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                                                                   EXHIBIT 10.26

                              EMPLOYMENT AGREEMENT


This agreement made as of the 2nd day of January, 2002



BETWEEN:

                         ALDERWOODS GROUP SERVICES INC.

                                                                 (the "Company")

                                      -And-

                                  JAMES ARTHURS

                                                               (the "Executive")



WHEREAS:

         The Company is a wholly-owned subsidiary of Alderwoods Group, Inc.
         ("AGI"), a Delaware corporation that is the holding entity for a
         corporate group engaged in the operation of funeral homes, insurance
         and cemeteries in Canada, the United States and England; and

         The Company and the Executive wish to enter into a written Employment
         Agreement which will provide the Executive with an incentive to
         continue in his position as Senior Vice President, Chief Information
         Officer of the Company for the term of this Agreement.

IN CONSIDERATION of the mutual covenants contained herein, the parties agree as
follows:

DEFINITIONS

1.       "CHANGE IN CONTROL" means any one of the following events that occurs
         during the term of this Agreement other than pursuant to a plan of
         reorganization submitted by AGI and confirmed by the U.S. Bankruptcy
         Court:

         a)       the acquisition by any individual, entity or group (a
                  "Person") of beneficial ownership of 30% or more of the
                  combined voting power of the then-outstanding Voting Stock (as
                  defined below) of AGI; provided, however, that the following
                  acquisitions will not constitute a Change in Control: (1) any
                  issuance of Voting Stock of AGI directly from AGI that is
                  approved by the Incumbent Board (as defined below), (2) any
                  acquisition by AGI of Voting Stock of AGI, (3) any acquisition
                  of Voting Stock of AGI by any employee benefit plan (or
                  related trust) sponsored or maintained by AGI or any
                  subsidiary of AGI, or (4) any acquisition of Voting Stock of
                  AGI by any Person pursuant to a Business Combination (as
                  defined below) that would not constitute a Change in Control;

         b)       the consummation of a reorganization, amalgamation, merger or
                  consolidation, a sale or other disposition of all or
                  substantially all of the assets of AGI, or any other
                  transaction (each, a


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                  "Business Combination") in which all or substantially all of
                  the individuals and entities who were the beneficial owners of
                  Voting Stock of AGI immediately prior to such Business
                  Combination beneficially own, directly or indirectly,
                  immediately following such Business Combination less than 40%
                  of the combined voting power of the then outstanding shares of
                  Voting Stock of the entity resulting from such Business
                  Combination;

         c)       individuals who, as of the Effective Date, constitute the
                  Board of Directors of AGI (the "Incumbent Board") cease for
                  any reason to constitute at least a majority of the Board;
                  provided, however, that any individual becoming a Director
                  subsequent to such Effective Date whose election, or
                  nomination for election by AGI's stockholders, was approved by
                  a vote of at least two-thirds of the Directors then comprising
                  the Incumbent Board (either by a specific vote or by approval
                  of the proxy statement of AGI in which such person is named as
                  a nominee for director, without objection to such nomination)
                  will be deemed to have been a member of the Incumbent Board,
                  but excluding, for this purpose, any such individual whose
                  initial assumption of office occurs as a result of an actual
                  or threatened election contest with respect to the election or
                  removal of Directors or other actual or threatened
                  solicitation of proxies or consents by or on behalf of a
                  Person other than the Board; or

         d)       the approval by the stockholders of AGI of a complete
                  liquidation or dissolution of AGI, except pursuant to a
                  Business Combination that would not constitute a Change in
                  Control.

2.       "CONSTRUCTIVE DISCHARGE" means the termination of the Executive's
         employment by the Executive following the occurrence of one or more of
         the following events (regardless of whether any other reason, other
         than Just Cause, exists for the termination of Executive's employment):

         a)       the geographic relocation of the Executive's place of
                  employment by the Company by more than 50 miles from Toronto,
                  Ontario;

         b)       any material reduction by the Company in the Executive's job
                  duties or responsibilities;

         c)       any material reduction by the Company in the Executive's level
                  of compensation or benefits;

         d)       any adverse change by the Company or AGI to the Executive's
                  title or function;

         e)       harassment by a representative or affiliate of the Company; or

         f)       any circumstance in which the Executive was induced by the
                  actions of the Company to terminate his employment other than
                  on a purely voluntary basis.

3.       "EFFECTIVE DATE" has the meaning set forth in the "Fourth Amended Joint
         Plan of Reorganization of Loewen Group International, Inc., Its Parent
         Corporation and Certain of Their Debtor Subsidiaries."

4.       "JUST CAUSE" means willful misconduct or willful neglect of duty by the
         Executive, including, but not limited to, intentional wrongful
         disclosure of confidential or proprietary information of the Company or
         AGI or any of its subsidiaries; intentional wrongful engagement in any
         competitive activity prohibited by paragraph 20; and the intentional
         material breach of any provision of this Agreement.

5.       "SERVICES" has the meaning set forth in the Management Services
         Agreements, dated as of January 2, 2002, by and between the Company and
         AGI and the Company and certain subsidiaries of AGI.

6.       "TERMINATION WITHOUT JUST CAUSE" includes, but is not limited to, any
         unilateral change in the material terms and conditions of the
         Executive's employment.


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7.       "VOTING STOCK" means securities entitled to vote generally in the
         election of directors.

ENTIRE AGREEMENT

8.

         a)       The Executive and the Company agree that this Agreement
                  represents the entire agreement between the parties and that
                  any and all prior agreements, written or verbal, express or
                  implied, between the parties relating to or in any way
                  connected with the employment of the Executive by the Company
                  or any related, associated, affiliated, predecessor or parent
                  corporations are declared null and void and are superseded by
                  the terms of this Agreement. There are no representations,
                  warranties, forms, conditions, undertakings, or collateral
                  agreements, express, implied or statutory between the parties
                  other than as expressly set forth in this Agreement. No waiver
                  or modification of this Agreement shall be valid unless in
                  writing and duly executed by both the Company and the
                  Executive.

         b)       The Executive acknowledges and agrees that, as of the
                  Effective Date, the Key Employee Retention Program will
                  terminate and be of no further force or effect with respect to
                  the Executive.

EMPLOYMENT

9.       The Company agrees to employ the Executive, and the Executive agrees to
         be employed by the Company, in the position of Senior Vice President,
         Chief Information Officer for the term of this Agreement. The Executive
         also agrees that, as part of the Executive's duties, the Executive
         shall occupy and perform the office of Senior Vice President, Chief
         Information Officer of AGI, on behalf of the Company, for the term of
         this Agreement. As used in this Agreement, the phrase "term of this
         Agreement" means the period beginning on the Effective Date and ending
         on the earlier of January 2, 2004, or the effective date of the
         termination of Executive's employment. Notwithstanding anything to the
         contrary in this Agreement, paragraph 16(b) shall survive and remain in
         effect following the term of this Agreement.

10.      The Executive agrees that he will at all times faithfully,
         industriously, and to the best of his skill, ability, and talents,
         perform all of the duties required of his position in a manner which is
         in the best interests of the Company and in accordance with the
         Company's objectives, and will devote his full working time and
         attention to these duties. The Executive acknowledges and agrees that
         the duties required of his position include, without limitation, the
         provision of Services on behalf of, and for the account of, the
         Company.

COMPENSATION

11.

         a)       In consideration for the Executive's continued performance of
                  his duties as Senior Vice President, Chief Information
                  Officer, the Executive will receive a base salary of $175,000
                  U.S. per annum. The amount of such salary shall be subject to
                  review and improvement on a periodic basis in accordance with
                  Company practice, but in no event shall such amount be
                  reduced. The Executive's base salary is payable in accordance
                  with the Company's customary payroll practices and is subject
                  to deductions required by applicable law.

         b)       The Company shall reimburse the Executive for all reasonable
                  expenses incurred by the Executive during the term of this
                  Agreement in the course of the Executive performing his duties
                  under this Agreement. These reimbursements shall be consistent
                  with the Company's policies in effect from time to time with
                  respect to travel, entertainment and other reimbursable
                  business expenses, subject to the Company's requirements
                  applicable generally with respect to reporting and
                  documentation of such expenses.



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SHORT TERM INCENTIVE PLAN - ANNUAL BONUS

12.      The Executive will be entitled to participate in a short term incentive
         plan as adopted by the Company from time to time in a manner
         commensurate with his position and level of responsibility with the
         Company. The bonus payable under such plan will be paid in full within
         90 days after the end of each year.

13.      The short term incentive plan bonus is subject to the following
         conditions and exceptions:

         a)       In order to qualify for and receive the annual bonus, the
                  Executive must be employed by the Company or its successor at
                  the time the bonus is paid unless the Executive is terminated
                  (1) without Just Cause or (2) by reason of Constructive
                  Discharge in compliance with paragraph 17. If the Executive's
                  employment is terminated without Just Cause or by reason of
                  Constructive Discharge after the end of the year but before
                  the bonus amount is paid, the Executive shall receive the
                  bonus for that completed year calculated in accordance with
                  terms of the short term incentive plan. The payment shall be
                  made by the Company within seven days of the termination and
                  will be subject to deductions required by applicable law. If
                  the bonus amount has not been determined within seven days of
                  the termination it will be paid in full within 90 days of the
                  subject year end.

         b)       If, before the end of a year, the Executive's employment is
                  terminated by the Company or its successor without Just Cause,
                  the bonus which the Executive will be entitled to receive
                  under paragraph 16 for that year will be equal to the
                  Executive's pro rata portion of the bonus for the year of
                  termination (for the number of days elapsed in the current
                  year), based on the achievement of the applicable performance
                  criteria through the date of termination.

STOCK OPTION PLAN

14.      The Executive is eligible for participation in AGI's equity incentive
         plan or plans. Stock options will be granted to the Executive as
         determined by the Board of Directors of AGI.

BENEFITS

15.      The Executive will be eligible to participate in the following benefit
         plans:

         a)       GROUP BENEFITS. The Executive will participate in the
                  Company's Group Benefit Plan and any other group perquisites
                  all as in effect from time to time.

         b)       VEHICLE ALLOWANCE. The Executive will be entitled to a vehicle
                  allowance of $500.00 per month plus operating expenses with no
                  allowance for auto insurance coverage.

         c)       CLUB MEMBERSHIP. The Executive will be entitled to the amount
                  of $1,000.00 per year for club memberships as directed by the
                  Executive.

TERMINATION OF EMPLOYMENT

16.      The parties agree that the Executive's employment under this Agreement
         may be terminated as follows:

         a)       by the Company, without notice of termination or pay in lieu
                  thereof, for Just Cause;

         b)       by the Company, not following a Change in Control as set forth
                  in paragraph 17 below, at its sole discretion and for any
                  reason other than Just Cause upon payment to the Executive in
                  a lump sum, within seven days of such termination, of an
                  amount equal to:



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                  i)       12 months' base salary; provided, however, that if
                           the Executive's employment is terminated prior to the
                           first anniversary of the Effective Date, he shall be
                           entitled to a lump sum payment in an amount equal to
                           24 months' base salary;

                  ii)      The amount of any unpaid bonus earned by the
                           Executive up to and including the date of termination
                           calculated in accordance with paragraph 13(b); and

                  iii)     The amount of any unpaid salary or vacation earned by
                           the Executive up to and including the date of
                           termination.

                  Payments identified in sub paragraphs (i) - (iii) will be
                  subject to deductions required by applicable law;

         c)       by the Company for any reason other than Just Cause or by
                  reason of Constructive Discharge, following a Change in
                  Control, both in compliance with paragraph 17 below; or

         d)       by the Executive, for any reason, upon thirty (30) days
                  advance written notice to the Company in which case the
                  Company will have no further obligation to the Executive under
                  this Agreement or otherwise except to pay the Executive the
                  unpaid portion, if any, of the Executive's base salary payable
                  for the period through the date of termination of the
                  Executive's employment.

CHANGE IN CONTROL

17.      If a Change in Control occurs and, within two years of the effective
         date of the Change in Control, the Executive's employment is terminated
         by the Company without Just Cause or by reason of Constructive
         Discharge, the Company shall, within seven days of the date of
         termination, pay to the Executive in a lump sum the following payments:

                  i)       24 months' base salary;

                  ii)      The replacement value of all Executive's benefit
                           coverage, including the full vesting of all stock
                           options (exercised or not) granted to the Executive,
                           and all monies due from the Registered Retirement
                           Savings Plan, following the date of the Executive's
                           termination (such benefit coverage being calculated
                           over 24 months following termination);

                  iii)     Two times the amount of incentive pay (in an amount
                           equal to not less than the highest aggregate
                           incentive pay earned by the Executive in any of the
                           three fiscal years immediately preceding the year in
                           which the Change in Control occurred);

                  iv)      The amount of any unpaid bonus earned by the
                           Executive for a completed year, calculated in
                           accordance with paragraph 13; and

                  v)       The amount of any unpaid salary or vacation earned by
                           the Executive up to and including the date of
                           termination.

         Payments identified in paragraphs (i) - (v) will be subject to
         deductions required by applicable law. Any termination of employment of
         the Executive by the Company or the removal of the Executive from the
         office or position in the Company or AGI that occurs (A) not more than
         365 days prior to the date on which a Change in Control occurs and (B)
         following the commencement of any discussion with a third party that
         ultimately results in a Change in Control will be deemed to be a
         termination or removal of the Executive after a Change in Control for
         purposes of this Agreement.



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CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY

18.      In the event that it is determined (as hereinafter provided) that any
         payment (other than the Gross-Up Payments provided for in this
         paragraph 18 and Annex A) or distribution by the Company, AGI or any of
         its affiliates to or for the benefit of the Executive, whether paid or
         payable or distributed or distributable pursuant to the terms of this
         Agreement or otherwise pursuant to or by reason of any other agreement,
         policy, plan, program or arrangement, including, without limitation,
         the lapse or termination of any restriction on the vesting or
         exercisability of any benefit under any of the foregoing (a "Payment"),
         would be subject to the excise tax imposed by Section 4999 of the
         United States Internal Revenue Code of 1986, as amended (the "Code")
         (or any successor provision thereto), by reason of being considered
         "contingent on a change in ownership or control," within the meaning of
         Section 280G of the Code (or any successor provision thereto) or to any
         similar tax imposed by U.S. state or local law, or any interest or
         penalties with respect to such tax (such tax or taxes, together with
         any such interest and penalties, being hereafter collectively referred
         to as the "Excise Tax"), then the Executive will be entitled to receive
         an additional payment or payments (collectively, a "Gross-Up Payment").
         The Gross-Up Payment will be in an amount such that, after payment by
         the Executive of all U.S. taxes (including any interest or penalties
         imposed with respect to such taxes), including any Excise Tax imposed
         upon the Gross-Up Payment, the Executive retains an amount of the
         Gross-Up Payment equal to the Excise Tax imposed upon the Payment. For
         purposes of determining the amount of the Gross-Up Payment, the
         Executive will be considered to pay any applicable U.S. federal, state
         and local income taxes at the highest rate applicable to the Executive
         in effect in the year in which the Gross-Up Payment will be made, net
         of the maximum reduction in U.S. federal income tax that could be
         obtained from deduction of such state and local taxes.

19.      The obligations set forth in paragraph 18 will be subject to the
         procedural provisions described in Annex A.

CONFIDENTIAL INFORMATION; COMPETITIVE ACTIVITY

20.      The Executive agrees that he will not, without the prior written
         consent of the Company, during the term of this Agreement or at any
         time thereafter, disclose to any person not employed by the Company, or
         use in connection with engaging in competition with the Company, any
         confidential or proprietary information of the Company. For purposes of
         this Agreement, the term "confidential or proprietary information"
         includes all information of any nature and in any form that is owned by
         the Company and that is not publicly available (other than by
         Executive's breach of this paragraph 20) or generally known to persons
         engaged in businesses similar or related to those of the Company.
         Confidential or proprietary information will include, without
         limitation, the Company's financial matters, customers, employees,
         industry contracts, strategic business plans, product development (or
         other proprietary product data), marketing plans, and all other secrets
         and all other information of a confidential or proprietary nature. The
         foregoing obligations imposed by this paragraph 20 will not apply (i)
         during the Term, in the course of the business of and for the benefit
         of the Company, (ii) if such confidential or proprietary information
         has become, through no fault of the Executive, generally known to the
         public or (iii) if the Executive is required by law to make disclosure
         (after giving the Company notice and an opportunity to contest such
         requirement).

21.      In addition, during the term of this Agreement and for a period of 12
         months thereafter, the Executive will not, without the prior written
         consent of the Company, which consent will not be unreasonably
         withheld:

         a)       Engage in any Competitive Activity. For purposes of this
                  Agreement, "Competitive Activity" means the Executive's
                  participation in the management of any business enterprise if
                  such enterprise engages in substantial and direct competition
                  with the Company and such enterprise's sales of any product or
                  service competitive with any product or service of the Company
                  amounted to 10% of such enterprise's net sales for its most
                  recently completed fiscal year and if the Company's net sales
                  of said product or service amounted to 10% of the Company's
                  net sales for its most recently completed fiscal year.
                  "Competitive Activity" will not include (i) the mere ownership
                  of securities in any such enterprise and the exercise of
                  rights appurtenant thereto or



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                  (ii) participation in the management of any such enterprise
                  other than in connection with the competitive operations of
                  such enterprise.

         b)       On behalf of the Executive or on behalf of any person, firm or
                  company, directly or indirectly, attempt to influence,
                  persuade or induce, or assist any other person in so
                  persuading or inducing, any employee of the Company or any of
                  its subsidiaries to give up, or to not commence, employment or
                  a business relationship with the Company or any of its
                  subsidiaries.

22.      The Executive and the Company agree that the covenants contained in
         paragraphs 20 and 21 are reasonable under the circumstances, and
         further agree that if, in the opinion of any court of competent
         jurisdiction, any such covenant is not reasonable in any respect, such
         court will have the right, power and authority to excise or modify any
         provision or provisions of such covenants as to the court will appear
         not reasonable and to enforce the remainder of the covenants as so
         amended. The Executive acknowledges and agrees that the remedy at law
         available to the Company for breach of any of his obligations under
         this paragraph 22 would be inadequate and that damages flowing from
         such a breach may not readily be susceptible to being measured in
         monetary terms. Accordingly, the Executive acknowledges, consents and
         agrees that, in addition to any other rights or remedies that the
         Company may have at law, in equity or under this Agreement, upon
         adequate proof of his violation of any such provision of this
         Agreement, the Company will be entitled to immediate injunctive relief
         and may obtain a temporary order restraining any threatened or further
         breach, without the necessity of proof of actual damage.

23.      For purposes of paragraphs 20, 21 and 22, the term "Company" will also
         include AGI and any subsidiary of AGI.

GENERAL

24.      The parties confirm that the provisions of this Agreement are fair and
         reasonable and that the total compensation and benefits payable under
         paragraphs 16, 17 or 18 are reasonable estimates of the damages which
         would be suffered by the Executive. Any amount paid under paragraphs
         16, 17 or 18 shall be in full satisfaction of all claims whatsoever
         relating to the Executive's employment or for the termination of the
         Executive's employment, including claims for salary, bonus, benefits,
         vacation pay, termination pay and/or severance pay pursuant to the
         Ontario EMPLOYMENT STANDARDS ACT, as amended, including sections 57 and
         58 thereof.

25.      Any payment made to the Executive under paragraphs 16, 17 or 18 of this
         Agreement shall be paid to the Executive by the Company regardless of
         any offer of alternate employment made to the Executive by the Company
         or by any other prospective employer, whether accepted by the Executive
         or not. The Executive will not be required to mitigate any damages
         arising from this Agreement and any amounts and benefits to be provided
         to the Executive hereunder shall not be reduced or set off against any
         amounts earned by the Executive from alternate employment, including
         self-employment, or by other means.

26.      Any payment other than for base salary made to the Executive under this
         Agreement shall be made by way of a lump sum payment or, at the
         Executive's option, in such other manner as he may direct, less
         deductions required by applicable law.

27.      Where the context requires, the singular shall include the plural and
         the plural shall include the singular. Masculine pronouns shall be
         deemed to be read as feminine pronouns and VICE VERSA. Words importing
         persons shall include individuals, partnerships, associations, trusts,
         unincorporated organizations and corporations and VICE VERSA.

28.      The division of this Agreement into paragraphs and the insertion of
         headings are for the convenience of reference only and shall not affect
         the construction or interpretation of this Agreement. The terms "this
         Agreement", "hereof", "hereunder" and similar expressions refer to this
         Agreement only and not to any



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         particular paragraph and include any agreement or instrument
         supplemental or ancillary to the Agreement. References herein to
         paragraphs are to paragraphs of this Agreement unless something in the
         subject matter or context is inconsistent therewith.

29.      All dollar amounts identified in this contract are in U.S. currency.

30.      The parties' respective rights and obligations under paragraphs 16(b),
         18, 19, 20, 21, 22, 34 and 35 will survive any termination or
         expiration of this Agreement or the termination of the Executive's
         employment for any reason whatsoever.

GOVERNING LAWS

31.      This Agreement shall be governed by the laws of the Province of Ontario
         without giving effect to the principles of conflict of laws thereof.
         Each party to this Agreement hereby consents and submits himself or
         itself to the jurisdiction of the courts of the Province of Ontario for
         the purposes of any legal action or proceeding arising out of this
         Agreement.

SEVERABILITY

32.      All terms and covenants contained in this Agreement are severable and
         in the event that any of them is held to be invalid by any competent
         court in the Province of Ontario, the invalid provision shall be
         deleted and the balance of this Agreement shall be interpreted as if
         such invalid clause or covenant were not contained herein.

CONTINUITY

33.      This Agreement shall be binding upon and enure to the benefit of (i)
         the Executive and his heirs, executors, administrators and legal
         representatives and (ii) the Company, its related corporations,
         affiliates, and associates, and any other entity or organization which
         shall succeed to substantially all or any distinct portion of the
         business, divisions or property of the Company or its related
         corporations, affiliates, and associates, whether by means of
         amalgamation, merger, consolidation, acquisition, and/or sale of all or
         part of the shares or assets of the Company or otherwise, including by
         operation of law or by succession to the business of AGI pursuant to a
         Plan of Reorganization approved by a Bankruptcy Court. In addition, the
         Company will require any such successor expressly to assume and agree,
         by written agreement, to perform this Agreement in the same manner and
         to the same extent the Company would be required to perform if no such
         succession had taken place.

LEGAL ADVICE

34.      The Executive acknowledges that he has obtained or has had an
         opportunity to obtain independent legal advice in connection with this
         Agreement, and further acknowledges that he has read, understands, and
         agrees to be bound by all of the terms and conditions contained herein.

35.      The Company agrees to reimburse the Executive for all reasonable legal
         expenses incurred in connection with any dispute involving the
         Executive, the Company, its related corporations, affiliates,
         successors, or assigns, or any other third party, as between any of
         them, arising from the validity, interpretation, or enforcement of this
         Agreement or any of its terms, including all reasonable legal expenses
         incurred by the Executive in respect of any action or actions commenced
         by the Executive to obtain, enforce, or retain any right, benefit or
         payment provided for in this Agreement regardless of whether such
         expenses are incurred during the term of the Agreement or after;
         provided that, in regard to such matters, the Executive has not acted
         in bad faith or with no colorable claim of success. However, the
         Company shall not be required to reimburse the Executive for any legal
         costs or expenses in relation to any action commenced by the



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         Company to enforce the confidentiality or non-competition provisions
         hereof and in respect of which in a court of competent jurisdiction the
         Company is the prevailing party for either preliminary or final remedy.

NOTICE

36.      Any demand, notice or other communication to be given in connection
         with this Agreement shall be given by personal delivery, by registered
         mail or by electronic means of communication addressed to the recipient
         as follows:

         TO THE EXECUTIVE:

         James Arthurs
         11th Floor, Atria III
         2225 Sheppard Avenue East
         Toronto, Ontario   M2J 5C2

         TO THE COMPANY:

         Alderwoods Group Services Inc.
         11th Floor, Atria III
         2225 Sheppard Avenue East
         Toronto, Ontario   M2J 5C2

         Attention: Senior Vice-President, Legal  & Asset Management

         WITH A COPY TO:

         Alderwoods Group, Inc.
         311 Elm Street
         Suite 1000, First Floor
         Cincinnati, OH  45202

         Attention: Senior Vice-President, Legal & Asset Management

         or such other address, individual or electronic communication as may be
         designated by notice given by either party to the other.

ADDITIONAL

37.      The failure of a party to insist upon strict adherence to any term of
         this Agreement on any occasion shall not be considered a waiver of such
         party's rights or deprive such party of the right thereafter to insist
         upon strict adherence to that term or any other term of this Agreement.

38.      Nothing herein expressed or implied is intended or shall be construed
         to confer upon or give to any person, other than (1) the parties to
         this Agreement, (2) any permitted assignees of the Company and the
         Executive, and (3) AGI, as contemplated by paragraphs 8(b), 9, 10, 14,
         20, 21, 22 and 23, any rights or remedies under or by reason of this
         Agreement and AGI shall be a third party beneficiary of this Agreement.



                                                                    ...CONTINUED



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IN WITNESS WHEREOF the Executive has executed and the Company has caused its
duly authorized representative to execute this Agreement as of the date set
forth on the first page of this Agreement.

                                ALDERWOODS GROUP SERVICES INC.


                                By:  /s/ PAUL A. HOUSTON
                                     -------------------------------------------

                                Name:   Paul A. Houston

                                Title:  President and Chief Executive Officer


WITNESS:
/s/ AZALEA ANGELES              /s/ JAMES ARTHURS
---------------------------     ------------------------------------------------
                                                James Arthurs



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                                     ANNEX A

EXCISE TAX GROSS-UP PROCEDURAL PROVISIONS

1.       Subject to the provisions of paragraph 5 of this Annex, all
         determinations required to be made under paragraph 18 of this Agreement
         and this Annex A, including whether an Excise Tax is payable by the
         Executive and the amount of such Excise Tax and whether a Gross-Up
         Payment is required to be paid by the Company to the Executive and the
         amount of such Gross-Up Payment, if any, will be made by a U.S.
         nationally recognized accounting firm (the "National Firm") selected by
         the Executive in his sole discretion. The Executive will direct the
         National Firm to submit its determination and detailed supporting
         calculations to both the Company and the Executive within 30 calendar
         days after the date of his termination of employment, if applicable,
         and any such other time or times as may be requested by the Company or
         the Executive. If the National Firm determines that any Excise Tax is
         payable by the Executive, the Company will pay the required Gross-Up
         Payment to the Executive within five business days after receipt of
         such determination and calculations with respect to any Payment to the
         Executive. If the National Firm determines that no Excise Tax is
         payable by the Executive with respect to any material benefit or amount
         (or portion thereof), it will, at the same time as it makes such
         determination, furnish the Company and the Executive with an opinion
         that the Executive has substantial authority not to report any Excise
         Tax on his U.S. federal, state or local income or other tax return with
         respect to such benefit or amount. As a result of the uncertainty in
         the application of Section 4999 of the Code and the possibility of
         similar uncertainty regarding applicable U.S. state or local tax law at
         the time of any determination by the National Firm hereunder, it is
         possible that Gross-Up Payments that will not have been made by the
         Company should have been made (an "Underpayment"), consistent with the
         calculations required to be made hereunder. In the event that the
         Company exhausts or fails to pursue its remedies pursuant to paragraph
         5 of this Annex and the Executive thereafter is required to make a
         payment of any Excise Tax, the Executive will direct the National Firm
         to determine the amount of the Underpayment that has occurred and to
         submit its determination and detailed supporting calculations to both
         the Company and the Executive as promptly as possible. Any such
         Underpayment will be promptly paid by the Company to, or for the
         benefit of, the Executive within five business days after receipt of
         such determination and calculations.

2.       The Company and the Executive will each provide the National Firm
         access to and copies of any books, records and documents in the
         possession of the Company or the Executive, as the case may be,
         reasonably requested by the National Firm, and otherwise cooperate with
         the National Firm in connection with the preparation and issuance of
         the determinations and calculations contemplated by paragraph 1 of this
         Annex. Any determination by the National Firm as to the amount of the
         Gross-Up Payment will be binding upon the Company and the Executive.

3.       The U.S. federal, state and local income or other tax returns filed by
         the Executive will be prepared and filed on a consistent basis with the
         determination of the National Firm with respect to the Excise Tax
         payable by the Executive. The Executive will report and make proper
         payment of the amount of any Excise Tax, and at the request of the
         Company, provide to the Company true and correct copies (with any
         amendments) of his federal income tax return as filed with the U.S.
         Internal Revenue Service and corresponding state and local tax returns,
         if relevant, as filed with the applicable taxing authority, and such
         other documents reasonably requested by the Company, evidencing such
         payment. If prior to the filing of the Executive's federal income tax
         return, or corresponding state or local tax return, if relevant, the
         National Firm determines that the amount of the Gross-Up Payment should
         be reduced, the Executive will within five business days pay to the
         Company the amount of such reduction.

4.       The fees and expenses of the National Firm for its services in
         connection with the determinations and calculations contemplated by
         paragraph 1 of this Annex will be borne by the Company. If such fees
         and expenses are initially paid by the Executive, the Company will
         reimburse the Executive the full amount of such fees and expenses
         within five business days after receipt from the Executive of a
         statement therefor and reasonable evidence of his payment thereof.

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5.       The Executive will notify the Company in writing of any claim by the
         U.S. Internal Revenue Service or any other U.S. taxing authority that,
         if successful, would require the payment by the Company of a Gross-Up
         Payment. Such notification will be given as promptly as practicable but
         no later than 10 business days after the Executive actually receives
         notice of such claim and the Executive will further apprise the Company
         of the nature of such claim and the date on which such claim is
         requested to be paid (in each case, to the extent known by the
         Executive). The Executive will not pay such claim prior to the
         expiration of the 30-calendar-day period following the date on which he
         gives such notice to the Company or, if earlier, the date that any
         payment of amount with respect to such claim is due. If the Company
         notifies the Executive in writing prior to the expiration of such
         period that it desires to contest such claim, the Executive will:

                           (A) provide the Company with any written records or
         documents in his possession relating to such claim reasonably requested
         by the Company;

                           (B) take such action in connection with contesting
         such claim as the Company reasonably requests in writing from time to
         time, including, without limitation, accepting legal representation
         with respect to such claim by an attorney competent in respect of the
         subject matter and reasonably selected by the Company;

                           (C) cooperate with the Company in good faith in order
         effectively to contest such claim; and

                           (D) permit the Company to participate in any
         proceedings relating to such claim;

         PROVIDED, HOWEVER, that the Company will bear and pay directly all
         costs and expenses (including interest and penalties) incurred in
         connection with such contest and will indemnify and hold harmless the
         Executive, on an after-tax basis, for and against any Excise Tax or
         income or other tax, including interest and penalties with respect
         thereto, imposed as a result of such representation and payment of
         costs and expenses. Without limiting the foregoing provisions of this
         paragraph 5, the Company will control all proceedings taken in
         connection with the contest of any claim contemplated by this paragraph
         5 and, at its sole option, may pursue or forego any and all
         administrative appeals, proceedings, hearings and conferences with the
         taxing authority in respect of such claim (provided, however, that the
         Executive may participate therein at his own cost and expense) and may,
         at its option, either direct the Executive to pay the tax claimed and
         sue for a refund or contest the claim in any permissible manner, and
         the Executive agrees to prosecute such contest to a determination
         before any administrative tribunal, in a court of initial jurisdiction
         and in one or more appellate courts, as the Company determines;
         PROVIDED, HOWEVER, that if the Company directs the Executive to pay the
         tax claimed and sue for a refund, the Company will advance the amount
         of such payment to the Executive on an interest-free basis and will
         indemnify and hold the Executive harmless, on an after-tax basis, from
         any Excise Tax or income or other tax, including interest or penalties
         with respect thereto, imposed with respect to such advance; and
         PROVIDED FURTHER, HOWEVER, that any extension of the statute of
         limitations relating to payment of taxes for the taxable year of the
         Executive with respect to which the contested amount is claimed to be
         due is limited solely to such contested amount. Furthermore, the
         Company's control of any such contested claim will be limited to issues
         with respect to which a Gross-Up Payment would be payable hereunder and
         the Executive will be entitled to settle or contest, as the case may
         be, any other issue raised by the Internal Revenue Service or any other
         taxing authority.

6.       If, after the receipt by the Executive of an amount advanced by the
         Company pursuant to paragraph 5 of this Annex, the Executive receives
         any refund with respect to such claim, the Executive will (subject to
         the Company's complying with the requirements of such paragraph 5)
         promptly pay to the Company the amount of such refund (together with
         any interest paid or credited thereon after any taxes applicable
         thereto). If, after the receipt by the Executive of an amount advanced
         by the Company pursuant to paragraph 5 of this Annex, a determination
         is made that the Executive is not entitled to any refund with respect
         to such claim and the Company does not notify the Executive in writing
         of its intent to contest such denial or refund prior to the expiration
         of 30 calendar days after such determination, then such advance will be
         forgiven and will not be required to be repaid and the amount of any
         such advance will offset, to the



                                      A-2

<PAGE>

         extent thereof, the amount of Gross-Up Payment required to be paid by
         the Company to the Executive pursuant to paragraph 18 of this Agreement
         and this Annex A.










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