UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2007

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

For the transition period from                      to                     

Group 1 Automotive, Inc.

(Exact name of registrant as specified in its charter)

Delaware		76-0506313
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

950 Echo Lane, Suite 100
Houston, Texas 77024
(Address of principal executive offices) (Zip Code)

(713) 647-5700
(Registrant’s telephone number, including area 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. (Check one):

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

     As of October 31, 2007, the Company had 22,777,750 shares of common stock, par value $.01, outstanding.

 

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures about Market Risk			32
Item 4. Controls and Procedures			32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 6. Exhibits			33
SIGNATURES			34
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

Part I. Financial Information

Item 1. Financial Statements

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(in thousands)

		September 30,				December 31,
		2007				2006
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	78,579			$	39,313
Contracts-in-transit and vehicle receivables, net			158,965				189,004
Accounts and notes receivable, net			81,192				76,793
Inventories			793,563				830,628
Deferred income taxes			20,132				17,176
Prepaid expenses and other current assets			12,558				25,098
Total current assets			1,144,989				1,178,012
PROPERTY AND EQUIPMENT, net			380,162				230,385
GOODWILL			445,496				426,439
INTANGIBLE FRANCHISE RIGHTS			261,021				249,886
OTHER ASSETS			25,728				29,233
Total assets		$	2,257,396			$	2,113,955
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Floorplan notes payable — credit facility		$	598,167			$	437,288
Floorplan notes payable — manufacturer affiliates			143,044				287,978
Current maturities of long-term debt			11,350				854
Accounts payable			134,719				117,536
Accrued expenses			108,622				97,302
Total current liabilities			995,902				940,958
LONG-TERM DEBT, net of current maturities			509,351				428,639
DEFERRED INCOME TAXES			17,662				2,787
OTHER LIABILITIES			29,111				27,826
Total liabilities before deferred revenues			1,552,026				1,400,210
DEFERRED REVENUES			17,224				20,905
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 1,000 shares authorized; none issued or outstanding			—				—
Common stock, $.01 par value, 50,000 shares authorized; 25,272 and 25,165 issued, respectively			253				252
Additional paid-in capital			294,478				292,278
Retained earnings			500,417				448,115
Accumulated other comprehensive income (loss)			(1,434	)			591
Treasury stock, at cost; 2,496 and 904 shares, respectively			(105,568	)			(48,396	)
Total stockholders’ equity			688,146				692,840
Total liabilities and stockholders’ equity		$	2,257,396			$	2,113,955

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

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2007				2006				2007				2006
REVENUES:
New vehicle retail sales		$	1,042,442			$	1,009,300			$	3,031,117			$	2,837,827
Used vehicle retail sales			298,257				292,931				894,745				848,611
Used vehicle wholesale sales			86,833				83,264				244,889				251,010
Parts and service sales			179,416				165,296				534,590				492,803
Finance, insurance and other, net			54,357				51,021				158,291				146,172
Total revenues			1,661,305				1,601,812				4,863,632				4,576,423
COST OF SALES:
New vehicle retail sales			972,547				937,629				2,826,331				2,631,330
Used vehicle retail sales			263,717				254,648				787,074				738,160
Used vehicle wholesale sales			88,304				84,757				245,836				252,254
Parts and service sales			79,482				74,930				242,005				224,345
Total cost of sales			1,404,050				1,351,964				4,101,246				3,846,089
GROSS PROFIT			257,255				249,848				762,386				730,334
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			198,368				188,043				593,304				551,463
DEPRECIATION AND AMORTIZATION EXPENSE			5,506				4,449				15,571				13,384
ASSET IMPAIRMENTS			345				—				701				—
INCOME FROM OPERATIONS			53,036				57,356				152,810				165,487
OTHER INCOME AND (EXPENSES):
Floorplan interest expense			(11,842	)			(10,065	)			(35,882	)			(34,943	)
Other interest expense, net			(6,380	)			(5,366	)			(18,417	)			(13,353	)
Other income and (expenses), net			(1,410	)			(122	)			(1,218	)			(367	)
INCOME BEFORE INCOME TAXES			33,404				41,803				97,293				116,824
PROVISION FOR INCOME TAXES			12,588				15,383				34,814				43,221
NET INCOME		$	20,816			$	26,420			$	62,479			$	73,603
EARNINGS PER SHARE:
Basic		$	0.90			$	1.11			$	2.65			$	3.05
Diluted		$	0.90			$	1.10			$	2.63			$	3.01
CASH DIVIDENDS PER COMMON SHARE		$	0.14			$	0.14			$	0.42			$	0.41
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic			23,110				23,796				23,580				24,131
Diluted			23,229				24,009				23,730				24,432

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

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

		Nine Months Ended September 30,
		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	62,479			$	73,603
Adjustments to reconcile net income to net cash provided by operating activities:
Asset impairments			701				—
Depreciation and amortization			15,571				13,384
Other			22,031				17,402
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
Contracts-in-transit and vehicle receivables			30,152				42,102
Accounts and notes receivable			(3,609	)			9,295
Inventories			77,899				12,708
Prepaid expenses and other assets			13,179				8,624
Floorplan notes payable — manufacturer affiliates			(142,827	)			(18,190	)
Accounts payable and accrued expenses			17,495				(27,259	)
Deferred revenues			(3,681	)			(4,268	)
Net cash provided by operating activities			89,390				127,401
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(119,021	)			(50,633	)
Cash paid in acquisitions, net of cash received (See Note 9)			(111,394	)			(191,120	)
Proceeds from sales of franchises, property and equipment			16,888				51,015
Other			2,633				(1,404	)
Net cash used in investing activities			(210,894	)			(192,142	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on credit facility — Floorplan Line			4,114,854				3,407,021
Repayments on credit facility — Floorplan Line			(3,953,975	)			(3,534,731	)
Borrowings on credit facility — Acquisition Line			—				15,000
Repayments on credit facility — Acquisition Line			—				(15,000	)
Repayments on other facilities for divestitures			(2,498	)			(4,880	)
Principal payments of long-term debt			(2,445	)			(555	)
Borrowings of long-term debt			114,285				—
Proceeds from issuance of 2.25% Convertible Notes			—				287,500
Debt issue costs			(3,630	)			(6,721	)
Purchase of equity calls			—				(116,251	)
Sale of equity warrants			—				80,551
Proceeds from issuance of common stock to benefit plans			4,150				21,913
Excess tax benefits from stock-based compensation			136				3,498
Repurchases of common stock, amounts based on settlement date			(63,038	)			(54,582	)
Dividends paid			(10,177	)			(10,033	)
Repurchase of senior subordinated notes			(36,865	)			(10,827	)
Net cash provided by financing activities			160,797				61,903
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(27	)			—
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			39,266				(2,838	)
CASH AND CASH EQUIVALENTS, beginning of period			39,313				37,695
CASH AND CASH EQUIVALENTS, end of period		$	78,579			$	34,857
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest		$	69,383			$	59,683
Income taxes, net of refunds received		$	8,357			$	22,659

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

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

																		Accumulated Other
																		Comprehensive Income (Loss)
																		Unrealized				Unrealized				Unrealized
										Additional								Losses on				Gains on				Gains on
		Common Stock								Paid-in				Retained				Interest				Marketable				Currency				Treasury
		Shares				Amount				Capital				Earnings				Rate Swaps				Securities				Translation				Stock				Total
BALANCE, December 31, 2006			25,165			$	252			$	292,278			$	448,115			$	797			$	(206	)		$	—			$	(48,396	)		$	692,840
Comprehensive income:
Net income			—				—				—				62,479				—				—				—				—				62,479
Interest rate swap adjustment, net of tax benefit of $2,189			—				—				—				—				(3,648	)			—				—				—				(3,648	)
Gain on investments, net of tax expense of $20			—				—				—				—				—				34				—				—				34
Unrealized gain on currency translation			—				—				—				—				—				—				1,589				—				1,589
Total comprehensive income																																			60,454
Purchases of treasury stock			—				—				—				—				—				—				—				(63,038	)			(63,038	)
Issuance of common and treasury shares to employee benefit plans			6				—				(1,716	)			—				—				—				—				5,866				4,150
Issuance of restricted stock			129				1				(1	)			—				—				—				—				—				—
Forfeiture of restricted stock			(28	)			—				—				—				—				—				—				—				—
Stock-based compensation			—				—				3,678				—				—				—				—				—				3,678
Tax benefit from options exercised and the vesting of restricted shares			—				—				239				—				—				—				—				—				239
Cash dividends			—				—				—				(10,177	)			—				—				—				—				(10,177	)
BALANCE, September 30, 2007			25,272			$	253			$	294,478			$	500,417			$	(2,851	)		$	(172	)		$	1,589			$	(105,568	)		$	688,146

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

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

     Group 1 Automotive, Inc., a Delaware corporation, through its subsidiaries, is a leading operator in the automotive retailing industry with operations in the states of Alabama, California, Florida, Georgia, Kansas, Louisiana, Massachusetts, Mississippi, New Hampshire, New Jersey, New Mexico, New York, Oklahoma and Texas in the United States of America and in the towns of Brighton, Hailsham and Worthing in the United Kingdom. Through their dealerships, these subsidiaries sell new and used cars and light trucks; arrange related financing, vehicle service and insurance contracts; provide maintenance and repair services; and sell replacement parts. Group 1 Automotive, Inc. and its subsidiaries are herein collectively referred to as the “Company” or “Group 1.”

     As of September 30, 2007, the Company’s retail network consisted of the following three regions (with the number of dealerships they comprised): (i) the Eastern (36 dealerships in Alabama, Florida, Georgia, Louisiana, Massachusetts, Mississippi, New Hampshire, New Jersey and New York), (ii) the Central (50 dealerships in Kansas, New Mexico, Oklahoma and Texas), and (iii) the Western (10 dealerships in California). Each region is managed by a regional vice president reporting directly to the Company’s Chief Executive Officer and a regional chief financial officer reporting directly to the Company’s Chief Financial Officer. In addition, our international operations consist of three dealerships in the United Kingdom also managed locally with direct reporting responsibilities to the Company’s corporate management team.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     Basis of Presentation

     All acquisitions of dealerships completed during the periods presented have been accounted for using the purchase method of accounting and their results of operations are included from the effective dates of the closings of the acquisitions. The initial allocations of purchase price to the assets acquired and liabilities assumed are preliminary and are assigned and recorded based on estimates of fair value at the dates of acquisition. These initial allocations are subject to final adjustment. All intercompany balances and transactions have been eliminated in consolidation.

     Interim Financial Information

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included. Due to seasonality and other factors, the results of operations for the interim period are not necessarily indicative of the results that will be realized for the entire fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

     Statements of Cash Flows

     With respect to all new vehicle floorplan borrowings, vehicle manufacturers draft the Company’s credit facilities directly with no cash flow to or from the Company.  With respect to borrowings for used vehicle financing, the Company chooses which vehicles to finance and the funds flow directly to the Company from the lender.  All borrowings from, and repayments to, lenders affiliated with the vehicle manufacturers (excluding the cash flows from or to affiliated lenders participating in our syndicated lending group) are presented within cash flows from operating activities on the Consolidated Statements of Cash Flows and all borrowings from, and repayments to, the syndicated lending group under the revolving credit facility (including the cash flows from or to affiliated lenders participating in the facility) are presented within cash flows from financing activities.

     Income Taxes

     Currently, the Company operates in 14 different states in the U.S. and one other country, each of which has unique tax rates and payment calculations. As the amount of income generated in each jurisdiction varies from period to period, the Company’s estimated effective tax rate can vary based on the proportion of taxable income generated in each jurisdiction.

     The effective income tax rate of 37.7% of pretax income for the three months ended September 30, 2007, differed from the federal statutory rate of 35%, and the Company’s effective income tax rate of 36.8% for the three months ended September 30, 2006, due primarily to increases attributable to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS 123(R)”) and the impact of a change in the mix of the Company’s pretax income from taxable state jurisdictions. The effective tax rate of 35.8% for the nine months ended September 30, 2007, differed from the federal statutory rate and the Company’s effective income tax rate of 37.0% for the nine months ended September 30, 2006, due primarily to the increases noted above, and offset for the nine months ended September 30, 2007, primarily by the benefit received from tax-deductible goodwill related to dealership dispositions.

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The Company’s option grants include options that qualify as incentive stock options for income tax purposes. The treatment of the potential tax deduction, if any, related to incentive stock options may cause variability in the Company’s effective tax rate in future periods. In the period in which compensation cost related to incentive stock options is recorded in accordance with SFAS 123(R), a corresponding tax benefit is not recorded, as based on the design of these incentive stock options, the Company is not expected to receive a tax deduction related to such incentive stock options when exercised. However, if upon exercise the incentive stock options fail to continue to meet the qualifications for treatment as incentive stock options, the Company may be eligible for certain tax deductions in subsequent periods. In those cases, the Company would record a tax benefit for the lower of the actual income tax deduction or the amount of the corresponding cumulative stock compensation cost recorded in the financial statements for the particular options multiplied by the statutory tax rate.

     Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109” (“FIN 48”). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order to be recognized in the financial statements (See Note 5 for additional information).

     Foreign Currency Translation

     The functional currency for our foreign subsidiaries is the Pounds Sterling. The financial statements of all our foreign subsidiaries have been translated into U.S. Dollars in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation.” All assets and liabilities of foreign operations are translated into U.S. Dollars using period-end exchange rates and all revenues and expenses are translated at average rates during the respective period. The U.S. Dollar results that arise from such translation, as well as exchange gains and losses on intercompany balances of a long-term investment nature, are included in the cumulative currency translation adjustments in accumulated other comprehensive income in stockholders’ equity.

     Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement does not require new fair value measurements, but is applied to the extent that other accounting pronouncements require or permit fair value measurements. The statement emphasizes that fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Companies will be required to disclose the extent to which fair value is used to measure assets and liabilities, the inputs used to develop the measurements, and the effect of certain of the measurements on earnings (or changes in net assets) for the period. SFAS 157 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2007. The Company does not expect SFAS 157 to have a material effect on its future results of operations or financial position.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect SFAS 159 to have a material effect on its future results of operations or financial position.

     In August 2007, the FASB issued for comment an exposure draft of a proposed FASB Staff Position APB 14-a (“Proposed FSP”) that would change the accounting for certain convertible debt instruments, including the Company’s 2.25% Convertible Notes. Under the proposed new rules, for convertible debt instruments that may be settled entirely or partially in cash upon conversion, an entity should separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost. The effect of the proposed new rules for the Company’s 2.25% Convertible Notes is that the equity component would be included in the paid-in-capital section of stockholders’ equity on the Company’s balance sheet and the value of the equity component would be treated as an original issue discount for purposes of accounting for the debt component of the 2.25% Convertible Notes. Higher interest expense would result by recognizing the accretion of the discounted carrying value of the 2.25% Convertible Notes to their face amount as interest expense over the expected term of the 2.25%

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Convertible Notes using an effective interest rate method of amortization. This Proposed FSP, if issued in its current state, would be effective for fiscal years beginning after December 15, 2007, would not permit early application and would be applied retrospectively to all periods presented. The Company is currently evaluating the proposed new rules and its impact on the Company’s current accounting for the 2.25% Convertible Notes. However, if the Proposed FSP is adopted in its current form, the Company expects to recognize additional interest expense starting in 2008 due to the interest expense accretion associated with the 2.25% Convertible Notes and to report greater than previously reported interest expense in all prior periods presented due to retrospective application.

     Reclassifications

     Certain reclassifications have been made to the prior period to conform to the current period presentation.

3. STOCK-BASED COMPENSATION

     The Company provides compensation benefits to employees and non-employee directors pursuant to its 2007 Long Term Incentive Plan and 1998 Employee Stock Purchase Plan, as amended.

     2007 Long Term Incentive Plan

     In March 2007, the Company’s Board of Directors adopted an amendment and restatement of the 1996 Stock Incentive Plan to, among other things, rename the plan as the “Group 1 Automotive, Inc. 2007 Long Term Incentive Plan,” increase the number of shares of common stock available for issuance under the plan from 5.5 million to 6.5 million shares and extend the duration of the plan from March 9, 2014, to March 8, 2017. The 2007 Long Term Incentive Plan reserves shares of common stock for grants of options (including options qualified as incentive stock options under the Internal Revenue Code of 1986 and options that are non-qualified), stock appreciation rights, restricted stock, performance awards, bonus stock and phantom stock awards to directors, officers and other employees of the Company and its subsidiaries at the market price at the date of grant. As of September 30, 2007, there were 2,095,534 shares available under the 2007 Long Term Incentive Plan for future grants of these awards.

     Stock Option Awards

     The fair value of each stock option award is estimated as of the date of grant using the Black-Scholes option-pricing model. The Company has not issued stock option awards since November 2005. The following summary presents information regarding outstanding options as of September 30, 2007, and the changes during the nine months then ended:

						Weighted Average
		Shares Under				Exercise Price
		Option				Per Share
Outstanding December 31, 2006			271,170			$	28.10
Grants			—				—
Exercised			(32,975	)			23.25
Canceled			(21,631	)			33.84
Outstanding September 30, 2007			216,564			$	28.26
Vested or expected to vest at September 30, 2007			202,664			$	28.30
Exercisable at September 30, 2007			171,144			$	28.61

     Restricted Stock Awards

     Beginning in 2005, the Company began granting directors and certain employees, at no cost to the recipient, restricted stock awards or, at their election, phantom stock awards, pursuant to the Company’s 2007 Long Term Incentive Plan, as amended. In November 2006, the Company began to grant certain employees, at no cost to the recipient, performance awards pursuant to the Company’s 2007 Long Term Incentive Plan, as amended. Restricted stock awards are considered outstanding at the date of grant, but are restricted from disposition for periods ranging from six months to five years. The phantom stock awards will settle in shares of common stock upon the termination of the grantees’ employment or directorship and have vesting periods also ranging from six months to five years. Performance awards are considered outstanding at the date of grant, but are restricted from disposition based on time and the achievement of certain performance criteria established by the Company. In the event the employee or director terminates his or her employment or directorship with the Company prior to the lapse of the restrictions, the shares, in most cases, will be forfeited to the Company.

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     A summary of these awards as of September 30, 2007, and the changes during the nine months then ended, is as follows:

						Weighted Average
						Grant Date
		Awards				Fair Value
Non-vested at December 31, 2006			380,000			$	43.28
Granted			134,061				40.28
Vested			(29,630	)			32.30
Forfeited			(24,262	)			46.55
Non-vested at September 30, 2007			460,169				42.94

     Employee Stock Purchase Plan

     In September 1997, the Company adopted the Group 1 Automotive, Inc. 1998 Employee Stock Purchase Plan, as amended (the “Purchase Plan”). The Purchase Plan authorizes the issuance of up to 2.5 million shares of common stock and provides that no options to purchase shares may be granted under the Purchase Plan after March 6, 2016. As of September 30, 2007, there were 532,114 shares remaining in reserve for future issuance under the Purchase Plan. During the nine months ended September 30, 2007 and 2006, the Company issued 105,938 and 96,594 shares, respectively, of common stock to employees participating in the Purchase Plan.

     All Stock-Based Payment Arrangements

     Total stock-based compensation cost was $1.4 million for both the three months ended September 30, 2007 and 2006, and $3.7 million for both the nine months ended September 30, 2007 and 2006. Total income tax benefit recognized for stock-based compensation arrangements was $0.3 million for both the three months ended September 30, 2007 and 2006, and $0.7 million for both the nine months ended September 30, 2007 and 2006.

     Cash received from option exercises and Purchase Plan purchases was $4.2 million and $21.9 million for the nine months ended September 30, 2007 and 2006, respectively. The actual tax benefit realized for the tax deductions from option exercises and Purchase Plan purchases totaled $0.2 million and $7.2 million for the nine months ended September 30, 2007 and 2006, respectively.

4. EARNINGS PER SHARE:

     Basic earnings per share is computed by dividing net income by the weighted average shares outstanding (excluding dilutive securities). Diluted earnings per share is computed including the impact of all potentially dilutive securities. The following table sets forth the calculation of earnings per share for the three and nine months ended September 30, 2007 and 2006:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2007				2006				2007				2006
		(In thousands, except per share amounts)
Net income		$	20,816			$	26,420			$	62,479			$	73,603
Weighted average basic shares outstanding			23,110				23,796				23,580				24,131
Dilutive effect of stock-based awards, net of assumed repurchase of treasury stock			119				213				150				301
Weighted average diluted shares outstanding			23,229				24,009				23,730				24,432
Earnings per share:
Basic		$	0.90			$	1.11			$	2.65			$	3.05
Diluted		$	0.90			$	1.10			$	2.63			$	3.01

     Any options with an exercise price in excess of the average market price of the Company’s common stock, during the periods presented, are not considered when calculating the dilutive effect of stock options for diluted earnings per share calculations. The weighted average number of stock-based awards not included in the calculation of the dilutive effect of stock-based awards was 234,487 and 60,296 for the three months ended September 30, 2007 and 2006, respectively, and 207,054 and 132,787 for the nine months ended September 30, 2007 and 2006, respectively.

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The Company will be required to include the dilutive effect, if applicable, of the net shares issuable under its 2.25% Convertible Notes and the warrants sold in connection with the Convertible Notes. Since the average price of the Company’s common stock for the three and nine months ended September 30, 2007, was less than $59.43, no net shares were issuable under the Convertible Notes or the warrants.

5. INCOME TAXES:

     As discussed in Note 2, the Company adopted FIN 48 on January 1, 2007. No cumulative adjustment was required to effect the adoption of FIN 48. As of September 30, 2007, approximately $0.7 million of unrecognized tax benefits, including $0.1 million of interest, remained unrecognized. All of the unrecognized tax benefits could potentially be recognized in the next 12 months based upon resolution of these with the relevant tax authorities.

     The Company is subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. In addition, the Company is subject to income tax in the United Kingdom as a result of its dealership acquisitions in March 2007. Taxable years 2003 and subsequent remain open for examination by the Company’s major taxing jurisdictions.

     Consistent with prior practices, the Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

6. CREDIT FACILITIES:

     Revolving Credit Facility

     Effective March 19, 2007, the Company entered into an amended and restated five-year revolving syndicated credit arrangement with 22 financial institutions, including three manufacturer-affiliated finance companies (the “Revolving Credit Facility”). The facility matures in March 2012 and provides a total of $1.35 billion of financing. The Company can expand the facility to its maximum commitment of $1.85 billion, subject to participating lender approval. This facility consists of two tranches: $1.0 billion for vehicle inventory floorplan financing, which we refer to as the Floorplan Line, and $350.0 million for working capital, including acquisitions, which we refer to as the Acquisition Line. Up to half of the Acquisition Line can be borrowed in either Euros or Pounds Sterling. The Acquisition Line bears interest at LIBOR plus a margin that ranges from 150 to 225 basis points, depending on the Company’s leverage ratio. The Floorplan Line bears interest at rates equal to LIBOR plus 87.5 basis points for new vehicle inventory and LIBOR plus 97.5 basis points for used vehicle inventory. In conjunction with the amendment to the Revolving Credit Facility, the Company capitalized $2.3 million of related costs that are being amortized over the term of the facility.

     All of the Company’s domestic dealership-owning subsidiaries are co-borrowers under the Revolving Credit Facility. The Revolving Credit Facility contains a number of significant covenants that, among other things, restrict the Company’s ability to make disbursements outside of the ordinary course of business, dispose of assets, incur additional indebtedness, create liens on assets, make investments and engage in mergers or consolidations. The Company is also required to comply with specified financial tests and ratios defined in the Revolving Credit Facility, such as fixed-charge coverage, current ratio, leverage, and a minimum net worth requirement, among others. Additionally, under the terms of the Revolving Credit Facility, the Company is limited in its ability to make cash dividend payments to its stockholders and to repurchase shares of its outstanding stock, based primarily on the quarterly net income of the Company.

     The Company’s obligations under the Revolving Credit Facility are secured by essentially all of the Company’s domestic personal property (other than equity interests in dealership-owning subsidiaries) including all motor vehicle inventory and proceeds from the disposition of dealership-owning subsidiaries.

     On February 28, 2007, the Company’s floorplan facility with DaimlerChrysler matured and was not renewed. The facility provided for up to $300.0 million of financing for Chrysler, Dodge, Jeep and Mercedes-Benz new vehicle inventory. The Company used available funds from our Revolving Credit Facility to pay off the outstanding balance on the maturity date. Consistent with its accounting policies, the Company has presented the payment of the $112.1 million of outstanding floorplan borrowings with DaimlerChrysler as of February 28, 2007, as an operating cash outflow and the corresponding borrowing from the Revolving Credit Facility as a financing cash inflow in the accompanying consolidated statement of cash flows.

     The Company will continue to use the Revolving Credit Facility to finance our Chrysler, Dodge, Jeep and Mercedes-Benz new vehicle inventory. The Company’s Ford and Lincoln-Mercury dealerships will continue to obtain new vehicle floorplan financing from Ford Motor Credit Company under its $300 million floorplan credit facility.

     As of September 30, 2007, borrowings outstanding under the Floorplan Line and the Acquisition Line totaled $598.2 million and $18.0 million, respectively. The $18.0 million of borrowings outstanding under the Acquisition Line represents letters of credit issued and outstanding. Borrowings available under the Floorplan Line and the Acquisition Line totaled $401.8 million and $332.0 million, respectively, for an aggregate available under the Revolving Credit Facility of $733.8 million. Included in the $401.8 million available balance under the Floorplan Line is $39.7 million of immediately available funds, resulting from

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

payments made on our floorplan notes payable with excess cash.

     Real Estate Credit Facility

     On March 30, 2007, the Company entered into a five-year term real estate credit facility with Bank of America, N.A. (the “Mortgage Facility”), initially providing $75.0 million of financing for real estate expansion. In April 2007, the Company amended the Mortgage Facility expanding its maximum commitment to $235.0 million and syndicating the facility with nine financial institutions. The proceeds of the Mortgage Facility will be used primarily for acquisitions of real property and vehicle dealerships. The facility matures in March 2012. At the Company’s option, any loan under the Mortgage Facility will bear interest at a rate equal to (i) one month LIBOR plus 1.05% or (ii) the Base Rate plus 0.50%. Quarterly principal payments are required of each loan outstanding under the facility at an amount equal to one eightieth of the original principal amount. As of September 30, 2007, borrowings under the facility totaled $113.3 million, with $5.7 million recorded as a current maturity. The Company capitalized $1.3 million of related debt financing costs that are being amortized over the term of the facility.

     The Mortgage Facility is guaranteed by the Company and essentially all of the existing and future direct and indirect domestic subsidiaries of the Company which guarantee or are required to guarantee the Company’s Revolving Credit Facility. So long as no default exists, the Company is entitled to sell any property subject to the facility on fair and reasonable terms in an arm’s length transaction, remove it from the facility, repay in full the entire outstanding balance of the loan relating to such sold property, and then increase the available borrowings under the Mortgage Facility by the amount of such loan repayment. Each loan is secured by real property (and improvements related thereto) specified by the Company and located at or near a vehicle dealership operated by a subsidiary of the Company or otherwise used or to be used by a vehicle dealership operated by a subsidiary of the Company. As of September 30, 2007, available borrowings from the Mortgage Facility totaled $121.7 million.

     The Mortgage Facility contains certain covenants, including financial ratios that must be complied with: fixed charge coverage ratio; senior secured leverage ratio; dispositions of financed properties; ownership of equity interests in a lessor subsidiary; and occupancy or sublease of any financed property. As of September 30, 2007, the Company was in compliance with all such covenants.

7. PROPERTY AND EQUIPMENT:

     The Company’s property and equipment consists of the following:

		Estimated
		Useful Lives				September 30,				December 31,
		in Years				2007				2006
						(In thousands)
Land			—			$	126,446			$	66,383
Buildings			30 to 40				121,259				51,056
Leasehold improvements			7 to 15				63,675				57,526
Machinery and equipment			7 to 20				56,444				43,798
Furniture and fixtures			3 to 10				60,951				56,099
Company vehicles			3 to 5				11,207				9,980
Construction in progress							42,731				30,163
Total							482,713				315,005
Less accumulated depreciation and amortization							102,551				84,620
Property and equipment, net						$	380,162			$	230,385

     During the nine months ended September 30, 2007, the Company acquired $48.4 million of fixed assets associated with dealership acquisitions, including $15.2 million for land and $28.0 million for buildings. In addition to these acquisitions, the Company incurred $119.0 million of capital expenditures, including $39.3 million for land and $64.9 million for existing buildings and construction of new or expanded facilities, of which $50.6 million was drawn against our Mortgage Facility based upon the applicable loan to value ratio.

8. COMMITMENTS AND CONTINGENCIES:

     Legal Proceedings

     From time to time, the Company’s dealerships are named in claims involving the manufacture of automobiles, contractual disputes and other matters arising in the ordinary course of business. Due to the nature of the automotive retailing business, the

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company may be involved in legal proceedings or suffer losses that could have a material adverse effect on the Company’s business. In the normal course of business, the Company is required to respond to customer, employee and other third-party complaints. In addition, the manufacturers of the vehicles the Company sells and services have audit rights allowing them to review the validity of amounts claimed for incentive, rebate or warranty-related items and charge back the Company for amounts determined to be invalid rewards under the manufacturers’ programs, subject to the Company’s right to appeal any such decision.

     Through relationships with insurance companies, the Company’s dealerships sell credit life insurance policies to its vehicle customers and receive payments for these services. Recently, allegations have been made against insurance companies with which the Company does business for failing to remit to credit life insurance policyholders the appropriate amount of unearned premiums when the policy was cancelled in conjunction with early payoffs of the associated loan balance. Some of the Company’s dealerships have received notice from three (3) insurance companies advising us that they have entered into settlement agreements and indicating that the insurance companies expect the dealerships to either pay a portion of a settlement reached by the insurance companies as a result of the allegations or require the return of commissions on the dealerships’ portion of the premiums that are required to be refunded to customers. The Company believes that it has meritorious defenses, which it will pursue.

     There are currently no legal or other proceedings pending against or involving the Company that, in management’s opinion, based on current known facts and circumstances, are expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

     Vehicle Service Contract Obligations

     While the Company is not an obligor under the vehicle service contracts it currently sells, it is an obligor under vehicle service contracts previously sold in two states. The contracts were sold to retail vehicle customers with terms, typically, ranging from two to seven years. The purchase price paid by the customer, net of the fee the Company received, was remitted to an administrator. The administrator set the pricing at a level adequate to fund expected future claims and their profit. Additionally, the administrator purchased insurance to further secure its ability to pay the claims under the contracts. The Company can become liable if the administrator and the insurance company are unable to fund future claims. Though the Company has never had to fund any claims related to these contracts, and reviews the credit worthiness of the administrator and the insurance company, it is unable to estimate the maximum potential claim exposure, but believes that it is unlikely that there will be any future obligation to fund claims on the contracts. The Company’s revenues related to these contracts were deferred at the time of sale and are being recognized over the life of the contracts. The amounts deferred are presented on the face of the balance sheets as deferred revenues.

     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 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 in connection with the sale of assets or businesses in which it agrees to indemnify the purchaser, or other 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 dealership dispositions, the Company’s subsidiaries assign or sublease 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 $24.2 million at September 30, 2007. 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

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

effect on the Company’s business, financial condition and cash flows.

9. ACQUISITIONS AND DISPOSITIONS:

     During the nine months ended September 30, 2007, the Company acquired three automobile dealership franchises located in Kansas and six franchises located in the United Kingdom. Total consideration paid of $111.4 million consisted of $78.8 million to the sellers and $32.6 million to the sellers’ financing sources to pay off outstanding floorplan borrowings, which we replaced with borrowings from our Revolving Credit Facility. Of the $78.8 million paid to the sellers, $43.2 million was for land and buildings. The accompanying consolidated balance sheet as of September 30, 2007, includes preliminary allocations of the purchase price for all of the acquired assets and liabilities assumed based on their estimated fair market values at the dates of acquisition and, are subject to final adjustment. Also during the nine months ended September 30, 2007, the Company disposed of 15 automobile dealership franchises for total consideration of $10.2 million.

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

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements because of various factors. See “Cautionary Statement about Forward Looking Statements.”

Overview

     We are a leading operator in the $1.0 trillion automotive retailing industry. As of September 30, 2007, we own and operate 96 automotive dealerships, 131 franchises, and 24 collision service centers in the United States and three dealerships, six franchises and two collision centers in the United Kingdom. We market and sell an extensive range of automotive products and services including new and used vehicles and related financing, vehicle maintenance and repair services, replacement parts, and warranty, insurance and extended service contracts. Our operations are primarily located in major metropolitan areas in the states of Alabama, California, Florida, Georgia, Kansas, Louisiana, Massachusetts, Mississippi, New Hampshire, New Jersey, New Mexico, New York, Oklahoma and Texas in the United States of America and in the towns of Brighton, Hailsham and Worthing in the United Kingdom.

     As of September 30, 2007, our retail network consisted of the following three regions (with the number of dealerships they comprised): (i) the Eastern (36 dealerships in Alabama, Florida, Georgia, Louisiana, Massachusetts, Mississippi, New Hampshire, New Jersey and New York), (ii) the Central (50 dealerships in Kansas, New Mexico, Oklahoma and Texas), and (iii) the Western (10 dealerships in California). Each region is managed by a regional vice president reporting directly to the Chief Executive Officer and a regional chief financial officer reporting directly to the our Chief Financial Officer. In addition, our international operations consist of three dealerships in the United Kingdom also managed locally with direct reporting responsibilities to our corporate management team.

     Our operating results reflect the combined performance of each of our interrelated business activities, which include the sale of new vehicles, used vehicles, finance and insurance products, and parts, service and collision repair services. Historically, each of these activities has been directly or indirectly impacted by a variety of supply/demand factors, including vehicle inventories, consumer confidence, discretionary spending, availability and affordability of consumer credit, manufacturer incentives, weather patterns, fuel prices and interest rates. For example, during periods of sustained economic downturn or significant supply/demand imbalances, new vehicle sales may be negatively impacted as consumers tend to shift their purchases to used vehicles. Some consumers may even delay their purchasing decisions altogether, electing instead to repair their existing vehicles. In such cases, however, we believe the impact on our overall business is mitigated by our ability to offer other products and services, such as used vehicles and parts, service and collision repair services.

     Our operations are also subject to seasonal variations as demand for automobiles is generally lower during the winter months than in other seasons. A greater amount of vehicle sales generally occurs in the second and third quarters of each year due in part to weather-related factors, consumer buying patterns, the historical timing of major manufacturer incentive programs, and the introduction of new vehicle models. Accordingly, we expect our operating results to be higher in the second and third quarters as compared to the first and fourth quarters.

     For the three and nine months ended September 30, 2007, we reported net income of $20.8 million and $62.5 million and diluted earnings per share of $0.90 and $2.63, respectively, compared to net income of $26.4 million and $73.6 million and diluted earnings per share of $1.10 and $3.01, respectively, during the comparable periods of 2006. Our 2007 results have been negatively impacted by a $1.0 million after-tax loss related to the redemption of $36.4 million of our senior subordinated notes and a $0.2 million after-tax charge for the impairment of assets associated with one of our terminated domestic brand stores in the third quarter, a $2.8 million after-tax charge for payments made during the first and second quarters in conjunction with the sale and lease termination of two of our domestic brand stores and a $0.2 million after-tax charge for the impairment of assets associated with one of the two stores.

Key Performance Indicators

     The following table highlights certain of the key performance indicators we use to manage our business:

     Consolidated Statistical Data

		For the Three									For the Nine
		Months Ended September 30,									Months Ended September 30,
		2007				2006					2007				2006
Unit Sales
Retail Sales
New Vehicle			34,863				35,182					101,412				97,593
Used Vehicle			17,011				18,064					52,027				51,876
Total Retail Sales			51,874				53,246					153,439				149,469
Wholesale Sales			12,361				12,211					35,293				34,623
Total Vehicle Sales			64,235				65,457					188,732				184,092
Gross Margin
New Vehicle Retail			6.7	%			7.1	%				6.8	%			7.3	%
Used Vehicle			8.6	%			9.8	%				9.4	%			9.9	%
Parts and Service			55.7	%			54.7	%				54.7	%			54.5	%
Total Gross Margin			15.5	%			15.6	%				15.7	%			16.0	%
SG&A(1) as a % of Gross Profit			77.1	%			75.3	%				77.8	%			75.5	%
Operating Margin			3.2	%			3.6	%				3.1	%			3.6	%
Pretax Margin			2.0	%			2.6	%				2.0	%			2.6	%
Finance and Insurance Revenues per Retail   Unit Sold		$	1,048			$	958				$	1,032			$	978

     Our new vehicle retail unit sales for the three months ended September 30, 2007, were negatively impacted by the decline in our high volume brands and the sustained market weakness in several of the areas that we operate. For the nine months ended September 30, 2007, this decline in our unit sales was more than offset by the impact of recent acquisitions. We believe our performance is generally consistent with the national retail results of the brands we represent and the overall markets in which we operate, specifically reflecting strong performance from our Houston market area and weaker performance in our California and Florida markets. New vehicle gross margin decreased 40 basis points from 7.1% for the three months ended September 30, 2006, to 6.7% for 2007. Consolidated gross profit per new vehicle unit sold decreased from $2,037 per unit in 2006, to $2,005 per unit in 2007. For the nine months ended September 30, 2007, new vehicle gross margin declined 50 basis points to 6.8%, and gross profit per retail unit decreased 4.6% to $2,019.

     With respect to used vehicles, our used retail unit sales decreased 5.8%, while revenues increased 1.8%, for the three months ended September 30, 2007, as the general decline in retail vehicle market conditions in our new vehicle business negatively pressured our used vehicle unit sales, while the contribution of our net acquisition and disposition activity offset Same Store declines in revenue. Used retail gross profit declined 9.8% and profit per used retail unit declined 4.2%, as our retail margin declined 150 basis points to 11.6%. Our used wholesale revenues increased 4.3% on 1.2% more units, while our loss per wholesale unit improved 2.5%. Used retail units and sales were up for the nine-month period ending September 30, 2007, 0.3% and 5.4%, respectively. Gross profit per retail unit decreased 2.8%, while total used retail gross profit declined 2.5% for the nine months ended September 30, 2007. In total, for the first nine months of 2007, our used vehicle revenues improved 3.6%, while our profits declined 2.3% and our profits per unit decreased 3.2%. Total used vehicle margin declined 50 basis points to 9.4% for the nine months ended September 30, 2007.

     Our consolidated parts and service margin improved 100 basis points between the third quarter of 2006 and 2007, as our revenues improved 8.5%, and our consolidated parts and service gross profit improved 10.6%. Our parts and service margins and profits were positively impacted by our recent pricing structure enhancements and other initiatives designed to enhance our customers’ service experience. For the nine months ended September 30, 2007, our consolidated parts and service revenues improved 8.5%. Our gross profit for the nine months ended September 30, 2007 improved 9.0% and our margin increased 20 basis points to 54.7%.

     Our consolidated finance and insurance (F&I) revenues improved 6.5% from $958 per retail unit sold in the third quarter of 2006 to $1,048 in 2007, and 8.3% from $978 in the first nine months of 2006 to $1,032 in 2007, reflecting improvements in finance income, our cost structure for vehicle service contracts and other F&I products, and our chargeback experience.

     Our consolidated selling, general and administrative expenses (SG&A), as a percentage of gross profit, increased from 75.3% during the third quarter of 2006, to 77.1% in 2007. This increase from 2006 to 2007 is primarily the combination of the decreases in gross margin previously discussed, coupled with additional costs for legal and other outside services engaged in the execution of our business strategies. For the nine months ended September 30, 2007, SG&A increased from 75.5% in 2006 to 77.8%. This increase is attributable to $4.9 million in lease termination costs during the first half of 2007, as well as accrued expenses associated with the standardization of our employee vacation policies as of January 1, 2007, and the net benefit in 2006 from the hurricane-related insurance proceeds and from gains on the sale of a franchises during the first half of 2006.

     The combination of all of these factors contributed to a 40 and 50 basis points decline in our operating margin in the three and nine month periods ended September 30, 2007, respectively. Our floorplan and other interest expenses increased 17.7% and 18.9% for the three months ended September 30, 2007, and 2.7% and 37.9% for the nine months ended September 30, 2007. As a result, our pretax margin declined 60 basis points in both periods.

     We further address these items, and other variances between the periods presented, in the results of operations section below.

Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement does not require new fair value measurements, but is applied to the extent that other accounting pronouncements require or permit fair value measurements. The statement emphasizes that fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Companies will be required to disclose the extent to which fair value is used to measure assets and liabilities, the inputs used to develop the measurements, and the effect of certain of the measurements on earnings (or changes in net assets) for the period. SFAS 157 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2007. We do not expect SFAS 157 to have a material effect on our future results of operations or financial position.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not expect SFAS 159 to have a material effect on our future results of operations or financial position.

     In August 2007, the FASB issued for comment an exposure draft of a proposed FASB Staff Position APB 14-a (“Proposed FSP”) that would change the accounting for certain convertible debt instruments, including our 2.25% Convertible Notes. Under the proposed new rules, for convertible debt instruments that may be settled entirely or partially in cash upon conversion, an entity should separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost. The effect of the proposed new rules for our 2.25% Convertible Notes is that the equity component would be included in the paid-in-capital section of stockholders’ equity on our balance sheet and the value of the equity component would be treated as an original issue discount for purposes of accounting for the debt component of the 2.25% Convertible Notes. Higher interest expense would result by recognizing the accretion of the discounted carrying value of the 2.25% Convertible Notes to their face amount as interest expense over the expected term of the 2.25% Convertible Notes using an effective interest rate method of amortization. This Proposed FSP, if issued in its current state, would be effective for fiscal years beginning after December 15, 2007, would not permit early application and would be applied retrospectively to all periods presented. We are currently evaluating the proposed new rules and its impact on our current accounting for the 2.25% Convertible Notes. However, if the Proposed FSP is adopted in its current form, we expect to recognize additional interest expense starting in 2008 due to the interest expense accretion associated with the 2.25% Convertible Notes and to report greater than previously reported interest expense in all prior periods presented due to retrospective application.

Critical Accounting Policies and Accounting Estimates

     Our consolidated financial statements are impacted by the accounting policies we use and the estimates and assumptions we make during their preparation. We disclosed our critical accounting policies and estimates in our 2006 Annual Report on Form 10-K. No significant changes have occurred since that time.

Results of Operations

     The following tables present comparative financial and non-financial data for the three and nine months ended September 30, 2007 and 2006, of (a) our “Same Store” locations, (b) those locations acquired or disposed of (“Transactions”) during the periods, and (c) the total company. Same Store amounts include the results of dealerships for the identical months in each period presented in the comparison, commencing with the first month in which we owned the dealership and, in the case of dispositions, ending with the last month it was owned. Same Store results also include the activities of the corporate office.

     The following table summarizes our combined Same Store results for the three and nine months ended September 30, 2007, as compared to 2006.

     Total Same Store Data

     (dollars in thousands, except per unit amounts)

		Three Months Ended September 30,													Nine Months Ended September 30,
		2007				% Change				2006					2007				% Change				2006
Revenues
New vehicle retail		$	944,950				(4.1	)%		$	985,571				$	2,697,261				(2.8	)%		$	2,774,048
Used vehicle retail			262,935				(6.4	)%			280,974					784,594				(3.4	)%			812,069
Used vehicle wholesale			74,262				(7.2	)%			80,062					208,417				(13.4	)%			240,776
Parts and service			163,270				2.5	%			159,306					483,310				2.4	%			472,170
Finance, insurance and other			51,080				2.9	%			49,623					147,109				3.6	%			142,064
Total revenues			1,496,497				(3.8	)%			1,555,536					4,320,691				(2.7	)%			4,441,127
Cost of Sales
New vehicle retail			882,323				(3.7	)%			915,876					2,516,710				(2.2	)%			2,572,427
Used vehicle retail			231,728				(5.2	)%			244,365					687,578				(2.7	)%			706,744
Used vehicle wholesale			75,474				(7.1	)%			81,225					209,516				(13.2	)%			241,423
Parts and service			72,792				1.1	%			72,015					220,149				3.0	%			213,755
Total cost of sales			1,262,317				(3.9	)%			1,313,481					3,633,953				(2.7	)%			3,734,349
Gross Profit		$	234,180				(3.3	)%		$	242,055				$	686,738				(2.8	)%		$	706,778
Selling, General and Administrative Expenses		$	181,649				0.8	%		$	180,128				$	534,190				0.8	%		$	529,946
Depreciation and Amortization expenses		$	4,352				3.0	%		$	4,224				$	12,959				1.1	%		$	12,818
Floorplan Interest Expense		$	10,581				11.7	%		$	9,469				$	31,797				(4.4	)%		$	33,253
Gross Margin
New vehicle retail			6.6	%							7.1	%				6.7	%							7.3	%
Used vehicle			8.9	%							9.8	%				9.7	%							9.9	%
Parts and service			55.4	%							54.8	%				54.4	%							54.7	%
Total gross margin			15.6	%							15.6	%				15.9	%							15.9	%
SG&A as a % of Gross Profit			77.6	%							74.4	%				77.8	%							75.0	%
Operating Margin			3.2	%							3.7	%				3.2	%							3.7	%
Finance and Insurance Revenues per Retail Unit Sold		$	1,078				12.2	%		$	961				$	1,073				9.4	%		$	981

     The discussion that follows provides explanation for the variances noted above. Each table presents, by primary income statement line item, comparative financial and non-financial data for our Same Store locations, Transactions and the consolidated company for the three and nine months ended September 30, 2007 and 2006.

     New Vehicle Retail Data

     (dollars in thousands, except per unit amounts)

		Three Months Ended September 30,													Nine Months Ended September 30,
		2007				% Change				2006					2007				% Change				2006
Retail Unit Sales
Same Stores			31,929				(7.1	)%			34,365					90,475				(5.1	)%			95,326
Transactions			2,934								817					10,937								2,267
Total			34,863				(0.9	)%			35,182					101,412				3.9	%			97,593
Retail Sales Revenues
Same Stores		$	944,950				(4.1	)%		$	985,571				$	2,697,261				(2.8	)%		$	2,774,048
Transactions			97,492								23,729					333,856								63,779
Total		$	1,042,442				3.3	%		$	1,009,300				$	3,031,117				6.8	%		$	2,837,827
Gross Profit
Same Stores		$	62,627				(10.1	)%		$	69,695				$	180,551				(10.5	)%		$	201,621
Transactions			7,268								1,976					24,235								4,876
Total		$	69,895				(2.5	)%		$	71,671				$	204,786				(0.8	)%		$	206,497
Gross Profit per Retail Unit Sold
Same Stores		$	1,961				(3.3	)%		$	2,028				$	1,996				(5.6	)%		$	2,115
Transactions		$	2,477							$	2,419				$	2,216							$	2,151
Total		$	2,005				(1.6	)%		$	2,037				$	2,019				(4.6	)%		$	2,116
Gross Margin
Same Stores			6.6	%							7.1	%				6.7	%							7.3	%
Transactions			7.5	%							8.3	%				7.3	%							7.6	%
Total			6.7	%							7.1	%				6.8	%							7.3	%
Inventory Days’ Supply (1)
Same Stores			55				1.9	%			54					55				1.9	%			54
Transactions			50													50
Total			55				0.0	%			55					55				0.0	%			55

     For the three months ended September 30, 2007, as compared to 2006, Same Store new vehicle unit sales and revenues declined 7.1% and 4.1%, respectively. Soft market conditions, especially in the California and Florida markets, continued to negatively affect our new vehicle results. Further, we experienced a decline in both unit volume and revenues in our high volume brands, with the largest impact from our Ford and Toyota franchises. Our Same Store new vehicle domestic and import revenues decreased 10.3% and 4.8%, respectively. Partially offsetting this decline, Same Store new vehicle revenues in our luxury brands improved 4.5% over 2006 levels. Same Store gross profit per retail unit and gross margin declined 3.3% and 50 basis points, respectively, as the market conditions for our domestic and import stores resulted in margin pressures for the major brands. As a partial offset, we generated improvements in both gross profit per retail unit and gross margin in our luxury segment.

     For the nine months ended September 30, 2007, new vehicle unit sales and sales revenues increased 3.9% and 6.8%, respectively, as Same Store declines were offset by the net contribution from units sold at dealerships acquired and disposed. With respect to Same Store new vehicle revenues, we experienced a 10.4% and 2.3% decrease in our domestic and import nameplates, respectively, partially offset by a 5.4% increase in luxury unit sales. Our Same Store profits per retail unit and margins experienced similar pressures from the volume declines.

     The following table sets forth our top ten Same Store brands, based on retail unit sales volume:

     Same Store New Vehicle Unit Sales

		Three Months Ended September 30,													Nine Months Ended September 30,
		2007				% Change				2006					2007				% Change				2006
Toyota/Scion			10,761				(6.7)	%			11,529					28,890				(3.3)	%			29,867
Ford			3,498				(20.0	)			4,371					10,498				(17.6	)			12,746
Nissan			3,286				(6.4	)			3,509					8,953				(2.2	)			9,158
Honda			2,935				0.1				2,932					8,189				1.4				8,075
Lexus			1,856				5.2				1,764					5,201				6.5				4,885
Chevrolet			1,520				(18.6	)			1,867					4,615				(11.7	)			5,229
Dodge			1,479				2.6				1,441					4,371				(7.3	)			4,716
BMW			1,210				11.1				1,089					3,557				4.2				3,414
Mercedez-Benz			929				(8.0	)			1,010					2,877				(2.5	)			2,950
Jeep			745				4.6				712					2,222				10.7				2,007
Other			3,710				(10.4	)			4,141					11,102				(9.6	)			12,279
Total			31,929				(7.1	)			34,365					90,475				(5.1	)			95,326

     Although our overall Same Store brand sales experienced year-over-year declines, certain nameplates exceeded prior year sales highlighting the cyclical nature of our business and the need to have a well-balanced portfolio of new vehicle brands of which we sell. We anticipate that total industrywide sales of new vehicles throughout 2007 will be lower than 2006 and remain highly competitive. The level of retail sales, as well as our own ability to retain or grow market share during future periods, is difficult to predict.

     Most manufacturers offer interest assistance to offset floorplan interest charges incurred in connection with inventory purchases. This assistance varies by manufacturer, but generally provides for a defined amount regardless of our actual floorplan interest rate or the length of time for which the inventory is financed. The amount of interest assistance we recognize in a given period is primarily a function of the specific terms of the respective manufacturers’ interest assistance programs and wholesale interest rates, the average wholesale price of inventory sold, and our rate of inventory turn. For these reasons, this assistance has ranged from approximately 71.5% to 113.8% of our total floorplan interest expense over the past three years, with the current quarter’s assistance totaling 86.7%. We record these incentives as a reduction of new vehicle cost of sales as the vehicles are sold, which therefore impact the gross profit and gross margin detailed above. The total assistance recognized in cost of goods sold during the three months ended September 30, 2007 and 2006, was $10.3 million and $10.4 million, respectively, while the assistance for the nine months ended September 30, 2007 and 2006, was $29.3 million and $28.5 million, respectively.

     Finally, our days’ supply of new vehicle inventory decreased from 63 days’ supply at December 31, 2006, to 55 days’ supply at September 30, 2007, remaining constant at 55 days’ supply from September 30, 2006, levels. Our domestic and import inventory levels were reduced 14 days’ and 10 days’, respectively, from December 31, 2006 levels, to 85 days’ and 47 days’ supply, respectively, at September 30, 2007, while our luxury vehicles increased by 1 day to 38 days’ at September 30, 2007. The following table sets forth the inventory days’ supply for our top ten brands, based on retail unit sales volume:

     Inventory Days’ Supply

		September 30,				December 31,				September 30,
		2007				2006				2006
Lexus			16				14				21
Toyota			33				47				27
BMW			35				31				30
Mercedez-Benz			47				39				54
Honda			51				55				36
Acura			59				45				47
Nissan			64				68				60
Ford			82				114				88
Chevrolet			98				89				100
Dodge			110				74				134
Total			55				63				55
Import			47				57				38
Domestic			85				99				100
Luxury			38				37				40

Used Vehicle Retail Data
(dollars in thousands, except per unit amounts)

		Three Months Ended September 30,													Nine Months Ended September 30,
		2007				% Change				2006					2007				% Change				2006
Retail Unit Sales
Same Stores			15,456				(10.5	)%			17,278					46,600				(5.9	)%			49,501
Transactions			1,555								786					5,427								2,375
Total			17,011				(5.8	)%			18,064					52,027				0.3	%			51,876
Retail Sales Revenues
Same Stores		$	262,935				(6.4	)%		$	280,974				$	784,594				(3.4	)%		$	812,069
Transactions			35,322								11,957					110,151								36,542
Total		$	298,257				1.8	%		$	292,931				$	894,745				5.4	%		$	848,611
Gross Profit
Same Stores		$	31,207				(14.8	)%		$	36,609				$	97,016				(7.9	)%		$	105,325
Transactions			3,333								1,674					10,655								5,126
Total		$	34,540				(9.8	)%		$	38,283				$	107,671				(2.5	)%		$	110,451
Gross Profit per Retail Unit Sold
Same Stores		$	2,019				(4.7	)%		$	2,119				$	2,082				(2.2	)%		$	2,128
Transactions		$	2,143							$	2,130				$	1,963							$	2,158
Total		$	2,030				(4.2	)%		$	2,119				$	2,070				(2.8	)%		$	2,129
Gross Margin
Same Stores			11.9	%							13.0	%				12.4	%							13.0	%
Transactions			9.4	%							14.0	%				9.7	%							14.0	%
Total			11.6	%							13.1	%				12.0	%							13.0	%