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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2005

o 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: 1-11961

CARRIAGE SERVICES, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		76-0423828
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1900 Saint James Place, 4^th Floor, Houston, TX		77056
(Address of principal executive offices)		(Zip Code)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).
Yes o No ý

The number of shares of the Registrant’s Common Stock, $.01 par value per share, outstanding as of May 6, 2005 was 18,286,610.

CARRIAGE SERVICES, INC.

INDEX

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of December 31, 2004 and March 31, 2005 (unaudited)

Consolidated Unaudited Statements of Operations for the Three Months ended March 31, 2004 and 2005

Consolidated Unaudited Statements of Cash Flows for the Three Months ended March 31, 2004 and 2005

Condensed Notes to Consolidated Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures of Market Risk

Item 4. Controls and Procedures

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits

Signatures

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CARRIAGE SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	December 31, 2004			March 31, 2005
				(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,948		$	9,111
Short term investments	—			6,919
Accounts receivable — trade, net of allowance for doubtful accounts of $940 in 2004 and $1,031 in 2005	12,941			13,651
Assets held for sale	4,021			3,529
Inventories and other current assets	12,815			13,716
Total current assets	31,725			46,926
Preneed receivables and trust investments:
Cemetery	65,855			66,508
Funeral	49,494			49,335
Receivable from funeral trusts	18,074			17,636
Property, plant and equipment, at cost, net of accumulated depreciation of $40,531 in 2004 and $42,196 in 2005	104,893			105,241
Cemetery property	62,649			62,425
Goodwill	156,983			156,983
Deferred obtaining costs	35,701			36,514
Deferred charges and other non-current assets	8,581			11,938
Cemetery perpetual care trust investments	31,201			31,091
Total assets	$	565,156		$	584,595
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	22,039		$	19,222
Liabilities associated with assets held for sale	2,598			2,557
Current portion of senior long-term debt and capital leases obligations	2,155			2,178
Total current liabilities	26,792			23,957
Senior long-term debt, net of current portion	102,714			135,929
Convertible junior subordinated debenture due in 2029 to an affiliated trust	93,750			93,750
Obligations under capital leases, net of current portion	5,424			5,403
Deferred interest on convertible junior subordinated debenture	10,891			—
Preneed obligations:
Deferred cemetery revenue	46,787			47,847
Deferred preneed funeral contracts revenue	30,973			30,325
Non-controlling interests in funeral and cemetery trust investments	98,652			99,089
Total liabilities	415,983			436,300
Commitments and contingencies
Non-controlling interests in perpetual care trust investments	32,212			31,322
Non-controlling interests in perpetual care trust investments associated with assets held for sale	523			511
Stockholders’ equity:
Common Stock, $.01 par value; 80,000,000 shares authorized; 17,910,000 and 18,246,000 shares issued and outstanding at December 31, 2004 and March 31, 2005, respectively	179			182
Contributed capital	188,029			189,626
Accumulated deficit	(71,056		)	(71,427		)
Deferred compensation	(714		)	(1,920		)
Total stockholders’ equity	116,438			116,462
Total liabilities and stockholders’ equity	$	565,156		$	584,595

The accompanying condensed notes are an integral part of these consolidated financial statements.

CARRIAGE SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per share data)

	For the three months ended March 31,
	2004			2005
Revenues, net
Funeral	$	30,775		$	31,817
Cemetery	9,613			10,197
	40,388			42,014
Costs and expenses
Funeral	21,456			21,811
Cemetery	7,141			7,155
	28,597			28,966
Gross profit	11,791			13,048
General and administrative expenses	2,683			2,779
Operating income	9,108			10,269
Interest expense	4,382			4,663
Additional interest and other costs on senior debt refinancing	—			6,693
Other income	—			(57		)
Total interest and other	4,382			11,299
Income (loss) from continuing operations before income taxes	4,726			(1,030		)
(Provision) benefit for income taxes	(1,772		)	386
Net income (loss) from continuing operations	2,954			(644		)
Discontinued operations
Operating income from discontinued operations	157			84
Gain on sales of discontinued operations	—			353
Income tax provision	(59		)	(164		)
Income from discontinued operations	98			273
Net income (loss)	$	3,052		$	(371	)

Basic earnings (loss) per common share
Continuing operations	$	0.17		$	(0.04	)
Discontinued operations	$	—		$	0.02
Net income (loss)	$	0.17		$	(0.02	)
Diluted earnings (loss) per common share
Continuing operations	$	0.16		$	(0.04	)
Discontinued operations	$	0.01		$	0.02
Net income (loss)	$	0.17		$	(0.02	)
Weighted average number of common and common equivalent shares outstanding:
Basic	17,655			18,127
Diluted	18,139			18,127

The accompanying condensed notes are an integral part of these consolidated financial statements.

CARRIAGE SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

	For the three months ended March 31,
	2004			2005
Cash flows from operating activities:
Net income (loss) from continuing operations	$	2,954		$	(644	)
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) continuing operating activities:
Depreciation	1,745			1,694
Amortization	1,315			1,249
Provision for losses on accounts receivable	577			768
Stock-related compensation	164			181
Loss on early extinguishment of debt	—			738
Loss on sale of trust investments	235			—
Deferred income taxes	1,773			(385		)
Other	(5		)	(2		)
Changes in assets and liabilities, net of effects from dispositions
(Increase) in accounts receivable	(720		)	(3,382		)
(Increase) in inventories and other current assets	(430		)	(900		)
(Increase) in deferred charges and other	(104		)	—
(Increase) in deferred obtaining costs	(1,120		)	(1,255		)
(Increase) in preneed trust investments	(1,097		)	(1,486		)
(Decrease) in accounts payable and accrued liabilities	(2,833		)	(2,820		)
Increase in deferred preneed revenue	1,020			3,164
Increase (decrease) in deferred interest on convertible junior subordinated debenture	1,709			(10,891		)
Net cash provided by (used in) operating activities of continuing operations	5,183			(13,971		)
Net cash provided by operating activities of discontinued operations	291			57
Net cash provided by (used in) operating activities	5,474			(13,914		)

Cash flows from investing activities:
Purchase of short term investments	—			(6,919		)
Capital expenditures	(744		)	(1,738		)
Net cash used in investing activities of continuing operations	(744		)	(8,657		)
Net cash provided by (used in) investing activities of discontinued operations	(45		)	505
Net cash used in investing activities	(789		)	(8,152		)

Cash flows from financing activities:
Payments on bank line of credit	(3,100		)	(25,600		)
Proceeds from the issuance of senior notes	—			130,000
Net payments on senior long-term debt and obligations under capital leases	(2,052		)	(71,188		)
Proceeds from issuance of common stock	72			110
Proceeds from the exercise of stock options	46			82
Payment of loan origination costs	—			(4,175		)
Net cash provided by (used in) financing activities of continuing operations	(5,034		)	29,229
Net cash used in financing activities of discontinued operations	—			—
Net cash provided by (used in) financing activities	(5,034		)	29,229

Net increase (decrease) in cash and cash equivalents	(349		)	7,163
Cash and cash equivalents at beginning of period	2,024			1,948
Cash and cash equivalents at end of period	$	1,675		$	9,111

The accompanying condensed notes are an integral part of these consolidated financial statements.

CARRIAGE SERVICES, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. BASIS OF PRESENTATION

(a) The Company

Carriage Services, Inc. (“Carriage” or the “Company”) is a leading provider of products and services in the death care industry in the United States. As of March 31, 2005, the Company owned and operated 134 funeral homes and 30 cemeteries in 28 states.

(b) Principles of Consolidation

The accompanying consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

The information for the three month period ended March 31, 2004 and 2005 is unaudited, but in the opinion of management, reflects all adjustments which are normal, recurring and necessary for a fair presentation of financial position and results of operations for the interim periods. Certain information and footnote disclosures, normally included in annual financial statements, have been condensed or omitted. The accompanying consolidated financial statements have been prepared consistent with the accounting policies described in our annual report on Form 10-K for the year ended December 31, 2004, and should be read in conjunction therewith. Certain amounts in the consolidated financial statements for the period ended in 2004 in this report have been reclassified to conform to current year presentation.

(d) Cash Equivalents

The Company considers all investments purchased with an original maturity of three months or less at the time of purchase to be cash equivalents.

(e) Use of Estimates

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

2. RECENTLY APPLIED AND FUTURE ACCOUNTING CHANGES

Consolidation of Variable Interest Entities

The Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, as revised, (FIN 46R), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51.” This interpretation clarifies the circumstances in which certain entities that do not have equity investors with a controlling financial interest must be consolidated by its sponsor. The Company implemented FIN 46R as of March 31, 2004, which resulted, for financial reporting purposes, in the consolidation of the Company’s preneed and perpetual care trust funds. The investments of such trust funds are reported at market value and the Company’s future obligations to deliver merchandise and services are reported at estimated settlement amounts. The Company has also recognized the non-controlling financial interests of third parties in the trust funds. There was no cumulative effect of an accounting change recognized by the Company as a result of the implementation of FIN 46R. The implementation of FIN 46R affected certain accounts on the Company’s balance sheet beginning March 31, 2004 as described below; however, it did not affect cash flow, net income or the manner in which the Company recognizes and reports revenues.

Although FIN 46R requires consolidation of preneed and perpetual care trusts, it does not change the legal relationships among the trusts, the Company and its customers. In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, the Company does not have a right to access the corpus in the perpetual care trusts. For these reasons, the Company has recognized non-controlling interests in our financial statements to reflect third party interests in these consolidated trust funds.

Both the preneed trusts and the cemetery perpetual care trusts hold investments in marketable securities which have been classified as available-for-sale. The investments are reported at fair value, with unrealized gains and losses allocated to Non-controlling interests in trust investments in the Company’s consolidated balance sheet. Unrealized gains and losses attributable to the Company, but that have not been earned through the performance of services or delivery of merchandise is allocated to deferred revenues.

Also beginning March 31, 2004, the Company recognizes realized income, gains and losses of the preneed trusts and cemetery perpetual care trusts. The Company recognizes a corresponding expense equal to the realized earnings of these trusts attributable to the non-controlling interest holders. When such earnings attributable to the Company have not been earned through the performance of services or delivery of merchandise, the Company will record such earnings as deferred revenue.

For preneed trusts, the Company recognizes as revenues amounts attributed to the non-controlling interest holders and the Company, including accumulated realized earnings, when the contracted services have been performed and merchandise delivered. For cemetery perpetual care trusts, the Company recognizes investment earnings in cemetery revenues when such earnings are realized and distributable. Such earnings are intended to defray cemetery maintenance costs incurred by the Company.

Stock Related Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“FAS No. 123R”). FAS No. 123R requires companies to recognize compensation expense in an amount equal to the fair value of the share-based payment (including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans) issued to employees. FAS No. 123R applies to all transactions involving issuance of equity by a company in exchange for goods and services, including employee services. FAS No. 123R is effective in the first annual reporting period of the first fiscal year beginning on or after June 15, 2005. The Company will adopt FAS No. 123R in the first fiscal quarter of its 2006 fiscal year and expects to use the modified prospective application method, which results in no restatement of the Company’s previously issued annual consolidated financial statements. The adoption of FAS No. 123R using the modified prospective application method is not expected to have a material impact on the consolidated financial position or cash flows of the Company, and will reduce earnings in 2006 by the approximate amount disclosed in Note 10.

3. ASSETS HELD FOR SALE

During 2004 the Company identified certain businesses to be sold, of which two funeral homes and a cemetery business remained for sale at December 31, 2004. The carrying values of the assets of one funeral home business were reduced in the fourth quarter of 2004 to management’s estimate of fair value less estimated costs to sell by providing impairment charges totaling $0.2 million, a substantial portion of which related to specifically identified goodwill. The fair values less estimated costs to sell for the cemetery business and the other funeral home business were determined to be greater than the carrying values. In estimating fair value, management considered, among other things, the range of preliminary prices being discussed with potential buyers. During January 2005 the Company closed on the sale of one of the funeral home businesses. The sale transaction generated net cash proceeds totaling $0.5 million and a gain of approximately $0.3 million. At December 31, 2004 and March 31, 2005, assets and liabilities associated with the businesses held for sale in the accompanying balance sheet consisted of the following (in thousands):

	December 31, 2004		March 31, 2005
Assets:
Current assets	$	200	$	161
Property, plant and equipment, net	393		52
Preneed receivables and trust investments	2,378		2,374
Cemetery property, net	462		459
Cemetery perpetual care trust investments	455		451
Deferred obtaining costs	133		32
Total	$	4,021	$	3,529

Liabilities:
Current liabilities	32		14
Deferred cemetery revenue	515		478
Non-controlling interests in funeral and cemetery trust investments	2,051		2,065
Total	$	2,598	$	2,557

Noncontrolling interests in perpetual care trust investments with assets held for sale	$	523	$	511

The operating results of the funeral home and cemetery businesses held for sale and the funeral home sold during the quarter, as well as the gain on the disposal are presented in the discontinued operations section of the consolidated statements of operations, along with the income tax effect on a comparative basis. Likewise, the operating results, the impairment charges and gains or losses from businesses sold in the prior year have been similarly reported for comparability. Revenues and operating income for the businesses presented in the discontinued operations section are as follows (in thousands):

	For the three months ended March 31,
	2004		2005

Revenues, net	$	785	$	267

Operating income	$	157	$	84

4. SHORT TERM INVESTMENTS

Short term investments are investments purchased with an original maturity of greater than three months at the time of purchase. Short term investments at March 31, 2005 consisted of the following (amounts in thousands):

	Term (in days)	Rate		Maturity Date	Face		Cost and Market Value

Commercial paper	142	2.72	%	July 14, 2005	$	5,000	$	4,946

Commercial paper	160	3.08	%	August 31, 2005	$	2,000	$	1,973

							$	6,919

5. PRENEED RECEIVABLES AND TRUST INVESTMENTS

Preneed cemetery receivables and trust investments

Preneed cemetery receivables and trust investments, net of allowance for cancellations, represent trust fund assets and customer receivables (net of unearned finance charges) for contracts sold in advance of when merchandise or services are needed. The components of Preneed cemetery receivables and trust investments in the consolidated balance sheet at March 31, 2005 are as follows (in thousands):

	March 31, 2005
Trust investments	$	53,210
Receivables from customers, excluding current portion, net	16,549
Unearned finance charges	(3,251		)
Preneed cemetery receivables and trust investments	$	66,508

Preneed cemetery receivables and trust investments are reduced by the trust investment earnings the Company has been allowed to withdraw prior to performance by the Company and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws. Preneed cemetery sales are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years. The interest rates generally range between 12 percent and 14 percent.

The cost and market values associated with cemetery preneed trust investments at March 31, 2005 are detailed below (in thousands). The Company believes the unrealized losses related to trust investments at March 31, 2005 are temporary in nature. Net unrealized gains decreased $0.6 million for the three months ended March 31, 2005.

	Cost		Unrealized Gains		Unrealized Losses			Market

Cash, money market and other short-term investments	$	6,322	$	—	$	—		$	6,322
Fixed income securities:
U.S. Treasury	156		—		(7		)	149
U.S. Agency obligations	4,670		18		(48		)	4,640
State obligations	12,863		232		(151		)	12,944
Corporate	3,177		56		(37		)	3,196

Common stock	12,163		2,029		(228		)	13,964
Mutual funds:
Equity	7,829		317		(32		)	8,114
Fixed income	3,393		27		(51		)	3,369
Other investments	271		10		—			281

	$	50,844	$	2,689	$	(554	)	$	52,979

Accrued net investment income	$	231						231

Trust investments								$	53,210

Market value as a percentage of cost								105		%

Preneed funeral receivables and trust investments

Preneed funeral receivables and trust investments, net of allowance for cancellations, represent trust fund assets and customer receivables related to contracts sold in advance of when the services or merchandise is needed. Such contracts are secured by funds paid by the customer to the Company. Preneed funeral receivables and trust investments are reduced by the trust investment earnings the Company has been allowed to withdraw prior to performance by the Company and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws.

The components of Preneed funeral receivables and trust investments in the consolidated balance sheet at March 31, 2005 are as follows (in thousands):

	March 31, 2005

Trust investments	$	45,879
Receivables from customers	9,317
Allowance for contract cancellations	(5,861		)

Preneed funeral receivables and trust investments	$	49,335

The cost and market values associated with funeral preneed trust investments at March 31, 2005 are detailed below (in thousands). The Company believes the unrealized losses related to trust investments at March 31, 2005 are temporary in nature. Net unrealized gains increased $0.2 million for the three months ended March 31, 2005.

	Cost		Unrealized Gains		Unrealized Losses			Market

Cash, money market and other short-term investments	$	15,191	$	—	$	—		$	15,191
Fixed income securities:
U.S. Treasury	2,740		5		(28		)	2,717
U.S. Agency obligations	1,953		105		—			2,058
State obligations	1,633		56		(13		)	1,676
Corporate	198		—		(3		)	195
Common stock	2,552		828		(43		)	3,337
Mutual funds:
Equity	7,026		624		(120		)	7,530
Fixed income	13,276		60		(161		)	13,175

Trust investments	$	44,569	$	1,678	$	(368	)	$	45,879

Market value as a percentage of cost								103		%

Cemetery perpetual care trust investments

The Company is required by state law to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. The cost and market values associated with the trust investments held in perpetual care trust funds at March 31, 2005 are detailed below (in thousands). The Company believes the unrealized losses related to the trust investments at March 31, 2005 are temporary in nature.

	Cost		Unrealized Gains		Unrealized Losses			Market

Cash, money market and other short-term investments	$	2,397	$	—	$	(1	)	$	2,396
Fixed income securities:
U.S. Treasury	1,522		12		(17		)	1,517
U.S. Agency obligation	7,398		16		(57		)	7,357
State obligations	158		—		—			158
Corporate	2,874		124		(20		)	2,978
Common stock	9,112		980		(203		)	9,889
Mutual funds:
Equity	1,807		46		(38		)	1,815
Fixed income	4,212		6		(69		)	4,149
Other assets	771		7		(117		)	661

	$	30,251	$	1,191	$	(522	)	$	30,920

Accrued net investment income	$	171						171

Trust investments								$	31,091

Market value as a percentage of cost								103		%

Receivable from Preneed Funeral Contracts

The receivable from funeral trusts at March 31, 2005 represent assets in commingled trusts in which the Company does not have a controlling financial interest in the trust assets. The Company accounts for these investments at cost.

Trust Investment Security Transactions

Investment security transactions recorded in Other income in the Consolidated Statement of Operations for the three months ended March 31, 2005 are as follows (in thousands). Since the Company adopted FIN46R as of March 31, 2004, there was no effect on the Consolidated Statement of Operations for the three months ended March 31, 2004.

	Three months ended March 31, 2005

Investment income	$	804
Realized gains	1,061
Realized losses	(163		)
Expenses	(185		)
Increase in non-controlling interests in trust investments	(1,517		)
	$	—

6. CONTRACTS SECURED BY INSURANCE

Certain preneed funeral contracts are secured by life insurance contracts. The proceeds of the life insurance policies have been assigned to the Company and will be paid upon the death of the insured. The proceeds will be used to satisfy the beneficiary’s obligations under the preneed contract for services and merchandise. We changed our method of accounting for preneed funeral contracts secured by insurance at March 31, 2004 because we concluded that they are not assets and liabilities as defined by Statement of Financial Accounting Concepts No. 6, “Elements in Financial Statements.” Therefore, we have eliminated amounts relating to such preneed funeral contracts along with the corresponding deferred revenue from our

consolidated balance sheet. The elimination of these amounts had no impact on our consolidated stockholders’ equity, results of operations or cash flows. The preneed funeral contracts secured by insurance totaled $160.6 million at March 31, 2005.

7. NON-CONTROLLING INTERESTS IN FUNERAL AND CEMETERY TRUSTS AND IN PERPETUAL CARE TRUSTS

The components of Non-controlling interests in funeral and cemetery trusts and Non-controlling interests in perpetual care trusts as of March 31, 2005 are as follows:

	Non-controlling Interests
	Preneed Funeral		Preneed Cemetery		Total Preneed		Cemetery Perpetual Care

Trust assets, at market value	$	45,879	$	53,210	$	99,089	$	31,091
Pending withdrawals of income	—		—		—		(1,250		)
Debt due to a perpetual care trust	—		—		—		1,111
Pending deposits	—		—		—		370
	$	—	$	—	$	—	$	231

Non-controlling interests	$	45,879	$	53,210	$	99,089	$	31,322
Non-controlling interests in assets held for sale	$	—	$	2,065	$	2,065	$	511

8. MAJOR SEGMENTS OF BUSINESS

Carriage conducts funeral and cemetery operations only in the United States. The following table presents external revenue, income from continuing operations and total assets by segment (in thousands):

	Funeral		Cemetery		Corporate			Consolidated
External revenues from continuing operations:
Three months ended March 31, 2005	$	31,817	$	10,197	$	—		$	42,014
Three months ended March 31, 2004	30,775		9,613		—			40,388

Income (loss) from continuing operations before income taxes:
Three months ended March 31, 2005	$	10,005	$	3,042	$	(14,077	)	$	(1,030	)
Three months ended March 31, 2004	9,319		2,472		(7,065		)	4,726

Total assets:
March 31, 2005	$	344,527	$	206,431	$	33,637		$	584,595
December 31, 2004	344,940		205,230		14,986			565,156

9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The following information is supplemental disclosure for the Consolidated Statement of Cash Flows (in thousands):

	For the three months ended March 31,
	2004		2005

Cash paid for interest and financing costs	$	4,365	$	22,196

Cash paid for income taxes (state)	$	57	$	195

Common stock issued to officers	$	—	$	1,337

Restricted cash investing and financing activities:

Proceeds from the sale of securities of the funeral and cemetery trusts			$	12,434

Purchase of available for sale securities of the funeral and cemetery trusts			$	20,440

Net deposits in trust accounts increasing noncontrolling interests			$	328

Amortization for the three month periods ended March 31, 2004 and 2005 consists of the following (in thousands):

	March 31, 2004		March 31, 2005

Intangible assets	$	83	$	79
Loan origination fees	260		236
Preneed contract obtaining costs	346		434
Cemetery interment and entombment costs	626		500
	$	1,315	$	1,249

10. EMPLOYEE STOCK PLANS

The Company has stock-based employee compensation plans in the form of stock option and employee stock purchase plans. The Company accounts for stock-based compensation under APB Opinion No. 25, “Accounting for Stock Issued to Employees” whereby no compensation expense is recognized in the Consolidated Statement of Operations and has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.”

Had compensation cost for these plans been determined consistent with SFAS No. 123, “Accounting for Stock-Based Compensation”, net income and income per share would have been the following pro forma amounts (in thousands, except per share data):

	Three months ended March 31,
	2004		2005
Net income (loss) available to common stockholders:
As reported	$	3,052	$	(371	)
Pro forma	$	2,942	$	(481	)

Net income (loss) per share available to common stockholders:
Basic
As reported	$	0.17	$	(0.02	)
Pro forma	$	0.17	$	(0.03	)
Diluted
As reported	$	0.17	$	(0.02	)
Pro forma	$	0.16	$	(0.03	)

The Company issued 268,000 shares of restricted common stock to certain officers of the Company in the three months ended March 31, 2005. Twenty-five percent of the shares vest annually on each of the next four anniversary dates of the grant.

The value of the stock at the date of grant was $4.99 per share, for a total of $1,337,320, which is amortized into expense over the vesting period.

The Company also has a compensation plan for its outside directors under which directors may choose to accept fully vested shares of the Company’s common stock for all or a portion of their annual retainer and meeting fees. The value of the shares at the grant date is charged to expense. The Company issued 3,255 and 2,886 shares of common stock to directors equal to a charge of approximately $16,000 each period in lieu of payment in cash for their fees for the first quarter of 2004 and 2005, respectively.

11. DEBT

At December 31, 2004, Carriage had a $45 million revolving bank credit facility that was scheduled to mature in March 2006. See Note 13. Interest is payable at either the prime rate plus 1.25% or a rate indexed to LIBOR, at the option of the Company. Currently, the LIBOR option is set at LIBOR plus 275 basis points. In order to comply with the conditions of the credit facility, the Company began deferring interest payments in September 2003 on the $93.75 million of convertible junior subordinated debenture payable to its affiliated trust, Carriage Services Capital Trust. As a result, cash distributions on the Company-obligated mandatorily redeemable convertible preferred securities (“TIDES”) of Carriage Services Capital Trust were deferred. In March 2005, the Company paid the cumulative deferred distributions on the TIDES of $10.9 million. At March 31, 2005, there were no outstanding borrowings under the credit facility.

In January 2005, the Company issued $130 million of 7.875 percent Senior Notes at par, due in 2015. The proceeds from these notes were used to refinance all senior debt, bring current the cumulative deferred distributions on the convertible junior subordinated debenture and the TIDES, and for general corporate purposes. The Company’s bank credit facility was amended to permit the issuance of the Senior Notes. The Company filed a registration statement on Form S-4 on April 27, 2005 with the Securities Exchange Commission to provide the Senior Note holders with registration rates and will use its best efforts to have the registration statement declared effective within 180 days from the issue date, January 27, 2005. However, should the registration statement not be declared effective within 180 days of the issue date, the interest rate on the Senior Notes will increase by 0.25 percent per annum for each successive 90 day period after the 180 days up to a maximum of 1.0 percent per annum until the registration statement is declared effective.

Carriage, the parent entity, has no independent assets or operations. All assets and operations are held and conducted by subsidiaries, each of which (except for Carriage Services Capital Trust which is a single purpose entity that holds our debentures issued in connection with our TIDES) have fully and unconditionally guaranteed our obligations under the new Senior Notes. Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any subsidiary guarantor under the new Senior Notes.

In connection with the senior debt refinancing, the Company made a required “make whole” payment of $6.0 million in the form of additional interest and recorded a charge to write off $0.7 million of unamortized loan costs. These charges which aggregate $4.2 million after tax, or $0.23 per diluted share, are included in the Consolidated Statement of Operations as additional interest and other costs on senior debt refinancing for the first quarter of 2005.

12. SUBSEQUENT EVENT

Effective April 27, 2005, the Company entered into a $35 million senior secured revolving credit facility that matures in five years to replace the existing unsecured credit facility that was scheduled to mature in 2006. Borrowings under the new credit facility bear interest at prime or LIBOR options with the initial LIBOR option set at LIBOR plus 3 percent and is collateralized by all personal property and funeral home real property in certain states. The facility is currently undrawn and no borrowings are anticipated during 2005.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

In addition to historical information, this Quarterly Report contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include any projections of earnings, revenues, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “project”, “forecast”, “plan”, “anticipate” and other similar words.

Cautionary Statements

The Company cautions readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company’s actual consolidated results and could cause the Company’s actual consolidated results in the future to differ materially from the goals and expectations expressed herein and in any other forward-looking statements made by or on behalf of the Company. For further information regarding the Company’s cautionary statements, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2004 annual report filed on Form 10-K.

Risks related to our business

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

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

(3) Improved performance in our funeral segment is highly dependent upon successful execution of our standards-based Being the Best operating model.

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

(5) Earnings from and principal of trust funds and insurance contracts could be reduced by changes in financial markets.

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

(7) Increased costs may have a negative impact on our earnings and cash flows.

(8) Increases in interest rates would increase interest costs on our variable-rate indebtedness and could have a material adverse effect on our net income.

(9) Covenant restrictions under our debt instruments may limit our flexibility in operating our business.

Risks related to the death care industry

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

(2) The increasing number of cremations in the United States could cause revenues to decline because we could lose market share to firms specializing in cremations. In addition, direct cremations produce no revenues for cemetery operations and lower funeral revenues.

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

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

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

OVERVIEW

We operate two types of businesses: funeral homes, which account for approximately 75% of our revenues, and cemeteries, which account for approximately 25% of our revenues. Funeral homes are principally a service business that provide funeral services (burial and cremation) and sell related merchandise, such as caskets and urns. Cemeteries are primarily a sales business that sells interment rights (grave sites and mausoleums) and related merchandise such as markers and memorials. As of March 31, 2005, we operated 134 funeral homes and 30 cemeteries in 28 states within the United States. Substantially all administrative activities are conducted in our home office in Houston, Texas.

Factors affecting our funeral operating results include: demographic trends in terms of population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by packaging complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our at-need business to increase average revenues per contract. In simple terms, volume and price are the two variables that affect funeral revenues. The average revenue per contract is influenced by the mix of traditional and cremation services because our average cremation service revenue is approximately 32% of the average revenue earned from a traditional burial service. Funeral homes have a high fixed cost structure. Thus small changes in revenues, up or down, normally cause significant changes to our profitability.

During the second half of 2003, we implemented several significant changes in our funeral operations designed to improve operating and financial results by growing market share and increasing profitability. We introduced a more decentralized, entrepreneurial and local operating model. At the same time, we introduced operating and financial standards developed from our best funeral operations. The operating model and standards, which we refer to as “Being the Best,” focus on the key drivers of a successful funeral operation, organized around three primary areas – market share, people and operating and financial metrics.

The cemetery operating results are affected by the size and success of our sales organization because approximately 47% of our cemetery revenues for the three months ended March 31, 2005 relate to sales of grave sites and mausoleums and related merchandise before the time of need. We believe that changes in the level of consumer confidence (a measure of whether consumers will spend for discretionary items) also affects the amount of cemetery revenues. Approximately 14% of our cemetery revenues for the three months ended March 31, 2005 are attributable to investment earnings on trust funds and finance charges on installment contracts. Changes in the capital markets and interest rates affect this component of our cemetery revenues.

Net loss from continuing operations for the first quarter of 2005 totaled $0.6 million, equal to ($0.04) per diluted share as compared to net income from continuing operations of $3.0 million for the first quarter of 2004, or $0.16 per diluted share. The variance between the two periods was primarily due to a make-whole payment to the former debtholders in connection with the repayment of the previously outstanding senior debt. We repaid this senior debt and paid the make-whole payment with proceeds from our $130 million senior note offering, which closed in January 2005. The make-whole payment resulted in additional interest of $6.0 million and a charge in the amount of $0.7 million to write off the related unamortized loan costs, in total equal to $0.23 per diluted share. Excluding this effect, total diluted earnings per share from continuing operations for the first quarter of 2005 equaled $0.19 compared to the prior year first quarter of $0.16 because of modest increases in volumes, averages and margins in the funeral divisions and higher preneed trust income in the cemetery division.

Income from discontinued operations for the first quarter of 2005 totaled $0.3 million, equal to $0.02 per diluted share, and consisted primarily of a gain on the sale of a funeral home business. Income from discontinued operations for the first quarter of 2004 totaled $0.1 million, equal to $0.01 per diluted share, and consisted of operating income of the discontinued businesses.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate estimates and judgments, including those related to revenue recognition, realization of accounts receivable, intangible assets, property and equipment and deferred tax assets. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance the margins, operating income and net earnings as a percentage of revenues will be sustained consistently from year to year.

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements presented herewith, which have been prepared in accordance with generally accepted accounting principles in the United States of America. Our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2004. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Funeral and Cemetery Operations

We record the sales of funeral merchandise and services when the funeral service is performed. Sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions of Statement of Financial Accounting Standards (SFAS) No 66, “Accounting for Sales of Real Estate.” This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the contract price related to the real estate. Costs related to the sales of interment rights, which include property and other costs related to cemetery development activities, are charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. Revenue from the sales of cemetery merchandise and services are recognized in the period in which the merchandise is delivered or the service is performed. Revenues to be recognized from the delivery of merchandise and performance of services related to contracts that were acquired in acquisitions are typically lower than those originated by the Company and are likely to exceed the cash collected from the contract and received from the trust at maturity.

Allowances for customer cancellations, refunds and bad debts are provided at the date that the sale is recognized as revenue based on our historical experience. In addition, we monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. When preneed funeral services and merchandise are funded through third-party insurance policies, we earn a commission from the sale of the policies. Insurance commissions are recognized as revenues when the commission is no longer subject to refund, which is usually one year after the policy is issued.

Deferred Obtaining Costs

Deferred obtaining costs consist of sales commissions and other direct related costs of originating preneed sales contracts. These costs are deferred and amortized into funeral and cemetery costs and expenses over the period we expect to perform the services or delivery of the merchandise covered by the preneed contracts. The periods over which the costs are recognized are based on actuarial statistics for the actual contracts we hold, provided by a third party administrator.

Goodwill and Other Intangible Assets

The excess of the purchase price over the fair value of net identifiable assets acquired, as determined by management in transactions accounted for as purchases, is recorded as goodwill. Many of the acquired funeral homes have provided high quality service to families for generations. The resulting loyalty often represents a substantial portion of the value of a funeral business. Goodwill is typically not associated with or recorded for the cemetery businesses. In accordance with SFAS No. 142 we review the carrying value of goodwill at least annually on reporting units (aggregated geographically) to determine if facts and circumstances exist which would suggest that this intangible asset might be carried in excess of fair value. Fair value is determined by discounting the estimated future cash flows of the businesses in each reporting unit at the Company’s weighted average cost of capital less debt allocable to the reporting unit and by reference to recent sales transactions of similar businesses. The calculation of fair value can vary dramatically with changes in estimates of the number of future services performed, inflation in costs, and the Company’s cost of capital, which is impacted by long-term interest rates. If impairment is indicated, then an adjustment will be made to reduce the carrying amount of goodwill to fair value.

Income Taxes

The Company and its subsidiaries file a consolidated U.S. federal income tax return and separate income tax returns in the states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities, in accordance with SFAS 109, “Accounting for Income Taxes. The Company records a valuation

allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.

Stock Compensation Plans

The Company has four stock incentive plans currently in effect under which stock options may be issued. Additionally, the Company sponsors an Employee Stock Purchase Plan (ESPP) under which employees can purchase common stock at a discount. The stock options are granted with an exercise price equal to or greater than the fair market value of the Company’s Common Stock. Substantially all of the options granted under the four stock option plans have ten-year terms. The options generally vest over a period of two to four years. The Company accounts for stock options and shares issued under the ESPP under APB Opinion No. 25, under which no compensation cost is recognized in the Consolidated Statement of Operations and has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Had the Company accounted for stock options and shares pursuant to its employee stock benefit plans under SFAS No. 123 for the three months ended March 31, 2004 and 2005, net income for those periods would have been lower by approximately $0.01 for each period.

ACCOUNTING PRINCIPLE CHANGE

The Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, as revised, (“FIN 46R”), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51.” This interpretation clarifies the circumstances in which certain entities that do not have equity investors with a controlling financial interest must be consolidated by its sponsor. The Company implemented FIN 46R as of March 31, 2004, which resulted, for financial reporting purposes, in the consolidation of the Company’s preneed and perpetual care trust funds. The investments of such trust funds have been reported at market value and the Company’s future obligations to deliver merchandise and services have been reported at estimated settlement amounts. The Company has also recognized the non-controlling financial interests of third parties in the trust funds. There was no cumulative effect of an accounting change recognized by the Company as a result of the implementation of FIN 46R. The implementation of FIN 46R affected certain accounts on the Company’s balance sheet beginning March 31, 2004 as described below; however, it did not affect cash flow, net income or the manner in which we recognize and report revenues.

Both the preneed trusts and the cemetery perpetual care trusts hold investments in marketable securities which have been classified as available-for-sale. The investments are reported at fair value, with unrealized gains and losses allocated to Non-controlling interests in trust investment in the Company’s consolidated balance sheet. Unrealized gains and losses attributable to the Company, but that have not been earned through the performance of services or delivery of merchandise, are allocated to deferred revenues.

Also beginning March 31, 2004, the Company recognizes realized income, gains and losses, of the preneed trusts and cemetery perpetual care trusts. The Company recognizes a corresponding expense equal to the realized earnings of these trusts attributable to the non-controlling interest holders. When such earnings attributable to the Company have not been earned through the performance of services or delivery of merchandise, the Company will record such earnings as deferred revenue.

For preneed trusts, the Company recognizes as revenues amounts attributed to the non-controlling interest holders and the Company, including accumulated realized earnings accumulated, when the contracted services have been performed and merchandise delivered. For cemetery perpetual care trusts, the Company recognizes investment earnings in cemetery revenues when such earnings are realized and distributable. Such earnings are intended to defray cemetery maintenance costs incurred by the Company.

Impairment of Long-Lived Assets

Except as noted for Goodwill and deferred obtaining costs, the Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of the net asset may not be recoverable in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less estimated cost to sell. The revenues and expenses, as well as gains, losses and impairments, from those assets are reported in the discontinued operations section of the Consolidated Statement of Operations for all periods presented which represents a change in classification to our previously issued consolidated financial statements filed prior to our quarterly report on Form 10-Q for the periods ended June 30, 2004.

RESULTS OF OPERATIONS

The following is a discussion of the Company’s results of operations for the three month periods ended March 31, 2004 and 2005. Funeral homes and cemeteries owned and operated for the entirety of each period being compared are referred to as “same-store” or “existing operations.”

Funeral Home Segment. The following table sets forth certain information regarding the net revenues and gross profit of the Company from the funeral home operations for the three months ended March 31, 2004 compared to the three months ended March 31, 2005. For purposes of our discussion, the revenue and gross profit of our businesses identified to be sold are included in the same-store classification up to the quarter prior to their sale.

Three months ended March 31, 2004 compared to three months ended March 31, 2005 (dollars in thousands):

	Three Months Ended March 31,					Change
	2004		2005			Amount			Percent

Total same-store revenue	$	30,457	$	31,350		$	893		2.9	%
Less businesses held for sale	—		—			—			—
Preneed insurance commissions revenue	318		467			149			46.9	%
Revenues from continuing operations	$	30,775	$	31,817		$	1,042		3.4	%
Revenues from discontinued operations	$	616	$	19		$	(597	)		*

Total same-store gross profit	$	9,001	$	9,539		$	538		6.0	%
Less businesses held for sale	—		—			—			—
Preneed insurance commissions revenue	318		467			149			46.9	%
Gross profit from continuing operations	$	9,319	$	10,006		$	687		7.4	%
Gross profit from discontinued operations	$	109	$	(21	)	$	(130	)		*

* not meaningful

Funeral same-store revenues for the three months ended March 31, 2005 increased 2.9 percent when compared to the three months ended March 31, 2004, as we experienced a increase of 1.0 percent in the number of contracts and an increase of 1.9 percent to $4,942 in the average revenue per contract for those existing operations. Cremation services represented 32.8 percent of the number of funeral services during the first quarter of 2005 compared to 31.8 percent in the first quarter of 2004. The average revenue for burial contracts increased 3.3 percent to $6,694, while the average revenue for cremation contracts increased 3.7 percent to $2,394.

Total funeral same-store gross profit for the three months ended March 31, 2005 increased $0.5 million from the comparable three months of 2004, and as a percentage of funeral same-store revenue, increased from 29.6 percent to 30.4 percent. We achieved positive operating leverage because of better execution of our new standards-based operating model.

Cemetery Segment. The following table sets forth certain information regarding the net revenues and gross profit of the Company from the cemetery operations for the three months ended March 31, 2004 compared to the three months ended March 31, 2005:

Three months ended March 31, 2004 compared to the three months ended March 31, 2005 (dollars in thousands)

	Three Months Ended March 31,						Change
	2004			2005			Amount			Percent

Total same-store revenues	$	9,782		$	10,445		$	663		6.8	%
Less businesses held for sale	(169		)	(248		)	(79		)		*
Revenues from continuing operations	$	9,613		$	10,197		$	584		6.1	%
Revenues from discontinued operations	$	169		$	248		$	79			*

Total same-store gross profit	$	2,520		$	3,147		$	627		24.9	%
Less businesses held for sale	(48		)	(105		)	(57		)		*
Gross profit from continuing operations	$	2,472		$	3,042		$	570		23.1	%
Gross profit from discontinued operations	$	48		$	105		$	57			*

* not meaningful

Cemetery revenues from continuing operations for the three months ended March 31, 2005 increased $0.6 million, or 6.1 percent, compared to the three months ended March 31, 2004 primarily because of securities gains recognized in the perpetual care trusts. Atneed property revenue increased 7.8 percent and the average selling price for each interment site sold was 14.7 percent greater than the same period in the prior year. The number of preneed contracts written in the first three months of 2005

declined 1.7 percent to 2,404 compared to the same period in 2004. Average revenue per preneed contract written during the first quarter of 2005 increased 10.2 percent to $2,884 compared to the first quarter of 2004. Financial revenues (trust earnings and finance charges on installment contracts) increased $0.8 million compared to the first quarter of the prior year because of $0.6 million recognized gains on sales of securities in the perpetual care trust funds in 2005 compared to recognized losses of $0.2 million in 2004.

Cemetery gross profit from continuing operations for the three months ended March 31, 2005 increased $0.6 million from the comparable three months of 2004. Cemetery gross profit from continuing operations as a percentage of revenues increased from 25.7 percent to 29.8 percent primarily because securities gains totaling $0.6 million were recognized in the 2005 quarter compared to securities losses totaling $0.2 million in the 2004 quarter.

Other. General and administrative expenses, for the three months ended March 31, 2005 increased $0.1 million approximately 3.6 percent, as compared to the first quarter of 2004 primarily because the 2005 period included higher salaries and incentive compensation.

Interest expense for the three month period ended March 31, 2005 increased $0.3 million, or 6.4 percent, compared to the three month period ended March 31, 2004 because the total debt is higher in the 2005 period. Additionally, the current year expense is negatively impacted by higher loan fees and compound interest on the deferred distributions on the convertible junior subordinated debenture.

Income Taxes. The Company provided income taxes at the expected effective annual rate of 37.5 percent for continuing operations for the three months ended March 31, 2004 and 2005.

The Company has net operating loss carryforwards totaling approximately $13.2 million for Federal income tax purposes, as well as significant operating loss carryforwards in certain states. Because of the ability to use the net operating loss to offset taxable income and the timing of when revenue and expenses are recognized for tax purposes, we do not expect to pay Federal income taxes in 2005.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $9.1 million at March 31, 2005, representing an increase of $7.2 million from December 31, 2004. Historically, it had been Carriage’s practice to apply available cash against its revolving line of credit, described below, to minimize interest expense. If the Company needed cash for working capital or investment purposes, it could draw on the line of credit so long as the Company is in compliance with the loan covenants and committed funds are available. At March 31, 2005, there were no amounts outstanding on the line of credit. For the three months ended March 31, 2005, cash used by operating activities was $13.9 million as compared to cash provided of $5.5 million for the three months ended Mach 31, 2004. Cash used by operating activities was impacted by the $6.0 million make-whole payment and the payment of the previously deferred interest on the convertible junior subordinated debenture in the amount of $10.3 million. Cash used by investing activities was $8.2 million for the three months ended March 31, 2005 compared to $0.8 million for the first three months of 2004 as cash provided by the senior debt refinancing was invested in short term investments and capital expenditures increased $1.0 million from the 2004 period. Cash provided by financing activities was a function of the net proceeds from the Senior Notes offering which was used primarily to repay all senior debt then outstanding.

In January 2005, the Company issued 7.875 percent $130 million of Senior Notes at par, due in 2015. The proceeds from these notes were used to refinance all senior debt, including payments for accrued interest and make-whole payment, bring current the cumulative deferred distributions on the convertible junior subordinated debenture and the TIDES, and for general corporate purposes. The Company’s bank credit facility was amended subsequent to year-end to permit the issuance of the Senior Notes; however, this amendment did not create any additional indebtedness by the Company. The refinancing improved the Company’s liquidity because debt totaling approximately $96 million due in 2006 and 2008 was replaced by debt maturing in ten years.

The Company’s senior debt at March 31, 2005 totaled $143.5 million and consisted of the $130.0 million in Senior Notes, a $45 million revolving line of credit (none of which was outstanding at the time) and $13.5 million in acquisition indebtedness and capital lease obligations. Additionally, $0.7 million in letters of credit have been issued from the credit facility and are outstanding at March 31, 2005.

As of March 31, 2005, the Company’s senior debt to total capitalization was 40.6 percent as compared to 34.3 percent at December 31, 2004.

The Company’s convertible junior subordinated debenture at March 31, 2005 total $93.75 million in principal amount, are payable to the Company’s affiliate trust, Carriage Services Capital Trust, bear interest at 7 percent and mature in 2029. Substantially all the assets of the Trust consist of the convertible junior subordinated debenture of the Company. The Trust issued 1.875 million shares of convertible preferred term income deferrable equity securities (TIDES). The rights of the debenture are functionally equivalent to those of the TIDES.

The convertible junior subordinated debenture payable to the affiliated trust and the TIDES each contain a provision for the deferral of interest payments and distributions for up to 20 consecutive quarters. During the period in which distribution payments are deferred, distributions continue to accumulate at the 7 percent annual rate. Also, the deferred distributions themselves accumulate distributions at the annual rate of 7 percent and are recorded as a liability. During the deferral period, Carriage is prohibited from paying dividends on the common stock or repurchasing its common stock, subject to limited exceptions. The Company, in complying with the conditions of the existing credit facility, began deferring interest payments on the subordinated debenture payable to the Company’s affiliated trust beginning with the September 1, 2003 payment. In March 2005, the Company paid the $10.3 million for the cumulative deferred distributions on the TIDES.

Effective April 27, 2005, the Company entered into a $35 million senior secured revolving credit facility to replace the existing unsecured credit facility that was scheduled to mature in 2006. Borrowings under the new credit facility bear interest at prime or LIBOR options with the initial LIBOR option set at LIBOR plus 3 percent, matures in five years and is collateralized by all personal property and funeral home real property in certain states. The facility is currently undrawn and no borrowings are anticipated during 2005.

The Company intends to use cash flow provided by operations, net of investments in property, plant and equipment, to acquire funeral home and cemetery businesses. The Company does not intend to draw on its revolving credit facility to finance acquisitions.

SEASONALITY

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

INFLATION

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

Item 3. Quantitative and Qualitative Disclosures of Market Risk

Carriage is currently exposed to market risk primarily related to changes in interest rates related to the Company’s debt and changes in the values of securities associated with the preneed and perpetual care trusts. For information regarding the Company’s exposure to certain market risks, see Item 7A. “Quantitative and Qualitative Market Risk Disclosure” in the Company’s 2004 annual report filed on Form 10-K for the year ended December 31, 2004. There have been no significant changes in the Company’s market risk from that disclosed in the Form 10-K for the year ended December 31, 2004.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on their evaluation, our chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective at the end of the period. During the period covered by this report, there were no changes in our internal control over financial reporting, as such term is defined under Rule 13a-15(f) of the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Based on our current stock price, we expect, as of June 30, 2005, to become an accelerated filer. As an accelerated filer, in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, for the year ending December 31, 2005, we will be required to perform a review of our internal controls over financial reporting, and our internal controls over financial reporting will be audited by our independent accountant. In order to comply with the Act, we are currently undergoing a comprehensive effort to document, verify and test key internal controls. During the documentation and verification phases, which are still underway, we have identified certain internal control issues which management concluded should be improved. However, to date we have not identified any material weaknesses in our internal controls as defined by the Public Company Accounting Oversight Board. Nonetheless, we are making improvements to our internal controls by revising or updating policies and procedures; training field personnel on procedures and best practices; improving segregation of duties when possible; enhancing information technology systems controls; and improving preventative controls. If additional internal control issues are identified by our continuing compliance efforts, management will address the matter in a timely manner.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Carriage and our subsidiaries are parties to a number of legal proceedings that arise from time to time in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on the financial statements.

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Issuance of Unregistered Securities

Carriage has an adopted compensation policy for fees paid to its directors under which our directors may choose to receive director compensation fees either in the form of cash compensation or equity compensation based on the fair market value of our common stock based on the closing price published by the New York Stock Exchange on the date the fees are earned. On January 12, 2005, Carriage issued 10,288 shares of its common stock to three of its directors who elected to receive their fees in equity compensation. No underwriter was used in connection with this issuance. Carriage relied on the Section 4(2) exemption from the registration requirements of the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

The Company reported on Form 8-K during the quarter covered by this report all information required to be reported on such form.

Item 6. Exhibits

4.1	— First Amendment to the Credit Agreement dated January 7, 2005 among Carriage Services, Inc., as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank of Texas, Nation al Association, As Syndication Agent and Other Lenders.

4.2	— Second Amendment to the Credit Agreement dated March 25, 2005 among Carriage Services, Inc., as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank of Texas, Nation al Association, As Syndication Agent and Other Lenders.

4.3	— Indenture dated as of January 27, 2005 between Carriage Services, Inc., the Guarantors named therein, as Guarantors, and Wells Fargo Bank, National Association, as trustee. Incorporated herein by reference to exhibit 4.1 to the Company’s current report on Form 8-K dated January 27, 2005.

4.4	– Registration Rights Agreement dated as of January 27, 2005 among Carriage Services, Inc., the Guarantors named therein, and the Initial Purchasers named herein. Incorporated herein by reference to exhibit 4.2 to the Company’s current report on Form 8-K dated January 27, 2005.

10.2	— Employment Agreement with George J. Klug dated March 30, 2005

11.1	— Computation of Per Share Earnings

31.1	— Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002

31.2	— Certification of Periodic Financial Reports by Joseph Saporito in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002

32.1	— Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350

32.2	— Certification of Periodic Financial Reports by Joseph Saporito in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350

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.

		CARRIAGE SERVICES, INC.


May 13, 2005		/s/ Joseph Saporito
Date		Joseph Saporito,
		Executive Vice President and Chief Financial Officer and Secretary (Principal Financial Officer and Accounting Officer)

CARRIAGE SERVICES, INC.

INDEX OF EXHIBITS

(a) Exhibits

4.1		First Amendment to the Credit Agreement dated January 7, 2005 among Carriage Services, Inc., as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank of Texas, Nation al Association, As Syndication Agent and Other Lenders.

4.2		Second Amendment to the Credit Agreement dated March 25, 2005 among Carriage Services, Inc., as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank of Texas, Nation al Association, As Syndication Agent and Other Lenders.

4.3		Indenture dated as of January 27, 2005 between Carriage Services, Inc., the Guarantors named therein, as Guarantors, and Wells Fargo Bank, National Association, as trustee. Incorporated herein by reference to exhibit 4.1 to the Company’s current report on Form 8-K dated January 27, 2005.

4.4		Registration Rights Agreement dated as of January 27, 2005 between Carriage Services, Inc., the Guarantors named therein, and the Initial Purchasers named herein. Incorporated herein by reference to exhibit 4.2 to the Company’s current report on Form 8-K dated Janury 27, 2005.

10.2		Employment Agreement with George J. Klug dated March 30, 2005

11.1		Computation of Per Share Earnings

31.1		Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Periodic Financial Reports by Joseph Saporito in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350

32.2		Certification of Periodic Financial Reports by Joseph Saporito in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350

Exhibit 4.1

FIRST AMENDMENT TO CREDIT AGREEMENT

THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this “First Amendment”), dated as of January 7, 2005, is by and among CARRIAGE SERVICES, INC., a Delaware corporation (the “Borrower”), the banks listed on the signature pages hereof (the “Lenders”), WELLS FARGO BANK, N.A., as Syndication Agent (in said capacity, the “Syndication Agent”), and BANK OF AMERICA, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (in said capacity as Administrative Agent, the “Administrative Agent”).

BACKGROUND

A. The Borrower, the Lenders, the Syndication Agent, and the Administrative Agent are parties to that certain Credit Agreement, dated as of August 4, 2003 as modified by that certain Commitment Increase Agreement, dated as of May 13, 2004 (as modified, the “Credit Agreement”; the terms defined in the Credit Agreement and not otherwise defined herein shall be used herein as defined in the Credit Agreement).

B. The Borrower has advised the Lenders that it intends to issue certain senior notes in aggregate amount not to exceed $150,000,000 (hereinafter, the “Proposed Senior Note Issuance”). The Borrower requests that the Lenders agree to certain amendments to the Credit Agreement to account for the Proposed Senior Note Issuance, in each case as more fully set forth herein.

C. The Lenders parties to this First Amendment (which Lenders constitute the Required Lenders as required under the Credit Agreement) are willing to agree to such amendment, subject to the performance and observance in full of each of the covenants, terms and conditions, and in reliance upon all of the representations and warranties of the Borrower, set forth herein.

NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are all hereby acknowledged, the parties hereto covenant and agree as follows:

1. AMENDMENTS.

(a) The definition of “Senior Notes” set forth in Section 1.01 of the Credit Agreement is hereby amended to read as follows:

“Senior Notes” means the up to $150,000,000 Senior Notes of the Borrower issued on or about January 21, 2005, and including the unsecured guaranties thereof executed by certain Subsidiaries of the Borrower, issued on substantially the same terms as set forth on Exhibit A to the First Amendment.

(b) The defined term “First Amendment” is hereby added to Section 1.01 of the Credit Agreement in proper alphabetical order to read as follows:

“First Amendment” means that certain First Amendment to Credit Agreement, dated as of January 7, 2005, among the Borrower, the Lenders, the Syndication Agent and the Administrative Agent.

(c) The defined term “Foreign Subsidiary” is hereby added to Section 1.01 of the Credit Agreement in proper alphabetical order to read as follows:

“Foreign Subsidiary” means each Subsidiary of the Borrower which is organized under the laws of a jurisdiction other than the United States of America or any State thereof.

(d) Section 7.06(a) of the Credit Agreement is hereby amended to (a) delete the last full paragraph thereof and (b) revise subsection (iii) to read as follows:

(iii) so long as there exists no Default both before and after giving effect to any such transaction, (x) the Borrower may make (A) payments of Dividends on and redemptions of Existing Preferred Stock, (B) payments of Dividends on Qualified Preferred Stock, and (C) distribution of the Trust Notes to the holders of the Trust Preferred Stock in connection with the dissolution of the Trust Subsidiary, and (y) the Borrower may pay interest on the Trust Notes to the Trust Subsidiary and may cause or permit the Trust Subsidiary to declare, make or pay Dividends in respect of the Trust Preferred Stock.

(e) Section 7.11(a) of the Credit Agreement is hereby amended to read as follows:

(a) Maximum Leverage Ratio. Permit the Leverage Ratio at any time during any period of four fiscal quarters of the Borrower to be greater than 4.00 to 1.00.

(f) Amendment to Article VII. Article VII of the Credit Agreement is hereby amended by adding the following new Section 7.16 thereto to read as follows:

Section 7.16 Collateral. On or before February 28, 2005, to secure the Obligations, the Borrower shall, and shall cause it Subsidiaries (other than the Trust Subsidiary) to, grant a first priority Lien and security interest in (a) all Capital Stock of each of its Domestic Subsidiaries (other than the Trust Subsidiary) and 66% of the Capital Stock of any Foreign Subsidiary of the Borrower and (b) certain existing and future real and personal property of the Borrower and each Domestic Subsidiary (other than the Trust Subsidiary), including, but not limited to, machinery and equipment, inventory and other goods, accounts receivable, owned real estate, leaseholds, fixtures, bank accounts, general intangibles, financial assets, investment property, license rights, patents, trademarks, trade names, copyrights, chattel paper, insurance proceeds, contract rights, hedge agreements, documents, instruments, indemnification rights, tax refunds and cash (collectively, the “Collateral”). The Borrower shall, and shall cause its Domestic Subsidiaries to provide for the benefit of the Administrative Agent and the Lenders, all items to fully effect the foregoing, including, without

limitation, provide the Administrative Agent with UCC-ls together with security agreements, pledge agreements, mortgages, deeds of trust, appraisals, hazard insurance, title insurance, UCC searches, tax and Lien searches, intellectual property documentation and registration and other similar types of documents, consents, authorizations, licenses, instruments and agreements relating to all property and other assets of the Borrower and its Domestic Subsidiaries as requested by the Administrative Agent, and opinions of local legal counsel with respect to the execution and filing thereof, and perfection of Liens created thereby. Notwithstanding the foregoing, in no event shall any provision of this Section 7.16 require (i) any assets owned by any Foreign Subsidiary to be pledged or hypothecated to secure the Obligations or (ii) more than 66% of the issued and outstanding Capital Stock of any Foreign Subsidiary of the Borrower to be pledged to secure the Obligations.

(g) Section 8.01 (1) of the Credit Agreement is hereby amended to read as follows:

(1) Other Obligations. (i) Any event shall occur or condition shall exist under the Trust Preferred Stock, Trust Notes or Trust Guaranties (collectively, the “Debt Documents”), after the applicable grace period, if any, specified in such Debt Document, if the effect of such event or condition is to accelerate the maturity of the Trust Preferred Stock or Trust Notes, as applicable; (ii) without the prior written consent of the Required Lenders, any modification shall be made to any Debt Document which (a) renders the subordination provisions thereof more favorable to the holders of the Trust Preferred Stock or Trust Notes, as applicable, or less favorable to the Lenders, or (b) renders the economic terms of the Trust Preferred Stock or Trust Notes, as applicable, materially more favorable to the holders of the Trust Preferred Stock or Trust Notes, as applicable, or materially less favorable to the Borrower or the applicable Subsidiary, or (iii) any event shall occur under any Debt Document that would permit the holders thereof to require the redemption or mandatory prepayment thereof.

(h) Exhibit E to the Credit Agreement is hereby amended to be in the form of Exhibit E to this First Amendment.

2. APPLICABLE RATE. Notwithstanding anything in the Credit Agreement to the contrary, the parties hereto agree that the Applicable Rate in effect from the date of effectiveness of this First Amendment as determined pursuant to Section 4 hereof through and including the date of the first Compliance Certificate delivered pursuant to Section 6.02(a) of the Credit Agreement after such date of effectiveness shall be determined based upon Pricing Level 4.

3. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its execution and delivery hereof, the Borrower represents and warrants that, as of the date hereof:

(a) the representations and warranties contained in the Credit Agreement and the other Loan Documents are true and correct on and as of the date hereof as made on and as of such date;

(b) no event has occurred and is continuing which constitutes a Default or Event of Default;

(c) (i) the Borrower has full power and authority to execute and deliver this First Amendment, (ii) this First Amendment has been duly executed and delivered by the Borrower, and (iii) this First Amendment constitutes the legal, valid and binding obligations of the Borrower, enforceable in accordance with its terms, except as enforceability may be limited by applicable debtor relief laws and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) and except as rights to indemnity may be limited by federal or state securities laws;

(d) neither the execution, delivery and performance of this First Amendment, nor the consummation of any transactions contemplated herein or therein, will conflict with (i) the certificate or articles of incorporation or the applicable constituent documents or bylaws of the Borrower or its Subsidiaries, (ii) to Borrower’s knowledge, any provision or law, statute, rule or regulation applicable to the Borrower or its Subsidiaries or (iii) any indenture, agreement or other instrument to which the Borrower, the Subsidiaries or any of their properties are subject; and

(e) no authorization, approval, consent, or other action by, notice to, or filing with, any governmental authority or other Person not previously obtained is required for (i) the execution, delivery or performance by the Borrower of this First Amendment or (ii) the acknowledgement by each Guarantor of this First Amendment.

4. CONDITIONS OF EFFECTIVENESS. This First Amendment shall be effective on and as of the date of the Proposed Senior Note Issuance, subject to the following:

(a) the representations and warranties set forth in Section 3 of this First Amendment shall be true and correct;

(b) the Administrative Agent shall have received counterparts of this First Amendment executed by the Required Lenders;

(c) the Administrative Agent shall have received counterparts of this First Amendment executed by the Borrower and acknowledged by each Guarantor,

(d) the Administrative Agent shall have received an opinion of counsel to the Borrower, in form and substance satisfactory to the Administrative Agent and its counsel, as to the matters set forth in clauses (c), (d) and (e) of Section 3 hereof;

(e) the Administrative Agent shall have received evidence that the Senior Notes as defined in the Credit Agreement without giving effect to this First Amendment shall have simultaneously been paid in full and are extinguished; and

(f) the Administrative Agent shall have received an amendment fee in immediately available funds in the amount of $15,000 for each Lender.

This First Amendment shall in no event be effective until and unless the Proposed Senior Note Issuance occurs, with the Borrower retaining the discretion as to whether to consummate the Proposed Senior Note Issuance.

5. TERMINATION. If the Proposed Senior Note Issuance does not occur by February 28, 2005, this First Amendment shall terminate and be null and void without any action taken by any party hereto.

6. GUARANTOR’S ACKNOWLEDGMENT. By signing below, each Guarantor (i) acknowledges, consents and agrees to the execution, delivery and performance by the Borrower of this First Amendment, (ii) acknowledges and agrees that its obligations in respect of its Guaranty are not released, diminished, waived, modified, impaired or affected in any manner by this First Amendment, or any of the provisions contemplated herein, (iii) ratifies and confirms its obligations under its Guaranty and (iv) acknowledges and agrees that it has no claim or offsets against, or defenses or counterclaims to, its Guaranty.

7. REFERENCE TO THE CREDIT AGREEMENT.

(a) Upon and during the effectiveness of this First Amendment, each reference in the Credit Agreement to “this Agreement”, “hereunder”, or words of like import shall mean and be a reference to the Credit Agreement, as affected and amended by this First Amendment.

(b) Except as expressly set forth herein, this First Amendment shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights or remedies of the Administrative Agent or the Lenders under the Credit Agreement or any of the other Loan Documents, and shall not alter, modify, amend, or in any way affect the terms, conditions, obligations, covenants, or agreements contained in the Credit Agreement or the other Loan Documents, all of which are hereby ratified and affirmed in all respects and shall continue in full force and effect.

8. COSTS AND EXPENSES. The Borrower shall be obligated to pay the costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution and delivery of this First Amendment and the other instruments and documents to be delivered hereunder.

9. EXECUTION IN COUNTERPARTS. This First Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. For purposes of this First Amendment, a counterpart hereof (or signature page thereto) signed and transmitted by any Person party hereto to the Administrative Agent (or its counsel) by facsimile machine, telecopier or electronic mail is to be treated as an original. The signature of such Person thereon, for purposes hereof, is to be considered as an original signature, and the counterpart (or signature page thereto) so transmitted is to be considered to have the same binding effect as an original signature on an original document.

10. GOVERNING LAW; BINDING EFFECT. This First Amendment shall be governed by and construed in accordance with the laws of the State of Texas applicable to agreements made and to be performed entirely within such state; provided that the Administrative Agent and each Lender shall retain all rights arising under federal law. This First Amendment shall be binding upon the Borrower and each Lender and their respective successors and assigns.

11. HEADINGS. Section headings in this First Amendment are included herein for convenience of reference only and shall not constitute a part of this First Amendment for any other purpose.

12. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS FIRST AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AS TO THE SUBJECT MATTER THEREIN AND HEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.

REMAINDER OF PAGE LEFT INTENTIONALLY BLANK

IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as of the date above written.

CARRIAGE SERVICES, INC.


By:	/s/ Joseph Saporito
	Name:	Joseph Saporito
	Title:	Executive Vice President

BANK OF AMERICA, N.A., as Administrative Agent


By:	/s/ Suzanne M. Paul
	Name:		SUZANNE M. PAUL
	Title:	VICE PRESIDENT

BANK OF AMERICA, N.A., as a Lender, L/C Issuer and Swing Line Lender


By:	/s/ Gary L. Mingle
	Name:	Gary L. Mingle
	Title:	Senior Vice President

WELLS FARGO BANK, N A., as Syndication Agent


By:	/s/ Warren R. Ross
	Name:		Warren R. Ross
	Title:	Vice President

GUARANTORS:

	CARRIAGE FUNERAL HOLDINGS, INC.
	CFS FUNERAL SERVICES, INC.
	CARRIAGE HOLDING COMPANY, INC.
	CARRIAGE FUNERAL SERVICES OF MICHIGAN, INC.
	CARRIAGE FUNERAL SERVICES OF KENTUCKY, INC.
	CARRIAGE FUNERAL SERVICES OF CALIFORNIA, INC.
	CARRIAGE CEMETERY SERVICES OF IDAHO, INC.
	WILSON & KRATZER MORTUARIES
	ROLLING HILLS MEMORIAL PARK
	CARRIAGE SERVICES OF CONNECTICUT, INC
	CSI FUNERAL SERVICES OF MASSACHUSETTS, INC.
	CHC INSURANCE AGENCY OF OHIO, INC.
	BARNETT, DEMROW & ERNST, INC.
	CARRIAGE SERVICES OF NEW MEXICO, INC.
	FORASTIERE FAMILY FUNERAL SERVICE, INC.
	CARRIAGE CEMETERY SERVICES, INC.
	CARRIAGE SERVICES OF OKLAHOMA, L.L.C.
	CARRIAGE SERVICES OF NEVADA, INC.
	HUBBARD FUNERAL HOME, INC.
	CARRIAGE TEAM CALIFORNIA (CEMETERY), LLC
	CARRIAGE TEAM CALIFORNIA (FUNERAL), LLC
	CARRIAGE TEAM FLORIDA (CEMETERY), LLC
	CARRIAGE TEAM FLORIDA (FUNERAL), LLC
	CARRIAGE SERVICES OF OHIO, LLC
	CARRIAGE TEAM KANSAS, LLC
	CARRIAGE MUNICIPAL CEMETERY SERVICES OF NEVADA, INC.
	CARRIAGE CEMETERY SERVICES OF CALIFORNIA, INC.
	CARRIAGE INTERNET STRATEGIES, INC.
	CARRIAGE INVESTMENTS, INC.
	CARRIAGE MANAGEMENT, L.P.
	HORIZON CREMATION SOCIETY, INC.
	CARRIAGE LIFE EVENTS, INC.
	CARRIAGE MERGER I, INC.
	CARRIAGE MERGER II, INC.
	CARRIAGE MERGER III, INC.
	CARRIAGE MERGER IV, INC.

By:	/s/ Joseph Saporito
	Name:	Joseph Saporito
	Title:	Executive Vice President

CARRIAGE INSURANCE AGENCY OF MASSACHUSETTS, INC.

By:	/s/ Melvin C. Payne
	Name:	Melvin C. Payne
	Title:	Chief Executive Officer

COCHRANE’S CHAPEL OF THE ROSES, INC.


By:	/s/ Wendy Wilson Boyer
	Name:	Wendy Wilson Boyer
	Title:	President

CARRIAGE INSURANCE AGENCY OF MASSACHUSETTS, INC.

By:	/s/ Melvin C. Payne
	Name:	Melvin C. Payne
	Title:	Chief Executive Officer

COCHRANE’S CHAPEL OF THE ROSES, INC.


By:	/s/ Doug Wagemann
	Name:	Doug Wagemann
	Title:	Secretary

EXHIBIT E

FORM OF COMPLIANCE CERTIFICATE

Financial Statement Date:

To: Bank of America, N.A., as Administrative Agent

Ladies and Gentlemen:

Reference is made to that certain Credit Agreement, dated as of August 4, 2003 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “Agreement;” the terms defined therein being used herein as therein defined), among Carriage Services, Inc., a Delaware corporation (the “Borrower”), the Lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line Lender.

The undersigned Responsible Officer hereby certifies as of the date hereof that he/she is the of the Borrower, and that, as such, he/she is authorized to execute and deliver this Certificate to the Administrative Agent on the behalf of the Borrower, and that:

[Use following paragraph 1 for fiscal year-end financial statements]

1. Attached hereto as Schedule 1 are the year-end audited financial statements required by Section 6.01(a) of the Agreement for the fiscal year of the Borrower ended as of the above date, together with the report and opinion of an independent certified public accountant required by such section.

[Use following paragraph 1 for fiscal quarter-end financial statements]

1. Attached hereto as Schedule 1 are the unaudited financial statements required by Section 6.01(b) of the Agreement for the fiscal quarter of the Borrower ended as of the above date. Such financial statements fairly present the financial condition, results of operations and cash flows of the Borrower and its Subsidiaries in accordance with GAAP as at such date and for such period, subject only to normal year-end audit adjustments and the absence of footnotes.

2. The undersigned has reviewed and is familiar with the terms of the Agreement and has made, or has caused to be made under his/her supervision, a detailed review of the transactions and condition (financial or otherwise) of the Borrower during the accounting period covered by the attached financial statements.

3. A review of the activities of the Borrower during such fiscal period has been made under the supervision of the undersigned with a view to determining whether during such fiscal period the Borrower performed and observed all its Obligations under the Loan Documents, and

E - 1

[select one:]

[to the best knowledge of the undersigned during such fiscal period, the Borrower performed and observed each covenant and condition of the Loan Documents applicable to it.]

–or–

[the following covenants or conditions have not been performed or observed and the following is a list of each such Default and its nature and status:]

4. The representations and warranties of the Borrower contained in Article V of the Agreement, or which are contained in any document furnished at any time under or in connection with the Loan Documents, are true and correct on and as of the date hereof, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date, and except that for purposes of this Compliance Certificate, the representations and warranties contained in subsections (a) and (b) of Section 5.05 of the Agreement shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 6.01 of the Agreement, including the statements in connection with which this Compliance Certificate is delivered.

5. The financial covenant analyses and information set forth on Schedule 2 attached hereto are true and accurate on and as of the date of this Certificate.

IN WITNESS WHEREOF, the undersigned has executed this Certificate on behalf of the Borrower as of , .

		CARRIAGE SERVICES, INC.


		By:
			Name:
			Title:

E - 2

For the Quarter/Year ended (“Statement Date”)

SCHEDULE 2
to the Compliance Certificate
($ in 000’s)

I. Section 7.11(a) – Maximum Leverage Ratio.

A.	Total Senior Debt (excluding the Trust Notes) at Statement Date:	$

B.	EBITDA for four consecutive fiscal quarters ending on the Statement Date (“Subject Period”):

	(1) Net Income for the Subject Period:	$

	(2) To the extent deducted in calculating Net Income, Interest Expense for the Subject Period:	$

	(3) To the extent deducted in calculating Net Income, the provision for federal, state, local and foreign income taxes payable by the Borrower and its Subsidiaries for the Subject Period:	$

	(4) To the extent deducted in calculating Net Income, depreciation and amortization expenses and payments in respect of Deferred Purchase Price for the Subject Period:	$

	(5) To the extent deducted in calculating Net Income, other expenses of the Borrower and the Subsidiaries reducing Net Income which do not represent a cash item in the Subject Period or any future period:	$

	(6) Non-cash items increasing Net Income for the Subject Period:	$

	(7) EBITDA (Lines I.B.l + 2 + 3 + 4 + 5 – 6):	$

C.	Leverage Ratio (Line I.A. ÷ Line I.B.7):		to

E - 3

Maximum permitted:

4.00 to 1.00

II. Section 7.11(b) – Minimum Fixed Charge Coverage Ratio.

A.	EBITDA for the Subject Period (Line I.B.7. above):	$

B.	Capital Expenditures for the Subject Period:	$

C.	Cash taxes paid during the Subject Period:	$

D.	Cash tax refunds received during the Subject Period:	$

E.	Cash Interest Expenses during the Subject Period (excluding cash Dividends paid in respect of the Trust Preferred Stock prior to the Closing Date):	$

F.	Scheduled and required principal payments during the Subject Period in respect of Debt (other than scheduled and required principal payments on the Senior Notes):	$

G.	Scheduled and required payments made by the Borrower in respect of Deferred Purchase Price for the Subject Period (to extent not included in II.E. and II.F. above):	$

H.	Fixed Charge Coverage Ratio (Lines II.A. – II.B. – II.C. + to II.D.) ÷ (Lines II.E. + II.F. + II.G):		to 1

Minimum required

2.00 to 1.00

III. Section 7.11(c) Minimum EBITDA

A.	(1)	Minimum EBITDA for the Subject Period ending the last day of each fiscal quarter through and including the fiscal quarter in which the Series A Note Payment Date occurs:	$	36,000,000

	(2)	Actual	$

B.	(1)	Minimum EBITDA for the Subject Period ending the last day of each fiscal quarter thereafter:	$	35,000,000

	(2)	Actual	$

E - 4

The Offering

The summary below describes the principal terms of the notes. Some of the terms and conditions described below are subject to important limitations and exceptions. The “Description of the Notes” section of this offering memorandum contains a more detailed description of the terms and conditions of the notes. As used in this summary of the offering, references to “we,” “us,” “our,” the “Company” and “Carriage” refer to Carriage Services, Inc.

Issuer		Carriage Services, Inc,
Notes offered		$130,000,000 aggregate principal amount of % senior notes due 2015.
Maturity date		, 2015.
Interest payment dates		and , beginning , 2005.
Guarantees		All of our existing subsidiaries (other than the issuer of our TIDES preferred securities) will guarantee the notes on a senior basis. Future restricted subsidiaries will also be required to guarantee the notes on a senior basis.
Ranking		The notes will be unsecured senior indebtedness. The notes will rank senior in right of payment to our subordinated indebtedness, including our TIDES, and equal in right of payment with any of our existing and future senior indebtedness. Each guarantee will be unsecured and will rank equally with all unsecured senior indebtedness of the guarantors and senior to all subordinated indebtedness of the guarantors. The notes and guarantees will also be effectively subordinated to all of our secured indebtedness and the secured indebtedness of the subsidiary guarantors to the extent of the value of the assets securing such indebtedness.

		As of September 30, 2004, after giving effect to this offering and the use of proceeds therefrom as described under “Use of Proceeds,” including the pre-payment of certain of our existing senior notes, we would have had approximately $14.6 million of other senior indebtedness that would have ranked equally with the notes. Initially, after using proceeds from this offering to pay down the outstanding principal and accrued but unpaid interest on our existing unsecured credit facility, we expect to have no or nominal borrowings under our existing unsecured credit facility or our amended senior secured credit facility.
Optional redemption		We will have the option to redeem the notes, in whole or in part, at any time on or after , 2010, at the redemption prices described in this offering memorandum under the heading “Description of the Notes — Optional Redemption,” together with any accrued and unpaid interest to the date of redemption.
Equity offering optional redemption		Before , 2008, we may, at any time or from time to time, redeem up to 35% of the aggregate principal amount of the notes with the net proceeds of one or more equity offerings at % of the principal amount of the notes, plus any accrued and unpaid interest, provided at least 65% of the aggregate principal amount of the notes issued under the indenture remains outstanding after such redemption and the redemption occurs within 90 days of the date of the closing of such equity offering.

Change of control	When a change of control event occurs, each holder of notes may require us to repurchase all or a portion of its notes at a price equal to 101% of the principal amount of the notes, plus any accrued and unpaid interest.
Certain Covenants	The indenture governing the notes will contain covenants that, among other things, will limit our ability and the ability of our restricted subsidiaries to;

	•	sell assets,

	•	pay dividends on, redeem or repurchase our capital stock or redeem or repurchase our subordinated debt,

	•	make investments,

	•	incur additional indebtedness,

	•	create certain liens,

	•	enter into agreements that restrict dividends or other payments from our restricted subsidiaries to us,

	•	consolidate, merge or transfer all or substantially all of the assets of us and our restricted subsidiaries taken as a whole,

	•	engage in transactions with affiliates, and

	•	enter into sale and leaseback transactions.

	These covenants are subject to important exceptions and qualifications that are described under the heading “Description of the Notes” in this offering memorandum.
Exchange offer, registration rights	Under a registration rights agreement to be executed as part of this offering, we will agree to:

	•	file a registration statement within 90 days after the issue date of the notes enabling holders of notes to exchange the privately placed notes offered hereby for publicly registered notes with substantially identical terms,

	•	use our reasonable best efforts to cause the registration statement to become effective within 180 days after the issue date of the notes,

	•	complete the exchange offer within 30 days after the effective date of our registration statement, and

	•	file a shelf registration statement for the resale of the notes if we cannot effect an exchange offer within the time periods listed above and in other circumstances.

	The interest rate of the notes will increase if we do not comply with our obligations under the registration rights agreement. See “Exchange Offer; Registration Rights.”

Use of proceeds	We estimate that the net proceeds from this offering will be approximately $125.5 million. We intend to use the net proceeds from the offering:

	•	to prepay the principal and accrued but unpaid interest, and to pay the “make-whole” premium, on our existing senior notes;

	•	to repay outstanding borrowings under our existing unsecured credit facility;

	•	to repay TIDES deferred interest; and

	•	to fund general corporate purposes.
Transfer restrictions; absence of a public market for the notes	We have not registered the notes under the Securities Act of 1933 and the notes are subject to restrictions on transferability and resale. The notes are new securities and there is currently no established market for the notes. If issued, the exchange notes generally will be freely transferable but will also be new securities for which there will not initially be a market. Accordingly, we cannot assure you as to the development or liquidity of any market for the notes or the exchange notes. We expect that the notes will be eligible for trading in The PORTAL^® Market. The initial purchasers have advised us that they currently intend to make a market in the notes and, if issued, the exchange notes. However, they are not obligated to do so, and they may discontinue any market making with respect to the notes or the exchange notes without notice. We do not intend to apply for a listing of the notes, or, if issued, the exchange notes, on any securities exchange or for the inclusion of the notes, or, if issued, the exchange notes, on any automated dealer quotation system.
Risk factors	See “Risk Factors” and the other information in this offering memorandum for a discussion of factors you should carefully consider before deciding to invest in the notes.

Exhibit 4.2

SECOND AMENDMENT TO CREDIT AGREEMENT

THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this “Second Amendment”), dated as of March 25, 2005, is by and among CARRIAGE SERVICES, INC., a Delaware corporation (the “Borrower”), the banks listed on the signature pages hereof (the “Lenders”), WELLS FARGO BANK, N.A., as Syndication Agent (in said capacity, the “Syndication Agent”), and BANK OF AMERICA, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (in said capacity as Administrative Agent, the “Administrative Agent”).

BACKGROUND

A. The Borrower, the Lenders, the Syndication Agent, and the Administrative Agent are parties to that certain Credit Agreement, dated as of August 4, 2003 as modified by that certain Commitment Increase Agreement, dated as of May 13, 2004, that certain First Amendment to Credit Agreement, dated as of January 7, 2005, and that certain Limited Extension to First Amendment to Credit Agreement, dated as of February 28, 2005 (as modified and amended, the “Credit Agreement”; the terms defined in the Credit Agreement and not otherwise defined herein shall be used herein as defined in the Credit Agreement).

B. The Borrower has requested that the Lenders amend the Credit Agreement, as more fully set forth herein.

C. The Lenders parties to this Second Amendment (which Lenders constitute the Required Lenders as required under the Credit Agreement) are willing to agree to such amendment, subject to the performance and observance in full of each of the covenants, terms and conditions, and in reliance upon all of the representations and warranties of the Borrower, set forth herein.

1. AMENDMENTS.

(a) Section 1.01 of the Credit Agreement is hereby amended by adding in proper alphabetical order the defined terms “Old Senior Notes” and “Trust Preferred Interest Deferral” thereto to read as follows:

“Old Senior Notes” mean, collectively, (a) the $25,000,000 7.73% Senior Notes of the Borrower, Series 1999-A, duly July 30, 2004, (b) the $60,000,000 7.96% Senior Notes of the Borrower, series 1999-B, due July 30, 2006, and (c) the $25,000,000 8.06% Senior Notes of the Borrower, Series 1999-C, due July 30, 2008, and in each case including the unsecured guaranties thereof executed by certain Subsidiaries of the Borrower.

“Trust Preferred Interest Deferral” means any deferral of interest payments by the Borrower in respect of the Trust Notes in accordance with the provisions governing such Trust Notes.

(b) The definition of “Fixed Charge Coverage Ratio” set forth in Section 1.01 of the Credit Agreement is hereby amended to read as follows:

“Fixed Charge Coverage Ratio” means, for any period of determination, for the Borrower and its Subsidiaries, on a consolidated basis, the ratio of (a) the sum of (i) EBITDA for such period minus (ii) Capital Expenditures for such period minus (iii) the cash taxes paid during such period plus (iv) any cash tax refunds received during such period to (b) the sum of (i) cash Interest Expense during such period (other than (x) the Make-Whole Premium paid to the holders of the Old Senior Notes that were retired in January 2005 and (y) the amount of Trust Preferred Interest Deferral paid in March 2005] in respect of interest deferred from September 2003 through December 2004), plus (ii) scheduled and required principal payments during such period in respect of Debt (other than scheduled and required principal payments on the Old Senior Notes) plus, (iii) to the extent not included in subclause (i) or (ii) above of this clause (b), scheduled and required payments made by the Borrower in respect of Deferred Purchase Price for such period.

(c) Section 7.16 of the Credit Agreement is hereby amended to read as follows:

Section 7.16 Collateral. On or before April 29, 2005, to secure the Obligations, the Borrower shall, and shall cause it Subsidiaries (other than the Trust Subsidiary) to, grant a first priority Lien and security interest in (a) all Capital Stock of each of its Domestic Subsidiaries (other than the Trust Subsidiary) and 66% of the Capital Stock of any Foreign Subsidiary of the Borrower and (b) certain existing and future real and personal property of the Borrower and each Domestic Subsidiary (other than the Trust Subsidiary), including, but not limited to, machinery and equipment, inventory and other goods, accounts receivable, owned real estate, leaseholds, fixtures, bank accounts, general intangibles, financial assets, investment property, license rights, patents, trademarks, trade names, copyrights, chattel paper, insurance proceeds, contract rights, hedge agreements, documents, instruments, indemnification rights, tax refunds and cash (collectively, the “Collateral”). The Borrower shall, and shall cause its Domestic Subsidiaries to provide for the benefit of the Administrative Agent and the Lenders, all items to fully effect the foregoing, including, without limitation, provide the Administrative Agent with UCC-1s together with security agreements, pledge agreements, mortgages, deeds of trust, appraisals, hazard insurance, title insurance, UCC searches, tax and Lien searches, intellectual property documentation and registration and other similar types of documents, consents, authorizations, licenses, instruments and agreements relating to all property and other assets of the Borrower and its Domestic Subsidiaries as requested by the Administrative Agent, and opinions of local legal counsel with respect to the execution and filing thereof, and perfection of Liens created

thereby. Notwithstanding the foregoing, in no event shall any provision of this Section 7.16 require (i) any assets owned by any Foreign Subsidiary to be pledged or hypothecated to secure the Obligations or (ii) more than 66% of the issued and outstanding Capital Stock of any Foreign Subsidiary of the Borrower to be pledged to secure the Obligations.

(d) Exhibit E to the Credit Agreement is hereby amended to be in the form of Exhibit E to this Second Amendment.

2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its execution and delivery hereof, the Borrower represents and warrants that, as of the date hereof:

(a) the representations and warranties contained in the Credit Agreement and the other Loan Documents are true and correct on and as of the date hereof as made on and as of such date;

(b) no event has occurred and is continuing which constitutes a Default or Event of Default;

(c) (i) the Borrower has full power and authority to execute and deliver this Second Amendment, (ii) this Second Amendment has been duly executed and delivered by the Borrower, and (iii) this Second Amendment constitutes the legal, valid and binding obligations of the Borrower, enforceable in accordance with its terms, except as enforceability may be limited by applicable debtor relief laws and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) and except as rights to indemnity may be limited by federal or state securities laws;

(d) neither the execution, delivery and performance of this Second Amendment, nor the consummation of any transactions contemplated herein or therein, will conflict with (i) the certificate or articles of incorporation or the applicable constituent documents or bylaws of the Borrower or its Subsidiaries, (ii) to Borrower’s knowledge, any provision or law, statute, rule or regulation applicable to the Borrower or its Subsidiaries or (iii) any indenture, agreement or other instrument to which the Borrower, the Subsidiaries or any of their properties are subject; and

(e) no authorization, approval, consent, or other action by, notice to, or filing with, any governmental authority or other Person not previously obtained is required for (i) the execution, delivery or performance by the Borrower of this Second Amendment or (ii) the acknowledgement by each Guarantor of this Second Amendment.

3. CONDITIONS OF EFFECTIVENESS. This Second Amendment shall be effective on and as March 25, 2005, subject to the following:

(a) the representations and warranties set forth in Section 3 of this Second Amendment shall be true and correct;

(b) the Administrative Agent shall have received counterparts of this Second Amendment executed by the Required Lenders; and

(c) the Administrative Agent shall have received counterparts of this Second Amendment executed by the Borrower and acknowledged by each Guarantor.

4. GUARANTOR’S ACKNOWLEDGMENT. By signing below, each Guarantor (i) acknowledges, consents and agrees to the execution, delivery and performance by the Borrower of this Second Amendment, (ii) acknowledges and agrees that its obligations in respect of its Guaranty are not released, diminished, waived, modified, impaired or affected in any manner by this Second Amendment, or any of the provisions contemplated herein, (iii) ratifies and confirms its obligations under its Guaranty and (iv) acknowledges and agrees that it has no claim or offsets against, or defenses or counterclaims to, its Guaranty.

5. REFERENCE TO THE CREDIT AGREEMENT.

(a) Upon and during the effectiveness of this Second Amendment, each reference in the Credit Agreement to “this Agreement”, “hereunder”, or words of like import shall mean and be a reference to the Credit Agreement, as affected and amended by this Second Amendment.

(b) Except as expressly set forth herein, this Second Amendment shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights or remedies of the Administrative Agent or the Lenders under the Credit Agreement or any of the other Loan Documents, and shall not alter, modify, amend, or in any way affect the terms, conditions, obligations, covenants, or agreements contained in the Credit Agreement or the other Loan Documents, all of which are hereby ratified and affirmed in all respects and shall continue in full force and effect.

6. COSTS AND EXPENSES. The Borrower shall be obligated to pay the costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution and delivery of this Second Amendment and the other instruments and documents to be delivered hereunder.

7. EXECUTION IN COUNTERPARTS. This Second Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. For purposes of this Second Amendment, a counterpart hereof (or signature page thereto) signed and transmitted by any Person party hereto to the Administrative Agent (or its counsel) by facsimile machine, telecopier or electronic mail is to be treated as an original. The signature of such Person thereon, for purposes hereof, is to be considered as an original signature, and the counterpart (or signature page thereto) so transmitted is to be considered to have the same binding effect as an original signature on an original document.

8. GOVERNING LAW; BINDING EFFECT. This Second Amendment shall be governed by and construed in accordance with the laws of the State of Texas applicable to agreements made and to be performed entirely within such state; provided that the Administrative Agent and each Lender shall retain all rights arising under federal law. This

Second Amendment shall be binding upon the Borrower and each Lender and their respective successors and assigns.

9. HEADINGS. Section headings in this Second Amendment are included herein for convenience of reference only and shall not constitute a part of this Second Amendment for any other purpose.

10. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS SECOND AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AS TO THE SUBJECT MATTER THEREIN AND HEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.

REMAINDER OF PAGE LEFT INTENTIONALLY BLANK

IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment as of the date above written.

	CARRIAGE SERVICES, INC.


	By:	/s/ Joseph Saporito
		Joseph Saporito
		Executive Vice President

BANK OF AMERICA, N.A., as Administrative Agent


By:	/s/ David A. Johanson
	Name:		David A. Johanson
	Title:	Vice President

BANK OF AMERICA, N.A., as a Lender, L/C Issuer and Swing Line Lender


By:	/s/ Gary L. Mingle
	Name:		Gary L. Mingle
	Title:	Senior Vice President

WELLS FARGO BANK, N.A., as Syndication Agent


By:	/s/ Warren R. Ross
	Name:		Warren R. Ross
	Title:	Vice President

WELLS FARGO BANK, N.A., as a Lender


By:	/s/ Warren R. Ross
	Name:		Warren R. Ross
	Title:	Vice President

GUARANTORS:

	CARRIAGE FUNERAL HOLDINGS, INC.
	CFS FUNERAL SERVICES, INC.
	CARRIAGE HOLDING COMPANY, INC.
	CARRIAGE FUNERAL SERVICES OF MICHIGAN, INC.
	CARRIAGE FUNERAL SERVICES OF KENTUCKY, INC.
	CARRIAGE FUNERAL SERVICES OF CALIFORNIA, INC.
	CARRIAGE CEMETERY SERVICES OF IDAHO, INC.
	WILSON & KRATZER MORTUARIES
	ROLLING HILLS MEMORIAL PARK
	CARRIAGE SERVICES OF CONNECTICUT, INC.
	CSI FUNERAL SERVICES OF MASSACHUSETTS, INC.
	CHC INSURANCE AGENCY OF OHIO, INC.
	BARNETT, DEMROW & ERNST, INC.
	CARRIAGE SERVICES OF NEW MEXICO, INC.
	FORASTIERE FAMILY FUNERAL SERVICE, INC.
	CARRIAGE CEMETERY SERVICES, INC.
	CARRIAGE SERVICES OF OKLAHOMA, L.L.C.
	CARRIAGE SERVICES OF NEVADA, INC.
	HUBBARD FUNERAL HOME, INC.
	CARRIAGE TEAM CALIFORNIA (CEMETERY), LLC
	CARRIAGE TEAM CALIFORNIA (FUNERAL), LLC
	CARRIAGE TEAM FLORIDA (CEMETERY), LLC
	CARRIAGE TEAM FLORIDA (FUNERAL), LLC
	CARRIAGE SERVICES OF OHIO, LLC
	CARRIAGE TEAM KANSAS, LLC
	CARRIAGE MUNICIPAL CEMETERY SERVICES OF NEVADA, INC.
	CARRIAGE CEMETERY SERVICES OF CALIFORNIA, INC.
	CARRIAGE INTERNET STRATEGIES, INC.
	CARRIAGE INVESTMENTS, INC.
	CARRIAGE MANAGEMENT, L.P.
	HORIZON CREMATION SOCIETY, INC.
	CARRIAGE LIFE EVENTS, INC.
	CARRIAGE MERGER I, INC.
	CARRIAGE MERGER II, INC.
	CARRIAGE MERGER III, INC.


	By:	/s/ Joseph Saporito
		Joseph Saporito
		Executive Vice President

	CARRIAGE INSURANCE AGENCY OF MASSACHUSETTS, INC.


	By:	/s/ Melvin C. Payne
		Melvin C. Payne
		Chief Executive Officer


	COCHRANE’S CHAPEL OF THE ROSES, INC.


	By:	/s/ Wendy Wilson Boyer
		Wendy Wilson Boyer
		President

EXHIBIT E

FORM OF COMPLIANCE CERTIFICATE

Financial Statement Date: ,

To: Bank of America, N.A., as Administrative Agent

Ladies and Gentlemen:

[Use following paragraph 1 for fiscal year-end financial statements]

[Use following paragraph 1 for fiscal quarter-end financial statements]

E - 1

Form of Compliance Certificate

[select one:]

[to the best knowledge of the undersigned during such fiscal period, the Borrower performed and observed each covenant and condition of the Loan Documents applicable to it.]

—or—

[the following covenants or conditions have not been performed or observed and the following is a list of each such Default and its nature and status:]

5. The financial covenant analyses and information set forth on Schedule 2 attached hereto are true and accurate on and as of the date of this Certificate.

IN WITNESS WHEREOF, the undersigned has executed this Certificate on behalf of the Borrower as of , .

CARRIAGE SERVICES, INC.


By:	/s/ Joseph Saporito
		Name:	Joseph Saporito
		Title	Executive Vice President

E - 2

For the Quarter/Year ended (“Statement Date”)

SCHEDULE 2
to the Compliance Certificate
($ in 000’s)

I.	Section 7.11 (a) – Maximum Leverage Ratio.

	A.	Total Senior Debt (excluding the Trust Notes) at Statement Date:		$

	B.	EBITDA for four consecutive fiscal quarters ending on the Statement Date (“Subject Period”):

		(1)	Net Income for the Subject Period:	$

		(2)	To the extent deducted in calculating Net Income, Interest Expense for the Subject Period:	$

		(3)	To the extent deducted in calculating Net Income, the provision for federal, state, local and foreign income taxes payable by the Borrower and its Subsidiaries for the Subject Period:	$

		(4)	To the extent deducted in calculating Net Income, depreciation and amortization expenses and payments in respect of Deferred Purchase Price for the Subject Period:	$

		(5)	To the extent deducted in calculating Net Income, other expenses of the Borrower and the Subsidiaries reducing Net Income which do not represent a cash item in the Subject Period or any future period:	$

		(6)	Non-cash items increasing Net Income for the Subject Period:	$

		(7)	EBITDA (Lines I.B.1 + 2 + 3 + 4 + 5 - 6):	$

	C.	Leverage Ratio (Line I.A. ¸ Line I.B.7):		to

		Maximum permitted:		4.00 to 1.00

E - 3

II.	Section 7.11(b) – Minimum Fixed Charge Coverage Ratio.

	A.	EBITDA for the Subject Period (Line I.B.7. above):		$

	B.	Capital Expenditures for the Subject Period:		$

	C.	Cash taxes paid during the Subject Period:		$

	D.	Cash tax refunds received during the Subject Period:		$

	E.	Cash Interest Expenses during the Subject Period (other than (x) Make-Whole Premiums paid to the holders of the Old Senior Notes that were retired in January 2005 and (y) the amount of Trust Preferred Interest Deferral paid in March 2005] in respect of interest deferred from September 2003 through December 2004):		$

	F.	Scheduled and required principal payments during the Subject Period in respect of Debt: (other than scheduled and required principal payments on the Old Senior Notes):		$

	G.	Scheduled and required payments made by the Borrower in respect of Deferred Purchase Price for the Subject Period (to extent not included in II.E. and II.F. above):		$

	H.	Fixed Charge Coverage Ratio (Lines II.A. – II.B. – II.C. + II.D.) ¸ (Lines II.E. + II.F. + II.G):		to 1

		Minimum required		2.00 to 1.00

III.	Section 7.11(c) Minimum EBITDA

	A.	(1)	Minimum EBITDA for the Subject Period ending the last day of each fiscal quarter through and including the fiscal quarter in which the Series A Note Payment Date occurs:	$	36,000,000

		(2)	Actual	$

	B.	(1)	Minimum EBITDA for the Subject Period ending the last day of each fiscal quarter thereafter:	$	35,000,000

		(2)	Actual	$

E - 4

Exhibit 10.2

EMPLOYMENT AGREEMENT

THIS AGREEMENT, made effective as of the 30th day of March, 2005, is between CARRIAGE SERVICES, INC., a Delaware corporation (the “Company”), and GEORGE J. KLUG, a resident of Kingwood, Texas (the “Employee”).

1. Employment Term. The Company hereby continues the employment of the Employee for a term commencing effective on the date first above written and, subject to earlier termination as provided in Section 7 hereof, continuing until December 31, 2007 (such term being herein referred to as the “term of this Agreement”). The Employee agrees to accept such employment and to perform the services specified herein, all upon the terms and conditions hereinafter stated.

2. Duties. The Employee shall serve the Company and shall report to, and be subject to the general direction and control of the Chief Executive Officer of the Company or any other officer designated by him. The Employee shall perform the management and administrative duties of Senior Vice President of Information Systems and Chief Information Officer of the Company. In such capacity, the Employee shall be responsible for the operation and management of Company’s information systems, networks and communications infrastructure. The Employee shall also serve as Senior Vice President of Information Systems and Chief Information Officer of any subsidiary of the Company as requested by the Company, and the Employee shall perform such other duties as are from time to time assigned to him by the Chief Executive Officer as are not inconsistent with the provisions hereof.

3. Extent of Service. The Employee shall devote his full business time and attention to the business of the Company, and, except as may be specifically permitted by the Company, shall not be engaged in any other business activity during the term of this Agreement. The foregoing shall not be construed as preventing the Employee from making passive investments in other businesses or enterprises, provided, however, that such investments will not require services on the part of the Employee which would in any way impair the performance of his duties under this Agreement.

4. Compensation. During the term of this Agreement, the Company shall pay the Employee a salary of $15,833.33 per full calendar month of service completed, appropriately prorated for partial months at the commencement and end of the term of this Agreement. The salary set forth herein shall be payable in bi-weekly installments in accordance with the payroll policies of the Company in effect from time to time during the term of this Agreement. The Company shall have the right to deduct from any payment of all compensation to the Employee hereunder (x) any federal, state or local taxes required by law to be withheld with respect to such payments, and (y) any other amounts specifically authorized to be withheld or deducted by the Employee.

5. Benefits. In addition to the base salary under Section 4, the Employee shall be entitled to participate in the following benefits during the term of this Agreement:

(a) Consideration for an annual performance-based bonus within the sole discretion of the Company, as may be recommended by the Chief Executive Officer and, if applicable, approved by the Compensation Committee of the Company’s Board of Directors.

(b) Eligibility for consideration of incentive stock options or restricted stock grants under the terms of one or more of the Company’s stock incentive plans.

(c) Five days of vacation accrued in each calendar year of service in addition to that provided to the Employee under the Company’s employee policy.

(d) Such other employee benefits as are available generally to employees of the Company.

6. Certain Additional Matters. The Employee agrees that at all times during the term of this Agreement and for the two-year period specified in Section 8:

(a) The Employee will not knowingly or intentionally do or say any act or thing which will or may impair, damage or destroy the goodwill and esteem for the Company of its suppliers, employees, patrons, customers and others who may at any time have or have had business relations with the Company.

(b) The Employee will not reveal to any third person any difference of opinion, if there be such at any time, between him and the management of the Company as to its personnel, policies or practices.

7. Termination.

(a) Death. If the Employee dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate and the Company shall have no further obligation to the Employee or his estate except that the Company shall pay the Employee’s estate that portion of the Employee’s base salary under Section 4 accrued through the date on which the Employee’s death occurred. Such payment of base salary to the Employee’s estate shall be made in the same manner and at the same times as they would have been paid to the Employee had he not died.

(b) Disability. If during the term of this Agreement, the Employee shall be prevented from performing his duties hereunder by reason of disability, and such disability shall continue for a period of six months, then the Company may terminate this Agreement at any time after the expiration of such six-month period. For purposes of this Agreement, the Employee shall be deemed to have become disabled when the Company, upon the advice of a qualified physician, shall have determined that the Employee has become physically or mentally incapable (excluding infrequent and temporary absences due to ordinary illness) of performing his duties under this Agreement. In the event of a termination pursuant to this paragraph (b), the Company shall be relieved of all its obligations under this Agreement, except that the Company shall pay to the Employee (or his estate in the event of his subsequent death) the Employee’s base salary under Section 4 through the date on which such termination shall have occurred, reduced during such period by the amount of any benefits received under any disability policy maintained by the Company. All such payments to the

Employee or his estate shall be made in the same manner and at the same times as they would have been paid to the Employee had he not become disabled.

(c) Discharge for Cause. Prior to the end of the term of this Agreement, the Company may discharge the Employee for Cause and terminate this Agreement. In such case this Agreement shall automatically terminate and the Company shall have no further obligation to the Employee or his estate other than to pay to the Employee (or his estate in the event of his subsequent death) that portion of the Employee’s salary accrued through the date of termination. For purposes of this Agreement, the Company shall have “Cause” to discharge the Employee or terminate the Employee’s employment hereunder upon (i) the Employee’s commission of any felony or any other crime involving moral turpitude, (ii) the Employee’s failure or refusal to perform all of his duties, obligations and agreements herein contained or imposed by law, including his fiduciary duties, to the reasonable satisfaction of the Company, (iii) the Employee’s commission of acts amounting to negligence or willful misconduct to the material detriment of the Company, or (iv) the Employee’s breach of any provision of this Agreement or uniformly applied provisions of the Company’s employee handbook.

(d) Discharge Without Cause. Prior to the end of the term of this Agreement, the Company may discharge the Employee without Cause (as defined in paragraph (c) above) and terminate this Agreement. In such case this Agreement shall automatically terminate and the Company shall have no further obligation to the Employee or his estate, except that the Company shall continue to pay to the Employee (or his estate in the event of his subsequent death) the Employee’s base salary under Section 4, and shall continue to include the Employee in any group health and hospitalization insurance program, for a period of 18 months following the date of discharge. All such payments to the Employee or his estate shall be made in the same manner and at the same times as they would have been paid to the Employee had he not been discharged.

(e) Corporate Change. If there occurs a Corporate Change (as defined in the Company’s 1996 Stock Incentive Plan), during the term of this Agreement, and if the Employee is terminated without Cause or resigns his employment hereunder for Good Cause (as hereafter defined) within twelve months thereafter, then this Agreement shall automatically terminate (if then still in effect), in which event Company shall have no further obligation to the Employee or his estate, except that the Company shall continue to pay to the Employee (or his estate in the event of his subsequent death) the Employee’s base salary under Section 4, and shall continue to include the Employee in any group health and hospitalization insurance program, for a period of 18 months following the date of discharge, or until expiration of the term of this Agreement (whichever is longer). All such payments to the Employee or his estate shall be made in the same manner and at the same times as they would have been paid to the Employee had he not resigned or been discharged. For purposes hereof, “Good Cause” means (i) the Company has assigned to Employee any duties inconsistent with his position (including status, offices, titles and reporting requirements), authority, duties or responsibilities hereunder, or taken any other action which results in a diminution in such position, authority, duties or responsibilities, excluding any isolated, insubstantial or inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee; or (ii) the Company requires the Employee to be based at any office or location outside of the Greater Houston Metropolitan Area.

(f) No resignation with or without Good Cause, nor any discharge hereunder, whether or not following a Corporate Change, will relieve the Employee of his obligations under Sections 6, 8 and 9 hereunder.

8. Restrictive Covenants. The Employee acknowledges that in the course of his employment with the Company as a member of the Company’s senior executive and management team, he has had and will continue to have access to confidential and proprietary business

information of the Company and its affiliates, and will develop through such employment business systems, methods of doing business, and contacts within the death care industry, all of which will help to identify him with the business and goodwill of the Company. Consequently, it is important that the Company protect its interests in regard to such matters from unfair competition. The parties therefore agree that for so long as the Employee shall remain employed by the Company and, if the employment of the Employee ceases for any reason (including voluntary resignation), then for a period of two (2) years thereafter, the Employee shall not, directly or indirectly:

(i) alone or for his own account, or as a officer, director, shareholder, partner, member, trustee, employee, consultant, advisor, agent or any other capacity of any corporation, partnership, joint venture, trust, or other business organization or entity, encourage, support, finance, be engaged in, interested in, or concerned with (x) any of the companies and entities described on Schedule I hereto, except to the extent that any activities in connection therewith are confined exclusively outside the Continental United States, or (y) any other business within the death care industry having an office or being conducted within a radius of fifty (50) miles of any funeral home, cemetery or other death care business owned or operated by the Company or any of its subsidiaries at the time of such termination;

(ii) induce or assist anyone in inducing in any way any employee of the Company or any of its subsidiaries to resign or sever his or her employment or to breach an employment contract with the Company or any such subsidiary; or

(iii) own, manage, advise, encourage, support, finance, operate, join, control, or participate in the ownership, management, operation, or control of or be connected in any manner with any business which is or may be in the funeral, mortuary, crematory, cemetery or burial insurance business or in any business related thereto (x) as part of any of the companies or entities listed on Schedule I, or (y) otherwise within a radius of fifty (50) miles of any funeral home, cemetery or other death care business owned or operated by the Company or any of its subsidiaries at the time of such termination.

Notwithstanding the foregoing, the above covenants shall not prohibit the passive ownership of not more than one percent (1%) of the outstanding voting securities of any entity within the death care industry. The foregoing covenants shall not be held invalid or unenforceable because of the scope of the territory or actions subject hereto or restricted hereby, or the period of time within which such covenants respectively are operative, but the maximum territory, the action subject to such covenants and the period of time they are enforceable are subject to any determination by a final judgment of any court which has jurisdiction over the parties and subject matter.

9. Confidential Information. The Employee acknowledges that in the course of his employment by the Company he has received and will continue to receive certain trade secrets, lists of customers, management methods, financial and accounting data (including but not limited to reports, studies, analyses, spreadsheets and other materials and information), operating techniques, prospective acquisitions and dispositions, employee lists, training manuals and procedures, personnel evaluation procedures, and other confidential information and knowledge concerning the business of the Company and its affiliates (hereinafter collectively referred to as “Information”) which the Company desires to protect. The Employee understands that the Information is confidential and he agrees not to reveal the Information to anyone outside the Company so long as the confidential or

secret nature of the Information shall continue. The Employee further agrees that he will at no time use the Information in competing with the Company. Upon termination of this Agreement, the Employee shall surrender to the Company all papers, documents, writings and other property produced by his or coming into his possession by or through his employment or relating to the Information and the Employee agrees that all such materials will at all times remain the property of the Company.

10. Remedies. The parties recognize that the services to be rendered under this Agreement by the Employee are special, unique, and of extraordinary character, and that in the event of the breach by the Employee of the covenants contained in Section 8 or Section 9 hereof, the Company may suffer irreparable harm as a result. The parties therefore agree that, in the event of any breach or threatened breach of any of such covenants, the Company shall be entitled to specific performance or injunctive relief, or both, and may, in addition to and not in lieu of any claim or proceeding for damages, institute and prosecute proceedings in any court of competent jurisdiction to enforce through injunctive relief such covenants. In addition, the Company may, if it so elects, suspend (if applicable) any payments due under this Agreement pending any such breach and offset against any future payments the amount of the Company’s damages arising from any such breach. The Employee agrees to waive and hereby waives any requirement for the Company to secure any bond in connection with the obtaining of such injunction or other equitable relief.

11. Notices. All notices, requests, consents and other communications under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or three business days after the date mailed, postage prepaid, by certified mail, return receipt requested, or when sent by telex or telecopy and receipt is confirmed, if addressed to the respective parties as follows:

If to the Employee: Mr. George J. Klug

5918 Spring Lodge

Kingwood, Texas 77345

If to the Company: Carriage Services, Inc.

1900 St. James Place, 4^th Floor

Houston, Texas 77056

Attn: Chief Executive Officer

Either party hereto may designate a different address by providing written notice of such new address to the other party hereto.

102. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such provision or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

113. Assignment. This Agreement may not be assigned by the Employee. Neither the Employee nor his estate shall have any right to commute, encumber or dispose of any right to receive

payments hereunder, it being agreed that such payments and the right thereto are nonassignable and nontransferable.

124. Binding Effect. Subject to the provisions of Section 13 of this Agreement, this Agreement shall be binding upon and inure to the benefit of the parties hereto, the Employee’s heirs and personal representatives, and the successors and assigns of the Company.

135. Captions. The section and paragraph headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

146. Complete Agreement. This Agreement represents the entire agreement between the parties concerning the subject hereof and supersedes all prior agreements and arrangements between the parties concerning the subject thereof.

157. Governing Law; Venue. A substantial portion of the Employee’s duties under this Agreement shall be performed at the Company’s corporate headquarters in Houston, Texas, and this Agreement has been substantially negotiated and is being executed and delivered in the State of Texas. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Texas. Any suit, claim or proceeding arising under or in connection with this Agreement or the employment relationship evidenced hereby must be brought, if at all, in a state district court in Harris County, Texas or federal district court in the Southern District of Texas, Houston Division. Each party submits to the jurisdiction of such courts and agrees not to raise any objection to such jurisdiction.

18. Counterparts. This Agreement may be executed in multiple original counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

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

	CARRIAGE SERVICES, INC.


	By:	/s/ Melvin C. Payne
		MELVIN C. PAYNE, Chief Executive Officer


	/s/ George J. Klug
	GEORGE J. KLUG

SCHEDULE I

EMPLOYMENT AGREEMENT

(GEORGE J. KLUG)

1. The following entities, together with all Affiliates thereof:

Service Corporation International

Alderwoods Group Inc.

Stewart Enterprises, Inc.

Keystone Group Holdings, Inc.

Meridian Mortuary Group, Inc.

StoneMor Partners

Hamilton Group, Inc.

Century Group

Saber Group

Thomas Pierce & Co.

Graystone Associates

For purposes of the foregoing, an “Affiliate” of an entity is a person that directly or indirectly controls, is under the control of or is under common control with such entity.

2. Any new entity which may hereafter be established which acquires any combination of ten or more funeral homes and/or cemeteries from any of the entities described in 1 above.

3. Any funeral home, cemetery or other death care enterprise which is managed by any entity described in 1 or 2 above.

EXHIBIT 11.1

CARRIAGE SERVICES, INC.

COMPUTATION OF PER SHARE EARNINGS

(unaudited and in thousands, except per share data)

Earnings per share for the three month periods ended March 31, 2004 and 2005 is calculated based on the weighted average number of common and common equivalent shares outstanding during the periods as prescribed by SFAS 128. The following table sets forth the computation of the basic and diluted earnings per share for the three month periods ended March 31, 2004 and 2005:

	Three months ended March 31,
	2004		2005
Income (loss) from continuing operations available to common stockholders	$	2,954	$	(644	)
Income from discontinued operations available to common stockholders	98		273
Effect of dilutive securities	—		—
Net income available to common stockholders	$	3,052	$	(371	)

Weighted average number of common shares outstanding for basic EPS computation	17,655		18,127
Effect of dilutive securities:
Stock options	484		—
Weighted average number of common and common equivalent shares outstanding for diluted EPS computation	18,139		18,127

Basic earnings (loss) per common
share:
Continuing operations	$	0.17	$	(0.04	)
Discontinued operations	$	—	$	0.02
Net income (loss)	$	0.17	$	(0.02	)

Diluted earnings (loss) per common
share:
Continuing operations	$	0.16	$	(0.04	)
Discontinued operations	$	0.01	$	0.02
Net income (loss)	$	0.17	$	(0.02	)

Options to purchase 1.5 million shares were not included in the computation of diluted earnings per share for the three months ending March 31, 2005, because the effect would be antidilutive.

The convertible junior subordinated debenture is convertible into 4.6 million shares of common stock and is not included in the computation of diluted earnings per share because the effect would be antidilutive.

EXHIBIT 31.1

I, Melvin C. Payne, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Carriage Services Inc.;

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

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

4. The registrant’s other certifying 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 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 quarterly report is 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 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 controls over financial reporting.

Dated: May 13, 2005	/s/ Melvin C. Payne
	Melvin C. Payne
	Chairman of the Board, President and Chief Executive Officer

EXHIBIT 31.2

I, Joseph Saporito, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Carriage Services Inc.;

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

Dated: May 13, 2005	/s/ Joseph Saporito
	Joseph Saporito
	Senior Vice President and Chief Financial Officer

EXHIBIT 32.1

I, Melvin C. Payne, certify pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (i) the attached Quarterly Report on Form 10-Q of Carriage Services, Inc. for the period March 31, 2005 (“Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Carriage Services, Inc.

May 13, 2005	/s/ Melvin C. Payne
	Melvin C. Payne
	Chairman of the Board,
	President and
	Chief Executive Officer

EXHIBIT 32.2

I, Joseph Saporito, certify pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (i) the attached Quarterly Report on Form 10-Q of Carriage Services, Inc. for the period March 31, 2005 (“Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Carriage Services, Inc.

May 13, 2005	/s/ Joseph Saporito
	Joseph Saporito
	Executive Vice President and Chief Financial Officer