UNITED STATES

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~~

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

For the quarterly period ended September 30, 2005

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

~~For the quarterly period ended June 30, 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: 001-14733

LITHIA MOTORS, INC.

(Exact name of registrant as specified in its charter)

Oregon		93-0572810
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

360 E. Jackson Street, Medford, Oregon		97501
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 541-776-6899

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 in Rule 12b-2 of the Exchange Act). Yes ý No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class A common stock without par value		~~15,502,096~~15,585,799
Class B common stock without par value		3,762,231
(Class)		(Outstanding at ~~August 4,~~November 3, 2005)

LITHIA MOTORS, INC.

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets ~~(Unaudited)~~(unaudited) – ~~June~~September 30, 2005 and December 31, 2004

	Consolidated Statements of Operations ~~(Unaudited) -~~(unaudited) – Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2005 and 2004

	Consolidated Statements of Cash Flows ~~(Unaudited) - Six~~(unaudited) – Nine Months Ended ~~June~~September 30, 2005 and 2004

	Notes to ~~Condensed~~ Consolidated Financial Statements ~~(Unaudited)~~(unaudited)

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

Item 3.	Quantitative and Qualitative Disclosures About 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 4.	~~Submission of Matters to a Vote of Security Holders~~

~~Item~~ 6.	Exhibits

Signatures

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

LITHIA MOTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

~~(in thousands)~~

~~(Unaudited)~~

	June 30,			December 31,		September 30,			December 31,
	2005			2004		2005			2004

Assets
Current Assets:
Cash and cash equivalents	$	29,842		$	29,264	$	41,687		$	29,264
Contracts in transit	54,658			42,913		45,285			42,913
Trade receivables, net of allowance for doubtful accounts of $508 and $436	51,612			41,576
Trade receivables, net of allowance for doubtful accounts of $463 and $436						47,801			41,576
Inventories, net	659,060			536,653		516,068			536,653
Vehicles leased to others, current portion	5,492			5,494		5,479			5,494
Prepaid expenses and other	6,004			6,840		9,678			6,840
Deferred income taxes	363			—		1,945			—
Assets held for sale	—			135		—			135
Total Current Assets	807,031			662,875		667,943			662,875

Land and buildings, net of accumulated depreciation of $9,703 and $8,110	242,998			226,356
Equipment and other, net of accumulated depreciation of $29,419 and $25,922	76,405			73,275
Land and buildings, net of accumulated depreciation of $10,674 and $8,110						257,221			226,356
Equipment and other, net of accumulated depreciation of $31,242 and $25,922						76,470			73,275
Goodwill	251,377			244,532		252,325			244,532
Other intangible assets, net of accumulated amortization of $75 and $63	47,039			44,649
Other intangible assets, net of accumulated amortization of $81 and $63						47,415			44,649
Other non-current assets	4,505			5,217		4,417			5,217
Total Assets	$	1,429,355		$	1,256,904	$	1,305,791		$	1,256,904

Liabilities and Stockholders’ Equity
Current Liabilities:
Flooring notes payable	$	554,994		$	450,859	$	370,028		$	400,084
Flooring notes payable: non-trade						45,106			50,776
Current maturities of long-term debt	6,449			6,565		6,546			6,565
Trade payables	29,861			26,821		25,590			26,821
Accrued liabilities	57,139			52,043		64,582			52,042
Deferred income taxes	—			410		—			410
Total Current Liabilities	648,443			536,698		511,852			536,698

Used vehicle flooring facility	20,000			—		11,000			—
Real estate debt, less current maturities	143,050			139,702		144,568			139,702
Other long-term debt, less current maturities	136,717			127,608		136,612			127,608
Other long-term liabilities	10,900			10,611		10,127			10,611
Deferred income taxes	38,910			36,339		41,708			36,339
Total Liabilities	998,020			850,958		855,867			850,958

Stockholders’ Equity:
Preferred stock - no par value; authorized 15,000 shares; none outstanding	—			—		—			—
Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 15,439 and 15,142	221,187			215,333
Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 15,521 and 15,142						222,962			215,333
Class B common stock - no par value authorized 25,000 shares; issued and outstanding 3,762 and 3,762	468			468		468			468
Additional paid-in capital	2,190			1,811		2,349			1,811
Unearned compensation	(1,346		)	—		(1,253		)	—
Accumulated other comprehensive income	1,690			789		2,932			789
Retained earnings	207,146			187,545		222,466			187,545
Total Stockholders’ Equity	431,335			405,946		449,924			405,946
Total Liabilities and Stockholders’ Equity	$	1,429,355		$	1,256,904	$	1,305,791		$	1,256,904

The accompanying notes are an integral part of these ~~condensed~~ consolidated ~~balance sheets.~~statements.

LITHIA MOTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)

													Three months ended September 30,						Nine months ended September 30,
	Three months ended June 30,						Six months ended June 30,						2005			2004			2005			2004
	2005			2004			2005			2004
Revenues:
New vehicle sales	$	444,777		$	397,600		$	810,424		$	749,005		$	517,536		$	448,805		$	1,327,960		$	1,197,810
Used vehicle sales	203,257			182,251			403,791			370,107			227,959			196,784			631,728			566,869
Finance and insurance	28,195			24,560			53,828			47,787			32,979			27,660			85,868			74,963
Service, body and parts	77,207			71,228			153,234			139,999			82,456			74,147			235,690			214,146
Fleet and other	9,001			1,365			11,965			2,896			8,380			3,631			20,163			6,378
Total revenues	762,437			677,004			1,433,242			1,309,794			869,310			751,027			2,301,409			2,060,166
Cost of sales	633,130			561,794			1,184,663			1,089,096			726,555			627,242			1,910,788			1,715,938
Gross profit	129,307			115,210			248,579			220,698			142,755			123,785			390,621			344,228
Selling, general and administrative	95,778			88,409			187,459			173,262			100,594			90,260			287,279			263,239
Depreciation - buildings	886			650			1,714			1,254			962			701			2,676			1,955
Depreciation and amortization - other	2,575			2,400			5,188			4,696			2,716			2,507			7,904			7,203
Income from operations	30,068			23,751			54,218			41,486
Other income (expense):
Income from continuing operations													38,483			30,317			92,762			71,831
Other income (expense)
Floorplan interest expense	(6,144		)	(4,086		)	(11,392		)	(7,668		)	(5,628		)	(4,472		)	(17,020		)	(12,140		)
Other interest expense	(3,041		)	(2,155		)	(5,850		)	(3,889		)	(3,043		)	(2,305		)	(8,893		)	(6,194		)
Other income, net	282			281			599			502
Other expense, net													189			203			727			677
	(8,903		)	(5,960		)	(16,643		)	(11,055		)	(8,482		)	(6,574		)	(25,186		)	(17,657		)
Income from continuing operations before income taxes	21,165			17,791			37,575			30,431			30,001			23,743			67,576			54,174
Income taxes	(8,398		)	(6,938		)	(14,748		)	(11,868		)	(12,276		)	(9,260		)	(27,024		)	(21,128		)
Income before discontinued operations	12,767			10,853			22,827			18,563			17,725			14,483			40,552			33,046
Loss from discontinued operations, net of income tax benefit of $(61), $(8), $(105) and $(156)	(92		)	(13		)	(162		)	(244		)
Loss from discontinued operations, net of income tax benefit of $65, $8, $170 and $164													(93		)	(13		)	(255		)	(257		)
Net income	$	12,675		$	10,840		$	22,665		$	18,319		$	17,632		$	14,470		$	40,297		$	32,789

Basic income per share from continuing operations	$	0.67		$	0.58		$	1.20		$	0.99		$	0.92		$	0.77		$	2.12		$	1.76
Basic loss per share from discontinued operations	(0.01		)	0.00			(0.01		)	(0.01		)	0.00			0.00			(0.01		)	(0.01		)
Basic net income per share	$	0.66		$	0.58		$	1.19		$	0.98		$	0.92		$	0.77		$	2.11		$	1.75

Shares used in basic per share calculations	19,142			18,746			19,085			18,686			19,221			18,818			19,131			18,730

Diluted income per share from continuing operations	$	0.61		$	0.54		$	1.09		$	0.95		$	0.83		$	0.70		$	1.93		$	1.66
Diluted loss per share from discontinued operations	(0.01		)	0.00			0.00			(0.01		)	0.00			0.00			(0.02		)	(0.01		)
Diluted net income per share	$	0.60		$	0.54		$	1.09		$	0.94		$	0.83		$	0.70		$	1.91		$	1.65

Shares used in diluted per share calculations	21,749			20,549			21,710			19,828			21,882			21,376			21,765			20,353

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

LITHIA MOTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

~~(in thousands)~~

~~(Unaudited)~~

	Six months ended June 30,						Nine months ended September 30,
	2005			2004			2005			2004
Cash flows from operating activities:
Net income	$	22,665		$	18,319		$	40,297		$	32,789
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization	6,902			5,950			10,580			9,158
Depreciation and amortization of discontinued operations	47			107			47			139
Compensation expense related to stock issuances	278			150
Compensation expense related to stock option issuances							389			192
(Gain) loss on sale of assets	224			190			427			984
Gain on sale of franchise	(44		)	(569		)	(28		)	(914		)
Deferred income taxes	1,527			3,785			1,974			6,029
(Increase) decrease, net of effect of acquisitions:
Trade and installment contract receivables, net	(10,020		)	(955		)	(6,201		)	1,532
Contracts in transit	(11,745		)	4,011			(2,372		)	(7,305		)
Inventories	(103,841		)	(113,609		)	38,102			(4,800		)
Vehicles leased to others	(498		)	312			(736		)	(43		)
Prepaid expenses and other	1,987			349			332			(968		)
Other noncurrent assets	745			372			833			207
Increase (decrease), net of effect of acquisitions:
Floorplan notes payable	89,267			89,905
Flooring notes payable							(43,128		)	(1,497		)
Trade payables	3,040			2,256			(1,231		)	3,080
Accrued liabilities	5,593			4,957			13,145			10,655
Other long-term liabilities and deferred revenue	49			3,046			(724		)	4,147
Net cash provided by operating activities	6,176			18,576			51,706			53,385

Cash flows from investing activities:
Principal payments received on notes receivable							—			585
Capital expenditures:
Non-financeable	(12,769		)	(5,061		)	(20,230		)	(7,807		)
Financeable	(13,797		)	(19,234		)	(24,453		)	(31,640		)
Proceeds from sale of assets	258			320			188			870
Cash paid for acquisitions, net of cash acquired	(26,007		)	(52,198		)	(27,950		)	(62,662		)
Proceeds from sales of franchises	6,577			643
Proceeds from sale of dealerships							6,696			2,226
Net cash used in investing activities	(45,738		)	(75,530		)	(65,749		)	(98,428		)

Cash flows from financing activities:
Flooring notes payable: non-trade							(5,670		)	(12,320		)
Net borrowings (repayments) on lines of credit	29,314			(111,018		)	20,314			(94,018		)
Principal payments on long-term debt and capital leases	(3,757		)	(9,690		)	(5,451		)	(11,805		)
Proceeds from issuance of long-term debt	13,334			114,317			16,539			129,069
Debt issuance costs	—			(2,550		)	—			(2,550		)
Repurchase of common stock	(9		)	—			(9		)	(13		)
Proceeds from issuance of common stock	4,322			4,075			6,119			5,523
Dividends paid	(3,064		)	(2,617		)	(5,376		)	(4,122		)
Net cash provided by (used in) financing activities	40,140			(7,483		)
Net cash provided by financing activities							26,466			9,764

Increase (decrease) in cash and cash equivalents	578			(64,437		)	12,423			(35,279		)

Cash and cash equivalents:
Beginning of period	29,264			74,408			29,264			74,408
End of period	$	29,842		$	9,971		$	41,687		$	39,129

Supplemental Cash Flow Information:
Cash paid for income taxes	$	6,207		$	6,642		$	17,608		$	14,035
Cash paid for interest	17,253			11,367			26,090			17,854

Supplemental Schedule of Non-Cash Transactions:
Debt issued in connection with acquisitions	$	—		$	12,000		$	—		$	12,000
Flooring debt assumed in connection with acquisitions	23,352			36,437			23,352			41,050
Debt paid by purchaser in connection with dealership disposals							6,550			—
Flooring debt paid in connection with dealership disposals							3,166			717

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

LITHIA MOTORS, INC. ~~AND SUBSIDIARIES~~

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The financial information included herein as of ~~June~~September 30, 2005 and December 31, 2004 and for the three and ~~six-month~~nine-month periods ended ~~June~~September 30, 2005 and 2004 is unaudited; however, such information reflects all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2004 is derived from our 2004 Annual Report on Form 10-K. The interim condensed consolidated financial statements should be read in conjunction with the ~~condensed~~ consolidated financial statements and the notes thereto included in our 2004 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Note 2. Inventories

Inventories are valued at the lower of market value or cost, using the specific identification method for vehicles and parts. The cost of new and used vehicle inventories includes the cost of any equipment added, reconditioning and transportation (in thousands).

	June 30, 2005		December 31, 2004		September 30, 2005		December 31, 2004
New and program vehicles	$	529,013	$	427,134	$	387,023	$	427,134
Used vehicles	103,952		84,739		102,008		84,739
Parts and accessories	26,095		24,780		27,037		24,780
	$	659,060	$	536,653	$	516,068	$	536,653

Note 3. Earnings Per Share

Following is a reconciliation of the income from continuing operations and weighted average shares used for our basic earnings per share (“EPS”) and diluted EPS (in thousands, except per share amounts).

	2005						2004(1)						2005						2004(1)
Three Months Ended June 30,	Income from Continuing Operations		Shares	Per Share Amount			Income from Continuing Operations		Shares	Per Share Amount
Three Months Ended September 30,													Income from Continuing Operations		Shares	Per Share Amount			Income from Continuing Operations		Shares	Per Share Amount
Basic EPS
Income from continuing operations available to common stockholders	$	12,767	19,142	$	0.67		$	10,853	18,746	$	0.58		$	17,725	19,221	$	0.92		$	14,483	18,818	$	0.77
Effect of Dilutive Securities
2 7/8% convertible senior subordinated notes	459		2,255	(0.04		)	293		1,413	(0.03		)	447		2,255	(0.07		)	452		2,255	(0.06		)
Stock options and restricted stock	—		352	(0.02		)	—		390	(0.01		)
Stock options and unvested restricted stock													—		406	(0.02		)	—		303	(0.01		)
Diluted EPS
Income from continuing operations available to common stockholders	$	13,226	21,749	$	0.61		$	11,146	20,549	$	0.54		$	18,172	21,882	$	0.83		$	14,935	21,376	$	0.70

Antidilutive Securities
Shares issuable pursuant to stock options not included since they were antidilutive			392						333						—						327

	2005						2004(1)						2005						2004(1)
Six Months Ended June 30,	Income from Continuing Operations		Shares	Per Share Amount			Income from Continuing Operations		Shares	Per Share Amount
Nine Months Ended September 30,													Income from Continuing Operations		Shares	Per Share Amount			Income from Continuing Operations		Shares	Per Share Amount
Basic EPS
Income from continuing operations available to common stockholders	$	22,827	19,085	$	1.20		$	18,563	18,686	$	0.99		$	40,552	19,131	$	2.12		$	33,046	18,730	$	1.76
Effect of Dilutive Securities
2 7/8% convertible senior subordinated notes	927		2,255	(0.08		)	293		706	(0.02		)	1,374		2,255	(0.15		)	745		1,226	(0.07		)
Stock options and restricted stock	—		370	(0.03		)	—		436	(0.02		)
Stock options and unvested restricted stock													—		379	(0.04		)	—		397	(0.03		)
Diluted EPS
Income from continuing operations available to common stockholders	$	23,754	21,710	$	1.09		$	18,856	19,828	$	0.95		$	41,926	21,765	$	1.93		$	33,791	20,353	$	1.66

Antidilutive Securities
Shares issuable pursuant to stock options not included since they were antidilutive			392						333						334						327

(1) The 2004 amounts have been restated for the effects of applying EITF 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings Per Share.”

Note 4. Comprehensive Income

Comprehensive income includes the change in hedging instruments that are reflected in ~~shareholders’~~stockholders’ equity instead of net ~~income and unrealized gains and losses on investments.~~income. The following table sets forth the calculation of comprehensive income for the periods indicated (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,				Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2004		2005		2004		2005		2004			2005		2004
Net income	$	12,675		$	10,840	$	22,665	$	18,319	$	17,632	$	14,470		$	40,297	$	32,789
Cash flow hedges:
Net derivative gains (losses), net of tax effect of $869, $(2,277), $(201) and $(1,087), respectively	(1,363		)	3,560		334		1,651
Reversal of net derivative losses previously recorded due to their recognition in our statements of operations as incremental interest expense, net of tax effect of $(148), $(474), $(367) and $(869), respectively	220			741		567		1,359
Net derivative gains (losses), net of tax effect of $(843), $1,466, $(1,044) and $379, respectively										1,194		(2,292		)	1,527		(641		)
Reversal of net derivative losses previously recorded due to their recognition in our statements of operations as incremental interest expense, net of tax effect of $(44), $(411), $(411) and $(1,280), respectively										48		642			616		2,001
Total comprehensive income	$	11,532		$	15,141	$	23,566	$	21,329	$	18,874	$	12,820		$	42,440	$	34,149

Note 5. Acquisitions

The following acquisitions were made in the first ~~six~~nine months of 2005.

• In January 2005, we acquired a Chrysler and Jeep franchise in Concord, California. The franchises were added to our Dodge store in that market. The store is now named Lithia Chrysler Jeep Dodge of Concord.

• In January 2005, we acquired a Chrysler franchise in Eugene, Oregon. The franchise was added to our Dodge store in that market. The stores name is now Lithia Chrysler Dodge of Eugene.

• In February 2005, we acquired a Chrysler, Jeep, Dodge, Dodge Truck store in Omaha, Nebraska. The store has anticipated annualized revenues of $110 million. The store was renamed Lithia Chrysler Jeep Dodge of Omaha.

• In April 2005, we acquired a Chrysler, Dodge, Dodge Truck store in Eureka, California. The store has anticipated annualized revenues of $28 million. The store was renamed Lithia Chrysler Dodge of Eureka.

• In May 2005, we acquired a Chrysler, Jeep, Dodge, Dodge Truck store in Butte, Montana. The store has anticipated annualized revenues of $26 million. The store was renamed Lithia Chrysler Dodge Jeep of Butte.

•In August 2005, we acquired a Chrysler, Dodge, Dodge Truck store in Wenatchee, Washington. The store had annualized revenues of approximately $8 million. The store was renamed Lithia Chrysler Dodge of Wenatchee.

The above acquisitions were accounted for under the purchase method of accounting. Pro forma results of operations assuming all of the 2005 and the previously disclosed 2004 acquisitions occurred as of January 1, 2004 are as follows (in thousands, except per share amounts):

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004		2005		2004		2005		2004
Total revenues	$	765,788	$	759,242	$	1,451,835	$	1,494,960	$	870,328	$	826,701	$	2,322,652	$	2,324,056
Net income	12,709		12,017		22,732		20,210		17,634		15,852		40,354		36,058
Basic earnings per share	0.66		0.64		1.19		1.08		0.92		0.84		2.11		1.93
Diluted earnings per share	0.61		0.60		1.09		1.03		0.83		0.76		1.92		1.81

There are no future contingent payouts related to any of the ~~above~~2004 or 2005 acquisitions and no portion of the purchase price was paid with our equity securities. During the first ~~six~~nine months of 2005 we acquired the ~~fourteen~~four stores and seventeen franchises ~~and three stores~~ discussed above for ~~$26.0~~$28.0 million, which included ~~$10.0~~$10.9 million of goodwill and ~~$3.7~~$4.1 million of other intangible assets. Within one year from the purchase date, we may update the value allocated to purchased assets and the resulting goodwill balances based on pending information received regarding the valuation of such assets. All of the goodwill from the above acquisitions is expected to be deductible for tax purposes.

Note 6. Dividend Payments

Cash dividends at the rate of $0.08 per common share, which totaled approximately $1.5 million, were paid on March 14, 2005 related to the fourth quarter of 2004 and on May 20, 2005 related to the first quarter of 2005. In addition, in July 2005, our Board of Directors approved a 50% increase in the dividend on our Class A and Class B common stock to $0.12 per share. The dividend, which totaled approximately $2.3 million, was paid on August 19, 2005.

Note 7. Stock-Based Compensation

We account for stock options using the intrinsic value method as prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Pursuant to Statement of Financial Accounting Standards (SFAS) No. 148 “Accounting for Stock-Based Compensation - Transition and Disclosure,” which we adopted in December 2002, we have computed, for pro forma disclosure purposes, the impact on net income and net income per share as if we had accounted for

our stock-based compensation plans in accordance with the fair value method prescribed by SFAS No. 123 “Accounting for Stock-Based Compensation” as follows (in thousands):

Three Months Ended June 30,	2005			2004
Three Months Ended September 30,							2005			2004
Net income, as reported	$	12,675		$	10,840		$	17,632		$	14,470
Add – Stock-based employee compensation expense included in reported net income, net of related tax effects	25			25			64			25
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(683		)	(900		)	(629		)	(949		)
Net income, pro forma	$	12,017		$	9,965		$	17,067		$	13,546
Basic net income per share:
As reported	$	0.66		$	0.58		$	0.92		$	0.77
Pro forma	$	0.63		$	0.53		$	0.89		$	0.72
Diluted net income per share:
As reported	$	0.60		$	0.54		$	0.83		$	0.70
Pro forma	$	0.57		$	0.50		$	0.80		$	0.66

Six Months Ended June 30,	2005			2004
Nine Months Ended September 30,							2005			2004
Net income, as reported	$	22,665		$	18,319		$	40,297		$	32,789
Add – Stock-based employee compensation expense included in reported net income, net of related tax effects	49			50
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(1,383		)	(1,589		)
Add — Stock-based employee compensation expense included in reported net income, net of related tax effects							233			117
Deduct — total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects							(2,132		)	(2,580		)
Net income, pro forma	$	21,331		$	16,780		$	38,398		$	30,326
Basic net income per share:
As reported	$	1.19		$	0.98		$	2.11		$	1.75
Pro forma	$	1.12		$	0.90		$	2.01		$	1.62
Diluted net income per share:
As reported	$	1.09		$	0.94		$	1.91		$	1.65
Pro forma	$	1.02		$	0.87		$	1.83		$	1.54

To determine the fair value of stock-based awards granted, we used the Black-Scholes option pricing model and the following weighted average assumptions:

Three and Six Months Ended June 30,	2005		2004
Three and Nine Months Ended September 30,					2005		2004
Employee Stock Purchase Plan
Risk-free interest rates	2.32	%	0.93% - 0.95	%	2.32	%	0.93 - 1.22	%
Dividend yield	1.23	%	0.99% - 1.12	%	1.23	%	0.99 - 1.19	%
Expected lives	3 months		3 months		3 months		3 months
Volatility	28.18	%	33.85% - 47.31	%	28.18	%	28.11 - 47.31	%

Option Plans
Risk-free interest rates	3.58% - 3.71	%	2.80	%	3.58 - 3.71	%	2.80	%
Dividend yield	1.16% - 1.20	%	1.04	%	1.16 - 1.20	%	1.04	%
Expected lives	5.4 years		5.4 years		5.4 years		5.4 years
Volatility	41.92% - 42.04	%	43.32	%	41.92 - 42.04	%	43.32	%

During the second quarter of 2005, we modified our employee stock purchase plan to eliminate the look-back feature and, accordingly, the fair value of such grants is equal to the 15% purchase discount on the date of grant.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment,” which requires companies to recognize in their income statement the grant-date fair value of stock options and other equity-based compensation issued to employees. Originally, the FASB had determined that the new rules would be effective for the first interim or annual period beginning after June 15, 2005. However, in April 2005, the Securities and Exchange Commission amended SFAS 123R

to be effective for the first annual period beginning after June 15, 2005. Accordingly, we will adopt SFAS No. 123R in our first quarter of 2006. We do not expect the results of SFAS No. 123R to be significantly different than those of applying SFAS No. 123. SFAS No. 123R will not have any effect on our cash flows.

Note 8. Unearned Compensation

Unearned compensation includes the value of restricted stock issued to employees for which vesting provisions have not yet been met. The unearned compensation will be recognized over the vesting periods of up to five years.

Note 9. Discontinued Operations

During the first ~~six~~nine months of 2005, we classified one dealership as a discontinued operation. We had additional discontinued operations during 2004. As of ~~June~~September 30, 2005, the amount of goodwill and other intangible assets disposed of related to the 2005 discontinued operation was $4.4 million. Certain other financial information related to discontinued operations was as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004			2005			2004			2005			2004
Revenue	$	1,441		$	17,371		$	6,019		$	35,562		$	10		$	14,221		$	6,029		$	49,783
Pre-tax income (loss)	(153		)	(17		)	(303		)	(388		)	(149		)	(368		)	(452		)	(756		)
Gain (loss) on disposal of discontinued operations	—			(4		)	36			(12		)	(9		)	347			27			335

We continually monitor the performance of each of our stores and make determinations to sell based primarily on return on capital criteria.

Interest expense is allocated to stores classified as discontinued operations for actual flooring interest expense directly related to the new vehicles in the store. Interest expense related to the used vehicle line of credit is allocated based on total used vehicle inventory of the store, and interest expense related to the equipment line of credit is allocated based on the amount of fixed assets.

Note 10. Reclassifications

During the first quarter of 2005, we reclassified bank fees and bank card charges, net of cash discounts earned, from other income (expense) to selling, general and administrative expense. The effect on the three and ~~six~~nine months ended ~~June~~September 30, 2004 was to decrease other expense by ~~$637,000~~$0.7 million and ~~$1.2~~$1.9 million, respectively, and increase selling, general and administrative by like amounts.

During the third quarter of 2005, we separated our flooring notes payable into two classifications on our balance sheet; flooring notes payable and flooring notes payable: non-trade in order to distinguish between affiliated and unaffiliated manufacturer financing of new vehicles. Unaffiliated manufacturer financing is considered flooring notes payable: non-trade. In connection with this separation, we also reclassified our statement of cash flows to report flooring notes payable: non-trade as a financing activity in accordance SFAS No. 95 “Statement of Cash Flows.” Flooring notes payable to affiliated manufacturers continues to be reported as an operating cash flow.

Certain other reclassifications were also made to conform prior period presentation with current period presentation.

Note 11. New Accounting Pronouncement

SFAS No. 154

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections: a replacement of APB Opinion No. 20 and FASB Statement No. 3,” which requires companies to apply most voluntary accounting changes retrospectively to prior financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Any future voluntary accounting changes made by us will be accounted for under SFAS No. 154 and will be applied retrospectively.

Note ~~11.~~12. Subsequent ~~Event~~Events

Dividend

In ~~July~~October 2005, our Board of Directors approved a ~~50% increase in the~~ dividend on our Class A and Class B common stock toof $0.12 per share. The dividend, which will total approximately $2.3 million, will be paid on ~~August 19,~~November 18, 2005 to shareholders of record on ~~August 5,~~November 4, 2005.

Acquisitions

In October 2005, we acquired a Honda store and Chrysler and Jeep franchises that were added to our existing Dodge store in Midland, Texas. The combined stores and franchises have anticipated annualized revenues of $24 million. The Honda store was renamed Lithia Honda of Midland.

In November 2005, we acquired a Toyota and a Honda store in Abilene, Texas. The stores have anticipated annualized revenues of $60 million. The stores were renamed Lithia Toyota of Abilene and Honda of Abilene.

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

~~Forward Looking~~Forward-Looking Statements ~~and Risk Factors~~

Some of the statements in this Form 10-Q constitute forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” and “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements.

Some of the important factors that could cause actual results to differ from our expectations are discussed in Exhibit 99.1 to ~~this~~our Quarterly Report on Form ~~10-Q.~~10-Q for the quarter ended June 30, 2005, as filed with the Securities and Exchange Commission on August 9, 2005. These factors have not significantly changed since the filing of our Form 10-Q for the quarter ended June 30, 2005.

Although we believe that the assumptions underlying the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements.

Overview

We are a leading operator of automotive franchises and retailer of new and used vehicles and services. As of ~~August 5,~~November 7, 2005, we offered 25 brands of new vehicles through ~~176~~182 franchises in 8891 stores in the Western United States and over the Internet. As of ~~August 5,~~November 7, 2005, we operated 16 stores in Oregon, 12 in California, 1112 in Washington, 911 in Texas, 7 in Idaho, 7 in Colorado, 7 in Alaska, 7 in Montana, 6 in Nevada, 3 in Nebraska, 2 in South Dakota and 1 in New Mexico. We sell new and used cars and light trucks; sell replacement parts; provide vehicle maintenance, warranty, paint and repair services; and arrange related financing, service contracts, protection products and credit insurance for our automotive customers.

Our ~~auto-retail~~acquisition model is focused on acquiring average performing new vehicle franchised stores and then integrating and improving them. Our goal is to maximize the operations of all four departments of every store we acquire. We have had success with this strategy since our initial public offering in late 1996. While our strategy has not changed over the last eight years, our ability to integrate and improve the stores that we acquire has increased dramatically. We have also developed a better process for identifying acquisition targets that fit our operating model. Our cash position, substantial lines of credit,

plus an experienced and well-trained staff are all available to facilitate our continued growth as the opportunities develop.

In keeping with this model, we acquired a total of ~~three~~seven stores and ~~fourteen~~twenty-two additional franchises from January 1, 2005 through ~~August 5,~~November 7, 2005 with total estimated annual revenues of ~~approximately $200~~nearly $300 million.

Historically, new vehicle sales have accounted for over half of our total revenues but less than one-third of total gross profit. We use a volume-based strategy for new vehicle sales called “Promo Pricing,” that ~~was initiated in 2002. This strategy~~ complements the goal of most auto manufacturers, which have continued to offer a high level of cash or other incentives to automotive customers.

For the remainder of 2005 and into 2006, we expect that manufacturers will continue to offer incentives on new vehicle sales through a combination of ~~employee pricing,~~repricing strategies, rebates, early lease cancellation programs and low interest rate loans to ~~consumers or repricing strategies.~~consumers.

Since the beginning of 2002, the used vehicle market has been negatively impacted by strong competition from the new vehicle market, with heavy manufacturer incentives in the form of cash rebates and low interest financing. In the first quarter of 2005, the used vehicle market showed positive signs as a result of constrained industry supply, which led to improvements in retail pricing and margins. In the second ~~quarter~~and third quarters of 2005, we experienced an increase in trade-ins of quality used vehicles in connection with the ~~General Motors~~domestic manufacturers “employee pricing” ~~program.~~programs. We have implemented new procedures in the used vehicle business, which have also demonstrated positive results for our used vehicle business:

• We have begun conducting our own local used vehicle auctions in select markets and managing the disposal of used vehicles at larger auctions. The process is centralized and controlled at the management level.

• We utilize a “Used Vehicle Promo Pricing” strategy, which markets vehicles with a $99 down payment and then groups vehicles by payment level. Vehicles are marked with clear and understandable pricing, which reduces haggling and speeds up the sale process. This strategy ~~resolves~~clearly addresses the three biggest issues of price, down payment and monthly payment for our customers and our sales ~~personnel in a simple way.~~personnel.

In addition, as a complement to our ongoing used vehicle operation at each store, we use specialists in our support services group to increase the acquisition of used vehicles. We believe that this will help bolster sales volumes in the 3 to 7 year old vehicle range.

Results of Continuing Operations

Certain revenue, gross margin and gross profit information by product line was as follows:

Three Months Ended June 30, 2005	Percent of Total Revenues		Gross Margin		Percent of Total Gross Profit
Three Months Ended September 30, 2005							Percent of Total Revenues		Gross Margin		Percent of Total Gross Profit
New vehicle	58.3	%	7.9	%	27.1	%	59.5	%	7.7	%	27.9	%
Used vehicle(1)	26.7		13.7		21.4		26.2		13.3		21.2
Finance and insurance(2)	3.7		99.8		21.8		3.8		99.9		23.1
Service, body and parts	10.1		49.2		29.4		9.5		47.9		27.7
Fleet and other.	1.2		4.4		0.3
Fleet and other							1.0		2.3		0.1

Three Months Ended June 30, 2004	Percent of Total Revenues		Gross Margin		Percent of Total Gross Profit
Three Months Ended September 30, 2004							Percent of Total Revenues		Gross Margin		Percent of Total Gross Profit
New vehicle	58.7	%	8.1	%	27.9	%	59.8	%	7.9	%	28.7	%
Used vehicle(1)	27.0		12.9		20.5		26.1		12.4		19.7
Finance and insurance(2)	3.6		99.6		21.2		3.7		99.9		22.3
Service, body and parts	10.5		48.7		30.1		9.9		48.6		29.1
Fleet and other.	0.2		22.7		0.3
Fleet and other							0.5		5.4		0.2

Six Months Ended June 30, 2005	Percent of Total Revenues		Gross Margin		Percent of Total Gross Profit
Nine Months Ended September 30, 2005							Percent of Total Revenues		Gross Margin		Percent of Total Gross Profit
New vehicle	56.5	%	8.0	%	26.0	%	57.7	%	7.9	%	26.7	%
Used vehicle(1)	28.2		13.5		22.0		27.5		13.5		21.8
Finance and insurance(2)	3.8		99.8		21.6		3.7		99.9		22.0
Service, body and parts	10.7		48.9		30.1		10.2		48.5		29.3
Fleet and other.	0.8		5.5		0.3
Fleet and other							0.9		3.3		0.2

Six Months Ended June 30, 2004	Percent of Total Revenues		Gross Margin		Percent of Total Gross Profit
Nine Months Ended September 30, 2004							Percent of Total Revenues		Gross Margin		Percent of Total Gross Profit
New vehicle	57.2	%	7.8	%	26.5	%	58.1	%	7.8	%	27.3	%
Used vehicle(1)	28.3		12.6		21.2		27.6		12.6		20.8
Finance and insurance(2)	3.6		99.5		21.5
Finance and insurance(2)							3.6		99.7		21.7
Service, body and parts	10.7		48.1		30.5		10.4		48.3		30.0
Fleet and other.	0.2		21.3		0.3
Fleet and other							0.3		10.4		0.2

(1) Includes retail and wholesale used vehicles.

(2) Reported net of anticipated cancellations.

The following table sets forth selected condensed financial data, expressed as a percentage of total revenues for the periods indicated.

Lithia Motors, Inc. (1)	Three Months Ended June 30,				Six Months Ended June 30,
Lithia Motors, Inc.(1)									Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004		2005		2004		2005		2004
Revenues:
New vehicle	58.3	%	58.7	%	56.5	%	57.2	%	59.5	%	59.8	%	57.7	%	58.1	%
Used vehicle	26.7		27.0		28.2		28.3		26.2		26.1		27.5		27.6
Finance and insurance	3.7		3.6		3.8		3.6		3.8		3.7		3.7		3.6
Service, body and parts	10.1		10.5		10.7		10.7		9.5		9.9		10.2		10.4
Fleet and other	1.2		0.2		0.8		0.2		1.0		0.5		0.9		0.3
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Gross profit	17.0		17.0		17.3		16.8		16.4		16.5		17.0		16.7
Selling, general and administrative expenses	12.6		13.1		13.1		13.2		11.6		12.0		12.5		12.8
Depreciation and amortization	0.4		0.5		0.5		0.5		0.4		0.4		0.4		0.4
Income from operations	3.9		3.5		3.8		3.2		4.4		4.0		4.0		3.5
Floorplan interest expense	0.8		0.6		0.8		0.6		0.6		0.6		0.7		0.6
Other interest expense	0.4		0.3		0.4		0.3		0.4		0.3		0.4		0.3
Other income, net	0.0		0.0		0.0		0.0
Other expense, net									—		—		—		—
Income from continuing operations before taxes	2.8		2.6		2.6		2.3		3.5		3.2		2.9		2.6
Income tax expense	1.1		1.0		1.0		0.9		1.4		1.2		1.2		1.0
Income from continuing operations	1.7	%	1.6	%	1.6	%	1.4	%	2.0	%	1.9	%	1.8	%	1.6	%

(1) The percentages may not add due to rounding.

1112

The following tables set forth the changes in our operating results from continuing operations in the three and ~~six month~~nine-month periods ended ~~June~~September 30, 2005 compared to the three and ~~six month~~nine-month periods ended ~~June~~September 30, ~~2004:~~2004 (dollars in thousands, except per vehicle and per unit amounts):

	Three Months Ended June 30,						Increase		% Increase		Three Months Ended September 30,						Increase			% Increase
(Dollars in thousands)	2005			2004			(Decrease)		(Decrease)
											2005			2004			(Decrease)			(Decrease)
Revenues:
New vehicle sales	$	444,777		$	397,600		$	47,177	11.9	%
Used vehicle sales	203,257			182,251			21,006		11.5
New vehicle											$	517,536		$	448,805		$	68,731		15.3	%
Used vehicle											227,959			196,784			31,175			15.8
Finance and insurance	28,195			24,560			3,635		14.8		32,979			27,660			5,319			19.2
Service, body and parts	77,207			71,228			5,979		8.4		82,456			74,147			8,309			11.2
Fleet and other	9,001			1,365			7,636		559.4		8,380			3,631			4,749			130.8
Total revenues	762,437			677,004			85,433		12.6		869,310			751,027			118,283			15.7
Cost of sales	633,130			561,794			71,336		12.7		726,555			627,242			99,313			15.8
Gross profit	129,307			115,210			14,097		12.2		142,755			123,785			18,970			15.3
Selling, general and administrative	95,778			88,409			7,369		8.3		100,594			90,260			10,334			11.4
Depreciation and amortization	3,461			3,050			411		13.5		3,678			3,208			470			14.7
Income from operations	30,068			23,751			6,317		26.6		38,483			30,317			8,166			26.9
Floorplan interest expense	(6,144		)	(4,086		)	2,058		50.4		(5,628		)	(4,472		)	1,156			25.8
Other interest expense	(3,041		)	(2,155		)	886		41.1		(3,043		)	(2,305		)	738			32.0
Other income, net	282			281			1		0.4
Other, net											189			203			(14		)	(6.9	)
Income from continuing operations before taxes	21,165			17,791			3,374		19.0		30,001			23,743			6,258			26.4
Income tax expense	8,398			6,938			1,460		21.0		12,276			9,260			3,016			32.6
Income from continuing operations	$	12,767		$	10,853		$	1,914	17.6	%	$	17,725		$	14,483		$	3,242		22.4	%

New units sold											18,926			15,928			2,998			18.8	%
Average selling price per new vehicle											$	27,345		$	28,177		$	(832	)	(3.0	)

Used units sold											19,285			16,836			2,449			14.5
Average selling price per used vehicle											$	11,821		$	11,688		$	132		1.1

Finance and insurance income per retail unit											$	1,062		$	1,037		$	25		2.4	%

Three Months Ended
June 30,

Increase

%
Increase

2005

2004

(Decrease)

(Decrease)

New units sold

15,817

14,301

1,516

10.6
%
Average selling price per new vehicle

$
28,120

$
27,802

$
318

1.1

Used units sold

16,510

15,796

714

4.5

Average selling price per used vehicle

$
12,311

$
11,538

$
773

6.7

Finance and insurance sales per retail unit

$
1,063

$
1,004

$
59

5.9

	Six Months Ended June 30,						Increase		% Increase		Nine Months Ended September 30,						Increase			% Increase
(Dollars in thousands)	2005			2004			(Decrease)		(Decrease)
											2005			2004			(Decrease)			(Decrease)
Revenues:
New vehicle	$	810,424		$	749,005		$	61,419	8.2	%	$	1,327,960		$	1,197,810		$	130,150		10.9	%
Used vehicle	403,791			370,107			33,684		9.1		631,728			566,869			64,859			11.4
Finance and insurance	53,828			47,787			6,041		12.6		85,868			74,963			10,905			14.5
Service, body and parts	153,234			139,999			13,235		9.5		235,690			214,146			21,544			10.1
Fleet and other	11,965			2,896			9,069		313.2		20,163			6,378			13,785			216.1
Total revenues	1,433,242			1,309,794			123,448		9.4		2,301,409			2,060,166			241,243			11.7
Cost of sales	1,184,663			1,089,096			95,567		8.8		1,910,788			1,715,938			194,850			11.4
Gross profit	248,579			220,698			27,881		12.6		390,621			344,228			46,393			13.5
Selling, general and administrative	187,459			173,262			14,197		8.2		287,279			263,239			24,040			9.1
Depreciation and amortization	6,902			5,950			952		16.0		10,580			9,158			1,422			15.5
Income from operations	54,218			41,486			12,732		30.7		92,762			71,831			20,931			29.1
Floorplan interest expense	(11,392		)	(7,668		)	3,724		48.6		(17,020		)	(12,140		)	4,880			40.2
Other interest expense	(5,850		)	(3,889		)	1,961		50.4		(8,893		)	(6,194		)	2,699			43.6
Other income, net	599			502			97		19.3
Other, net											727			677			50			7.4
Income from continuing operations before taxes	37,575			30,431			7,144		23.5		67,576			54,174			13,402			24.7
Income tax expense	14,748			11,868			2,880		24.3		27,024			21,128			5,896			27.9
Income from continuing operations	$	22,827		$	18,563		$	4,264	23.0	%	$	40,552		$	33,046		$	7,506		22.7	%

New units sold											47,808			42,985			4,823			11.2	%
Average selling price per new vehicle											$	27,777		$	27,866		$	(89	)	(0.3	)

Used units sold											52,451			49,297			3,154			6.4
Average selling price per used vehicle											$	12,044		$	11,499		$	545		4.7

Finance and insurance income per retail unit											$	1,052		$	1,006		$	46		4.6	%

1213

Six Months Ended
June 30,

Increase

%
Increase

2005

2004

(Decrease)

(Decrease)

New units sold

28,882

27,057

1,825

6.7
%
Average selling price per new vehicle

$
28,060

$
27,682

$
378

1.4

Used units sold

33,166

32,461

705

2.2

Average selling price per used vehicle

$
12,175

$
11,402

$
773

6.8

Finance and insurance sales per retail unit

$
1,065

$
998

$
67

6.7

Revenues

Total revenues increased ~~12.6%~~15.7% and ~~9.4%~~11.7%, respectively, in the three and ~~six month~~nine-month periods ended ~~June~~September 30, 2005 compared to the same periods of 2004, as a result of acquisitions and improvements in same-store sales, which were driven by increases in ~~the average new~~units sold. Same-store sales increased 7.9% and ~~used vehicle sales prices. A 3.4% increase in same store sales also contributed to the increase~~2.7%, respectively, in the three ~~month period~~and nine-month periods ended ~~June~~September 30, 2005 compared to the ~~three month period ended June 30, 2004, while the six month period increase was partially offset by a 0.3% decrease in same-store sales.~~same periods of 2004. The ~~increase~~increases in total same store sales ~~in the second quarter of 2005 was~~were driven by same-store sales increases across all business lines. The “employee pricing” programs offered by the domestic manufacturers during the second and third quarters of 2005 resulted in a decrease in average selling prices which led to increases in new units sold, the combination of which resulted in higher same-store new vehicle sales. The same programs also contributed to improvements in same-store used vehicle sales due to the large number of good quality used vehicle trade-ins associated with the new vehicle purchases. Same-store sales percentage increases ~~(decreases)~~ were as follows:

	Three months ended June 30, 2005 vs. three months ended June 30, 2004		Six months ended June 30, 2005 vs. six months ended June 30, 2004		Three months ended September 30, 2005 vs. three months ended September 30, 2004		Nine months ended September 30, 2005 vs. nine months ended September 30, 2004
New vehicle retail (excludes fleet)	3.8	%	(1.0	)%	7.8	%	2.3	%
Used vehicle, including wholesale	3.7		0.9		9.3		3.8
Finance and insurance	2.1		0.2		7.0		2.7
Service, body and parts	1.0		0.5		4.7		1.9
Total sales (excludes fleet)	3.4		(0.3	)	7.9		2.7

Same-store sales are calculated by dealership comparing only those dealerships with operations in both comparative periods.

Penetration rates for certain products were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004		2005		2004		2005		2004
Finance and insurance	77	%	76	%	78	%	76	%	73	%	79	%	76	%	77	%
Service contracts	42		43		43		43		42		43		43		43
Lifetime oil change and filter	39		38		39		37		39		34		39		36

The decrease in the finance and insurance penetration rate in the third quarter of 2005 compared to the third quarter of 2004 was due to less availability of manufacturer subsidized low-interest rate loans during the third quarter of 2005 when the manufacturers offered their employee pricing programs.

Gross Profit

Gross profit increased ~~$14.1~~$19.0 million and ~~$27.9~~$46.4 million, respectively, in the three and ~~six month~~nine-month periods ended ~~June~~September 30, 2005 compared to the same periods of 2004 due to increased total revenues as well as an increase in our overall gross margin for the ~~six month~~nine-month period. Our gross margins by business lines are detailed in the tables below:

	Three Months Ended June 30,				Lithia		Three Months Ended September 30,				Lithia
	2005		2004		Margin Change*		2005		2004		Margin Change*
New vehicle	7.9	%	8.1	%	(20	)bp	7.7	%	7.9	%	(20	)bp
Retail used vehicle	15.7		14.7		100		15.7		14.2		150
Wholesale used vehicle	3.8		4.2		(40	)	1.6		3.2		(160	)
Finance and insurance	99.8		99.6		20		99.9		99.9		—
Service and parts	49.2		48.7		50		47.9		48.6		(70	)
Overall	17.0		17.0		—		16.4		16.5		(10	)

	Six Months Ended June 30,				Lithia		Nine Months Ended September 30,				Lithia
	2005		2004		Margin Change*		2005		2004		Margin Change*
New vehicle	8.0	%	7.8	%	20	bp	7.9	%	7.8	%	10	bp
Retail used vehicle	15.5		14.4		110		15.6		14.4		120
Wholesale used vehicle	4.1		3.6		50		3.2		3.4		(20	)
Finance and insurance	99.8		99.5		30		99.9		99.7		20
Service and parts	48.9		48.1		80		48.5		48.3		20
Overall	17.3		16.8		50		17.0		16.7		30

* “bp” stands for basis points (one hundred basis points equals one percent).

In the new vehicle business, margins improved for the ~~six-month~~nine-month period as a result of strategic initiatives ~~designed to increase~~in the first quarter of the year that increased gross profit per vehicle sold. These ~~increases~~initiatives were ~~partially~~ offset somewhat by ~~lower margins which resulted from a volume based strategy for all brands and GM’s~~manufacturers’ “employee pricing” ~~program,~~programs, which ~~took effect in June 2005~~created a higher volume, lower margin environment during the second and ~~are scheduled to continue through most~~third quarters of ~~the third quarter of~~ 2005.

Retail used vehicle margins improved as a result of a stronger pricing and retail environment for used ~~vehicles.~~ vehicles in combination with a large quantity of good quality used vehicle trade-ins in recent quarters.

Margins in our wholesale used vehicle business ~~improved~~declined in the ~~six month period due~~three and nine-month periods of 2005 compared to ~~our continued strategy~~the same periods of ~~holding~~2004, as a result of aggressive wholesaling in the third quarter of 2005 designed to clear inventories going into the seasonally slower winter months. Gross profits per unit in both periods remained positive. We continue to hold our own local used vehicle auctions and ~~managing~~manage the disposal of our units at larger ~~auctions.~~ auctions, which has contributed to the improvements in gross profit per vehicle.

The service and parts business has benefited from our focus on service advisor training, which has led to gains in the sale of higher margin service ~~items.~~items in the first nine months of 2005. In addition, we have also instituted a number of pricing and cost saving initiatives across the entire service and parts business. High penetration rates for our lifetime oil change and filter service have also contributed to our gross profit margin ~~increases.~~increases in the first nine months of 2005. In the third quarter of 2005, the service and parts business continued to grow steadily, however, a relative shift in mix to lower margin parts business from the higher margin service business contributed to the decrease in the gross margin compared to the third quarter of 2004.

The ~~improved~~increases in same store revenues combined with the gross margins achieved led to increases in total same-store gross profit of ~~1.9%~~6.1% and 3.5%, respectively, in the ~~six months~~three and nine-month periods ended ~~June 30, 2005 despite a 0.3% decrease in total same-store sales in the six month period ended June~~September 30, 2005 compared to the same period of 2004.

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A”) includes salaries and related personnel expenses, facility lease expense, advertising (net of manufacturer cooperative advertising credits), legal, accounting, professional services and general corporate expenses.

~~Selling, general and administrative expense~~SG&A increased ~~$7.4~~$10.3 million and ~~$14.2~~$24.0 million, respectively, in the three and ~~six month~~nine-month periods ended ~~June~~September 30, 2005 compared to same periods of 2004 and improved 50by 40 basis points and 1030 basis points, respectively, as a percentage of revenue. The increases in dollars spent were due to increased selling, or variable, expenses related to the increases in revenues and the number of locations. More importantly, however, SG&A as a percentage of gross profit is an industry standard and better gauge for measuring performance relative to SG&A expense. SG&A as a percentage of gross profit improved by ~~260~~240 basis points and ~~310~~300 basis points, respectively, in the three and ~~six month~~nine-month periods ended ~~June~~September 30, 2005 compared to the same periods of ~~2004.~~2004 as we continue to realize the positive results of multiple cost saving initiatives.

Depreciation and Amortization

Depreciation and amortization increased ~~$0.4~~$0.5 million and ~~$1.0~~$1.4 million, respectively, in the three and ~~six month~~nine-month periods ended ~~June~~September 30, 2005 compared to the same periods of 2004 due to the addition of property and equipment primarily related to our acquisitions, as well as leasehold improvements to existing facilities.

Income from Operations

Operating margins improved by 40 basis points and 6050 basis points, respectively, in the three and ~~six month~~nine-month periods ended ~~June~~September 30, 2005 to ~~3.9%~~4.4% and ~~3.8%~~4.0%, respectively, from ~~3.5%~~4.0% and ~~3.2%~~3.5%, respectively, in the comparable periods of 2004. The increases were due ~~the improved overall gross profit margins as discussed above, as well as~~primarily to lower operating expenses as a percentage of ~~revenue.~~revenue and of gross profit in both the three and nine-month periods, and the improved overall gross profit margins in the nine-month period as discussed above.

1415

Floorplan Interest Expense

Floorplan interest expense increased ~~$2.1~~$1.2 million and ~~$3.7~~$4.9 million, respectively, in the three and ~~six month~~nine-month periods ended ~~June~~September 30, 2005 compared to the same periods of 2004. ~~A $424,000 and $962,000 increase, respectively, was the result of increases~~Changes in ~~the~~ average outstanding balances resulted in a decrease of ~~our floorplan facilities, mainly due to acquisitions,~~$24,000 and ~~increases~~an increase of ~~$2.5 million~~$938,000, respectively, and ~~$4.1 million, respectively, resulted from~~ increases in the average interest rates on our floorplan ~~facilities.~~facilities resulted in increases of $2.1 million and $6.2 million, respectively. These increases were partially offset by decreases of ~~$847,000~~$1.0 million and ~~$1.3~~$2.3 million, respectively, related to our interest rate swaps.

Other Interest Expense

Other interest expense includes interest on our convertible notes, debt incurred related to acquisitions, real estate mortgages, our used vehicle line of credit and equipment related notes.

Other interest expense increased ~~$0.9~~$0.7 million and ~~$2.0~~$2.7 million, respectively, in the three and ~~six month~~nine-month periods ended ~~June~~September 30, 2005 compared to the same periods of 2004. Changes in the weighted average interest rate on our debt in the three and ~~six month~~nine-month periods ended ~~June~~September 30, 2005 compared to the same periods of 2004 increased other interest expense by approximately ~~$265,000~~$0.8 million and ~~$589,000,~~$1.4 million, respectively, and changes in the average outstanding balances resulted in ~~increases~~a decrease of $68,000 and an increase of approximately ~~$665,000 and~~ $1.4 million, respectively. Our average interest rate increased at only about half the pace of market interest rates due to our hedging strategies. Interest expense related to the $85.0 million of convertible notes that were issued in May 2004 totals approximately $764,000 per quarter, which consists of $611,000 of contractual interest and $153,000 of amortization of debt issuance costs.

Income Tax Expense

Our effective tax rate was ~~39.3%~~40.0% in the first ~~six~~nine months of 2005 compared to 39.0% in the first ~~six~~nine months of 2004. Our effective tax rate may be affected in the future by the mix of asset acquisitions compared to corporate acquisitions, as well as by the mix of states where our stores are located. The increase in our effective tax rate in the first nine months of 2005 compared to the first nine months of 2004 was due primarily to an increase in revenue in some of our higher tax rate states.

Income from Continuing Operations

Income from continuing operations as a percentage of revenue increased in the three and ~~six month~~nine-month periods ended ~~June~~September 30, 2005 compared to same periods of 2004 as a result of improvements in gross margins and operating expenses as discussed above.

Discontinued Operations

During the first ~~six~~nine months of 2005, we classified one dealership as a discontinued operation. We had additional discontinued operations during 2004. As of ~~June~~September 30, 2005, the amount of goodwill and other intangible assets disposed of related to the 2005 discontinued operation was $4.4 million. Certain financial information related to discontinued operations was as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004			2005			2004			2005			2004
Revenue	$	1,441		$	17,371		$	6,019		$	35,562		$	10		$	14,221		$	6,029		$	49,783
Pre-tax income (loss)	(153		)	(17		)	(303		)	(388		)	(149		)	(368		)	(452		)	(756		)
Gain (loss) on disposal of discontinued operations	—			(4		)	36			(12		)	(9		)	347			27			335

We continually monitor the performance of each of our stores and make determinations to sell based primarily on return on capital criteria.

1516

Seasonality and Quarterly Fluctuations

Historically, our sales have been lower in the first and fourth quarters of each year due to consumer purchasing patterns during the holiday season, inclement weather in certain of our markets and the reduced number of business days during the holiday season. As a result, financial performance is expected to be lower during the first and fourth quarters than during the other quarters of each fiscal year. We believe that interest rates, levels of consumer debt and consumer confidence, as well as general economic conditions, also contribute to fluctuations in sales and operating results. Acquisitions have also been a contributor to fluctuations in our operating results from quarter to quarter.

Liquidity and Capital Resources

Our principal needs for capital resources are to finance acquisitions and capital expenditures, as well as for working capital. We have relied primarily upon internally generated cash flows from operations, borrowings under our credit agreements and the proceeds from public equity and private debt offerings to finance operations and expansion. We believe that our available cash, cash equivalents, available lines of credit and cash flows from ~~operation~~operations will be sufficient to meet our anticipated operating expenses and capital requirements for at least ~~24 to~~the next 36 months from ~~June~~September 30, 2005.

Our inventories ~~increased~~decreased to ~~$659.1~~$516.1 million at ~~June~~September 30, 2005 from $536.7 million at December 31, 2004 due primarily to ~~acquisitions~~strong sales in the second and ~~our decision to purchase a greater stock~~third quarters of vehicles going into the seasonally strongest selling period of the year. This was a strategic decision designed to ensure a good allocation of popular models and good inventories at our stores going into the summer selling season2005, offset in ~~order to take advantage of what we believe will be a strong period supported~~part by ~~manufacturer incentives.~~acquisitions. As a result, our new and used flooring notes payable ~~increased~~decreased to ~~$575.0~~$426.1 million at ~~June~~September 30, 2005 from $450.9 million at December 31, 2004. New vehicles are financed at approximately 100% and used vehicles are financed at approximately 80% of cost. Our days supply of new vehicles decreased by approximately 1427 days at ~~June~~September 30, 2005 compared to December 31, 2004. Our new vehicle inventories are 4 days below our average September 30 balances and we believe that they are at good levels going into the seasonally slower fourth quarter. Our days supply of used vehicles increased by approximately 1110 days at ~~June~~September 30, 2005 compared to December 31, 2004. This increase was due ~~to a~~our low level of inventory at the beginning of 2005 and the large number of trade-ins received ~~as a result or our volume strategy and~~via the GMdomestic manufacturers’ “employee pricing” ~~program~~programs that occurred in the second ~~quarter~~and third quarters of 2005. WeUsed vehicle inventories at September 30, 2005 were 4 days above average levels for September 30 and we believe that ~~our new and used vehicle inventories~~they are at appropriate levels at this time.

As a result of the store and franchise acquisitions in the first ~~six~~nine months of 2005, our goodwill and other intangibles increased ~~$9.2~~$10.5 million to ~~$298.4~~$299.7 million at ~~June~~September 30, 2005, compared to $289.2 million at December 31, 2004. This increase was partially offset by a $4.4 million decrease in goodwill and other intangibles related to dealership disposals. Cash paid for acquisitions, net of cash received, in the first ~~six~~nine months of 2005 was ~~$26.0~~$28.0 million.

Our Board of Directors declared a dividend of $0.08 per share on our Class A and Class B common stock for the fourth quarter of 2004 and for the first quarter of 2005, which were paid in the first ~~six months~~two quarters of 2005 and totaled approximately $1.5 million each. For the second ~~quarter~~and third quarters of 2005, our Board of Directors ~~also~~ declared a ~~50% increase in the~~$0.12 per share dividend on our Class A and Class B common stock that totaled approximately $2.3 million each. The dividend related to ~~$0.12 per share, which will be~~the second quarter of 2005 was paid induring the third quarter of 2005 and ~~total approximately $2.3 million.~~the dividend for the third quarter of 2005 will be paid in November 2005. We anticipate recommending to the Board of Directors the approval of a cash dividend each quarter.

In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our Class A common stock. Through ~~June~~September 30, 2005, we have purchased a total of ~~60,230~~60,231 shares under this program and may continue to do so from time to time in the future as conditions warrant. However, the recent change in the tax law tends to equalize the benefits of dividends and share repurchases as a means to return capital or earnings to shareholders. As a result, we believe it is now advantageous to shareholders to have a dividend in place. With the dividend, we are able to offer an

immediate and tangible return to our shareholders without reducing our already limited market float, which occurs when we repurchase shares.

We have a working capital and used vehicle flooring credit facility with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation, ~~as amended in June 2004,~~ totaling up to $150 million, which expires May 1, 2007 with an option for the lenders to extend to May 1, ~~2008, with interest due monthly.~~2008. This credit facility is cross-collateralized and secured by cash and cash equivalents, new and used vehicles on a subordinated basis to the extent not specifically financed by other lenders, parts inventories, accounts receivable, intangible assets and equipment. We pledged to DaimlerChrysler Services and Toyota Motor Credit the stock of all of our dealership subsidiaries except entities operating BMW, Honda, Nissan or Toyota stores.

The financial covenants in our agreement with DaimlerChrysler Services and Toyota Motor Credit require us to maintain compliance with, among other things, (i) a specified current ratio; (ii) a specified fixed charge coverage ratio; (iii) a specified interest coverage ratio; (iv) a specified adjusted leverage ratio; and (v) certain working capital levels. At ~~June~~September 30, 2005, we were in compliance with all of the covenants of this agreement.

Ford Motor Credit, General Motors Acceptance Corporation and Volkswagen Credit have agreed to floor all of our new vehicles for their respective brands with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation serving as the primary lenders for substantially all other brands. These new vehicle lines are secured by new vehicle inventory of the relevant brands.

~~We also had~~ Vehicles financed by lenders not directly associated with the manufacturer are included as a ~~revolving credit real estate line~~financing activity in our statements of cash flows, while vehicles financed by lenders directly associated with ~~Toyota Motor Credit totaling $40 million, which expired in May 2005.~~the manufacturer are included as an operating activity.

We have a credit facility with U.S. Bank N.A., which provides for a $50.0 million revolving line of credit for leased vehicles and equipment purchases and expires May 1, 2007. The financial covenants in our agreement with U.S. Bank N.A. require us to maintain compliance with, among other things, (i) a specified current ratio; (ii) a specified fixed charge coverage ratio; (iii) a minimum total net worth; and (iv) a minimum tangible net worth. At ~~June~~September 30, 2005, we were in compliance with all of the covenants of this agreement.

Interest rates on all of the above facilities ranged from ~~4.95%~~5.36% to ~~6.09%~~6.61% at ~~June~~September 30, 2005. Amounts outstanding on the lines at ~~June~~September 30, 2005, together with amounts remaining available under such lines were as follows (in thousands):

	Outstanding at June 30, 2005		Remaining Availability as of June 30, 2005			Outstanding at September 30, 2005		Remaining Availability as of September 30, 2005
New and program vehicle lines	$	554,994	$		*	$	415,134	$		*
Working capital and used vehicle line	20,000		130,000			11,000		139,000
Equipment/leased vehicle line	50,000		—			50,000		—
	$	624,994	$	130,000		$	476,134	$	139,000

* There are no formal limits on the new and program vehicle lines with certain lenders.

We also have outstanding $85.0 million of 2.875% senior subordinated convertible notes due 2014. We will also pay contingent interest on the notes during any six-month interest period beginning May 1, 2009, in which the trading price of the notes for a specified period of time equals or exceeds 120% of the principal amount of the notes. The notes are convertible into shares of our Class A common stock at a price of $37.69 per share upon the satisfaction of certain conditions and upon the occurrence of certain events as follows:

• if, prior to May 1, 2009, and during any calendar quarter, the closing sale price of our common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter;

• if, after May 1, 2009, the closing sale price of our common stock exceeds 120% of the conversion price;

• if, during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each day of such period was less than

98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the notes;

• if the notes have been called for redemption; or

• upon certain specified corporate events.

A declaration and payment of a dividend in excess of $0.08 per share per quarter will result in an adjustment in the conversion rate for the notes if such adjustment exceeds 1%. of the current conversion rate. We declared a dividend of $0.12 per share in July 2005 and again in October 2005. The affect of such ~~dividend~~dividends does not yet reach the 1% threshold amount and no adjustment in the conversion rate is currently required.

The notes are redeemable at our option beginning May 6, 2009 at the redemption price of 100% of the principal amount plus any accrued interest. The holders of the notes can require us to repurchase all or some of the notes on May 1, 2009 and upon certain events constituting a fundamental change or a termination of trading. A fundamental change is any transaction or event in which all or substantially all of our common stock is exchanged for, converted into, acquired for, or constitutes solely the right to receive, consideration that is not all, or substantially all, common stock that is listed on, or immediately after the transaction or event, will be listed on, a United States national securities exchange. A termination of trading will have occurred if our common stock is not listed for trading on a national securities exchange or the NASDAQ stock market.

Our earnings to fixed charge coverage ratio, as defined in the senior subordinated convertible notes, was ~~2.75~~3.12 for the ~~six~~nine months ended ~~June~~September 30, 2005.

We had capital commitments of ~~$7.5~~$12.1 million at ~~June~~September 30, 2005 for the construction of ~~four~~three new facilities, additions to ~~four~~three existing facilities and the remodel of ~~one facility.~~two facilities. The new facilities will be for our Toyota ~~dealership~~dealerships in Springfield, Oregon ~~our Chevrolet~~ and ~~Hyundai dealerships in~~ Odessa, Texas and ~~a body shop~~our Dodge dealership in ~~Odessa, Texas.~~Sioux Falls, South Dakota. We have already incurred ~~$8.9~~$3.9 million for these projects with an additional ~~$7.0~~$5.5 million expected to be incurred during the remainder of 2005 and the remaining ~~$0.5~~$6.6 million to be incurred in 2006. We expect to pay for the construction out of existing cash balances until completion of the projects, at which time we anticipate securing long-term financing and general borrowings from third party lenders for 70% to 90% of the amounts expended.

Critical Accounting Policies and Use of Estimates

We reaffirm our critical accounting policies and use of estimates as described in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 15, 2005.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks and risk management policies ~~or risk factors~~ since the filing of our 2004 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 15, 2005.

Item 4. Controls and Procedures

Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer, our Chief Financial Officer and our Chief Accounting Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that

evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer, our Chief Financial Officer and our Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.

PART II - - OTHER INFORMATION

Item 1. Legal Proceedings

We are party to numerous legal proceedings arising in the normal course of our business. While we cannot predict with certainty the outcomes of these matters, we do not anticipate that the resolution of these proceedings will have a material adverse effect on our business, results of operations, financial condition, or cash flows.

On ~~April 28, 2004,~~November 25, 2003, Aimee Phillips filed a lawsuit ~~was filed against us~~ in the ~~United States~~U.S. District Court for the District of ~~Oregon: Robert Allen, et al., vs.~~Oregon (Case No. 03-3109-HO) against Lithia Motors, Inc.~~, et al., Civil Case No. 04-03032-CO. The complaint seeks money damages from us for alleged~~ and two of its wholly-owned subsidiaries alleging violations of state and federal ~~and state~~ RICO ~~violations, violation of Oregon’s Unlawful~~laws, the Oregon Unfair Trade Practices Act (“UTPA”) and common law fraud. Ms. Phillips seeks damages, attorney’s fees and injunctive relief. Ms. Phillips’ complaint stems from her purchase of a Toyota Tacoma pick-up truck on July 6, 2002. On May 14, 2004, we filed an answer to Ms. Phillips’ Complaint. This case was consolidated with the Allen case described below and has a similar current procedural status.

On April 28, 2004, Robert Allen and 29 other plaintiffs (“Allen Plaintiffs”) filed a lawsuit in the U.S. District Court for the District of Oregon (Case No. 04-3032-HO) against Lithia Motors, Inc. and three of its wholly-owned subsidiaries alleging violations of state and federal RICO laws, the Oregon UTPA and common law fraud. The Allen Plaintiffs seek damages, attorney’s fees and injunctive relief. The Allen Plaintiffs’ Complaint stems from vehicle purchases made at Lithia dealerships between July 2000 and April 2001. On August 27, 2004, we filed a Motion to Dismiss the Complaint. On May 26, 2005, the Court entered an Order granting Defendants’ Motion to Dismiss plaintiffs’ state and federal RICO claims with prejudice. The Court declined to exercise supplemental jurisdiction over plaintiffs’ UTPA and fraud claims. Plaintiffs filed a Motion to Reconsider the dismissal Order. On August 23, 2005, the Court granted Plaintiffs’ Motion for Reconsideration and permitted the filing of a Second Amended Complaint (“SAC”). On September 21, 2005, the Allen Plaintiffs, along with ~~respect to arranging~~Ms. Phillips, filed the financing of vehicles. Each of the 23 Allen plaintiffs seeks stated actual damages ranging from $733 to $20,859, damages for mental distress ranging from $10,000 to $250,000, and punitive damages of $1,500,000. With statutory penalties,SAC. In this complaint, the Allen plaintiffs seek actual damages that total less than ~~$250,000,~~$500,000, trebled, approximately $3.0 million in mental distress claims, ~~and~~trebled, punitive damages of ~~$34.5 million. Management believes that if~~$15.0 million, attorney’s fees and injunctive relief. The SAC added as defendants certain officers and employees of Lithia. In addition, the SAC added a claim for relief based on the Truth in Lending Act (“TILA”).

On September 23, 2005, Maria Anabel Aripe and 19 other plaintiffs (“Aripe Plaintiffs”) filed a lawsuit in the U.S. District Court for the District of Oregon (Case No. 05-3083-HO) against Lithia Motors, Inc., 12

of its wholly-owned subsidiaries and certain officers and employees of the Company, alleging violations of state and federal RICO laws, the Oregon UTPA, common law fraud and TILA. The Aripe Plaintiffs seek actual damages ~~were assessed, most would be covered by insurance.~~of less than $600,000, trebled, approximately $3.7 million in mental distress claims, trebled, punitive damages of $12.6 million, attorney’s fees and injunctive relief. The ~~case has been dismissed~~Aripe Plaintiffs’ Complaint stems from vehicle purchases made at Lithia dealerships between May 2001 and August 2005 and is substantially similar to the ~~Plaintiffs are appealing that dismissal.~~ allegations made in the Allen case.

We intend to vigorously defend ~~this matter~~both matters and management believes that the likelihood of a judgment for the amount of damages sought in either case is remote.

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

We repurchased the following shares of our Class A common stock during the ~~first~~third quarter of 2005:

Total number
of shares
purchased

Average
price paid
per
share(1)

Total number of
shares purchased
as part of publicly
announced plan

Maximum number
of shares that may
yet be purchased
under the plan

April 1 to April 30

12

$
40.00

60,228

939,772

May 1, to May 31

1

$
40.00

60,229

939,771

June 1 to June 30

1

$
40.00

60,230

939,770

Total

14

$
40.00

60,230

939,770

	Total number of shares purchased	Average price paid per share(1)		Total number of shares purchased as part of publicly announced plan	Maximum number of shares that may yet be purchased under the plan
July 1 to July 31	1	$	40	60,231	939,769
August 1 to August 31	—	—		—	—
September 1 to September 30	—	—		—	—
Total	1	$	40	60,231	939,769

(1) In December 1998, in connection with our listing on the NYSE, we issued a single share of our Class A common stock to approximately 1,750 employees in order to meet the NYSE requirements for the minimum number of shareholders of record. We no longer require these single share shareholders to meet this requirement and have initiated a buyback plan for those single shares at a set price of $40 per share in order to eliminate future mailing and other costs related to these shareholders. The offer to buy back these shares at $40 per share expired March 28, 2005, although requests for buyback from employees who filed a lost certificate claim prior to that date are still being settled.

The plan to repurchase up to a total of 1.0 million shares of our Class A common stock was approved by our Board of Directors in June 2000 and renewed in August 2005 and does not have an expiration date.

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

Our annual meeting of the shareholders was held on May 5, 2005. Class A shares carry 1 vote per share on all matters voted upon and Class B shares carry 10 votes per share on all matters voted upon. The following actions were approved:

1. ~~To elect the following persons to serve as directors of Lithia Motors, Inc. until the next annual meeting of shareholders and until their successors are duly elected and qualified:~~

Name

No. of Shares
Voting For

No. of Shares
Withheld Voting

Sidney B. DeBoer

Class A

8,092,073

87,140

Class B

3,762,231

—

M. L. Dick Heimann

Class A

8,104,012

75,201

Class B

3,762,231

—

Thomas Becker

Class A

8,068,529

110,684

Class B

3,762,231

—

Maryann N. Keller

Class A

8,102,269

76,944

Class B

3,762,231

—

Gerald F. Taylor

Class A

8,098,254

80,959

Class B

3,762,231

—

William J. Young

Class A

8,097,904

81,309

Class B

3,762,231

—

2. ~~To approve the amendment and restatement of the 2003 Stock Incentive Plan:~~

Number of
Shares Voting
For

Number of
Shares Voting
Against

Number of
Shares
Abstaining

Number of
Broker
Non-Votes

Class A

2,018,056

3,746,263

13,811

2,401,083

Class B

3,762,231

—

—

—

3. ~~To approve the 2005 Discretionary Executive Bonus Plan:~~

Number of
Shares Voting For

Number of
Shares Voting
Against

Number of
Shares
Abstaining

Number of
Broker
Non-Votes

Class A

5,622,172

141,230

14,727

2,401,084

Class B

3,762,231

—

—

—

Item 6. Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

3.1		Restated Articles of Incorporation (filed as Exhibit 3.1 to Form 10-K filed March 30, 2000 and incorporated herein by reference).
3.2		Bylaws (filed as Exhibit 3.2 to Form S-1, Registration Statement No. 333-14031, as declared effective by the Securities and Exchange Commission on December 18, 1996 and incorporated herein by reference).
10.1		Fifth Amendment to Amended and Restated Loan Agreement and Amendment to Promissory ~~Notes.~~Notes (filed as Exhibit 10.1 to Form 10-Q filed August 9, 2005 and incorporated herein by reference).
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
~~99.1~~	~~Risk Factors~~

2021

SIGNATURES

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.

Date: ~~August~~	November 9, 2005		LITHIA MOTORS, INC.


		By	/s/ JEFFREY B. DEBOER
		Jeffrey B. DeBoer
		Senior Vice President and
		Chief Financial Officer
		(Principal Financial Officer)


		By	/s/ LINDA A. GANIM
		Linda A. Ganim
		Vice President and Chief Accounting Officer
		(Principal Accounting Officer)

2122

Name		No. of Shares Voting For	No. of Shares Withheld Voting
Sidney B. DeBoer	Class A	8,092,073	87,140
	Class B	3,762,231	—
M. L. Dick Heimann	Class A	8,104,012	75,201
	Class B	3,762,231	—
Thomas Becker	Class A	8,068,529	110,684
	Class B	3,762,231	—
Maryann N. Keller	Class A	8,102,269	76,944
	Class B	3,762,231	—
Gerald F. Taylor	Class A	8,098,254	80,959
	Class B	3,762,231	—
William J. Young	Class A	8,097,904	81,309
	Class B	3,762,231	—

	Number of Shares Voting For	Number of Shares Voting Against	Number of Shares Abstaining	Number of Broker Non-Votes
Class A	2,018,056	3,746,263	13,811	2,401,083
Class B	3,762,231	—	—	—

	Number of Shares Voting For	Number of Shares Voting Against	Number of Shares Abstaining	Number of Broker Non-Votes
Class A	5,622,172	141,230	14,727	2,401,084
Class B	3,762,231	—	—	—