Summary of AUTONATION INC /FL

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included under Item 1. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations included in our most recent Annual Report on Form 10-K.
Certain amounts have been reclassified from the previously reported financial statements to conform to the financial statement presentation of the current period.
Overview
AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of September 30, 2008, we owned and operated 311 new vehicle franchises from 238 stores located in major metropolitan markets, predominantly in the Sunbelt region of the United States. Our stores, which we believe include some of the most recognizable and well known in our key markets, sell 39 different brands of new vehicles. The core brands of vehicles that we sell, representing approximately 96% of the new vehicles that we sold during the nine months ended September 30, 2008, are manufactured by Toyota, Ford, Honda, Nissan, General Motors, Daimler, Chrysler, and BMW.
We offer a diversified range of automotive products and services, including new vehicles, used vehicles, vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products, and other aftermarket products. We also arrange financing for vehicle purchases through third-party finance sources. We believe that the significant scale of our operations and the quality of our managerial talent allow us to achieve efficiencies in our key markets by, among other things, leveraging our market brands and advertising, improving asset management, implementing standardized processes, and increasing productivity across all of our stores.
For the nine months ended September 30, 2008, new vehicle sales accounted for approximately 56% of our total revenue, but approximately 22% of our total gross margin. Our parts and service and finance and insurance operations, while comprising approximately 20% of total revenue for the nine months ended September 30, 2008, contributed approximately 64% of our gross margin for the same period.
We believe that many factors affect sales of new vehicles and automotive retailers' gross profit margins in the United States and in our particular geographic markets, including the economy, inflation, recession or economic slowdown, consumer confidence, housing markets, fuel prices, credit availability, the level of manufacturers' production capacity, manufacturer incentives (and consumers' reaction to such offers), intense industry competition, interest rates, the prospects of war, other international conflicts or terrorist attacks, severe weather conditions, the level of personal discretionary spending, product quality, affordability and innovation, employment/unemployment rates, the number of consumers whose vehicle leases are expiring, and the length of consumer loans on existing vehicles. Changes in interest rates could significantly impact industry new vehicle sales and vehicle affordability, due to the direct relationship between interest rates and monthly loan payments, a critical factor for many vehicle buyers, and the impact interest rates can have on customers' borrowing capacity and disposable income. In periods where there is a decline in the availability of credit, particularly in the sub-prime lending market, the ability of certain consumers to purchase vehicles will be limited, resulting in a decline in sales or profits. Sales of certain new vehicles, particularly larger trucks and sports utility vehicles that historically have provided us with higher gross margins, also are impacted by fuel prices and the level of construction activity.
During the three months ended September 30, 2008, we had a net loss from continuing operations of $1.40 billion and diluted loss per share of $7.95, as compared to net income from continuing operations of $76.6 million and diluted earnings per share of $0.39, during the same period in 2007. During the nine months ended September 30, 2008, we had a net loss from continuing operations of $1.30 billion and diluted loss per share of $7.27, as compared to net income from continuing operations of $237.9 million and diluted earnings per share of $1.16 during the same period in 2007.

Results for the three months ended September 30, 2008, were impacted by a non-cash goodwill impairment charge of $1.61 billion ($1.37 billion after-tax), non-cash franchise impairments of $141.4 million ($87.7 million after-tax), and a gain on senior note repurchases of $12.1 million ($7.4 million after-tax). Results for the three months ended September 30, 2007, included favorable tax adjustments of $3.4 million.
Results for the nine months ended September 30, 2008, were impacted by the non-cash goodwill impairment charge of $1.61 billion ($1.37 billion after-tax), non-cash franchise impairments of $146.5 million ($90.8 million after-tax), the gain on senior note repurchases of $12.1 million ($7.3 million after-tax), as well as a non-cash stock compensation expense adjustment of $5.3 million ($3.2 million after-tax). See further discussion of these adjustments in Note 4, Goodwill and Intangible Assets, Note 5, Notes Payable and Long-Term Debt, and Note 9, Stock-Based Compensation of the Notes to Unaudited Condensed Consolidated Financial Statements. Results for the nine months ended September 30, 2007, included favorable tax adjustments of $12.0 million. Operating Segments
Prior to the third quarter of 2008, we had a single operating segment. During the third quarter of 2008, in response to changes in the automotive retail market, including the disproportionate decline in revenue and earnings from our domestic franchises compared to our import and premium luxury franchises, we made changes to our management approach that divided our business into three operating segments: (1) Domestic, (2) Import, and (3) Premium Luxury. This realignment had no effect on our previously reported consolidated results of operations, financial position or cash flows. In connection with this change, we have reclassified historical amounts to conform to our current segment presentation.
Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by General Motors, Ford, and Chrysler. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Toyota, Honda, and Nissan. Our Premium Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Mercedes, BMW, and Lexus. The franchises in each segment also sell used vehicles, parts and automotive services, and automotive finance and insurance products. For additional information regarding our operating segments, see "Segment Results" below and Note 14, Segment Information, of the Notes to Unaudited Condensed Consolidated Financial Statements. Market Challenges
Our results of operations for the third quarter of 2008 were adversely impacted by the unfavorable economic conditions in the United States, including the continued turbulence in the credit and housing markets and the high cost of fuel. Tight credit conditions, particularly in the sub-prime market, limited the ability of some of our customers to purchase vehicles, as well as finance and insurance products. In the third quarter of 2008, Domestic revenue declined 30%, Import revenue declined 17%, and Premium Luxury revenue declined 15%, in each case compared to the third quarter of 2007. For the three months ended September 30, 2008, Domestic revenue represented 34% of our total revenue, compared to 38% in the third quarter of 2007. We expect that in the foreseeable future this percentage will continue to decline and that Import revenue and Premium Luxury revenue will represent a higher percentage of our total revenue.
In July 2008, as part of our continuing response to the ongoing market challenges, we announced a cost reduction plan with a targeted annualized run rate savings of approximately $100 million. We have made substantial progress in achieving our targeted annualized savings.
We now anticipate that full-year industry new vehicle sales will decline from the low-16 million unit level in 2007 to the low-13 million unit level for 2008. We expect that the automotive retail market will remain challenging and that adverse market conditions will continue into 2009.

Inventory Management
Our new and used vehicle inventories are stated at the lower of cost or market in our consolidated balance sheets.
We have generally not experienced losses on the sale of new vehicle inventory, in part due to incentives provided by manufacturers to promote sales of new vehicles and our inventory management practices. We reduced our new vehicle inventory to 51,607 units at September 30, 2008, from 56,949 units at September 30, 2007. Although we focus on managing our inventory levels in accordance with consumer demand, we believe we must maintain a minimum level of inventory at our lower volume stores that is representative of the full line of vehicles offered by manufacturers. This may result in a higher days supply of inventory than would otherwise result if we were in a better economic environment. However, given our inventory management practices (such as managing our inventory purchases based on our sales forecasts and sharing inventory among our stores within a local market), we do not believe the current business climate is likely to result in material impairment charges related to new vehicle inventory. We continue to monitor our new vehicle inventory levels closely based on current economic conditions and will adjust them as appropriate.
In general, used vehicles that are not sold on a retail basis are liquidated at wholesale auctions. We record estimated losses on used vehicle inventory expected to be liquidated at wholesale auctions at a loss. Our used vehicle inventory balance was net of cumulative write-downs of $2.2 million at September 30, 2008, and $2.0 million at December 31, 2007.
Parts, accessories, and other inventory are carried at the lower of acquisition cost (first-in, first-out method) or market. We estimate the amount potential obsolete inventory based upon past experience and market trends. Our parts, accessories, and other inventory balance was net of cumulative write-downs of $6.5 million at September 30, 2008, and $5.8 million at December 31, 2007.
Critical Accounting Policies and Estimates We prepare our Unaudited Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. We evaluate our estimates on an ongoing basis, and we base our estimates on historical experience and various other assumptions we believe to be reasonable. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our Unaudited Condensed Consolidated Financial Statements. For a complete discussion of our critical and significant accounting policies and estimates, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008.
Goodwill and franchise rights assets are tested for impairment annually or more frequently when events or circumstances indicate that impairment may have occurred. As discussed in Note 4, Goodwill and Intangible Assets, of the Notes to Unaudited Condensed Consolidated Financial Statements, during the third quarter of 2008, we recorded $1.61 billion ($1.37 billion after-tax) of estimated non-cash goodwill impairment charges and $141.4 million ($87.7 million after-tax) of non-cash impairment charges related to franchise rights intangible assets. The aggregate non-cash goodwill impairment charge is an estimate because we have not finalized the valuation of certain assets and liabilities. We expect to finalize this non-cash goodwill impairment amount during the fourth quarter of 2008, and any adjustment will be reflected in our results for the fourth quarter of 2008. Despite these impairment charges, as of September 30, 2008, we were in compliance with the requirements of all applicable financial and operating covenants under our debt agreements, as further discussed below in "Restrictions and Covenants."
As a result of the change in our operating segment structure noted above, we were required to reassess the reporting units to which goodwill is assigned for goodwill impairment testing purposes. This reassessment resulted in a conclusion that the Company's reporting units were comprised of its three operating segments: Domestic, Import, and Premium Luxury.
We are required to complete interim tests for impairment of goodwill and other intangible assets when events occur or circumstances change between annual tests that indicate that the assets might be impaired. We continue to face a challenging automotive retail environment and an uncertain economic environment in general. As a result of these conditions, there can be no assurance that an additional material impairment charge will not occur in a future period. We will continue to monitor events in future periods to determine if additional asset impairment testing should be performed. If we are required to apply the second step of the goodwill impairment test to the goodwill in any of our three reporting units in future periods, we believe that we could incur another significant non-cash impairment charge related to goodwill, which could have a material adverse impact on our consolidated financial statements and on our ability to satisfy the financial ratios or other covenants under our debt and other agreements.

Reported Operating Data
   Historical operating results include the results of acquired businesses from
the date of acquisition.

                                               Three Months Ended September 30,                                        Nine Months Ended September 30,
                                                                   Variance                                                                Variance
($ in millions, except per                                       Favorable /             %                                               Favorable /             %
vehicle data)                     2008            2007          (Unfavorable)         Variance           2008             2007          (Unfavorable)         Variance
Revenue:
New vehicle                    $  1,974.6       $ 2,634.4       $       (659.8 )          (25.0 )     $  6,335.4       $  7,615.0       $     (1,279.6 )          (16.8 )
Used vehicle                        822.0         1,068.3               (246.3 )          (23.1 )        2,728.0          3,197.2               (469.2 )          (14.7 )
Parts and service                   612.1           642.7                (30.6 )           (4.8 )        1,895.6          1,919.0                (23.4 )           (1.2 )
Finance and insurance, net          119.3           150.9                (31.6 )          (20.9 )          398.8            445.2                (46.4 )          (10.4 )
Other                                15.4            17.0                 (1.6 )                            49.8             51.0                 (1.2 )

Total revenue                  $  3,543.4       $ 4,513.3       $       (969.9 )          (21.5 )     $ 11,407.6       $ 13,227.4       $     (1,819.8 )          (13.8 )

Gross profit:
New vehicle                    $    130.1       $   186.1       $        (56.0 )          (30.1 )     $    418.9       $    539.9       $       (121.0 )          (22.4 )
Used vehicle                         68.0            87.0                (19.0 )          (21.8 )          231.1            280.5                (49.4 )          (17.6 )
Parts and service                   265.8           281.1                (15.3 )           (5.4 )          824.2            839.9                (15.7 )           (1.9 )
Finance and insurance               119.3           150.9                (31.6 )          (20.9 )          398.8            445.2                (46.4 )          (10.4 )
Other                                 8.7             9.0                 (0.3 )                            27.7             29.8                 (2.1 )

Total gross profit                  591.9           714.1               (122.2 )          (17.1 )        1,900.7          2,135.3               (234.6 )          (11.0 )
Selling, general and
administrative expenses             452.7           506.7                 54.0             10.7          1,432.0          1,516.6                 84.6              5.6
Depreciation and
amortization                         22.7            22.0                 (0.7 )                            68.4             64.0                 (4.4 )
Goodwill impairment               1,610.0               -             (1,610.0 )                         1,610.0                -             (1,610.0 )
Franchise rights
impairment                          141.4               -               (141.4 )                           146.5              1.0               (145.5 )
Other expenses, net                   2.8             0.1                 (2.7 )                             3.2              0.6                 (2.6 )

Operating income (loss)          (1,637.7 )         185.3             (1,823.0 )                        (1,359.4 )          553.1             (1,912.5 )

Floorplan interest expense          (19.8 )         (32.9 )               13.1                             (66.2 )          (96.4 )               30.2
Other interest expense              (20.9 )         (29.6 )                8.7                             (69.3 )          (82.4 )               13.1
Gain on senior note
repurchases                          12.1               -                 12.1                              12.1                -                 12.1
Interest income                       0.7             0.8                 (0.1 )                             1.5              2.6                 (1.1 )
Other gains (losses), net            (2.3 )          (0.9 )               (1.4 )                            (2.9 )            0.1                 (3.0 )

Income (loss) from
continuing operations
before income taxes            $ (1,667.9 )     $   122.7       $     (1,790.6 )                      $ (1,484.2 )     $    377.0       $     (1,861.2 )


Retail vehicle unit sales:
New vehicle                        65,698          86,191              (20,493 )          (23.8 )        210,606          247,524              (36,918 )          (14.9 )
Used vehicle                       45,629          52,103               (6,474 )          (12.4 )        145,435          155,742              (10,307 )           (6.6 )

                                  111,327         138,294              (26,967 )          (19.5 )        356,041          403,266              (47,225 )          (11.7 )


Revenue per vehicle
retailed:
New vehicle                    $   30,056       $  30,565       $         (509 )           (1.7 )     $   30,082       $   30,765       $         (683 )           (2.2 )
Used vehicle                   $   15,234       $  16,262       $       (1,028 )           (6.3 )     $   15,716       $   16,388       $         (672 )           (4.1 )

Gross profit per vehicle
retailed:
New vehicle                    $    1,980       $   2,159       $         (179 )           (8.3 )     $    1,989       $    2,181       $         (192 )           (8.8 )
Used vehicle                   $    1,549       $   1,685       $         (136 )           (8.1 )     $    1,617       $    1,783       $         (166 )           (9.3 )
Finance and insurance          $    1,072       $   1,091       $          (19 )           (1.7 )     $    1,120       $    1,104       $           16              1.4

                                                    Three Months Ended                  Nine Months Ended
                                                       September 30,                      September 30,
                                                 2008 (%)         2007 (%)          2008 (%)         2007 (%)
Revenue mix percentages:
New vehicle                                         55.7             58.4              55.5             57.6
Used vehicle                                        23.2             23.7              23.9             24.2
Parts and service                                   17.3             14.2              16.6             14.5
Finance and insurance, net                           3.4              3.3               3.5              3.4
Other                                                0.4              0.4               0.5              0.3

Total                                              100.0            100.0             100.0            100.0

Gross profit mix percentages:
New vehicle                                         22.0             26.1              22.0             25.3
Used vehicle                                        11.5             12.2              12.2             13.1
Parts and service                                   44.9             39.4              43.4             39.3
Finance and insurance                               20.2             21.1              21.0             20.8
Other                                                1.4              1.2               1.4              1.5

Total                                              100.0            100.0             100.0            100.0

Operating items as a percentage of
revenue:
Gross profit:
New vehicle                                          6.6              7.1               6.6              7.1
Used vehicle - retail                               10.2             10.4              10.3             10.9
Parts and service                                   43.4             43.7              43.5             43.8
Total                                               16.7             15.8              16.7             16.1
Selling, general and administrative
expenses                                            12.8             11.2              12.6             11.5
Operating income (loss)                               NM              4.1                NM              4.2
Operating items as a percentage of total
gross profit:
Selling, general and administrative
expenses                                            76.5             71.0              75.3             71.0
Operating income (loss)                               NM             25.9                NM             25.9



NM = Not Meaningful

                                                                        September 30,          September 30,
                                                                            2008                   2007
Days supply:
New vehicle (industry standard of selling days, including fleet)           62 days                48 days
Used vehicle (trailing 30 days)                                            41 days                43 days


   The following table details net new vehicle inventory carrying cost,
consisting of new vehicle floorplan interest expense, net of floorplan

assistance earned (amounts received from manufacturers specifically to support store financing of new vehicle inventory). Floorplan assistance is accounted for as a component of new vehicle gross profit.

                                      Three Months Ended September 30,                          Nine Months Ended September 30,
($ in millions)                 2008                2007              Variance            2008                2007             Variance
Floorplan assistance         $      17.9         $      27.3         $     (9.4 )      $      58.2         $      75.2        $    (17.0 )
Floorplan interest
expense (new vehicles)             (18.4 )             (32.8 )             14.4              (63.9 )             (96.2 )            32.3


Net new vehicle
inventory carrying cost      $      (0.5 )       $      (5.5 )       $      5.0        $      (5.7 )       $     (21.0 )      $     15.3

Same Store Operating Data
   We have presented below our operating results on a same store basis to
reflect our internal performance. The "Same Store" amounts presented below
include the results of dealerships for the identical months in each period
presented in the comparison, commencing with the first full month in which the
dealership was owned by us.

                                               Three Months Ended September 30,                                        Nine Months Ended September 30,
                                                                   Variance                                                                Variance
($ in millions, except per                                       Favorable /             %                                               Favorable /             %
vehicle data)                     2008            2007          (Unfavorable)         Variance           2008             2007          (Unfavorable)         Variance
Revenue:
New vehicle                     $ 1,966.0       $ 2,634.4       $       (668.4 )          (25.4 )     $  6,306.5       $  7,615.0       $     (1,308.5 )          (17.2 )
Used vehicle                        815.3         1,067.7               (252.4 )          (23.6 )        2,707.4          3,195.6               (488.2 )          (15.3 )
Parts and service                   609.5           642.7                (33.2 )           (5.2 )        1,884.8          1,919.0                (34.2 )           (1.8 )
Finance and insurance, net          118.7           150.9                (32.2 )          (21.3 )          397.1            445.2                (48.1 )          (10.8 )
Other                                 4.6             5.6                 (1.0 )                            16.2             18.9                 (2.7 )

Total revenue                   $ 3,514.1       $ 4,501.3       $       (987.2 )          (21.9 )     $ 11,312.0       $ 13,193.7       $     (1,881.7 )          (14.3 )

Gross profit:
New vehicle                     $   129.3       $   186.1       $        (56.8 )          (30.5 )     $    416.3       $    539.9       $       (123.6 )          (22.9 )
Used vehicle                         67.1            86.4                (19.3 )          (22.3 )          228.1            278.9                (50.8 )          (18.2 )
Parts and service                   264.0           280.3                (16.3 )           (5.8 )          817.6            838.2                (20.6 )           (2.5 )
Finance and insurance               118.7           150.9                (32.2 )          (21.3 )          397.1            445.2                (48.1 )          (10.8 )
Other                                 5.4             5.9                  (.5 )                            17.4             19.3                 (1.9 )

Total gross profit              $   584.5       $   709.6       $       (125.1 )          (17.6 )     $  1,876.5       $  2,121.5       $       (245.0 )          (11.5 )


Retail vehicle unit sales:
. . .