UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2006

or

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

For The Transition Period From                      to                     

AUTONATION, INC.

DELAWARE		73-1105145
(STATE OF INCORPORATION)		(IRS EMPLOYER IDENTIFICATION NO.)

110 S.E. 6TH STREET
FT. LAUDERDALE, FLORIDA		33301
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)		(ZIP CODE)

     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 þ       No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o       No þ

     On October 23, 2006 the registrant had 207,758,435 outstanding shares of common stock, par value $.01 per share.

 

 

AUTONATION, INC.

INDEX

				Page
		PART I. FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS
		Unaudited Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005			3
		Unaudited Condensed Consolidated Income Statements for the Three and Nine Months Ended September 30, 2006 and 2005			4
		Unaudited Condensed Consolidated Statement of Shareholders’ Equity for the Nine Months Ended September 30, 2006			5
		Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005 (restated and revised)			6
		Notes to Unaudited Condensed Consolidated Financial Statements			8
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			24
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			41
ITEM 4.		CONTROLS AND PROCEDURES			42
		PART II. OTHER INFORMATION
ITEM 1.		LEGAL PROCEEDINGS			43
ITEM 1A.		RISK FACTORS			43
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			43
ITEM 6.		EXHIBITS			44

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUTONATION, INC.

		September 30,				December 31,
		2006				2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	29.7			$	245.4
Receivables, net			713.1				779.5
Inventory			2,363.8				2,601.8
Other current assets			177.6				311.8
Total Current Assets			3,284.2				3,938.5
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $521.2 and $459.8, respectively			1,897.4				1,786.1
GOODWILL, NET			2,740.3				2,717.9
OTHER INTANGIBLE ASSETS, NET			286.0				228.0
OTHER ASSETS			172.5				154.0
Total Assets		$	8,380.4			$	8,824.5
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Vehicle floorplan payable — trade		$	2,034.6			$	2,361.7
Vehicle floorplan payable — non-trade			86.4				102.2
Accounts payable			222.7				209.8
Notes payable and current maturities of long-term obligations			39.8				40.6
Other current liabilities			585.3				697.9
Total Current Liabilities			2,968.8				3,412.2
LONG-TERM DEBT, NET OF CURRENT MATURITIES			1,462.1				484.4
DEFERRED INCOME TAXES			209.6				186.2
OTHER LIABILITIES			79.5				72.2
COMMITMENTS AND CONTINGENCIES (NOTE 12)
SHAREHOLDERS’ EQUITY:
Preferred stock, par value $.01 per share; 5,000,000 shares authorized; none issued			—				—
Common stock, par value $.01 per share; 1,500,000,000 shares authorized; 273,562,149 and 273,562,137 shares issued, respectively, including shares held in treasury			2.7				2.7
Additional paid-in capital			2,196.1				2,201.0
Retained earnings			2,914.2				2,672.5
Accumulated other comprehensive income (loss)			(.3	)			1.8
Treasury stock, at cost; 65,828,804 and 11,329,650 shares held, respectively			(1,452.3	)			(208.5	)
Total Shareholders’ Equity			3,660.4				4,669.5
Total Liabilities and Shareholders’ Equity		$	8,380.4			$	8,824.5

The accompanying notes are an integral part of these statements.

AUTONATION, INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Revenue:
New vehicle		$	2,942.5			$	3,087.8			$	8,540.8			$	8,677.5
Used vehicle			1,180.7				1,144.8				3,507.2				3,314.4
Parts and service			656.2				653.5				1,976.1				1,916.9
Finance and insurance, net			165.5				164.1				487.1				465.0
Other			16.6				20.8				56.4				62.8
TOTAL REVENUE			4,961.5				5,071.0				14,567.6				14,436.6
Cost of Sales:
New vehicle			2,727.1				2,864.9				7,913.1				8,048.5
Used vehicle			1,077.3				1,038.3				3,184.8				2,990.9
Parts and service			367.3				369.3				1,104.4				1,083.1
Other			7.3				9.5				24.0				28.5
TOTAL COST OF SALES			4,179.0				4,282.0				12,226.3				12,151.0
Gross Profit:
New vehicle			215.4				222.9				627.7				629.0
Used vehicle			103.4				106.5				322.4				323.5
Parts and service			288.9				284.2				871.7				833.8
Finance and insurance			165.5				164.1				487.1				465.0
Other			9.3				11.3				32.4				34.3
TOTAL GROSS PROFIT			782.5				789.0				2,341.3				2,285.6
Selling, general and administrative expenses			557.6				549.3				1,660.3				1,598.2
Depreciation and amortization			21.3				19.2				61.9				58.7
Other expenses (income)			(.4	)			1.2				(.3	)			.7
Operating income			204.0				219.3				619.4				628.0
Floorplan interest expense			(37.2	)			(24.1	)			(106.2	)			(75.9	)
Other interest expense			(27.2	)			(15.9	)			(64.4	)			(48.9	)
Other interest expense – senior note repurchases			—				—				(34.5	)			(15.1	)
Interest income			.9				1.5				7.6				4.4
Other income, net			.5				.1				1.2				(.1	)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			141.0				180.9				423.1				492.4
PROVISION FOR INCOME TAXES			55.6				60.3				166.1				175.9
NET INCOME FROM CONTINUING OPERATIONS			85.4				120.6				257.0				316.5
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES			(3.6	)			8.7				(15.3	)			104.7
NET INCOME		$	81.8			$	129.3			$	241.7				421.2
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations		$	.40			$	.46			$	1.11			$	1.20
Discontinued operations		$	(.02	)		$	.03			$	(.07	)		$	.40
Net income		$	.39			$	.49			$	1.05			$	1.60
Weighted average common shares outstanding			210.9				261.6				231.2				263.5
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations		$	.40			$	.45			$	1.09			$	1.18
Discontinued operations		$	(.02	)		$	.03			$	(.07	)		$	.39
Net income		$	.38			$	.48			$	1.03			$	1.57
Weighted average common shares outstanding			215.0				267.2				235.0				269.1
COMMON SHARES OUTSTANDING, net of treasury stock			207.7				261.4				207.7				261.4

The accompanying notes are an integral part of these statements.

AUTONATION, INC.

																		Accumulated
																		Other
										Additional								Compre-
		Common Stock								Paid-in				Retained				hensive				Treasury
		Shares				Amount				Capital				Earnings				Gain (Loss)				Stock				Total
BALANCE AT DECEMBER 31, 2005			273,562,137			$	2.7			$	2,201.0			$	2,672.5			$	1.8			$	(208.5	)		$	4,669.5
Exercise of stock options			—				—				(17.0	)			—				—				93.5				76.5
Stock option expense			—				—				11.9				—				—				—				11.9
Other comprehensive loss			—				—				—				—				(2.1	)			—				(2.1	)
Other			12				—				.2				—				—				—				.2
Purchases of treasury stock			—				—				—				—				—				(1,337.3	)			(1,337.3	)
Net income			—				—				—				241.7				—				—				241.7
BALANCE AT SEPTEMBER 30, 2006			273,562,149			$	2.7			$	2,196.1			$	2,914.2			$	(.3	)		$	(1,452.3	)		$	3,660.4

The accompanying notes are an integral part of these statements.

AUTONATION, INC.

		Nine Months ended
		September 30,
		2006				2005
						(Restated*)
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income		$	241.7			$	421.2
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (income) from discontinued operations			15.3				(104.7	)
Depreciation and amortization			61.9				58.7
Amortization of debt issue costs and discounts			2.8				5.5
Stock option expense			11.9				—
Interest expense on senior note repurchase			34.5				11.3
Income taxes			150.9				153.8
Other			(.6	)			.5
Changes in assets and liabilities, net of effects from business combinations and divestitures:
Receivables			106.5				104.1
Inventory			273.1				369.3
Other assets			(18.0	)			(10.6	)
Vehicle floorplan payable-trade, net			(327.1	)			(493.4	)
Accounts payable			12.5				31.1
Other liabilities			(191.7	)			(120.2	)
Net cash provided by continuing operations			373.7				426.6
Net cash provided by (used in) discontinued operations			.1				(2.1	)
Net cash provided by operating activities			373.8				424.5
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of property and equipment, excluding property operating lease buyouts			(136.9	)			(91.5	)
Property operating lease buy-outs			—				(10.3	)
Proceeds from sale of property and equipment			.7				32.3
Proceeds from assets held for sale			—				20.6
Cash used in business acquisitions, net of cash acquired			(88.5	)			(13.4	)
Net change in restricted cash			(2.0	)			28.7
Purchases of restricted investments			(4.9	)			(22.3	)
Proceeds from the sale of restricted investments			9.8				6.1
Cash received from business divestitures, net of cash relinquished			19.0				47.4
Other			(.6	)			(.5	)
Net cash used in continuing operations			(203.4	)			(2.9	)
Net cash used in discontinued operations			(.2	)			(.2	)
Net cash used in investing activities			(203.6	)			(3.1	)

AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Continued)

		Nine Months Ended
		September 30
		2006				2005
						(Restated*)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Purchases of treasury stock			(1,337.3	)			(187.2	)
Proceeds from senior unsecured notes issued			600.0				—
Proceeds from term loan			600.0				—
Proceeds from revolving credit facility			329.0				—
Payments of revolving credit facility			(238.0	)			—
Net proceeds (payments) of vehicle floorplan – non-trade			(56.6	)			8.9
Payment of mortgage facilities			(4.2	)			(36.8	)
Payments of notes payable and long-term debt			(2.8	)			(1.2	)
Proceeds from the exercises of stock options			62.1				76.7
Tax benefit from stock options			14.4				—
Repurchases of 9% senior unsecured notes			(334.2	)			(112.4	)
Other			(16.6	)			—
Net cash used in continuing operations			(384.2	)			(252.0	)
Net cash provided by (used in) discontinued operations			(1.7	)			.3
Net cash used in financing activities			(385.9	)			(251.7	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(215.7	)			169.7
CASH AND CASH EQUIVALENTS at beginning of period			245.4				110.3
CASH AND CASH EQUIVALENTS at end of period		$	29.7			$	280.0

The accompanying notes are an integral part of these statements.

AUTONATION, INC.

1. Interim Financial Statements

Business and Basis of Presentation

     AutoNation, Inc. (the “Company”), through its subsidiaries, is the largest automotive retailer in the United States. As of September 30, 2006, the Company owned and operated 335 new vehicle franchises from 261 stores primarily located in major metropolitan markets in 16 states, predominantly in the Sunbelt region of the United States. The Company offers a diversified range of automotive products and services, including new vehicles, used vehicles, vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products and other aftermarket products. The Company also arranges financing for vehicle purchases through third-party finance sources.

     The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of AutoNation, Inc. and its subsidiaries; all significant intercompany accounts and transactions have been eliminated. The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). 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 Condensed 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.

     The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates made by the Company in the accompanying Unaudited Condensed Consolidated Financial Statements include allowances for doubtful accounts, accruals for chargebacks against revenue recognized from the sale of finance and insurance products, certain assumptions related to intangible, long-lived assets and accruals related to self-insurance programs, certain legal proceedings, estimated tax liabilities, estimated losses from disposals of discontinued operations and certain assumptions related to stock option compensation.

     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.

Restatement and Revision

     The Company has restated certain amounts in the Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 from operating activities to financing activities to comply with Statement of Financial Accounting Standards (“SFAS”) No. 95, “Statement of Cash Flows,” as a result of comments to the Company from the SEC, as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. Amounts that were previously reported as operating activities have been restated as a component of financing activities to reflect the net cash flows for floorplan facilities with lenders other than the automotive manufacturers’ captive finance subsidiaries for that franchise (“non-trade lenders”.)

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

     Additionally, the Company has revised its Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 as a result of guidance given by the SEC to separately disclose the operating, investing and financing cash flows attributable to the Company’s discontinued operations. The Company had previously reported these amounts on a combined basis.

     A summary of the effects of the restatement and revision for the nine months ended September 30, 2005 is as follows:

Net cash provided by operating activities as previously reported		$	433.1
Revision of discontinued operations			.6
Restatement of vehicle floorplan payable – non-trade:
Continuing operations			(8.9	)
Discontinued operations			(.3	)
Restated and revised net cash provided by operating activities		$	424.5
Net cash used in investing activities as previously reported		$	(3.3	)
Revision of discontinued operations			.2
Revised net cash used in investing activities		$	(3.1	)
Net cash used in financing activities as previously reported		$	(260.9	)
Restatement of vehicle floorplan payable – non-trade:
Continuing operations			8.9
Discontinued operations			.3
Restated net cash used in financing activities		$	(251.7	)

		As
		Previously				As
		Reported				Restated
Vehicle floorplan payable		$	(471.0)	*		$	—
Vehicle floorplan payable – trade, net		$	—			$	(493.4	)
Net proceeds of vehicle floorplan payable–non-trade		$	—			$	8.9
Vehicle floorplan payable – non-trade (discontinued operations)		$	—			$	.3

New Accounting Pronouncements

     In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections” which replaces Accounting Principles Board Opinion (“APB”) No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28.” SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 did not have an effect on the Company’s Unaudited Condensed Consolidated Financial Statements.

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

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value and applies to other accounting pronouncements that require or permit fair value measurements and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS No. 157 on its Consolidated Financial Statements.

     In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting For Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R).” The standard requires companies to recognize the funded status (plan obligations less the fair value of plan assets) of pension and other postretirement benefit plans on their balance sheets, effective for fiscal years ending after December 15, 2006. The statement will also require fiscal year-end measurements of plan assets and benefit obligations, effective for fiscal years ending after December 15, 2008. SFAS No. 158 will have no effect on the Company’s Consolidated Financial Statements, as the Company does not maintain defined benefit pension or other postretirement plans.

     In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, to address diversity in practice in quantifying financial statement misstatements and the potential for the build up of improper amounts on the balance sheet. SAB No. 108 identifies the approach that registrants should take when evaluating the effects of unadjusted misstatements on each financial statement, the circumstances under which corrections of misstatements should result in a revision to financial statements, and disclosures related to the correction of misstatements. SAB No. 108 is effective for any report for an interim period of the first fiscal year ending after November 16, 2006. The Company is currently evaluating the impact of adopting SAB No. 108 on its Consolidated Financial Statements.

2. Stock Options

     The Company has various stock option plans under which options to purchase shares of common stock may be granted to key employees and directors of the Company. Upon exercise, shares of common stock are issued from the Company’s treasury stock. Options granted under the plans are non-qualified and are granted at a price equal to or above the closing price of the common stock on the trading day immediately prior to the date of grant. Generally, options have a term of 10 years from the date of grant and vest in increments of 25% per year over a four-year period on the yearly anniversary of the grant date.

     In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” a revision of SFAS No. 123. In March 2005, the SEC issued SAB No. 107 regarding its interpretation of SFAS No. 123R. The standard requires companies to expense the grant-date fair value of stock options and other equity-based compensation issued to employees and is effective for annual periods beginning after June 15, 2005. As of January 1, 2006, the Company adopted SFAS No. 123R and related interpretive guidance issued by the FASB and SEC using the modified prospective transition method. Accordingly, the Company’s Unaudited Condensed Consolidated Financial Statements for prior periods have not been restated to reflect the adoption of SFAS No. 123R.

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

     The following table summarizes the impact to compensation expense (included in Selling, General and Administrative expenses in the 2006 Unaudited Condensed Consolidated Income Statement) attributable to stock options granted or vested subsequent to December 31, 2005:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Pre-tax compensation expense		$	3.2			$	—			$	11.9			$	—
After-tax compensation expense		$	1.9			$	—			$	7.2			$	—

     The Company used the Black-Scholes valuation model to determine compensation expense and amortized compensation expense over the requisite service period of the grants on a straight-line basis. The following is a summary of the assumptions used:

Risk-free interest rate			2.99%- 5.16	%
Expected dividend yield			—
Expected term		5-6 years
Expected volatility			32%-40	%

     The risk-free interest rate is based on the U.S. Treasury yield curve at the time of the grant. The expected term of stock options granted is derived from historical data and represents the period of time that stock options are expected to be outstanding. The expected volatility is based on historical volatility, implied volatility and other factors impacting the Company, including its recent debt and equity tender offers discussed in Notes 6 and 7 of the Notes to Unaudited Condensed Consolidated Financial Statements.

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

     A summary of stock option transactions is as follows for the nine months ended September 30, 2006:

						Weighted-
						Average				Weighted-				Aggregate
						Exercise				Average Remaining				Intrinsic
		Shares				Price				Contractual Term				Value
		(millions)				(per share)				(Years)				(in millions)
Options outstanding at beginning of period			28.0			$	16.39
Granted			2.1			$	20.21
Exercised			(4.6	)		$	13.51
Forfeited			(.4	)		$	18.86
Expired			(.8	)		$	23.37
Options outstanding at end of period			24.3			$	16.98				4.2			$	95.1
Options exercisable at end of period			19.2			$	16.31				3.0			$	88.2
Options available for future grants			14.1

     The weighted average grant-date fair value of stock options granted during the nine months ended September 30, 2006 and 2005 was $8.27 and $7.77, per share, respectively. The total intrinsic value of stock options exercised during the nine months ended September 30, 2006 and 2005 was $37.9 million and $56.2 million, respectively.

     A summary of non-vested stock option transactions is as follows for the nine months ended September 30, 2006:

						Weighted-
						Average
						Grant-Date
		Shares				Fair Value
		(in millions)				(per share)
Nonvested at beginning of period			6.0			$	6.67
Granted			1.9			$	8.24
Vested			(2.4	)		$	6.22
Forfeited			(.4	)		$	6.92
Nonvested at end of period			5.1			$	7.44

     As of September 30, 2006, there was $33.3 million of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a period of four years. The total fair value of shares vested during the three and nine months ended September 30, 2006 was $14.7 million.

     Prior to the adoption of SFAS No. 123R, the Company reported all tax benefits resulting from the exercise of stock options as operating cash flows in the Company’s Unaudited Condensed Consolidated Statements of Cash Flows. In accordance with SFAS No. 123R, commencing January 1, 2006, excess tax benefits from the exercise of stock options of $14.4 million are reported as financing cash flows.

     Prior to January 1, 2006, the Company applied 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 was generally not recognized in determining net income and the pro forma impact of compensation cost related to stock options was disclosed.

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

     The Company’s pro forma net income and pro forma earnings per share that would have been reported if the fair value based method had been applied to all awards were as follows for the nine months ended September 30, 2005:

Net income, as reported		$	421.2
Pro forma stock-based employee compensation cost, net of taxes			(7.2	)
Pro forma net income		$	414.0
Basic earnings per share, as reported		$	1.60
Pro forma stock-based employee compensation cost		$	(.03	)
Pro forma basic earnings per share		$	1.57
Diluted earnings per share, as reported		$	1.57
Pro forma stock-based employee compensation cost		$	(.03	)
Pro forma diluted earnings per share		$	1.54
Risk-free interest rate			2.99% - 4.84	%
Expected dividend yield			—
Expected term		5 years
Expected volatility			33% - 40	%

3. Receivables, Net

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

		September 30,				December 31,
		2006				2005
Trade receivables		$	92.2			$	94.6
Manufacturer receivables			151.7				173.4
Other			102.6				97.1
			346.5				365.1
Less: Allowances			(7.0	)			(6.7	)
			339.5				358.4
Contracts-in-transit and vehicle receivables			339.1				421.1
Income taxes receivable			34.5				—
Receivables, net		$	713.1			$	779.5

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

4. Inventory and Vehicle Floorplan Payable

     The components of inventory are as follows:

		September 30,				December 31,
		2006				2005
New vehicles		$	1,869.9			$	2,133.0
Used vehicles			342.3				320.6
Parts, accessories and other			151.6				148.2
		$	2,363.8			$	2,601.8

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

     At September 30, 2006 and December 31, 2005, vehicle floorplan payable-trade totaled $2.0 billion and $2.4 billion, respectively. Vehicle floorplan payable-trade reflects amounts borrowed to finance the purchase of specific vehicle inventories with the corresponding manufacturers’ captive finance subsidiaries (“trade lenders”). Vehicle floorplan payable-non-trade totaled $86.4 million and $102.2 million at September 30, 2006 and December 31, 2005, respectively, and represents amounts borrowed to finance the purchase of specific vehicle inventories with non-trade lenders. Changes in vehicle floorplan payable-trade are reported as operating cash flows and changes in vehicle floorplan-non-trade are reported as financing cash flows in the accompanying Unaudited Condensed Consolidated Statements of Cash Flows.

     The Company’s floorplan facilities are at LIBOR-based rates of interest (6.1% and 4.4% weighted average for the nine months ended September 30, 2006 and 2005, respectively). Secured floorplan facilities are used to finance new vehicle inventories and the amounts outstanding thereunder are due on demand, but are generally paid within several business days after the related vehicles are sold. Floorplan facilities are primarily collateralized by new vehicle inventories and related receivables. The Company’s manufacturer agreements generally require that the manufacturer have the ability to draft against the floorplan facilities so that the lender directly funds the manufacturer for the purchase of inventory. The floorplan facilities contain certain financial and operating covenants. At September 30, 2006, the Company was in compliance with such covenants in all material respects. At September 30, 2006, aggregate capacity under the floorplan credit facilities to finance new vehicles was approximately $4.0 billion, of which $2.1 billion total was outstanding.

     In December 2004, the FASB issued SFAS No. 151, “Inventory Costs”. SFAS No. 151 requires abnormal amounts of inventory costs related to idle facility, freight, handling and wasted materials to be recognized as current period expenses. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a material effect on the Company’s Unaudited Condensed Consolidated Financial Statements.

5. Goodwill and Intangible Assets

     Intangible assets, net, consist of the following:

		September 30 ,				December 31,
		2006				2005
Goodwill		$	3,006.1			$	2,983.7
Franchise rights — indefinite-lived			282.6				224.4
Other intangibles			6.4				6.2
			3,295.1				3,214.3
Less: accumulated amortization			(268.8	)			(268.4	)
		$	3,026.3			$	2,945.9

     The Company completed impairment tests as of June 30, 2006 for goodwill and intangibles with indefinite lives. The goodwill test includes determining the estimated fair value of the Company’s single reporting unit and comparing it to the carrying value of the net assets allocated to the reporting unit. The Company’s principal identifiable intangible assets are individual store rights under franchise agreements with vehicle manufacturers. The test for intangibles with indefinite lives requires the comparison of estimated fair value to its carrying value by store. No impairment charges resulted from the required impairment tests. Goodwill and intangibles with indefinite lives will be tested for impairment annually at June 30 or more frequently when events or circumstances indicate that an impairment may have occurred.

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

6. Notes Payable and Long-term Debt

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

		September 30,				December 31,
		2006				2005
Floating rate senior unsecured notes		$	300.0			$	—
7% senior unsecured notes			300.0				—
Term loan			600.0				—
9% senior unsecured notes, net of unamortized discount of $1.8 million at December 31, 2005			14.1				321.7
Revolving credit facility			91.0				—
Mortgage facility			149.5				153.7
Other debt			47.3				49.6
			1,501.9				525.0
Less: current maturities			(39.8	)			(40.6	)
Long-term debt, net of current maturities		$	1,462.1			$	484.4

     In April 2006, the Company sold $300.0 million of floating rate senior unsecured notes due April 15, 2013 and $300.0 million of 7% senior unsecured notes due April 15, 2014, in each case at par. The floating rate senior unsecured notes bear interest at a rate equal to three-month LIBOR plus 2.0% per annum, adjusted quarterly, and may be redeemed by the Company on or after April 15, 2008 at 103% of principal, on or after April 15, 2009 at 102% of principal, on or after April 15, 2010 at 101% of principal and on or after April 15, 2011 at 100% of principal. The 7% senior unsecured notes may be redeemed by the Company on or after April 15, 2009 at 105.25% of principal, on or after April 15, 2010 at 103.5% of principal, on or after April 15, 2011 at 101.75% of principal and on or after April 15, 2012 at 100% of principal.

     In connection with the issuance of the new senior notes, the Company amended its existing credit agreement to provide: (1) a $675.0 million revolving credit facility that provides for various interest rates on borrowings generally at LIBOR plus 1.0%, and (2) a $600.0 million term loan that bears interest at a rate equal to LIBOR plus 1.25%. The amended credit agreement, which includes the new term loan, terminates on July 14, 2010, and is guaranteed by substantially all of the Company’s subsidiaries. The credit spread charged for the revolving credit facility is impacted by the Company’s senior unsecured credit ratings. The Company has negotiated a letter of credit sublimit as part of its revolving credit facility. The amount available to be borrowed under the revolving credit facility is reduced on a dollar-for-dollar basis by the cumulative amount of any outstanding letters of credit, which totaled $136.5 million at September 30, 2006.

     The proceeds of the new senior notes and term loan borrowings, together with cash on hand and borrowings of $80.0 million under the amended revolving credit facility, were used to: (1) purchase 50 million shares of the Company’s common stock at $23 per share for an aggregate purchase price of $1.15 billion pursuant to the Company’s equity tender offer, (2) purchase $309.4 million aggregate principal of the Company’s 9% senior unsecured notes for an aggregate total consideration of $339.8 million pursuant to the Company’s debt tender offer and consent solicitation, and (3) pay related financing costs. Approximately $34.5 million of tender premium and other financing costs related to the Company’s debt tender offer was expensed during the nine months ended September 30, 2006.

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

     As discussed above, in April 2006 the Company purchased $309.4 million aggregate principal amount of the 9% senior notes. The 9% senior unsecured notes are guaranteed by substantially all of the Company’s subsidiaries. As of April 12, 2006, covenants related to the 9% senior unsecured notes were substantially eliminated as a result of the successful completion of the consent solicitation. The remaining aggregate principal amount of 9% senior unsecured notes was not tendered for purchase and, accordingly, remains outstanding after completion of the transaction.

     At September 30, 2006, the Company had $149.5 million outstanding under a mortgage facility with various maturities through 2008. The facility bears interest at LIBOR-based interest rates (6.3% and 5.5% weighted average for the nine months ended September 30, 2006 and 2005, respectively) and is secured by mortgages on certain of the Company’s Toyota store properties.

     The Company’s new senior notes, amended credit agreement and mortgage facility contain numerous customary financial and operating covenants that place significant restrictions on the Company, including the Company’s ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell (or otherwise dispose of) assets and merge or consolidate with other entities. The indenture for the Company’s new senior notes restricts the Company’s ability to make payments in connection with share repurchases, dividends, debt retirement, investments and similar matters to a cumulative aggregate amount that is limited to $500 million plus 50% of the Company’s cumulative consolidated net income (as defined in the indenture), subject to certain exceptions and conditions set forth in the indenture. The amended credit agreement requires the Company to meet certain financial ratios, including financial covenants, as defined, requiring the maintenance of a maximum consolidated cash flow leverage ratio, as defined, (2.75 times) and a maximum capitalization ratio (65%), as defined. In addition, the indenture for the new senior notes contains a debt incurrence restriction based on a minimum fixed charge coverage ratio (2:1), and the mortgage facility contains covenants regarding maximum cash flow leverage and minimum interest coverage. In the event that the Company were to default in the observance or performance of any of the financial covenants in the amended credit agreement or mortgage facility and such default were to continue beyond any cure period or waiver, the lender under the respective facility could elect to terminate the facilities and declare all outstanding obligations under such facilities immediately payable. The Company’s amended credit agreement, the indenture for the Company’s new senior notes, vehicle floorplan payable facilities and mortgage facility have cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness of the Company. In connection with the issuance of the new senior notes, the Company is currently conducting, and expects to complete in November 2006, an exchange offer registered with the SEC pursuant to which the senior notes will be exchanged for substantially similar new notes that are not subject to certain transfer restrictions. As of September 30, 2006, the Company was in compliance with the requirements of all applicable financial and operating covenants.

     The Company’s senior notes and borrowings under the amended credit agreement are guaranteed by substantially all of the Company’s subsidiaries. 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.

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

     In the event of a downgrade in the Company’s credit ratings, none of the covenants described above would be impacted. In addition, availability under the amended credit agreement described above would not be impacted should a downgrade in the senior unsecured debt credit ratings occur. Certain covenants in the indenture for the new senior notes would be eliminated with an upgrade of the Company’s new senior notes to investment grade by either Standard & Poor’s or Moody’s Investors Service.

7. Shareholders’ Equity

     As a result of the transactions discussed in Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements, the Company’s share repurchase program was temporarily suspended and it made no repurchases of its common stock during the first quarter of 2006. In April 2006, the Company purchased 50 million shares of its common stock at $23 per share for an aggregate purchase price of $1.15 billion pursuant to the Company’s equity tender offer. After completion of the equity tender offer, the Company repurchased an additional 9.1 million shares of its common stock for a purchase price of $185.7 million during the six months ended September 30, 2006. There is approximately $135.6 million available for share repurchases authorized by the Company’s Board of Directors. Future share repurchases are subject to limitations contained in the indenture relating to the Company’s new senior notes.

     During the nine months ended September 30, 2006 and 2005, proceeds from the exercise of stock options were $62.1 million and $76.7 million, respectively.

     In October 2006, the Company’s Board of Directors authorized the retirement of 50 million treasury shares, which will assume the status of authorized but unissued shares. This will have the effect of reducing treasury stock and issued common stock, which includes treasury stock. The Company’s outstanding common stock, net of treasury stock, will not be impacted by the treasury share retirements. The Company’s common stock, additional paid-in capital and treasury stock accounts will be adjusted accordingly. There will not be an impact to total shareholders’ equity.

8. Income Taxes

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

     During the three and nine months ended September 30, 2005, the Company recorded net income tax benefits in the provision for income taxes totaling $9.4 million and $16.2 million, respectively, primarily related to the resolution of various income tax matters. During the three and nine months ended September 30, 2005, the Company recognized a $3.0 million and $110.4 million gain, respectively, included in Discontinued Operations, related to the resolution of various income tax matters.

     As a matter of course, various taxing authorities, including the IRS, regularly audit the Company. Currently, the IRS is auditing the tax years from 2002 to 2004. These audits may 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, 2006 and December 31, 2005 are $58.3 million and $54.5 million, respectively, provided by the Company for these matters.

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

     In March 2006, the EITF reached a consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, Gross versus Net Presentation)” (EITF 06-3), which allows companies to adopt a policy of presenting taxes in the income statement on either a gross or net basis. Taxes within the scope of this EITF would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes, and some types of excise taxes. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. EITF 06-3 will not impact the method for recording and reporting these sales taxes in the Company’s Consolidated Financial Statements as the Company’s policy is to exclude all such taxes from revenue.

     In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109, Accounting for Income Taxes” (FIN 48) to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of adopting FIN 48 on its Consolidated Financial Statements.

9. Earnings Per Share

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Weighted-average common shares outstanding used to calculate basic earnings per share			210.9				261.6				231.2				263.5
Effect of dilutive options			4.1				5.6				3.8				5.6
Weighted-average common and common equivalent shares used to calculate diluted earnings per share			215.0				267.2				235.0				269.1

     As discussed in Note 6 to the Notes to Unaudited Condensed Consolidated Financial Statements, in April 2006 the Company purchased 50 million shares of its common stock pursuant to an equity tender offer.

     At September 30, 2006 and 2005, the Company had approximately 24.3 million and 31.4 million stock options outstanding, respectively, of which 8.4 million and 7.4 million, respectively, have been excluded from the computation of diluted earnings per share since they are anti-dilutive.

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

10. Comprehensive Income

     Comprehensive income (loss) is as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Net income		$	81.8			$	129.3			$	241.7			$	421.2
Other comprehensive gain (loss)			(1.1	)			.7				(2.1	)			3.0
Comprehensive income		$	80.7			$	130.0			$	239.6			$	424.2

     The Company had an interest rate hedge instrument (swap) with a total notional value of $50.0 million, which matured in July 2006. This instrument was designed to convert certain floating rate vehicle floorplan payable and mortgage notes to fixed rate debt. During the nine months ended September 30, 2006, the Company had $800.0 million of interest rate hedge instruments mature, consisting of $200.0 million in swaps, which effectively locked in a LIBOR-based rate of 3.0%, and $600.0 million in collars that capped floating rates to a maximum LIBOR-based rate no greater than 2.4%. For the nine months ended September 30, 2005, net unrealized gains related to hedges included in other comprehensive gain (loss) were $1.8 million. For the nine months ended September 30, 2006 and 2005, the income statement impact from interest rate hedges was an additional income (expense) of $1.8 million and $(.9) million, respectively.

11. Acquisitions

     The Company acquired four automotive retail franchises and other related assets during the nine months ended September 30, 2006 and two automotive retail franchises and other related assets during the nine months ended September 30, 2005. Additionally, the Company also signed a separate agreement in January 2006 to acquire certain rights to establish a new Mercedes-Benz dealership. Acquisitions are included in the Unaudited Condensed Consolidated Financial Statements from the date of acquisition.

     Purchase price allocations for business combinations for the nine months ended September 30, 2006 are tentative and subject to final adjustment. Preliminary purchase price allocations for the nine months ended September 30, 2006 are as follows:

Accounts receivable		$	5.6
Inventory			35.2
Property and equipment			6.7
Other assets			7.9
Goodwill			19.2
Franchise rights — indefinite-lived			58.3
Other intangibles subject to amortization			.2
Vehicle floorplan payable–non-trade			(40.8	)
Other liabilities			(4.0	)
			88.3
Cash paid in deferred purchase price			.2
Cash used in acquisitions, net of cash acquired		$	88.5

     During the nine months ended September 30, 2005, the Company paid $5.9 million in cash for indefinite-lived franchise rights and $7.5 million in cash for the deferred purchase price for certain prior year automotive retail acquisitions.

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

     Responsibility for the vehicle floorplan payable is assumed by the Company in acquisition transactions. Typically, the Company refinances the vehicle floorplan payable in which case the initial refinancing is accounted for as a vehicle floorplan payable-non-trade.

     The Company’s unaudited pro forma consolidated results of continuing operations, assuming acquisitions had occurred at January 1, 2005, are as follows for the nine months ended September 30:

		2006				2005
Revenue		$	14,651.5			$	14,635.2
Net income		$	243.6			$	429.5
Diluted earnings per share		$	1.04			$	1.60

     The unaudited pro forma results of continuing 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.

12. Commitments and Contingencies

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.

     Many of the Company’s Texas dealership subsidiaries had 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 deceived customers with respect to a vehicle inventory tax and violated federal antitrust and other laws as well. In February 2005, the Company and the plaintiffs in all three of the cases agreed to settlement terms. The state court granted final approval of the settlement on August 14, 2006. The Company has been dismissed from the state court actions and is currently going through the procedures to obtain a dismissal from the federal action. The anticipated expense of the settlement is not material and includes the Company’s stores issuing coupons for discounts off future vehicle purchases, refunding cash in certain circumstances and paying attorneys’ fees and certain costs. Under the terms of the settlement, the Company’s stores are permitted to continue to itemize and pass through to the customer the cost of the vehicle inventory tax.

     In addition to the foregoing lawsuits, 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 results of operations, financial condition 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.

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

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 dealership 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 dealership purchaser the subsidiaries’ interests 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 under any such assigned leases or subleases, the Company estimates that lessee rental payment obligations during the remaining terms of these leases are approximately $70 million at September 30, 2006. 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 and such 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 business, financial condition and cash flows.

     At September 30, 2006, surety bonds, letters of credit and cash deposits totaled $170.1 million, including $136.5 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. The Company does not currently provide cash collateral for outstanding letters of credit.

     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.

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

     In October 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 13-1, “Accounting for Rental Costs Incurred During a Construction Period.” FSP No. FAS 13-1 requires rental costs associated with operating leases that are incurred during a construction period to be recognized as rental expense. FSP No. FAS 13-1 is effective for reporting periods beginning after December 15, 2005 and did not have a material impact on the Company’s Unaudited Condensed Consolidated Financial Statements.

13. Discontinued Operations

     Discontinued operations are related to stores that were sold or for which the Company has entered into a sale agreement. Generally, the sale of a store is completed within 60 to 90 days after the date of a sale agreement. The accompanying Unaudited Condensed Consolidated Financial Statements for all the periods presented have been adjusted to classify these stores as discontinued operations. Also included in results from discontinued operations for the nine months ended September 30, 2005 is a gain from an income tax adjustment related to items previously reported in discontinued operations. Selected income statement data for the Company’s discontinued operations is as follows:

		Three Months Ended								Nine Months Ended
		September 30								September 30,
		2006				2005				2006				2005
Total revenue		$	54.8			$	160.5			$	230.9			$	535.0
Pre-tax loss from discontinued operations		$	(1.9	)		$	(4.5	)		$	(8.0	)		$	(12.3	)
Pre-tax gain (loss) on disposal from discontinued operations			(2.2	)			2.3				(12.4	)			(3.3	)
			(4.1	)			(2.2	)			(20.4	)			(15.6	)
Income tax benefit			(.5	)			(7.9	)			(5.1	)			(9.9	)
			(3.6	)			5.7				(15.3	)			(5.7	)
Income tax adjustment (see Note 8)			—				3.0				—				110.4
Income (loss) from discontinued operations, net of income taxes		$	(3.6	)		$	8.7			$	(15.3	)		$	104.7

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

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

		September 30,				December 31,
		2006				2005
Inventory		$	26.5			$	92.3
Other current assets			12.5				26.7
Property and equipment, net			12.1				63.7
Goodwill			6.2				17.7
Other non-current assets			.3				1.3
Total assets		$	57.6			$	201.7
Vehicle floorplan payable — trade		$	21.8			$	84.1
Vehicle floorplan payable – non-trade			.2				1.9
Other current liabilities			.4				14.4
Total liabilities		$	22.4			$	100.4

     Responsibility for the Company’s vehicle floorplan payable at the time of divestiture is assumed by the buyer. Cash received from business divestitures is net of vehicle floorplan payable assumed by the buyer.

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

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

     Certain amounts have been reclassified from the previously reported financial statements to conform with the income statement presentation of the current period.

     We have restated certain amounts in the Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 from operating activities to financing activities to comply with Statement of Financial Accounting Standards (“SFAS”) No. 95, “Statement of Cash Flows,” as a result of comments to us from the Securities and Exchange Commission, as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. Amounts that were previously reported as operating activities have been restated as a component of financing activities to reflect the net cash flows for floorplan facilities with lenders other than the corresponding automotive manufacturers’ captive finance subsidiaries for that franchise (“non-trade lenders”).

OVERVIEW

     AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of September 30, 2006, we owned and operated 335 new vehicle franchises from 261 stores primarily located in major metropolitan markets in 16 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 37 different brands of new vehicles. The core brands of vehicles that we sell are manufactured by Ford, General Motors, DaimlerChrysler, Toyota, Nissan, Honda and BMW.

     We operate in a single industry segment, automotive retailing. We offer a diversified range of automotive products and services, including new vehicles, used vehicles, vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products and other aftermarket products. We also arrange financing for vehicle purchases through third-party finance sources. We believe that the significant scale of our operations and the quality of our managerial talent allow us to achieve efficiencies in our key markets by, among other things, reducing operating expenses, leveraging our market brands and advertising, improving asset management and sharing and implementing best practices across all of our stores.

     Historically, new vehicle sales have accounted for approximately 60% of our total revenue, but less than 30% of our total gross profit. Our parts and service and finance and insurance operations, while comprising less than 20% of total revenue, contribute approximately 60% of our gross profit. We believe that many factors affect industry-wide sales of new and used vehicles and finance and insurance products, and retailers’ gross profit margins, including consumer confidence in the economy, inflation, recession or economic downturn, the level of manufacturers’ excess production capacity, manufacturer incentives (and consumers’ reaction to such offers), intense industry competition, interest rates, the prospects of war, other international conflicts or terrorist attacks, severe weather conditions, the level of personal discretionary spending, product quality, affordability and innovation, fuel prices, credit availability, unemployment rates, the number of consumers whose vehicle leases are expiring and the length of consumer loans on existing vehicles. Our parts and service business is also impacted by many of these factors.

     For the three months ended September 30, 2006 and 2005, we had net income from continuing operations of $85.4 million and $120.6 million, respectively, and diluted earnings per share of $.40 and $.45, respectively. Total revenue and gross profit decreased in the third quarter of 2006 compared to the same period in 2005, primarily as a result of decreased same store new vehicle sales volumes with respect to domestic brands and in our California business. This volume decrease is consistent with industry unit sales declines in the U.S. and California. Additionally, prior year employee discounts programs offered by domestic manufacturers resulted in adverse year-over-year comparisons.

     For the nine months ended September 30, 2006 and 2005, we had net income from continuing operations of $257.0 million and $316.5 million, respectively, and diluted earnings per share of $1.09 and $1.18, respectively. The results for the first nine months of 2006 include $34.5 million of premium and deferred financing costs recognized as Interest Expense related to the repurchase of our 9% senior unsecured notes.

     The results for 2006 were impacted by lower weighted average common shares outstanding and higher interest expense resulting from our equity tender offer and related financing, higher floorplan interest expense primarily resulting from higher short-term LIBOR interest rates and higher inventory levels, and additional non-cash compensation expense related to the implementation of SFAS No. 123R for stock options.

     In April 2006 we purchased 50 million shares of our common stock at $23 per share for an aggregate purchase price of $1.15 billion pursuant to our equity tender offer. We repurchased an additional 9.1 million shares of our common stock for a purchase price of $185.7 million during the six months ended September 30, 2006. There is approximately $135.6 million available for share repurchases authorized by our Board of Directors. Future share repurchases are subject to limitations contained in the indenture relating to our new senior notes.

     During the three months ended September 30, 2006 and 2005, we had a (loss)/income from discontinued operations (generally related to stores that were sold or for which we have entered into a sale agreement) totaling $(3.6) million and $8.7 million, respectively, net of income taxes. For the nine months ended September 30, 2006 and 2005, we had a (loss)/income from discontinued operations totaling $(15.3) million and $104.7 million, respectively, net of income taxes. For the three and nine months ended September 30, 2005, we recognized gains of $3.0 million and $110.4 million, respectively, included in discontinued operations primarily related to the resolution of various income tax matters. Certain amounts reflected in the accompanying Unaudited Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2006 and 2005, have been adjusted to classify the results of these stores as discontinued operations.

Reported Operating Data

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

		Three Months Ended September 30,																Nine Months Ended September 30,
										Variance																Variance
($ in millions, except per										Favorable/																Favorable/
vehicle data)		2006				2005				(Unfavorable)				% Variance				2006				2005				(Unfavorable)				% Variance
Revenue:
New vehicle		$	2,942.5			$	3,087.8			$	(145.3	)			(4.7	)		$	8,540.8			$	8,677.5			$	(136.7	)			(1.6	)
Used vehicle			1,180.7				1,144.8				35.9				3.1				3,507.2				3,314.4				192.8				5.8
Parts and service			656.2				653.5				2.7				.4				1,976.1				1,916.9				59.2				3.1
Finance and insurance, net			165.5				164.1				1.4				.9				487.1				465.0				22.1				4.8
Other			16.6				20.8				(4.2	)							56.4				62.8				(6.4	)
Total revenue		$	4,961.5			$	5,071.0			$	(109.5	)			(2.2	)		$	14,567.6			$	14,436.6			$	131.0				.9
Gross profit:
New vehicle		$	215.4			$	222.9			$	(7.5	)			(3.4	)		$	627.7			$	629.0			$	(1.3	)			(.2	)
Used vehicle			103.4				106.5				(3.1	)			(2.9	)			322.4				323.5				(1.1	)			(.3	)
Parts and service			288.9				284.2				4.7				1.7				871.7				833.8				37.9				4.5
Finance and insurance			165.5				164.1				1.4				.9				487.1				465.0				22.1				4.8
Other			9.3				11.3				(2.0	)							32.4				34.3				(1.9	)
Total gross profit			782.5				789.0				(6.5	)			(.8	)			2,341.3				2,285.6				55.7				2.4
Selling, general and administrative expenses			557.6				549.3				(8.3	)			(1.5	)			1,660.3				1,598.2				(62.1	)			(3.9	)
Depreciation and amortization			21.3				19.2				(2.1	)							61.9				58.7				(3.2	)
Other expenses (income)			(.4	)			1.2				1.6								(.3	)			.7				1.0
Operating income			204.0				219.3				(15.3	)			(7.0	)			619.4				628.0				(8.6	)			(1.4	)
Floorplan interest expense			(37.2	)			(24.1	)			(13.1	)							(106.2	)			(75.9	)			(30.3	)
Other interest expense			(27.2	)			(15.9	)			(11.3	)							(64.4	)			(48.9	)			(15.5	)
Other interest expense – senior note repurchases			—				—				—								(34.5	)			(15.1	)			(19.4	)
Interest income			.9				1.5				(.6	)							7.6				4.4				3.2
Other income, net			.5				.1				.4								1.2				(.1	)			1.3
Income from continuing operations before income taxes		$	141.0			$	180.9			$	(39.9	)			(22.1	)		$	423.1			$	492.4			$	(69.3	)			(14.1	)
Retail vehicle unit sales:
New vehicle			99,390				107,578				(8,188	)			(7.6	)			286,396				298,022				(11,626	)			(3.9	)
Used vehicle			59,822				60,574				(752	)			(1.2	)			176,388				177,371				(983	)			(.6	)
			159,212				168,152				(8,940	)			(5.3	)			462,784				475,393				(12,609	)			(2.7	)
Revenue per vehicle retailed:
New vehicle		$	29,606			$	28,703			$	903				3.1			$	29,822			$	29,117			$	705				2.4
Used vehicle		$	15,844			$	15,082			$	762				5.1			$	15,995			$	15,103			$	892				5.9
Gross profit per vehicle retailed:
New vehicle		$	2,167			$	2,072			$	95				4.6			$	2,192			$	2,111			$	81				3.8
Used vehicle		$	1,764			$	1,781			$	(17	)			(1.0	)		$	1,826			$	1,811			$	15				.8
Finance and insurance		$	1,039			$	976			$	63				6.5			$	1,053			$	978			$	75				7.7