Forward Looking Statements and Risk Factors

Some of the statements in this Form 10-Q constitute forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "intend," "forecast," "anticipate," "believe," "estimate," "predict," "potential," and "continue" or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Some of the important factors that could cause actual results to differ from our expectations are discussed in Item 1A to our 2008 Form 10-K, which was filed with the Securities and Exchange Commission on March 16, 2009. These risk factors have not significantly changed since the filing of the 2008 Form 10-K.

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

Overview

We are a leading operator of automotive franchises and retailer of new and used vehicles and services. As of May 11, 2009, we offered 27 brands of new vehicles and all brands of used vehicles in 91 stores in the United States and over the Internet. We sell new and used cars and light trucks; sell replacement parts; provide vehicle maintenance, warranty, paint and repair services; and arrange related financing, service contracts, protection products and GAP insurance for our automotive customers.

The first quarter of 2009 has continued to be a challenging retail environment. The projected Seasonally Adjusted Annualized Rate ("SAAR") of vehicle sales was revised down numerous times during the first three months of the year. Uncertainty as to the future of both General Motors and Chrysler remains. Consumer spending continues to face headwinds as the recessionary environment becomes more pronounced and uncertainty regarding the economic outlook increases.

Despite these negative trends, we have continued to make progress on our restructuring plan. While vehicle sales levels have remained weak, we have focused on improving the gross margin on each retail transaction. We have continued to take costs out of the organization in response to declining top line revenue numbers, through both expense control and personnel reductions. Continued progress has been made on our divestiture plan, as we have sold or closed 20 of the 31 stores we targeted for disposal. Finally, we have raised cash through mortgage financings, the assumption from a third party of future service contract obligations and the divestiture of assets. This cash has been utilized to retire debt obligations and reduce the balance outstanding on our Credit Facilities.

We believe the actions we have taken over the past three months continue to demonstrate the strength of our company. However, no assurances can be given that industry sales will not experience a further decline, or that our restructuring plan will be of sufficient magnitude to meet our operating objectives in a declining market.

Outlook

The overall macroeconomic issues that affected us in 2008 continued in the first quarter of 2009 and have reduced consumers' desire and ability to purchase automobiles. An additional factor negatively impacting auto sales has been a reduction in available options for consumer auto loans. The manufacturers' captive financing companies have suffered additional pressure as the financial crisis has raised their cost of funds and reduced their access to capital. This has prevented them from offering as many incentives designed to drive sales, such as subsidized interest rates and the amount of loan to value they are willing to advance on vehicles.

While the number of customers visiting our stores increased in the first quarter of 2009 compared to the fourth quarter of 2008, it has significantly declined from the first quarter of 2008. We believe one of the reasons showroom traffic has suffered is that customers are assuming that financing is not available or that they would not qualify for vehicle financing. One of the main objectives of our recent advertising has focused on overcoming this obstacle and communicating that consumer vehicle financing continues to be available.

The magnitude of the seasonal improvement we have typically experienced in March did not occur in the first quarter of 2009. This is similar to our experience in 2008, where the seasonally strong second and third quarters of the year were relatively flat compared with the first quarter of 2008. Our current operational plan assumes vehicle sales do not materially increase during the second and third quarters of 2009. However, no assurances can be provided that our plan will be achieved, or that a further deterioration in the economic environment will not occur.

Manufacturer Update

As discussed in Note 1, Interim Financial Statements, we are subject to a concentration of risk in the event of financial distress, including potential reorganization or bankruptcy, of a major vehicle manufacturer. Our Chrysler, General Motors and Ford stores represented approximately 34%, 17%, and 5% of our new vehicle sales in the first quarter of 2009, respectively, and approximately 31%, 20%, and 4% for all of 2008, respectively.

These manufacturers have experienced significant declines in sales revenue due to the current economic recession. These entities have disclosed substantial operating losses over the recent past. Two of these manufacturers, Chrysler and General Motors, have received substantial financial assistance from the U.S. government since December 2008. Additional funding from the U.S. government has been requested by these entities in order to continue to operate in 2009. Restructuring plans by General Motors and Chrysler were submitted for review and rejected by the U.S. government in March 2009. The U.S. government then set new deadlines to Chrysler and General Motors for the presentation of updated restructuring plans of May 1, 2009 and June 1, 2009, respectively, in order to provide additional funding. These plans must assure the long-term viability of the manufacturers, and may include the termination of brands, the restructuring of debt, further personnel cost cuts, a decrease in the number of dealers and a further reduction in production in 2009.

On April 30, 2009 Chrysler filed a Petition for Chapter 11 bankruptcy protection. The Petition includes a Restructuring Plan establishing New Chrysler. New Chrysler will form a strategic alliance with Italian automaker, Fiat S.p.A, at which time Chrysler proposes to transfer certain of its assets and liabilities as well as certain executory contracts to New Chrysler. New Chrysler will continue to manufacture its major brands of vehicles (Chrysler, Dodge and Jeep cars and light trucks).

Chrysler has disclosed it intends to continue to operate during the reorganization period under the protection of the bankruptcy filing. During this period, Chrysler's manufacturing facilities are to sit idle for approximately 60 days.

On May 1, 2009, the bankruptcy court approved the U.S. Treasury to provide debtor in possession financing. This financing is intended to provide Chrysler the necessary operating capital to fund its operations during the reorganization period.

Chrysler has filed a Motion for approval of a sale of its assets to New Chrysler, or to consider other bids, and for approval of bidding and other procedures for the assumption and assignment of executory contracts (the "Motion"). There are no assurances that the Motion will be approved by the Court. Under the Motion, New Chrysler will have the right to designate certain executory contracts, which would include certain dealer and franchise agreements, to be assumed by the new company. In addition, Chrysler has announced that a reduction in its domestic dealer body may occur as part of the Chapter 11 reorganization. At a minimum, until the Motion is approved, and for a period of up to 90 days after the sale date, franchise agreements can be assumed or rejected at Chrysler's sole discretion. Based on our assessment of currently available information, and focusing on strategic location, size and profitability of our Chrysler stores, we believe that under Chrysler's current Restructuring Plan, if approved by the courts, most of our existing dealer agreements will be assigned to New Chrysler, although no assurances can be provided that this will be the case. Should certain of our franchises be terminated, this could lead to an impairment of the related intangible franchise rights (if any) and of other associated long-lived assets, which could adversely impact our financial condition, results of operations and cash flows.

Based upon the Restructuring Plan, if approved by the courts, it appears most, if not all, of our pre-petition receivables will be honored. On April 30, 2009, we had $3.9 million in pre-petition receivables from Chrysler. The Bankruptcy Court has granted motions authorizing Chrysler to honor its warranty and extended service programs, continue most of its incentive, rebate, credit, allowance and support programs for customers and dealers. On May 6, 2009, Chrysler has started processing payments on our pre-petition receivables in accordance with the Motion. However, until the reorganization plan is approved by the courts, and our dealership agreements are assigned to New Chrysler, the extent of collection of our pre-petition receivables outstanding will not be known and no assurances can be provided that we will be able to recover all of these receivables.

On April 30, 2009, Chrysler Financial stopped providing advances for new floorplan financing. We utilize Chrysler Financial for floorplan financing at all of our Chrysler locations and certain non-Chrysler locations. Existing floorplan financing from Chrysler Financial remains in place, and will be repaid as inventory is sold. General Motors Acceptance Corporation ("GMAC") has indicated that floorplan financing will be provided to all Chrysler Financial dealers on an interim basis. We anticipate we will be able to obtain similar floorplan financing with substantially equivalent terms from GMAC or another finance company. However, no assurances can be provided that we will be able to obtain financing at terms and conditions acceptable to us, or at all. In addition, certain of our interest rate swaps are designated as cash flow hedges to hedge benchmark interest payments on the flooring line with Chrysler Financial. Changes in fair value of these interest rate swaps are recorded in other comprehensive income (loss). The cumulative balance recorded in accumulated other comprehensive income at March 31, 2009 related to these swaps was a loss of $3.6 million. We are evaluating whether a change in the floorplan provider would impact the prospective effectiveness of our hedges under the requirements of hedge accounting. Should our hedges no longer be considered prospectively effective, the amount recorded in accumulated other comprehensive income would need to be reclassified into earnings.

General Motors announced their updated restructuring plan on April 27, 2009, which includes measures such as a comprehensive debt to equity swap, a planned reduction of its dealer network by 40% by the end of 2010, primarily through the elimination or sale of brands such as Pontiac, Saturn, Hummer and SAAB and further brand alignment, and further personnel reductions. The restructuring plan also calls for the receipt of up to an additional approximately $12 billion in funding from the U.S. government. General Motors also announced that they will temporarily halt production at most of their production plants for a period of 9 weeks in the summer of 2009 in order to decrease the amount of their unsold inventory. Based on our assessment of publicly available information with respect to General Motors' restructuring plans, we do not believe a significant number of our franchises would be terminated in a bankruptcy filing to affect the restructuring plans. We currently have 1 Saturn, 1 GMC and 1 SAAB franchise, and we do not believe their termination would have a significant impact on our financial position, results of operations or cash flows. However, no assurances can be provided that the restructuring plan will be executed as currently put forward, and that our financial condition, results of operations and cash flows will not be adversely impacted by General Motors' restructuring plan.

If the U.S. government rejects General Motors' restructuring plan and fails to provide funding, or if concessions by bond holders, unions and other parties cannot be reached, it may also be required to seek protection and reorganize under U.S. bankruptcy laws.

In a Chapter 11 reorganization in Bankruptcy Court: (1) the manufacturer could cease producing certain makes of vehicles in addition to those brands already identified for elimination and terminate all or any of our franchises even on continuing brands without consideration, (2) we may not be able to collect some or all of our significant receivables that are due us from such manufacturer,
(3) we may not be able to obtain financing for our new vehicle inventory, or arrange financing for our customers for their vehicle purchases and leases and
(4) consumer demand for such manufacturer's products could be adversely affected.

Given the uncertainty surrounding the future of General Motors and Chrysler, we have attempted to position Lithia to mitigate certain of the risks to our business. We have been restructuring our operations since the second quarter of 2008. The restructuring has impacted our business in a number of ways. We have targeted stores for divestiture based on profitability and brand exposure. We have sold a number of stores in metropolitan markets with too many competing franchises. We have closed some locations with brands that could be eliminated, where brand alignment was not possible, or where operations are small. We have converted assets into cash to reduce debt and improve liquidity. We have reduced costs to reflect the drop in consumer demand. Finally, we have sought expert legal and industry advice to evaluate potential legal ramifications in the event of a filing.

However, the assumptions and scenarios used to prepare for this contingency are uncertain. Plans may change, or be different than we anticipated. Therefore, no assurances can be given that our assumptions and preparations will be adequate to overcome the significant uncertainties surrounding the future of Chrysler after its bankruptcy filing or of General Motors.

Results of Continuing Operations

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



                                           Percent         Gross        Percent
                                              of           Profit       of Total
    Three Months Ended March 31, 2009   Total Revenues     Margin     Gross Profit
    New vehicle                                   47.0 %      8.7 %           20.8 %
    Used vehicle, retail                          27.3       12.4             17.3
    Used vehicle, wholesale                        4.1        2.3              0.5
    Finance and insurance(1)                       3.4      100.0             17.2
    Service, body and parts                       18.1       47.7             43.8
    Fleet and other                                0.1       60.1              0.4

                                           Percent         Gross        Percent
                                              of           Profit       of Total
    Three Months Ended March 31, 2008   Total Revenues     Margin     Gross Profit
    New vehicle                                   55.1 %      7.8 %           25.1 %
    Used vehicle, retail                          21.9       12.0             15.4
    Used vehicle, wholesale                        5.4       (1.2 )           (0.4 )
    Finance and insurance(1)                       3.8      100.0             22.1
    Service, body and parts                       13.6       46.9             37.4
    Fleet and other                                0.2       43.2              0.4

(1) Commissions reported net of anticipated cancellations.

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

                                                                Three Months Ended March 31,
                                                               2009(1)                2008(1)
Revenues:
New vehicle                                                          47.0 %                 55.1 %
Used vehicle, retail                                                 27.3                   21.9
Used vehicle, wholesale                                               4.1                    5.4
Finance and insurance                                                 3.4                    3.8
Service, body and parts                                              18.1                   13.6
Fleet and other                                                       0.1                    0.2

Total revenues                                                      100.0 %                100.0 %
Gross profit                                                         19.7                   17.1
Selling, general and administrative expenses                         17.1                   14.6
Depreciation and amortization                                         1.1                    0.8

Operating income                                                      1.5                    1.7
Floorplan interest expense                                            0.7                    0.9
Other interest expense                                                0.9                    0.8
Other income, net                                                    (0.3 )                   -

Income from continuing operations before income taxes                 0.1                    0.1
Income tax expense                                                     -                      -

Income from continuing operations                                      -  %                   -  %

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

The following tables set forth the changes in our operating results from continuing operations in the first quarter of 2009 compared to the first quarter of 2008:

                                                 Three Months Ended                            %
                                                      March 31,             Increase        Increase
(In Thousands)                                   2009          2008        (Decrease)      (Decrease)
Revenues:
New vehicle                                    $ 187,104     $ 312,358     $  (125,254 )        (40.1 )%
Used vehicle, retail                             108,588       124,312         (15,724 )        (12.6 )
Used vehicle, wholesale                           16,256        30,820         (14,564 )        (47.3 )
Finance and insurance                             13,462        21,463          (8,001 )        (37.3 )
Service, body and parts                           71,853        77,278          (5,425 )         (7.0 )
Fleet and other                                      539           913            (374 )        (41.0 )

Total revenues                                   397,802       567,144        (169,342 )        (29.9 )
Cost of sales:
New vehicle                                      170,847       287,987        (117,140 )        (40.7 )
Used vehicle, retail                              95,071       109,429         (14,358 )        (13.1 )
Used vehicle, wholesale                           15,885        31,205         (15,320 )        (49.1 )
Service, body and parts                           37,602        41,065          (3,463 )         (8.4 )
Fleet and other                                      215           519            (304 )        (58.6 )

Total cost of sales                              319,620       470,205        (150,585 )        (32.0 )

Gross profit                                      78,182        96,939         (18,757 )        (19.3 )
Selling, general and administrative               68,059        82,577         (14,518 )        (17.6 )
Depreciation and amortization                      4,307         4,538            (231 )         (5.1 )

Operating income                                   5,816         9,824          (4,008 )        (40.8 )
Floorplan interest expense                        (2,863 )      (5,062 )        (2,199 )        (43.4 )
Other interest expense                            (3,779 )      (4,449 )          (670 )        (15.1 )
Other income, net                                  1,171            63           1,108        1,758.7

Income from continuing operations before
income taxes                                         345           376             (31 )         (8.2 )
Income tax expense                                   153           154              (1 )         (0.6 )

Income from continuing operations              $     192     $     222     $       (30 )        (13.5 )%



                                                 Three Months Ended                            %
                                                      March 31,             Increase        Increase
                                                 2009          2008        (Decrease)      (Decrease)
New units sold                                     6,243        10,542          (4,299 )        (40.8 )%
Average selling price per new vehicle          $  29,970     $  29,630     $       340            1.1
Used retail units sold                             7,055         7,105             (50 )         (0.7 )
Average selling price per used retail
vehicle                                        $  15,392     $  17,496     $    (2,104 )        (12.0 )
Used wholesale units sold                          3,077         4,660          (1,583 )        (34.0 )
Average selling price per used wholesale
vehicle                                        $   5,283     $   6,614     $    (1,331 )        (20.1 )
Finance and insurance sales per retail unit    $   1,012     $   1,216     $      (204 )        (16.8 )%

Revenues

Total revenues decreased 29.9% in the first quarter of 2009 compared to the first quarter of 2008 primarily as a result of a 29.5% decrease in same-store sales, excluding fleet. The decrease in same-store sales in the first quarter of 2009 compared to the first quarter of 2008 reflected the continuing challenging retail environment, led by declining credit availability and deteriorating consumer confidence as the recessionary environment gained momentum.

Same-store sales percentage decreases were as follows:

                                               First quarter of 2009 vs.
                                                 first quarter of 2008
        New vehicle retail, excluding fleet                        (39.9 )%
        Used vehicle, retail                                       (13.0 )
        Used vehicle, wholesale                                    (48.1 )
        Total vehicle sales, excluding fleet                       (33.2 )
        Finance and insurance                                      (33.0 )
        Service, body and parts                                     (6.3 )
        Total sales, excluding fleet                               (29.5 )

Same store sales are calculated for stores that were in operation as of March 31, 2009, and only including the months of operations for both comparable periods. For example, a store acquired in January 2009 would be included in same store operating data beginning in February 2009, after its first full complete comparable month of operation. Thus, operating results for same store comparisons would include only the periods of February through March of both comparable years.

Within our business lines, vehicle sales have been impacted most severely by the current recessionary environment. Weak consumer confidence and a lack of available credit have reduced demand for vehicles. Same-store new vehicle sales declined by nearly 40% in the first quarter of 2009 compared to the first quarter of 2008. Although same-store used vehicle sales have also declined, we believe the decrease has been less pronounced as consumers seek out lower-priced vehicles when making a purchase. As a result, our used to new vehicle sales ratio has improved from 0.67:1 in the first quarter of 2008 to 1.13:1 in the first quarter of 2009.

The decline in finance and insurance same store sales was primarily due to fewer vehicles sold in the first quarter of 2009 compared to the first quarter of 2008, as well as a decline in our penetration rate for finance and insurance products.

Additionally, in the first quarter of 2009, we discontinued the transfer of the obligation related to our lifetime lube, oil and filter insurance product to a third party. As a result, starting March 1 2009, we no longer recognize revenue related to earned commissions at the inception of the contract but, instead, defer the full sale price of the contract and recognize the revenue over the expected life of the contract as services are provided. This change improves our cash position as we retain 100% of the contract sales price, but has impacted our finance and insurance revenues by approximately $31 per vehicle in the first quarter of 2009.

Individual penetration rates for certain products were as follows:

                   Three Months Ended March 31,     2009     2008
                   Finance and insurance              71 %     79 %
                   Service contracts                  43       43
                   Lifetime oil change and filter     34       36

Our same-store service, body and parts business was also affected, albeit at a lesser magnitude than vehicle sales, by the challenging economic environment in the first quarter of 2009. We focus on customer satisfaction in an effort to keep our customers returning to our facilities for their service needs. Warranty work accounted for approximately 20.6% of our same-store service, body and parts sales in the first quarter of 2009. Same-store warranty sales in the first quarter of 2009 were up 1.9% compared to the first quarter of 2008. Domestic brand warranty work increased by 4.6%, while import/luxury warranty work decreased by 3.2% during the first quarter of 2009 compared to the first quarter of 2008. The customer pay service and parts business, which represented 79.4% of the total service, body and parts business in the first quarter of 2009, was down 8.2% on a same-store basis compared to the first quarter of 2008.

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