3

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

(in thousands, except per share amounts)

		Three Months Ended June 30,								Six Months Ended June 30,
		2006				2005				2006				2005
REVENUES:
New vehicle retail sales		$	968,399			$	980,375			$	1,828,527			$	1,814,320
Used vehicle retail sales			289,760				278,787				555,680				540,332
Used vehicle wholesale sales			87,053				106,786				167,746				202,980
Parts and service sales			164,641				163,057				327,507				322,517
Finance, insurance and other, net			47,193				48,328				95,151				93,911
Total revenues			1,557,046				1,577,333				2,974,611				2,974,060
COST OF SALES:
New vehicle retail sales			898,087				911,815				1,693,701				1,686,648
Used vehicle retail sales			252,632				244,053				483,512				472,222
Used vehicle wholesale sales			87,783				107,378				167,497				203,454
Parts and service sales			74,882				73,998				149,415				147,157
Total cost of sales			1,313,384				1,337,244				2,494,125				2,509,481
GROSS PROFIT			243,662				240,089				480,486				464,579
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			182,944				192,347				363,420				374,637
DEPRECIATION AND AMORTIZATION EXPENSE			4,372				4,302				8,935				9,925
INCOME FROM OPERATIONS			56,346				43,440				108,131				80,017
OTHER INCOME AND (EXPENSES):
Floorplan interest expense			(13,033	)			(10,074	)			(24,878	)			(18,739	)
Other interest expense, net			(3,997	)			(4,706	)			(7,987	)			(9,830	)
Other income and (expense), net			(271	)			11				(245	)			8
INCOME BEFORE INCOME TAXES			39,045				28,671				75,021				51,456
PROVISION FOR INCOME TAXES			14,173				10,582				27,838				18,967
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE			24,872				18,089				47,183				32,489
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX BENEFIT OF $10,231			—				—				—				(16,038	)
NET INCOME		$	24,872			$	18,089			$	47,183			$	16,451
EARNINGS PER SHARE:
BASIC:
Income before cumulative effect of a change in accounting principle		$	1.01			$	0.76			$	1.94			$	1.38
Cumulative effect of a change in accounting principle			—				—				—				(0.68	)
Net income		$	1.01			$	0.76			$	1.94			$	0.70
DILUTED:
Income before cumulative effect of a change in accounting principle		$	1.00			$	0.75			$	1.91			$	1.36
Cumulative effect of a change in accounting principle			—				—				—				(0.67	)
Net income		$	1.00			$	0.75			$	1.91			$	0.69
DIVIDENDS PER SHARE:		$	0.14			$	—			$	0.27			$	—
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic			24,558				23,737				24,300				23,596
Diluted			24,840				23,985				24,647				23,935

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

4

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

(in thousands)

		Six Months Ended June 30,
		2006				2005
						(Restated)
CASH FLOWS FROM OPERATING ACTIVITES:
Net income		$	47,183			$	16,451
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of a change in accounting principle, net of tax			—				16,038
Depreciation and amortization			8,935				9,925
Other			13,559				8,130
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
Contracts-in-transit and vehicle receivables			41,801				(7,249	)
Accounts and notes receivable			6,824				(2,800	)
Inventories			(87,208	)			31,942
Prepaid expenses and other assets			6,198				7,478
Floorplan notes payable — manufacturer affiliates			46,542				(2,232	)
Accounts payable and accrued expenses			(26,441	)			18,409
Deferred revenues			(3,005	)			(3,704	)
Net cash provided by operating activities			54,388				92,388
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(30,078	)			(28,261	)
Cash paid in acquisitions, net of cash received			(40,589	)			(32,726	)
Proceeds from sales of franchises, property and equipment			36,223				8,616
Other			(2,989	)			113
Net cash used in investing activities			(37,433	)			(52,258	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on credit facility — Floorplan Line			1,770,611				1,797,007
Repayments on credit facility — Floorplan Line			(1,950,357	)			(1,823,106	)
Borrowings on credit facility — Acquisition Line			15,000				25,000
Repayments on credit facility — Acquisition Line			(15,000	)			(59,000	)
Repayments on other facilities for divestitures			(4,994	)			—
Proceeds from issuance of 2.25% Convertible Notes			287,500				—
Debt issue costs on issuance of 2.25% Convertible Notes			(6,469	)			—
Purchase of equity calls			(116,251	)			—
Sale of equity warrants			80,551				—
Proceeds from issuance of common stock to benefit plans			19,647				11,572
Excess tax benefits from stock-based compensation			3,400				—
Repurchases of common stock, amounts based on settlement date			(53,665	)			(310	)
Dividends paid			(6,667	)			—
Other			(502	)			(594	)
Net cash provided by (used in) financing activities			22,804				(49,431	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			39,759				(9,301	)
CASH AND CASH EQUIVALENTS, beginning of period			37,695				37,750
CASH AND CASH EQUIVALENTS, end of period		$	77,454			$	28,449
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest		$	31,525			$	28,065
Income taxes, net of refunds received		$	12,799			$	3,904

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

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

(in thousands)

																						Accumulated Other
																						Comprehensive Income (Loss)
																						Unrealized				Unrealized
										Additional								Deferred				Gains (Losses)				Losses on
		Common Stock								Paid-in				Retained				Stock-Based				on Interest				Marketable				Treasury
		Shares				Amount				Capital				Earnings				Compensation				Rate Swaps				Securities				Stock				Total
BALANCE, December 31, 2005			24,588			$	246			$	276,904			$	373,162			$	(5,413	)		$	(384	)		$	(322	)		$	(17,400	)		$	626,793
Comprehensive income:
Net income			—				—				—				47,183				—				—				—				—				47,183
Interest rate swap adjustment, net of taxes of $2,726			—				—				—				—				—				4,544				—				—				4,544
Loss on investments, net of taxes of $42			—				—				—				—				—				—				(70	)			—				(70	)
Total comprehensive income																																			51,657
Reclassification resulting from adoption of FAS 123(R) on January 1, 2006			—				—				(5,413	)			—				5,413				—				—				—				—
Purchases of treasury stock			—				—				—				—				—				—				—				(54,045	)			(54,045	)
Issuance of common shares to employee benefit plans			294				3				(559	)			—				—				—				—				20,203				19,647
Issuance of restricted stock			123				1				(1	)			—				—				—				—				—				—
Forfeiture of restricted stock			(25	)			—				—				—				—				—				—				—				—
Stock-based compensation			—				—				2,345				—				—				—				—				—				2,345
Tax benefit from options exercised			—				—				6,889				—				—				—				—				—				6,889
Purchase of equity calls			—				—				(116,251	)			—				—				—				—				—				(116,251	)
Sale of equity warrants			—				—				80,551				—				—				—				—				—				80,551
Deferred income tax benefit associated with purchase of equity calls			—				—				43,593				—				—				—				—				—				43,593
Cash dividends			—				—				—				(6,667	)			—				—				—				—				(6,667	)
BALANCE, June 30, 2006			24,980			$	250			$	288,058			$	413,678			$	—			$	4,160			$	(392	)		$	(51,242	)		$	654,512

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

6

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED 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 California, Florida, Georgia, Louisiana, Massachusetts, New Hampshire, New Jersey, New Mexico, New York, Oklahoma and Texas. 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.”

     Prior to January 1, 2006, the Company’s retail network was organized into 13 regional dealership groups, or “platforms.” Effective January 1, 2006, the Company reorganized its operations into the following five regions (with the number of dealerships they currently comprise): (i) the Northeast (20 dealerships in Massachusetts, New Hampshire, New Jersey and New York), (ii) the Southeast (15 dealerships in Florida, Georgia and Louisiana), (iii) the South Central (36 dealerships in Oklahoma and Central and Southeast Texas), (iv) the West Central (11 dealerships in New Mexico and West Texas) and (v) the California (11 dealerships in California). Each region is managed by a regional vice president reporting directly to the Company’s chief executive officer.

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 allocations of purchase price to the assets acquired and liabilities assumed are assigned and recorded based on estimates of fair value. 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, 2005.

     Intangible Franchise Rights

     The Company’s only significant identifiable intangible assets, other than goodwill, are rights under franchise agreements with manufacturers, which are recorded at an individual dealership level. The Company expects these franchise agreements to continue for an indefinite period and, when these agreements do not have indefinite terms, the Company believes that renewal of these agreements can be obtained without substantial cost. As such, the Company believes that its franchise agreements will contribute to cash flows for an indefinite period and, therefore, the carrying amount of franchise rights are not amortized. Franchise rights acquired in acquisitions prior to July 1, 2001, were recorded and amortized as part of goodwill and remain as part of goodwill in the accompanying consolidated balance sheets at June 30, 2006 and December 31, 2005. Since July 1, 2001, intangible franchise rights acquired in business combinations have been recorded as distinctly separate intangible assets and, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company evaluates these franchise rights for impairment annually, or more frequently if events or circumstances indicate possible impairment has occurred.

     At the September 2004 meeting of the Emerging Issues Task Force (“EITF”), the SEC staff issued Staff Announcement No. D-108, “Use of the Residual Method to Value Acquired Assets Other Than Goodwill,” which states that for business combinations after September 29, 2004, the residual method should no longer be used to value intangible assets other than goodwill. Rather, a direct value method should be used to determine the fair value of all intangible assets other than goodwill required to be recognized under SFAS No. 141, “Business Combinations.” Additionally, registrants who applied a residual method to the valuation of intangible assets for purposes of impairment testing under SFAS 142, were required to perform an impairment test using a direct value method by no later than the beginning of their first fiscal year beginning after December 15, 2004.

     In performing this transitional impairment test as of January 1, 2005, the Company tested the carrying value of each individual franchise right that had been recorded for impairment by using a discounted cash flow model. Included in this “direct”

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

analysis were assumptions, at a dealership level, regarding which cash flow streams were directly attributable to each dealership’s franchise rights, revenue growth rates, future gross margins and future selling, general and administrative expenses. Using an estimated weighted average cost of capital, estimated residual values at the end of the forecast period and future capital expenditure requirements, the Company calculated the fair value of each dealership’s franchise rights after considering estimated values for tangible assets, working capital and workforce. For some of the Company’s dealerships, this transitional impairment test resulted in an estimated fair value that was less than the carrying value of their intangible franchise rights. As a result, a non-cash charge of $16.0 million, net of deferred taxes of $10.2 million, was recorded in the first quarter of 2005 as a cumulative effect of a change in accounting principle in accordance with the transitional rules of EITF D-108.

     Stock Based Compensation

     Prior to January 1, 2006, we accounted for our stock option plan and our employee stock purchase plan using the intrinsic value method of accounting provided under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. This was permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” under which no compensation expense was recognized for stock option grants and issuances of stock pursuant to the employee stock purchase plan. However, stock-based compensation expense was recognized in periods prior to January 1, 2006, (and continues to be recognized) for restricted stock award issuances. Stock-based compensation expense using the fair value method under SFAS 123 was included as a pro forma disclosure in the financial statement footnotes and such disclosure continues to be provided herein for periods prior to 2006.

     Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment,” using the modified-prospective transition method. Under this transition method, compensation cost recognized in the first six months of 2006 includes: (a) compensation cost for all stock-based payments granted through December 31, 2005, for which the requisite service period had not been completed as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, (b) compensation cost for all stock-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R), and (c) the fair value of the shares sold to employees subsequent to December 31, 2005, pursuant to the employee stock purchase plan. As permitted under the transition rules for SFAS 123(R), results for prior periods have not been restated. See Note 3.

     Statements of Cash Flows

     Floorplan borrowings

     With respect to all new vehicle floorplan borrowings, the manufacturers of the vehicles 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.

     Restatement for prior period classification errors

     Subsequent to the issuance of the Company’s June 30, 2005, consolidated financial statements, the Company’s management determined that certain information in the Consolidated Statements of Cash Flows for the six months ended June 30, 2005, should be restated to comply with the guidance set forth in the rules and regulations of the Securities and Exchange Commission and SFAS No. 95, “Statement of Cash Flows,” and as set forth above under Floorplan Borrowings. A summary of the restatement is as follows:

	•		Cash flows relating to floorplan notes payable - Cash flows relating to floorplan notes payable to a party other than the manufacturer of a particular new vehicle, including the cash flows from or to manufacturer affiliated lenders participating in our syndicated credit facility, and all floorplan notes payable relating to used vehicles, have been reclassified from operating activities to financing activities.
	•		Cash flows relating to acquisitions and dispositions - Upon acquiring dealership operations, cash flows related to the payment of the seller’s floorplan payable obligations have been revised to be reflected as cash paid in acquisitions, net of cash received within cash flows from investing activities with a corresponding borrowing under either the Company’s revolving credit facility or other facilities within cash flows from financing activities.

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

			Likewise, when disposing of dealership operations, the Company reflects the purchaser’s payment of the Company’s floorplan payable obligation as additional proceeds from sales of dealership franchises within cash flows from investing activities with a corresponding repayment under either its revolving credit facility or other facilities within cash flows from financing activities.
			Previously, the Company treated all such activity as either a non-cash acquisition or disposition of inventory and related floorplan payable.

     A summary of the effects of the restatement is as follows:

Consolidated Statements of Cash Flows

		Six Months Ended
		June 30, 2005
		Reported				Restated
		(in thousands)
Cash Flows From Operating Activities
Floorplan notes payable		$	(40,300	)		$	—
Floorplan notes payable — manufacturer affiliates			—				(2,232	)
Net cash provided by operating activities			54,320				92,388
Cash Flows From Investing Activities:
Cash paid in acquisitions, net of cash received			(18,989	)			(32,726	)
Net cash used in investing activities			(38,521	)			(52,258	)
Cash Flows From Financing Activities:
Net borrowings (payments) on revolving credit facility			(35,768	)			—
Borrowings on credit facility — Floorplan Line			—				1,797,007
Repayments on credit facility — Floorplan Line			—				(1,823,106	)
Borrowings on credit facility — Acquisition Line			—				25,000
Repayments on credit facility — Acquisition Line			—				(59,000	)
Net cash provided by (used in) financing activities			(25,100	)			(49,431	)

     Effect of SFAS 123(R) Adoption

     Prior to the adoption of SFAS 123(R), the Company presented all tax benefits for deductions resulting from the exercise of options as operating cash flows in the Consolidated Statements of Cash Flows. SFAS 123(R) requires the cash flows resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The $3.4 million excess tax benefit classified as a financing cash inflow for the period ended June 30, 2006, would have been classified as an operating cash inflow if the Company had not adopted SFAS 123(R).

     Income Taxes

     Currently, the Company operates in 11 different states, each of which has unique tax rates and payment calculations. As the amount of income generated in each state varies from period to period, the Company’s estimated effective tax rate can vary based on the proportion of taxable income generated in each state.

     The effective income tax rate of 36.3% and 37.1% of pretax income for the three and six months ended June 30, 2006, respectively, differed from the federal statutory rate of 35%, and the Company’s effective income tax rate of 36.9% for the three and six months ended June 30, 2005, due primarily to increases attributable to the adoption of SFAS 123(R) and the impact of a change in the mix of the Company’s pretax income from taxable state jurisdictions, partially offset by a decrease attributable to tax credits associated with the Company’s activities in the Hurricane Katrina and Hurricane Rita employment zones.

     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 the 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 such incentive stock options fail to continue to meet the qualifications for treatment as incentive stock options, the Company may be

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

eligible for certain tax deductions in subsequent periods. In such 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.

     Recent Accounting Pronouncements

     In October 2005, the FASB staff issued FASB Staff Position No. FAS 13-1, “Accounting for Rental Costs Incurred During a Construction Period,” which, starting prospectively in the first reporting period beginning after December 15, 2005, requires companies to expense, versus capitalizing into the carrying costs, rental costs associated with ground or building operating leases that are incurred during a construction period. The Company adopted the provisions of FAS 13-1 effective January 1, 2006. During the three and six months ended June 30, 2006, the Company expensed rental cost incurred during construction of approximately $0.5 million and $0.9 million, respectively, versus approximately $0.4 million and $0.8 million in rental costs capitalized during the three and six months ended June 30, 2005, respectively. The Company is not required to restate prior year’s financial statements as a result of adopting this provision.

     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” a replacement of APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 changes the requirements for the accounting and reporting of a change in accounting principle. The Statement eliminates the requirement in APB No. 20 to include the cumulative effect of changes in accounting principle in the income statement in the period of change, and instead requires that changes in accounting principle be retrospectively applied unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The Statement applies to all voluntary changes in accounting principle, and therefore does not apply to the Company’s adoption of SFAS No. 123(R) or FAS 13-1. SFAS 154 is effective for changes made in fiscal years beginning after December 15, 2005. The Company did not implement any voluntary changes in its accounting principles during the six months ended June 30, 2006.

     In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS 155 is an amendment of SFAS No. 133 and SFAS No. 140. SFAS 155 permits companies to elect, on a deal by deal basis, to apply a fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not expect SFAS 155 to have a material effect on its future results of operations or financial position.

     In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” SFAS 156 amends SFAS No. 140. SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value. For subsequent measurements, SFAS 156 permits companies to choose between using an amortization method or a fair value measurement method for reporting purposes. SFAS 156 is effective as of the beginning of a company’s first fiscal year that begins after September 15, 2006. The Company does not expect SFAS 156 to have a material effect on its future results of operations or financial position.

     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),” 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 06-03 is effective for interim and annual reporting periods beginning after December 15, 2006. EITF 06-03 will not impact the Company’s method for recording and reporting these type taxes in its consolidated financial statements, as the Company’s policy is to exclude all such taxes from revenue.

     In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently assessing the impact of the interpretation on its future results of operations and financial position.

     Reclassifications

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

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. STOCK BASED COMPENSATION

     The Company provides compensation benefits to employees and non-employee directors pursuant to its 1996 Stock Option Plan, as amended, and 1998 Employee Stock Purchase Plan, as amended.

     1996 Stock Option Plan

     The Company’s 1996 Stock Option Plan, as amended, reserved 5.5 million shares of common stock for grants of options (including options qualified as incentive stock options under the Internal Revenue Code of 1986 and options which are non-qualified), stock appreciation rights and restricted stock awards to directors, officers and other employees of the Company and its subsidiaries at the market price at the date of grant. The terms of the awards (including vesting schedules) are established by the Compensation Committee of the Company’s Board of Directors. All outstanding awards are exercisable over a period not to exceed ten years and vest over periods ranging from three to eight years. Certain of the Company’s option awards are subject to graded vesting over a service period. In those cases, the Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award. Under SFAS 123(R), forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate. Under APB 25 and SFAS 123, the Company elected to account for forfeitures when awards were actually forfeited, at which time all previous pro forma expense was reversed to reduce pro forma expense for that period. As of June 30, 2006, there were 1,249,102 shares available under the 1996 Stock Option Plan for future grants of options, stock appreciation rights and restricted stock 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 application of this valuation model involves assumptions that are highly sensitive in the determination of stock-based compensation expense. The weighted average assumptions for the periods indicated are noted in the following table. Expected volatility is based on historical volatility of the Company’s common stock. The Company utilizes historical data to estimate option exercise and employee termination behavior within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. No stock option awards were granted during the six-month period ended June 30, 2006.

		Six Months
		Ended
		June 30, 2005
Risk-free interest rate			5.9	%
Expected life of options		6.0		yrs
Expected volatility			42.0	%
Expected dividend yield			—
Fair Value		$	13.84

     The following summary presents information regarding outstanding options as of June 30, 2006, and the changes during the six months then ended:

										Weighted Average
						Weighted Average				Remaining				Aggregate
		Shares Under				Exercise Price				Contractual				Intrinsic
		Option				Per Share				Term				Value
														(in thousands)
Outstanding December 31, 2005			1,314,560			$	23.43
Granted			—				—
Exercised			(847,982	)			20.39
Canceled			(60,951	)			34.17
Outstanding June 30, 2006			405,627			$	28.13			6.4 years				$	11,362
Vested or expected to vest at June 30, 2006			359,703			$	27.98							$	10,128
Exercisable at June 30, 2006			169,703			$	27.21			5.2 years				$	4,909

     The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005, was $19.9 million and

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$8.7 million, respectively.

     Restricted Stock Awards

     In March 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 1996 Stock 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. 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. Compensation expense for these awards is based on the price of the Company’s common stock at the date of grant and recognized over the requisite service period.

     A summary of these awards as of June 30, 2006, is as follows:

						Weighted Average
						Grant Date
		Awards				Fair Value
Nonvested at December 31, 2005			234,900			$	27.83
Granted			83,270				45.41
Vested			(29,000	)			27.83
Forfeited			(24,600	)			31.83
Nonvested at June 30, 2006			264,570				32.99

     The total fair value of shares vested during the six months ended June 30, 2006, was $1.2 million. During the six months ended June 30, 2005, 3,078 shares vested with a total fair value of $82,337.

     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 previously authorized the issuance of up to 2.0 million shares of common stock and provided that no options to purchase shares could be granted under the Purchase Plan after June 30, 2007. In May 2006, the Company’s shareholders approved an amendment to the Purchase Plan increasing the number of shares available for issuance to 2.5 million shares and extending the duration of the plan to March 6, 2016. As of June 30, 2006, there were 686,827 shares remaining in reserve for future issuance under the Purchase Plan. The Purchase Plan is available to all employees of the Company and its participating subsidiaries and is a qualified plan as defined by Section 423 of the Internal Revenue Code. At the end of each fiscal quarter (the “Option Period”) during the term of the Purchase Plan, the employee contributions are used by the employee to acquire shares of common stock from the Company at 85% of the fair market value of the common stock on the first or the last day of the Option Period, whichever is lower. During the six months ended June 30, 2006 and 2005, the Company issued 71,140 and 100,931 shares, respectively, of common stock to employees participating in the Purchase Plan.

     The weighted average fair value of employee stock purchase rights issued pursuant to the Purchase Plan was $10.34 and $6.06 during the three months ended June 30, 2006 and 2005, respectively, and $8.43 and $6.87 during the six months ended June 30, 2006 and 2005, respectively. The fair value of the stock purchase rights was calculated as the sum of (a) the difference between the stock price and the employee purchase price, (b) the value of the embedded call option and (c) the value of the embedded put option.

     All Stock-Based Payment Arrangements

     Total stock-based compensation cost was $1.0 million and $0.6 million for the three months ended June 30, 2006 and 2005, respectively, and $2.3 million and $0.7 million for the six months ended June 30, 2006 and 2005, respectively. Total income tax benefit recognized for stock-based compensation arrangements was $0.2 million and $0.2 million for the three months ended June 30, 2006 and 2005, respectively, and $0.4 million and $0.3 million for the six months ended June 30, 2006 and 2005, respectively.

     As a result of adopting SFAS 123(R) on January 1, 2006, the Company recognized $0.3 million of additional stock-based compensation expense related to stock options and $0.3 million related to the Purchase Plan during the three months ended June 30, 2006. During the six months ended June 30, 2006, the Company recognized $0.9 million of additional stock-based compensation expense related to stock options and $0.6 million related to the Purchase Plan. The Company’s income before income taxes and net income for the three month period ended June 30, 2006, were therefore both $0.6 million lower than if the

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company had continued to account for stock-based compensation under APB 25. For the six month period ended June 30, 2006, the Company’s income before income taxes and net income were both $1.5 million lower. Basic and diluted earnings per share were $0.02 and $0.06 lower for the three and six month periods ended June 30, 2006, respectively, than if the Company had continued to account for the stock-based compensation under APB 25.

     As of June 30, 2006, there was $9.4 million of total unrecognized compensation cost related to stock-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 3.1 years.

     Cash received from option exercises and Purchase Plan purchases was $19.6 million and $11.6 million for the six months ended June 30, 2006 and 2005, respectively. The actual tax benefit realized for the tax deductions from option exercises and Purchase Plan purchases totaled $6.9 million and $3.1 million for the six months ended June 30, 2006 and 2005, respectively.

     The Company generally issues new shares when options are exercised or restricted stock vests or, at times, will use treasury shares if available. With respect to shares issued under the Purchase Plan, the Company’s Board of Directors has authorized specific share repurchases to fund the shares issuable under the plan. With the exception of the changes made to the Purchase Plan discussed above, there were no modifications to the Company’s stock-based compensation plans during the three and six-month periods ended June 30, 2006.

     Pro Forma Net Income

     The following table provides pro forma net income and net income per share had the Company applied the fair value method of SFAS No. 123 for the three- and six-month periods ended June 30, 2005. The pro forma effects for the period presented are not necessarily indicative of the pro forma effects in future years (amounts in thousands except per share amounts):

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2005				2005
Net income, as reported		$	18,089			$	16,451
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			363				458
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(978	)			(1,621	)
Pro forma net income		$	17,474			$	15,288
Earnings per share:
Basic — as reported		$	0.76			$	0.70
Basic — pro forma		$	0.74			$	0.65
Diluted — as reported		$	0.75			$	0.69
Diluted — pro forma		$	0.73			$	0.64

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. EARNINGS PER SHARE:

     Basic earnings per share is computed based on weighted average shares outstanding and excludes 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:

		Three Months Ended June 30,								Six Months Ended June 30,
		2006				2005				2006				2005
		(in thousands, except per share amounts)
Income before cumulative effect of a change in accounting principle		$	24,872			$	18,089			$	47,183			$	32,489
Cumulative effect of a change in accounting principle, net of tax benefit			—				—				—				(16,038	)
Net income		$	24,872			$	18,089			$	47,183			$	16,451
Weighted average basic shares outstanding			24,558				23,737				24,300				23,596
Dilutive effect of stock-based awards, net of assumed repurchase of treasury stock			282				248				347				339
Weighted average diluted shares outstanding			24,840				23,985				24,647				23,935
Earnings per share:
Basic:
Income before cumulative effect of a change in accounting principle		$	1.01			$	0.76			$	1.94			$	1.38
Cumulative effect of a change in accounting principle			—				—				—				(0.68	)
Net income		$	1.01			$	0.76			$	1.94			$	0.70
Diluted:
Income before cumulative effect of a change in accounting principle		$	1.00			$	0.75			$	1.91			$	1.36
Cumulative effect of a change in accounting principle			—				—				—				(0.67	)
Net income		$	1.00			$	0.75			$	1.91			$	0.69

     The adoption of SFAS 123(R) results in lower diluted shares outstanding than would have been calculated had compensation cost not been recorded for stock options and stock issuances under the employee stock purchase plan. This is due to a modification required by SFAS 123(R) of the treasury stock method calculation utilized to compute the dilutive effect of stock options. The weighted average number of stock-based awards not included in the calculation of the dilutive effect of stock-based awards were 10,600 and 112,499 for the three months ended June 30, 2006 and 2005, respectively, and 169,633 and 93,236 for the six months ended June 30, 2006 and 2005, respectively.

5. LONG-TERM DEBT:

     On June 26, 2006, the Company issued $287.5 million aggregate principal amount of convertible senior notes (the “2.25% Notes”) at par in a private offering to qualified institutional buyers under Rule 144A under the Securities Act of 1933. The 2.25% Notes will bear interest at a rate of 2.25% per year until June 15, 2016, and at a rate of 2.00% per year thereafter. Interest on the 2.25% Notes will be payable semiannually in arrears in cash on June 15^th and December 15^th of each year, beginning on December 15, 2006. The 2.25% Notes mature on June 15, 2036, unless earlier converted, redeemed or repurchased.

     The Company may not redeem the 2.25% Notes before June 20, 2011. On or after that date, but prior to June 15, 2016, the Company may redeem all or part of the 2.25% Notes if the last reported sale price of the Company’s common stock is greater than or equal to 130% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day prior to the date on which the Company mails the redemption notice. On or after June 15, 2016, the Company may redeem all or part of the 2.25% Notes at any time. Any redemption of the 2.25% Notes will be for cash at 100% of the principal amount of the 2.25% Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Holders of the 2.25% Notes may require the Company to repurchase all or a portion of the 2.25% Notes on each of June 15, 2016, and June 15, 2026. In addition, if the Company experiences specified types of fundamental changes, holders of

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the 2.25% Notes may require the Company to repurchase the 2.25% Notes. Any repurchase of the 2.25% Notes pursuant to these provisions will be for cash at a price equal to 100% of the principal amount of the 2.25% Notes to be repurchased plus any accrued and unpaid interest to, but excluding, the purchase date.

     The holders of the 2.25% Notes who convert their notes in connection with a change in control, or in the event that the Company’s common stock ceases to be listed, as defined in the Indenture for the 2.25% Notes (the “Indenture”), may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, if one of these events were to occur, the holders of the 2.25% Notes may require the Company to purchase all or a portion of their notes at a purchase price equal to 100% of the principal amount of the 2.25% Notes, plus accrued and unpaid interest, if any.

     The 2.25% Notes are convertible into cash and, if applicable, common stock based on an initial conversion rate of 16.8267 shares of common stock per $1,000 principal amount of the 2.25% Notes (which is equal to an initial conversion price of approximately $59.43 per common share) subject to adjustment, under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) beginning after September 30, 2006, if the closing price of the Company’s common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is equal to or more than 130% of the applicable conversion price per share (such threshold closing price initially being $77.259); (2) during the five business day period after any ten consecutive trading day period in which the trading price per 2.25% Note for each day of the ten day trading period was less than 98% of the product of the closing sale price of the Company’s common stock and the conversion rate of the 2.25% Notes; (3) upon the occurrence of specified corporate transactions set forth in the Indenture; and (4) if the Company calls the 2.25% Notes for redemption. Upon conversion, a holder will receive an amount in cash and common shares of the Company’s common stock, determined in the manner set forth in the Indenture. Upon any conversion of the 2.25% notes, the Company will deliver to converting holders a settlement amount comprised of cash and, if applicable, shares of the Company’s common stock, based on a conversion value determined by multiplying the then applicable conversion rate by a volume weighted price of the Company’s common stock on each trading day in a specified 25 trading day observation period. In general, as described more fully in the Indenture, converting holders will receive, in respect of each $1,000 principal amount of notes being converted, the conversion value in cash up to $1,000 and the excess, if any, of the conversion value over $1,000 in shares of the Company’s common stock.

     The net proceeds from the issuance of the 2.25% Notes were used to repay borrowings under the Floorplan Line of the Company’s Credit Facility, which may be re-borrowed; to repurchase 933,800 shares of the Company’s common stock for approximately $50 million; and to pay the approximate $35.7 million net cost of the purchased options and warrant transactions described below. Debt issue costs totaled approximately $6.5 million and are being amortized over a period of ten years (the point at which the holders can first require the Company to redeem the 2.25% Notes).

     The 2.25% Notes rank equal in right of payment to all of the Company’s other existing and future senior indebtedness. The 2.25% Notes are not guaranteed by any of the Company’s subsidiaries and, accordingly, are structurally subordinated to all of the indebtedness and other liabilities of the Company’s subsidiaries.

     In connection with the issuance of the 2.25% Notes, the Company purchased ten-year call options on its common stock (the “Purchased Options”). Under the terms of the Purchased Options, which become exercisable upon conversion of the 2.25% Notes, the Company has the right to purchase a total of approximately 4.8 million shares of its common stock at a purchase price of $59.43 per share. The total cost of the Purchased Options was $116.3 million, which was recorded as a reduction to additional paid-in capital in the accompanying consolidated balance sheet at June 30, 2006, in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” and EITF No. 01-6, “The Meaning of ‘Indexed to a Company’s Own Stock’.” The cost of the Purchased Options will be deductible as original issue discount for income tax purposes over the expected life of the 2.25% Notes (ten years). Therefore, the Company has established a deferred tax asset, with a corresponding increase to additional paid-in capital, in the accompanying consolidated balance sheet at June 30, 2006.

     In addition to the purchase of the Purchased Options, the Company sold warrants in separate transactions (the “Warrants”). These Warrants have a ten year term and enable the holders to acquire shares of the Company’s common stock from the Company. The Warrants are exercisable for a maximum of 4.8 million shares of the Company’s common stock at an exercise price of $80.31 per share, subject to adjustment for quarterly dividends in excess of $0.14 per quarter, liquidation, bankruptcy, or a change in control of the Company and other conditions, including the failure by the Company to deliver registered securities to the purchasers upon exercise. Subject to these adjustments, the maximum amount of shares of the Company’s common stock that could be required to be issued under the warrants is 9.7 million shares. On exercise of the Warrants, the Company will settle the difference between the then market price and the strike price of the Warrants in shares of its Common Stock. The proceeds from the sale of the Warrants were $80.6 million, which was recorded as an increase to additional paid-in capital in the accompanying consolidated balance sheet at June 30, 2006, in accordance with SFAS 133, EITF No. 00-19 and EITF No. 01-6.

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     In accordance with EITF No. 00-19, future changes in the Company’s share price will have no effect on the carrying value of the Purchased Options or the Warrants. The Purchased Options and the Warrants are subject to early expiration upon the occurrence of certain events that may or may not be within the Company’s control. Should there be an early termination of the Purchased Options or the Warrants prior to the conversion of the 2.25% Notes from an event outside of the Company’s control, the amount of shares potentially due to or due from the Company under the Purchased Options or the Warrants will be based solely on the Company’s common stock price, and the amount of time remaining on the Purchased Options or the Warrants and will be settled in shares of the Company’s common stock. The Purchased Option and Warrant transactions were designed to increase the conversion price per share of the Company’s common stock from $59.43 to $80.31 (a 50% premium to the closing price of the Company’s common stock on the date that the 2.25% Convertible Notes were priced to investors) and, therefore, mitigate the potential dilution of the Company’s common stock upon conversion of the 2.25% Notes, if any.

6. COMMITMENTS AND CONTINGENCIES:

     Legal Proceedings

     From time to time, our dealerships are named in claims involving the manufacture of automobiles, contractual disputes and other matters arising in the ordinary course of business.

     The Texas Automobile Dealers Association (“TADA”) and certain new vehicle dealerships in Texas that are members of the TADA, including a number of the Company’s Texas dealership subsidiaries, have been named in two state court class action lawsuits and one federal court class action lawsuit. The three actions allege that since January 1994, Texas dealers have deceived customers with respect to a vehicle inventory tax and violated federal antitrust and other laws. In April 2002, the state court in which two of the actions are pending certified classes of consumers on whose behalf the action would proceed. In October 2002, the Texas Court of Appeals affirmed the trial court’s order of class certification in the state court actions. The defendants requested that the Texas Supreme Court review that decision, and the Court declined that request on March 26, 2004. The defendants petitioned the Texas Supreme Court to reconsider its denial, and that petition was denied on September 10, 2004. In the federal antitrust action, in March 2003, the federal district court also certified a class of consumers. Defendants appealed the district court’s certification to the Fifth Circuit Court of Appeals, which on October 5, 2004, reversed the class certification order and remanded the case back to the federal district court for further proceedings. In February 2005, the plaintiffs in the federal action sought a writ of certiorari to the United States Supreme Court in order to obtain review of the Fifth Circuit’s order, which request the Court denied. In June 2005, the Company’s Texas dealerships and certain other defendants in the lawsuits entered settlements with the plaintiffs in each of the cases. The settlements are contingent upon and subject to court approval. The settlement of the state court actions was preliminarily approved by the state court in December 2005. As a result of that settlement, the state court certified a settlement class of certain Texas automobile purchasers. Dealers participating in the settlement, including a number of the Company’s Texas dealership subsidiaries, are expected to issue certificates for discounts off future vehicle purchases, refund cash in some circumstances, pay attorneys’ fees, and make certain disclosures regarding inventory tax charges when itemizing such charges on customer invoices. In addition, participating dealers have funded and will fund certain costs of the settlement, including costs associated with notice of the settlement to the class members. The federal action settlement does not involve the certification of any additional classes. The estimated remaining expense of the proposed settlements of $1.3 million has been included in accrued expenses in the accompanying consolidated financial statements. If the settlements are not approved, the Company will continue to vigorously assert available defenses in connection with these lawsuits. While the Company does not believe this litigation will have a material adverse effect on its financial position, results of operations or cash flows, no assurance can be given as to its ultimate outcome. A settlement on different terms or an adverse resolution of this matter in litigation could result in the payment of significant costs and damages.

     On August 29, 2005, the Company’s Dodge dealership in Metairie, Louisiana, suffered severe damage due to Hurricane Katrina and subsequent flooding. The dealership facility was leased. Pursuant to its terms, the Company terminated the lease based on damages suffered at the facility. The lessor disputed the termination as wrongful and instituted arbitration proceedings against the Company. The lessor demanded damages for alleged wrongful termination and other items related to alleged breaches of the lease agreement. In June 2006, the Company paid a total of $4.5 million in full and final settlement of all claims associated with the termination of the lease and in lieu of any further payments under the terms of the lease. At the time the lease was terminated, payments remaining due under the lease over the initial term thereof (155 months at the time of termination) totaled $16.3 million. The $4.5 million charge is reflected as a component of selling, general and administrative expenses in the accompanying consolidated statements of operations.

     In addition to the foregoing cases, due to the nature of the automotive retailing business, the Company may be involved in legal proceedings or suffer losses that could have a material adverse effect on its 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-,

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

rebate- or warranty-related items. 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 or results of operations.

     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 there will not 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 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 $36.7 million at June 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.

7. HURRICANE KATRINA AND HURRICANE RITA BUSINESS INTERRUPTION INSURANCE:

     On August 29, 2005, Hurricane Katrina struck the Gulf Coast of the United States, including New Orleans, Louisiana. At that time, the Company operated six dealerships in the New Orleans area, consisting of nine franchises. Two of the dealerships are located in the heavily flooded East Bank of New Orleans and nearby Metairie areas, while the other four are located on the West Bank of New Orleans, where flood-related damage was less severe. The East Bank stores suffered significant damage and loss of business and remain closed, although the Dodge store in Metairie resumed limited operations from a satellite location. In June 2006, the Company terminated this franchise with DaimlerChrysler and ceased satellite operations. The West Bank stores reopened approximately two weeks after the storm. On September 24, 2005, Hurricane Rita came ashore along the Texas/Louisiana border, near Houston and Beaumont, Texas. The Company operated two dealerships in Beaumont, Texas, consisting of eleven franchises and nine dealerships in the Houston area consisting of seven franchises. As a result of the evacuation by many residents in Houston, and the aftermath of the storm in Beaumont, all of these dealerships were closed several days before and after the storm. All of these dealerships have since resumed operations.

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The Company maintains business interruption insurance coverage under which it has filed claims totaling $7.8 million, after application of related deductibles, related to the effects of these two storms. During the second quarter of 2006, the Company settled all claims and received monies due with respect to $7.6 million of this amount. During 2005, the Company had recorded approximately $1.4 million of these proceeds, related to covered payroll and fixed cost expenditures incurred from August 29, 2005, to December 31, 2005. During the first quarter of 2006, the Company recorded approximately $0.2 million more of these proceeds, and during the second quarter recognized the remaining $6.0 million, all of which were reflected as a reduction of selling, general and administrative expense. Although the Company believes it is entitled to the remaining $0.2 million claimed, it is unable to recognize the additional amounts until all issues have been resolved. Any additional recoveries under this coverage, will be recognized as a reduction of selling, general and administrative expenses in the period in which all contingencies have been resolved.

     In addition to the business interruption recoveries noted above, the Company also incurred and has been reimbursed for approximately $0.8 million of expenses related to the clean-up and reopening of its affected dealerships. The Company recognized $0.7 million of these proceeds during 2005 and $0.1 million during the first quarter of 2006.

8. RELATED PARTY TRANSACTION:

     During the second quarter of 2006, the Company sold a Pontiac and GMC franchised dealership to a former employee for approximately $1.9 million, realizing a gain of approximately $0.8 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. We currently own and operate 134 franchises at 93 dealership locations and 29 collision centers. 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 California, Florida, Georgia, Louisiana, Massachusetts, New Hampshire, New Jersey, New Mexico, New York, Oklahoma and Texas.

     Prior to January 1, 2006, our retail network was organized into 13 regional dealership groups, or “platforms.” Effective January 1, 2006, we reorganized our operations into the following five regions (with the number of dealerships they currently comprise): (i) the Northeast (20 dealerships in Massachusetts, New Hampshire, New Jersey and New York), (ii) the Southeast (15 dealerships in Florida, Georgia and Louisiana), (iii) the South Central (36 dealerships in Oklahoma and Central and Southeast Texas), (iv) the West Central (11 dealerships in New Mexico and West Texas) and (v) the California (11 dealerships in California). Each region is managed by a regional vice president reporting directly to our chief executive officer.

     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 six months ended June 30, 2006, we reported net income of $24.9 million and $47.2 million and diluted earnings per share of $1.00 and $1.91, respectively, compared to net income of $18.1 million and $16.5 million and diluted earnings per share of $0.75 and $0.69, respectively, during the comparable periods of 2005. For some of our dealerships, our adoption of EITF D-108, “Use of the Residual Method to Value Acquired Assets Other Than Goodwill,” in the first quarter of last year resulted in intangible franchise rights having carrying values that were in excess of their fair values. This required us to write-off the excess value of $16.0 million, net of deferred taxes of $10.2 million, or $0.67 per diluted share, as a cumulative effect of a change in accounting principle.

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 Six
		Months Ended June 30,									Months Ended June 30,
		2006				2005					2006				2005
Unit Sales
Retail Sales
New Vehicle			33,442				33,721					62,411				62,554
Used Vehicle			17,549				17,441					33,812				34,683
Total Retail Sales			50,991				51,162					96,223				97,237
Wholesale Sales			11,757				13,240					22,412				25,688
Total Vehicle Sales			62,748				64,402					118,635				122,925
Gross Margin
New Vehicle Retail			7.3	%			7.0	%				7.4	%			7.0	%
Used Vehicle			9.7	%			8.9	%				10.0	%			9.1	%
Parts and Service			54.5	%			54.6	%				54.4	%			54.4	%
Total Gross Margin			15.6	%			15.2	%				16.2	%			15.6	%
SG&A(1)as a % of Gross Profit			75.1	%			80.1	%				75.6	%			80.6	%
Operating Margin			3.6	%			2.8	%				3.6	%			2.7	%
Pretax Margin			2.5	%			1.8	%				2.5	%			1.7	%
Finance and Insurance
Revenues per Retail Unit Sold		$	926			$	945				$	989			$	966

     The following discussion briefly highlights certain of the results and trends occurring within our business. Throughout the following discussion, references are made to same store results and variances, which are discussed in more detail in the Results of Operations section that follows.

     Our overall retail unit sales have decreased slightly as same store retail unit sales of new vehicles decreased 2.2% in the second quarter and 1.5% for the six-month period ended June 30, 2006, as compared to the comparable periods of 2005. Partially offsetting the second-quarter decline were a 2.2% increase in same store used vehicle retail unit sales and a slight contribution from newly acquired stores net of the loss of volume previously contributed from stores disposed. For the six months ended June 30, 2006, in addition to the decline in same store new vehicle units sales, we also experienced a 1.2% decline in retail used vehicle unit sales. These decreases were partially offset by the contribution from newly acquired stores net of the loss of volume previously contributed from stores disposed.

     With respect to same store new vehicle unit sales, for the three months ended June 30, 2006, as compared to 2005, we experienced a 1.0% increase in luxury brand sales and a 7.7% increase in import sales. These increases were, however, offset by a 15.4% decrease in domestic unit sales. We believe these results are consistent with the overall markets in which we operate and, specifically, reflect continued strong post-hurricane driven demand from our stores located in New Orleans and weaker performance in our other Southeast Region dealerships and West Central dealerships, most of which sell domestic brands. For the six months ended June 30, 2006, as compared to 2005, we experienced a 2.6% increase in luxury brand sales and a 5.3% increase in import sales. These increases were, however, offset by an 11.6% decrease in domestic unit sales. We believe these results are also consistent with the overall markets in which we operate.

     Offsetting the decline in same store unit sales were increases in same store new and used vehicle gross margin and gross profit per unit sold. Our new vehicle gross margin increased from 7.0% for the three months ended June 30, 2005, to 7.3% for the same period of 2006, resulting in our consolidated gross profit per new vehicle unit sold rising from $2,051 per unit in 2005, to $2,111 per unit in 2006. For the six months ended June 30, 2006, our same store new vehicle gross margin was 7.4%, as compared to 7.1% for the comparable period of 2005, and we saw a $107 increase in gross profit per unit sold from $2,060 in 2005, to $2,167 in 2006. With respect to used vehicles, during the second quarter we experienced a 6.0% increase in same store gross profit per retail unit sold, however we experienced a loss of $70 per wholesale unit compared to a loss of $36 per unit in 2005, resulting in an overall 90 basis-point improvement in total used vehicle gross margin, to 9.8% for the three months ended

June 30, 2006. For the six months ended June 30, 2006, as compared to 2005, we experienced an 8.7% increase in same store used vehicle gross profit per retail unit sold, and realized gross profit of $9 per wholesale unit compared to a loss of $9 per unit in 2005, resulting in an overall 100 basis-point improvement in total used vehicle gross margin, to 10.1% for the six months ended June 30, 2006.

     Our consolidated parts and service gross margin varied slightly between the second quarter and first six months of 2005 and the comparable periods of 2006, as the component (parts, service and collision) margins and mix stayed relatively consistent between the periods on a 1.0% and 1.5% increase in revenues for the three- and six-month periods, respectively.

     Our consolidated finance and insurance revenues decreased from $945 per retail unit sold in the second quarter of 2005 to $926 in 2006, primarily due a 2.9% decline in same store income per finance contract sold and a 0.9% decline in same store penetration of vehicle service contracts sold. We believe both of these declines resulted from increased subvented financing programs by the various manufacturers. For the six months ended June 30, 2006, we experienced an increase, to $989 per retail unit sold, from $966 per retail unit sold during the first six months of 2005. This increase was primarily due to a decrease in chargeback expense related to finance contracts, an increase in retroactive incentive monies earned on vehicle service contracts and an overall increase in the income from sales of guaranteed asset protection and other maintenance contracts sold.

     During 2006, our consolidated selling, general and administrative expenses (SG&A), as a percentage of gross profit, decreased from 80.1% and 80.6% for the three and six months ended June 30, 2005, to 75.1% and 75.6% for the comparable periods in 2006. This decrease resulted primarily from the combination of the increases in gross profit noted above, as well as cost reductions initiatives in personnel-related costs and advertising implemented in late 2005 and early 2006.

     The combination of the above factors contributed to a net increase in our operating margin to 3.6% for the three and six months ended June 30, 2006, from 2.8% and 2.7% for the three and six months ended June 30, 2005, respectively. After factoring in an increase in interest expense, primarily as a result of rising interest rates, our pretax margin increased to 2.5% for the three and six months ended June 30, 2006, from 1.8% and 1.7% for the three and six months ended June 30, 2005, respectively.

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

Critical Accounting Policies and Accounting Estimates

     Our condensed 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 2005 Annual Report on Form 10-K. With the exception of the discussion below regarding stock based compensation, no significant changes have occurred since that time.

     Stock Based Compensation

     We provide compensation benefits to employees and non-employee directors pursuant to our 1996 Stock Option Plan, as amended, and 1998 Employee Stock Purchase Plan, as amended. Historically, we utilized stock options to provide long-term incentive to these individuals. However, beginning in March 2005, we began utilizing restricted stock awards or, at the recipient’s election, phantom stock awards, in lieu of stock options. Any future grants of either stock options or restricted stock awards are subject to the discretion of our board of directors.

     Prior to January 1, 2006, we accounted for our stock option plans and our employee stock purchase plan using the intrinsic value method of accounting provided under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, as permitted by FASB Statement No. 123, “Accounting for Stock-Based Compensation,” under which no compensation expense was recognized for stock option grants and issuances of stock pursuant to the employee stock purchase plan. However, stock-based compensation expense was recognized in periods prior to January 1, 2006, (and continues to be recognized) for restricted stock award issuances. Stock-based compensation expense using the fair value method under SFAS 123 was included as a pro forma disclosure in the financial statement footnotes and such disclosure continues to be provided for periods prior to 2006.

     Effective January 1, 2006, we adopted the fair value recognition provisions of FASB Statement No. 123(R), “Share-Based Payment,” using the modified-prospective transition method. Under this transition method, compensation cost recognized in the first six months of 2006 includes: (a) compensation cost for all stock-based payments granted through December 31, 2005, for which the requisite service period had not been completed as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, (b) compensation cost for all stock-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R), and (c) the fair value of the shares sold to employees subsequent to December 31, 2005, pursuant to the employee stock purchase plan. As

permitted under the transition rules for SFAS 123(R), results for prior periods have not been restated. See Note 3.

     As a result of adopting SFAS 123(R) on January 1, 2006, we recognized $0.3 million of additional stock-based compensation expense related to stock options and $0.3 million related to the employee stock purchase plan during the three months ended June 30, 2006. During the six months ended June 30, 2006, we recognized $0.9 million of additional stock-based compensation expense related to stock options and $0.6 million related to the employee stock purchase plan. Income before income taxes and net income for the three-month period ended June 30, 2006, were therefore both $0.6 million lower than if we had continued to account for stock-based compensation under APB. For the six-month period ended June 30, 2006, income before income taxes and net income were both $1.5 million lower. Basic and diluted earnings per share were $0.02 and $0.06 lower for the three- and six-month periods ended June 30, 2006, respectively, than if we had continued to account for the stock-based compensation under APB 25.

Results of Operations

     The following tables present comparative financial and non-financial data for the three and six months ended June 30, 2006 and 2005, 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, but exclude the results of our two New Orleans dealerships that remain closed as a result of Hurricane Katrina in August of 2005.

     The following table summarizes our combined Same Store results for the three and six months ended June 30, 2006, as compared to 2005.

Total Same Store Data

(dollars in thousands, except per unit amounts)

		Three Months Ended June 30,													Six Months Ended June 30,
		2006				% Change				2005					2006				% Change				2005
Revenues
New vehicle retail		$	928,882				(2.5	)%		$	952,251				$	1,757,133				(0.6	)%		$	1,767,155
Used vehicle retail			281,681				4.7	%			268,993					540,231				3.4	%			522,624
Used vehicle wholesale			83,101				(18.3	)%			101,747					160,630				(17.6	)%			194,953
Parts and Service			160,982				2.6	%			156,979					320,642				2.7	%			312,206
Finance, insurance and other			45,653				(2.4	)%			46,782					92,439				1.3	%			91,238
Total revenues			1,500,299				(1.7	)%			1,526,752					2,871,075				(0.6	)%			2,888,176
Cost of Sales
New vehicle retail			861,329				(2.7	)%			885,169					1,627,304				(0.9	)%			1,641,923
Used vehicle retail			245,336				4.2	%			235,441					469,583				2.8	%			456,866
Used vehicle wholesale			83,876				(17.9	)%			102,195					160,445				(17.8	)%			195,180
Parts and Service			73,447				3.2	%			71,173					146,710				3.1	%			142,355
Total cost of sales			1,263,988				(2.3	)%			1,293,978					2,404,042				(1.3	)%			2,436,324
Gross profit		$	236,311				1.5	%		$	232,774				$	467,033				3.4	%		$	451,852
Selling, general and administrative expenses		$	180,853				(2.2	)%		$	184,844				$	356,712				(1.2	)%		$	361,142
Depreciation and amortization expenses		$	4,316				5.2	%		$	4,103				$	8,850				(7.4	)%		$	9,561
Floorplan interest expense		$	12,595				31.5	%		$	9,580				$	24,090				34.8	%		$	17,875
Gross Margin
New Vehicle Retail			7.3	%							7.0	%				7.4	%							7.1	%
Used Vehicle			9.8	%							8.9	%				10.1	%							9.1	%
Parts and Service			54.4	%							54.7	%				54.2	%							54.4	%
Total Gross Margin			15.8	%							15.2	%				16.3	%							15.6	%
SG&A as a % o f Gross Profit			76.5	%							79.4	%				76.4	%							79.9	%
Operating Margin			3.4	%							2.9	%				3.5	%							2.8	%
Finance and Insurance
Revenues per Retail Unit Sold		$	929				(1.7	)%		$	945				$	994				2.7	%		$	968

     The discussion that follows provides explanation for the variances noted above and each table presents by primary income statement line item comparative financial and non-financial data of our Same Store locations, Transactions and the consolidated company for the three and six months ended June 30, 2006 and 2005.

New Vehicle Retail Data

(dollars in thousands, except per unit amounts)

		Three Months Ended June 30,													Six Months Ended June 30,
		2006				% Change				2005					2006				% Change				2005
Retail Unit Sales
Same Stores			32,001				(2.2	)%			32,709					59,901				(1.5	)%			60,801
Transactions			1,441								1,012					2,510								1,753
Total			33,442				(0.8	)%			33,721					62,411				(0.2	)%			62,554
Retail Sales Revenues
Same Stores		$	928,882				(2.5	)%		$	952,251				$	1,757,133				(0.6	)%		$	1,767,155
Transactions			39,517								28,124					71,394								47,165
Total		$	968,399				(1.2	)%		$	980,375				$	1,828,527				0.8	%		$	1,814,320
Gross Profit
Same Stores		$	67,553				0.7	%		$	67,082				$	129,830				3.7	%		$	125,232
Transactions			2,759								1,478					4,996								2,440
Total		$	70,312				2.6	%		$	68,560				$	134,826				5.6	%		$	127,672
Gross Profit per Retail Unit Sold
Same Stores		$	2,111				2.9	%		$	2,051				$	2,167				5.2	%		$	2,060
Transactions		$	1,915							$	1,460				$	1,990							$	1,392
Total		$	2,103				3.4	%		$	2,033				$	2,160				5.8	%		$	2,041
Gross Margin
Same Stores			7.3	%							7.0	%				7.4	%							7.1	%
Transactions			7.0	%							5.3	%				7.0	%							5.2	%
Total			7.3	%							7.0	%				7.4	%							7.0	%
Inventory Days Supply(1)
Same Stores			63				5.0	%			60					63				5.0	%			60
Transactions			47													47
Total			62				0.0	%			62					62				0.0	%			62