UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

            [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                 For the Quarterly Period Ended August 31, 2005

                                       OR

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

                         Commission File Number: 1-31420

                                  CARMAX, INC.
             (Exact name of registrant as specified in its charter)

            VIRGINIA                                 54-1821055
 (State or other jurisdiction of                   (I.R.S. Employer
  incorporation or organization)                  Identification No.)

  4900 COX ROAD, GLEN ALLEN, VIRGINIA                   23060
(Address of principal executive offices)              (Zip Code)

                                 (804) 747-0422
              (Registrant's telephone number, including area code)

                                       N/A
              (Former name, former address and former fiscal year,
                         if changed since last report)

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   X                             No
            -----                              -----

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

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

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

           Class                          Outstanding at September 30, 2005
- ------------------------------            ---------------------------------
Common Stock, par value $0.50                       104,683,265






 


                                                  CARMAX, INC. AND SUBSIDIARIES

                                                       TABLE OF CONTENTS
                                                       -----------------

                                                                                                                      Page
                                                                                                                       No.
PART I.           FINANCIAL INFORMATION
                  ---------------------

      Item 1.     Consolidated Financial Statements:

                     Consolidated Statements of Earnings -
                     Three Months and Six Months Ended August 31, 2005 and 2004                                        3

                     Consolidated Balance Sheets -
                     August 31, 2005, and February 28, 2005                                                            4

                     Consolidated Statements of Cash Flows -
                     Six Months Ended August 31, 2005 and 2004                                                         5

                     Notes to Consolidated Financial Statements                                                        6

      Item 2.     Management's Discussion and Analysis of Financial Condition and Results
                  of Operations                                                                                       15

      Item 3.      Quantitative and Qualitative Disclosures About Market Risk                                         25

      Item 4.     Controls and Procedures                                                                             26


PART II.          OTHER INFORMATION
                  -----------------

      Item 1.     Legal Proceedings                                                                                   27

      Item 4.     Submission of Matters to a Vote of Security Holders                                                 27

      Item 6.     Exhibits                                                                                            27


SIGNATURES                                                                                                            28
- ----------


EXHIBIT INDEX                                                                                                         29
- -------------


Page 2 of 29




                                                 PART I. FINANCIAL INFORMATION

                                                 ITEM 1. FINANCIAL STATEMENTS



                                                 CARMAX, INC. AND SUBSIDIARIES
                                                 -----------------------------
                                        Consolidated Statements of Earnings (Unaudited)
                                            (In thousands except per share data)


                                                       Three Months Ended                            Six Months Ended
                                                            August 31                                    August 31
                                            ----------------------------------------   -----------------------------------------
                                                2005     %(1)       2004    %(1)            2005     %(1)        2004    %(1)
                                               ------  -------    -------  -------        -------  -------     -------  -------

Sales and operating revenues:
    Used vehicle sales                   $  1,236,514    75.7  $   987,359    74.6      $2,440,319    76.0   $1,972,734    74.5
    New vehicle sales                         151,922     9.3      137,516    10.4         286,015     8.9      274,281    10.4
    Wholesale vehicle sales                   190,783    11.7      152,118    11.5         380,275    11.8      308,989    11.7
    Other sales and revenues                   54,634     3.3       46,514     3.5         105,604     3.3       92,493     3.5
                                         -----------------------------------------     ----------------------------------------
Net sales and operating revenues            1,633,853   100.0    1,323,507   100.0       3,212,213   100.0    2,648,497   100.0
Cost of sales                               1,425,269    87.2    1,160,307    87.7       2,805,870    87.4    2,318,067    87.5
                                         -----------------------------------------     ----------------------------------------
Gross profit                                  208,584    12.8      163,200    12.3         406,343    12.6      330,430    12.5
CarMax Auto Finance income
    (Notes 3 and 4)                            23,824     1.5       20,744     1.6          50,895     1.6       42,560     1.6
Selling, general, and administrative
    expenses                                  165,274    10.1      134,726    10.2         324,509    10.1      265,414    10.0
Loss on franchise dispositions, net                 -       -           11       -               -       -           11       -
Interest expense                                  375       -          324       -           1,569       -          817       -
Interest income                                   191       -           66       -             326       -          119       -
                                         -----------------------------------------     ----------------------------------------
Earnings before income taxes                   66,950     4.1       48,949     3.7         131,486     4.1      106,867     4.0
Provision for income taxes                     25,528     1.6       19,090     1.4          50,246     1.6       41,678     1.6
                                         -----------------------------------------     ----------------------------------------
Net earnings                             $     41,422     2.5  $    29,859     2.3     $    81,240     2.5  $    65,189     2.5
                                         =========================================     ========================================

Weighted average common
   shares (Note 7):
    Basic                                     104,528              104,002                 104,457              103,933
                                         ============          ===========             ===========          ===========
    Diluted                                   106,217              105,512                 106,201              105,643
                                         ============          ===========             ===========          ===========
Net earnings per share (Note 7):
    Basic                                $       0.40          $      0.29             $      0.78          $      0.63
                                         ============          ===========             ===========          ===========
    Diluted                              $       0.39          $      0.28             $      0.76          $      0.62
                                         ============          ===========             ===========          ===========


(1) Percents are calculated as a percentage of net sales and operating revenues
and may not equal totals due to rounding.

See accompanying notes to consolidated financial statements.


Page 3 of 29



                                                CARMAX, INC. AND SUBSIDIARIES
                                                -----------------------------
                                                 Consolidated Balance Sheets
                                               (In thousands except share data)


                                                                                August 31, 2005         February 28, 2005
                                                                                ---------------         -----------------
                                                                                 (Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents (Note 2)                                              $     53,800               $     29,099
Accounts receivable, net                                                              62,037                     76,167
Automobile loan receivables held for sale (Note 4)                                     2,360                     22,152
Retained interest in securitized receivables (Note 4)                                157,784                    147,963
Inventory                                                                            585,248                    576,567
Prepaid expenses and other current assets                                              8,418                     13,008
                                                                                 -----------               ------------

Total current assets                                                                 869,647                    864,956

Property and equipment, net                                                          434,835                    406,301
Other assets                                                                          26,787                     21,756
                                                                                 -----------               ------------

TOTAL ASSETS                                                                    $  1,331,269               $  1,293,013
                                                                                ============               ============

LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable                                                                $    148,341               $    170,646
Accrued expenses and other current liabilities                                        83,929                     65,664
Accrued income taxes                                                                  12,333                      1,179
Deferred income taxes                                                                 23,552                     26,315
Short-term debt                                                                            -                     65,197
Current portion of long-term debt (Note 9)                                           106,152                        330
                                                                                 -----------               ------------

Total current liabilities                                                            374,307                    329,331

Long-term debt, excluding current portion (Note 9)                                    35,279                    128,419
Deferred revenue and other liabilities                                                28,776                     29,260
Deferred income taxes                                                                  4,112                      5,027
                                                                                 -----------               ------------

TOTAL LIABILITIES                                                                    442,474                    492,037
                                                                                 -----------               ------------

Commitments and contingent liabilities (Note 6)

Shareholders' equity:
Common stock, $0.50 par value; 350,000,000 shares authorized; 104,645,141 and
       104,303,375 shares issued and outstanding at
       August 31, 2005, and February 28, 2005, respectively                           52,323                     52,152
Capital in excess of par value                                                       495,572                    489,164
Retained earnings                                                                    340,900                    259,660
                                                                                 -----------               ------------

TOTAL SHAREHOLDERS' EQUITY                                                           888,795                    800,976
                                                                                 -----------               ------------


TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                      $  1,331,269               $  1,293,013
                                                                                ============               ============

See accompanying notes to consolidated financial statements.


Page 4 of 29




                                                CARMAX, INC. AND SUBSIDIARIES
                                        Consolidated Statements of Cash Flows (Unaudited)
                                                      (In thousands)


                                                                               Six Months Ended August 31
                                                                              2005                    2004
                                                                          -----------             -----------
Operating Activities:
- ---------------------
Net earnings                                                              $   81,240              $   65,189
Adjustments to reconcile net earnings to net
    cash provided by operating activities:
    Depreciation and amortization                                             12,194                   8,844
    Amortization of restricted stock awards                                       44                      51
    Gain on disposition of assets                                               (829)                    (83)
    Provision for deferred income taxes                                       (3,678)                   (605)
    Changes in operating assets and liabilities:
       Decrease in accounts receivable, net                                   14,130                   2,563
       Decrease in automobile loan receivables held
         for sale                                                             19,792                  15,617
       (Increase) decrease in retained interest in securitized
         receivables                                                          (9,821)                  6,463
       Increase in inventory                                                  (8,681)                (25,950)
       Decrease in prepaid expenses and
         other current assets                                                  4,590                   3,177
       (Increase) decrease in other assets                                      (737)                     71
       Increase (decrease) in accounts payable, accrued
         expenses and other current liabilities,
         and accrued income taxes                                             10,385                  (8,926)
       Increase in deferred revenue and other liabilities                        254                   1,313
                                                                          ----------              ----------
Net cash provided by operating activities                                    118,883                  67,724
                                                                          ----------              ----------

Investing Activities:
- ---------------------
Purchases of property and equipment                                         (115,240)               (118,624)
Proceeds from sales of assets                                                 78,173                  43,659
                                                                          ----------              ----------
Net cash used in investing activities                                        (37,067)                (74,965)
                                                                          ----------              ----------


Financing Activities:
- ---------------------
(Decrease) increase in short-term debt, net                                  (65,197)                    198
Issuance of long-term debt                                                   105,229                       -
Payments on long-term debt                                                  (100,411)                      -
Equity issuances, net                                                          3,264                   2,007
                                                                          ----------              ----------
Net cash (used in) provided by financing activities                          (57,115)                  2,205
                                                                          ----------              ----------

Increase (decrease) in cash and cash equivalents                              24,701                  (5,036)
Cash and cash equivalents at beginning of year                                29,099                  61,643
                                                                          ----------              ----------
Cash and cash equivalents at end of period                                $   53,800              $   56,607
                                                                          ==========              ==========


See accompanying notes to consolidated financial statements.

Page 5 of 29




                          CARMAX, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                   ------------------------------------------
                                   (Unaudited)
1.   Background
     ----------

     CarMax,  Inc.  ("CarMax"  and "the  company"),  including  its wholly owned
     subsidiaries,  is the largest retailer of used cars and light trucks in the
     United States.  CarMax was the first used vehicle retailer to offer a large
     selection  of quality  used  vehicles at low,  "no-haggle"  prices  using a
     customer-friendly  sales process in an attractive,  modern sales  facility.
     CarMax also sells new vehicles under various franchise  agreements.  CarMax
     provides its customers with a full range of related services, including the
     financing of vehicle  purchases through its own finance  operation,  CarMax
     Auto Finance ("CAF"), and third-party lenders; the sale of extended service
     plans; and vehicle repair service.

2.   Accounting Policies
     -------------------

     Principles of Consolidation.  CarMax's  consolidated  financial  statements
     conform to U.S.  generally  accepted  accounting  principles.  The  interim
     period  consolidated  financial  statements are unaudited;  however, in the
     opinion of  management,  all  adjustments,  which  consist  only of normal,
     recurring  adjustments  necessary  for a fair  presentation  of the interim
     consolidated  financial  statements,  have been included.  All  significant
     intercompany   balances   and   transactions   have  been   eliminated   in
     consolidation.

     The fiscal  year end  balance  sheet  data were  derived  from the  audited
     consolidated  financial  statements included in the company's Annual Report
     on Form 10-K for the fiscal  year ended  February  28,  2005.  The Notes to
     Consolidated  Financial Statements contained in the Annual Report should be
     read in conjunction with these consolidated financial statements.

     Cash and Cash Equivalents.  Cash equivalents of $49.2 million at August 31,
     2005,  and $18.0  million at February 28, 2005,  consisted of highly liquid
     debt securities with original  maturities of three months or less. Included
     in cash  equivalents  at August 31,  2005,  and  February  28,  2005,  were
     restricted cash deposits of $17.7 million and $12.0 million,  respectively,
     which were associated with certain insurance deductibles.

     Stock-Based   Compensation.   The  company  accounts  for  its  stock-based
     compensation  plans under the  recognition  and  measurement  principles of
     Accounting  Principles Board ("APB") Opinion No. 25,  "Accounting for Stock
     Issued to Employees," and related  interpretations.  Under this opinion and
     related  interpretations,  compensation  expense is recorded on the date of
     grant and amortized over the vesting period only if the market value of the
     underlying  stock on the grant date  exceeds the exercise  price.  No stock
     option-based  employee  compensation cost is reflected in net earnings,  as
     options  granted under those plans had exercise  prices equal to the market
     value of the  underlying  common stock on the date of grant.  The following
     table  illustrates the effect on net earnings and net earnings per share as
     if the  fair-value-based  method  of  accounting  had been  applied  to all
     outstanding stock awards in each reported period:

Page 6 of 29



                                                                          Three Months Ended                Six Months Ended
                                                                               August 31                        August 31
     (In thousands except per share data)                                 2005          2004             2005          2004
     -------------------------------------------------------------------------------------------------------------------------

     Net earnings, as reported .....................................      $41,422       $29,859          $81,240        $65,189

     Total additional stock-based compensation expenses
         determined under the fair-value-based method
         for all awards, net of related tax effects .................       3,770         3,046            6,555          5,653
                                                                        -----------------------        ------------------------
     Pro forma net earnings .........................................     $37,652       $26,813          $74,685     $   59,536
                                                                        =======================        ========================

     Earnings per share:
         Basic, as reported..........................................   $    0.40    $     0.29        $    0.78     $    0.63
         Basic, pro forma............................................   $    0.36    $     0.26        $    0.71     $    0.57

         Diluted, as reported........................................   $    0.39    $     0.28        $    0.76     $    0.62
         Diluted, pro forma..........................................   $    0.36    $     0.25        $    0.71     $    0.56

     The pro forma  effect on the second  quarter and first six months of fiscal
     2006 and prior periods may not be  representative  of the pro forma effects
     on net earnings and net earnings per share for future periods.

     Reclassifications.  Certain  prior year amounts have been  reclassified  to
     conform to the current period's presentation.

3.   CarMax Auto Finance Income
     --------------------------

     The company's finance operation,  CAF, originates prime-rated financing for
     qualified  customers at  competitive  market rates of interest.  Throughout
     each month, the company sells  substantially all of the loans originated by
     CAF in securitization  transactions as discussed in Note 4. The majority of
     the  contribution  from CAF is generated by the spread between the interest
     rate  charged  to the  customer  and the  related  cost of  funds.  A gain,
     recorded  at the  time of each  securitization  transaction,  results  from
     recording a  receivable  approximately  equal to the  present  value of the
     expected residual cash flows generated by the securitized receivables.  The
     cash flows are  calculated  taking into  account  expected  prepayment  and
     default rates.

     CarMax Auto Finance income was as follows:
                                                                  Three Months Ended                  Six Months Ended
                                                                        August 31                         August 31
     (In millions)                                                   2005       2004                 2005          2004
     --------------------------------------------------------------------------------------------------------------------

     Gains on sales of loans.................................    $  17.2      $  14.9              $  37.7        $ 30.5
                                                                 --------------------              ---------------------

     Other CAF income:
        Servicing fee income.................................        6.9          6.1                 13.5          12.1
        Interest income......................................        5.1          4.4                 10.1           9.4
                                                                 --------------------              ---------------------
     Total other CAF income..................................       12.0         10.5                 23.6          21.5
                                                                 --------------------              ---------------------

     Direct CAF expenses:
        CAF payroll and fringe benefit expense...............        2.5          2.3                  4.9           4.4
        Other direct CAF expenses............................        2.9          2.4                  5.5           4.9
                                                                 --------------------              ---------------------
     Total direct CAF expenses...............................        5.4          4.7                 10.4           9.4
                                                                 --------------------              ---------------------

     CarMax Auto Finance income..............................    $  23.8      $  20.7              $  50.9        $ 42.6
                                                                 ====================              =====================

     Amounts in the table above may not total due to rounding.


Page 7 of 29


     CarMax Auto  Finance  income does not  include any  allocation  of indirect
     costs or income. The company presents this information on a direct basis to
     avoid making  arbitrary  decisions  regarding the indirect benefit or costs
     that could be  attributed to CAF.  Examples of indirect  costs not included
     are retail store  expenses,  retail  financing  commissions,  and corporate
     expenses  such as  human  resources,  administrative  services,  marketing,
     information systems, accounting, legal, treasury, and executive payroll.

4.   Securitizations
     ---------------

     The company uses a securitization  program to fund substantially all of the
     automobile  loan  receivables  originated  by CAF.  The  company  sells the
     automobile loan receivables to a wholly owned,  bankruptcy-remote,  special
     purpose entity that transfers an undivided interest in the receivables to a
     group of third-party  investors.  The special  purpose entity and investors
     have no recourse to the company's assets.  The company's risk is limited to
     the retained  interest on the company's  consolidated  balance sheets.  The
     investors issue commercial paper supported by the transferred  receivables,
     and the proceeds from the sale of the commercial  paper are used to pay for
     the securitized  receivables.  This program is referred to as the warehouse
     facility.

     The company  periodically  uses public  securitizations  to  refinance  the
     receivables  previously  securitized through the warehouse  facility.  In a
     public  securitization,  a pool of automobile loan receivables is sold to a
     bankruptcy-remote,  special  purpose  entity  that  in turn  transfers  the
     receivables to a special purpose  securitization  trust. The securitization
     trust issues asset-backed securities, secured or otherwise supported by the
     transferred  receivables,  and the proceeds from the sale of the securities
     are used to pay for the securitized receivables. Refinancing receivables in
     a public  securitization during a quarter may or may not have a significant
     impact on the company's results, depending on securitization structures and
     market  conditions.  In the first  quarter  of  fiscal  2006,  the  company
     recognized  a  gain  of  $0.01  per  share  related  to the  2005-1  public
     securitization.  However,  this  impact  may not be  representative  of the
     potential impact of future securitizations.

     The transfers of receivables  are accounted for as sales in accordance with
     Statement of Financial  Accounting  Standards ("SFAS") No. 140, "Accounting
     for  Transfers  and Servicing of Financial  Assets and  Extinguishments  of
     Liabilities." When the receivables are securitized,  the company recognizes
     a gain or loss on the sale of the receivables as described in Note 3.

                                                         Three Months                                 Six Months
                                                        Ended August 31                             Ended August 31
     (In millions)                                   2005           2004                         2005           2004
     -------------------------------------------------------------------------------------------------------------------
     Net loans originated.........................    $481.5        $369.8                      $918.0          $755.8
     Loans sold...................................    $514.7        $391.8                      $989.4          $822.4
     Gains on sales of loans......................   $  17.2       $  14.9                     $  37.7         $  30.5
     Gains on sales of loans as a
         percentage of loans sold.................       3.3%          3.8%                        3.8%            3.7%


     Retained  Interest.  The company retains an interest in the automobile loan
     receivables  that it  securitizes.  The retained  interest,  presented as a
     current asset on the company's  consolidated  balance  sheets,  serves as a
     credit  enhancement  for the benefit of the  investors  in the  securitized
     receivables.  The  retained  interest  includes  the  present  value of the
     expected residual cash flows generated by the securitized  receivables,  or
     "interest-only  strip  receivables,"  the  restricted  cash on  deposit  in
     various  reserve  accounts,  and an  undivided  ownership  interest  in the
     receivables  securitized  through the warehouse facility and certain public
     securitizations, or "required excess receivables," as described below. On a
     combined  basis,  the cash  reserves and required  excess  receivables  are
     generally 2% to 4% of managed receivables. The special purpose entities and
     the investors have no recourse to the company's assets.  The company's risk
     is limited to the retained interest on the company's  consolidated  balance
     sheets. The fair value of the retained interest may fluctuate  depending on
     the performance of the securitized receivables.

Page 8 of 29



     The fair value of the retained interest was $157.8 million as of August 31,
     2005, and $148.0 million as of February 28, 2005. The retained interest had
     a weighted  average life of 1.4 years as of August 31, 2005,  and 1.5 years
     as of February 28, 2005.  As defined in SFAS No. 140, the weighted  average
     life in periods  (for  example,  months or years) of  prepayable  assets is
     calculated by multiplying the principal collections expected in each future
     period by the number of periods  until that future  period,  summing  those
     products,  and  dividing  the sum by the  initial  principal  balance.  The
     following  is a detailed  explanation  of the  components  of the  retained
     interest.

     Interest-only strip receivables.  Interest-only strip receivables represent
     -------------------------------
     the  present  value of residual  cash flows the company  expects to receive
     over  the  life  of  the  securitized  receivables.   The  value  of  these
     receivables  is  determined  by  estimating  the future  cash  flows  using
     management's  assumptions  of key factors,  such as finance  charge income,
     default rates,  prepayment  rates,  and discount rates  appropriate for the
     type of asset and risk. The value of interest-only strip receivables may be
     affected by external  factors,  such as changes in the behavior patterns of
     customers,  changes in the strength of the economy, and developments in the
     interest rate markets;  therefore, actual performance may differ from these
     assumptions.  Management  evaluates  the  performance  of  the  receivables
     relative to these  assumptions  on a regular  basis.  Any financial  impact
     resulting  from a change in  performance  is  recognized in earnings in the
     period in which it occurs.

     Restricted cash.  Restricted cash represents  amounts on deposit in various
     ---------------
     reserve  accounts   established  for  the  benefit  of  the  securitization
     investors.  In the  event  that  the  cash  generated  by  the  securitized
     receivables  in a  given  period  was  insufficient  to pay  the  interest,
     principal,  and other  required  payments,  the  balances on deposit in the
     reserve  accounts would be used to pay those amounts.  In general,  each of
     the company's  securitizations requires that an amount equal to a specified
     percentage  of the initial  receivables  balance be  deposited in a reserve
     account on the  closing  date and that any  excess  cash  generated  by the
     receivables be used to fund the reserve account to the extent  necessary to
     maintain  the  required  amount.  If the amount on  deposit in the  reserve
     account  exceeds the  required  amount,  an amount  equal to that excess is
     released  through the special purpose entity to the company.  In the public
     securitizations,  the  amount  required  to be on  deposit  in the  reserve
     account must equal or exceed a specified floor amount.  The reserve account
     remains  funded  until the  investors  are paid in full,  at which time the
     remaining  balance is released  through the special  purpose  entity to the
     company. The amount required to be maintained in the public  securitization
     reserve  accounts  may  increase  depending  upon  the  performance  of the
     securitized receivables.  The amount on deposit in restricted cash accounts
     was $31.6  million as of August 31, 2005,  and $33.5 million as of February
     28, 2005.

     Required  excess  receivables.  The warehouse  facility and certain  public
     -----------------------------
     securitizations require that the total value of the securitized receivables
     exceed, by a specified amount,  the principal amount owed to the investors.
     The required excess  receivables  balance represents this specified amount.
     Any cash flows  generated by the required  excess  receivables are used, if
     needed,  to make payments to the investors.  The unpaid  principal  balance
     related to the required  excess  receivables was $53.8 million as of August
     31, 2005, and $44.3 million as of February 28, 2005.

     Key  Assumptions  Used in Measuring the Retained  Interest and  Sensitivity
     Analysis.  The following table shows the key economic  assumptions  used in
     measuring the fair value of the retained interest at August 31, 2005, and a
     sensitivity  analysis  showing  the  hypothetical  effect  on the  retained
     interest if there were  unfavorable  variations from the assumptions  used.
     Key economic  assumptions at August 31, 2005, were not materially different
     from assumptions used to measure the fair value of the retained interest at
     the time of securitization. These sensitivities are hypothetical and should
     be used  with  caution.  In this  table,  the  effect of a  variation  in a
     particular  assumption  on the  fair  value  of the  retained  interest  is
     calculated without changing any other assumption;  in actual circumstances,
     changes in one factor may result in changes in another, which might magnify
     or counteract the sensitivities.

Page 9 of 29




                                                                              Impact on Fair              Impact on Fair
                                                    Assumptions                Value of 10%                  Value of 20%
     (In millions)                                      Used                  Adverse Change                Adverse Change
     ---------------------------------------------------------------------------------------------------------------------
     Prepayment rate........................       1.43%-1.50%                     $5.5                         $  10.9
     Cumulative default rate................       1.60%-2.16%                     $4.7                         $   9.4
     Annual discount rate...................             12.0%                     $2.3                         $   4.6

     Prepayment rate. The company uses the Absolute Prepayment Model or "ABS" to
     ---------------
     estimate  prepayments.  This model assumes a rate of prepayment  each month
     relative to the original  number of receivables  in a pool of  receivables.
     ABS further assumes that all the receivables are the same size and amortize
     at the same rate and that each  receivable  in each  month of its life will
     either be paid as scheduled or prepaid in full.  For example,  in a pool of
     receivables  originally containing 10,000 receivables,  a 1% ABS rate means
     that 100 receivables prepay each month.

     Cumulative  default rate. The cumulative default rate, or "static pool" net
     ------------------------
     losses,  is calculated by dividing the total  projected  credit losses of a
     pool of receivables by the original pool balance.

     Continuing Involvement with Securitized Receivables.  The company continues
     to manage the automobile loan receivables that it securitizes.  The company
     receives  servicing fees of approximately  1% of the outstanding  principal
     balance of the securitized receivables. The servicing fees specified in the
     securitization  agreements  adequately compensate the company for servicing
     the securitized receivables.  Accordingly,  no servicing asset or liability
     has been recorded.  The company is at risk for the retained interest in the
     securitized  receivables.  If the securitized receivables do not perform as
     originally projected, the value of the retained interest would be impacted.
     Supplemental  information  about the  managed  receivables  is shown in the
     following tables:

                                                                     As of August 31             As of February 28 or 29
     (In millions)                                                 2005            2004           2005            2004
     -----------------------------------------------------------------------------------------------------------------------
     Loans securitized.....................................   $   2,611.9     $   2,336.5        $2,427.2       $2,200.4
     Loans held for sale or investment.....................          60.6            43.5            67.7           48.2
                                                              ------------------------------------------------------------
     Ending managed receivables............................   $   2,672.5     $   2,380.0        $2,494.9       $2,248.6
                                                              ============================================================
     Accounts 31+ days past due............................   $      40.9     $      35.7        $   31.1       $   31.4
     Past due accounts as a percentage of
         ending managed receivables........................          1.53%           1.50%           1.24%          1.40%

                                                                        Three Months                   Six Months
                                                                       Ended August 31                Ended August 31
    (In millions)                                                   2005            2004           2005           2004
    -----------------------------------------------------------------------------------------------------------------------
    Average managed receivables............................... $   2,636.6      $  2,364.8     $   2,586.9   $   2,332.3
    Credit losses on managed receivables...................... $       5.0      $      5.3     $       8.1   $       9.3
    Annualized credit losses as a percentage of
        average managed receivables...........................        0.76%           0.90%           0.62%         0.80%


Page 10 of 29




     Selected  Cash  Flows  from  Securitized   Receivables.   The  table  below
     summarizes certain cash flows received from and paid to the automobile loan
     securitizations:

                                                                             Three Months                    Six Months
                                                                            Ended August 31                Ended August 31
     (In millions)                                                        2005         2004              2005         2004
     ------------------------------------------------------------------------------------------------------------------------
o        Proceeds from new securitizations............................    $384.0        $297.0          $791.5        $672.5
o        Proceeds from collections reinvested in
             revolving period securitizations.........................    $217.0        $167.4          $388.2        $311.4
o        Servicing fees received......................................    $  6.8        $  6.1          $ 13.3        $ 12.0
o        Other cash flows received from the retained interest:....
             Interest-only strip receivables..........................    $ 18.1        $ 18.4          $ 42.1        $ 42.0
             Cash reserve releases, net...............................    $  0.2        $  1.1          $  9.1        $ 10.9

     Proceeds  from  new  securitizations.  Proceeds  from  new  securitizations
     ------------------------------------
     includes proceeds from receivables newly securitized  through the warehouse
     facility   during  the  period.   Proceeds  from   receivables   previously
     securitized through the warehouse facility that are periodically refinanced
     in  public   securitizations   are  not   considered   proceeds   from  new
     securitizations for this table. Proceeds from receivables  repurchased from
     public  securitizations  and refinanced  through the warehouse facility are
     included in proceeds from new  securitizations and totaled $51.5 million in
     the first  quarter of fiscal 2006 and $51.0 million in the first quarter of
     fiscal 2005. There were no repurchases in the second quarter of fiscal 2006
     or fiscal 2005.

     Proceeds  from  collections.   Proceeds  from  collections   reinvested  in
     ---------------------------
     revolving period  securitizations  represent principal amounts collected on
     receivables  securitized  through the  warehouse  facility that are used to
     fund new originations.

     Servicing  fees.  Servicing  fees received  represent cash fees paid to the
     ---------------
     company to service the securitized receivables.

     Other cash flows  received  from the  retained  interest.  Other cash flows
     --------------------------------------------------------
     received from the retained interest  represent cash received by the company
     from  securitized  receivables  other than servicing fees. It includes cash
     collected on  interest-only  strip  receivables and amounts released to the
     company from restricted cash accounts.

     Financial  Covenants  and  Performance  Triggers.   Certain  securitization
     agreements  include various financial  covenants and performance  triggers.
     For such agreements,  the company must meet financial covenants relating to
     minimum tangible net worth, maximum total liabilities to tangible net worth
     ratio,  minimum tangible net worth to managed assets ratio, minimum current
     ratio, minimum cash balance or borrowing capacity, and minimum fixed charge
     coverage  ratio.  Certain  pools  of  securitized   receivables  must  meet
     performance   tests  relating  to  portfolio  yield,   default  rates,  and
     delinquency  rates. If these financial  covenants and/or  performance tests
     are not met, in addition to other  consequences,  the company may be unable
     to continue to securitize  receivables through the warehouse facility or it
     may be  terminated  as servicer  under the  securitizations.  At August 31,
     2005, the company was in compliance with these financial covenants, and the
     securitized receivables were in compliance with these performance triggers.

5.   Financial Derivatives
     ---------------------

     The company enters into amortizing  fixed-pay  interest rate swaps relating
     to its automobile loan receivable securitizations. Swaps are used to better
     match funding costs to the  fixed-rate  receivables  being  securitized  by
     converting  variable-rate  financing  costs in the  warehouse  facility  to
     fixed-rate  obligations.  During the second  quarter  of fiscal  2006,  the
     company  entered into seven  40-month  amortizing  interest rate swaps with
     initial notional amounts  totaling $426.5 million.  The amortized  notional
     amount of all  outstanding  swaps related to the automobile loan receivable

Page 11 of 29


     securitizations  was $836.7  million at August 31, 2005, and $662.1 million
     at February 28, 2005. The fair value of swaps included in prepaid  expenses
     and other  current  assets  was a net asset of $0.3  million  at August 31,
     2005, and $5.4 million at February 28, 2005.

     The market and credit risks associated with interest rate swaps are similar
     to those relating to other types of financial  instruments.  Market risk is
     the  exposure  created by potential  fluctuations  in interest  rates.  The
     company does not anticipate  significant market risk from swaps as they are
     used on a monthly  basis to match  funding costs to the use of the funding.
     Credit  risk is the  exposure  to  nonperformance  of  another  party to an
     agreement.  The company  mitigates credit risk by dealing with highly rated
     bank counterparties.

6.   Retirement Plans
     ----------------

     The  company  has a  noncontributory  defined  benefit  pension  plan  (the
     "pension plan") covering the majority of full-time  employees.  The company
     also has an  unfunded  nonqualified  plan  (the  "restoration  plan")  that
     restores retirement benefits for certain senior executives who are affected
     by the Internal  Revenue Code  limitations  on benefits  provided under the
     pension  plan.  The  liabilities  for these  plans are  included in accrued
     expenses and other current liabilities in the consolidated  balance sheets.
     The company  uses a fiscal year end  measurement  date for both the pension
     plan and the  restoration  plan. The components of net pension expense were
     as follows:

                                                                      Three Months Ended August 31
                                                      Pension Plan          Restoration Plan                Total
                                                      ------------          ----------------         ------------------
     (In thousands)                                 2005       2004         2005        2004           2005       2004
     -----------------------------------------------------------------------------------------------------------------------
     Service cost...............................    $2,126     $1,624       $  94       $  80         $2,220     $1,704
     Interest cost..............................       699        538          65          54            764        592
     Expected return on plan assets.............      (493)      (386)         --          --           (493)      (386)
     Amortization of prior year
         service cost...........................         9          9           6          --             15          9
     Recognized actuarial loss..................       240        184          34          38            274        222
                                                ---------------------------------------------------------------------------

     Net pension expense........................    $2,581     $1,969        $199        $172         $2,780     $2,141
                                                ===========================================================================


                                                                       Six Months Ended August 31
                                                      Pension Plan          Restoration Plan                Total
                                                      ------------          ----------------         ------------------
     (In thousands)                                 2005       2004         2005        2004           2005       2004
     -----------------------------------------------------------------------------------------------------------------------
     Service cost...............................    $4,252     $3,308        $188        $160         $4,440     $3,468
     Interest cost..............................     1,398      1,076         130         108          1,528      1,184
     Expected return on plan assets.............      (986)      (738)         --          --           (986)      (738)
     Amortization of prior year
         service cost...........................        18         18          12          --             30         18
     Recognized actuarial loss..................       480        368          68          76            548        444
                                                ---------------------------------------------------------------------------

     Net pension expense........................    $5,162     $4,032        $398        $344         $5,560     $4,376
                                                ===========================================================================

     The company  did not make a  contribution  to the  pension  plan during the
     first  six  months  of  fiscal   2006.   There  are  no  minimum   required
     contributions for fiscal 2006.  However,  the company expects to contribute
     at least $4.5  million  to the  pension  plan in the second  half of fiscal
     2006.

Page 12 of 29


7.   Earnings per Share
     ------------------

     Reconciliations  of the  numerator  and  denominator  of basic and  diluted
     earnings per share are presented below:

                                                                           Three Months                      Six Months
                                                                          Ended August 31                  Ended August 31
     (In thousands except per share data)                              2005            2004              2005           2004
     -------------------------------------------------------------------------------------------------------------------------

     Weighted average common shares..............................     104,528          104,002          104,457        103,933
     Dilutive potential common shares:
        Options..................................................       1,671            1,495            1,726          1,695
        Restricted stock.........................................          18               15               18             15
                                                                  ----------------------------      --------------------------
     Weighted average common shares
        and dilutive potential common shares.....................     106,217          105,512          106,201        105,643
                                                                  ============================      ==========================

     Net earnings available to common shareholders...............  $   41,422       $   29,859       $   81,240      $  65,189
     Basic net earnings per share................................  $     0.40       $     0.29       $     0.78      $    0.63
     Diluted net earnings per share..............................  $     0.39       $     0.28       $     0.76      $    0.62

     Certain  options were  outstanding  and not included in the  computation of
     diluted  earnings  per share  because  the  options'  exercise  prices were
     greater than the average  market price of the common  shares.  As of August
     31,  2005,  options  to  purchase  2,009,571  shares of common  stock  with
     exercise  prices  ranging from $28.38 to $43.44 per share were  outstanding
     and not  included in the  calculation.  As of August 31,  2004,  options to
     purchase  3,090,318  shares with  exercise  prices  ranging  from $21.49 to
     $43.44 per share were outstanding and not included in the calculation.

8.   Recent Accounting Pronouncements
     --------------------------------

     SFAS No. 123R,  "Share-Based  Payment," replaces SFAS No. 123,  "Accounting
     for   Stock-Based   Compensation"   and  supercedes  APB  Opinion  No.  25,
     "Accounting  for Stock Issued to Employees."  This new standard  requires a
     public entity to measure the cost of employee services received in exchange
     for an award of equity  instruments  based on the grant-date  fair value of
     the award.  That cost will be  recognized  over the period  during which an
     employee is required to provide services in exchange for the award (usually
     the vesting period). In accordance with the revised statement,  the company
     will be required to recognize  the expense  attributable  to stock  options
     effective with the company's 2007 fiscal year, beginning March 1, 2006. The
     company  has not yet  determined  the impact of  adopting  SFAS 123R on its
     financial position, results of operations, or cash flows.

9.   Long-Term Debt
     --------------

     In August 2005, CarMax entered into a four year,  revolving credit facility
     (the  "credit  agreement")  with Bank of America,  N.A.  and various  other
     financial institutions and terminated its $300 million credit facility with
     DaimlerChrysler  Services  North  America,  LLC  and  Toyota  Motor  Credit
     Corporation.  The credit  agreement  is secured  by vehicle  inventory  and
     contains  customary   representations  and  warranties,   conditions,   and
     covenants. Borrowings accrue interest at variable rates based on LIBOR, the
     federal funds rate, or the prime rate,  depending on the type of borrowing.
     The company pays a commitment  fee on the unused  portion of the  available
     funds. All outstanding  principal amounts will be due and payable in August
     2009, and there are no penalties for prepayment.

     The  credit  agreement  provides  for  aggregate  borrowings  of up to $450
     million.  The aggregate borrowing limit includes a $25 million limit on new
     vehicle  swing line loans,  a $25 million  limit on other swing line loans,
     and a $30 million  limit on standby  letters of credit.  Borrowings  on the
     each of the swing  lines are due on demand  and must be repaid  monthly  or
     refinanced through other committed borrowings under the credit agreement.

Page 13 of 29


     As of August 31, 2005, the amount  outstanding  under the credit  agreement
     was $105.2  million.  The  entire  balance of  outstanding  borrowings  was
     classified  as current  portion of long-term  debt,  based on  management's
     ability  and intent to repay the  balance  within  one year of the  balance
     sheet date. We expect that a portion of future  borrowings will be used for
     long-term  capital purposes and will remain  outstanding more than one year
     from the  balance  sheet  date.  Such  amounts  will be  classified  on the
     company's balance sheets as long-term debt.

     Obligations under capital leases as of August 31, 2005,  consisted of $35.3
     million  classified  as  long-term  debt,  and $0.9 million  classified  as
     current portion of long-term debt.

10.  Subsequent Event
     ----------------

     In  September   2005,   the  company   completed  a  $525  million   public
     securitization of automobile loan receivables.







Page 14 of 29


                                     ITEM 2.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                      ------------------------------------
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                ------------------------------------------------


The following  Management's  Discussion and Analysis of Financial  Condition and
Results of  Operations  ("MD&A") is provided as a  supplement  to, and should be
read in conjunction with, our audited  consolidated  financial  statements,  the
accompanying notes, and the MD&A included in the company's Annual Report on Form
10-K for the fiscal year ended February 28, 2005.

In this  discussion,  "we,"  "our,"  "us,"  "CarMax,"  "CarMax,  Inc.," and "the
company"  refer to CarMax,  Inc. and its wholly owned  subsidiaries,  unless the
context requires otherwise.  Amounts and percentages in tables may not total due
to rounding.

BUSINESS OVERVIEW

CarMax is the nation's largest retailer of used vehicles. As of August 31, 2005,
we  operated  63 used car  superstores  in 29 markets,  including  21  mid-sized
markets  and eight  large  markets.  We define  mid-sized  markets as those with
television  viewing  audiences between 1 million and 2.5 million people. We also
operated seven new car  franchises,  all of which were  integrated or co-located
with our used car  superstores.  During the twelve month period ended August 31,
2005, we sold 278,178 used cars,  representing 93% of the total 299,138 vehicles
the company sold at retail during that period.

We  believe  the  CarMax   consumer  offer  is  unique  in  the  auto  retailing
marketplace. Our offer gives consumers a way to shop for cars in the same manner
that they shop for items at other "big box"  retailers.  Our  consumer  offer is
structured around four core equities:  low, no-haggle prices; a broad selection;
high quality; and customer-friendly  service. We generate revenues,  income, and
cash flows  primarily by retailing used vehicles and associated  items including
vehicle  financing,  extended  service  plans,  and vehicle  repair  service.  A
majority of the used  vehicles  we sell at retail are  purchased  directly  from
consumers. Vehicles purchased through our appraisal process that do not meet our
retail  standards  are  sold at  on-site  wholesale  auctions.  CarMax  provides
prime-rated financing to qualified customers through CarMax Auto Finance ("CAF")
and Bank of America.  Nonprime financing is provided through several third-party
lenders, and subprime financing is provided through a third-party lender under a
program rolled out to our entire store base in August 2004. We periodically test
additional  third-party  lenders.  CarMax has no  recourse  liability  for loans
provided by  third-party  lenders.  We sell extended  service plans on behalf of
unrelated  third parties who are the primary  obligors.  We have no  contractual
liability  to the  customer  under these  third-party  service  plans.  Extended
service plan revenue  represents  commissions  from the unrelated third parties.
Sales of new vehicles represented a decreasing  percentage of our total revenues
over the last several years as we divested new car franchises and added used car
superstores.

We are still at an early stage in the national rollout of our retail concept. We
believe the primary driver for future earnings growth will be vehicle unit sales
growth from comparable store sales increases and from geographic  expansion.  We
plan to open used car superstores at a rate of  approximately  15% to 20% of our
used car  superstore  base each year. In fiscal 2006, our plan calls for opening
nine used car superstores, representing an approximate 16% increase in our store
base.

Fiscal 2006 Second Quarter Highlights
- -------------------------------------

|X|  Net sales and operating  revenues increased 23% to $1.63 billion from $1.32
     billion in the second quarter of fiscal 2005, while net earnings  increased
     39% to $41.4 million,  or $0.39 per share, from $29.9 million, or $0.28 per
     share.
|X|  Total used vehicle units  increased  21%,  which included a 10% increase in
     comparable  store used unit sales.  |X| We added one used car superstore in
     the second quarter of fiscal 2006,  entering the Salt Lake City market with
     a standard-sized superstore that was opened on the last day of the quarter.


Page 15 of 29


|X|  Our total  gross  profit per unit  increased  to $2,546  from $2,395 in the
     second quarter of fiscal 2005. Our gross profit per unit rose on used, new,
     and wholesale vehicles.
|X|  CAF income  increased 15% to $23.8 million from $20.7 million in the second
     quarter  of fiscal  2005,  reflecting  the growth in total  vehicle  sales,
     partially offset by lower gain spreads, as expected.
|X|  Selling, general, and administrative expenses as a percent of net sales and
     operating revenues (the "SG&A ratio") declined modestly to 10.1% from 10.2%
     in the second quarter of fiscal 2005. The overhead leverage provided by the
     strong sales growth was largely offset by the combination of the rollout of
     television  advertising  in Los  Angeles in the  current  year,  lower-than
     normal  store and  corporate  bonuses in the prior  year,  and the  growing
     proportion  of our store base that is  comprised of stores not yet at basic
     maturity.  Stores  generally  have higher SG&A  ratios  during  their first
     several years of operation.
|X|  We completed the  sale-leaseback  of four superstores for total proceeds of
     $56.0 million.
|X|  For the first six months of fiscal  2006,  net cash  provided by  operating
     activities  increased to $118.9  million from $67.7 million in fiscal 2005,
     reflecting the improved net earnings and an increase in cash generated from
     changes in working capital.

FORWARD-LOOKING STATEMENTS

The  company  cautions  readers  that  the  statements  contained  in this  MD&A
regarding the company's  future business plans,  operations,  opportunities,  or
prospects,  including  without  limitation any  statements or factors  regarding
expected  sales,  margins,  or earnings,  are  forward-looking  statements  made
pursuant to the safe harbor  provisions  of the  Private  Securities  Litigation
Reform Act of 1995. Such forward-looking  statements are based upon management's
current  knowledge  and  assumptions  about future  events and involve risks and
uncertainties  that  could  cause  actual  results  to  differ  materially  from
anticipated results. For more details on factors that could affect expectations,
see the company's  Annual Report on Form 10-K for the fiscal year ended February
28, 2005,  and its quarterly  and current  reports as filed with or furnished to
the Securities and Exchange Commission.

CRITICAL ACCOUNTING POLICIES

For a discussion of our critical  accounting  policies see "Critical  Accounting
Policies" in Management's  Discussion and Analysis included in the CarMax,  Inc.
2005 Annual  Report to  Shareholders,  which is included as Exhibit  13.1 to the
Annual  Report on Form 10-K for the fiscal year ended  February 28, 2005.  These
policies relate to  securitization  transactions,  revenue  recognition,  income
taxes, and the defined benefit retirement plan.

RESULTS OF OPERATIONS

Reclassifications.  Certain prior year amounts have been reclassified to conform
to the current period's presentation.

Seasonality. CarMax's operations, in common with other retailers in general, are
subject to seasonal influences.  Historically,  our superstores experience their
strongest  sales in the spring and summer fiscal  quarters.  The net earnings of
any quarter are seasonally  disproportionate  to net sales since  administrative
and certain  operating  expenses  remain  relatively  constant  during the year.
Therefore, quarterly results should not be relied upon as necessarily indicative
of results for the entire fiscal year.


Page 16 of 29




Net Sales and Operating Revenues
- --------------------------------

                                                       Three Months                                   Six Months
                                                      Ended August 31                               Ended August 31
(In millions)                                2005       %          2004       %           2005       %         2004        %
- ------------------------------------------------------------------------------------------------------------------------------
Used vehicle sales.....................   $1,236.5    75.7    $    987.4    74.6        $2,440.3   76.0      $1,972.7    74.5
New vehicle sales......................      151.9     9.3         137.5    10.4           286.0    8.9         274.3    10.4
Wholesale vehicle sales................      190.8    11.7         152.1    11.5           380.3   11.8         309.0    11.7
Other sales and revenues:
  Extended service plan revenues.......       25.7     1.6          20.7     1.6            50.2    1.6          41.8     1.6
  Service department sales.............       24.7     1.5          21.4     1.6            47.4    1.5          41.8     1.6
  Third-party finance fees, net........        4.2     0.3           4.4     0.3             8.0    0.2           8.9     0.3
                                        -------------------------------------------------------------------------------------
Total other sales and revenues.........       54.6     3.3          46.5     3.5           105.6    3.3          92.5     3.5
                                        -------------------------------------------------------------------------------------
Total net sales and operating
  revenues............................. $  1,633.8   100.0      $1,323.5   100.0        $3,212.2  100.0      $2,648.5   100.0
                                        =====================================================================================


Retail vehicle sales changes were as follows:

                                                      Three Months                         Six Months
                                                     Ended August 31                      Ended August 31
                                                   2005         2004                    2005          2004
                                                   -------------------------------------------------------
Vehicle units:
     Used vehicles..........................         21%           4 %                     20%          6 %
     New vehicles...........................         10%          (1)%                      3%         (1)%
Total ......................................         20%           3 %                     19%          5 %

Vehicle dollars:
     Used vehicles..........................         25%           5 %                     24%          8 %
     New vehicles...........................         10%          (1)%                      4%         (1)%
Total ......................................         23%           4 %                     21%          7 %


Comparable  store  used  unit  sales  growth  is one of the key  drivers  of our
profitability.  A CarMax  store is  included  in  comparable  store sales in the
store's  fourteenth  full month of  operation.  Comparable  store  retail  sales
changes were as follows:

                                                      Three Months                         Six Months
                                                     Ended August 31                      Ended August 31
                                                   2005         2004                    2005          2004
                                                   -------------------------------------------------------
Vehicle units:
     Used vehicles..........................         10%          (7)%                      8%         (5)%
     New vehicles...........................         10%          13 %                      5%         12 %
Total ......................................         10%          (5)%                      8%         (3)%

Vehicle dollars:
     Used vehicles..........................         14%          (6)%                     12%         (3)%
     New vehicles...........................         10%          13 %                      6%         12 %
Total ......................................         14%          (4)%                     11%         (1)%


Used Vehicle Sales.  The 25% increase in used vehicle dollar sales in the second
- -------------------
quarter of fiscal 2006  reflects a 21%  increase in unit sales and a 3% increase
in average  retail  selling  price.  The unit  sales  growth was driven by a 10%
increase  in  comparable  store  used  units,  together  with  sales  from newer
superstores that are not yet in the comparable store base. The used vehicle unit
sales growth  reflects a strong  increase in store traffic as well as continuing
excellent execution by our store teams. We believe the increase in store traffic
was  helped in part by the  domestic  new car  manufacturers'  employee  pricing


Page 17 of 29


programs. Under the employee pricing programs,  introduced in June and July, the
manufacturers  established  specific  employee  prices  for each make and model,
which  created  greater  clarity on new car pricing.  We believe we benefit from
pricing transparency in the marketplace,  and our no-haggle consumer offer makes
price-comparing easy, giving us a unique advantage as consumers cross-shop.  The
10% increase in comparable store used units included  approximately 1 percentage
point added from sales  financed by our  subprime  finance  provider,  which was
added to our third-party lender group in August 2004 following a nine-month test
in selected stores.

The 24% increase in used vehicle  dollar sales in the first six months of fiscal
2006  reflects a 20% increase in unit sales and a 3% increase in average  retail
selling price. The unit sales growth reflects an 8% increase in comparable store
used units,  together with the sales from newer  superstores that are not yet in
the  comparable  store base.  The  increase in  comparable  store used units was
driven by increased  store  traffic and  continuing  excellent  execution by our
store  teams,  which  helped  overcome  some loss of  momentum in our sales pace
during April and May 2005. We believe some of the same factors that affected the
marketplace  in the spring and summer of 2004 put  pressure  on the market  this
spring,  including an atypical rise in wholesale  auction  prices and higher gas
prices.  In response,  we did not increase our appraisal offers at the same rate
as the steep  increase in major  public  wholesale  auction  market  prices.  We
believe that doing so helped to keep our retail prices more in line with demand,
helping to keep our cars  attractive to consumers as they compared their options
in the new and used car marketplace. The increase in comparable store used units
included  approximately  2 percentage  points  added from sales  financed by our
subprime finance provider.

New Vehicle  Sales.  We reported  strong growth in  comparable  new vehicle unit
- ------------------
sales in both the second quarter and the first six months of fiscal 2006, driven
in part by the traffic  generated by the employee discount  programs.  The sales
performance  for our new car  franchises  was generally in line with the overall
performance of the brands we represent.

Wholesale Vehicle Sales. The 25% increase in wholesale  vehicles dollar sales in
- -----------------------
the second quarter of fiscal 2006 reflects the  combination of a 16% increase in
wholesale  units sold and an 8%  increase  in average  wholesale  sales  prices.
Wholesale unit sales increases reflect a solid increase in appraisal traffic and
the growth of our store base as compared  with the prior fiscal year. We believe
the increased  appraisal traffic was due in part to the new car employee pricing
programs and in part to an increase in radio advertising over the summer focused
on our "we buy cars"  message.  Even as prices  on SUVs and  light  trucks  fell
dramatically, CarMax continued to make appraisal purchase offers on all vehicles
presented  for  appraisal  by  consumers.  We  believe a portion  of the  higher
appraisal traffic reflected  franchised  dealers' loss of negotiating ability on
trade-ins in connection with the more transparent employee discount price on new
cars.  Vehicles acquired through the appraisal purchase process that do not meet
our retail standards are sold at our on-site wholesale auctions.

The 23%  increase in wholesale  vehicle  sales for the first half of fiscal 2006
reflects the  combination  of a 12%  increase in wholesale  unit sales and a 10%
increase in average  selling  prices.  In the first quarter of fiscal 2006,  our
in-house wholesale auction prices rose at a higher-than-normal  pace, reflecting
trends in the general wholesale market.

Other Sales and Revenues. Other sales and revenues include extended service plan
- ------------------------
revenues,  service  department sales, and third-party  finance fees. Other sales
and revenues  increased during the second quarter and first six months of fiscal
2006, as extended service plan and service  department  revenues  benefited from
the  increase  in retail  sales and the  growth in the store  base.  Third-party
finance  fees  declined,  primarily  as a result of the August 2004 rollout of a
subprime provider.  As is customary in the industry,  subprime finance contracts
are  purchased  from the  company at a discount.  We record this  discount as an
offset to the  third-party  finance  fee  revenues  received  from our prime and
nonprime finance providers.


Page 18 of 29




Supplemental information related to vehicle sales follows:

Retail Unit Sales
- -----------------
                                                       Three Months                                  Six Months
                                                      Ended August 31                              Ended August 31
                                                 2005                2004                      2005               2004
                                               ----------------------------                 ----------------------------
Used vehicles   ............................    75,616              62,396                   149,759            124,749
New vehicles    ............................     6,320               5,756                    11,924             11,600
                                              -----------------------------                -----------------------------
Total ......................................    81,936              68,152                   161,683            136,349
                                              =============================                =============================

Average Retail Selling Prices
- -----------------------------
                                                       Three Months                                  Six Months
                                                      Ended August 31                              Ended August 31
                                                 2005                2004                   2005                  2004
                                             ------------------------------               ------------------------------
Used vehicles...............................    $16,204             $15,693               $16,161                $15,678
New vehicles................................    $23,878             $23,706               $23,824                $23,463
Weighted average............................    $16,796             $16,370               $16,726                $16,340

Retail Vehicle Sales Mix
- ------------------------
                                                       Three Months                                  Six Months
                                                      Ended August 31                              Ended August 31
                                                 2005                2004                     2005                2004
                                               ----------------------------                 ----------------------------
Vehicle units:
      Used vehicles.........................      92%                 92%                       93%                91%
      New vehicles..........................       8                   8                         7                  9
                                               ----------------------------                 ----------------------------
Total.......................................     100%                100%                      100%               100%
                                               ===========================                  ============================

Vehicle dollars:
      Used vehicles.........................      89%                 88%                       89%                88%
      New vehicles..........................      11                  12                        11                 12
                                               ----------------------------                 ----------------------------
Total.......................................     100%                100%                      100%               100%
                                               ============================                 ============================


Retail Stores.  CarMax opened five superstores in the first half of fiscal 2006.
- -------------
In the first quarter, we expanded our presence in the Los Angeles market, adding
both a standard and a satellite  superstore and bringing to five the total store
count in this large  market.  We also  entered  the  Jacksonville  market with a
standard  superstore,  and we added a  satellite  superstore  in the Kansas City
market.  At the end of the second quarter,  we entered the Salt Lake City market
with a  standard  superstore.  We have a total of seven new car  franchises  and
expect  to  maintain  long-term  strategic  relationships  with  the  automotive
manufacturers we currently represent.


                                             Estimate
    Retail Store Mix                       Feb. 28, 2006         August 31, 2005        Feb. 28, 2005       August 31, 2004
- ---------------------------------------------------------------------------------------------------------------------------
Mega superstores.............................    13                    13                     13                    13
Standard superstores.........................    34                    32                     29                    28
Satellite superstores........................    20                    18                     16                    14
                                                 --------------------------------------------------------------------------
Total used car superstores...................    67                    63                     58                    55
Co-located new car stores....................     4                     4                      3                     3
                                                ---------------------------------------------------------------------------
Total........................................    71                    67                     61                    58
                                                ===========================================================================


Page 19 of 29


Gross Profit
- ------------

                                                           Three Months                              Six Months
                                                          Ended August 31                           Ended August 31
                                                     2005               2004                  2005               2004
                                            $ per unit(1) %(2)  $ per unit(1) %(2)  $ per unit(1) %(2)  $ per unit(1)  %(2)
                                            --------------------------------------  ---------------------------------------
Used vehicle gross profit..................    1,856      11.3     1,846      11.7      1,829     11.2     1,855      11.7
New vehicle gross profit...................    1,122       4.7       890       3.7        973      4.1       859       3.6
Wholesale vehicle gross profit.............      578      14.4       406      11.0        604     14.6       423      11.3
Other gross profit.........................      411      61.7       385      56.3        404     61.8       398      58.7
Total gross profit.........................    2,546      12.8     2,395      12.3      2,513     12.6     2,423      12.5

(1)Calculated  as category gross profit dollars divided by the respective  units
sold, except the other and total  categories,  which are divided by total retail
units sold.
(2) Calculated as a percentage of its respective sales or revenue.

Used Vehicle Gross  Profit.  Our second  quarter  fiscal 2006 used vehicle gross
- --------------------------
profit per unit rose slightly compared with the prior year's quarter. During the
quarter,  increasing  gasoline costs caused  wholesale prices for SUVs and light
trucks to  plummet,  while  prices  for more  gasoline  efficient  compact  cars
remained  above  historical  norms.  We were able to  maintain  margins  in this
environment,  despite taking a supplemental  markdown in retail SUV valuation at
the end of the quarter.  Our ability to quickly adjust  appraisal offers to stay
in line with the broader market  trade-in  offer trends and our rapid  inventory
turns, which reduce our exposure to declining prices,  contributed to our margin
stability.

For the six months  ended August 31,  2005,  used vehicle  gross profit per unit
declined  modestly compared with the prior year, due to an increase in wholesale
auction  pricing in the first quarter of fiscal 2006.  This  increase  adversely
affected used vehicle gross profits,  particularly for vehicles obtained through
the major public wholesale auctions.

New Vehicle Gross Profit.  The increase in new vehicle gross profit per unit for
- ------------------------
the three months and six months ended  August 31, 2005,  compared  with the same
periods in the prior year,  was  primarily  the result of the employee  discount
pricing programs offered by the domestic new car manufacturers beginning in June
and July 2005. We were able to increase our new car prices modestly, as they had
generally been below the employee discount pricing.

Wholesale Vehicle Gross Profit.  For the second quarter and the first six months
- ------------------------------
of fiscal 2006, wholesale vehicle gross profit per unit increased from the prior
year  levels,  primarily  as a result  of the  strengthening  wholesale  vehicle
pricing  environment.  We typically  experience our strongest  wholesale profits
during the spring when  wholesale  prices are rising,  and the atypical  rate of
increase in the current year added to the profit improvement.  Wholesale profits
also  benefited from our decision not to increase  appraisal  offers at the same
rate as the steep  increase in major public  wholesale  auction market prices in
the current year.

Other Gross Profit.  Compared with the prior year's second quarter and first six
- ------------------
months, other gross profit per unit increased slightly, primarily as a result of
the growth in our  service  margin.  The service  department,  which is the only
category  within other sales and revenues that has an associated  cost of sales,
reported higher profits  reflecting the greater overhead expense absorption that
higher vehicle sales and reconditioning volumes provide. The increase in service
margins  was offset  somewhat  by a decline in  third-party  finance  fees.  The
discount  at which  our  subprime  lender  purchases  installment  contracts  is
reflected as an offset to third-party finance fees.

CarMax Auto Finance Income
- --------------------------

CAF provides  prime auto  financing for our used and new car sales.  Because the
purchase of an automobile is traditionally  reliant on the consumer's ability to
obtain  on-the-spot  financing,  it is  important  to  our  business  that  such
financing be available to  creditworthy  customers.  While financing can also be
obtained  from  third-party  sources,  we believe  that total  reliance on third
parties can create an unacceptable volatility and business risk. Furthermore, we
believe that our processes and systems, the transparency of our pricing, and our


Page 20 of 29


vehicle  quality  provide a unique  and ideal  environment  in which to  procure
high-quality  auto loan receivables,  both for CAF and for third-party  lenders.
CAF provides us the  opportunity  to capture  additional  profits and cash flows
from auto loan  receivables  while managing our reliance on third-party  finance
sources.

The components of CarMax Auto Finance income were as follows:

                                                        Three Months Ended August 31            Six Months Ended August 31
(In millions)                                         2005        %       2004       %        2005       %       2004      %
- ------------------------------------------------------------------------------------------------------------------------------

Gains on sales of loans(1)........................ $     17.2   3.3   $    14.9    3.8    $     37.7    3.8  $     30.5   3.7
                                                   -----------------------------------    -----------------------------------

Other CAF income: (2)
     Servicing fee income.........................        6.9   1.0         6.1    1.0          13.5    1.0        12.1   1.0
     Interest income..............................        5.1   0.8         4.4    0.7          10.1    0.8         9.4   0.8
                                                   -----------------------------------    -----------------------------------
Total other CAF income............................       12.0   1.8        10.5    1.8          23.6    1.8        21.5   1.8
                                                   -----------------------------------    -----------------------------------

Direct CAF expenses: (2)
     CAF payroll and fringe benefit expense.......        2.5   0.4         2.3    0.4           4.9    0.4         4.4   0.4
     Other direct CAF expenses....................        2.9   0.4         2.4    0.4           5.5    0.4         4.9   0.4
                                                   -----------------------------------    -----------------------------------
Total direct CAF expenses.........................        5.4   0.8         4.7    0.8          10.4    0.8         9.4   0.8
                                                   -----------------------------------    -----------------------------------

CarMax Auto Finance income (3).................... $     23.8   1.5   $    20.7    1.6    $     50.9    1.6  $     42.6   1.6
                                                   ===================================    ===================================

Loans sold........................................ $    514.7         $   391.8           $    989.4         $    822.4
Average managed receivables....................... $  2,636.6         $ 2,364.8           $  2,586.9         $  2,332.3
Net sales and operating revenues.................. $  1,633.9         $ 1,323.5           $  3,212.2         $  2,648.5
Ending managed receivables........................ $  2,672.5         $ 2,380.0           $  2,672.5         $  2,380.0

Percent columns indicate:
(1) Percent of loans sold.
(2) Annualized percent of averaged managed receivables.
(3) Percent of net sales and operating revenues.

CAF's  second  quarter  income rose 15% in fiscal 2006  compared  with the prior
year's quarter.  CAF income benefited from the growth in total vehicle sales and
a  modest  increase  in  CAF's  loan  penetration.  The  gains on sales of loans
increased  15%, as the benefit of the 31%  increase in loans sold was  partially
offset by the  decrease  in the gain  spread  to 3.3%  from  3.8% in the  second
quarter of fiscal 2005.

CAF income for the first six months of fiscal 2006  increased  19% compared with
the same period of the prior year. This increase includes first quarter gains of
$0.02 per share  resulting from a favorable  valuation  adjustment and $0.01 per
share resulting from the favorable terms of the 2005-1 public  securitization in
April.  In the first quarter of fiscal 2006, we lowered the loss  assumptions on
previously securitized  receivables,  reflecting the favorable market conditions
and the continued  favorable  performance of CAF's  portfolio.  Other income and
other direct expenses for the second quarter and first six months of fiscal 2006
increased proportionately to managed receivables.

In May 2005, we exercised our option to repurchase the loan balances outstanding
in the 2001-2  securitization  when the  remaining  balance of the related  auto
loans  receivable fell below 10% of the original pool balance.  These loans were
subsequently  resold into the  warehouse  facility.  In May 2004, we completed a
similar  repurchase  and resale  related to the 2001-1  securitization.  In both
cases, the loan balances carried  relatively high interest rates that,  combined
with relatively low short-term  funding costs,  resulted in an earnings  benefit
for the first quarter of both fiscal years of approximately $0.01 per share.

The  reported  gains on sales of loans of 3.8% in the first six months of fiscal
2006 included the effects of the repurchase and resale of the receivables in the
2001-2 public securitization,  the valuation adjustment, and the favorable terms
of the 2005-1 public  securitization.  The reported gains on sales of loans as a
percent of all loans sold of 3.7% in the first half of fiscal 2005  included the


Page 21 of 29


effect of the  repurchase  and resale of the  receivables  in the 2001-1  public
securitization.  Excluding the impacts of the 2005-1 public securitization,  the
repurchase and resale of the 2001-2 and 2001-1 public  securitizations,  and the
valuation  adjustment,  the gains on loans  originated  and sold was 3.3% in the
first  six  months of fiscal  2006,  and 3.8% in the first six  months of fiscal
2005.

We are at risk for the performance of the managed securitized receivables to the
extent that we maintain a retained  interest  in the  receivables.  Supplemental
information on our portfolio of managed receivables is as follows:

                                                                      As of August 31              As of February 28 or 29
(In millions)                                                       2005           2004              2005           2004
- ---------------------------------------------------------------------------------------------------------------------------
Loans securitized..........................................   $   2,611.9     $   2,336.5      $   2,427.2     $  2,200.4
Loans held for sale or investment..........................          60.6            43.5             67.7           48.2
                                                              -------------------------------------------------------------
Ending managed receivables.................................   $   2,672.5     $   2,380.0      $   2,494.9     $  2,248.6
                                                              =============================================================
Accounts 31+ days past due.................................   $      40.9     $      35.7      $      31.1     $     31.4
Past due accounts as a percentage of
ending managed receivables.................................          1.53%           1.50%            1.24%          1.40%


                                                                     Three Months                      Six Months
                                                                   Ended August 31                   Ended August 31
(In millions)                                                    2005             2004            2005            2004
- ---------------------------------------------------------------------------------------------------------------------------
Average managed receivables................................   $   2,636.6     $   2,364.8      $   2,586.9    $   2,332.3
Credit losses on managed receivables.......................   $       5.0     $       5.3      $       8.1    $       9.3
Annualized credit losses as a percentage of
average managed receivables................................          0.76%           0.90%            0.62%          0.80%

If the managed  receivables  do not perform in accordance  with the  assumptions
used in determining the fair value of the retained  interest,  earnings could be
impacted.  Annualized losses as a percentage of average managed  receivables for
the second quarter and first six months of fiscal 2006  decreased  substantially
compared  with the same periods in fiscal 2005.  We believe the decrease was due
to a combination of factors including improved general economic conditions,  the
implementation  of a new credit  scorecard in the third  quarter of fiscal 2003,
and operational  efficiencies resulting from system enhancements.  The change in
performance is reflected in the revaluation of the retained  interest during the
first quarter, as previously discussed.

Selling, General and Administrative Expenses
- --------------------------------------------

The SG&A ratio  declined  modestly to 10.1% in the second quarter of fiscal 2006
compared with 10.2% in the second quarter of the prior fiscal year. The expected
leverage of fixed expenses and corporate  overhead  provided by our strong sales
growth was largely offset by a combination of factors. The rollout of marketwide
television  advertising in Los Angeles in fiscal 2006 and the  lower-than-normal
store and  corporate  bonuses in fiscal 2005 both  adversely  affected  the SG&A
comparison.  In addition,  we continue to see a larger  percentage  of our store
base that is made up of newer stores not yet at basic maturity,  which we define
as four years.  Newer stores typically  experience  higher SG&A ratios.  In this
fiscal  year's  second  quarter,  46% of our stores were newer  stores;  in last
year's second  quarter,  that percentage was 38%. For the six month period ended
August 31, 2005,  the SG&A ratio  increased to 10.1% compared with 10.0% for the
same period last year.  This  increase  was due to the factors  mentioned  above
combined with a slightly lower sales growth in the first quarter of fiscal 2006.

Income Taxes
- ------------

The effective  income tax rate declined to 38.1% in the second quarter and 38.2%
in the first six months of fiscal 2006 from 39.0% in the same  periods of fiscal
2005,  primarily as a result of a legal entity  reorganization in December 2004.
The company created a centralized  corporate  management  entity in an effort to
obtain  operational,  legal,  and other benefits that also resulted in state tax
efficiencies.

Page 22 of 29


Operations Outlook
- ------------------

For the third  quarter  of fiscal  2006,  we  anticipate  comparable  store used
vehicle  unit growth in the range of 2% to 8% and net  earnings per share in the
range of $0.19 to $0.25.  We have chosen to provide  wider than usual ranges for
the third  quarter's  expectations  because  market  conditions  continue  to be
uncertain and because the model year  changeover  that  coincides with the third
quarter typically makes it the most challenging  period of the year to forecast.
We have  continued to see price declines for SUVs and light trucks in September,
and as these declines  cause us to take  supplemental  markdowns,  we anticipate
incremental  margin pressure in the third quarter.  Now that subprime  financing
has been  available  across our full retail store base for 12 months,  we do not
expect  subprime  financed sales to provide  significant  incremental  used unit
comparable  store  sales  growth in future  periods.  We expect the CAF gains on
sales  of  loans  will be  approximately  3.5%,  which  is at the low end of our
normalized  range of 3.5% to 4.5%,  but is  slightly  higher  than the 3.3% gain
spread realized in the second quarter of fiscal 2006.

We believe we experienced a slight sales benefit early in the third quarter from
replacement vehicle purchases  resulting from Hurricane Katrina,  despite having
no stores in Louisiana or  Mississippi.  However,  because we have no basis that
would  allow us to predict if and to what  extent our sales  might  continue  to
benefit,  our  current  third  quarter  expectations  do not include any further
anticipated benefit from possible replacement purchases.

Hurricane Rita is expected to have a minimal  effect on the company's  sales and
earnings.  The  four  CarMax  stores  in the  Houston  market  were  closed  for
approximately a week in mid-September due to this hurricane; however, we believe
that, as with most  weather-related  events, we should recover nearly all of the
resulting lost sales during the next few months. We do not, however,  expect our
sales to  benefit  from  Rita as we  believe  that few  Houston  customers  lost
vehicles as a result of the storm.

We plan to open four  additional  superstores  during the second  half of fiscal
2006. Two of these  superstores are satellite  additions  opened in September in
the Miami and Nashville  markets.  Later in the third quarter,  we plan to enter
the Virginia Beach and the Wichita markets with one standard superstore in each.

During the first half of fiscal 2007,  we currently  plan to open four  standard
superstores and one satellite superstore.  We plan to enter the Columbus,  Ohio,
market  with one  standard  superstore  and one  satellite  superstore,  and the
Hartford,  Conn.;  Oklahoma City,  Okla.; and Fresno,  Calif.;  markets with one
superstore each.

RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting  pronouncements applicable to the company,
see Note 8 to the company's consolidated financial statements.

FINANCIAL CONDITION

Liquidity and Capital Resources
- -------------------------------

Operating  Activities.  Net cash from operations  increased to $118.9 million in
the first  half of fiscal  2006 from  $67.7  million in the first half of fiscal
2005. The increase reflects a combination of factors,  including a $16.1 million
increase in net earnings,  $17.3 million due to slower growth in inventory,  and
$17.8 million associated with other changes in working capital in the first half
of fiscal 2006 compared with the same period in the prior year. In the first six
months of fiscal 2006, inventory increased by only $8.7 million,  despite having
opened five  superstores  since the end of the prior fiscal  year.  Each year we
target having our lowest level of inventory of the year after Labor Day in order
to minimize the inherent  inventory  risk during the fall model year  changeover
period. At August 31, 2005, our inventories were at target levels.

Page 23 of 29



Investing Activities. Net cash used in investing activities was $37.1 million in
- --------------------
the first six months of fiscal 2006,  compared  with $75.0  million in the first
half of the prior year.  Capital  expenditures  were $115.2 million in the first
half of fiscal 2006,  compared  with $118.6  million in the first half of fiscal
2005. We plan to open nine  superstores  in fiscal 2006,  equal to the number of
stores opened in fiscal 2005. In addition to store construction  costs,  capital
spending includes costs associated with our new home office and the cost of land
acquisition for future year store openings.

The company  generated net proceeds from the sales of assets of $78.2 million in
the first half of fiscal 2006,  compared with $43.7 million in the first half of
fiscal  2005.  These  proceeds  are  primarily  associated  with  sale-leaseback
transactions.  In the first half of fiscal 2006, we completed the sale-leaseback
of five  superstores,  while in the first half of fiscal 2005,  we completed the
sale-leaseback  of  three  superstores.  The  sale-leaseback  transactions  were
structured  with  initial  lease  terms  of  either  15 or 20 years  with  four,
five-year  renewal  options.  As of August 31,  2005,  we owned six  superstores
currently in operation, as well as land and construction-in-progress  related to
several planned superstores.

Financing Activities. Net cash used in financing activities was $57.1 million in
- --------------------
the  first six  months  of  fiscal  2006,  compared  with net cash  provided  by
financing  activities  of $2.2  million in the first six  months of last  fiscal
year. In the first half of fiscal 2006, we used cash generated  from  operations
to reduce total debt by $60.4 million.

The aggregate  principal  amount of automobile loan  receivables  funded through
securitizations,  which  are  discussed  in  Notes  3  and  4 to  the  company's
consolidated financial statements, totaled $2.61 billion at August 31, 2005, and
$2.34  billion at August 31,  2004.  During the first half of fiscal  2006,  the
company  completed a $617  million  public  securitization  of  automobile  loan
receivables.  At August 31,  2005,  the unused  warehouse  capacity  totaled $63
million. The warehouse facility matures in July 2006. We anticipate that we will
be able to renew, expand, or enter into new securitization  arrangements to meet
the future needs of the automobile finance operation.

In August 2005,  we entered into a new,  four-year,  revolving  credit  facility
secured by vehicle  inventory.  Concurrently,  we  terminated  our existing $300
million credit agreement. Borrowings under the new credit facility are available
for working capital and general corporate purposes, and represent senior secured
indebtedness   of  the  company.   The  credit   facility   contains   customary
representations  and  warranties,  conditions,  and covenants.  All  outstanding
principal  amounts borrowed under the credit facility will be due and payable in
August 2009.

The credit  agreement  provides for aggregate  borrowings of up to $450 million.
The aggregate  borrowing limit includes a $25 million limit on new vehicle swing
line  loans,  a $25 million  limit on other swing line loans,  and a $30 million
limit on standby  letters of credit.  Borrowings  on the each of the swing lines
are due on  demand  and must be  repaid  monthly  or  refinanced  through  other
committed borrowings under the credit agreement.

As of August 31, 2005, $105.2 million was outstanding under the credit facility,
with the  remainder  fully  available  to the  company.  The  entire  balance of
outstanding  borrowings  was  classified as current  portion of long-term  debt,
based on management's ability and intent to repay the balance within one year of
the balance  sheet date.  As we continue to execute our growth  plan,  we expect
that a portion of future  borrowings will be used for long-term capital purposes
and will remain outstanding more than one year from the balance sheet date. Such
amounts will be classified on the company's balance sheets as long-term debt.

We  expect  that  proceeds  from  securitization  transactions;   sale-leaseback
transactions;  current and, if needed,  additional credit  facilities;  and cash
generated by  operations  will be sufficient  to fund capital  expenditures  and
working capital for the foreseeable future.


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                                     ITEM 3.

                          QUANTITATIVE AND QUALITATIVE
                          DISCLOSURES ABOUT MARKET RISK


Automobile  Installment Loan  Receivables.  At August 31, 2005, and February 28,
- -----------------------------------------
2005, all loans in the portfolio of automobile loan  receivables were fixed-rate
installment  loans.  Financing for these automobile loan receivables is achieved
through  asset  securitization  programs  that,  in turn,  issue both fixed- and
floating-rate  securities.  Interest  rate  exposure  relating to  floating-rate
securitizations  is managed through the use of interest rate swaps.  Receivables
held for  investment  or sale are  financed  with  working  capital.  Generally,
changes in  interest  rates  associated  with  underlying  swaps will not have a
material impact on earnings.  However, changes in interest rates associated with
underlying swaps may have a material impact on cash and cash flows.

Credit risk is the exposure to  nonperformance of another party to an agreement.
Credit risk is mitigated by dealing with highly rated bank  counterparties.  The
market and credit risks  associated  with financial  derivatives  are similar to
those relating to other types of financial instruments.

The  total  principal  amount of  managed  receivables  securitized  or held for
investment or sale as of August 31, 2005, and February 28, 2005, was as follows:


(In millions)                                                                 August 31              February 28
- ----------------------------------------------------------------------------------------------------------------

Fixed-rate securitizations.............................................    $   1,774.9             $   1,764.7
Floating-rate securitizations
     synthetically altered to fixed....................................          836.7                   662.1
Floating-rate securitizations.........................................             0.3                     0.4
Held for investment (1)...............................................            58.2                    45.5
Held for sale (2).....................................................             2.4                    22.2
                                                                           ---------------------------------------
Total.................................................................     $   2,672.5             $   2,494.9
                                                                           =======================================

(1) The majority is held by a bankruptcy-remote special purpose entity.
(2) Held by a bankruptcy-remote special purpose entity.

Interest Rate Exposure.  We also have interest rate risk from changing  interest
- ----------------------
rates  related  to our  outstanding  debt.  Substantially  all of  the  debt  is
floating-rate debt based on LIBOR. A 100-basis point increase in market interest
rates would not have had a material  effect on our results of operations or cash
flows for the three months and six months ended August 31, 2005.




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                                     ITEM 4.

                             CONTROLS AND PROCEDURES

The company maintains disclosure controls and procedures ("disclosure controls")
that are  designed to ensure that  information  required to be  disclosed in our
reports filed under the Securities Exchange Act of 1934 is recorded,  processed,
summarized,  and  reported  within  the  time  periods  specified  in  the  U.S.
Securities and Exchange  Commission's rules and forms.  Disclosure  controls are
also designed to ensure that such information is accumulated and communicated to
our  management,  including the chief  executive  officer  ("CEO") and the chief
financial officer ("CFO"),  as appropriate,  to allow timely decisions regarding
required disclosure.

As of the end of the period  covered by this report,  the company  evaluated the
effectiveness  of the design and  operation  of its  disclosure  controls.  This
evaluation was performed  under the supervision  and with the  participation  of
management,  including our CEO and CFO. Based upon that evaluation,  the CEO and
CFO concluded  that the company's  disclosure  controls were effective as of the
end of such period.  There was no change in the company's  internal control over
financial reporting that occurred during the quarter ended August 31, 2005, that
has  materially  affected,  or is reasonably  likely to materially  affect,  the
company's internal control over financial reporting.

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                           PART II. OTHER INFORMATION


Item 1.        Legal Proceedings

               CarMax is subject  to  various  legal  proceedings,  claims,  and
               liabilities that arise in the ordinary course of its business. In
               the opinion of management,  the amount of ultimate liability with
               respect to these actions will not materially affect the financial
               position or results of operations of CarMax.

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

               The company held an annual  meeting of  shareholders  on June 21,
               2005.  Information  on the matters  voted upon and the votes cast
               with  respect  to each  matter  was  previously  reported  in the
               company's Quarterly Report on Form 10-Q for the quarter ended May
               31, 2005.

Item 6.        Exhibits

               10.1 Credit  Agreement,  dated August 24, 2005, among CarMax Auto
                    Superstores,  Inc., CarMax,  Inc.,  various  subsidiaries of
                    CarMax,  various  Lenders  named therein and Bank of America
                    N.A.,  as  Administrative  Agent,  filed  herewith.  Certain
                    non-material  schedules  and exhibits have been omitted from
                    the  Credit  Agreement  as filed.  CarMax  agrees to furnish
                    supplementally to the Commission upon request a copy of such
                    schedules and exhibits.

               10.2 Security  Agreement,  dated August 24, 2005,  among  CarMax,
                    Inc., CarMax Auto Superstores, Inc., various subsidiaries of
                    CarMax  named   therein,   and  Bank  of  America  N.A.,  as
                    Administrative Agent, filed herewith.

               10.3 Company Guaranty  Agreement,  dated August 24, 2005, between
                    CarMax,  Inc. and Bank of America,  N.A., as  Administrative
                    Agent, filed herewith

               31.1 Certification  of the Chief  Executive  Officer  Pursuant to
                    Rule 13a-14(a), filed herewith.

               31.2 Certification  of the Chief  Financial  Officer  Pursuant to
                    Rule 13a-14(a), filed herewith.

               32.1 Certification of the Chief Executive  Officer Pursuant to 18
                    U.S.C. Section 1350, filed herewith.

               32.2 Certification of the Chief Financial  Officer Pursuant to 18
                    U.S.C. Section 1350, filed herewith.

Page 27 of 29





                                   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.

                                             CARMAX, INC.


                                             By:    /s/  Austin Ligon
                                                   -------------------------
                                                   Austin Ligon
                                                   President and
                                                   Chief Executive Officer



                                             By:    /s/  Keith D. Browning
                                                   -------------------------
                                                   Keith D. Browning
                                                   Executive Vice President and
                                                   Chief Financial Officer

October 7, 2005


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                                  EXHIBIT INDEX



     10.1 Credit   Agreement,   dated  August  24,   2005,   among  CarMax  Auto
          Superstores,  Inc.,  CarMax,  Inc.,  various  subsidiaries  of CarMax,
          various   Lenders   named   therein  and  Bank  of  America  N.A.,  as
          Administrative Agent, filed herewith.  Certain non-material  schedules
          and exhibits  have been  omitted  from the Credit  Agreement as filed.
          CarMax agrees to furnish supplementally to the Commission upon request
          a copy of such schedules and exhibits.

     10.2 Security Agreement,  dated August 24, 2005, among CarMax, Inc., CarMax
          Auto Superstores,  Inc., various subsidiaries of CarMax named therein,
          and Bank of America N.A., as Administrative Agent, filed herewith.

     10.3 Company  Guaranty  Agreement,  dated August 24, 2005,  between CarMax,
          Inc.  and  Bank of  America,  N.A.,  as  Administrative  Agent,  filed
          herewith

     31.1 Certification  of  the  Chief  Executive   Officer  Pursuant  to  Rule
          13a-14(a), filed herewith.

     31.2 Certification  of  the  Chief  Financial   Officer  Pursuant  to  Rule
          13a-14(a), filed herewith.

     32.1 Certification  of the Chief  Executive  Officer  Pursuant to 18 U.S.C.
          Section 1350, filed herewith.

     32.2 Certification  of the Chief  Financial  Officer  Pursuant to 18 U.S.C.
          Section 1350, filed herewith.


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