply to Swingline Loan Borrowings, which may not be converted or continued.

          (b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower.

          (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02:

     (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing);

     (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day;

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     (iii) whether the resulting Borrowing is to be an Alternate Base Rate Borrowing or a Eurodollar Borrowing; and

     (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term “Interest Period”.

If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration.

          (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender’s portion of each resulting Borrowing.

          (e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an Alternate Base Rate Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an Alternate Base Rate Borrowing at the end of the Interest Period applicable thereto.

     SECTION 2.08 Termination of Commitments; Reductions and Increases of Commitments .

          (a) Unless previously terminated, the Commitments shall terminate on the Maturity Date.

          (b) The Borrower may at any time terminate, or from time to time reduce, the Commitments; provided that (i) each reduction of the Commitments shall be in an amount that is an integral multiple of $1,000,000 and not less than $10,000,000 and (ii) the Borrower shall not terminate or reduce the Commitments if, after giving effect to concurrent prepayment of the Loans in accordance with Section 2.10, the total Revolving Credit Exposures (net of any cash collateral provided in accordance with Section 9.13(b)) would exceed the total Commitments.

          (c) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; provided that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not

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satisfied. Any termination or reduction of the Commitments shall be permanent. Each reduction of the Commitments shall be made ratably among the Lenders in accordance with their respective Commitments.

          (d) The Borrower may on no more than two occasions during the period beginning on the date hereof to and including the date that is six months prior to the Maturity Date, by written notice to the Administrative Agent executed by the Borrower and one or more financial institutions (any such financial institution referred to in this Section being called an “Increasing Lender”), which may include any Lender, cause Commitments to be extended by the Increasing Lenders (or cause the Commitments of the Increasing Lenders to be increased, as the case may be) in an amount for each Increasing Lender set forth in such notice; provided, that (i) each extension of new Commitments or increase in existing Commitments pursuant to this paragraph shall result in the aggregate Commitments being increased by no less than $10,000,000, (ii) no extension of new Commitments or increase in existing Commitments pursuant to this paragraph may result in the aggregate Commitments exceeding $250,000,000, (iii) each Increasing Lender, if not already a Lender hereunder, shall be subject to the approval of the Administrative Agent (which approval shall not be unreasonably withheld) and (iv) each Increasing Lender, if not already a Lender hereunder, shall become a party to this Agreement by completing and delivering to the Administrative Agent a duly executed accession agreement in a form satisfactory to the Administrative Agent and the Borrower (an “Accession Agreement”). New Commitments and increases in Commitments shall become effective on the date specified in the applicable notices delivered pursuant to this paragraph. Upon the effectiveness of any Accession Agreement to which any Increasing Lender is a party, (i) such Increasing Lender shall thereafter be deemed to be a party to this Agreement and shall be entitled to all rights, benefits and privileges accorded a Lender hereunder and subject to all obligations of a Lender hereunder and (ii) Schedule 2.01 shall be deemed to have been amended to reflect the Commitment of such Increasing Lender as provided in such Accession Agreement. Upon the effectiveness of any increase pursuant to this Section in the Commitment of a Lender already a party hereto, Schedule 2.01 shall be deemed to have been amended to reflect the increased Commitment of such Lender. Notwithstanding the foregoing, no increase in the aggregate Commitments (or in the Commitment of any Lender) shall become effective under this Section unless, on the date of such increase, the Administrative Agent shall have received a certificate, dated as of the effective date of such increase and executed by a Financial Officer of the Borrower, to the effect that the conditions set forth in paragraphs (a), (b) and (c) of Section 4.02 shall be satisfied (with all references in such paragraphs to a Borrowing being deemed to be references to such increase). Following any extension of a new Commitment or increase of a Lender’s Commitment pursuant to this paragraph, any Loans outstanding prior to the effectiveness of such increase or extension shall continue to be outstanding until the ends of the respective Interests Periods applicable thereto, and shall then be repaid and, if the Borrower shall so elect, refinanced with new Loans made pursuant to Section 2.01 ratably in accordance with the Commitments in effect following such extension or increase.

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     SECTION 2.09 Repayment of Loans; Evidence of Debt.

          (a) The Borrower hereby unconditionally promises to pay (i) to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Revolving Loan on the Maturity Date and (ii) to the Swingline Lender the then unpaid principal amount of each Swingline Loan on the earlier of the Maturity Date and the first date after such Swingline Loan is made that is the 15th or last day of a calendar month and is at least three Business Days after such Swingline Loan is made; provided that on each date that a Revolving Borrowing is made, the Borrower shall repay all Swingline Loans then outstanding.

          (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.

          (c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender’s share thereof.

          (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein (including any failure to record the making or repayment of any Loan) shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement or prevent the Borrower’s obligations in respect of Loans from being discharged to the extent of amounts actually paid in respect thereof.

          (e) Any Lender may request that Loans made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns).

     SECTION 2.10 Prepayment of Loans .

          (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to prior notice in accordance with paragraph (b) of this Section.

          (b) The Borrower shall notify the Administrative Agent (and, in the case of prepayment of a Swingline Loan, the Swingline Lender) by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later

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than 11:00 a.m., Houston, Texas time, three Business Days before the date of prepayment, (ii) in the case of prepayment of an Alternate Base Rate Revolving Borrowing, not later than 11:00 a.m., Houston, Texas time, one Business Day before the date of prepayment or (iii) in the case of prepayment of a Swingline Loan, not later than 12:00 noon, Houston, Texas time, on the date of prepayment. Each such notice shall be irrevocable, shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.08, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.08. Promptly following receipt of any such notice relating to a Revolving Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Revolving Borrowing shall be in an amount that would be permitted in the case of an advance of a Revolving Borrowing of the same Type as provided in Section 2.02. Each prepayment of a Revolving Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.12.

     SECTION 2.11 Fees .

          (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee, which shall accrue at the Applicable Rate on the daily unused amount of the Commitment of such Lender during the period from and including the date hereof to but excluding the date on which such Commitment terminates. Any Swingline Exposure of any Lender, including the Swingline Lender, will not be considered used for purposes of calculating the daily unused amount of the Commitment of such Lender. Accrued commitment fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the date hereof. All commitment fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).

          (b) The Borrower agrees to pay (i) to the Administrative Agent for the account of each Lender a participation fee with respect to its participations in Letters of Credit, which shall accrue at the same Applicable Rate used to determine the interest rate applicable to Eurodollar Loans on the average daily amount of such Lender’s LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date on which such Lender’s Commitment terminates and the date on which such Lender ceases to have any LC Exposure, and (ii) to each Issuing Bank a fronting fee, which shall accrue at the rate of 0.125% per annum on the average daily amount of the LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date of termination of the Commitments and the date on which there ceases to be any LC Exposure, as well as such Issuing Bank’s standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Participation fees and fronting fees accrued through and including the last day of March, June, September and December of each year shall be payable on the third Business Day following such last day, commencing on the first such date to occur after the Effective Date; provided that all such accrued fees shall be payable on the date on which the Commitments

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terminate and any such fees accruing after the date on which the Commitments terminate shall be payable on demand. Any other fees payable to the Issuing Banks pursuant to this paragraph shall be payable within 10 days after demand. All participation fees and fronting fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).

          (c) The Borrower agrees to pay to the Administrative Agent, for its own account, fees in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent.

          (d) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent (or to the Issuing Banks, in the case of fees payable to it) for distribution, in the case of commitment fees and participation fees, to the Lenders. Fees paid shall not be refundable under any circumstances.

     SECTION 2.12 Interest.

          (a) The Loans comprising each Alternate Base Rate Borrowing (including each Swingline Loan) shall bear interest at the Alternate Base Rate plus the Applicable Rate in effect from time to time.

          (b) The Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate in effect from time to time.

          (c) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount, 2% plus the rate applicable to Alternate Base Rate Loans as provided in paragraph (a) of this Section.

          (d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and, in the case of Revolving Loans, upon termination of the Commitments; provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an Alternate Base Rate Revolving Loan prior to the end of the Revolving Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion.

          (e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate or

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Adjusted LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error.

     SECTION 2.13 Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurodollar Borrowing:

          (a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate for such Interest Period; or

          (b) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Revolving Borrowing to, or continuation of any Revolving Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as an Alternate Base Rate Borrowing.

     SECTION 2.14 Increased Costs.

          (a) If any Change in Law shall:

     (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate) or any Issuing Bank; or

     (ii) impose on any Lender or any Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein;

and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to such Lender or such Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or such Issuing Bank hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender or such Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or such Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered.

          (b) If any Lender or any Issuing Bank determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender’s or such Issuing Bank’s capital or on the capital of such Lender’s or such Issuing Bank’s holding company, if any, as a consequence of this Agreement or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by such

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Issuing Bank, to a level below that which such Lender or such Issuing Bank or such Lender’s or such Issuing Bank’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s or such Issuing Bank’s policies and the policies of such Lender’s or such Issuing Bank’s holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender or such Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or such Issuing Bank or such Lender’s or such Issuing Bank’s holding company for any such reduction suffered.

          (c) A certificate of a Lender or a Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or such Issuing Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender or such Issuing Bank, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof.

          (d) Failure or delay on the part of any Lender or any Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of such Lender’s or such Issuing Bank’s right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender or an Issuing Bank pursuant to this Section for any increased costs or reductions incurred more than 180 days prior to the date that such Lender or such Issuing Bank, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s or such Issuing Bank’s intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 180-day period referred to above shall be extended to include the period of retroactive effect thereof.

     SECTION 2.15 Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Eurodollar Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.10(b) and is revoked in accordance therewith), or (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.18, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest which would accrue on such principal amount for such period at the interest rate which such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the Eurodollar market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The

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Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.

     SECTION 2.16 Taxes .

          (a) Any and all payments by or on account of any obligation of the Borrower hereunder or under any other Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, Lender or Issuing Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.

          (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.

          (c) The Borrower shall indemnify the Administrative Agent, each Lender and each Issuing Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent, such Lender or such Issuing Bank, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower hereunder (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or an Issuing Bank, or by the Administrative Agent on its own behalf or on behalf of a Lender or an Issuing Bank, shall be conclusive absent manifest error.

          (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.

          (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate; provided that such Foreign Lender has received written notice from the Borrower advising it of the availability of such exemption or reduction and supplying all applicable documentation.

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     SECTION 2.17 Payments Generally; Pro Rata Treatment; Sharing of Setoffs .

          (a) The Borrower shall make each payment required to be made by it hereunder (whether of principal, interest, fees or reimbursement of LC Disbursements, or of amounts payable under Section 2.14, 2.15 or 2.16, or otherwise) prior to 12:00 noon, Houston, Texas time, on the date when due, in immediately available funds, without setoff, counterclaim or other deduction. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 712 Main Street, Houston, Texas, 77002, except payments to be made directly to an Issuing Bank or a Swingline Lender as expressly provided herein and except that payments pursuant to Sections 2.14, 2.15, 2.16 and 9.03 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person in appropriate ratable shares to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in dollars.

          (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal and unreimbursed LC Disbursements then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal and unreimbursed LC Disbursements then due to such parties.

          (c) If any Lender shall, by exercising any right of setoff or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Revolving Loans or participations in LC Disbursements or Swingline Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Loans and participations in LC Disbursements and Swingline Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans and participations in LC Disbursements and Swingline Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans and participations in LC Disbursements and Swingline Loans; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in LC Disbursements to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the

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foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of setoff and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation.

          (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders or the Issuing Banks hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the Issuing Banks, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders or each of the Issuing Banks, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or such Issuing Bank with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.

          (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.04(c), 2.05(d) or 2.05(e), 2.06(b) or 2.17(d), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender’s obligations under such Sections until all such unsatisfied obligations are fully paid.

     SECTION 2.18 Mitigation Obligations; Replacement of Lenders.

          (a) If any Lender requests compensation under Section 2.14, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.16, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.14 or 2.16, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.

          (b) If any Lender requests compensation under Section 2.14, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.16, or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrower shall have received the prior written consent of the Administrative

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Agent, which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Revolving Loans and participations in LC Disbursements and Swingline Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.14 or payments required to be made pursuant to Section 2.16, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.

ARTICLE III
Representations and Warranties

     The Borrower represents and warrants to the Lenders that:

     SECTION 3.01 Organization; Powers. The Borrower and each of its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business, and is in good standing, in every jurisdiction where such qualification is required.

     SECTION 3.02 Authorization; Enforceability. The Transactions to be entered into by each Loan Party are within such Loan Party’s powers and have been duly authorized. This Agreement has been duly executed and delivered by the Borrower and constitutes, and each other Loan Document to which any Loan Party is to be a party, when executed and delivered by such Loan Party, will constitute, a legal, valid and binding obligation of the Borrower or such Loan Party, as the case may be, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

     SECTION 3.03 Governmental Approvals; No Conflicts. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of the Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower or any of the Subsidiaries or its assets, or give rise to a right thereunder to require any payment to be made by the Borrower or any of the Subsidiaries, and (d) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of the Subsidiaries, except Liens created under the Loan Documents.

     SECTION 3.04 Financial Statements; No Material Adverse Change.

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          (a) The Borrower has heretofore furnished to the Lenders its consolidated balance sheet and statements of income, stockholders equity and cash flows (i) as of and for the fiscal year ended December 31, 2003, reported on by PricewaterhouseCoopers LLP, independent public accountants, and (ii) as of and for the fiscal quarter and the portion of the fiscal year ended March 31, 2004, certified by its chief financial officer. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Borrower and the Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) above. Such financial statements contain all references to and descriptions of contingent liabilities required under GAAP.

          (b) Since December 31, 2003, there has been no material adverse change in the business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and the Subsidiaries, taken as a whole.

     SECTION 3.05 Properties. Each of the Borrower and the Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, except for (a) minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes and (b) Liens permitted by Section 6.02.

     SECTION 3.06 Litigation and Environmental Matters.

          (a) Except as set forth in the Information Memorandum or as disclosed by the Borrower in any 10-K, 8-K or 10-Q filed by the Borrower with the Securities and Exchange Commission prior to the Effective Date and which is available on the website of the Securities and Exchange Commission, there are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of the Subsidiaries (i) that could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect or (ii) that involve the Loan Documents or the Transactions.

          (b) Except with respect to matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither the Borrower nor any of the Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability.

     SECTION 3.07 Compliance with Laws and Agreements. Each of the Borrower and the Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing.

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     SECTION 3.08 Investment and Holding Company Status. Neither the Borrower nor any of the Subsidiaries is (a) an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a “holding company” as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935.

     SECTION 3.09 Taxes. The Borrower and each of the Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary, as applicable, has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect.

     SECTION 3.10 ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other ERISA Events that have occurred or are reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $10,000,000 the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $10,000,000 the fair market value of the assets of all such underfunded Plans.

     SECTION 3.11 Disclosure. The Borrower has disclosed to all the Lenders all agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other information furnished by or on behalf of the Borrower to the Administrative Agent or any Lender in connection with this Agreement or the Transactions or delivered hereunder contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time.

     SECTION 3.12 Subsidiaries. Schedule 3.12 sets forth the name of, and the ownership interest of the Borrower and each other Person in, each Subsidiary of the Borrower and identifies each Subsidiary that is a Material Subsidiary, in each case as of the date hereof. The shares of capital stock or other ownership interests of each Subsidiary are owned by the Borrower, directly or indirectly, free and clear of all Liens, except for the Liens created under the Security Documents.

     SECTION 3.13 Security Interests. When executed and delivered, the Guarantee and Collateral Agreement will be effective to create in favor of the Collateral Agent for the ratable benefit of the Secured Parties a valid and enforceable security interest in the Collateral and (a) when the Collateral constituting certificated securities (as defined in the Uniform Commercial

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Code) is delivered to the Collateral Agent thereunder together with instruments of transfer duly endorsed in blank, the Guarantee and Collateral Agreement will constitute a fully perfected Lien on, and security interest in, all right, title and interest of the pledgors thereunder in such Collateral, prior and superior in right to any other Person, and (b) when financing statements in appropriate form are filed in the offices specified in the Perfection Certificate delivered in accordance with the Guarantee and Collateral Agreement, the Guarantee and Collateral Agreement will constitute a fully perfected Lien on and security interest in all right, title and interest of the Loan Parties in the remaining Collateral, prior and superior to the rights of any Person, other than rights secured by Liens expressly permitted by Section 6.02.

     SECTION 3.14 Margin Stock. Neither the Borrower nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock. The proceeds of the Loans and the Letters of Credit will not be used, directly or indirectly, immediately, incidentally or ultimately, for the purpose of purchasing or carrying any Margin Stock or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase or carry Margin Stock or for any other purpose which might constitute any of the Loans or the Letters of Credit under this Agreement “purpose credit” within the meaning of Regulation U or Regulation X of the Board.

     SECTION 3.15 Use of Proceeds. The proceeds of the Loans shall be used only for the purposes referred to in the preamble to this Agreement. The Borrower represents and warrants to the Lenders and the Administrative Agent that all Loans will be for business, commercial, investment or other similar purpose and not primarily for personal, family, household or agricultural use, as such terms are used in the Texas Finance Code.

ARTICLE IV
Conditions

     SECTION 4.01 Effective Date. The obligations of the Lenders to make Loans and of the Issuing Banks to issue Letters of Credit hereunder shall not become effective until each of the following conditions shall have been satisfied (or waived in accordance with Section 9.02):

          (a) The Administrative Agent (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement.

          (b) The Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of (i) Locke Liddell & Sapp LLP, outside counsel for the Borrower, in form and substance reasonably acceptable to the Administrative Agent and the Lenders, and (ii) James M. Shelger, senior vice president, general counsel and secretary of the Borrower, in form and substance reasonably acceptable to the Administrative Agent and the Lenders. The Borrower hereby requests such counsel to deliver such opinion.

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          (c) The Administrative Agent shall have received such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of each Loan Party, the authorization of the Transactions and any other legal matters relating to the Borrower, the Loan Parties, the Loan Documents or the Transactions, all in form and substance reasonably satisfactory to the Administrative Agent and its counsel.

          (d) The Administrative Agent shall have received a certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer, setting forth computations in reasonable detail of the Indenture Basket Amount as of the Effective Date (and after giving effect to the Borrowings to be made and the Letters of Credit to be issued on the Effective Date) and of the Consolidated Revenues and Consolidated Total Assets as of March 31, 2004, and confirming compliance with the conditions set forth in paragraphs (a), (b) and (c) of Section 4.02 and paragraph (f) of this Section.

          (e) The Lenders shall have received (i) satisfactory audited consolidated balance sheet and related statements of operations, stockholders’ equity and cash flows of the Borrower for the two most recent fiscal years ended prior to the Effective Date as to which such financial statements are available and (ii) satisfactory unaudited consolidated balance sheet and related statements of operations, stockholders’ equity and cash flows of the Borrower for each quarterly period ended subsequent to the date of the latest financial statements delivered pursuant to clause (i) of this Section 4.01(e) as to which such financial statements are available.

          (f) The Guarantee and Collateral Requirement shall have been satisfied.

          (g) All consents and approvals required to be obtained from any Governmental Authority or other Person in connection with the Transactions shall have been obtained.

          (h) The Administrative Agent shall have received, on behalf of itself, the Syndication Agent, the Joint Lead Arrangers, and the Lenders, all fees and other amounts due and payable to the foregoing Persons on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder.

          (i) The obligations of the Lenders to make Loans and of the Issuing Banks to issue Letters of Credit hereunder shall not become effective unless each of the foregoing conditions shall have been satisfied (or waived pursuant to Section 9.02) at or prior to 5:00 p.m., Houston, Texas time, on August 31, 2004 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time).

     SECTION 4.02 Each Credit Event. The obligation of each Lender to make a Loan on the occasion of any Borrowing, and of each Issuing Bank to issue, amend, renew or extend any Letter of Credit, shall be subject to the satisfaction of the following conditions:

          (a) The representations and warranties of the Borrower set forth in this Agreement shall be true and correct on and as of the date of such Borrowing or the date of issuance, amendment, renewal or extension of such Letter of Credit, as applicable, except to the

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extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date and except that, for purposes of this Section 4.02(a), the representations and warranties set forth in Section 3.04(a) shall be deemed to refer to the financial statements furnished to the Lenders pursuant to Section 5.01(a) and (b).

          (b) At the time of and immediately after giving effect to such Borrowing or the issuance, amendment, renewal or extension of such Letter of Credit, as applicable, no Material Adverse Effect and no Default shall have occurred and be continuing.

          (c) At the time of and immediately after giving effect to such Borrowing or the issuance, amendment, renewal, or extension of such Letter of Credit, as applicable, the Indenture Basket Amount shall not be less than zero.

          (d) At the time of such Borrowing or the issuance, amendment, renewal or extension of such Letter of Credit, as applicable, the Guarantee and Collateral Requirement shall be satisfied.

Each Borrowing and each issuance, amendment, renewal or extension of a Letter of Credit shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a), (b) and (c) of this Section.

ARTICLE V
Affirmative Covenants

     Until the Commitments shall have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full and all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that:

     SECTION 5.01 Financial Statements and Other Information. The Borrower will furnish to the Administrative Agent and each Lender:

          (a) within 95 days after the end of each fiscal year of the Borrower, its audited consolidated balance sheet and related statements of operations, stockholders’ equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by PricewaterhouseCoopers LLP or other independent public accountants of recognized national standing (without a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of the Borrower and its consolidated subsidiaries on a consolidated basis in accordance with GAAP consistently applied;

          (b) within 50 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, its consolidated balance sheet and related statements of operations, stockholders’ equity and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the

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end of) the previous fiscal year, all certified by one of its Financial Officers as presenting fairly in all material respects the financial condition and results of operations of the Borrower and its consolidated subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes;

          (c) as promptly as practicable and in any event not later than (i) 25 days after any delivery of financial statements under clause (a) above and (ii) 10 days after any delivery of financial statements under clause (b) above, a certificate of a Financial Officer (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations (A) showing the aggregate amounts of Consolidated Revenues, the portion of the aggregate amounts of Consolidated Revenues attributable to each Material Foreign Subsidiary and the Indenture Basket Amount as of the date of the balance sheet included in such financial statements and for the period of four fiscal quarters then ended and (B) demonstrating compliance with Sections 6.12, 6.13, 6.14 (and showing the effect of the exclusion from the financial statements of subsidiaries of the Borrower that are not Subsidiaries) and 6.15, (iii) setting forth any changes required to be made to Schedule 1.01(b) in order for the information set forth therein to be complete and correct as of the date of the balance sheet included in such financial statements (or stating that no such changes are required) and (iv) stating whether any change in GAAP or in the application thereof has occurred since the date of the most recent audited financial statements delivered under clause (a) above (or, prior to the delivery of any such financial statements, since December 31, 2003) and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate;

          (d) concurrently with any delivery of a certificate of a Financial Officer under clause (c)(i) above, a certificate of the accounting firm that reported on such financial statements stating that, in connection with its audit, nothing has come to its attention that caused it to believe that the Borrower failed to comply with the terms, covenants, provisions or conditions of Article V, VI or VII of this Agreement (which certificate may be limited to the extent required by accounting rules or guidelines);

          (e) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by the Borrower or any Subsidiary with the United States Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed by the Borrower to its shareholders generally, as the case may be;

          (f) upon the earlier of (i) 10 business days following approval of such information by the board of directors of the Borrower and (ii) March 31 of each fiscal year of the Borrower, an annual budget of the Borrower and the Subsidiaries for such fiscal year; and

          (g) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Borrower or any Subsidiary, or compliance with the terms of this Agreement, as the Administrative Agent or any Lender may reasonably request.

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Information required to be delivered pursuant to this Section 5.01 shall be deemed to have been delivered if such information, or one or more annual or quarterly reports containing such information, shall have been posted by the Administrative Agent on an IntraLinks or similar site to which the Lenders have been granted access or shall be available on the website of the Securities and Exchange Commission at http://www.sec.gov (and a confirming electronic correspondence is delivered or caused to be delivered providing notice of such posting or availability); provided that the Borrower shall deliver paper copies of such information to any Lender that requests such delivery. Information required to be delivered pursuant to this Section 5.01 may also be delivered by electronic communications pursuant to procedures approved by the Administrative Agent.

     SECTION 5.02 Notices of Material Events. The Borrower will furnish to the Administrative Agent and each Lender prompt written notice of the following:

          (a) the occurrence of any Default;

          (b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Borrower or any Affiliate thereof that could reasonably be expected to result in a Material Adverse Effect;

          (c) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and the Subsidiaries in an aggregate amount exceeding $5,000,000; and

          (d) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect.

Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto.

     SECTION 5.03 Existence; Conduct of Business. The Borrower will, and will cause each of the Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business except to the extent that failures to keep in effect such rights, licenses, permits, privileges and franchises could not reasonably be expected, individually or in the aggregate for all such failures, to result in a Material Adverse Effect; provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.04.

     SECTION 5.04 Payment of Obligations. The Borrower will, and will cause each of the Subsidiaries to, pay its Indebtedness and other obligations, including Tax liabilities, before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect.

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     SECTION 5.05 Maintenance of Properties. The Borrower will, and will cause each of the Subsidiaries to, keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted.

     SECTION 5.06 Books and Records; Inspection and Audit Rights. The Borrower will, and will cause each of the Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of the Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested.

     SECTION 5.07 Compliance with Laws. The Borrower will, and will cause each of the Subsidiaries to, comply with all material laws, including Environmental Laws, rules, regulations and orders of any Governmental Authority applicable to it or its property.

     SECTION 5.08 Information Regarding Collateral.

          (a) The Borrower will furnish to the Administrative Agent prompt written notice of any change (i) in any Loan Party’s corporate name or in any trade name used to identify it in the conduct of its business or in the ownership of its properties, (ii) in any Loan Party’s identity, corporate structure or jurisdiction of incorporation or formation or (iii) in any Loan Party’s Federal taxpayer identification number or other organizational identification number. The Borrower agrees not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the Uniform Commercial Code or otherwise that are required in order for the Collateral Agent to continue at all times following such change to have a valid, legal and perfected security interest in all the Collateral.

          (b) Each year, at the time of delivery of annual financial statements with respect to the preceding fiscal year pursuant to clause (a) of Section 5.01, the Borrower shall deliver to the Administrative Agent a certificate of a Financial Officer and a legal officer of the Borrower certifying that the Guarantee and Collateral Requirement is satisfied.

     SECTION 5.09 Insurance. The Borrower will, and will cause each of the Subsidiaries to, maintain, with financially sound and reputable insurance companies, insurance in such amounts (with no greater risk retention) and against such risks as are customary among companies of established reputation engaged in the same or similar businesses and operating in the same or similar locations. The Borrower will furnish to the Lenders, upon request of the Administrative Agent, information in reasonable detail as to the insurance so maintained.

     SECTION 5.10 Additional Subsidiaries.

     If any Material Subsidiary is formed or acquired, or if any Subsidiary shall become a Material Subsidiary, after the Effective Date, the Borrower will, within five Business Days, notify the Administrative Agent and the Lenders thereof and, if necessary for the Borrower to maintain compliance with the Guarantee and Collateral Requirement, promptly cause the Guarantee and Collateral Requirement to be satisfied with respect to such Material Subsidiary

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and with respect to any Equity Interest in such Material Subsidiary owned by or on behalf of any Loan Party.

     SECTION 5.11 Further Assurances. The Borrower will, and will cause each other Loan Party to, execute any and all further documents, financing statements, agreements and instruments, and take all such further actions, which may be required under any applicable law, or which the Administrative Agent may reasonably request, to cause the Guarantee and Collateral Requirement to be and remain satisfied, all at the expense of the Loan Parties. The Borrower also agrees to provide to the Administrative Agent, from time to time upon request, all such information as the Administrative Agent shall reasonably request as necessary to confirm the perfection and priority of the Liens created or intended to be created by the Security Documents.

     SECTION 5.12 Use of Proceeds and Letters of Credit. The proceeds of the Loans will be used only for the purposes referred to in the preamble to this Agreement. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations T, U and X. Letters of Credit will be issued only to support obligations incurred by the Borrower and the Subsidiaries in the ordinary course of business.

ARTICLE VI
Negative Covenants

     Until the Commitments shall have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full and all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that:

     SECTION 6.01 Indebtedness; Certain Equity Securities.

          (a) The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Indebtedness, except:

          (i) Indebtedness created under the Loan Documents;

          (ii) Indebtedness existing on the date hereof and set forth in Schedule 6.01 and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount or change the parties directly or indirectly responsible for the payment thereof; provided that any such refinancing Indebtedness (A) shall not be secured by any collateral that did not secure the Indebtedness refinanced and (B) shall not mature before the earlier of (x) the maturity date of the Indebtedness refinanced and (y) the date six months following the Maturity Date;

          (iii) Indebtedness of the Borrower to any Subsidiary and of any Subsidiary to the Borrower or any other Subsidiary; provided that Indebtedness of any Subsidiary that is not a Loan Party to the Borrower or any other Loan Party shall be subject to Section 6.05;

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          (iv) Guarantees by the Borrower of Indebtedness of any Subsidiary, to the extent said Indebtedness is permitted hereunder; provided that Guarantees by the Borrower of Indebtedness of any Subsidiary that is not a Loan Party shall be subject to Section 6.05;

          (v) (A) Indebtedness of the Borrower or any Subsidiary incurred after the date hereof to finance the acquisition, construction or improvement of any fixed or capital assets, including Capital Lease Obligations and any Indebtedness assumed in connection with the acquisition of any such assets, or secured by a Lien on any such assets prior to the acquisition thereof, and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount or change the parties directly or indirectly responsible for the payment thereof, (B) Attributable Debt of the Borrower or any Subsidiary incurred after the date hereof pursuant to Sale and Leaseback Transactions permitted by Section 6.03 and (C) Indebtedness represented by seller notes executed by the Borrower or any Subsidiary incurred after the date hereof in connection with Permitted Acquisitions; provided that (i) the Indebtedness in clause (A) hereof is incurred prior to or within 120 days (or such longer period if necessary solely to obtain any permits or licenses required in connection with such acquisition, construction or improvement) after such acquisition or the completion of such construction or improvement and (ii) the aggregate principal amount of the Indebtedness permitted by this clause (v) shall not exceed $75,000,000 at any time outstanding;

          (vi) Indebtedness of any Subsidiary, provided that the aggregate principal amount of all Indebtedness permitted by this clause (vi) shall not exceed the aggregate principal amount of $100,000,000 at any time outstanding, less the aggregate principal amount of the Borrower’s secured Indebtedness permitted under clause (vii) of this Section 6.01(a);

          (vii) secured Indebtedness of the Borrower not permitted by any other clause of this Section 6.01; provided that the aggregate principal amount of all Indebtedness permitted by this clause (vii) shall not exceed $25,000,000 at any time outstanding; and

          (viii) unsecured Indebtedness of the Borrower not permitted by any other clause of this Section 6.01; provided that (i) no Default exists at the time, or is created as a result, of the incurrence of such Indebtedness, (ii) for all Indebtedness permitted by this Section 6.01(a)(viii) in excess of $100,000,000, such Indebtedness does not have a maturity date before the date six months following the Maturity Date, and (iii) the terms of such unsecured Indebtedness are not more restrictive than the terms of this Agreement.

          (b) The Borrower will not, nor will it permit any Subsidiary to, issue any preferred stock or other preferred Equity Interests, other than (i) preferred Equity Interests of the Borrower issued pursuant to any shareholders’ rights plan of the Borrower and (ii) preferred Equity Interests issued by any Subsidiary to the extent, and only to the extent, that such preferred Equity Interests are owned by the Borrower or another Subsidiary.

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     SECTION 6.02 Liens. The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except:

          (a) Liens created under the Loan Documents;

          (b) Permitted Encumbrances;

          (c) any Lien on any property or asset of the Borrower or any Subsidiary existing on the date hereof and set forth in Schedule 6.02; provided that (i) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary and (ii) such Lien shall secure only those obligations which it secures on the date hereof and extensions, renewals and replacements thereof that do not increase the outstanding principal amount or change the parties directly or indirectly responsible for the payment thereof;

          (d) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Subsidiary or existing on any property or asset of any Person that becomes a Subsidiary after the date hereof prior to the time such Person becomes a Subsidiary; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary, as the case may be, (ii) such Lien shall not apply to any other property or assets of the Borrower or any Subsidiary and (iii) such Lien shall secure only those obligations which it secures on the date of such acquisition or the date such Person becomes a Subsidiary, as the case may be, and extensions, renewals and replacements thereof that do not increase the outstanding principal amount or change the parties directly or indirectly responsible for the payment thereof;

          (e) Liens on fixed or capital assets acquired, constructed or improved by the Borrower or any Subsidiary; provided that (i) such Liens secure Indebtedness permitted by clause (v) of Section 6.01(a), (ii) such Liens and the Indebtedness secured thereby are incurred prior to or within 120 days (or such longer period if necessary solely to obtain any permits or licenses required in connection with such acquisition, construction or improvement) after such acquisition or the completion of such construction or improvement, (iii) the Indebtedness secured thereby does not exceed the cost of acquiring, constructing or improving such fixed or capital assets and (iv) such Liens shall not apply to any other property or assets of the Borrower or any Subsidiary; and

          (f) Liens securing the Indebtedness permitted by clauses (vi) and (vii) of Section 6.01(a) of such Indebtedness at any time outstanding.

     SECTION 6.03 Sale and Leaseback Transactions. The Borrower will not, and will not permit any of the Subsidiaries to, enter into any Sale and Leaseback Transaction; provided that the Borrower may, and may permit any Subsidiary to, enter into Sale and Leaseback Transactions if the aggregate outstanding Attributable Debt in respect of Sale and Leaseback Transactions permitted by this proviso shall at no time exceed $75,000,000; and provided further that all Attributable Debt associated with any such Sale and Leaseback Transaction shall be

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treated as Indebtedness of the Borrower or the applicable Subsidiary, as the case may be, incurred pursuant to Section 6.01(a)(v) and shall be subject to the limitations of such Section.

     SECTION 6.04 Fundamental Changes.

          (a) The Borrower will not, and will not permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) assets (including capital stock of Subsidiaries) constituting all or substantially all the assets of the Borrower and the Subsidiaries on a consolidated basis (whether now owned or hereafter acquired), or, in the case of the Borrower or any Material Subsidiary, liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (i) any Subsidiary may merge into the Borrower in a transaction in which the Borrower is the surviving corporation, (ii) any Subsidiary may merge into any other Subsidiary in a transaction in which the surviving entity is a Subsidiary; provided, however, that (A) no Material Subsidiary may merge into a Foreign Subsidiary (unless prior to such merger, such Material Subsidiary was also a Foreign Subsidiary), and (B) after giving effect to such transaction, the Guarantee and Collateral Requirement remains satisfied, (iii) any Permitted Asset Disposition made in accordance with Section 6.06 and involving the sale of a Subsidiary may be effected by a merger of such Subsidiary, (iv) any Subsidiary may sell, transfer, lease or otherwise dispose of its assets to the Borrower or to another Subsidiary; provided, however, that (A) no Material Subsidiary may sell, transfer, lease or otherwise dispose of its assets to any Foreign Subsidiary (unless prior to such sale, transfer, lease or disposition such Material Subsidiary was also a Foreign Subsidiary), and (B) after giving effect to such transaction, the Guarantee and Collateral Requirement remains satisfied, and (v) any Subsidiary may liquidate or dissolve if the Borrower determines in good faith that such liquidation or dissolution is in the best interests of the Borrower and is not materially disadvantageous to the Lenders; provided that any such merger involving a Person that is not a wholly owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Section 6.05.

          (b) The Borrower will not, and will not permit any of the Subsidiaries to, engage to any material extent in any business other than businesses of the type conducted by the Borrower and the Subsidiaries on the date of execution of this Agreement and businesses reasonably related thereto.

     SECTION 6.05 Investments, Loans, Advances, Guarantees and Acquisitions. The Borrower will not, and will not permit any of the Subsidiaries to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a wholly owned Subsidiary prior to such merger) any capital stock, evidences of Indebtedness or securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit, except:

          (a) Permitted Investments;

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          (b) investments existing on the date hereof and set forth on Schedule 6.05;

          (c) investments by the Borrower and the Subsidiaries in Equity Interests in their respective Subsidiaries; provided that (i) any such Equity Interests in Loan Parties shall be pledged pursuant to the Guarantee and Collateral Agreement and (ii) the aggregate amount of investments made by Loan Parties to Subsidiaries that are not Loan Parties pursuant to this clause (c), together with all loans and advances and Guarantees made by Loan Parties to Subsidiaries that are not Loan Parties pursuant to Section 6.05(d) and 6.05(f) (excluding all such investments, loans, advances and Guarantees existing on the date hereof), shall not exceed $15,000,000 at any time outstanding;

          (d) loans or advances made by the Borrower to any Subsidiary or made by any Subsidiary to the Borrower or any other Subsidiary; provided that the amount of such loans and advances made by Loan Parties to Subsidiaries that are not Loan Parties pursuant to this clause (d), together with investments and Guarantees made by Loan Parties to Subsidiaries that are not Loan Parties pursuant to Section 6.05(c) and 6.05(f), shall not exceed $15,000,000 at any time outstanding;

          (e) obligations of the Borrower to any Subsidiary, or of any Subsidiary to the Borrower or any other Subsidiary, arising from the management and investment of cash on a pooled basis in the ordinary course of business;

          (f) Guarantees constituting Indebtedness permitted by Section 6.01; provided that (i) a Subsidiary shall not Guarantee any Indebtedness of the Borrower unless such Subsidiary also has Guaranteed the Obligations pursuant to the Guarantee and Collateral Agreement, and (ii) the aggregate principal amount of Indebtedness of Subsidiaries that are not Loan Parties that is Guaranteed by any Loan Party pursuant to this clause (f), together with investments and loans and advances made by Loan Parties to Subsidiaries that are not Loan Parties pursuant to Section 6.05(c) and (d), shall not exceed $15,000,000 at any time outstanding;

          (g) Guarantees by the Borrower of accounts payable of Subsidiaries in the ordinary course of business;

          (h) investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers, in each case in the ordinary course of business;

          (i) investments in Perpetual Care Trusts, Pre-Need Trusts or similar transactions made (a) in the ordinary course of such Person’s business and (b) subject to applicable Federal, state or local regulations;

          (j) Permitted Acquisitions for consideration consisting of common stock of the Borrower, and other Permitted Acquisitions to the extent the amount or fair market value of the consideration paid by the Borrower and the Subsidiaries therefor (including Indebtedness assumed pursuant to Section 6.01(a)(vi)) does not exceed (A) $100,000,000 for any single Permitted Acquisition, or (B) $200,000,000 for all Permitted Acquisitions which closed at any time during the 12-months preceding and including the date of such Permitted Acquisition;

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          (k) Equity Interests and debt obligations owned by the Borrower or any Subsidiary following a Permitted Asset Disposition; provided that any Permitted Asset Disposition is made in compliance with Section 6.06;

          (l) Equity Interests in Persons owned by the Borrower or any Subsidiary following the sale of Equity Interests in Subsidiaries in transactions constituting Permitted Asset Dispositions and other investments in joint ventures engaged in businesses reasonably related to the business of the Borrower as of the date of this Agreement; provided that no investment shall be permitted pursuant to this clause (l) that, together with all other investments permitted under this clause (l), would exceed $125,000,000 in the aggregate;

          (m) investments not permitted by any other clause of this Section; provided that no investment shall be made pursuant to this clause (n) that, together with all other investments made pursuant to this clause (n) after the date hereof, would exceed $10,000,000 in the aggregate; and

          (n) other alternative investments not permitted by any other clause of this Section; provided that both before and immediately after giving effect to any such investment, (i) the Borrower has at least $50,000,000 in liquidity in the form of Permitted Investments and at least $150,000,000 of total liquidity, including (A) unrestricted cash, (B) Permitted Investments and (C) the difference between the aggregate Commitments available hereunder as of such date and the aggregate Revolving Credit Exposure as of such date.

     SECTION 6.06 Asset Sales. The Borrower will not, and will not permit any of the Subsidiaries to, sell, transfer, lease or otherwise dispose of any asset, including any Equity Interest, owned by it, nor will the Borrower permit any of the Subsidiaries to issue any additional Equity Interest in such Subsidiary, except:

          (a) sales of inventory (including parcels in developed cemetery properties), used or surplus equipment and Permitted Investments in the ordinary course of business;

          (b) sales, transfers and dispositions to the Borrower or a Subsidiary; provided that any such sales, transfers or dispositions involving a Subsidiary that is not a Loan Party shall be made in compliance with Section 6.09; and

          (c) sales, transfers, leases and other dispositions of assets (other than accounts receivable or inventory of Loan Parties) the sale of which is not otherwise permitted by any other clause of this Section 6.06; provided that (i) the aggregate book value of all assets sold, transferred or otherwise disposed of in reliance upon this clause (c) shall not exceed 20% of the Consolidated Total Assets of the Borrower and its Subsidiaries as of the Effective Date (plus any increase in the Consolidated Total Assets resulting from Permitted Acquisitions of Subsidiaries after the Effective Date, with each such increase to be measured as of the date of such Permitted Acquisition) in the aggregate, (ii) all sales, transfers, leases and other dispositions permitted pursuant to this clause (c) shall be made for fair value and (iii) if any such sale, transfer, lease or other disposition is made for aggregate consideration in excess of $20,000,000, such sale, transfer, lease or other disposition shall be made for at least 80% cash consideration provided the

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Borrower may sell only up to an aggregate of $100,000,000 of such assets where the cash component is less than 80%.

     SECTION 6.07 Swap Agreements. The Borrower will not, and will not permit any of the Subsidiaries to, enter into any Swap Agreement, except (a) Swap Agreements entered into to hedge or mitigate risks (including foreign exchange risks) to which the Borrower or any Subsidiary has actual exposure (other than in respect of Equity Interests or Indebtedness of the Borrower or any of its Subsidiaries), and (b) Swap Agreements entered into in order to effectively cap, collar or exchange interest rates (from fixed to floating rates, from one floating rate to another floating rate or otherwise) with respect to any interest-bearing liability or investment of the Borrower or any Subsidiary.

     SECTION 6.08 Restricted Payments.

          (a) The Borrower will not, and will not permit any of the Subsidiaries to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except that (i) the Borrower may declare and pay dividends with respect to its Equity Interests or purchase or redeem any Equity Interests issued by the Borrower; provided that no Default or Event of Default exists at the time, or is created as a result of, such declaration or payment, and (ii) Subsidiaries may declare and pay dividends ratably with respect to their Equity Interests.

          (b) The Borrower will not, nor will it permit any of the Subsidiaries to, make or agree to make, directly or indirectly, any payment or other distribution (whether in cash, securities or other property) in respect of principal of or interest on any Indebtedness, or any payment or other distribution (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, defeasance, acquisition, cancellation or termination of any Indebtedness, except:

          (i) payment of Indebtedness created under the Loan Documents;

          (ii) regularly scheduled and other mandatory interest and principal payments as and when due in respect of any Indebtedness permitted under Section 6.01;

          (iii) refinancings of Indebtedness to the extent permitted by Section 6.01, including the payment of customary fees, costs and expenses in connection therewith;

          (iv) the payment of secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness to the extent such sale or transfer is permitted by Section 6.06;

          (v) the payment of Indebtedness of any Person acquired by the Borrower or any Subsidiary that exists on the date of such acquisition; provided that such Person becomes a Subsidiary as a result of such acquisition;

          (vi) Indebtedness that matures prior to the Maturity Date; provided there are no outstanding Loans under this Agreement;

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          (vii) Indebtedness that matures after the Maturity Date; provided that (A) no Indebtedness described in clause (vi) above is outstanding, other than (1) non-public Indebtedness described in Schedule 6.01 or (2) other non-public Indebtedness incurred after the Effective Date in an aggregate amount not to exceed $10,000,000, and (B) there are no outstanding Loans under this Agreement;

          (viii) prepayments and redemptions of Indebtedness of the Borrower or any Subsidiary with proceeds of any issuance and sale of common stock of the Borrower;

          (ix) exchanges of common stock of the Borrower for Indebtedness of the Borrower or any Subsidiary; and

          (x) other prepayments by the Borrower or any Subsidiary not permitted by any other clause of this section; provided that no such prepayment or redemption shall be made if (i) as of date of the most recently delivered financial statements pursuant to Section 5.01(c), the Leverage Ratio is greater than or equal to 3.00 to 1.00 and the Borrower or any Subsidiary has made such other prepayments permitted under this clause (x) (including the proposed prepayment) in excess of $200,000,000 in the aggregate, or (ii) as of the date of the most recently delivered financial statements pursuant to Section 5.01(c), the Leverage Ratio is less than 3.00 to 1.00 and the Borrower or any Subsidiary has made such other prepayments permitted under this clause (x) (including the proposed prepayment) in excess of $400,000,000 in the aggregate (inclusive of the aggregate amount of prepayments and redemptions made under clause (i)), in each case (A) so long as there are no outstanding Loans under this Agreement and (B) as determined from the Leverage Ratio determined from the most recently delivered financial statements delivered pursuant to Section 5.01(c).

     SECTION 6.09 Transactions with Affiliates. The Borrower will not, and will not permit any Subsidiary to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (a) transactions in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties, (b) transactions between or among the Borrower and one or more Subsidiaries that are Loan Parties not involving any other Affiliate, (c) any investment, loan or advance involving a Subsidiary that is permitted by Section 6.05, (d) any Restricted Payment permitted by Section 6.08 and (e) issuances of Equity Interests of the Borrower in satisfaction of obligations under retirement plans.

     SECTION 6.10 Restrictive Agreements. The Borrower will not, and will not permit any of the Subsidiaries to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its properties or assets, or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to the Borrower or any other subsidiary or to Guarantee Indebtedness of the Borrower or any other Subsidiary; provided that (i) the foregoing shall not apply to restrictions and conditions imposed by law or by any Loan Document, (ii) the foregoing shall not apply to restrictions and conditions existing on the

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date hereof identified on Schedule 6.10 (but shall apply to any extension or renewal of or any amendment or modification expanding the scope of, any such restriction or commitment) and (iii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder.

     SECTION 6.11 Fiscal Year. The Borrower will not change its fiscal year end to a date other than December 31.

     SECTION 6.12 Interest Expense Coverage Ratio. The Borrower will not permit the ratio of (a) Consolidated EBITDA to (b) Consolidated Interest Expense to be less than the ratio set forth opposite such date below. With respect to the first three fiscal quarters, the Consolidated Interest Expense shall be annualized as set forth below, and beginning with the fiscal quarter ending June 30, 2005, and for each fiscal quarter thereafter, the ratio shall be determined for the four consecutive fiscal quarters then ending. For the fiscal quarter ending September 30, 2004, the Consolidated Interest Expense shall be annualized by multiplying the Consolidated Interest Expense for such quarter by four. For the fiscal quarter ending December 31, 2004, the Consolidated Interest Expense shall be annualized by multiplying the two consecutive fiscal quarters ending on December 31, 2004 by two. For the fiscal quarter ending March 31, 2005, the Consolidated Interest Expense shall be annualized by multiplying the three consecutive fiscal quarters ending March 31, 2005, by (4/3).

Fiscal Quarter Ending	Minimum Ratio
September 30, 2004		3.00 to 1.00
December 31, 2004		3.25 to 1.00
March 31, 2005		3.25 to 1.00
June 30, 2005		3.25 to 1.00
September 30, 2005		3.25 to 1.00
December 31, 2005		3.50 to 1.00
March 31, 2006		3.50 to 1.00
June 30, 2006		3.50 to 1.00
September 30, 2006		3.50 to 1.00
December 31, 2006		3.50 to 1.00
March 31, 2007		3.50 to 1.00
June 30, 2007		3.50 to 1.00

     SECTION 6.13 Leverage Ratio. The Borrower will not permit the Leverage Ratio at the end of any fiscal quarter to exceed the amount set forth below opposite such fiscal quarter:

Fiscal Quarter Ending	Maximum Ratio
September 30, 2004		4.00 to 1.00
December 31, 2004		4.00 to 1.00
March 31, 2005		4.00 to 1.00
June 30, 2005		4.00 to 1.00
September 30, 2005		3.50 to 1.00
December 31, 2005		3.50 to 1.00
March 31, 2006		3.50 to 1.00

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Fiscal Quarter Ending	Maximum Ratio
June 30, 2006		3.50 to 1.00
September 30, 2006		3.00 to 1.00
December 31, 2006		3.00 to 1.00
March 31, 2007		3.00 to 1.00
June 30, 2007		3.00 to 1.00

     SECTION 6.14 Capital Expenditures. The Borrower and the Subsidiaries will not make Capital Expenditures in any fiscal year in an amount exceeding $130,000,000; provided, however, that the amount of Capital Expenditures in any fiscal year shall be increased by an amount equal to 50% of the Capital Expenditures permitted for the fiscal year immediately preceding such fiscal year but not made in such preceding fiscal year, provided that the amount of Capital Expenditures permitted for any fiscal year shall be fully utilized prior to utilization of any such carryforward amount and no unused amount of Capital Expenditures permitted in respect of any fiscal year may be carried forward beyond the next following fiscal year.

     SECTION 6.15 Net Worth. The Borrower will not permit Net Worth at any time to be less than the sum of (a) the amount of the Last Determined Minimum Net Worth, plus (b) 100% of the proceeds received by the Borrower after the Effective Date from all shares, rights to purchase, warrants, options, participations or other equivalents of the Borrower’s equity, including all common stock and preferred stock, plus (c)(i) if the Leverage Ratio is equal to or greater than 3.00 to 1.00, 50% of Consolidated Net Income for the most recently completed fiscal quarter, or (ii) if the Leverage Ratio is less than 3.00 to 1.00, 25% of Consolidated Net Income for the most recently completed fiscal quarter; provided that in no event will the Borrower permit its Net Worth to be less than the sum of clauses (a) and (b) above.

     SECTION 6.16 Uncertificated Subsidiaries. The Borrower agrees not to, and agrees to cause its Subsidiaries not to, permit any Uncertificated Subsidiary to issue any certificates or other instruments representing the Equity Interests in any Uncertificated Subsidiary, unless within ten (10) Business Days after the issuance of such certificates, such certificates shall have been pledged pursuant to the Guarantee and Collateral Agreement, the Collateral Agent shall have received such certificates, together with undated stock powers or other instruments of transfer with respect thereto endorsed in blank and the Guarantee and Collateral Requirement shall be satisfied.

ARTICLE VII
Events of Default

     If any of the following events (“Events of Default”) shall occur:

          (a) the Borrower shall fail to pay any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise;

          (b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this

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Agreement or any other Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of five Business Days;

          (c) any representation, warranty or other statement made or deemed made by or on behalf of the Borrower or any Subsidiary in or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, shall prove to have been incorrect in any material respect when made or deemed made;

          (d) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 5.02, 5.03 (with respect to the Borrower’s existence), 5.10(a) or 5.12 or in Article VI;

          (e) any Loan Party shall fail to observe or perform any covenant, condition or agreement contained in any Loan Document (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent to the Borrower (which notice will be given at the request of any Lender);

          (f) the Borrower or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable;

          (g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf, without the lapse of any grace period (other than grace periods that have already expired), to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption, defeasance or termination thereof, prior to its scheduled maturity; provided that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness in accordance with the terms and conditions of this Agreement;

          (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower or any Material Subsidiary or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Material Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered;

          (i) the Borrower or any Material Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any

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proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Material Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing;

          (j) the Borrower or any Material Subsidiary shall become unable, admit in writing its inability or fail generally to pay its debts as they become due;

          (k) one or more judgments for the payment of money in an aggregate amount in excess of $10,000,000 shall be rendered against the Borrower, any Material Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Borrower or any Material Subsidiary to enforce any such judgment;

          (l) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and its Subsidiaries in an aggregate amount exceeding (i) $10,000,000 in any year or (ii) $25,000,000 for all periods;

          (m) any Lien purported to be created under any Security Document shall cease to be, or shall be asserted by any Loan Party not to be, a valid and perfected Lien on any Collateral, with the priority required by the applicable Security Document, except (i) as a result of the sale or other disposition of the applicable Collateral in a transaction permitted under the Loan Documents or (ii) as a result of the Administrative Agent’s failure to maintain possession of any stock certificates or other instruments delivered to it;

          (n) the Borrower or any Subsidiary shall have received a notice, order or judgment from or of a Governmental Authority that temporarily or permanently suspends a material part of the operations of the business of the Borrower or a Subsidiary (due to a violation of applicable law or otherwise), which suspension could reasonably be expected to result in a Material Adverse Effect, or the Borrower or any Subsidiary shall otherwise, other than in the ordinary course of business (as determined by past practices), suspend all or any part of its operations material to the conduct of the business of the Borrower and the Subsidiaries, taken as a whole, for a period of more than 30 days;

          (o) there shall occur any loss of any permits, licenses, authorizations, certifications or approvals from any Federal, state or local Governmental Authority that, either individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect;

          (p) the Borrower or any Subsidiary, or any of its assets, properties or businesses, shall have become the subject of an investigation or proceeding commenced by a Governmental Authority which investigation or proceeding could reasonably be expected to result in a Material Adverse Effect; or

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          (q) a Change in Control shall occur;

then, and in every such event (other than an event with respect to the Borrower described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower, and (iii) demand cash collateral with respect to any Letters of Credit pursuant to Section 2.05(j); and in case of any event with respect to the Borrower described in clause (h) or (i) of this Article, the Commitments shall automatically terminate, the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, and the Borrower’s obligation to provide cash collateral for Letters of Credit shall become effective, in each case without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.

ARTICLE VIII
The Agents

     Each of the Lenders hereby irrevocably appoints the Agents as its agents and authorizes the Agents to take such actions on its behalf and to exercise such powers as are delegated to the Agents by the terms hereof and of the other Loan Documents, together with such actions and powers as are reasonably incidental thereto.

     The bank or banks serving as the Agents hereunder shall have the same rights and powers in their capacity as Lenders as any other Lender and may exercise the same as though they were not Agents, and such bank or banks and their Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if they were not Agents hereunder.

     The Agents shall not have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing (a) the Agents shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Agents shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Agents are required to exercise in writing by the Required Lenders, and (c) except as expressly set forth herein, the Agents shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information communicated to the Agents by or relating to the Borrower or any Subsidiary. The Agents shall not be liable for any action taken or not taken by them with the consent or at the request of the Required Lenders or the Lenders, as the case may be, or in the absence of their own gross negligence or willful misconduct. In addition, the Agents shall be deemed not to have knowledge of any Default unless and until written notice thereof is

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given to the Agents by the Borrower or a Lender, and the Agents shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Agents.

     The Agents shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by them to be genuine and to have been signed or sent by the proper Person. The Agents also may rely upon any statement made to them orally or by telephone and believed by them to be made by the proper Person, and shall not incur any liability for relying thereon. The Agents may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by them with reasonable care, and shall not be liable for any action taken or not taken by them in accordance with the advice of any such counsel, accountants or experts.

     The Agents may perform any and all their duties and exercise their rights and powers by or through any one or more sub-agents appointed by the Agents. The Agents and any such sub-agent may perform any and all their duties and exercise their rights and powers through their respective Affiliates. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Affiliates of the Agents and any such sub-agent.

     Subject to the appointment and acceptance of a successor Agent as provided below, either Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right to appoint a successor with the Borrower’s written consent (which shall not be unreasonably withheld or delayed and shall not be required from the Borrower if an Event of Default has occurred and is continuing). If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders, with the Borrower’s written consent (which shall not be unreasonably withheld or delayed and shall not be required if an Event of Default has occurred and is continuing), appoint a successor Agent which shall be a bank or an Affiliate thereof, in each case with a net worth of at least $1,000,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After an Agent’s resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent.

     Each Lender acknowledges that it has, independently and without reliance upon the Agents or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agents or any other

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Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder.

     Notwithstanding any other provision contained herein, the Syndication Agent shall, in its capacity as such, have no responsibilities under this Agreement or the other Loan Documents.

ARTICLE IX
Miscellaneous

     SECTION 9.01 Notices.

          (a) Except in the case of notices and other communications expressly permitted to be given by telephone (and subject to paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy or e-mail, as follows:

          (i) if to the Borrower, to it at 1929 Allen Parkway, Houston, Texas 77019, Attention of Chief Financial Officer (Telecopy No. (713) 525-7710; E-Mail Address jeffrey.curtis@sci-us.com);

          (ii) if to the Administrative Agent, to JPMorgan Chase Bank, Loan and Agency Services Group, 1111 Fannin, 10th Floor, Houston, Texas 77002, Attention of Bernie Gonzalez (Telecopy No. 713-750-2823; E-Mail Address Bernie.Gonzalez@jpmorgan.com), and a copy to JPMorgan Chase Bank, 712 Main Street, 5-CBBE-78, Houston, Texas 77002, Attention of James Dolphin (Telecopy No. 713-216-6004; E-Mail Address james.dolphin@jpmorgan.com) and Attention of Kathy King (Telecopy No. 713-216-6004; E-Mail Address kathy.l.king@jpmorgan.com);

          (iii) if to the Issuing Bank, to it at JPMorgan Chase Bank, Loan and Agency Services Group, Loan and Agency Services Group, 1111 Fannin, 10th Floor, Houston, Texas 77002, Attention of Bernie Gonzalez (Telecopy No. 713-750-2823; E-Mail Address Bernie.Gonzalez@jpmorgan.com),and a copy to JPMorgan Chase Bank, 712 Main Street, 5-CBBE-78, Houston, Texas 77002, Attention of James Dolphin (Telecopy No. 713-216-6004; E-Mail Address james.dolphin@jpmorgan.com) and Attention of Kathy King (Telecopy No. 713-216-6004; E-Mail Address kathy.l.king@jpmorgan.com);

          (iv) if to the Swingline Lender, to it at Loan and Agency Services Group, 1111 Fannin, 10th Floor, Houston, Texas 77002, Attention of Bernie Gonzalez (Telecopy No. 713-750-2823; E-Mail Address Bernie.Gonzalez@jpmorgan.com),and a copy to JP Morgan Chase Bank, 712 Main Street, 5-CBBE-78, Houston, Texas 77002, Attention of James Dolphin (Telecopy No. 713-216-6004; E-Mail Address james.dolphin@jpmorgan.com) and Attention of Kathy King (Telecopy No. 713-216-6004; E-Mail Address kathy.l.king@jpmorgan.com); and

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          (v) if to any other Lender, to it at its address (or telecopy number or e-mail address) set forth in its Administrative Questionnaire.

          (b) Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communications pursuant to procedures approved by the Administrative Agent; provided that, the foregoing shall not apply to notices pursuant to Article II unless otherwise agreed by the Administrative Agent and the applicable Lender. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.

          (c) Any party hereto may change its address, telecopy number or e-mail address for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt.

     SECTION 9.02 Waivers; Amendments.

          (a) No failure or delay by the Administrative Agent, the Issuing Bank or any Lender in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Issuing Bank and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by Section 9.02(b), and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent, any Lender or the Issuing Bank may have had notice or knowledge of such Default at the time.

          (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders or by the Borrower and the Administrative Agent with the consent of the Required Lenders; provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or LC Disbursement or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the date of any scheduled payment of the principal amount of any Loan or LC Disbursement, or any interest thereon, or any fees payable hereunder (including by way of any change in the manner of computation in any financial ratio (including any change in any applicable defined term) that would result in the reduction of any interest or fee rate), or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.17(b) or (c) in a manner that would alter the pro rata sharing of payments required

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thereby, without the written consent of each Lender, (v) release any Loan Party from its Guarantee under the Guarantee and Collateral Agreement (except as expressly provided in Section 9.13 and the Guarantee and Collateral Agreement), or limit its liability in respect of such Guarantee, without the written consent of each Lender, (vi) release all or any substantial part of the Collateral from the Liens of the Security Documents (except as expressly provided in Section 9.13 and the applicable Security Document), without the written consent of each Lender or (vii) change any of the provisions of this Section or the definition of “Required Lenders” or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, or waive any condition set forth in Section 4.01 hereof without the written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent, the Issuing Bank or the Swingline Lender hereunder without the prior written consent of the Administrative Agent, the Issuing Bank or the Swingline Lender, as the case may be. Notwithstanding the foregoing, any provision of this Agreement may be amended by an agreement in writing entered into by the Borrower, the Required Lenders and the Administrative Agent if (i) by the terms of such agreement the Commitment of each Lender not consenting to the amendment provided for therein shall terminate upon the effectiveness of such amendment and (ii) at the time such amendment becomes effective, each Lender not consenting thereto receives payment in full of the principal of and interest accrued on each Loan made by it and all other amounts owing to it or accrued for its account under this Agreement.

     SECTION 9.03 Expenses; Indemnity; Damage Waiver.

          (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Agents, the Syndication Agent and their Affiliates, including the reasonable fees, charges and disbursements of counsel for the Agents and the Syndication Agent, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of this Agreement and the other Loan Documents or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all out-of-pocket expenses incurred by the Agents, the Issuing Bank or any Lender, including the fees, charges and disbursements of any counsel for the Agents, the Issuing Bank or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit.

          (b) The Borrower shall indemnify the Agents, the Syndication Agent, the Issuing Bank and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an “Indemnitee”) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of

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their respective obligations hereunder or the consummation of the Transactions or any other transactions contemplated hereby, (ii) any Loan or Letter of Credit or the use of the proceeds thereof (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or release of Hazardous Materials on or from any property currently or formerly owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by the Borrower or any other Loan Party and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee.

          (c) To the extent that the Borrower fails to pay any amount required to be paid by it to either Agent, the Issuing Bank or the Swingline Lender under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to such Agent, the Issuing Bank or the Swingline Lender, as the case may be, such Lender’s Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against such Agent, the Issuing Bank or the Swingline Lender in its capacity as such.

          (d) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or Letter of Credit or the use of the proceeds thereof.

          (e) All amounts due under this Section shall be payable promptly after written demand therefor.

          (f) WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED HEREUNDER SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS AND DAMAGES ARISING OUT OF OR RESULTING FROM THE ORDINARY, SOLE AND CONTRIBUTORY NEGLIGENCE OF SUCH PERSON.

     SECTION 9.04 Successors and Assigns.

          (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), except that (i) the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without

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the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), Participants (to the extent provided in paragraph (c) of this Section) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the Issuing Bank and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

          (b) (i) Subject to the conditions set forth in paragraph (b)(ii) below, any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitments and the Loans at the time owing to it); with the prior written consent (such consent not to be unreasonably withheld or delayed) of:

          (A) the Borrower; provided that no consent of the Borrower shall be required for an assignment to a Lender, an Affiliate of a Lender, an Approved Fund (as defined below) or, if an Event of Default has occurred and is continuing, any other assignee; and

          (B) the Administrative Agent; provided that no consent of the Administrative Agent shall be required for an assignment to an assignee that is a Lender, an Affiliate of a Lender or an Approved Fund.

          (ii) Assignments shall be subject to the following additional conditions:

          (A) except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender’s Commitments or Loans of any Class, the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent) shall not be less than $3,000,000 or, if smaller, the entire remaining amount of the assigning Lender’s Commitment unless each of the Borrower and the Administrative Agent shall otherwise consent, provided (i) that no such consent of the Borrower shall be required if an Event of Default has occurred and is continuing and (ii) in the event of concurrent assignments to two or more assignees that are Affiliates of one another, or to two or more Approved Funds managed by the same investment advisor or by affiliated investment advisors, all such concurrent assignments shall be aggregated in determining compliance with this subsection;

          (B) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement;

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          (C) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500; provided that in the event of concurrent assignments to two or more assignees that are Affiliates of one another, or to two or more Approved Funds managed by the same investment advisor or by affiliated investment advisors, only one such fee shall be payable;

          (D) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; and

          (E) in the case of an assignment by a Lender to a CLO (as defined below) managed by such Lender or by an Affiliate of such Lender, unless such assignment (or an assignment to a CLO managed by the same manager or an Affiliate of such manager) shall have been approved by the Borrower (the Borrower hereby agreeing that such approval, if requested, will not be unreasonably withheld or delayed), the assigning Lender shall retain the sole right to approve any amendment, modification or waiver of any provision of this Agreement, except that the Assignment and Assumption between such Lender and such CLO may provide that such Lender will not, without the consent of such CLO, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such CLO.

          (iii) Subject to acceptance and recording thereof pursuant to paragraph (b)(iv) of this Section, from and after the effective date specified in each Assignment and Assumption the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.14, 2.15, 2.16 and 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 9.04 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (c) of this Section.

          (iv) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an assignee, the assignee’s completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Assumption; provided that if either the assigning Lender or the assignee shall have failed to make any payment required to be made by it pursuant to Section 2.04(c), 2.05(d) or (e), 2.06(b), 2.17(d) or 9.03(c), the Administrative Agent shall have no obligation to accept such Assignment and Assumption unless and until such payment shall have been made in full, together with all accrued interest thereon.

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          (c) By executing and delivering an Assignment and Assumption, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Commitment and the outstanding balances of its Loans, in each case without giving effect to assignments thereof that have not become effective, are as set forth in such Assignment and Assumption; (ii) except as set forth in clause (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or any other Loan Document or any other instrument or document furnished pursuant hereto or thereto, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of any of the foregoing, or the financial condition of the Loan Parties or the performance or observance by the Loan Parties of any of their obligations under this Agreement or under any other Loan Document or any other instrument or document furnished pursuant hereto or thereto; (iii) each of the assignee and the assignor represents and warrants that it is legally authorized to enter into such Assignment and Assumption; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of any amendments or consents entered into prior to the date of such Assignment and Assumption and copies of the most recent financial statements delivered pursuant to Section 5.01 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Assumption; (v) such assignee will independently and without reliance upon the Agents, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Agents to take such action as agents on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to them by the terms hereof and thereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations that by the terms of this Agreement are required to be performed by it as a Lender.

          (d) (i) Any Lender may, without the consent of the Borrower, the Administrative Agent, the Issuing Bank or the Swingline Lender, sell participations to one or more banks or other entities (a “Participant”) in all or a portion of such Lender’s rights and/or obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (A) such Lender’s obligations under this Agreement shall remain unchanged, (B) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (C) the Borrower, the Administrative Agent, the Issuing Bank and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (c)(ii) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.14, 2.15 and 2.16 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this

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Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.08 as though it were a Lender, provided such Participant agrees to be subject to Section 2.17(c) as though it were a Lender.

          (ii) A Participant shall not be entitled to receive any greater payment under Section 2.14 or 2.16 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.16 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.16(e) as though it were a Lender.

          (e) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

     SECTION 9.05 Survival. All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent, the Issuing Bank or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not expired or terminated. The provisions of Sections 2.14, 2.15, 2.16 and 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement or any provision hereof.

     SECTION 9.06 Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an

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executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.

     SECTION 9.07 Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.

     SECTION 9.08 Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by such Lender or Affiliate to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have.

     SECTION 9.09 Governing Law; Jurisdiction; Consent to Service of Process.

          (a) This Agreement, the other Loan Documents and all other documents executed in connection herewith, shall be deemed to be contracts and agreements executed by the Borrower, the Administrative Agent and the Lenders under the laws of the State of Texas and of the United States of America and for all purposes shall be governed by, and construed and interpreted in accordance with, the laws of said state and of the United States of America. Without limitation of the foregoing, nothing in this Agreement or the other Loan Documents shall be deemed to constitute a waiver of any rights which any Lender may have under applicable federal legislation relating to the amount of interest which such Lender may contract for, take, receive, or charge in respect of any Loans, including any right to contract for, take, receive, reserve and charge interest at the rate allowed by the law of the state where such Lender is located. If and to the extent the laws of the State of Texas are applicable for purposes of determining the Highest Lawful Rate, such term shall mean the “weekly ceiling” from time to time in effect under Section 303 of the Texas Finance Code, as amended (the “Act”), or, if permitted by applicable law and effective upon the giving of the notices required by the Act (or effective upon any other date otherwise specified by applicable law), the “monthly”, “quarterly” or “annualized” ceiling from time to time in effect under the Act, whichever Agent shall elect to substitute for the “weekly ceiling,” and vice versa, each such substitution to have the effect provided in the Act, and the Administrative Agent shall be entitled to make such election from time to time one or more times and, without notice to Borrower, to leave any such substitute rate in effect for subsequent periods in accordance with the Act. The provisions of Chapter 346 of the Texas Finance Code, as amended, do not apply to this Agreement or any note issued hereunder.

          (b) The Borrower hereby irrevocably submits generally and unconditionally for itself and in respect of its property to the non exclusive jurisdiction of any Texas state court,

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or any United States federal court, sitting in the City of Houston or County of Harris, Texas, and to the non exclusive jurisdiction of any state or United States federal court sitting in the state in which any of the Collateral is located, over any suit, action or proceeding arising out of or relating to this Agreement or the Obligations. The Borrower hereby agrees and consents that, in addition to any methods of service of process provided for under applicable law, all service of process in any such suit, action or proceeding in any Texas state court, or any United States federal court, sitting in the City of Houston or County of Harris, Texas may be made by certified or registered mail, return receipt requested, directed to such Borrower at its address stated in Section 9.10(a), or at a subsequent address of which the Administrative Agent received actual notice from the Borrower in accordance with this Agreement, and service so made shall be complete five (5) days after the same shall have been so mailed.

     SECTION 9.10 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

     SECTION 9.11 Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.

     SECTION 9.12 Confidentiality. Each of the Agents, the Issuing Bank and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates’ directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent, the Issuing Bank or any Lender on a nonconfidential basis from a source other than the Borrower. For the purposes of this Section, “Information” means all information received from the

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Borrower relating to the Borrower or its business, other than any such information that is available to the Administrative Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to disclosure by the Borrower. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

     SECTION 9.13 Release of Guarantors and Collateral.

     Notwithstanding any contrary provision herein or in any other Loan Document, if the Borrower shall request the release under the Guarantee and Collateral Agreement or any other Security Document of any Subsidiary or any Collateral to be sold or otherwise disposed of (including through the sale or disposition of any Subsidiary owning any such Subsidiary or Collateral) to a Person other than the Borrower or a Subsidiary in a transaction permitted under the terms of this Agreement and shall deliver to the Collateral Agent a certificate to the effect that such sale or other disposition and the application of the proceeds thereof will comply with the terms of this Agreement, the Collateral Agent, if satisfied that the applicable certificate is correct, shall, without the consent of any Lender, and at the expense of the Borrower, execute and deliver all such instruments, releases, financing statements or other agreements, and take all such further actions, as shall be necessary to effectuate the release of such Subsidiary or such Collateral substantially simultaneously with or at any time after the completion of such sale or other disposition. Any such release shall be without recourse to, or representation or warranty by, the Collateral Agent and shall not require the consent of any Lender.

     At such time as the Commitments have expired or terminated, the principal of and interest on each Loan and all fees payable hereunder have been paid in full, all Letters of Credit have expired or terminated (or shall have been cash collateralized on terms approved in writing by the applicable Issuing Banks) and all LC Disbursements shall have been reimbursed in full, the Liens created by the Security Documents shall be automatically released and the Collateral Agent shall, without the consent of any Lender, and at the expense of the Borrower, execute and deliver all such instruments, and take all such other actions, as shall be necessary to effectuate the release of the Collateral subject to such Liens.

     Without limiting the provisions of Section 9.03, the Borrower shall reimburse the Collateral Agent for all costs and expenses, including attorneys’ fees and disbursements, reasonably incurred by it in connection with any action contemplated by this Section.

     SECTION 9.14 FINAL AGREEMENT OF THE PARTIES. THIS WRITTEN AGREEMENT (INCLUDING THE EXHIBITS AND SCHEDULES HERETO) AND THE OTHER LOAN DOCUMENTS CONSTITUTE A “LOAN AGREEMENT” AS DEFINED IN SECTION 26.2(a) OF THE TEXAS BUSINESS AND COMMERCE CODE, AND REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. Any previous agreement among the parties with respect to the subject matter hereof is superseded by

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this Agreement. Nothing in this Agreement, expressed or implied, is intended to confer upon any party other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement.

     SECTION 9.15 USA PATRIOT ACT. Each Lender that is subject to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Patriot Act”) hereby notifies the Borrower that pursuant to the requirements of the Act, it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender to identify the Borrower in accordance with the Patriot Act.

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

SERVICE CORPORATION INTERNATIONAL

By:

Name:

Title:

Signature Page 1
Amended and Restated
Revolving Credit Agreement

JPMORGAN CHASE BANK,

individually and as Administrative Agent

By:

Name:

Title:

Signature Page 2
Amended and Restated
Revolving Credit Agreement

BANK OF AMERICA, N.A., individually and as Syndication Agent

By:

Name:

Title:

Signature Page 3
Amended and Restated
Revolving Credit Agreement

CALYON NEW YORK BRANCH,

individually and as Co-Documentation Agent

By:

Name:

Title:

Signature Page 4
Amended and Restated
Revolving Credit Agreement

SOUTHWEST BANK OF TEXAS, N.A.

individually and as Co-Documentation Agent

By:

Name:

Title:

Signature Page 5
Amended and Restated
Revolving Credit Agreement

MERRILL LYNCH CAPITAL CORPORATION,

individually and as Co-Documentation Agent

By:

Name:

Title:

Signature Page 6
Amended and Restated
Revolving Credit Agreement

HIBERNIA NATIONAL BANK

By:

Name:

Title:

Signature Page 7
Amended and Restated
Revolving Credit Agreement

LEHMAN COMMERCIAL PAPER, INC.

By:

Name:

Title:

Signature Page 8
Amended and Restated
Revolving Credit Agreement

SUMITOMO MITSUI BANKING CORPORATION, NEW YORK

By:

Name:

Title:

Signature Page 9
Amended and Restated
Revolving Credit Agreement

UNION PLANTERS BANK N.A.

By:

Name:

Title:

Signature Page 10
Amended and Restated
Revolving Credit Agreement

WACHOVIA BANK, NATIONAL ASSOCIATION

By:

Name:

Title:

Signature Page 11
Amended and Restated
Revolving Credit Agreement