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

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2002
	OR
[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to       

Commission file number: 000-21789

LITHIA MOTORS, INC.

(Exact name of registrant as specified in its charter)

Oregon (State or other jurisdiction of incorporation or organization)	93-0572810 (I.R.S. Employer Identification No.)
360 E. Jackson Street, Medford, Oregon (Address of principal executive offices)	97501 (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   X             No     

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

Class A common stock without par value
Class B common stock without par value
                              (Class) 14,032,200
3,918,231
(Outstanding at August 7, 2002)

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II — OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 99.1
EXHIBIT 99.2

LITHIA MOTORS, INC.
FORM 10-Q
INDEX

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets — June 30, 2002 (unaudited) and December 31, 2001		2
	Consolidated Statements of Operations — Three and Six Months Ended June 30, 2002 and 2001 (unaudited)		3
	Consolidated Statements of Cash Flows — Six Months Ended June 30, 2002 and 2001 (unaudited)		4
	Notes to Consolidated Financial Statements (unaudited)		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		17
PART II - OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders		17
Item 6.	Exhibits and Reports on Form 8-K		18
Signatures			19

1

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

				June 30,			December 31,
				2002			2001
				(unaudited)
Assets
Current Assets:
	Cash and cash equivalents			$	64,339		$	59,855
	Trade receivables, net of allowance for doubtful accounts of $448 and $504				40,336			33,196
	Notes receivable, current portion, net of allowance for doubtful accounts of $634 and $700				533			1,361
	Inventories, net				410,909			275,398
	Vehicles leased to others, current portion				6,973			5,554
	Prepaid expenses and other				3,282			3,759
	Deferred income taxes				3,010			1,286
			Total Current Assets		529,382			380,409
Land and buildings, net of accumulated depreciation of $2,783 and $2,098					104,036			84,739
Equipment and other, net of accumulated depreciation of $11,629 and $9,695					48,297			37,238
Notes receivable, less current portion					219			244
Vehicles leased to others, less current portion					246			122
Goodwill, net of accumulated amortization of $9,407 and $9,407					176,428			149,742
Other intangible assets					18,389			7,107
Other non-current assets, net of accumulated amortization of $320 and $312					3,763			3,343
			Total Assets	$	880,760		$	662,944
Liabilities and Stockholders’ Equity
Current Liabilities:
	Flooring notes payable			$	333,454		$	211,947
	Current maturities of long-term debt				8,666			10,203
	Trade payables				21,748			16,894
	Accrued liabilities				41,730			36,531
			Total Current Liabilities		405,598			275,575
Used Vehicle Flooring Facility					70,000			69,000
Real Estate Debt, less current maturities					51,542			40,693
Other Long-Term Debt, less current maturities					31,743			55,137
Deferred Revenue					1,277			1,481
Other Long-Term Liabilities					8,617			8,181
Deferred Income Taxes					12,126			9,380
			Total Liabilities		580,903			459,447
Stockholders’ Equity:
	Preferred stock — no par value; authorized 15,000 shares; 15 shares designated Series M Preferred; issued and outstanding 0 and 9.7				—			5,806
	Class A common stock — no par value; authorized 100,000 shares; issued and outstanding 13,986 and 8,894				201,411			113,553
	Class B common stock — no par value; authorized 25,000 shares; issued and outstanding 3,918 and 4,040				487			502
	Additional paid-in capital				578			507
	Accumulated other comprehensive loss				(2,165	)		(2,091	)
	Retained earnings				99,546			85,220
		Total Stockholders’ Equity			299,857			203,497
		Total Liabilities and Stockholders’ Equity		$	880,760		$	662,944

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

2

LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

			Three months ended June 30,						Six months ended June 30,
			2002			2001			2002			2001
Revenues:
	New vehicle sales		$	299,475		$	238,651			566,314		$	453,608
	Used vehicle sales			184,706			142,043			367,004			278,982
	Service, body and parts			54,995			45,511			107,033			90,656
	Finance and insurance			22,331			17,854			42,156			33,108
	Fleet and other			22,811			17,991			26,209			25,847
		Total revenues		584,318			462,050			1,108,716			882,201
Cost of sales				491,436			386,840			932,187			738,094
Gross profit				92,882			75,210			176,529			144,107
Selling, general and administrative				73,540			58,783			141,276			113,821
Depreciation — buildings				627			240			1,058			565
Depreciation — equipment and other				1,262			1,035			2,496			2,002
Amortization				6			951			9			1,874
		Income from operations		17,447			14,201			31,690			25,845
Other income (expense):
	Floorplan interest expense			(2,882	)		(3,832	)		(5,219	)		(8,487	)
	Other interest expense			(1,464	)		(2,078	)		(3,056	)		(4,345	)
	Other income (expense), net			(177	)		(45	)		(82	)		(124	)
				(4,523	)		(5,955	)		(8,357	)		(12,956	)
Income before income taxes				12,924			8,246			23,333			12,889
Income tax expense				4,989			3,175			9,007			4,963
Net income			$	7,935		$	5,071			14,326		$	7,926
Basic net income per share			$	0.44		$	0.38			0.87		$	0.59
Shares used in basic net income per share				17,919			13,493			16,456			13,478
Diluted net income per share			$	0.43		$	0.37			0.85		$	0.58
Shares used in diluted net income per share				18,454			13,762			16,927			13,710

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

3

LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

					Six months ended June 30,
					2002			2001
Cash flows from operating activities:
	Net income				$	14,326		$	7,926
	Adjustments to reconcile net income to net cash flows provided by operating activities:
			Depreciation and amortization			3,563			4,441
			Compensation expense related to stock option issuances			82			111
			Gain on sale of assets			(156	)		(26	)
			(Gain) loss on sale of vehicles leased to others			72			(14	)
			Gain on sale of franchise			(50	)		—
			Deferred income taxes			576			(12	)
			Equity in income (loss) of affiliate			(2	)		1
			Changes in operating assets and liabilities, net of effect of acquisitions:
				Trade and installment contract receivables, net		(4,507	)		55
				Inventories		(80,857	)		6,036
				Prepaid expenses and other		1,277			1,715
				Other noncurrent assets		(324	)		(527	)
				Floorplan notes payable		81,465			(8,466	)
				Trade payables		4,414			2,793
				Accrued liabilities		3,923			3,090
				Other long-term liabilities and deferred revenue		59			3,576
				Net cash provided by operating activities		23,861			20,699
Cash flows from investing activities:
	Notes receivable issued					(102	)		(404	)
	Principal payments received on notes receivable					1,045			1,424
	Capital expenditures:
		Maintenance				—			(2,813	)
		Financeable real estate and other				(17,429	)		(10,626	)
	Proceeds from sale of assets					1,178			4,627
	Expenditures for vehicles leased to others					(4,935	)		(3,234	)
	Proceeds from sale of vehicles leased to others					900			2,062
	Cash paid for acquisitions, net of cash acquired					(59,925	)		(8,965	)
	Cash from sales of franchises					535			1,541
				Net cash used in investing activities		(78,733	)		(16,388	)
Cash flows from financing activities:
	Net borrowings (repayments) on lines of credit					(21,000	)		(1,000	)
	Principal payments on long-term debt and capital leases					(5,980	)		(2,680	)
	Proceeds from issuance of long-term debt					10,585			293
	Proceeds from issuance of common stock					80,106			933
	Redemption of Series M Preferred Stock					(4,355	)		—
				Net cash provided by (used in) financing activities		59,356			(2,454	)
Increase in cash and cash equivalents						4,484			1,857
Cash and cash equivalents:
	Beginning of period					59,855			38,789
	End of period				$	64,339		$	40,646

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

4

LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Presentation

The financial information included herein as of June 30, 2002 and for the three and six-month periods ended June 30, 2002 and 2001 is unaudited; however, such information reflects all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2001 is derived from our 2001 Annual Report on Form 10-K. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2001 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Note 2. Inventories

Inventories are valued at cost, using the specific identification method for vehicles and the first-in first-out (FIFO) method of accounting for parts (collectively, the FIFO method). Detail of inventory is as follows (in thousands):

	June 30, 2002		December 31, 2001
New and program vehicles	$	309,429	$	191,598
Used vehicles		80,986		67,018
Parts and accessories		20,494		16,782
	$	410,909	$	275,398

Note 3. Supplemental Cash Flow Information

Supplemental disclosure of cash flow information is as follows (in thousands):

	Six Months Ended June 30,
	2002		2001
Cash paid during the period for income taxes	$	3,451	$	2,923
Cash paid during the period for interest		8,247		13,401

5

Note 4. Earnings Per Share

Following is a reconciliation of basic earnings per share (“EPS”) and diluted EPS (in thousands, except per share amounts).

	Three Months Ended June 30,
	2002						2001
					Per						Per
					Share						Share
Basic EPS	Income		Shares		Amount		Income		Shares		Amount
Net income available to common shareholders	$	7,935		17,919		0.44	$	5,071		13,493	$	0.38
Diluted EPS
Effect of dilutive stock options		—		535				—		269
Net income available to common shareholders	$	7,935		18,454		0.43	$	5,071		13,762	$	0.37

	Six Months Ended June 30,
	2002						2001
					Per						Per
					Share						Share
Basic EPS	Income		Shares		Amount		Income		Shares		Amount
Net income available to common shareholders	$	14,326		16,456	$	0.87	$	7,926		13,478	$	0.59
Diluted EPS
Effect of dilutive stock options		—		471				—		232
Net income available to common shareholders	$	14,326		16,927	$	0.85	$	7,926		13,710	$	0.58

Potentially dilutive securities that are not included in the diluted EPS calculations because they would be antidilutive include 10,000 and 126,000 shares, respectively, issuable pursuant to stock options, for the three month periods ended June 30, 2002 and 2001, respectively, and 10,000 and 485,000 shares, respectively, for the six month periods ended June 30, 2002 and 2001, respectively.

Note 5. Comprehensive Income

Comprehensive income includes the fair value of cash flow hedging instruments that are reflected in shareholders’ equity instead of net income. The following table sets forth the calculation of comprehensive income for the periods indicated (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Net income	$	7,935		$	5,071		$	14,326		$	7,926
Unrealized gain (loss) on investments, net, subsequently realized		1			(39	)		3			(15	)
Cash flow hedges:
Cumulative effect of adoption of SFAS 133, net of tax effect of $594		—			—			—			(948	)
Net derivative gains (losses), net of tax effect of $548, $(169), $515 and $394, respectively		(874	)		271			(822	)		(629	)
Reclassification adjustment, net of tax effect of $(235), $(109), $(468) and $(157), respectively		374			173			745			251
Total comprehensive income	$	7,436		$	5,476		$	14,252		$	6,585

6

Note 6. Acquisitions

The following acquisitions were made in the first six months of 2002:

• In January 2002, we acquired Lynn Alexander Auto Group, which is comprised of All American Chrysler/Jeep/Dodge and All American Chevrolet located in San Angelo, Texas and All American Chrysler/Jeep/Dodge in Big Spring, Texas. The stores have anticipated 2002 annual revenues of $115.0 million.

• In January 2002, we acquired Premier Chrysler/Jeep/Dodge in Odessa, Texas, which has anticipated 2002 annual revenues of $33.0 million.

• In February 2002, we acquired Thomason Subaru in Oregon City, Oregon, which has anticipated 2002 annual revenues of $20.0 million. The store has been renamed to Lithia Subaru of Oregon City.

• In April 2002, we acquired Village Dodge-Hyundai in Midland, Texas, which has anticipated 2002 annual revenues of $35.0 million.

• In May 2002, we opened a newly awarded Hummer franchise in Bellevue, Washington.

• In June 2002, we acquired Jay Wolfe Ford in Omaha, Nebraska, which has anticipated 2002 annual revenues of $55.0 million.

• In June 2002, we acquired Broncho Chevrolet in Odessa, Texas and Sherman Chevrolet in Midland, Texas. The stores have combined anticipated 2002 revenues of $115.0 million. The stores were renamed Chevrolet of Odessa and Chevrolet of Midland, respectively.

The above acquisitions were accounted for under the purchase method of accounting. Pro forma results of operations assuming all of the above acquisitions occurred at the beginning of the respective periods are as follows (in thousands, except per share amounts):

	Three Months Ended June 30,				Six Months Ended June 30,
	2002		2001		2002		2001
Total revenues	$	615,823	$	567,805	$	1,210,727	$	1,088,529
Net income		8,199		5,962		15,136		9,367
Basic earnings per share		0.46		0.44		0.92		0.69
Diluted earnings per share		0.44		0.43		0.89		0.68

There are no future contingent payouts related to any of the 2002 acquisitions. The purchase price for the 2002 acquisitions was allocated as follows (in thousands):

Inventory		$	55,953
Prepaid expenses and other current assets			3,476
Property and equipment			17,053
Goodwill			21,258
Other intangible assets — franchise value			11,283
Other non-current assets			100
	Total assets acquired		109,123
Flooring notes payable			43,162
Other current liabilities			1,615
Other non-current liabilities			1,956
	Total liabilities acquired		46,733
Net assets acquired		$	62,390

We anticipate that approximately 90 percent of the goodwill acquired in 2002 will be deductible for tax purposes over the period of 15 years.

7

Note 7. Conversion and Redemption of Series M Preferred Stock

On January 24, 2002, 5,177 shares of Series M Preferred Stock were converted at a price of $20.77 per common share into 249,311 shares of Class A common stock. On May 2, 2002, we redeemed the remaining 4,499 outstanding shares of Series M Preferred Stock for a total of $4.4 million from our existing cash balances. No shares of Series M Preferred Stock remain outstanding following the May 2, 2002 redemption.

Note 8. Offering of Class A Common Stock

In March 2002, we registered and sold 4.5 million newly issued shares of Class A common stock and 1.25 million shares from existing stockholders. Proceeds to the Company, net of offering expenses, totaled approximately $77.2 million. In connection with the sale of shares by existing stockholders, 121,488 shares of Class B common stock were converted into a like number of shares of Class A common stock.

Note 9. 2001 Stock Option Plan

At the Annual Meeting of Shareholders held on May 8, 2002, the shareholders approved the reservation of an additional 600,000 shares of our Class A common stock for issuance under our 2001 Stock Option Plan.

Note 10. 1998 Employee Stock Purchase Plan

At the Annual Meeting of Shareholders held on May 8, 2002, the shareholders approved the reservation of an additional 500,000 shares of our Class A common stock for issuance under our 1998 Employee Stock Purchase Plan.

Note 11. Adoption of SFAS No. 142

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.”

We adopted the provisions of SFAS No. 142 effective January 1, 2002. SFAS No. 141 “Business Combinations” requires, upon adoption of SFAS No. 142, that we evaluate our existing intangible assets and goodwill that were acquired in prior purchase business combinations, and make any necessary reclassifications in order to conform with the criteria in SFAS No. 141 for recognition apart from goodwill. We did not reclassify any intangibles upon adoption of SFAS No. 142. We tested our goodwill and other intangible assets with indefinite useful lives for impairment in accordance with the provisions of SFAS No. 142 during the first quarter of 2002. We determined that no impairment losses were required to be recognized.

8

The following table discloses what reported net income would have been in all periods presented prior to the adoption of SFAS No. 142 exclusive of amortization expense (including any related tax effects) recognized in those periods related to goodwill and other intangible assets that are no longer being amortized.

	Three Months Ended		Six Months Ended
(In thousands, except per share amounts)	June 30, 2001		June 30, 2001
Net income as reported	$	5,071	$	7,926
Add back amortization of goodwill and other intangible assets, net of tax effect of $(355) and $(704)		567		1,124
Adjusted net income	$	5,638	$	9,050
Basic net income per share as reported	$	0.38	$	0.59
Adjustment for add back of amortization expense, net of tax effect		0.04		0.08
Adjusted basic net income per share	$	0.42	$	0.67
Diluted net income as reported	$	0.37	$	0.58
Adjustment for add back of amortization expense, net of tax effect		0.04		0.08
Adjusted diluted net income per share	$	0.41	$	0.66

Note 12. Subsequent Event — Acquisition

In July 2002, we acquired Mercedes of Omaha in Omaha, Nebraska, which has anticipated 2002 revenues of $22.0 million.

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

Forward Looking Statements and Risk Factors

Some of the statements in this Form 10-Q constitute forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” and “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Some of the important factors that could cause actual results to differ from our expectations are discussed in Exhibit 99 to our 2001 Annual Report on 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.

9

General

We are a leading operator of automotive franchises and retailer of new and used vehicles and services. As of July 31, 2002, we offered 25 brands of new vehicles through 130 franchises in 68 stores in the western United States and over the Internet. As of July 31, 2002, we operate 16 stores in Oregon, 10 in California, 9 in Washington, 6 in Colorado, 7 in Idaho, 5 in Nevada, 8 in Texas, 3 in South Dakota, 2 in Alaska and 2 in Nebraska. We sell new and used cars and light trucks; sell replacement parts; provide vehicle maintenance, warranty, paint and repair services; and arrange related financing and insurance for our automotive customers.

During an economic downturn, customers tend to shift towards the purchase of more reasonably priced new vehicle models or used vehicles. Many customers decide to delay purchasing a new vehicle and instead repair existing vehicles. In addition, manufacturers typically offer increased dealer and customer incentives during an economic downturn in order to support new vehicle sales volume. These factors lead to less volatility in earnings for automobile retailers than for automobile manufacturers.

Historically, new vehicle sales have accounted for approximately 50% of our total revenues but less than 30% of total gross profit. We emphasize sales of higher margin products, which generate over 70% of our gross profits. Our revenues and gross profit by product line were as follows:

	Percent of			Gross			Percent of Total
Three Months Ended June 30, 2002	Total Revenues			Margin			Gross Profit
New vehicles		51.3	%		8.5	%		27.4	%
Retail used vehicles(1)		26.3			12.1			20.1
Service, body and parts		9.4			48.5			28.7
Finance and insurance(2)		3.8			99.3			23.9
Fleet and other		3.9			0.5			0.1

	Percent of			Gross			Percent of Total
Three Months Ended June 30, 2001	Total Revenues			Margin			Gross Profit
New vehicles		51.7	%		8.8	%		28.0	%
Retail used vehicles(1)		26.2			12.7			20.4
Service, body and parts		9.8			47.0			28.5
Finance and insurance(2)		3.9			98.6			23.4
Fleet and other		3.9			1.9			0.5

	Percent of			Gross			Percent of Total
Six Months Ended June 30, 2002	Total Revenues			Margin			Gross Profit
New vehicles		51.1	%		8.3	%		26.6	%
Retail used vehicles(1)		27.3			12.0			20.7
Service, body and parts		9.7			48.2			29.2
Finance and insurance(2)		3.8			99.4			23.7
Fleet and other		2.3			1.7			0.2

	Percent of			Gross			Percent of Total
Three Months Ended June 30, 2001	Total Revenues			Margin			Gross Profit
New vehicles		51.4	%		8.8	%		27.6	%
Retail used vehicles(1)		26.9			12.9			21.3
Service, body and parts		10.3			45.8			28.8
Finance and insurance(2)		3.8			98.5			22.6
Fleet and other		2.9			2.9			0.5

(1)	Excludes wholesale used vehicle sales, representing 5.3%, 4.6%, 5.8% and 4.8% of total revenues, respectively, and a negative gross margin contribution of 0.7%, 2.6%, 1.3% and 2.9%, respectively, for the three and six month periods ended June 30, 2002 and 2001.
(2)	Reported net of administration fees and anticipated cancellations.

10

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

Lithia Motors, Inc. (1)			Three Months Ended June 30,						Six Months Ended June 30,
			2002			2001			2002			2001
Revenues:
	New vehicles			51.3	%		51.7	%		51.1	%		51.4	%
	Used vehicles			31.6			30.7			33.1			31.6
	Service, body and parts			9.4			9.8			9.7			10.3
	Finance and insurance			3.8			3.9			3.8			3.8
	Fleet and other			3.9			3.9			2.3			2.9
		Total revenues		100.0	%		100.0	%		100.0	%		100.0	%
Gross profit				15.9			16.3			15.9			16.3
Selling, general and administrative expenses				12.6			12.7			12.7			12.9
Depreciation and amortization				0.3			0.5			0.3			0.5
Income from operations				3.0			3.1			2.9			2.9
Floorplan interest expense				0.5			0.8			0.5			1.0
Other interest expense				0.3			0.5			0.3			0.5
Income before taxes				2.2			1.8			2.1			1.5
Income tax expense				0.8			0.7			0.8			0.6
Net income				1.4	%		1.1	%		1.3	%		0.9	%

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

Results of Operations

			Three Months Ended
(Dollars in thousands)			June 30,									%
									Increase			Increase
			2002			2001			(Decrease)			(Decrease)
Revenues:
	New vehicle sales		$	299,475		$	238,651		$	60,824			25.5	%
	Used vehicle sales			184,706			142,043			42,663			30.0
	Service, body and parts			54,995			45,511			9,484			20.8
	Finance and insurance			22,331			17,854			4,477			25.1
	Fleet and other			22,811			17,991			4,820			26.8
		Total revenues		584,318			462,050			122,268			26.5
Cost of sales				491,436			386,840			104,596			27.0
Gross profit				92,882			75,210			17,672			23.5
Selling, general and administrative				73,540			58,783			14,757			25.1
Depreciation and amortization				1,895			2,226			(311	)		(14.9	)
Income from operations				17,447			14,201			3,246			22.9
Floorplan interest expense				(2,882	)		(3,832	)		(950	)		(24.8	)
Other interest expense				(1,464	)		(2,078	)		(614	)		(29.5	)
Other income (expense), net				(177	)		(45	)		132			293.3
Income before income taxes				12,924			8,246			4,678			56.7
Income tax expense				4,989			3,175			1,814			57.1
Net income			$	7,935		$	5,071		$	2,864			56.5	%

	Three Months Ended
	June 30,						%
					Increase		Increase
	2002		2001		(Decrease)		(Decrease)
New units sold		11,861		9,772		2,089		21.4	%
Average selling price per new vehicle	$	25,249	$	24,422	$	827		3.4
Used units sold — retail		10,580		9,119		1,461		16.0
Average selling price per retail used vehicle	$	14,528	$	13,270	$	1,258		9.5
Used units sold — wholesale		6,151		4,723		1,428		30.2
Average selling price per wholesale used vehicle	$	5,039	$	4,454	$	585		13.1	%

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			Six Months Ended
(Dollars in thousands)			June 30,									%
									Increase			Increase
			2002			2001			(Decrease)			(Decrease)
Revenues:
	New vehicle sales		$	566,314		$	453,608		$	112,706			24.8	%
	Used vehicle sales			367,004			278,982			88,022			31.6
	Service, body and parts			107,033			90,656			16,377			18.1
	Finance and insurance			42,156			33,109			9,048			27.3
	Fleet and other			26,209			25,846			362			1.4
		Total revenues		1,108,716			882,201			226,515			25.7
Cost of sales				932,187			738,094			194,093			26.3
Gross profit				176,529			144,107			32,422			22.5
Selling, general and administrative				141,276			113,821			27,455			24.1
Depreciation and amortization				3,563			4,441			(878	)		(19.8	)
Income from operations				31,690			25,845			5,845			22.6
Floorplan interest expense				(5,219	)		(8,487	)		(3,268	)		(38.5	)
Other interest expense				(3,056	)		(4,345	)		(1,289	)		(29.7	)
Other income (expense), net				(82	)		(124	)		(42	)		(33.9	)
Income before income taxes				23,333			12,889			10,444			81.0
Income tax expense				9,007			4,963			4,044			81.5
Net income			$	14,326		$	7,926		$	6,400			80.7	%

	Six Months Ended
	June 30,						%
					Increase		Increase
	2002		2001		(Decrease)		(Decrease)
New units sold		22,277		18,504		3,773		20.4	%
Average selling price per new vehicle	$	25,421	$	24,514	$	907		3.7
Used units sold — retail		20,944		17,973		2,971		16.5
Average selling price per retail used vehicle	$	14,454	$	13,181	$	1,273		9.7
Used units sold — wholesale		12,257		9,048		3,209		35.5
Average selling price per wholesale used vehicle	$	5,245	$	4,652	$	593		12.7	%

Revenues. Total revenues increased 26.5% in the second quarter of 2002 compared to the second quarter of 2001 as a result of acquisitions and 0.2% same store retail sales growth. Total revenues increased 25.7% in the first six months of 2002 compared to the first six months of 2001 as a result of acquisitions and 0.6% same store retail sales growth. We achieved same store new vehicle sales growth of 3.1% and 2.9% in the three and six-month periods ended June 30, 2002 compared to the same periods of 2001. This compares favorably to an industry decline in new vehicle sales of 1.7% and 3.0% for the same periods of 2002 compared to 2001. The increases in new vehicle same store sales for both the three and six month periods ended June 30, 2002 were augmented by same store increases in finance and insurance sales and were partially offset by decreases in same store used vehicles and service and parts sales.

During the first two quarters of 2002, manufacturers offered, and are continuing to offer, incentives, including low interest rates and rebates, in order to attract new vehicle buyers. The availability of cash rebates and zero percent and low interest rate financing have also enhanced our ability to sell finance, warranty and insurance products and services. Our finance and insurance sales per retail unit increased 5.3% to $995 per vehicle and 7.4% to $975 per vehicle, respectively, in the three and six-month periods ended June 30, 2002 compared to the same periods of 2001.

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Gross Profit. Gross profit increased due to increased total revenues, offset in part by a slightly lower overall gross profit percentage. Incentives and rebates received from manufacturers, including floorplan interest credits, are recorded as a reduction to cost of goods sold. Gross profit margins achieved were as follows:

	Three Months Ended June 30,
							Lithia
	2002			2001			Margin Change*
New vehicles		8.5	%		8.8	%		(30	)bp
Retail used vehicles		12.1			12.7			(60	)
Service and parts		48.5			47.0			150
Finance and insurance		99.3			98.6			70
Overall		15.9			16.3			(40	)

	Six Months Ended June 30,
							Lithia
	2002			2001			Margin Change*
New vehicles		8.3	%		8.8	%		(50	)bp
Retail used vehicles		12.0			12.9			(90	)
Service and parts		48.2			45.8			240
Finance and insurance		99.4			98.5			90
Overall		15.9			16.3			(40	)

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

The decrease in the overall gross profit margin in the three and six month periods ended June 30, 2002 compared to the same periods of 2001 are primarily a result of three factors:

• A mix shift in used vehicle sales to the lower margin one to three-year old vehicles, which have lower margins than the older used vehicles;

• Aggressive marketing of new vehicles in order to gain market share, which resulted in lower new vehicle margins; and

• Lower floorplan interest credits from the manufacturers due to lower market rates.

Selling, General and Administrative Expense. Selling, general and administrative expense includes salaries and related personnel expenses, facility lease expense, advertising, legal, accounting, professional services and general corporate expenses. Selling, general and administrative expense increased due to increased selling, or variable, expenses related to the increase in revenues and the number of locations. As a percentage of revenue, selling, general and administrative expense decreased 10 basis points and 20 basis points, respectively, in the three and six-month periods ended June 30, 2002 compared to the same periods of 2001 due to expense leverage on higher sales, which was partially offset by increases in workers’ compensation premiums, health insurance and other operating costs.

Depreciation and Amortization. Depreciation and amortization expense decreased primarily as a result of the adoption of SFAS No. 142 “Goodwill and Other Intangible Assets” in the first quarter of 2002. SFAS No. 142 requires that goodwill and other intangibles with indefinite useful lives no longer be amortized.

Income from Operations. Operating margins decreased 10 basis points in the three month period ended June 30, 2002 compared to the three month period ended June 30, 2001 and remained flat for the six-month period ended June 30, 2002 compared to the same period of 2001 due to the decrease in the overall gross margin percentage, offset by lower operating expenses as a percentage of revenue.

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Floorplan Interest Expense. The decrease in floorplan interest expense in the three and six-month periods ended June 30, 2002 compared to the same period of 2001 is primarily due to approximately $2.1 million and $4.8 million, respectively, in savings as a result of decreases in the effective interest rates on the floating rate credit lines, offset in part by a $37.1 million and a $16.8 million increase, respectively, in outstanding balances due to acquisitions. In addition to the interest expense on our flooring lines of credit, floorplan interest expense includes the interest expense related to our interest rate swaps.

Other Interest Expense. Other interest expense includes interest on debt incurred related to acquisitions, real estate mortgages, our used vehicle line of credit and equipment related notes. Approximately $0.6 million and $1.7 million of the decrease in other interest expense is due to lower interest rates in three and six-month periods ended June 30, 2002 compared to the same periods of 2001, offset in part by less capitalized interest in the three and six-month periods ended June 30, 2002 compared to the same periods of 2001. The lower interest rates in the 2002 periods are due in part to the refinancing of $15.2 million of fixed interest rate mortgage loans since November 2001, utilizing floating rate loans with Toyota Motor Credit and Ford Motor Credit.

Income Tax Expense. Our effective tax rate was 38.6% in the first six months of 2002 compared to 38.5% in the first six months of 2001. Our effective tax rate may be affected in the future by the mix of asset acquisitions compared to corporate acquisitions, as well as by the mix of states where our stores are located.

Net Income. Net income as a percentage of revenue increased 30 basis points and 40 basis points, respectively, for the three and six month periods ended June 30, 2002 compared to the same periods of the prior year as a result of increased revenues and lower operating expenses and interest expense, offset in part by a lower gross margin percentage.

Liquidity and Capital Resources

Our principal needs for capital resources are to finance acquisitions and capital expenditures, as well as for working capital. We have relied primarily upon internally generated cash flows from operations, borrowings under our credit agreements and the proceeds from public equity offerings to finance operations and expansion.

On May 2, 2002, we redeemed the remaining 4,499 outstanding shares of our Series M Preferred Stock for a total of $4.4 million from our existing cash balances.

In March 2002, we registered and sold 4.5 million newly issued shares of our Class A common stock for total proceeds, net of offering expenses, of approximately $77.2 million. We utilized the proceeds to pay down our lines of credit until such funds are required for acquisitions.

In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our Class A common stock. We have purchased 40,000 shares under this program and may continue to do so from time to time in the future as conditions warrant.

We have credit facilities with Ford Motor Credit Company totaling $530 million, which expire December 1, 2003, with interest due monthly. The facilities include $250 million for new and program vehicle flooring, $150 million for used vehicle flooring and $130 million for

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store acquisitions. We also have the option to convert the acquisition line into a five-year term loan.

The credit lines with Ford Motor Credit are cross-collateralized and are secured by inventory, accounts receivable, intangible assets and equipment. We pledged to Ford Motor Credit the stock of all of our subsidiaries except entities operating BMW, Honda, Nissan or Toyota stores.

The financial covenants in our agreement with Ford Motor Credit require us to maintain compliance with, among other things, (1) specified ratios of total debt to tangible base capital; (2) specified ratios of total adjusted debt to tangible base capital; (3) specific current ratio; (4) specific fixed charge coverage ratio; and (5) positive net cash. The Ford Motor Credit agreements also preclude the payment of cash dividends without prior consent. We were in compliance with all such covenants at June 30, 2002.

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

We also have a real estate line of credit with Toyota Financial Services totaling $40 million, which expires July 2, 2006. This line of credit is secured by the real estate financed under this line of credit.

In addition, U.S. Bank N.A. has extended a $27.5 million revolving line of credit for leased vehicles and equipment purchases, which expires January 31, 2004.

Interest rates on all of the above facilities ranged from 3.36% to 4.61% at June 30, 2002. Amounts outstanding on the lines at June 30, 2002 together with amounts remaining available under such lines were as follows (in thousands):

			Remaining
	Outstanding at		Availability as of
	June 30, 2002		June 30, 2002
New and program vehicle lines	$	333,454	$		*
Used vehicle line		70,000		80,000
Acquisition line		—		130,000
Real estate line		22,411		17,589
Equipment/leased vehicle line		27,500		—
	$	453,365	$	227,589	*

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

At June 30, 2002, we had capital commitments of approximately $10.8 million for the construction of three new store facilities, additions to three existing facilities and the remodel of one facility. The three new facilities will be a Ford store in Boise, Idaho, a Chrysler/Dodge/Jeep store in Colorado Springs, Colorado and a body shop in Reno, Nevada. We have already incurred $5.4 million for these commitments and anticipate incurring $8.4 million of the remaining $10.8 million during 2002. We expect to pay for the construction out of existing cash balances until completion of the projects, at which time we anticipate securing long-term financing and general borrowings from third party lenders for 85% to 100% of the amounts expended.

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Seasonality and Quarterly Fluctuations

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

Recent Accounting Pronouncements

See Note 11. for a description of the effects of the adoption of SFAS No. 142.

In August 2001, the FASB approved SFAS No. 143, “Accounting for Asset Retirement Obligations,” which we adopted in the first quarter of 2002. SFAS No. 143 addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. In October 2001, the FASB approved SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and the accounting and reporting provisions of APB No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for the disposal of a segment of a business. SFAS No. 144 retains many of the fundamental provisions of SFAS No. 121, but resolves certain implementation issues associated with that Statement. SFAS No. 144 was also adopted in the first quarter of 2002. The adoption of SFAS No. 143 and SFAS No. 144 did not have any effect on our financial condition or results of operations.

In July 2002, the FASB approved SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses the financial accounting and reporting for obligations associated with an exit activity, including restructuring, or with a disposal of long-lived assets. Exit activities include, but are not limited to, eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. SFAS No. 146 specifies that a company will record a liability for a cost associated with an exit or disposal activity only when that liability is incurred and can be measured at fair value. Therefore, commitment to an exit plan or a plan of disposal expresses only management’s intended future actions and, therefore, does not meet the requirement for recognizing a liability and the related expense. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. The Company does not anticipate that the adoption of SFAS No. 146 will have a material effect on its financial position or results of operations.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     There have been no material changes in our reported market risks or risk management policies since the filing of our 2001 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on February 22, 2002.

PART II — OTHER INFORMATION

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

The annual meeting of the shareholders of the Company was held on May 8, 2002, at which the following actions were approved:

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

		No. of		No. of
Name		Votes For		Votes Withheld
Sidney B. DeBoer	Class A Class B Series M		10,322,773 39,182,310 211,987	177,917 — —
M. L. Dick Heimann	Class A Class B Series M		10,322,773 39,182,310 211,987	177,917 — —
Thomas Becker	Class A Class B Series M		10,322,508 39,182,310 211,987	178,182 — —
R. Bradford Gray	Class A Class B Series M		10,322,773 39,182,310 211,987	177,917 — —
W. Douglas Moreland	Class A Class B Series M		10,322,773 39,182,310 211,987	177,917 — —
Gerald F. Taylor	Class A Class B Series M		10,322,773 39,182,310 211,987	177,917 — —
William J. Young	Class A Class B Series M		10,322,773 39,182,310 211,987	177,917 — —

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2. To approve an amendment to the Lithia Motors, Inc. 2001 Stock Option Plan to increase the number of shares available for grants under the plan:

					Number of		Number of
	Number of		Number of		Votes		Broker
	Votes For		Votes Against		Abstaining		Non-Votes
Class A		6,293,282		1,875,794		20,377		2,311,237
Class B		39,182,310		—		—		—
Series M		211,987		—		—		—

3. To approve an amendment to the Lithia Motors, Inc. 1998 Employee Stock Purchase Plan to increase the number of shares issuable under the plan:

					Number of		Number of
	Number of		Number of		Votes		Broker
	Votes For		Votes Against		Abstaining		Non-Votes
Class A		8,148,937		20,888		19,628		2,311,237
Class B		39,182,310		—		—		—
Series M		211,987		—		—		—

4. To ratify and approve the previous issuance of 514,238 shares of Class A common stock upon conversion of 10,360 shares of Series M preferred stock issued as partial consideration for the May 1999 purchase of certain dealerships from the Moreland Group:

					Number of		Number of
	Number of		Number of		Votes		Broker
	Votes For		Votes Against		Abstaining		Non-Votes
Class A		8,066,640		10,424		95,089		2,328,537
Class B		39,182,310		—		—		—
Series M		211,987		—		—		—

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

99.1	Certification of the Chief Executive Officer
99.2	Certification of the Chief Financial Officer

(b) Reports on Form 8-K

     There were no reports on Form 8-K filed during the quarter ended June 30, 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:	August 13, 2002		LITHIA MOTORS, INC.
		By	/s/ SIDNEY B. DEBOER
			Sidney B. DeBoer Chairman of the Board, Chief Executive Officer and Secretary (Principal Executive Officer)
		By	/s/ JEFFREY B. DEBOER
			Jeffrey B. DeBoer Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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