10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2004

OR

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

For the transition period from        to        

Commission file number: 001-14733

LITHIA MOTORS, INC.

(Exact name of registrant as specified in its charter)

Oregon	93-0572810
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
360 E. Jackson Street, Medford, Oregon	97501
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code:  541-776-6899

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   ý        No  o

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

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

Class A common stock without par value	15,055,476
Class B common stock without par value	3,762,231
(Class)	(Outstanding at August 4, 2004)

LITHIA MOTORS, INC.

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets – June 30, 2004 (unaudited) and December 31, 2003
	Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 2004 and 2003 (unaudited)
	Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2004 and 2003 (unaudited)
	Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II - OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits and Reports on Form 8-K
Signatures

1

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

LITHIA MOTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	June 30, 2004		December 31, 2003
	(Unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	9,971	$	74,408
Contracts in transit	40,698		44,709
Trade receivables, net of allowance for doubtful accounts of $453 and $413	43,568		42,199
Notes receivable, current portion, net of allowance for doubtful accounts of $42 and $49	86		208
Inventories, net	604,449		445,281
Vehicles leased to others, current portion	4,968		5,747
Prepaid expenses and other	6,871		3,392
Assets held for sale	16,537		20,408
Deferred income taxes	994		585
Total Current Assets	728,142		636,937
Land and buildings, net of accumulated depreciation of $6,598 and $5,683	195,389		164,676
Equipment and other, net of accumulated depreciation of $22,427 and $18,315	71,476		62,637
Notes receivable, less current portion	645		676
Vehicles leased to others, less current portion	8		10
Goodwill	233,500		207,027
Other intangible assets, net of accumulated amortization of $51 and $39	39,904		28,946
Other non-current assets	4,082		1,873
Total Assets	$	1,273,146	$	1,102,782
Liabilities and Stockholders’ Equity
Current Liabilities:
Flooring notes payable	$	514,750	$	378,961
Current maturities of long-term debt	5,679		14,299
Trade payables	26,661		24,402
Accrued liabilities	50,267		46,164
Liabilities held for sale	3,292		13,045
Total Current Liabilities	600,649		476,871
Used vehicle flooring facility	—		56,267
Real estate debt, less current maturities	112,364		80,159
Other long-term debt, less current maturities	136,607		98,308
Deferred revenue	726		875
Other long-term liabilities	10,644		7,235
Deferred income taxes	30,058		24,141
Total Liabilities	891,048		743,856
Stockholders’ Equity:
Preferred stock - no par value; authorized 15,000 shares; none outstanding	—		—
Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 14,987 and 14,693	212,331		208,187
Class B common stock - no par value authorized 25,000 shares; issued and outstanding 3,762 and 3,762	468		468
Additional paid-in capital	1,547		1,231
Accumulated other comprehensive income (loss)	1,542		(1,468		)
Retained earnings	166,210		150,508
Total Stockholders’ Equity	382,098		358,926
Total Liabilities and Stockholders’ Equity	$	1,273,146	$	1,102,782

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

2

LITHIA MOTORS, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except  per share amounts)

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
Revenues:
New vehicle sales	$	400,217		$	363,845		$	753,818		$	672,339
Used vehicle sales	184,186			191,092			374,092			363,188
Service, body and parts	71,753			61,032			141,179			117,517
Finance and insurance	24,744			22,478			48,129			42,888
Fleet and other	1,367			1,865			2,898			3,940
Total revenues	682,267			640,312			1,320,116			1,199,872
Cost of sales	566,328			538,573			1,097,943			1,009,646
Gross profit	115,939			101,739			222,173			190,226
Selling, general and administrative	88,565			79,585			173,752			153,814
Depreciation - buildings	675			481			1,319			940
Depreciation and amortization - other	2,414			1,773			4,724			3,445
Income from operations	24,285			19,900			42,378			32,027
Other income (expense):
Floorplan interest expense	(4,123		)	(3,672		)	(7,739		)	(7,218		)
Other interest expense	(2,157		)	(1,564		)	(3,897		)	(2,952		)
Other expense, net	(358		)	(255		)	(697		)	(402		)
	(6,638		)	(5,491		)	(12,333		)	(10,572		)
Income from continuing operations before income taxes	17,647			14,409			30,045			21,455
Income taxes	6,882			5,808			11,718			8,539
Income before discontinued operations	10,765			8,601			18,327			12,916
Income (loss) from discontinued operations, net of income tax expense (benefit) of $48, $(59), $(5) and $(154)	75			(82		)	(8		)	(232		)
Net income	$	10,840		$	8,519		$	18,319		$	12,684
Basic income per share from continuing operations	$	0.57		$	0.47		$	0.98		$	0.71
Basic income (loss) per share from discontinued operations	0.01			(0.00		)	(0.00		)	(0.01		)
Basic net income per share	$	0.58		$	0.47		$	0.98		$	0.70
Shares used in basic net income per share	18,746			18,228			18,686			18,181
Diluted income per share from continuing operations	$	0.56		$	0.47		$	0.96		$	0.70
Diluted income (loss) per share from discontinued operations	0.01			(0.01		)	(0.00		)	(0.01		)
Diluted net income per share	$	0.57		$	0.46		$	0.96		$	0.69
Shares used in diluted net income per share	19,142			18,379			19,127			18,326

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

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LITHIA MOTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six months ended June 30,
	2004			2003
Cash flows from operating activities:
Net income	$	18,319		$	12,684
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization	6,043			4,385
Depreciation and amortization of discontinued operations	14			340
Compensation expense related to stock option issuances	150			102
(Gain) loss on sale of assets	190			(874		)
Loss on sale of vehicles leased to others	104			52
Gain on sale of franchise	(569		)	(275		)
Deferred income taxes	3,785			1,750
(Increase) decrease, net of effect of acquisitions:
Trade and installment contract receivables, net	(1,077		)	(2,445		)
Contracts in transit	4,011			(6,791		)
Inventories	(110,638		)	9,034
Prepaid expenses and other	349			1,561
Other noncurrent assets	341			375
Increase (decrease), net of effect of acquisitions:
Floorplan notes payable	89,905			21,404
Trade payables	2,256			4,609
Accrued liabilities	4,957			10,213
Other long-term liabilities and deferred revenue	3,046			(2,856		)
Net cash provided by operating activities	21,186			53,268
Cash flows from investing activities:
Notes receivable issued	—			(61		)
Principal payments received on notes receivable	153			240
Capital expenditures:
Non-financeable	(5,061		)	(2,997		)
Financeable	(19,234		)	(10,873		)
Proceeds from sale of assets	320			215
Expenditures for vehicles leased to others	(4,044		)	(3,512		)
Proceeds from sale of vehicles leased to others	1,281			386
Cash paid for acquisitions, net of cash acquired	(52,198		)	(29,280		)
Proceeds from sales of franchises	643			252
Net cash used in investing activities	(78,140		)	(45,630		)
Cash flows from financing activities:
Net borrowings (repayments) on lines of credit	(111,018		)	25,613
Principal payments on long-term debt and capital leases	(9,690		)	(1,334		)
Proceeds from issuance of long-term debt	114,317			5,243
Debt issuance costs	(2,550		)	—
Repurchase of common stock	—			(215		)
Proceeds from issuance of common stock	4,075			2,133
Dividends paid	(2,617		)	—
Net cash provided by (used in) financing activities	(7,483		)	31,440
Increase (decrease) in cash and cash equivalents	(64,437		)	39,078
Cash and cash equivalents:
Beginning of period	74,408			15,932
End of period	$	9,971		$	55,010
Supplemental Cash Flow Information:
Cash paid for income taxes	$	6,642		$	41
Cash paid for interest	11,367			10,191
Supplemental Schedule of Non-Cash Transactions:
Debt issued in connection with acquisitions	$	12,000		$	—
Assets acquired through real estate exchange	—			1,946

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

4

LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The financial information included herein as of June 30, 2004 and for the three and six-month periods ended June 30, 2004 and 2003 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, 2003 is derived from our 2003 Annual Report on Form 10-K.  The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2003 Annual Report on Form 10-K.  The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Note 2. Inventories

Inventories are valued at the lower of market value or cost, using the specific identification method for vehicles and parts.  Detail of inventory is as follows (in thousands):

	June 30, 2004		December 31, 2003
New and program vehicles	$	496,712	$	355,937
Used vehicles	85,209		68,747
Parts and accessories	22,528		20,597
	$	604,449	$	445,281

Note 3. Earnings Per Share

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

	2004					2003
Three Months Ended June 30,	Income		Shares	Per Share Amount		Income		Shares	Per Share Amount
Basic EPS
Net income	$	10,840	18,746	$	0.58	$	8,519	18,228	$	0.47
Diluted EPS
Effect of dilutive stock options	—		396			—		151
Net income	$	10,840	19,142	$	0.57	$	8,519	18,379	$	0.46

	2004					2003
Six Months Ended June 30,	Income		Shares	Per Share Amount		Income		Shares	Per Share Amount
Basic EPS
Net income	$	18,319	18,686	$	0.98	$	12,684	18,181	$	0.70
Diluted EPS
Effect of dilutive stock options	—		441					145
Net income	$	18,319	19,127	$	0.96	$	12,684	18,326	$	0.69

Potentially dilutive securities that are not included in the diluted EPS calculations because they would be antidilutive are as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2004	2003	2004	2003
Stock options	333,140	1,017,863	333,140	1,021,292

5

Also excluded from the three and six month periods ended June 30, 2004 are 2,255,314 shares of Class A common stock issuable upon conversion of our outstanding convertible debt.  See Note 10.  However, should EITF 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings Per Share,” be approved, such shares may be required to be included in our diluted EPS calculation and would require prior period EPS calculations to be restated, as applicable.  We are unable to predict, at this time, if EITF 04-8 will be approved as it is currently written.

Note 4.  Comprehensive Income

Comprehensive income includes the change in hedging instruments that are reflected in stockholders’ equity instead of net income and unrealized gains and losses on investments.  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,
	2004		2003			2004		2003
Net income	$	10,840	$	8,519		$	18,319	$	12,684
Unrealized gain (loss) on investments, net, subsequently realized	—		5			—		(6		)
Cash flow hedges:
Net derivative gains (losses), net of tax effect of $(2,292), $617, $(1,087) and $998, respectively	3,560		(927		)	1,651		(1,515		)
Reversal of net derivative losses previously disclosed.  This component has been recognized in our statements of operations as incremental interest expense, net of tax effect of $(474), $(378), $(869) and $(693), respectively	741		549			1,359		1,048
Total comprehensive income	$	15,141	$	8,146		$	21,329	$	12,211

Note 5.  Acquisitions

The following acquisitions were made in the first six months of 2004.  For information on the acquisition made in July 2004, see Note 13. Subsequent Events.

•In January 2004, we acquired one Chrysler and Jeep store in Reno, Nevada, which has anticipated annual revenues of approximately $55.0 million.  The store has been renamed Lithia Chrysler Jeep of Reno.

•In March 2004, we acquired one Chevrolet store in Helena, Montana, which has anticipated annual revenues of approximately $40.0 million.  The store has been renamed Chevrolet of Helena.

•In April 2004, we acquired Tony Chevrolet of Anchorage and Tony Chevrolet of Wasilla, Alaska, which have anticipated combined annual revenues of approximately $125 million.  The stores have been renamed Chevrolet of South Anchorage and Chevrolet of Wasilla, respectively.

The above acquisitions were accounted for under the purchase method of accounting.  Pro forma results of operations assuming 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,
	2004		2003		2004		2003
Total revenues	$	690,183	$	698,638	$	1,359,619	$	1,311,540
Net income	10,957		9,905		18,629		14,555
Basic earnings per share	0.58		0.54		1.00		0.80
Diluted earnings per share	0.57		0.54		0.97		0.79

There are no future contingent payouts related to any of the above acquisitions and no portion of the purchase price was paid with our equity securities.

6

The purchase price for the above acquisitions was allocated as follows (in thousands):

Inventories	$	41,733
Other current assets	376
Property and equipment	21,770
Goodwill	26,493
Other intangible assets - franchise value	10,820
Total assets acquired	101,192
Flooring notes payable	36,437
Other current liabilities	324
Other non-current liabilities	288
Total liabilities acquired	37,049
Net assets acquired	$	64,143

Within one year from the purchase date, we may update the value allocated to purchased assets and the resulting goodwill balances based on information received regarding the valuation of such assets.

Note 6.  Dividend Payments

Cash dividends at the rate of $0.07 per common share, which totaled approximately $1.3 million, were paid on March 19, 2004 to shareholders of record on March 5, 2004 and on May 21, 2004 to shareholders of record on May 7, 2004.

Note 7.  U.S. Bank Agreement Amendment

In February 2004, our U.S. Bank N.A. agreement was amended to provide for a $50.0 million revolving line of credit for leased vehicles and equipment purchases, which expires January 31, 2006. Previously, the amount available under this line of credit was $35.0 million and with expiration on January 31, 2005.

Note 8.  DaimlerChrysler Agreement Amendment

In June 2004, our DaimlerChrysler Services North America LLC and Toyota Motor Credit revolving credit agreement was amended as follows:

•The revolving commitment amount was decreased from $200 million to $150 million following our successful convertible debt offering in May 2004; and

•The termination date of the agreement was extended to May 1, 2007 from February 25, 2006 and has an option to extend the termination date to May 1, 2008.

Note 9.  Interest Rate Swaps

In March 2004, we entered into the following new interest rate swaps with U.S. Bank Dealer Commercial Services to effectively change the variable rate cash flow exposure on a portion of our flooring debt to fixed rate cash flows:

•effective March 9, 2004 - a five year, $25 million interest rate swap at a fixed rate of 3.25% per annum, variable rate adjusted on the 1^st and 16^th of each month;

•effective March 18, 2004 - a five year, $25 million interest rate swap at a fixed rate of 3.10% per annum, variable rate adjusted on the 1^st and 16^th of each month.

Note 10.  Debt Offering

In May 2004, we sold $85 million of 2.875% senior subordinated convertible notes due 2014 through a Rule 144A offering to qualified institutional buyers. We will also pay contingent interest on the notes during any six-month interest period beginning May 1, 2009, in which the trading price of the notes for a specified period of time equals or exceeds 120% of the principal amount of the notes.  Net proceeds from this offering were approximately $82.5 million and were used to pay down our working capital and used vehicle line and new vehicle flooring notes payable. The notes are convertible into shares of our Class A common stock at a price of $37.69 per share upon the satisfaction of certain conditions and upon the occurrence of certain events as follows:

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

7

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

•if, during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each day of such period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the notes;

•if the notes have been called for redemption; or

•upon certain specified corporate events.

Any declaration and payment of a dividend in excess of $0.08 per share per quarter will result in an adjustment in the conversion rate for the notes.

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

We filed a registration statement on Form S-3 with the Securities and Exchange Commission on July 26, 2004 covering the resale of the notes and the common stock issuable upon conversion of the notes.

Note 11.  Amendments to Stock Plans

At our Annual Shareholders Meeting in April 2004, our shareholders approved amendments to our stock plans as follows:

•the number of shares of our common stock issuable pursuant to our 2003 Stock Incentive Plan were increased to 2.2 million from 1.2 million; and

•the number of shares of our common stock issuable pursuant to our 1998 Employee Stock Purchase Plan were increased to 1.75 million from 1.5 million.

Note 12.  Stock-Based Compensation

We account for stock options using the intrinsic value method as prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.”   Pursuant to Statement of Financial Accounting Standards (SFAS) No. 148 “Accounting for Stock-Based Compensation - Transition and Disclosure,” which we adopted in December 2002, we have computed, for pro forma disclosure purposes, the impact on net income and net income per share as if we had accounted for our stock-based compensation plans in accordance with the fair value method prescribed by SFAS No. 123 “Accounting for Stock-Based Compensation” as follows (in thousands):

Three Months Ended June 30,	2004			2003
Net income, as reported	$	10,840		$	8,519
Add – Stock-based employee compensation expense included in reported net income, net of related tax effects	25			24
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(566		)	(520		)
Net income, pro forma	$	10,299		$	8,023
Basic net income per share:
As reported	$	0.58		$	0.47
Pro forma	$	0.55		$	0.44
Diluted net income per share:
As reported	$	0.57		$	0.46
Pro forma	$	0.55		$	0.44

8

Six Months Ended June 30,	2004			2003
Net income, as reported	$	18,319		$	12,684
Add – Stock-based employee compensation expense included in reported net income, net of related tax effects	50			49
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(1,184		)	(1,057		)
Net income, pro forma	$	17,185		$	11,676
Basic net income per share:
As reported	$	0.98		$	0.70
Pro forma	$	0.92		$	0.64
Diluted net income per share:
As reported	$	0.96		$	0.69
Pro forma	$	0.91		$	0.64

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

Three and Six Months Ended June 30,	2004		2003
Risk-free interest rate	0.93 - 2.80	%	2.5 - 3.0	%
Expected dividend yield	1.04 - 1.42	%	0	%
Expected lives  - 2001 Plan	5.4 years		7.7 - 8 years
- Purchase Plan	3 months		3 months
Expected volatility	28.11%- 43.32	%	46.24% - 46.79	%

Note 13.  Subsequent Events

Acquisition

The following acquisition was made subsequent to June 30, 2004:

•In July 2004, we acquired one Toyota store in Odessa, Texas, which has anticipated annual revenues of approximately $20.0 million.  The store has been renamed Lithia Toyota of Odessa.

Dividend

In July 2004, our Board of Directors approved a dividend on our Class A and Class B common stock of $0.08 per share for the second quarter of 2004.  The dividend, which will total approximately $1.5 million, will be paid on August 16, 2004 to shareholders of record on August 2, 2004.

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

Some of the statements in this Form 10-Q constitute forward-looking statements.  In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” and “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Some of the important factors that could cause actual results to differ from our expectations are discussed in Exhibit 99.1 to our 2003 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.

General

We are a leading operator of automotive franchises and retailer of new and used vehicles and services.  As of August 1, 2004, we offered 25 brands of new vehicles through 152 franchises in 83 stores in the Western United States and over the Internet.  As of August 1, 2004, we operated 16 stores in Oregon, 13 in California, 11 in Washington, 9 in Texas, 7 in Idaho, 7 in Colorado, 6 in Nevada, 6 in Alaska, 3 in Montana, 2 in South Dakota, 2 in Nebraska and 1 in Oklahoma.  We sell new and used cars and light trucks; sell replacement parts; provide vehicle maintenance, warranty, paint and repair services; and arrange related financing, service contracts, protection products and credit insurance for our automotive customers.

Historically, new vehicle sales have accounted for over half of our total revenues but less than one-third of total gross profit.  We are continuing with a volume-based strategy for our new vehicle sales that we initiated in 2002. Through an advertising campaign called “Driving America” that is centered on “Promo Pricing,” we have been able to gain new vehicle market share in many of our markets.  This strategy complements the goal of most auto manufacturers, which have continued to offer a high level of cash or other incentives on purchases.

For the second half of 2004, we expect that manufacturers will continue to offer incentives on new vehicle sales through a combination of rebates and low interest rate loans to consumers. We plan to continue with our volume-based new vehicle strategy in most of our stores.  As the economy and the incentive environment change, we expect to change our new vehicle sales strategy to adjust to any new conditions.

Competition from new vehicles with heavy manufacture incentives in the past two years has had a strong negative impact on the used vehicle market.  This trend continued in the first half of 2004, and is likely to continue throughout the rest of 2004.  We have implemented new procedures in the used vehicle business to help offset this negative impact as follows:

•We have begun conducting our own local used vehicle auctions in select markets and managing the disposal of used vehicles at larger auctions.  We no longer allow stores to dispose of their excess inventories on their own.  The process is centralized and controlled at the management level; and

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

10

Results of Continuing Operations

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

Three Months Ended June 30, 2004	Percent of Total Revenues		Gross Margin		Percent of Total  Gross Profit
New vehicles	58.7	%	8.1	%	27.9	%
Retail used vehicles(1)	22.5		14.6		19.4
Service, body and parts	10.5		48.7		30.1
Finance and insurance(2)	3.6		99.6		21.3
Fleet and other	0.2		22.8		0.3

Three Months Ended June 30, 2003	Percent of Total Revenues		Gross Margin		Percent of Total  Gross Profit
New vehicles	56.8	%	7.8	%	28.0	%
Retail used vehicles(1)	24.8		13.9		21.6
Service, body and parts	9.5		46.8		28.1
Finance and insurance(2)	3.5		99.6		22.0
Fleet and other	0.3		22.4		0.4

Six Months Ended June 30, 2004	Percent of Total Revenues		Gross Margin		Percent of Total Gross Profit
New vehicles	57.1	%	7.8	%	26.5	%
Retail used vehicles(1)	23.6		14.4		20.2
Service, body and parts	10.7		48.0		30.5
Finance and insurance(2)	3.6		99.5		21.6
Fleet and other	0.2		21.4		0.3

Six Months Ended June 30, 2003	Percent of Total Revenues		Gross Margin		Percent of Total Gross Profit
New vehicles	56.0	%	7.6	%	27.0	%
Retail used vehicles(1)	25.0		13.5		21.2
Service, body and parts	9.8		47.2		29.1
Finance and insurance(2)	3.6		99.6		22.5
Fleet and other	0.3		17.4		0.4

(1)Excludes wholesale used vehicle sales, representing 4.5%, 5.1%, 4.8% and 5.3% of total revenues, respectively,  and a gross margin contribution of 1.0%, (0.1)%, 0.9% and (0.2)%, respectively, for the three and six month periods ended June 30, 2004 and 2003.

(2)Reported net of estimated cancellations.

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

	Three Months Ended June 30,				Six Months Ended June 30,
Lithia Motors, Inc. (1)	2004		2003		2004		2003
Revenues:
New vehicles	58.7	%	56.8	%	57.1	%	56.0	%
Used vehicles	27.0		29.9		28.4		30.3
Service, body and parts	10.5		9.5		10.7		9.8
Finance and insurance	3.6		3.5		3.6		3.6
Fleet and other	0.2		0.3		0.2		0.3
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%
Gross profit	17.0		15.9		16.8		15.9
Selling, general and administrative expenses	13.0		12.4		13.2		12.8
Depreciation and amortization	0.5		0.4		0.5		0.4
Income from operations	3.6		3.1		3.2		2.7
Floorplan interest expense	0.6		0.6		0.6		0.6
Other interest expense	0.3		0.2		0.3		0.2
Other expense, net	0.1		0.0		0.1		0.0
Income from continuing operations before taxes	2.6		2.3		2.3		1.8
Income tax expense	1.0		0.9		0.9		0.7
Income from continuing operations	1.6	%	1.3	%	1.4	%	1.1	%

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

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The following tables set forth the changes in our operating results from continuing operations in the three and six month periods ended June 30, 2004 compared to the three and six month periods ended June 30, 2003:

	Three Months Ended June 30,				Increase (Decrease)			% Increase (Decrease)
(Dollars in thousands)	2004		2003
Revenues:
New vehicle sales	$	400,217	$	363,845	$	36,372		10.0	%
Used vehicle sales	184,186		191,092		(6,906		)	(3.6	)
Service, body and parts	71,753		61,032		10,721			17.6
Finance and insurance	24,744		22,478		2,266			10.1
Fleet and other	1,367		1,865		(498		)	(26.7	)
Total revenues	682,267		640,312		41,955			6.6
Cost of sales	566,328		538,573		27,755			5.2
Gross profit	115,939		101,739		14,200			14.0
Selling, general and administrative	88,565		79,585		8,980			11.3
Depreciation and amortization	3,089		2,254		835			37.0
Income from operations	24,285		19,900		4,385			22.0
Floorplan interest expense	4,123		3,672		451			12.3
Other interest expense	2,157		1,564		593			37.9
Other (income) expense, net	358		255		103			40.4
Income from continuing operations before taxes	17,647		14,409		3,238			22.5
Income tax expense	6,882		5,808		1,074			18.5
Income from continuing operations	$	10,765	$	8,601	$	2,164		25.2	%

	Three Months Ended June 30,				Increase (Decrease)			% Increase (Decrease)
	2004		2003
New units sold	14,398		13,720		678			4.9	%
Average selling price per new vehicle	$	27,797	$	26,519	$	1,278		4.8
Used units sold - retail	10,253		10,792		(539		)	(5.0	)
Average selling price per retail used vehicle	$	14,977	$	14,699	$	278		1.9
Used units sold – wholesale	5,720		6,794		(1,074		)	(15.8	)
Average selling price per wholesale used vehicle	$	5,354	$	4,778	$	576		12.1
Finance and insurance sales per retail unit	$	1,004	$	917	$	87		9.5	%

	Six Months Ended June 30,				Increase (Decrease)			% Increase (Decrease)
(Dollars in thousands)	2004		2003
Revenues:
New vehicle sales	$	753,818	$	672,339	$	81,479		12.1	%
Used vehicle sales	374,092		363,188		10,904			3.0
Service, body and parts	141,179		117,517		23,662			20.1
Finance and insurance	48,129		42,888		5,241			12.2
Fleet and other	2,898		3,940		(1,042		)	(26.4	)
Total revenues	1,320,116		1,199,872		120,244			10.0
Cost of sales	1,097,943		1,009,646		88,297			8.7
Gross profit	222,173		190,226		31,947			16.8
Selling, general and administrative	173,752		153,814		19,938			13.0
Depreciation and amortization	6,043		4,385		1,658			37.8
Income from operations	42,378		32,027		10,351			32.3
Floorplan interest expense	7,739		7,218		521			7.2
Other interest expense	3,897		2,952		945			32.0
Other (income) expense, net	697		402		295			73.4
Income from continuing operations before taxes	30,045		21,455		8,590			40.0
Income tax expense	11,718		8,539		3,179			37.2
Income from continuing operations	$	18,327	$	12,916	$	5,411		41.9	%

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	Six Months Ended June 30,				Increase (Decrease)			% Increase (Decrease)
	2004		2003
New units sold	27,243		25,730		1,513			5.9	%
Average selling price per new vehicle	$	27,670	$	26,131	$	1,539		5.9
Used units sold - retail	21,030		20,544		486			2.4
Average selling price per retail used vehicle	$	14,801	$	14,603	$	198		1.4
Used units sold – wholesale	11,807		12,941		(1,134		)	(8.8	)
Average selling price per wholesale used vehicle	$	5,320	$	4,882	$	438		9.0
Finance and insurance sales per retail unit	$	997	$	927	$	70		7.6	%

Revenues

Total revenues increased 6.6% and 10.0%, respectively, in the three and six month periods ended June 30, 2004 compared to the same periods of 2003, as a result of acquisitions and increases in the average new and used vehicle sales prices. These increases were offset by same-store sales declines of 5.3% and 2.0%, respectively, for the three and six month periods ended June 30, 2004 compared to the same periods of 2003.  Same-store sales percentage increases (decreases) were as follows:

	Three months ended June 30, 2004 vs. three months ended June 30, 2003		Six months ended June 30, 2004 vs. six months ended June 30, 2003
New vehicles	(3.5	)%	(1.3	)%
Retail used vehicles	(13.1	)	(7.1	)
Service, body and parts	3.3		5.6
Finance and insurance	(1.2	)	0.6
Total retail sales	(5.3	)	(2.0	)

Same-store sales are calculated by dealership comparing only those months that contain full-month operating data.

New vehicle same store sales were down in the three and six month periods ended June 30, 2004 compared to the same periods of 2003 due to an unusually strong second quarter in 2003, which experienced double digit sales growth.  Used vehicle same store sales have been negatively affected  in the same periods by continued manufacturer incentives on new vehicles.  Although same store sales have declined in the current periods, we have experienced an increase in gross margins in both new and used vehicles compared to the same periods last year.

The increases in same-store service, body and parts revenue resulted from increases in the customer retail business with our manufacturer warranty business remaining relatively stable.  Our focus on service advisor training has also contributed to the increases in same-store sales. Improvements in the quality of Chrysler, General Motors, Ford and Toyota vehicles have resulted in declines in warranty work for these brands. Other brands, however, continue to demonstrate increases in same-store warranty sales.

Fleet and other sales include both fleet sales and fees received for delivering vehicles on behalf of the manufacturer, the U.S. military, rent-a-car companies or leasing companies.  In 2003 we decided to not focus on fleet sales due to their low margins.  This has resulted in a decrease in total fleet and other sales, but an increase in the gross margin percentage due to a higher percentage of fee income compared to fleet income.

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Penetration rates for certain products were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Finance and insurance	76	%	75	%	76	%	76	%
Service contracts	43		41		43		41
Lifetime oil and filter change	38		34		37		34

Gross Profit

Gross profit increased $14.2 million and $31.9 million, respectively, in the three and six month periods ended June 30, 2004 compared to the same periods of 2003 due to increased total revenues as well as increases in our overall gross margin. Gross margins achieved were as follows:

	Three Months Ended June 30,				Lithia Margin Change*
	2004		2003
New vehicles	8.1	%	7.8	%	30bp
Retail used vehicles	14.6		13.9		70
Service and parts	48.7		46.8		190
Finance and insurance	99.6		99.6		—
Overall	17.0		15.9		110

	Six Months Ended June 30,				Lithia Margin Change*
	2004		2003
New vehicles	7.8	%	7.6	%	20bp
Retail used vehicles	14.4		13.5		90
Service and parts	48.0		47.2		80
Finance and insurance	99.5		99.6		(10	)
Overall	16.8		15.9		90

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

The increases in the overall gross profit margin in the first half of 2004 compared to the first half of 2003 were primarily a result of improvements in the margins achieved on our used vehicle business as well as an increase in our high margin service and parts revenue as a percentage of total revenue.

New vehicle gross margins increased primarily due to internal directives communicated to our stores to attain a sales target closer to the manufacturer suggested retail price.

We have been able to improve the margins on our used vehicle sales primarily due to the strategies discussed above regarding the auctioning of our used vehicles and our “Used Vehicle Promo Pricing.” Total same-store gross profit for the second quarter and first half of 2004 increased from the comparable periods of 2003.

Our focus on margin improvement in the wholesale parts business was the major contributor to the improved gross margins in the service and parts department.

Selling, General and Administrative Expense

Selling, general and administrative (“SG&A”) expense includes salaries and related personnel expenses, facility lease expense, advertising (net of manufacturer cooperative advertising credits), legal, accounting, professional services and general corporate expenses.  Selling, general and administrative expense increased $9.0 million and $19.9 million, respectively, in the three and six month periods ended June 30, 2004 compared to same periods of 2003, and increased 60 basis points and 40 basis points, respectively, as a percentage of revenue.  The increases in dollars spent are due to increased selling, or variable, expenses related to the increases in revenues and the number of locations.  SG&A as a percentage of sales will increase when the service and parts revenue contribution increases relative to total sales due to its higher SG&A component.  Because of this, a more important gauge is the trend of SG&A as a percentage of gross profit, which has decreased for the same periods.

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Depreciation and Amortization

Depreciation and amortization increased $0.8 million and $1.7 million, respectively, in the three and six month periods ended June 30, 2004 compared to the same periods of 2003 due to the addition of property and equipment related to our acquisitions, as well as leasehold improvements to existing facilities.

Income from Operations

Operating margins improved by 50 basis points in both the three and six month periods ended June 30, 2004 to 3.6% and 3.2%, respectively, from 3.1% and 2.7%, respectively, in the comparable periods of 2003.  The increases are due to the improved overall gross profit margins as discussed above, partially offset by higher operating expenses as a percentage of revenue.

Floorplan Interest Expense

Floorplan interest expense increased $0.5 million in both the three and six month periods ended June 30, 2004 compared to the same periods of 2003.  A $612,000 and $825,000 increase, respectively, was the result of increases in the average outstanding balances of our floorplan facilities, mainly due to acquisitions, and increases of $287,000 and $487,000, respectively, resulting from our interest rate swaps were partially offset by decreases in the LIBOR and the prime rates in the three and six month periods ended June 30, 2004 compared to the same periods of 2003.

Other Interest Expense

Other interest expense includes interest on our convertible notes, debt incurred related to acquisitions, real estate mortgages, our used vehicle line of credit and equipment related notes. Other interest expense increased $0.6 million and $0.9 million, respectively, in the three and six month periods ended June 30, 2004 compared to the same periods of 2003. Changes in the weighted average interest rate on our debt in the three and six month periods ended June 30, 2004 compared to the same periods of 2003 increased other interest expense by approximately $8,000 and $161,000, respectively, and changes in the average outstanding balances resulted in increases of approximately $585,000 and $784,000, respectively.  Interest expense related to the $85.0 million of convertible notes that were issued in May 2004 totals approximately $748,000 per quarter, which consists of $611,000 of contractual interest and $137,000 of amortization of debt issuance costs.

Income Tax Expense

Our effective tax rate was 39.0% in the first six months of 2004 compared to 39.8% in the first six months of 2003. 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.

Income from Continuing Operations

Income from continuing operations as a percentage of revenue increased in the three and six month periods ended June 30, 2004 compared to same periods of 2003 as a result of improvements in gross margins being offset in part by increased operating expenses as discussed above.

Discontinued Operations

During 2003, we decided to sell certain stores and related franchises. We did not dispose of any stores during the first six months of 2004. At June 30, 2004, we had $16.5 million of assets classified as assets held for sale on our balance sheet related to one store we intend to sell during 2004. The assets primarily include inventory and property, plant and equipment.  Liabilities held for sale of $3.3 million at June 30, 2004 represent new vehicle flooring notes payable related to the store held for sale.

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

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

Free Cash Flow

Our free cash flow, defined as net income from continuing operations plus depreciation minus dividends and non-financeable capital expenditures, was approximately $16.7 million and $14.3 million, respectively, in the first six months of 2004 and 2003.  Management believes that free cash flow is an important metric for evaluating the strength and viability of our business model. The reconciliation of net income to free cash flow is as follows (in thousands):

Six Months Ended June 30,	2004			2003
Net income from continuing operations	$	18,327		$	12,916
Depreciation and amortization	6,043			4,385
Dividends	(2,617		)	—
Non-financeable capital expenditures	(5,061		)	(2,997		)
Free cash flow from continuing operations	$	16,692		$	14,304

Liquidity and Capital Resources

Our principal needs for capital resources are to finance acquisitions and capital expenditures, as well as for working capital. We have relied primarily upon internally generated cash flows from operations, borrowings under our credit agreements and the proceeds from public equity and private debt offerings to finance operations and expansion. In addition, in May 2004, we closed an $85.0 million private debt offering. We believe that our available cash, cash equivalents, available lines of credit, cash received from our debt offering in May 2004 and cash flows from operations will be sufficient to meet our anticipated operating expenses and capital requirements for at least 24 to 36 months from June 30, 2004.

Our inventories increased to $604.4 million at June 30, 2004 from $445.3 million at December 31, 2003 due primarily to acquisitions and our decision to purchase a greater stock of 2004 vehicles going into the third quarter in order to take advantage of the anticipated strong incentive environment for the 2004 models as the 2005 models are introduced.  Our new and used flooring notes payable increased to $514.8 million at June 30, 2004 from $435.2 million at December 31, 2003 due to acquisitions.  New vehicles are financed at approximately 100% and used vehicles are financed at approximately 80% of cost. Our days supply of new vehicles increased by approximately 9 days at June 30, 2004 compared to December 31, 2003. Our days supply of used vehicles increased by approximately 5 days at June 30, 2004 compared to December 31, 2003.  We believe that our new and used vehicle inventories are at appropriate levels at this time.

Assets of discontinued operations held for sale include inventory and property, plant and equipment related to one store held for sale and are recorded on our balance sheet at the lower of book value or estimated fair market value, less applicable selling costs.

As a result of the acquisition of four stores in the first six months of 2004, our goodwill and other intangibles increased $37.4 million to $273.4 million at June 30, 2004, compared to $236.0 million at December 31, 2003.

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In January and April 2004, our Board of Directors approved a dividend on our Class A and Class B common stock of $0.07 per share for the fourth quarter of 2003 and the first quarter of 2004, respectively, which totaled approximately $1.3 million each.  In July 2004, our Board of Directors declared a dividend on our Class A and Class B common stock of $0.08 per share for the second quarter of 2004, which will total approximately $1.5 million.  We anticipate recommending to the Board of Directors the approval of a cash dividend each quarter.

In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our Class A common stock.  Through July 2004, we have purchased a total of 59,400 shares under this program and may continue to do so from time to time in the future as conditions warrant.  However, the recent change in the tax law tends to equalize the benefits of dividends and share repurchases as a means to return capital or earnings to shareholders. As a result, we believe it is now advantageous to shareholders to have a dividend in place.  With the dividend, we are able to offer an immediate and tangible return to our shareholders without reducing our already limited market float, which occurs when we repurchase shares.

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

The financial covenants in our agreement with DaimlerChrysler Services and Toyota Motor Credit require us to maintain compliance with, among other things, (i) a specified current ratio; (ii) a specified fixed charge coverage ratio; (iii) a specified interest coverage ratio; (iv) a specified adjusted leverage ratio; and (v) certain working capital levels.   At June 30, 2004, we were in compliance with all of the covenants of this agreement.

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

We also have a revolving credit real estate line with Toyota Motor Credit totaling $40 million, which expires in May 2005. The advances are secured by the real estate financed under this line of credit.

We have a credit facility with U.S. Bank N.A., which provides for a $50.0 million revolving line of credit for leased vehicles and equipment purchases and expires January 31, 2006.

Interest rates on all of the above facilities ranged from 3.11% to 4.12% at June 30, 2004.  Amounts outstanding on the lines at June 30, 2004 together with amounts remaining available under such lines were as follows (in thousands):

	Outstanding at June 30, 2004		Remaining Availability as of June 30, 2004
New and program vehicle lines	$	514,750	$	*
Working capital and used vehicle line	—		150,000
Real estate line	—		40,000
Equipment/leased vehicle line	50,000		—
	$	564,750	$	190,000*

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

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In May 2004, we sold $85 million of 2.875% senior subordinated convertible notes due 2014 through a Rule 144A offering to qualified institutional buyers. We will also pay contingent interest on the notes during any six-month interest period beginning May 1, 2009, in which the trading price of the notes for a specified period of time equals or exceeds 120% of the principal amount of the notes.  Net proceeds from this offering were approximately $82.5 million and were used to pay down our working capital and used vehicle line and new vehicle flooring notes payable. The notes are convertible into shares of our Class A common stock at a price of $37.69 per share upon the satisfaction of certain conditions and upon the occurrence of certain events as follows:

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

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

•if, during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each day of such period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the notes;

•if the notes have been called for redemption; or

•upon certain specified corporate events.

Any declaration and payment of a dividend in excess of $0.08 per share per quarter will result in an adjustment in the conversion rate for the notes.

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

We filed a registration statement on Form S-3 with the Securities and Exchange Commission on July 26, 2004 covering the resale of the notes and the common stock issuable upon conversion of the notes.

We had capital commitments of $11.2 million at June 30, 2004 for the construction of one new facility, additions to three existing facilities and the remodel of two facilities.  The new facility will be for our Chevrolet dealership in Fairbanks, Alaska. We have already incurred $3.3 million for these projects, with an additional $8.7 million expected to be incurred during the remainder of 2004 and the remaining $2.5 million to be incurred in 2005. We expect to pay for the construction out of existing cash balances until completion of the projects, at which time we anticipate securing long-term financing and general borrowings from third party lenders for 70% to 90% of the amounts expended.

Critical Accounting Policies and Use of Estimates

We reaffirm our critical accounting policies and use of estimates as described in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 15, 2004, except for the addition of the following that only applies to our quarterly filings.

Executive Bonuses

We make certain estimates, judgments and assumptions regarding the likelihood of our attainment, and the level thereof, of the annual bonus criteria under our 2004 Discretionary Executive Bonus Program in order to record bonus expense on a quarterly basis. We accrue the estimated year-end expense on an accelerated basis in the first, second and third quarters based on bonus attainment expectations.  These estimates, judgments and assumptions are made quarterly based on available

18

information and take into consideration the historical seasonality of our business and current trends.  If actual year-end results differ materially from our estimates, the amount of bonus expense recorded in a particular quarter could be significantly over or under estimated.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Other than the addition of $85.0 million of fixed rate debt during the second quarter of 2004, there have been no material changes in our reported market risks or risk management policies since the filing of our 2003 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 15, 2004.

Item 4.Controls and Procedures

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our President and Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our President and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

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

PART II - OTHER INFORMATION

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

Our annual meeting of the shareholders was held on April 29, 2004, 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:

Name		No. of Shares Voting For	No. of Shares Withheld Voting
Sidney B. DeBoer	Class A	11,833,123	966,075
	Class B	3,762,231	—
M. L. Dick Heimann	Class A	11,879,893	919,305
	Class B	3,762,231	—
Thomas Becker	Class A	11,705,617	1,093,581
	Class B	3,762,231	—
R. Bradford Gray	Class A	11,879,618	919,580
	Class B	3,762,231	—
Phillip J. Romero	Class A	12,001,069	798,129
	Class B	3,762,231	—
Gerald F. Taylor	Class A	11,706,234	1,092,964
	Class B	3,762,231	—
William J. Young	Class A	11,706,048	1,093,150
	Class B	3,762,231	—

19

2.To approve an amendment to the 2003 Stock Incentive Plan to increase the number of shares issuable under the plan from 1.2 million to 2.2 million:

	Number of Shares Voting For	Number of Shares Voting Against	Number of Shares Abstaining	Number of Broker Non-Votes
Class A	5,780,853	5,007,672	10,777	1,999,896
Class B	3,762,231	—	—	—

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 from 1.5 million to 1.75 million:

	Number of Shares Voting For	Number of Shares Voting Against	Number of Shares Abstaining	Number of Broker Non-Votes
Class A	10,688,646	100,920	9,736	1,999,896
Class B	3,762,231	—	—	—

4.     To approve amendments to the Lithia Motors, Inc. Executive Bonus Plan:

	Number of Shares Voting For	Number of Shares Voting Against	Number of Shares Abstaining	Number of Broker Non-Votes
Class A	10,523,187	259,558	14,437	2,002,016
Class B	3,762,231	—	—	—

Item 6.Exhibits and Reports on Form 8-K

(a) Exhibits

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

3.1	Restated Articles of Incorporation (filed as Exhibit 3.1 to Form 10-K filed March 30, 2000 and incorporated herein by reference).
3.2	Bylaws (filed as Exhibit 3.2 to Form S-1, Registration Statement No. 333-14031, as declared effective by the Securities and Exchange Commission on December 18, 1996 and incorporated herein by reference).
4.1	Indenture dated May 4, 2004, between Lithia motors, Inc. and U.S. Bank National Association, as Trustee, relating to 2.875% Convertible Senior Subordinated Notes due 2014 (filed as Exhibit 4.1 to Form 10-Q filed May 10, 2004 and incorporated herein by reference).
10.1	Second Amendment, dated as of December 4, 2003, to Credit Agreement dated February 25, 2003, between DaimlerChrysler Services North America LLC, as Agent and Lithia Motors, Inc. (filed as Exhibit 10.1 to Form 10-Q filed May 10, 2004 and incorporated herein by reference).
10.2	Modification No. 2, dated as of November 1, 2003, to Amended and Restated Revolving Loan and Security Agreement and Notes Secured by Deed of Trust (filed as Exhibit 10.2 to Form 10-Q filed May 10, 2004 and incorporated herein by reference).
10.3	Modification No. 3, dated as of February 20, 2004, to Amended and Restated Revolving Loan and Security Agreement and Notes Secured by Deed of Trust (filed as Exhibit 10.3 to Form 10-Q filed May 10, 2004 and incorporated herein by reference).
10.4	Third Amendment, dated as of June 30, 2004, to Credit Agreement dated February 25, 2003, between DaimlerChrysler Services North America LLC, as Agent and Lithia Motors, Inc.
31.1	Certification of Sidney B. DeBoer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Jeffrey B. DeBoer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Sidney B. DeBoer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Jeffrey B. DeBoer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

The following reports on Form 8-K were filed during the quarter ended June 30, 2004:

• Dated and furnished April 8, 2004 pursuant to Item 9. Regulation FD Disclosure regarding an investor presentation to be made;

• Dated and furnished April 26, 2004 pursuant to Item 12.  Results of Operations and Financial Condition regarding financial results for the quarter ended March 31, 2004;

• Dated April 27, 2004 and furnished April 28, 2004 pursuant to Item 9. Regulation FD Disclosure to announce the sale of $85 million of convertible senior subordinated notes due 2014;

• Dated and filed May 3, 2004 pursuant to Item 5. Other Events and Regulation FD Disclosure and Item 7. Financial Statements and Exhibits regarding the filing of two lawsuits against us; and

• Dated and furnished May 4, 2004 pursuant to Item 9. Regulation FD Disclosure regarding the completion of the convertible note offering and the purchase of two Chevrolet stores in Alaska.

20

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 6, 2004	LITHIA MOTORS, INC.
		By		/s/ JEFFREY B. DEBOER
		Jeffrey B. DeBoer
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)
		By	/s/ LINDA A. GANIM
		Linda A. Ganim
		Vice President and Chief Accounting Officer (Principal Accounting Officer)

21

EX-10.4

EXHIBIT 10.4

THIRD AMENDMENT

THIS THIRD AMENDMENT dated as of June 30, 2004 (this “Amendment”) is to the Credit Agreement (as heretofore amended, the “Credit Agreement”) dated as of February 25, 2003 among LITHIA MOTORS, INC. (the “Company”), various financial institutions (the “Lenders”) and DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC, as agent for the Lenders (the “Agent”).  Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as defined in the Credit Agreement.

WHEREAS, the parties hereto desire to amend the Credit Agreement in certain respects;

NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties hereto agree as follows:

SECTION 1  AMENDMENTS.  Effective on (and subject to the occurrence of) the Amendment Effective Date (as defined below):

1.1(a)Section 1.1 of the Credit Agreement shall be amended by adding the following definitions thereto, each in its appropriate alphabetical position:

Senior Subordinated Indenture means the Indenture, dated as of May 4, 2004, between the Company and U.S. Bank National Association, as trustee.

Senior Subordinated Notes means the $85,000,000 of 2.875% Convertible Senior Subordinated Notes due 2014 of the Company issued pursuant to the Senior Subordinated Indenture.

Third Amendment Effective Date means the “Amendment Effective Date” under and as defined in the Third Amendment hereto dated as of June 30, 2004.

Unused Revolving Commitment Amount means, as of any time, (x) the Revolving Commitment Amount as of such time less (y) the Revolving Outstandings as of such time.

(b)The definitions of “Commitment,” “Pro Rata Share,” “Revolving Commitment Amount,” “Subordinated Debt” and “Termination Date” in Section 1.1 of the Credit Agreement shall be amended and restated in their entireties to read as follows:

Commitment means, as to any Lender, such Lender’s commitment to make Loans, and to issue or participate in Letters of Credit, under this Agreement.  The amount of each Lender’s Pro Rata Share of the Revolving Commitment Amount on the Third Amendment Effective Date is set forth on Schedule 2.1.

Pro Rata Share means, with respect to any Lender, the percentage which (a) the amount of such Lender’s Commitment is of (b) the Commitments of all Lenders; provided that, after the Commitments have been terminated, “Pro Rata Share” shall mean, as to any Lender, the percentage which the sum of the aggregate principal amount of such Lender’s Revolving Loans plus the participations of such Lender in all Letters of Credit is of the sum of the aggregate principal amount of all Revolving Loans plus the Stated Amount of all Letters of Credit.  The Pro Rata Share of each Lender as of the Third Amendment Effective Date is set forth on Schedule 2.1.

Revolving Commitment Amount means $150,000,000, as reduced from time to time pursuant to Section 6.1.

Subordinated Debt means (i) the Senior Subordinated Notes and (ii) other unsecured Debt of the Company that has subordination terms, covenants, pricing and other terms that have been approved in writing by the Required Lenders.

Termination Date means the earlier to occur of (a) May 1, 2007 (or any later date that may be established as the Termination Date pursuant to Section 2.6) or (b) such other date on which the Commitments terminate pursuant to Section 6 or 11.

(c)The definition of “Provider” in Section 1.1 of the Credit Agreement shall be deleted in its entirety.

1.2Section 2.6 of the Credit Agreement shall be amended and restated in its entirety to read as follows:

2.6Extension of Termination Date.  On each May 1 from and after May 1, 2005 (each, an “Extension Date”), the Termination Date shall be extended for an additional year (i.e., to the May 1 of the year following the year in which the then-scheduled Termination Date is to occur) if the Agent (acting at the request of all of the Lenders) shall have notified the Company in writing on or prior to such Extension Date that the Termination Date is so extended for an additional year (such notice an “Extension Notice”).  If the Agent shall have issued an Extension Notice on or prior to an Extension Date, the Agent shall promptly notify the Company and each Lender of the new Termination Date.  If no Extension Notice is received by the Company on or prior to any Extension Date, the Termination Date shall not be extended on such Extension Date.  For example: (x) if no Extension Notice is given before May 1, 2005, the Termination Date shall remain May 1, 2007 (unless such date occurs earlier pursuant to clause (b) of the definition of “Termination Date”) and (y) if an Extension Notice is given before May 1, 2005, the Termination Date shall be thereby extended to May 1, 2008, subject to further extension by operation of this Section (unless such date occurs earlier pursuant to clause (b) of the definition of “Termination Date”).

1.3Section 5.2 of the Credit Agreement shall be amended and restated in its entirety to read as follows:

5.2Unused Fees.  The Company agrees to pay to the Agent for the account of each Lender an unused fee at a rate per annum equal to 0.15% on such Lender’s share of the daily Unused Revolving Commitment Amount.  All unused fees shall be payable in arrears as follows: (i) the Agent will present an invoice reflecting the unused fees on or about April 30^th of each year for the period ending on such April 30^th for which such fees shall not have been theretofore paid and the Company shall pay such invoiced amount to the Agent for the account of the Lenders within one Business Day after receipt of such invoice, and (ii) on the Termination Date, the Agent will present an invoice reflecting the unused fees for the period ending on the Termination Date for which such fees shall not have been theretofore paid and the Company shall pay such invoiced amount to the Agent for the account of the Lenders on the Termination Date.

1.4Section 5 of the Credit Agreement shall be amended by (i) changing the designation of Section 5.4 to Section 5.5 and (ii) by adding the following new Section 5.4:

5.4Administrative Fee.  The Company agrees to pay to the Agent for its own account (and not for the account of any Lender) an administrative fee at a rate per annum equal to 0.10% on the daily Unused Revolving Commitment Amount.  The administrative fee shall be payable in arrears as follows: (i) the Agent will present an invoice reflecting the administrative fee on or about April 30^th of each year for the period ending on such April 30^th for which such fee shall not have been theretofore paid and the Company shall pay such invoiced amount to the Agent within one Business Day after receipt of such invoice; and (ii) on the Termination Date, the Agent will present an invoice reflecting the administrative fee for the period ending on the Termination Date for which such fee shall not have been theretofore paid and the Company shall pay such invoiced amount to the Agent on the Termination Date.

1.5Section 9.7(k) of the Credit Agreement shall be amended and restated to read in its entirety as follows:

(k)Debt with respect to Floor Plan Financings provided by Persons to whom all the Lenders consent;

2

1.6Section 9.20(h) of the Credit Agreement shall be amended by (x) deleting the existing text therein that read “[INTENTIONALLY LEFT BLANK]” and (y) inserting the following in lieu of such deleted text “an Investment in an amount not to exceed $50,000,000 in Lithia Real Estate, provided such Investment is made within 60 days after the Third Amendment Effective Date”.

1.7Section 9.20 of the Credit Agreement shall be amended by substituting the designation “(c), (g) or (h)” for the designation “(c) or (g)” in clause (y) of the proviso therein.

1.8Section 9 of the Credit Agreement shall be amended by adding thereto the following new Section 9.24:

9.24Senior Subordinated Notes.  Not: (i) make any redemption, prepayment, defeasance or repurchase of the Senior Subordinated Notes prior to May 1, 2009 (it being understood that, as a condition to extending the Termination Date or otherwise in connection with any modification or waiver of the Loan Documents, the Agent and the Lenders may require that such date be extended to another future date); or (ii) amend, modify or waive any rights under the Senior Subordinated Indenture or the Senior Subordinated Notes without the prior written consent of the Required Lenders.

1.9Section 13.17 of the Credit Agreement shall be amended and restated in its entirety to read as follows:

13.17[Intentionally left blank]

1.10Schedule 2.1 to the Credit Agreement shall be replaced by Schedule 2.1 hereto.

SECTION 2  REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the Agent and the Lenders that:  (a) the representations and warranties made in Section 8 of the Credit Agreement are true and correct on and as of the Amendment Effective Date (as defined below) with the same effect as if made on and as of the Amendment Effective Date (except to the extent relating solely to an earlier date, in which case they were true and correct as of such earlier date); (b) no Event of Default or Unmatured Event of Default exists or will result from the execution of this Amendment; (c) no event or circumstance has occurred since the Closing Date that has resulted, or would reasonably be expected to result, in a Material Adverse Effect; (d) the execution and delivery by the Company of this Amendment and the performance by the Company of its obligations under the Credit Agreement as amended hereby (as so amended, the “Amended Credit Agreement”) (i) are within the corporate powers of the Company, (ii) have been duly authorized by all necessary corporate action, (iii) have received all necessary approval from any governmental authority and (iv) do not and will not contravene or conflict with any provision of any law, rule or regulation or any order, decree, judgment or award which is binding on the Company or any of its Subsidiaries or of any provision of the certificate of incorporation or bylaws or other organizational documents of the Company or of any agreement, indenture, instrument or other document which is binding on the Company or any of its Subsidiaries; and (e) the Amended Credit Agreement is the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally or by equitable principles relating to enforceability.

SECTION 3  EFFECTIVENESS.  The amendments set forth in Section 1 above shall become effective as of such date (the “Amendment Effective Date”) when the Agent shall have received (a) a counterpart of this Amendment executed by the Company and the Lenders (or, in the case of any party other than the Company from which the Agent has not received a counterpart hereof, facsimile confirmation of the execution of a counterpart hereof by such party) and (b) each of the following documents, each in form and substance satisfactory to the Agent:

3.1Reaffirmation.  A counterpart of the Reaffirmation of Loan Documents, substantially in the form of Exhibit A, executed by each Loan Party other than the Company.

3.2Other Documents.  Such other documents as the Agent or any Lender may reasonably request.

3

SECTION 4  MISCELLANEOUS.

4.1Continuing Effectiveness, etc.  As hereby amended, the Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects.  As of the Amendment Effective Date, all references in the Credit Agreement, the Notes, each other Loan Document and any similar document to the “Credit Agreement” or similar terms shall refer to the Amended Credit Agreement.

4.2Counterparts.  This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Amendment.

4.3Expenses.  The Company agrees to pay the reasonable costs and expenses of the Agent (including reasonable fees and disbursements of counsel, including, without duplication, the allocable costs of internal legal services and all disbursements of internal legal counsel) in connection with the preparation, execution and delivery of this Amendment.

4.4Governing Law.  This Amendment shall be a contract made under and governed by the laws of the State of Michigan applicable to contracts made and to be wholly performed within the State of Michigan.

4.5Successors and Assigns.  This Amendment shall be binding upon the Company, the Lenders and the Agent and their respective successors and assigns, and shall inure to the benefit of the Company, the Lenders and the Agent and the successors and assigns of the Lenders and the Agent.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

4

Delivered as of the day and year first above written.

LITHIA MOTORS, INC.
By:	/s/ Jeffrey B. DeBoer
Title:		Senior Vice President and Chief Financial Officer
DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC, as the Agent, as the Issuing Lender and as a Lender
By:	/s/ Janet Toronski
Title:
TOYOTA MOTOR CREDIT CORPORATION, as a Lender
By:	/s/ Reid Boozer
Title:

S-1

SCHEDULE 2.1

LENDERS AND PRO RATA SHARES

Lender	Pro Rata Share of Revolving Commitment Amount		Pro Rata Share
DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC	$	93,750,000	62.5	%
TOYOTA MOTOR CREDIT CORPORATION	$	56,250,000	37.5	%
TOTALS	$	150,000,000	100	%

EXHIBIT A

FORM OF REAFFIRMATION

June    , 2004

DaimlerChrysler Services North

America LLC, as the Agent

and the Lenders party

to the Credit Agreement

referred to below

27777 Inkster Road

Farmington Hills, Michigan 48334

Attn: Michele Nowak

Re:  Reaffirmation of Loan Documents

Ladies and Gentlemen:

Please refer to:

(a)The Security Agreement dated as of February 25, 2003 (the “Security Agreement”) among Lithia Motors, Inc. (the “Company”), its subsidiaries and DaimlerChrysler Services North America LLC in its capacity as Agent (in such capacity, the “Agent”);

(b)The Guaranty dated as of February 25, 2003 (the “Guaranty”) executed in favor of the Agent and various other parties by all subsidiaries of the Company; and

(c)The Pledge Agreement dated as of February 25, 2003 (the “Pledge Agreement”) executed by the Company and certain of its subsidiaries.

Each of the undersigned acknowledges that the Company, the Lenders and the Agent have executed the Third Amendment (the “Third Amendment”) to the Credit Agreement dated as of February 25, 2003 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”).  Capitalized terms not otherwise defined herein have the meanings given in the Credit Agreement.

Each of the undersigned hereby confirms that the Security Agreement, the Guaranty, the Pledge Agreement and each other Loan Document to which such undersigned is a party remains in full force and effect after giving effect to the effectiveness of the Third Amendment and that, upon such effectiveness, all references in each Loan Document to the “Credit Agreement” shall be references to the Credit Agreement, as amended by the Third Amendment.

A-1

This letter agreement may be signed in counterparts and by the various parties on separate counterparts.  This letter agreement shall be governed by the laws of the State of Michigan applicable to contracts made and to be performed entirely within such State.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.  SIGNATURES FOLLOW]

A-2

HUTCHINS EUGENE NISSAN, INC.

HUTCHINS IMPORTED MOTORS, INC.

LGPAC, INC.

LITHIA AUTO SERVICES, INC.

LITHIA BNM, INC.

LITHIA DE, INC.

LITHIA DM, INC.

LITHIA HPI, INC.

LITHIA KLAMATH, INC.

LITHIA LAC, INC.

LITHIA MEDFORD HON, INC.

LITHIA MOTORS SUPPORT SERVICES, INC.

LITHIA MTLM, INC.

LITHIA OF ROSEBURG, INC.

LITHIA RENTALS, INC.

LITHIA ROSE-FT, INC.

LITHIA SOC, INC.

SATURN OF SOUTHWEST OREGON, INC.

LITHIA CHRYSLER JEEP OF ANCHORAGE,
INC.

LITHIA IMPORTS OF ANCHORAGE, INC.

LITHIA CIMR, INC.

LITHIA CJDB, INC.

LITHIA DC, INC.

LITHIA FMF, INC.

LITHIA FN, INC.

LITHIA FVHC, INC.

LITHIA JEF, INC.

LITHIA MMF, INC.

LITHIA NF, INC.

LITHIA OF ANCHORAGE, INC.

LITHIA TKV, INC.

LITHIA TR, INC.

LITHIA VWC, INC.

LITHIA VWPC, INC.

LITHIA CENTENNIAL CHRYSLER PLYMOUTH JEEP,
INC.

LITHIA CHERRY CREEK DODGE, INC.

LITHIA COLORADO CHRYSLER PLYMOUTH,
INC.

LITHIA COLORADO JEEP, INC.

LITHIA COLORADO SPRINGS JEEP CHRYSLER
PLYMOUTH, INC.

LITHIA FOOTHILLS CHRYSLER, INC.

LITHIA OF THORNTON, INC.

LITHIA CB, INC.

LITHIA DB, INC.

LITHIA IB, INC.

LITHIA LMB, INC.

LITHIA FORD OF BOISE, INC.

LITHIA OF CALDWELL, INC.

LITHIA OF POCATELLO, INC.

LITHIA POCA-HON, INC.

LITHIA CD, INC.

LITHIA OF OMAHA, INC.

LITHIA MBO, INC.

A-3

LITHIA RENO SUB-HYUN, INC.

LITHIA SALMIR, INC.

LITHIA AUTOMOTIVE, INC.

LITHIA OF SIOUX FALLS, INC.

CAMP AUTOMOTIVE, INC.

LITHIA BC, INC.

LITHIA DC OF RENTON, INC.

LITHIA DODGE OF TRI-CITIES, INC.

LITHIA FTC, INC.

LITHIA IC, INC.

LITHIA OF SEATTLE, INC.

TC HON, INC.

LITHIA HYR, INC.

LITHIA CS, INC.

LITHIA OF FAIRFIELD, INC.

LITHIA OF SANTA ROSA, INC.

LITHIA OF VACAVILLE, INC.

LITHIA CCTF, INC.

LITHIA OF TWIN FALLS, INC.

LITHIA LMM, INC.

LITHIA OF MISSOULA, INC.

LITHIA OF OKLAHOMA, INC.

LITHIA OF BILLINGS, INC.

LITHIA OF SPOKANE, INC.

LITHIA OF FAIRBANKS, INC.

LITHIA OF MEDFORD LM, INC.

LITHIA OF HELENA, INC.

LITHIA OF SOUTH CENTRAL AK, INC.

LITHIA NA, INC.

[LITHIA OF CLOVIS, INC.]

By:

Title:

A-4

LITHIA LP OF TEXAS, LLC

LITHIA GP OF TEXAS, LLC

By:  Lithia Motors, Inc., Manager

By:

Title:

LITHIA LAC OF WASHINGTON, LLC

By:  Lithia LAC, Inc., Manager

By:

Title:

LITHIA SH, LLC

By:

Title:

SOE, LLC

By:  Lithia SH, LLC, Manager

By:

Title:

LITHIA VS, LLC

By:  Camp Automotive, Inc., Manager

By:

Title:

A-5

	LITHIA CJDBS, L.P.
	LITHIA CJDO, L.P.
	LITHIA CJDSA. L.P.
	LITHIA CM, L.P.
	LITHIA CO, L.P.
	LITHIA CSA, L.P.
	LITHIA DMID, L.P.
	LITHIA DSA, L.P.
	LITHIA HMID, L.P.
	LITHIA NSA, L.P.
	LITHIA OF GRAPEVINE, L.P.
	By:  Lithia GP of Texas, LLC, General Partner
	By:  Lithia Motors, Inc., Manager
	By:
	Title:
	LRE SPRINGFIELD, LLC
	By:  Lithia Real Estate, Inc., Manager
	By:
	Title:
ACKNOWLEDGED AND AGREED as of the date first written above
DAIMLERCHRYSLER SERVICES NORTH AMERICA, LLC, as the Agent
By:
Title:

A-6

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, Sidney B. DeBoer, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Lithia Motors, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2004

/s/Sidney B. DeBoer

Sidney B. DeBoer

Chairman of the Board,

Chief Executive Officer and Secretary

Lithia Motors, Inc.

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey B. DeBoer, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Lithia Motors, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2004

/s/Jeffrey B. DeBoer

Jeffrey B. DeBoer

Senior Vice President

and Chief Financial Officer

Lithia Motors, Inc.

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Lithia Motors, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sidney B. DeBoer, Chairman of the Board, Chief Executive Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Sidney B. DeBoer

Sidney B. DeBoer

Chairman of the Board,

Chief Executive Officer and Secretary

Lithia Motors, Inc.

August 6, 2004

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Lithia Motors, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey B. DeBoer, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Jeffrey B. DeBoer

Jeffrey B. DeBoer

Senior Vice President

and Chief Financial Officer

Lithia Motors, Inc.

August 6, 2004