SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

or

For The Transition Period From                                       to                                      

COMMISSION FILE NUMBER: 1-13107

AUTONATION, INC.

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 769-6000

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

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

     On October 25, 2004 the registrant had 264,572,532 outstanding shares of common stock, par value $.01 per share.

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AUTONATION, INC.

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUTONATION, INC.

The accompanying notes are an integral part of these statements.

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AUTONATION, INC.

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AUTONATION, INC.

The accompanying notes are an integral part of these statements.

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AUTONATION, INC.

The accompanying notes are an integral part of these statements.

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AUTONATION, INC.

     The accompanying Unaudited Consolidated Financial Statements include the accounts of AutoNation, Inc. and its subsidiaries (the “Company”); all significant intercompany accounts and transactions have been eliminated. The accompanying Unaudited Consolidated Financial Statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information related to the Company’s organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. These Unaudited Consolidated Financial Statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state, in all material respects, the financial position and the results of operations of the Company for the periods presented.

     Operating results for interim periods are not necessarily indicative of the results that can be expected for a full year. These interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K.

     The Company’s parts and service departments provide reconditioning repair work for used vehicles acquired by the used vehicle department and minor preparatory work for new vehicles. The parts and service departments charge the new and used departments as if they were third parties in order to account for total activity performed by that department. The Company has determined that the revenue and related cost of sales of both new and used vehicles had not been reduced by the intracompany charge for such work. Commencing with the second quarter of 2004, the Company is making the adjustment and has revised amounts previously reported by reducing new and used vehicle revenue and cost of sales by the amount of the intracompany charge. The adjustments have no impact on gross profit, operating income, income from continuing operations, net income, earnings per share, cash flows, or financial position for any period or their respective trends.

     The effect of the adjustments was to reduce both revenue and cost of sales for new vehicles by $21 million and $65 million for the three and nine months ended September 30, 2004, respectively, and for used vehicles by $49 million and $151 million for the same periods, respectively. For 2003, the adjustment reduced both revenue and cost of sales for new vehicles by $21 million and $61 million for the three and nine months ended September 30, 2003, respectively, and used vehicles by $50 million and $143 million for the same periods, respectively. These revisions do not have a material impact on the amounts for any period or respective trends.

     Additionally, in order to maintain consistency and comparability between periods presented and in an effort to improve reporting consistency within our automotive retailing peer group, certain amounts have been reclassified from the previously reported financial statements to conform with the financial statement presentation of the current period. The reclassifications include certain revenue related to corporate volume incentives which was previously included in Other Revenue and has been reclassified to Finance and Insurance Revenue. Additionally, Used Vehicle Revenue and Cost of Sales have been adjusted to include the results of wholesale operations that were previously included in Other Revenue and Cost of Sales.

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     During the nine months ended September 30, 2004, the Company had losses from discontinued operations totaling $7.1 million, primarily related to several stores that were sold or for which the Company has entered a definitive agreement to sell. Generally, the sale of a store is completed within 60 to 90 days after a definitive agreement is signed. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” certain amounts reflected in the accompanying Unaudited Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003, have been adjusted to classify the related assets and liabilities as a component of Other Current Assets and Other Current Liabilities for discontinued operations. In addition, the accompanying Unaudited Consolidated Income Statements and Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003, have been adjusted to classify the results of the stores described above as discontinued operations.

     The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” in accounting for stock-based employee compensation arrangements whereby compensation cost related to stock options is generally not recognized in determining net income. Had compensation cost for the Company’s stock option plans been determined pursuant to SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share would have decreased accordingly. Using the Black-Scholes option pricing model for all outstanding options, and based on their vesting schedules, the Company’s pro forma net income and pro forma earnings per share are as follows for the nine months ended September 30:

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     The components of receivables, net of allowance for doubtful accounts, are as follows:

     Contracts-in-transit and vehicle receivables represent receivables from financial institutions for the portion of the vehicle sales price financed by the Company’s customers.

     The components of inventory are as follows:

     At September 30, 2004 and December 31, 2003, vehicle floorplan payable totaled $2.5 billion and $2.8 billion, respectively. Vehicle floorplan payable reflects amounts payable to finance the purchase of specific vehicle inventories at LIBOR-based rates of interest primarily with manufacturers’ captive finance subsidiaries, and is generally due within several days after the related vehicles are sold. Floorplan facilities are primarily collateralized by new vehicle inventories and related receivables and contain certain financial and operational covenants. At September 30, 2004, the Company was in compliance with such covenants in all material respects. At September 30, 2004, aggregate capacity under the floorplan credit facilities was approximately $3.9 billion, of which $2.5 billion was outstanding.

     The Company has restricted assets primarily held in trust accounts in accordance with the terms and conditions of certain reinsurance agreements to secure the payments of outstanding losses and loss adjustment expenses relating to its captive insurance subsidiaries.

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     A summary of restricted assets is as follows:

     At September 30, 2004 and December 31, 2003, current unearned premiums and loss reserves related to the Company’s reinsurance programs were included in Other Current Liabilities and long-term unearned premiums and loss reserves were included in Other Liabilities in the Unaudited Consolidated Balance Sheets as follows:

     Since January 1, 2003, the Company has not issued reinsurance for new and used vehicle warranties and credit insurance products. The remaining reserves pertaining to the Company’s reinsurance programs are expected to wind down over the next two years.

     At September 30, 2004, surety bonds, letters of credit and cash deposits totaled $101.5 million, including $73.7 million of letters of credit. In the ordinary course of business, the Company is required to post performance and surety bonds, letters of credit, and/or cash deposits as financial guarantees of the Company’s performance.

     Intangible assets, net, consist of the following:

     As required by SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), goodwill and intangibles with indefinite lives are tested for impairment annually at June 30 or more frequently when events or circumstances indicate that an impairment may have occurred. The Company has completed impairment tests as of June 30, 2004 for goodwill and intangibles with indefinite lives. These tests include determining the fair value of the reporting unit, as defined by SFAS 142, and comparing it to the carrying value of the net assets allocated to the reporting unit. No impairment charges resulted from the required impairment tests.

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     Notes payable and long-term debt consist of the following:

     The Company has $450.0 million of 9.0% senior unsecured notes due August 1, 2008. The senior unsecured notes are guaranteed by substantially all of the Company’s subsidiaries.

     The Company has two revolving credit facilities with an aggregate borrowing capacity of $500.0 million. A 364-day revolving credit facility provides borrowing capacity of up to $200.0 million at a LIBOR-based interest rate and was renewed in August 2004 for another 364-day term to August 2005. A five-year facility, which expires in August 2006, provides borrowing capacity up to $300.0 million at a LIBOR-based interest rate. These facilities are secured by a pledge of the capital stock of certain subsidiaries of the Company, which directly or indirectly own substantially all of the Company’s stores, and are guaranteed by substantially all of the Company’s subsidiaries. There were no borrowings on these revolving credit facilities during the nine months ended September 30, 2004 and 2003. The Company does not currently provide cash collateral for outstanding letters of credit. The Company has negotiated a letter of credit line as part of its multi-year revolving credit facility. The amount available to be borrowed under the $300.0 million multi-year credit facility is reduced on a dollar-for-dollar basis by the cumulative face amount of any outstanding letters of credit, which totaled $73.7 million at September 30, 2004.

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     At September 30, 2004, the Company had $321.2 million outstanding under two mortgage facilities with automotive manufacturers’ captive finance subsidiaries. The facilities have an aggregate capacity of $400.0 million. The facilities bear interest at LIBOR-based interest rates and are secured by mortgages on certain of the Company’s retail properties.

     The Company’s revolving credit facilities, the indenture for the Company’s senior unsecured notes and the mortgage facilities contain numerous customary financial and operating covenants that place significant restrictions on the Company, including the Company’s ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments (including dividends and share repurchases) and investments, and to sell or otherwise dispose of assets and merge or consolidate with other entities. The revolving credit facilities also require the Company to meet certain financial ratios and tests, including financial covenants requiring the maintenance of consolidated maximum debt-to-cash flow ratio, minimum interest coverage and maximum debt-to-total capital ratio. Over the life of the revolving credit facilities, certain of the financial covenants become more restrictive as prescribed by a predetermined schedule. In addition, the senior unsecured notes contain a minimum interest coverage covenant, and the mortgage facilities contain both maximum debt-to-cash flow ratio and minimum interest coverage covenants. In the event that the Company were to default in the observance or performance of any of the financial covenants in the revolving credit facilities or mortgage facilities and such default were to continue beyond any cure period or waiver, the lender under the respective facility could elect to terminate the facility and declare all outstanding obligations under such facility immediately payable. Under the senior unsecured notes, should the Company be in violation of the financial covenants, it could be limited in incurring certain additional indebtedness. The Company’s revolving credit facilities, the indenture for the Company’s senior unsecured notes and the mortgage facilities have cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness of the Company. At September 30, 2004, the Company was in compliance with the requirements of all such financial covenants.

     In the event of a downgrade in the Company’s debt credit ratings, none of the covenants described above would be impacted. In addition, availability under the revolving credit facilities described above would not be impacted should a downgrade in the senior secured debt credit ratings occur. The interest rate charged under the revolving credit facilities is impacted by the credit ratings of those facilities.

     Within the meaning of Regulation S-X, Rule 3-10, AutoNation, Inc. (the parent company) has no independent assets or operations, the guarantees of its subsidiaries are full and unconditional and joint and several, and any subsidiaries other than the guarantor subsidiaries are minor.

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     During the nine months ended September 30, 2004, the Company repurchased 11.6 million shares of its common stock for an aggregate purchase price of $190.8 million, leaving approximately $104.5 million available for share repurchases under the current program authorized by the Company’s Board of Directors. In October 2004, the Company’s Board of Directors authorized an additional $250.0 million share repurchase program. Future share repurchases are subject to limitations contained in the indenture relating to the Company’s senior unsecured notes and credit agreements relating to its two revolving credit facilities. During the nine months ended September 30, 2004 and 2003, proceeds from the exercise of stock options were $68.1 million and $101.9 million, respectively.

     In October 2004, the Company’s Board of Directors authorized the retirement of 20 million treasury shares, which will resume the status of authorized but unissued shares. This will have the effect of reducing treasury stock, which is a component of issued common stock. The Company’s outstanding common stock will not be impacted by the treasury share retirement. The Company’s common stock, additional paid-in capital and treasury stock accounts will be adjusted accordingly. There will be no impact to net shareholders’ equity.

     Income taxes provided are based upon the Company’s anticipated annual effective income tax rate.

     In March 2003, the Company entered into a settlement agreement with the Internal Revenue Service (“IRS”) with respect to the tax treatment of certain transactions the Company entered into in 1997 and 1999. As a result of the settlement, during the first quarter of 2003, the Company recognized an income tax benefit of $127.5 million from the reduction of previously recorded tax liabilities. The Company continues to be under federal income tax audit for the years 1997 through 2001.

     At September 30, 2004 and December 31, 2003 the amounts owed to the IRS as part of the above settlement total $85.6 million and $124.0 million, respectively, which includes interest from the filing date of the affected tax returns. During the three months ended September 30, 2004, the Company prepaid a portion of the IRS settlement totaling $42.6 million. The September 30, 2004 balance of $85.6 million and all of the December 31, 2003 balance are classified as long-term in the caption Deferred Income Taxes and Other Tax Liabilities. The Company recorded interest expense on the IRS tax settlement payable totaling $1.4 million and $3.1 million for the three months ended September 30, 2004 and 2003, respectively, and $4.2 million and $10.9 million for the nine months ended September 30, 2004 and 2003, respectively.

     As a matter of course, the Company is regularly audited by various taxing authorities and, from time to time, these audits result in proposed assessments where the ultimate resolution may result in the Company owing additional taxes. The Company believes that its tax positions comply with applicable tax law, and that it has adequately provided for these matters. Included in Other Current Liabilities at September 30, 2004 and December 31, 2003, are $305.1 million and $307.3 million, respectively, provided by the Company for these matters.

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is based on the combined weighted-average number of common shares and common share equivalents outstanding which includes, where appropriate, the assumed exercise or conversion of dilutive options.

     The computation of weighted-average common and common equivalent shares used in the calculation of basic and diluted earnings per share is as follows:

     At September 30, 2004 and 2003, the Company had approximately 36.0 million and 44.5 million stock options outstanding, respectively, of which 9.6 million and 8.2 million, respectively, have been excluded from the computation of diluted earnings per share since they are anti-dilutive.

     Comprehensive income (loss) is as follows:

     The Company has a series of interest rate hedge instruments, consisting of a combination of swaps, and cap and floor options (collars) with a notional value of $800.0 million at September 30, 2004. The hedge instruments are designed to convert certain floating rate vehicle floorplan payable and mortgage facilities to fixed rates. The Company has $200.0 million in swaps, which started in 2004 and effectively lock in a rate of approximately 3.0%, and $600.0 million in collars that cap floating rates to a maximum rate no greater than 2.4%. All of the Company’s hedge instruments mature over the next two years. At September 30, 2004, net unrealized losses related to hedges included in other comprehensive loss were $3.6 million. As of September 30, 2004, all of the Company’s derivative contracts were determined to be highly effective, and no ineffective portion was recognized in income.

     Businesses acquired through September 30, 2004 are included in the Unaudited Consolidated Financial Statements from the date of acquisition.

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     The Company acquired five automotive retail franchises and other related assets during the nine months ended September 30, 2004 and thirteen automotive retail franchises and other related assets during the nine months ended September 30, 2003. The Company paid $151.2 million and $45.7 million, respectively, in cash for these acquisitions. During the nine months ended September 30, 2004 and 2003, the Company also paid $3.1 million and $2.1 million, respectively, in deferred purchase price for certain prior year automotive retail acquisitions.

     Purchase price allocations for 2004 are tentative and subject to final adjustment due to their recent closing dates. Preliminary purchase price allocations for business combinations for the nine months ended September 30 were as follows:

     The Company’s unaudited pro forma consolidated results of continuing operations, assuming acquisitions had occurred at January 1, 2003, are as follows for the nine months ended September 30:

     The unaudited pro forma results of operations are presented for informational purposes only and may not necessarily reflect the future results of operations of the Company or what the results of operations would have been had the Company owned and operated these businesses as of the beginning of each period presented. The nine months ended September 30, 2003 includes the income tax benefit from an IRS settlement of $127.5 million.

Legal Proceedings

     The Company is involved, and will continue to be involved, in numerous legal proceedings arising out of the conduct of its business, including litigation with customers, employment-related lawsuits, class actions, purported class actions and actions brought by governmental authorities.

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     Many of the Company’s Texas store subsidiaries have been named in three class action lawsuits brought against the Texas Automobile Dealers Association (“TADA”) and approximately 700 new vehicle stores in Texas that are members of the TADA. The three actions allege that since January 1994, Texas dealers have deceived customers with respect to a vehicle inventory tax and violated federal antitrust and other laws as well. In April 2002, in two actions (which have been consolidated), the state court certified two classes of consumers on whose behalf the action would proceed. In October 2002, the Texas Court of Appeals affirmed the trial court’s order of class certification in the state action and the Company and other defendants appealed the ruling to the Texas Supreme Court which, on March 26, 2004, declined to review the class certification. The defendants then petitioned the Texas Supreme Court to reconsider its denial of review of the class certification and that petition was denied on September 10, 2004. In the federal antitrust case, in March 2003, the federal court conditionally certified a class of consumers. The Company and other defendants appealed the ruling to the Fifth Circuit Court of Appeals. On October 5, 2004, the Fifth Circuit Court of Appeals reversed the class certification order, remanding it back to the federal district court for further proceedings. The Company intends to vigorously assert available defenses in connection with the TADA lawsuits. Further, the Company may have certain rights of indemnification with respect to certain aspects of these matters. However, an adverse resolution of the TADA lawsuits could result in the payment of significant costs and damages and negatively impact the Company’s ability to itemize and pass through to the customer the cost of the tax in the future, which could have a material adverse effect on the Company’s results of operations, financial condition and cash flows.

     In addition to the foregoing cases, the Company is also a party to numerous other legal proceedings that arose in the conduct of its business. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its financial condition, results of operations or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on its financial condition, results of operations and cash flows.

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Other Matters

     The Company, acting through its subsidiaries, is the lessee under many real estate leases that provide for the use by the Company’s subsidiaries of their respective store premises. Pursuant to these leases, the Company’s subsidiaries generally agree to indemnify the lessor and other related parties from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities, or a breach of the lease by the lessee. Additionally, from time to time, the Company enters into agreements with third parties in connection with the sale of assets or businesses in which it agrees to indemnify the purchaser or related parties from certain liabilities or costs arising in connection with the assets or business. Also, in the ordinary course of business in connection with purchases or sales of goods and services, the Company enters into agreements that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability would be limited by the terms of the applicable agreement.

     From time to time, primarily in connection with dispositions of automotive stores, the Company’s subsidiaries assign or sublet to the store purchaser the subsidiaries’ interest in any real property leases associated with such stores. In general, the Company’s subsidiaries retain responsibility for the performance of certain obligations under such leases to the extent that the assignee or sublessee does not perform, whether such performance is required prior to or following the assignment or subletting of the lease. Additionally, the Company and its subsidiaries generally remain subject to the terms of any guarantees made by the Company and its subsidiaries in connection with such leases. Although the Company generally has indemnification rights against the assignee or sublessee in the event of non-performance under these leases, as well as certain defenses, and the Company presently has no reason to believe that it or its subsidiaries will be called on to perform any material obligations under any such assigned leases or subleases. The Company estimates that lessee rental payment obligations during the remaining terms of such assigned leases or subleases are approximately $55 million at September 30, 2004. The Company and its subsidiaries also may be called on to perform other obligations under these leases, such as environmental remediation of the leased premises or repair of the leased premises upon termination of the lease, although the Company presently has no reason to believe that it or its subsidiaries will be called on to so perform. Any potential obligations cannot be quantified at this time. The Company’s exposure under these leases is difficult to estimate and there can be no assurance that any performance of the Company or its subsidiaries required under these leases would not have a material adverse effect on the Company’s financial condition and cash flows.

     As further discussed in Note 5, Restricted Assets and Reinsurance, in the ordinary course of business, the Company is required to post performance and surety bonds, letters of credit, and/or cash deposits as financial guarantees of the Company’s performance.

     In the ordinary course of business, the Company is subject to numerous laws and regulations, including automotive, environmental, health and safety and other laws and regulations. The Company does not anticipate that the costs of such compliance will have a material adverse effect on its business, consolidated results of operations, cash flows or financial condition, although such outcome is possible given the nature of the Company’s operations and the extensive legal and regulatory framework applicable to its business. The Company does not have any material known environmental commitments or contingencies.

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14. Discontinued Operations

     During the nine months ended September 30, 2004, the Company had losses from discontinued operations totaling $7.1 million, primarily related to several stores that were sold or for which the Company has entered into a definitive agreement to sell. Generally, the sale of a store is completed within 60 to 90 days after a definitive agreement is signed. The accompanying Unaudited Consolidated Financial Statements for all the periods presented have been adjusted to classify these stores as discontinued operations. Selected income statement data for the Company’s discontinued operations is as follows:

     A summary of the total assets and liabilities of discontinued operations included in Other Current Assets and Other Current Liabilities are as follows:

     On June 30, 2000, the Company completed the tax-free spin-off of ANC Rental Corporation (“ANC Rental”), which operated its former rental business. In connection with the spin-off, the Company agreed to provide certain guarantees on behalf of ANC Rental. On November 13, 2001, ANC Rental filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in Wilmington, Delaware. In May 2003, the bankruptcy court approved a settlement agreement among the Company, ANC Rental and the Committee of Unsecured Creditors in the bankruptcy that resolved potential claims relating to ANC Rental’s bankruptcy, including potential claims against the Company arising out of the spin-off of ANC Rental (the “Settlement Agreement”). On October 14, 2003, with the approval of the

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bankruptcy court, substantially all of ANC Rental’s assets (the “Rental Business”) were sold to an entity controlled by Cerberus Capital Management, L.P.

     Following the sale, and pursuant to the Settlement Agreement, the Company continued to guarantee $29.5 million, and committed to guarantee up to an additional $10.5 million, in surety bonds supporting obligations of the Rental Business until December 2006. On June 30, 2004, the Company was released from its $29.5 million guarantee obligation, and on August 11, 2004, the Company was released from its remaining surety bond guarantee obligation. This triggered an obligation under the Settlement Agreement for the Company to pay $20 million (one-half of the permanent reduction of the surety bond guarantee obligations), to a trust established for the benefit of the unsecured creditors in the bankruptcy, which payment was made on September 10, 2004. The Company had previously incurred a pre-tax charge of $20.0 million ($12.3 million after-tax) for this liability, included in Loss from Discontinued Operations in the accompanying Unaudited Consolidated Income Statements during 2003.

15. New Accounting Pronouncements

     As of January 1, 2003, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor.” EITF 02-16, as it applies to the Company, addresses the recognition of certain manufacturer allowances and requires that manufacturer allowances be treated as a reduction of inventory cost unless specifically identified as reimbursement for services or costs incurred. The adoption of EITF 02-16 resulted in a cumulative effect of accounting change, net of $9.1 million of income tax, totaling $14.6 million to reflect the deferral of certain allowances, primarily floorplan assistance, into inventory cost during 2003.

     In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 “Consolidation of Variable Interest Entities, an Interpretation of APB No. 50,” (“FIN 46”). FIN 46 requires certain variable interest entities, as defined, to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46, as amended, is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. The adoption of FIN 46 did not have an impact on the Company’s consolidated financial position, results of operations or cash flows. In December 2003, the FASB issued a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions of the interpretation and defer the implementation date for certain entities to periods ending after March 14, 2004. The adoption of FIN 46R did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and notes thereto included under Item 1. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our most recent Annual Report on Form 10-K.

     Our parts and service departments provide reconditioning repair work for used vehicles acquired by the used vehicle department and minor preparatory work for new vehicles. The parts and service departments charge the new and used departments as if they were third parties in order to account for total activity performed by that department. We have determined that the revenue and related cost of sales of both new and used vehicles had not been reduced by the intracompany charge for such work. Commencing with the second quarter of 2004, we are making this adjustment and have revised amounts previously reported by reducing new and used vehicle revenue and cost of sales by the amount of the intracompany charge. The adjustments have no impact on total gross profit, operating income, income from continuing operations, net income, earnings per share, cash flows, or financial position for any period or their respective trends.

     The effect of the adjustments was to reduce both revenue and cost of sales for new vehicles by $21 million and $65 million for the three and nine months ended September 30, 2004, respectively, and for used vehicles by $49 million and $151 million for the same periods, respectively. For 2003, the adjustment reduced both revenue and cost of sales for new vehicles by $21 million and $61 million for the three and nine months ended September 30, 2003, respectively, and used vehicles by $50 million and $143 million for the same periods, respectively. Accordingly, our revenue-based performance metrics, such as revenue per vehicle, gross profit as a percent of revenue, and selling, general, and administrative expense as a percent of revenue, also have been revised. These revisions do not have a material impact on the amounts for any period or respective trends.

     Additionally, in order to maintain consistency and comparability between periods presented and in an effort to improve reporting consistency within our automotive retailing peer group, certain amounts have been reclassified from the previously reported financial statements to conform with the financial statement presentation of the current period. Finance and Insurance Revenue has been adjusted to include corporate volume incentives that were previously included in Other Revenue. Additionally, Used Vehicle Revenue and Cost of Sales have been adjusted to include the results of wholesale operations that were previously included in Other Revenue and Cost of Sales. There was no impact to total revenue or total gross profit as a result of these changes.

     During the nine months ended September 30, 2004, we had losses from discontinued operations totaling $7.1 million primarily related to several stores that were sold or for which we have entered into a definitive agreement to sell. Certain amounts reflected in the accompanying Unaudited Consolidated Financial Statements for the three and nine months ended September 30, 2004 and 2003, have been adjusted to classify the results of the stores described above as discontinued operations.

OVERVIEW

     AutoNation, Inc. is the largest automotive retailer in the United States. As of September 30, 2004, we owned and operated 360 new vehicle franchises primarily located in major metropolitan markets in 18 states, predominantly in the Sunbelt region of the United States. Our stores, which we believe include some of the most recognizable and well known in our key markets, sell 35 different brands of new vehicles. The core brands of vehicles that we sell are manufactured by Ford, General Motors, Daimler Chrysler, Toyota, Nissan, Honda and BMW.

     We offer a diversified range of automotive products and services, including new vehicles, used vehicles, vehicle maintenance and repair services, vehicle parts,

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extended service contracts, vehicle protection products and other aftermarket products. We also arrange financing for vehicle purchases through third-party finance sources. We believe that the significant scale of our operations and the quality of our managerial talent allow us to achieve efficiencies in our key markets by, among other things, reducing operating expenses, leveraging our market brands and advertising, improving asset management and sharing and implementing best practices across all of our stores.

     The automotive retailing industry historically has been subject to substantial cyclical variation characterized by periods of oversupply of new vehicles and weak consumer demand. We believe that many factors affect industry-wide sales of new vehicles and retailers’ gross profit margins, including, among other factors, consumer confidence in the economy, the level of manufacturers’ excess production capacity, industry-wide inventory levels, manufacturer pricing and incentives (and consumers’ reaction thereto), intense industry competition, interest rates and the level of personal discretionary spending.

     For the three months ended September 30, 2004 and 2003, we had net income of $92.4 million and $108.8 million, respectively. Net income from continuing operations for the three months ended September 30, 2004 and 2003 was $95.0 million and $109.5 million, respectively. Additionally, the results for the three months ended September 30, 2004, include a loss from discontinued operations totaling $2.6 million or $.01 per share, primarily due to store divestitures. A number of factors directly impacted our third-quarter earnings, including the four major hurricanes that caused store closings and substantial disruption of our business throughout Florida and the Southeast, and the challenging retail sales environment we continue to experience.

     For the nine months ended September 30, 2004 and 2003, we had net income of $271.8 million and $400.1 million, respectively, and diluted earnings per share of $.99 and $1.39, respectively. The nine months ended September 30, 2003 includes the income tax benefit from an IRS settlement of $127.5 million or $.44 per share. Additionally, the nine months ended September 30, 2003 was impacted by a loss from discontinued operations due to an agreement reached with ANC Rental and a charge for the cumulative effect of accounting change for manufacturer allowances, primarily related to floorplan assistance.

The following table details certain components of net income (in millions, except per share data):

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Reported Operating Data

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

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