LITHIA MOTORS INC, S-1/A, 1996-11-01

LITHIA MOTORS INC
S-1/A, 1996-11-01
AUTO DEALERS & GASOLINE STATIONS

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As filed with the Securities and Exchange Commission on October 31, 1996.
Registration No. 333 - 14031

- -------------------------------------------------------------------------------

Securities and Exchange Commission
Washington, D.C. 20549

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AMENDMENT NO. 1

LITHIA MOTORS, INC.
(Exact name of registrant as specified in charter)

OREGON 93-0572810 5511
- ----------------- ------------------------------------ -------------------
(State or other (I.R.S. Employer Identification No.) (Primary Standard
jurisdiction of Industrial
Incorporation or Classification
organization) Code Number)

360 E. Jackson Street, Medford, Oregon 97501
(541) 776-6899
(Address and telephone number of registrant's principal executive offices)

Sidney B. DeBoer, President
360 E. Jackson Street
Medford, Oregon 97501
(541) 776-6899
(Name, address and telephone number of agent for service)

Copies of all communications to:

Kenneth E. Roberts, Esq. Kenneth J. Baronsky, Esq.
Foster Pepper & Shefelman Milbank, Tweed, Hadley & McCloy
101 S.W. Main St., 15th Floor 601 South Figueroa St., 30th Floor
Portland, Oregon 97204 Los Angeles, California 90017
(503) 221-1151 (213) 892-4000
(503) 221-1510 (FAX) (213) 629-5063 (FAX)

APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /

If this Form is filed to register additional securities for an offering pursuant
to Rule 464(b) under the Securities Act, check the following box and list the
Securities Act registration number of earlier effective registration statement
for the same offering. / /
------------------------

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------

If delivery of the prospectus is expected to be made pursuant to the Rule 434,
please check the following box. / /

The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

<PAGE>

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.

<PAGE>

SUBJECT TO COMPLETION, DATED ___________, 1996
PROSPECTUS
___________ SHARES

[LOGO] LITHIA MOTORS, INC.
CLASS A COMMON STOCK
---------------------

All of the shares of Class A Common Stock, no par value (the "Class A
Common Stock"), offered hereby are being sold by Lithia Motors, Inc. ("Lithia
Motors" or the "Company"). Prior to this offering (the "Offering"), there has
been no public market for the Class A Common Stock of the Company. It is
currently anticipated that the initial public offering price will be between
$_____ and $_____ per share. For information which was considered in
determining the initial public offering price, see "Underwriting". Application
has been made to have the Class A Common Stock approved for quotation on the
Nasdaq National Market under the symbol "LITH."

The Company has two classes of authorized Common Stock, Class A Common
Stock, which is offered hereby, and Class B Common Stock, no par value (the
"Class B Common Stock"). Holders of Class A Common Stock are entitled to one
vote per share and holders of Class B Common Stock are entitled to ten votes per
share. Class A Common Stock is not convertible but is freely transferable,
while Class B Common Stock is transferable only to certain limited transferees
and is freely convertible into Class A Common Stock. All of the outstanding
shares of Class B Common Stock, which will represent approximately ___% of the
aggregate voting power of the Company upon completion of this Offering, are
controlled by Sidney B. DeBoer and beneficially owned by Mr. DeBoer, M. L. Dick
Heimann and R. Bradford Gray, each executive officers of the Company, through
Lithia Holding Company, L.L.C. ("Lithia Holding"), the sole shareholder of the
Company immediately prior to this Offering. See "Risk Factors--Concentration of
Voting Power; Anti-takeover Provisions," "Description of Capital Stock--Common
Stock" and "Principal Shareholders."

-------------------------

FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK OFFERED HEREBY, SEE "RISK
FACTORS" BEGINNING ON PAGE 8.

--------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
- --------------------------------------------------------------------------------
Per Share. . . . . . . . $ $ $
- --------------------------------------------------------------------------------
Total (3). . . . . . . . $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $___________.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to ____________ additional shares of Class A Common Stock solely to cover
over-allotments, if any. If such option is exercised, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $_____, $_______ and $________, respectively. See "Underwriting."

The shares of Class A Common Stock are being offered by the several
Underwriters when, as and if delivered to and accepted by the Underwriters and
subject to various prior conditions, including the right to reject orders in
whole or in part. It is expected that delivery of the certificates representing
the shares will be made against payment therefor at the offices of Furman Selz
LLC in New York, New York or through the facilities of the Depository Trust
Company on or about ______________, 1996.

FURMAN SELZ
DAIN BOSWORTH
INCORPORATED
EVEREN SECURITIES, INC.
-------------------------

The date of this Prospectus is ___________, 1996

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[Photo of Dealerships]

This Prospectus includes statistical data regarding the retail automobile
industry. Unless otherwise indicated herein, such data is taken or derived from
information published by the Industry Analysis Division of the National
Automobile Dealers Association ("NADA") in its INDUSTRY ANALYSIS AND OUTLOOK AND
AUTOMOTIVE EXECUTIVE MAGAZINE publication. This Prospectus includes trademarks
of companies other than Lithia Motors, Inc., which trademarks are the property
of their respective holders.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

<PAGE>

PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS, (i) ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION TO PURCHASE UP TO ____________ ADDITIONAL
SHARES OF CLASS A COMMON STOCK FROM THE COMPANY IS NOT EXERCISED AND (ii) GIVES
EFFECT TO THE CONSUMMATION OF THE RESTRUCTURING, AS DEFINED IN AND DESCRIBED
UNDER "COMPANY RESTRUCTURING AND PRIOR S CORPORATION STATUS" IN THIS PROSPECTUS,
WHICH TRANSACTIONS WILL TAKE PLACE IMMEDIATELY PRIOR TO THE CLOSING OF THE
OFFERING. REFERENCES HEREIN TO "COMMON STOCK" MEAN THE COMPANY'S CLASS A COMMON
STOCK AND CLASS B COMMON STOCK, COLLECTIVELY. UNLESS OTHERWISE INDICATED,
REFERENCES TO THE "COMPANY" MEAN LITHIA MOTORS AND ITS SUBSIDIARIES AFTER THE
RESTRUCTURING.

THE COMPANY

Lithia Motors is the largest retailer of new and used vehicles in Southwest
Oregon, offering 14 domestic and imported makes of new automobiles and light
trucks at five locations. As an integral part of its operations, the Company
also arranges related financing and insurance and sells parts, service and
ancillary products. The Company has grown primarily by successfully acquiring
and integrating dealerships and by obtaining new dealer franchises. Most of the
Company's operations are currently located in Medford, Oregon, where it has a
market share of over 40%. The Company's strategy is to become a leading
acquiror of dealerships in medium-sized markets in the western United States.
The Company has recently entered into agreements to acquire additional
dealerships in Eugene, Oregon and Salinas, California.

The Company's two senior executives, Sidney B. DeBoer and M.L. Dick
Heimann, have managed the Company's operations for over 25 years. During this
time, they have developed and implemented an operating strategy that has enabled
the Company to achieve profitability superior to industry averages. In 1995,
the Company's gross profit margin (on a FIFO basis) was 18.0% and its pre-tax
profit margin before minority interest (on a FIFO basis) was 3.3%, versus 12.9%
and 1.4%, respectively, for the industry.

OPERATING STRATEGY

The Company's operating strategy consists of the following elements:

PROVIDE A BROAD RANGE OF PRODUCTS AND SERVICES. The Company offers a
broad range of products and services including a wide selection of new and used
cars and light trucks, vehicle financing and insurance and replacement parts and
service. In Southwest Oregon, the Company's five locations offer, collectively,
14 makes of new vehicles including Chrysler, Toyota, Plymouth, Dodge,
Jeep/Eagle, Honda, Saturn, Mazda, Pontiac, Lincoln, Mercury, Isuzu, Suzuki and
Volkswagen. In addition, the Company sells a variety of used vehicles at a
broad range of prices. By offering new and used vehicles and an array of
complementary services at each of its locations, the Company seeks to increase
customer traffic and meet specific customer needs. The Company believes that
offering numerous new vehicle brands appeals to a variety of customers,
minimizes dependence on any one manufacturer and reduces its exposure to supply
problems and product cycles.

FOCUS ON USED VEHICLE SALES. A key element of the Company's operating
strategy is to focus on the sale of used vehicles. The Company's goal is to
sell two used vehicles for every new vehicle sold. In 1995, the Company sold
5,144 used vehicles, a 1.83 to one ratio as compared to new vehicles sold. The
Company strives to attract customers and enhance buyer satisfaction by offering
multiple financing options, a 10-day/500-mile "no questions asked" exchange
program and a 60-day/3,000-mile warranty on every used vehicle sold. The
Company believes that a well-managed used vehicle operation at each location
affords an opportunity to (i) generate additional customer traffic from a wide
variety of prospective buyers, (ii) increase new and used vehicle sales by
aggressively pursuing customer trade-ins, (iii) generate incremental revenues
from customers financially unable or unwilling to purchase a new vehicle, and
(iv) improve total vehicle profit margins and ancillary product sales. To
maintain a broad selection of high quality used vehicles and to meet local
demand preferences, the Company acquires used vehicles from trade-ins and a
variety of sources nationwide, including direct purchases and manufacturers' and
independent auctions.

<PAGE>

financing for 59% of its new vehicle sales and 69% of its used vehicle sales, as
compared to 42% and 51%, respectively, for the average automobile dealership in
the United States. The Company also sells extended service coverage and other
vehicle protection packages which the Company believes enhance the value of the
vehicle and provide a higher level of customer satisfaction.

EMPLOY PROFESSIONAL MANAGEMENT TECHNIQUES. The Company employs
professional management practices in all aspects of its operations, including
information technology, employee training, profit-based compensation and a cash
management system. Each dealership is a profit center and is managed by a
trained and experienced general manager who has primary responsibility for
decisions relating to inventory, advertising, pricing and personnel.
Compensation of the general manager is based on dealership profitability and the
compensation of department managers is similarly based upon departmental
profitability. Senior management utilizes computer-based management information
systems to monitor each dealership's sales, profitability and inventory on a
daily basis. The Company believes the application of its professional
management practices provides it a competitive advantage over many dealerships
and is critical to its ability to achieve levels of profitability superior to
industry average.

FOCUS ON CUSTOMER SATISFACTION AND LOYALTY. The Company emphasizes
customer satisfaction throughout its organization and continually seeks to
maintain a reputation for quality and fairness. The Company trains its sales
people to work to identify an appropriate vehicle for each of its customers at
an affordable price. The Company also recently implemented an innovative
marketing program entitled "Priority You." "Priority You" provides the
Company's retail customers six value-added services which the Company believes
are important to overall customer satisfaction, including a commitment to (i)
provide a customer credit check within 10 minutes, (ii) complete a used vehicle
appraisal within 30 minutes, (iii) complete the paper work on a new vehicle
purchase within 90 minutes, (iv) provide a 10-day/500-mile "no questions asked"
right of exchange on any used vehicle, (v) provide a warranty on all used
vehicles for 60 days/3,000 miles and (vi) make a $20 per vehicle donation to a
local charity or educational organization. The Company believes "Priority You"
will help differentiate it from many other dealerships thereby increasing
customer traffic and developing stronger customer loyalty.

GROWTH STRATEGY

The Company's goal is to become a leading acquiror of automobile
dealerships in the western United States. As part of its acquisition strategy,
the Company intends to focus its efforts on acquiring dealerships or dealer
groups that, among other criteria, possess either the sole franchise or a
significant share of new vehicle sales in a targeted market. Additionally, the
Company's evaluation of potential acquisitions takes into account a dealership's
local reputation with its customers, the type and make of vehicles sold by the
dealer and the possibility for the Company to acquire additional franchises
within the market to achieve a larger market share. The Company believes that
the majority of dealerships that fit its acquisition criteria will be located in
medium-sized markets within the nine western states. If the Company were able
to acquire a larger dealer group to significantly expand revenues and
earnings in a single transaction, it would carefully consider the acquisition
even if not all of the stores in the group were in medium-sized markets or
dominated sales of a particular manufacturer.

Upon completing an acquisition, the Company immediately implements its
operating strategy, including increasing finance and insurance revenues,
selling more used vehicles and enhancing employee training. The Company also
installs its management information system in the acquired dealership as soon
as possible after the acquisition, which allows the Company's executive
officers, as well as the general manager, to carefully monitor each aspect of
the dealership's operations and performance. Whenever possible, the Company
assumes the management of a dealership's operations prior to closing of an
acquisition, enabling the Company to accelerate the implementation of its
operating strategy.

To date, a significant percentage of the Company's growth has resulted from
acquisitions and the Company believes that acquisition opportunities will
continue to be available to well-capitalized, experienced dealership
organizations. The Company believes that its management team has considerable
experience in acquiring dealerships and implementing its operating strategy to
improve the performance and profitability of such dealerships following the
acquisition. The Company is continuing its expansion in Oregon and has recently
signed a purchase agreement to acquire the sole Dodge franchise in Eugene,
Oregon. The Company has also begun expansion into selected markets in
California with the signing of a purchase agreement to acquire the sole Honda
franchise in Salinas, located near the Monterey Peninsula and the Toyota
dealership in Vacaville. See "Risk Factors -- Dependence on Acquisitions
for Growth; Manufacturers' Consent to Acquisitions" and "Pending
Acquisitions."

The Company maintains its principal executive offices at 360 E. Jackson
Street, Medford, Oregon 97501, and its telephone number is (541) 776-6899.

<PAGE>

THE OFFERING

<TABLE>

<S> <C>
Common Stock offered by the Company. . . . . . . . . . . . shares of Class A Common Stock (1)
--------

Common Stock to be outstanding after the Offering. . . . . shares of Class A Common Stock (1)
--------
shares of Class B Common Stock
--------

Use of proceeds . . . . . . . . . . . . . . . . . . . . . Acquisition of additional automobile dealerships, payment of
distributions to existing owners of previously undistributed
earnings, the repayment of debt working capital and general
corporate purposes. See "Use of Proceeds."

Proposed Nasdaq National Market symbol . . . . . . . . . . LITH

</TABLE>

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(1) Does not include and aggregate of _____________ shares of Class A Common
Stock reserved for issuance under the Company's 1996 Stock Incentive Plan,
____________ of which are subject to outstanding options as of the date
hereof. See "Management -- 1996 Stock Incentive Plan."

<PAGE>

SUMMARY COMBINED FINANCIAL AND OPERATING DATA

The following table presents (i) summary historical combined financial
and other data of the Company as of the dates and for the periods indicated
and (ii) summary pro forma financial and other data of the Company as of the
dates and for the periods indicated giving effect to the events described in
the Pro Forma Combined and Condensed Financial Data included elsewhere herein
as though they had occurred on the dates indicated therein. The summary pro
forma financial data are not necessarily indicative of operating results or
financial position that would have been achieved had these events been
consummated on the date indicated and should not be construed as
representative of future operating results or financial position. The
summary historical and pro forma financial data should be read in conjunction
with the financial statements and related notes thereto of the Company,
Roberts Dodge, Inc. and Sam Linder, Inc. and Melody Vacaville, Inc. with the
Pro Forma Combined and Condensed Financial Statements and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.

Six Months Ended
Years Ended December 31, June 30,
------------------------------------------------------------------- -------------------------
Pro Pro
Actual Forma(1) Actual Forma(1)
------------------------------------------------------------------- ----------------- -------
1991 1992 1993 1994 1995 1995 1995 1996 1996
------- ------- ------- ------- ------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data)
COMBINED STATEMENT OF
OPERATIONS DATA:
Total sales. . . . . . . . . $64,087 $79,439 $92,109 $109,322 $114,196 $ $54,396 $69,125 $
Gross profit(2). . . . . . . 11,064 14,022 17,260 18,905 20,943 9,763 11,456
Operating income . . . . . . (499) (102) 2,138 3,731 4,208 1,903 2,142
Income before minority
interest (2) (3). . . . . $ 229 $ 516 $ 1,786 $ 3,972 $ 4,153 $ 1,869 $ 1,903
------- ------- ------- -------- -------- --------- -------
------- ------- ------- -------- -------- --------- -------
PRO FORMA COMBINED AND
CONDENSED STATEMENT OF
OPERATIONS DATA (4):
Income . . . . . . . . . . . _ $ 947 $2,168 $2,076 $ $ 915 $ 968 $
Income per share(5). . . . . $
Weighted average shares
outstanding(5)
OTHER OPERATING DATA:
New automobiles sold . . . . 1,890 2,106 2,464 2,744 2,715 1,303 1,594
Used automobiles sold. . . . 3,403 3,934 4,718 5,206 5,144 2,560 3,202
Gross margin (FIFO basis)(2) 17.8% 18.3% 19.3% 17.9% 18.0% 17.7% 16.9%
Pre-tax margin before
minority interest
(FIFO basis)(2) . . . . . . 1.0% 1.2% 2.5% 4.2% 3.3% 3.1% 3.1%

As of June 30, 1996
-------------------------------------------
As of Pro Forma
December 31, 1995 Actual Pro Forma(4) As Adjusted (6)
------------------- ------ ------------ ---------------
(In thousands)
COMBINED BALANCE SHEET DATA:
Working capital. . . . . . . . . . . . . . . . . $7,764 $ 8,763 $ 6,857 $
Total assets . . . . . . . . . . . . . . . . . . 39,225 32,116 30,210
Total long-term debt . . . . . . . . . . . . . . 12,828 10,469 10,469
Total shareholders' equity . . . . . . . . . . . 854 1,906 --

</TABLE>
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(1) For information regarding the pro forma adjustments made to the Company's
historical financial data, see "Pro Forma Combined and Condensed Financial
Data."
(2) The Company utilizes the LIFO (Last In-First Out) accounting method. See
Note 2 of the Notes to the Company's Combined Financial Statements.
Commencing January 1, 1997, the Company intends to file an election with
the IRS to convert to a FIFO (First In-First Out) accounting method and
report its earnings for tax and financial statements on the industry
standard FIFO method. If the Company had previously utilized the FIFO
method gross profit for the five years ended December 31, 1995 would have
been $11.4 million, $14.5 million, $17.8 million, $19.5 million and $20.5
million, respectively and $9.6 million and $11.7 million for the six months
ended June 30, 1995 and 1996. Income before minority interest for the five
years ended December 31, 1995 would have been $613,000, $955,000, $2.3
million, $4.6 million, and $3.7 million, respectively and $1.7 million and
$2.1 million for the six months ended June 30, 1995 and 1996.

<PAGE>

(3) Prior to 1994, the Company paid cash bonuses to its shareholders and
members in amounts approximating their respective income tax liability on
their undistributed earnings ($532,000 in 1991, $640,000 in 1992, and $1.0
million in 1993), in addition to their normal salaries. These cash bonuses
are reflected in SG&A expenses. In 1994 and subsequent periods, cash to
meet the shareholders' and members' tax liabilities was distributed to the
shareholders and members as dividends. The Company believes that for a
fair evaluation of its historical performance, results for 1991, 1992 and
1993 should be adjusted to eliminate such bonus payments.
(4) The Company was an S Corporation and accordingly was not subject to federal
and state income taxes during the periods indicated. Pro forma net income
reflects federal and state income taxes as if the Company had been a C
Corporation, based on the effective tax rates that would have been in
effect during these periods. See "Company Restructuring and Prior S
Corporation Status" and Notes 1 and 9 of Notes to Company's Combined
Financial Statements.
(5) Historical earnings per share are not presented, as the historical capital
structure of the Company prior to the Restructuring and the Offering is
not comparable with the capital structure that will exist subsequent to
these events. Pro forma earnings per share are based upon the assumption
that ____________ shares of Common Stock are outstanding. This amount
represents the number of shares of Class B Common Stock owned by the
Company's stockholders immediately following the Restructuring but before
the Offering. See Note 1 of the Notes to the Company's Combined Financial
Statements for a calculation of weighted average shares outstanding.
(6) Adjusted to reflect the sale of Class A Common Stock offered hereby by the
Company (at an assumed initial public offering price of $_______ per
share and after deducting the underwriting discounts and estimated offering
expenses payable by the Company) and the application of the net proceeds
therefrom. See "Use of Proceeds."
(7) Does not include ____________ shares of Class A Common Stock subject to
options outstanding, as of the date of this Prospectus, under the Company's
1996 Stock Incentive Plan. See "Management -- 1996 Stock Incentive Plan."

<PAGE>

RISK FACTORS

THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN OF THE RISK FACTORS SET FORTH BELOW AND
ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER
AND EVALUATE ALL OF THE INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING THE
RISK FACTORS SET FORTH BELOW. THE COMPANY CAUTIONS THE READER THAT THIS LIST OF
RISK FACTORS MAY NOT BE EXHAUSTIVE.

DEPENDENCE ON ACQUISITIONS FOR GROWTH

The U.S. automobile industry is considered a mature industry in which
minimal growth is expected in unit sales of new vehicles. Sales of new vehicles
by the Company have fluctuated in the past and no assurance can be given that
the Company will be able to increase or maintain unit sales from year to year in
the future. Accordingly, a principal component of the Company's business
strategy is to make additional acquisitions in its existing and new geographic
markets. In 1996, the Company entered into agreements to purchase dealerships
in Eugene, Oregon, Salinas, California and Vacaville, California.

The Company's future growth and financial success will be dependent upon a
number of factors including, among others, the Company's ability to identify
acceptable acquisition candidates, consummate the acquisition of such
dealerships on terms that are favorable to the Company, obtain the consent of
automobile manufacturers, retain, hire and train professional management and
sales personnel at each such acquired dealership and promptly and profitably
integrate the acquired operations into the Company. No assurance can be given
that the Company will be able to improve the profitability of such acquired
dealerships. The Company may acquire dealerships which have net profit margins
which are materially lower than the Company's historical average net profit
margin. No assurance can be given that the Company will be able to improve the
net profit margins of such acquired dealerships. To manage its expansion, the
Company intends to evaluate on an ongoing basis the adequacy of its existing
systems and procedures, including, among others, its financial and reporting
control systems, data processing systems and management structure. No
assurance, however, can be given that the Company will adequately anticipate all
of the demands its growth will impose on such systems, procedures and structure.
Any failure to adequately anticipate and respond to such demands could have a
material adverse effect on the Company.

Acquisitions of additional dealerships will require substantial capital
investment and could have a significant impact on the Company's financial
position and operating results. Any such acquisitions may involve the use of
cash (including the net proceeds of this Offering) or the issuance of additional
debt or equity securities, which could have a dilutive effect on the
then-outstanding capital stock of the Company. Acquisitions could result in the
accumulation of substantial goodwill and intangible assets, which would result
in amortization charges to the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," and "Business -- Growth Strategy."

DEPENDENCE ON AUTOMOBILE MANUFACTURERS

The Company is significantly dependent upon its relationships with, and the
success of, certain automobile manufacturers or authorized distributors thereof
(collectively referred to herein as "manufacturers"). For the year ended
December 31, 1995, four manufacturers, Chrysler, Toyota, Honda and Saturn,
collectively accounted for 87% of the Company's new vehicle sales. The Company
may become dependent on additional manufacturers as a result of its acquisition
strategy and changes in the Company's sales mix.

Each of the Company's dealerships operates pursuant to a franchise
agreement with each respective manufacturer. Manufacturers exert significant
control over the Company's dealerships through the terms and conditions of the
franchise agreements, including provisions for termination or non-renewal for a
variety of causes. The Company from time-to-time has failed to comply with
certain provisions of its franchise agreements. These agreements generally
afford the Company a reasonable opportunity to cure such violations and no
manufacturer has terminated or failed to renew any franchise agreement. If a
manufacturer terminated or declined to renew one or more of the Company's
significant franchise agreements, such action could have a material adverse
effect on the Company and its business.

The Company also is dependent upon its manufacturers to provide it with
inventory of new vehicles. The most popular automobiles tend to provide the
Company with the highest profit margins and are the most difficult to obtain
from the manufacturers. In order to obtain sufficient numbers of these
automobiles, the Company may be required to purchase a larger number of less
desirable makes and models than it would otherwise purchase. Sales of less
desirable makes and models may result in lower profit margins than sales of the
more popular vehicles. If the

<PAGE>

Company is unable to obtain sufficient quantities of the most popular makes and
models, its profitability may be adversely affected.

With the exception of the Saturn franchise, the Company's franchise
agreements with the manufacturers do not give the Company the exclusive right to
sell that manufacturer's product within a given geographical area. Accordingly,
a manufacturer could grant another dealer a franchise to start a new dealership
in proximity to one or more of the Company's locations or an existing dealer
could move its dealership to a location which would be directly competitive with
the Company. Such an event could have a material adverse effect on the Company
and its operations.

The success of each of the Company's franchises is dependent to a great
extent on the success of the respective manufacturer. The success of the
Company is therefore linked to the financial condition, marketing, vehicle
demand, production capabilities and management of the manufacturers of which the
Company is a franchisee. Events such as labor strikes or negative publicity
concerning a particular manufacturer may adversely affect the Company. The
Company has attempted to lessen its dependence on any one manufacturer by
acquiring franchise agreements with a number of different domestic and foreign
automotive manufacturers.

MANUFACTURERS' CONSENT TO OFFERING

Each of the Company's franchise agreements requires the consent of the
manufacturer to any change in the ownership of the franchise. Accordingly, the
Company has requested a consent to the proposed Restructuring, of which this
Offering is a part, from each of the manufacturers for which it serves as a
franchised dealer. To date, only Chrysler, Toyota and Honda have indicated that
they will consent to the Restructuring and the Offering but with certain
conditions and limitations. The Company currently believes that certain
manufacturers, such as Ford and Saturn, will not consent to the Restructuring.
There can be no assurance that any manufacturer that does not consent to the
Restructuring, will not attempt to prevent the Restructuring, terminate
franchises, refuse to renew or approve franchises or take other action which
could have a material adverse effect on the Company and its operations.

The franchise laws of the states of Oregon (where most of the Company's
current dealerships are located) and California (where certain of the Company's
pending acquisitions are located) generally make it unlawful for a manufacturer
to unreasonably fail to give effect to, or attempt to prevent unreasonably, any
sale or transfer of the ownership or management of a dealership or the making of
reasonable changes in the capital structure of the dealership, provided that the
dealership meets any reasonable capital requirements of the manufacturer and
certain other conditions. See "Business -- Regulation." Until recently, all
manufacturers have expressed reluctance to permit the public ownership of
dealerships since franchises are awarded to a named individual to whom the
manufacturer looks to have direct control of the franchise and its operations.
In the attempt to address manufacturers' concerns regarding the effects of
public ownership of the Company, the Company's principals have established
Lithia Holding and a dual-class voting structure, designed to ensure that Sidney
B. DeBoer will have voting control of the Company for the foreseeable future.
See "Risk Factors -- Concentration of Voting Power; Anti-takeover Provisions",
"Principal Shareholders" and "Description of Capital Stock."

This Offering is conditioned upon the Company's receipt of consents from
Chrysler, Toyota and Honda, which collectively accounted for 78% of the
Company's new vehicle sales in 1995. There can be no assurance that the Company
will receive any other consents prior to the closing of the Offering or ever.
The Company may have to sell one or more of its franchises in order to avoid
termination by a manufacturer who objects to the Restructuring. In the event of
such a sale, no assurance can be given that the Company will be able to receive
full value for such franchises or favorable sales terms.

MANUFACTURERS' CONSENT TO ACQUISITIONS

The Company is required to obtain a consent from each relevant manufacturer
prior to the acquisition of a dealership franchise. In determining whether to
approve an acquisition, the manufacturers consider many factors, including the
financial condition and ownership structure of the acquiror. Because the
Company will be publicly owned after consummation of the Offering, the Company
believes that certain manufacturers, including Ford and Saturn, will not consent
to new acquisitions of their respective franchises at this time. Further,
manufacturers may impose conditions on granting their approvals for acquisitions
including a limitation on the number of such manufacturers' dealerships that may
be acquired by the Company. In particular, Toyota limits the number of
dealerships which may be owned by any one group to seven Toyota and three Lexus
dealerships and prohibits ownership of contiguous dealerships and the dualing of
the franchise with any other brand without its consent. The Company's ability
to meet manufacturers' requirements for acquisitions in the future will have a
direct bearing on the Company's ability to complete acquisitions and effect its
growth strategy.

<PAGE>

In determining whether to approve an acquisition by the Company, a
manufacturer also consider factors such as the Company's past performance
as measured by the manufacturer's Customer Satisfaction Index ("CSI") scores and
sales performance at the Company's existing franchises. On occasion, certain of
the Company's franchises have had CSI scores and sales performance numbers which
were below the manufacturers' standards. In particular, the Company has
relatively low sales performance numbers and below average CSI scores for its
General Motors (Pontiac) franchise which is currently housed with other brands
at one of its Medford stores. The low performance ratings of the Pontiac
franchise have been cited by General Motors as the reason for its recent denial
of the transfer of two dealerships the Company had contracted to purchase.
Although the Company is still seeking to secure approvals for these
acquisitions, the Company can give no assurance that it will be permitted to
acquire any new General Motors franchise in the future. See "Pending
Acquisitions."

LIMITATION ON STOCK OWNERSHIP; RESTRICTION ON TRANSFER

Certain manufacturers may impose limitations on the amount of the
Company's securities that may be owned by an individual or a group without the
prior approval of such manufacturers. For example, any acquisition of a 20% or
greater ownership share of the Company by any individual or entity without
Toyota's prior approval would be a violation of the Company's agreement with
Toyota. This restriction may discourage certain investors from acquiring an
ownership interest in the Company. Certain manufacturers also may require that
Lithia Holding and/or Sidney B. DeBoer maintain a certain ownership interest in
the Company. These restrictions will limit the Company's ability to raise
additional capital through the issuance of equity securities to the extent that
such issuance dilutes the ownership interest of Lithia Holding or Sidney B.
DeBoer below requisite thresholds. See "Risk Factors -- Availability and Cost
of Capital" below.

COMPETITION

The automobile dealership business is highly competitive and generally
fragmented. The new and used automobile sectors are characterized by a large
number of independent operators. In addition, certain regional and national car
rental companies operate retail used car lots to dispose of their used rental
cars. Private sales of used vehicles by previous owners is an additional source
of competition. Recently, consolidation has begun to accelerate in the new and
used automobile dealership business as national and regional companies have
begun to establish large used automobile "mega-stores." No assurances can be
made with respect to the Company's ability to continue to compete effectively
with other automobile dealers or such mega-stores. Furthermore, certain of the
Company's future competitors may be larger than the Company and have access to
greater financial resources. See "Business --Competition." In addition, no
assurance can be given that automobile manufacturers will not attempt to modify
the historical automobile manufacturer/dealer franchise system in such a way to
increase competition among dealers or market their vehicles through other
distribution channels.

CYCLICAL NATURE OF AUTOMOBILE SALES; CONCENTRATION OF OPERATIONS IN OREGON

The market for automobiles, particularly the new automobile market, is
subject to substantial cyclical variation. An increase in interest or tax
rates, or uncertainties regarding future economic conditions that affect
consumer spending habits, could materially adversely affect the Company's
results of operations. For the past few years, the industry has experienced
growth that may not be sustained in the future. A material decrease in
automobile sales, whether new or used, would be expected to adversely affect
the Company's results of operations.

Although the Company has pending acquisitions of two dealership in
California, all of its current operations are located in Oregon. For at least
the immediately foreseeable future, the Company's results of operations will be
substantially dependent upon general economic conditions, consumer spending
habits and preferences in Oregon and, to a lesser extent, California, as well
as various factors specific to such states such as tax rates and state and
local regulation. The Company's growth strategy is intended to reduce its
dependence on the Oregon economy; however, no assurance can be given that it
will succeed or that geographic expansion will adequately insulate it from the
adverse effects of local or regional economic conditions.

AVAILABILITY AND COST OF CAPITAL

The Company's new and used automobile sales operations require significant
capital resources. The Company's future operating results will be directly
related to the availability and cost of its capital. The principal sources of
financing for the Company's new and used automobile inventories have
historically been lines of credit from United States National Bank of Oregon
("U.S. Bank") and cash generated from operations. No assurance can be given
that the Company will be able to continue to obtain capital for its current or
expanded operations on terms and conditions acceptable to the Company.

<PAGE>

The Company's strategy of growth through the acquisition of additional
dealerships will require substantial capital. The Company anticipates that
approximately $_____ million of the net proceeds from this Offering will be used
to acquire other dealerships. If the Company's acquisition strategy is
successful, this capital will be fully invested within a limited period of time
and the Company will require additional capital in order to continue its
acquisition strategy. Such expansion and new acquisitions may involve using
cash, incurring additional debt or issuing Company's equity securities, which
could have a dilutive effect on the then-outstanding capital stock. The Company
may seek to obtain funds through borrowings from institutions or by the public
or private sale of its securities subsequent to this Offering. No assurance can
be given that the Company will be able to obtain capital to finance its growth
on terms and conditions acceptable to the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

DEPENDENCE ON KEY PERSONNEL

The Company's success will depend largely on the efforts and abilities of
its senior management, particularly Sidney B. DeBoer, the Company's President
and Chief Executive Officer, M. L. Dick Heimann, the Company's Executive Vice
President and Chief Operating Officer, and R. Bradford Gray, the Company's Vice-
President of Acquisitions. Further, as Mr. DeBoer and Mr. Heimann are
identified in each of the Company's dealership franchise agreements as the
individuals who control the franchises and upon whose financial resources and
management expertise the manufacturers have relied on when awarding such
franchises. The loss of either of those individuals could materially adversely
affect the Company's on-going relationship with its vehicle manufacturers. See
"Business -- Relationships with Automobile Manufacturers." In addition, the
Company places substantial responsibility on the general managers of its
dealerships for the profitability of such dealerships. As the Company expands,
it will need to hire additional managers, particularly as it acquires
dealerships in locations which are distant from the Company's headquarters in
Medford, Oregon. The market for qualified employees in the industry,
particularly for general managers, is highly competitive. The loss of the
services of key management personnel or the inability to attract additional
qualified managers could have a material adverse effect on the Company's
business and the execution of its growth strategy. The Company does not have
employment agreements with any of its key management personnel which would
restrict their ability to terminate their employment or compete with the
Company. The Company does not maintain key man insurance on either Messrs.
DeBoer or Heimann.

VARIABILITY OF QUARTERLY OPERATING RESULTS

The Company's business is seasonal with a disproportionate amount of sales
occurring in the second and third quarters. Due to such seasonality, the
Company will likely experience quarter-to-quarter fluctuations in its operating
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Selected Quarterly Results of Operations."

CONCENTRATION OF VOTING POWER; ANTI-TAKEOVER PROVISIONS

Upon conclusion of this Offering, Lithia Holding, of which Sidney B.
DeBoer, the Company's President, Chief Executive Officer and Chairman of the
Board, is the sole managing member, will hold all of the shares of outstanding
Class B Common Stock. Holders of Class B Common Stock are entitled to ten votes
for each share held, while holders of Class A Common Stock are entitled to one
vote per share held. Consequently, upon completion of the Offering, Lithia
Holding will control ______% of the aggregate number of votes eligible to be
cast by shareholders for the election of Directors and certain other shareholder
actions. Therefore, Lithia Holding will control the election of the Board of
Directors of the Company and will be in a position to control the policies and
operations of the Company. In addition, because Mr. DeBoer is the managing
member of Lithia Holding, he currently does and will control all of the
outstanding Class B Common Stock, thus allowing him to control the Company. See
"Principal Shareholders." So long as at least 16 2/3% of the total number of
shares outstanding are shares of Class B Common Stock, the holders of Class B
Common Stock will be able to control all matters requiring approval of 66 2/3%
or less of the aggregate number of votes. Absent increases in the number of
shares of Class A Common Stock or conversion of Class B Common Stock into Class
A Common Stock, the holders of shares of Class B Common Stock will be entitled
to elect all members of the Board of Directors and control all matters subject
to shareholder approval that do not require a class vote. See "Description of
Capital Stock."

The formation of Lithia Holding and the creation of the dual classes of
voting stock were undertaken by the principals of the Company to consolidate
voting control of the Company in an attempt to address concerns of manufacturers
who have expressed opposition to public ownership of franchised dealerships.

The Company's Board of Directors will have the authority to issue up to
15,000,000 shares of Preferred Stock and determine the price, rights,
preferences and privileges (including voting rights) of those shares without any
further vote or action by the shareholders. The rights of the holders of Common
Stock will be subject to, and may

<PAGE>

be materially adversely affected by the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. The Company has no
present plans to issue shares of Preferred Stock. The Company's Restated
Articles of Incorporation and Bylaws contain certain other provisions that may
have the effect of discouraging offers to acquire the Company. The Company will
also be subject to certain provisions of the Oregon Business Corporation Act
which may have the effect of discouraging attempts to acquire the Company
without the approval or cooperation of the Company's Board of Directors. See
"Description of Capital Stock."

FOREIGN SUPPLIERS

Certain of the automobiles purchased by the Company are currently imported
into the United States from Japan. In the future, automobiles that the Company
distributes may also be imported from other countries. In 1995, 45% of the
Company's new automobile purchases (net of fleet sales) were imported
automobiles. As a result, the Company's operations are subject to the customary
risks of purchasing merchandise that has been imported from abroad, including
fluctuation in the value of currencies, import duties, restrictions on the
transfer of funds, work stoppages and, in certain parts of the world, political
instability. The United States or the countries from which the Company's
products are or may be imported may, from time to time, impose new quotas,
duties, tariffs or other restrictions, or adjust presently prevailing quotas,
duty or tariff levels, which could affect the Company's operations and its
ability to purchase imported automobiles at current or increased levels.
Imports into the United States are also affected by the cost of transportation
and increased competition from greater production demands abroad.

SUPERVISION AND REGULATION; ENVIRONMENTAL MATTERS

The Company's operations are subject to extensive regulation, supervision
and licensing under various other federal, state and local statutes, ordinances
and regulations. While management believes that it maintains all requisite
licenses and permits and is in substantial compliance with all applicable
federal, state and local regulations, there can be no assurance that the Company
will be able to maintain all requisite licenses and permits, and the failure to
satisfy those and other regulatory requirements could have a material adverse
effect on the operations of the Company. The adoption of additional laws, rules
and regulations could also have a material adverse effect on the Company's
business. See "Business -- Regulation." Various state and regulatory agencies,
such as the Occupational Safety and Health Administration ("OSHA"), the United
States Environmental Protection Agency (the "EPA") and the Oregon Department of
Justice, have jurisdiction over the operation of the Company's dealerships,
repair shops, body shops and other operations, with respect to matters such as
consumer protection, workers' safety and laws regarding clean air and water.

As with automobile dealerships generally, and service, parts and body shop
operations in particular, the Company's business involves the use, handling and
contracting for recycling or disposal of hazardous or toxic substances or
wastes, including environmentally sensitive materials such as motor oil, waste
motor oil and filters, transmission fluid, antifreeze, freon, waste paint and
lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline
and diesel fuels. Accordingly, the Company is subject to regulation by federal,
state and local authorities establishing health and environmental quality
standards, and liability related thereto, and providing penalties for violations
of those standards. The Company is also subject to laws, ordinances and
regulations governing remediation of contamination at facilities it operates or
to which it sends hazardous or toxic substances or wastes for treatment,
recycling or disposal. The Company believes that it does not have any material
environmental liabilities and that compliance with environmental laws,
ordinances and regulations will not, individually or in the aggregate, have a
material adverse effect on the Company's results of operations or financial
condition. However, soil and groundwater contamination has been known to exist
at certain properties leased by the Company. The Company has also been required
to remove aboveground and underground storage tanks containing hazardous
substances or wastes. Environmental laws and regulations are complex and
subject to frequent change. There can be no assurance that compliance with
amended, new or more stringent laws or regulations, stricter interpretations of
existing laws or the future discovery of environmental conditions will not
require additional expenditures by the Company, or that such expenditures would
not be material.

SHARES ELIGIBLE FOR FUTURE SALE

No accurate prediction can be made as to the effect, if any, that future
sales of Class A Common Stock, or the availability of shares for future sales,
will have on the prevailing market price for the Class A Common Stock prevailing
from time to time. Sales of a substantial amount of Class A Common Stock in the
public market following this Offering, or the perception that such sales could
occur, could adversely affect the prevailing market price for the Class A Common
Stock. None of the shares of Common Stock to be held by Lithia Holding
immediately after this Offering will be eligible for sale pursuant to Rule 144
until _____________, 1998. All of

<PAGE>

such shares are subject to a lock-up agreement between the Underwriters and
Lithia Holding for a period of 180 days following the date of this Prospectus.
As of the date of this Prospectus, options to acquire ________ shares of Common
Stock, which were granted at prices between $_______ and $______ per share, are
fully vested and exercisable. See "Management -- 1996 Stock Incentive Plan" and
"Shares Eligible for Future Sale."

NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this Offering, there has been no public market for any of the
Company's securities, and no assurance can be given that an active trading
market will develop after this Offering or that the Class A Common Stock offered
hereby will trade at or above the initial public offering price. The initial
public offering price has been determined by negotiations among the Company and
the Representatives (as defined herein) of the Underwriters. See
"Underwriting." Quarterly and annual operating results of the Company,
variations between such results and the results expected by investors and
analysts, changes in local or general economic conditions or developments
affecting the automobile industry, the Company or its competitors could cause
the market price of the Class A Common Stock to fluctuate substantially. As a
result of these factors, as well as other factors common to initial public
offerings, the market price could fluctuate substantially from the offering
price.

DILUTION; LACK OF DIVIDENDS

The public offering price is substantially higher than the tangible book
value per share of Class A Common Stock. Investors purchasing shares of Class A
Common Stock in this Offering will therefore incur immediate, substantial
dilution. See "Dilution." Further, the Company has no plans to pay any cash
dividends in the immediate future. See "Dividend Policy."

COMPANY RESTRUCTURING AND PRIOR S CORPORATION STATUS

The Company was founded by Walt DeBoer in 1946 as a single Dodge dealership
in Ashland, Oregon. In 1968, upon the death of Walt DeBoer, his son, Sidney B.
DeBoer, assumed ownership and control of the business and incorporated the
Company in Oregon. M. L. Dick Heimann joined the Company in 1970 and serves as
its Executive Vice President and Chief Operating Officer. As the Company
expanded, it formed subsidiaries and affiliated entities to hold certain
dealerships and real property on which the Company operates.

Currently, the Company is an S Corporation which is owned 62.5% by Sidney
D. DeBoer and 37.5% by M. L. Dick Heimann. In addition, there are five other
affiliated S Corporations which are owned 62.5% by Mr. DeBoer and 37.5% by
Mr. Heimann: (i) Lithia Rentals, Inc., (ii) Lithia Leasing, Inc., (iii)
Lithia Chrysler Plymouth Jeep Eagle, Inc., (iv) Discount Auto & Truck Rental,
Inc. and Lithia TKV, Inc. There are also three limited liability companies
which are owned as indicated: (i) Lithia TLM, L.L.C. (80% by Lithia Motors,
Inc., 19.99% by Stephen R. Philips and 0.01% by Mr. DeBoer), (ii) Lithia's
Grants Pass Auto Center, L.L.C. (75% by Lithia Motors, Inc, 24.99% by R.
Bradford Gray and 0.01% by Mr. DeBoer) and (iii) Lithia Dodge, L.L.C. (75% by
Lithia Motors, Inc, 24.99% by Mr. Gray and 0.01% by Mr. DeBoer).

Prior to completion of the Offering, the Company and these other
affiliated entities will consummate a restructuring (the "Restructuring")
which will result in each of the Company's dealerships and operating
divisions becoming direct or indirect wholly-owned subsidiaries of the
Company with Lithia Holding owning all of the outstanding Class B Common
Stock of the Company. All current shareholders or members will exchange
their interests in the Company and the affiliated entities for shares of
Lithia Holding with the exception of (i) the interest in Lithia TLM, L.L.C.
held by Mr. Philips which will be purchased by Lithia TLM, L.L.C. for
$700,000, the price paid by Mr. Philips for his interest, through the payment
of $135,000 cash and the cancellation of a note in the remaining principal
amount of $565,000 and (ii) Lithia TKV, Inc. which will be purchased by the
Company for $3.9 million, the amount contributed by Messrs. DeBoer and Heimann
on November ___, 1996 for all of its common stock. Lithia TKV, Inc.;
was formed to acquire Melody Vacaville, Inc.

The Company and the other corporations and limited liability companies
which are parties to the Restructuring have been treated for federal and state
income tax purposes as S Corporations under subchapter S of the Internal Revenue
Code of 1986, as amended (the "Code") or as partnerships. As a result of the
tax status of the Company and these affiliated entities, their stockholders or
members (the "Principal Owners"), rather than the Company and such other
entities, have been taxed directly on the earnings of such entities for federal
and state income tax purposes. In connection with the Restructuring, the tax
status of the Company and these affiliated entities as S Corporations or as
partnerships will terminate and they will thereafter be subject to federal and
state income tax at applicable C Corporation rates.

<PAGE>

The Company has distributed to the Principal Owners promissory notes
(the "Dividend Notes") in the aggregate amount of $3.9 million, representing
approximately all of the previously taxed undistributed earnings of the
Company through December 31, 1995. In 1994, the Company distributed total
tax payment dividends of $2.0 million to the Principal Owners. The Dividend
Notes bear interest at 9% per annum and are payable in ten equal annual
installments beginning one year and ten days after demand by the noteholders.
Shortly before the completion of the Offering, the Company and the other
affiliated entities each intend to declare additional distributions to the
Principal Owners in an aggregate amount equal to the undistributed taxable
income of the Company or such other entities, as the case may be, from
January 1, 1996 through the effective date of the Restructuring. The Company
intends to prepay the Dividend Notes at the time of the purchase
of Melody Vacaville, Inc. permitting Messrs. DeBoer and Heimann to fund
Lithia TKV, Inc. to complete the closing of the acquisition and make the
final distribution of earnings from a portion of the proceeds of the Offering
shortly after the closing of the Offering. Toyota Motors Distribution, Inc.
requires that each distributorship be held as a separate legal entity.
Accordingly, Lithia TKV, Inc. has been formed to acquire Melody Vacaville
but because of the Company's current subchapter S tax status, it cannot hold
the shares until after the Restructuring. The total amount to be paid to the
Principal Owners as the result of such distributions is expected to be
approximately $6.0 million, but the final amount may be more or less than
this estimate since it is dependent upon the earnings of the Company and the
other affiliated entities through the effective date of the Restructuring.
See "Use of Proceeds."

<PAGE>

PENDING ACQUISITIONS

In furtherance of the Company's growth strategy, the Company has signed
definitive agreements to purchase three additional dealerships: Roberts Dodge,
Inc., a Dodge dealer in Eugene, Oregon; Sam Linder, Inc., a Honda dealer in
Salinas, California and Melody Vacaville, Inc., a Toyota and Kia dealer in
Vacaville, California, (referred to herein as the "Pending Acquisitions").
The consummation of the Melody Vacaville and Roberts Dodge acquisition are a
condition for the consummation of the Offering.

ROBERTS DODGE, INC. The Company has agreed to pay $2.35 million for
Roberts Dodge, plus an additional amount for the new car and parts inventory
valued at seller's cost estimated to be approximately $1.9 million. The
Company will also purchase the used vehicle inventory, estimated to be
approximately $1.1 million, if the parties can agree to a price at the time
of closing. If no agreement can be reached, a used vehicle inventory will be
acquired from other sources. The purchase price is payable as (i) $1.75
million plus the cost of the parts and the new (and any used) vehicle
inventory acquired, in cash at closing and (ii) a promissory note for
$500,000, with interest at 8.5% per annum, payable in equal monthly
installments for five years. The Company is not assuming any material
liabilities as part of the acquisition. In addition, the Company will
purchase the real property on which the dealership is located for $2.33
million, payable in cash at closing. The Company may assign its obligation
to purchase the real estate to Lithia Properties which, in such event, would
lease the property to the Company or its subsidiary operating Roberts Dodge.
See "Business--Properties" and "Certain Relationships and Related
Transactions." Closing is expected to occur on or before November 30, 1996.
The purchase is subject to normal closing conditions and the approval of
Chrysler. The Company expects to obtain such approval in due course, but no
assurances can be made in that regard. Roberts Dodge had $31.9 million in
sales in 1995 and is the sole Dodge dealer in Eugene.

SAM LINDER, INC. The Company has agreed to pay approximately $1.15
million in cash for Sam Linder Honda, plus an additional amount for the new
vehicle and parts inventory valued at seller's costs and the used vehicle
inventory at the KELLY WHOLESALE BLUE BOOK value less any reconditioning
costs, estimated to be approximately $2.1 million. The Company is not
assuming any material liabilities as part of the acquisition. The Company
will also purchase the real property and improvements utilized for the new
vehicle store prior to December 31, 1997 for $2.1 million. The Company may
assign its obligation to purchase the real estate to Lithia Properties which,
in such event, would lease the property to the Company or its subsidiary
operating Sam Linder Honda. See "Business--Properties and "Certain
Relationships and Related Transactions." Closing is expected to occur early in
1997. The purchase is subject to normal closing conditions and the approval
of Honda Motor Company, Inc. The Company expects to obtain such approval in
due course, but no assurances can be made in that regard. Sam Linder, Inc.
also has a Cadillac and Oldsmobile dealership franchise at this location
which is expected to be sold and transferred to a third party purchaser. Sam
Linder, Inc. had $26.9 million in sales in 1995 and is the sole Honda dealer
in Salinas. Cadillac and Oldsmobile's new vehicle sales accounted for less
than 15% of its 1995 revenues.

MELODY VACAVILLE, INC. The Company has agreed to pay approximately $2.43
million in cash for Melody Toyota and Kia, plus an additional amount for the
new vehicle and parts inventory valued at seller's costs and the used vehicle
inventory at the KELLY WHOLESALE BLUE BOOK value less any reconditioning
costs, estimated to be approximately $4.2 million. The Company is not
assuming any material liabilities as part of the acquisition. In addition,
the Company will lease the real property and improvements utilized by the
dealership from a third party at a current monthly rental rate of
approximately $35,000. Closing is expected to occur on or before November 15,
1996. The purchase is subject to normal closing conditions and the approval
of Toyota Motor Distributors, Inc. The Company expects to obtain such
approval in due course, but no assurances can be made in that regard. Melody
Vacaville, Inc. had $27.8 million in sales in 1995 and is the sole Toyota and
Kia dealer in Vacaville.

Historical financial statements for Roberts Dodge, Inc., Sam Linder, Inc.
and Melody Vacaville, Inc. are included in this Prospectus beginning at page
F-20. Pro forma financial statements showing the effect on the Company of
all of the above acquisitions as if they had occurred as of January 1, 1995
and January 1, 1996 are included in this Prospectus beginning at page 21.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Class A Common Stock
offered hereby (after deducting underwriting discounts and commissions and
estimated Offering expenses payable by the Company) are estimated to be
$____________ ($____________ if the Underwriters' over-allotment option is
exercised in full), assuming an initial offering price of $__________ per share.

The Company anticipates that the net proceeds will be used for the
following purposes: (i) up to approximately $ million for the
acquisition of additional automobile dealerships, including approximately $
million to acquire the dealerships in Eugene, Oregon, Salinas, California and
Vacaville, California, which are subject to definitive purchase agreements.
See "Pending Acquisitions"; and (ii) approximately $6.0 million to purchase
Litria TKV Inc., at cost, from Sidney B DeBoer and M.L. Dick Heimann, to
prepay notes to certain other related parties and to distribute current
earnings of the Company to the Principal Owners. See "Company Restructuring
and Prior S Corporation Status" and "Certain Relationships and Related
Transactions." The balance of the net proceeds will be used for working
capital and general corporate purposes.

Pending utilization of the net proceeds for the purposes set forth herein,
the Company intends to reduce the outstanding balances of existing lines of
credit, including the Company's flooring line of credit (the "Flooring Line")
with U.S. National Bank of Oregon, and its line of credit obtained to close the
acquisitions described herein (the "Capital Line"). The Flooring Line bears
interest at the prime rate. The effective annual interest rate on such
indebtedness was 8.25% at June 30, 1996. The Capital Line bears interest at
prime plus 0.25 percent. See Notes 6 and 12 of Notes to the Company Combined
Financial Statements.

<PAGE>

After completion of this Offering, the Company intends to re-borrow under
the Flooring Line and other lines of credit as necessary from time to time to
fund purchases of new and used automobiles and additional dealerships.

DIVIDEND POLICY

Other than the dividends and distributions paid to the Principal Owners
referred to in "Company Restructuring and Prior S Corporation Status," the
Company has no present intention to declare or pay cash dividends in the
foreseeable future after the Offering. The Company intends to retain any
earnings that it may realize in the future to finance its operations. The
payment of any future dividends will be subject to the discretion of the Board
of Directors of the Company and will depend upon the Company's results of
operations, financial position and capital requirements, general business
conditions, restrictions imposed by financing arrangements, if any, legal
restrictions on the payment of dividends and other factors the Board of
Directors deems relevant.

<PAGE>

CAPITALIZATION

The following table sets forth the short-term debt and total combined
capitalization of the Company at June 30, 1996 (i) on an actual historical
basis, (ii) pro forma to include the effect of the Restructuring and (iii) as
adjusted to reflect the sale of _______ shares of Class A Common Stock pursuant
to the Offering and the application of the estimated net proceeds therefrom.
This table should be read in conjunction with the Combined Financial Statements
and related notes and "Pro Forma Combined and Condensed Financial Data"
appearing elsewhere in this Prospectus. See also, "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

June 30, 1996
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------------------------------
(Dollars in thousands)
Flooring notes payable . . . . . . . . . . . $13,723 $13,723 $
Current maturities of long-term debt . . . . 2,207 2,207
------ ------ ------
Total short-term debt. . . . . . . . . . $15,930 $15,930 $
------ ------ ------
------ ------ ------
Long-term debt(2). . . . . . . . . . . . . . $ 8,262 $11,000 $
Minority interest. . . . . . . . . . . . . . 1,029 1,029
Owners' equity . . . . . . . . . . . . . . . 1,906 --- ---
Shareholders' equity:
Preferred Stock, no par value,
15,000,000 shares authorized, none
outstanding . . . . . . . . . . . . . --- --- --
Common Stock
Class A Common Stock, no par value,
100,000,000 shares authorized, none
outstanding, actual and pro forma;
_____, pro forma as adjusted(1) . . --- ---

Class B Common Stock, no par value,
25,000,000 shares authorized,
________ outstanding, actual,
pro forma and pro forma as
adjusted. . . . . . . . . . . . . . 801
Retained earnings (deficit) (3). . . . . --- (1,230)
------ ------ ------
Total shareholders' equity(3)/
owners' equity. . . . . . . . . . . 1,906 (429)

Total capitalization . . . . . . . . . . . . $11,197 $11,600 $
------ ------ ------
------ ------ ------

- -----------------------
(1) Does not include an aggregate of __________ shares of Class A Common Stock
reserved for issuance under the Company's 1996 Stock Incentive Plan,
_______of which are subject to outstanding options as of the date hereof.
See "Management -- 1996 Stock Incentive Plan."
(2) Includes $3.3 million of notes payable to Principal Owners related to S
Corporation distributions.
(3) The Company utilizes the LIFO (Last In-First Out) method of accounting for
financial statement and tax reporting (See Note 2 of the Notes to the
Company's Combined Financial Statements). Commencing January 1, 1997, the
Company intends to file an election with the IRS to convert to a FIFO
(First In-First Out) accounting method and change its method of accounting
to the industry standard, FIFO accounting method for financial statement
and tax reporting. Had the Company used a FIFO method in 1996, total
shareholders' equity at June 30, 1996 would have been $3.2 million higher.

DILUTION

The pro forma net tangible book value of the Company's Common Stock at June
30, 1996, was $________, or $_____ per share. Pro forma net tangible book value
per share of Common Stock represents the Company's total tangible assets less
total liabilities, divided by the number of shares of Common Stock outstanding,
assuming the Restructuring has taken place. Without taking into account any
change in pro forma net tangible book value subsequent to June 30, 1996, other
than to give effect to the Offering by the Company of _________________ shares
of Class A Common Stock to the public at an assumed initial public offering
price of $___ per share and the receipt by the Company of the net proceeds
therefrom (after deducting the Underwriters' discount and estimated expenses of
the public offering payable by the Company), the pro forma net tangible book
value of the Company would have been $_____ per share. This amount represents
an immediate increase in the pro forma net tangible book value of $_____ per
share to the existing shareholders and an immediate dilution of $_____ per share
to new investors purchasing shares of Class A Common Stock at the initial public
offering price. The Company utilizes the LIFO method of accounting (See Note 2
of the Notes to the Company's Combined Financial Statements). Had the Company
used a FIFO method, total shareholders' equity at June 30, 1996 would have been
$3.2 million higher.

<PAGE>

The following table calculates dilution by subtracting net tangible book
value per share after the Offering on both a LIFO and a FIFO basis, from the
initial public Offering price.

LIFO BASIS FIFO BASIS
---------------------------- ------------------------
<S> <C> <C> <C> <C>
Assumed initial public offering price per share. . . . . . $ $
-------- --------
Pro forma net tangible book value
as of June 30, 1996. . . . . . . . . $ $
--------- --------
Increase attributable to
new investors. . . . . . . . . . . . $ $
--------- --------

Pro forma net tangible book value after Offering . . . . . $ $
-------- --------
Dilution per share to new investors. . . . . . . . . . . . $ $
-------- --------

</TABLE>

The following table summarizes, on a pro forma basis as of June 30, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by the
existing stockholders and by purchasers of the shares offered by the Company
hereby (at an assumed initial public offering price of $_________ per share).

Average
Shares Purchased(1) Cash Paid(2) Price
------------------- ------------------
Number Percent Amount Percent PerShare
-------- --------- -------- --------- --------
Existing shareholders. . . . % $ % $
New investors. . . . . . . . % $ % $

------ ------ ------- ------ -------
Total. . . . . . . . . . 100.0% 100.0%
------ ------ ------- ------ -------
------ ------ ------- ------ -------

- --------------------

(1) Does not include an aggregate of ____________shares of Class A Common Stock
reserved for issuance under the Company's 1996 Stock Incentive Plan,______
of which are subject to options outstanding as of June 30, 1996, with a
weighted average exercise price of $____ per share. If all such options
were deemed to be exercised and proceeds were received therefrom, dilution
per share to new investors would be $_________ (LIFO Basis) or $______ (FIFO
Basis) See "Management -- 1996 Stock Incentive Plan."
(2) Does not reflect deduction of the underwriting discount or estimated
Offering expenses.

SELECTED COMBINED FINANCIAL DATA

The following selected combined financial data presented below under the
captions "Combined Statement of Operations Data" and "Combined Balance Sheet
Data" for and as of the end of each of the years in the four year period ended
December 31, 1995, are derived from the combined financial statements of Lithia
Motors, Inc. and its affiliated companies, which financial statements have been
audited by KPMG Peat Marwick LLP, independent auditors. The following selected
combined historical financial information at or for the six months ended June
30, 1995 and June 30, 1996 has been derived from unaudited financial statements
that, in the opinion of management of the Company, reflect all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial information for such periods and as of such dates. The combined
historical results for the six months ended June 30, 1996 are not necessarily
indicative of results for a full fiscal year. The combined financial statements
as of December 31, 1994 and 1995 and for each of the years in the three year
period then ended, and as of June 30, 1996 and for the six months ended, June
30, 1995 and 1996 and the reports thereon, are included elsewhere in this
Prospectus. The following combined selected financial data should be read in
conjunction with the Combined Financial Statements, including the notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere herein.

<TABLE>
<CAPTION>
Six Months Ended
As of Year Ended December 31, June 30,
---------------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
SALES:
New vehicles . . . . . . . $ 28,946 $ 34,479 $ 42,663 $ 51,154 $ 53,277 $ 25,081 $ 31,482
Used vehicles. . . . . . . 23,369 29,930 34,986 42,381 44,061 20,995 28,395
Other operating revenues . 11,722 15,030 14,460 15,787 16,858 8,320 9,248
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total sales . . . . . . 64,087 79,439 92,109 109,322 114,196 54,396 69,125
Cost of sales. . . . . . . . 53,023 65,417 74,849 90,417 93,253 44,633 57,669
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit(1). . . . . . . 11,064 14,022 17,260 18,905 20,943 9,763 11,456
Selling, general and
administrative(2). . . . . 11,563 14,124 15,122 15,174 16,735 7,860 9,314
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss). . . (499) (102) 2,138 3,731 4,208 1,903 2,142
Interest income. . . . . . . 308 161 216 99 179 65 93
Interest expense . . . . . . (784) (743) (1,375) (955) (1,390) (583) (649)
Other income, net. . . . . . 1,204 1,200 807 1,097 1,156 484 382
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before minority
interest . . . . . . . . . 229 516 1,786 3,972 4,153 1,869 1,903
Minority interest. . . . . . (49) (168) (233) (458) (778) (383) (317)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (1),(2) . . . . . $ 180 $ 348 $ 1,553 $ 3,514 $ 3,375 $ 1,486 $ 1,586
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
Income before taxes and
minority interest,
as reported. . . . . . . . $ 1,786 $ 3,972 $ 4,153 $ 1,869 $ 1,903
Pro forma provision
for taxes(3) . . . . . . . 697 1,521 1,598 719 742
Pro forma minority
interest . . . . . . . . . 142 283 479 235 193
---------- ---------- ---------- ---------- ----------
Pro forma net income . . . . $ 947 $ 2,168 $ 2,076 $ 915 $ 968
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>

<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------------- As of
1991 1992 1993 1994 1995 June 30, 1996
---------- ---------- ---------- ---------- ---------- ---------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Working capital. . . . . . . . . . $ 2,339 $ 1,369 $ 13 $ 6,034 $ 7,764 $ 8,763
Total assets . . . . . . . . . . . 21,080 24,955 33,381 36,656 39,225 32,116
Total long-term debt . . . . . . . 4,222 5,424 6,153 8,369 12,828 10,469
Total shareholders' equity . . . . 1,628 1,238 1,184 2,800 854 1,906

</TABLE>
- --------------------

(1) The Company utilizes the LIFO (Last In-First Out) accounting method. See
Note 2 of the Notes to the Company's Combined Financial Statements.
Commencing January 1, 1997, the Company intends to file an election with
the IRS to convert to a FIFO (First In-First Out) accounting method for tax
and financial statement reporting and report its earnings on the FIFO
method. If it had previously utilized the FIFO method, gross profit for
the five years ended December 31, 1995 would have been $11.4 million,
$14.5 million, $17.8 million, $19.5 million and $20.5 million, net income
for the five years ended December 31, 1995 would have been $527,000,
$733,000, $2.1 million, $4.1 million, and $3.0 million, respectively and
$1.4 million and $1.8 million for the six months ended June 30, 1995 and
1996.

(2) Prior to 1994, the Company and it affiliated entities paid cash bonuses to
their shareholders and members in amounts approximating their respective
income tax liability on their undistributed earnings ($532,000 in 1991,
$640,000 in 1992, and $1.0 million in 1993), in addition to their normal
salaries. These cash bonuses are reflected in the SG&A expenses above. In
1994 and subsequent periods, cash to meet the shareholders' and members'
tax liabilities was distributed to the shareholders and members as
dividends.

<PAGE>

The Company believes that for a fair evaluation of its historical
performance, results for 1991, 1992 and 1993 should be adjusted to
eliminate such bonus payments.

(3) The Company was an S Corporation and accordingly was not subject to federal
and state income taxes during the periods indicated. Pro forma net income
reflects federal and state income taxes as if the Company had been a
C Corporation, based on the effective tax rates that would have been in
effect during these periods. See "Company Restructuring and Prior
S Corporation Status" and Notes 1 and 9 of Notes to Company's Combined
Financial Statements.

<PAGE>

PRO FORMA COMBINED AND CONDENSED FINANCIAL DATA

The following unaudited pro forma combined and condensed statements of
operations for the year ended December 31, 1995 and for the six months ended
June 30, 1996 reflect the historical accounts of the Company for those
periods adjusted to give pro forma effect to the Pending Acquisitions, the
conversion to the FIFO accounting method (to be effective January 1, 1997),
the Restructuring and the Offering, as if these transactions had occurred at
the beginning of each period presented.

The following unaudited pro forma combined balance sheet as of June 30,
1996 reflects the historical accounts of the Company as of that date adjusted
to give pro forma effect to the Pending Acquisitions, the conversion to the
FIFO accounting method (to be effective January 1, 1997), the Restructuring,
and the Offering, as if they had occurred as of June 30, 1996.

The unaudited pro forma combined and condensed financial data and
accompanying notes should be read in conjunction with the Combined Financial
Statements of the Company and the related notes as well as the combined
financial statements and related notes of Roberts Dodge, Inc., Sam Linder,
Inc., and Melody Vacaville, Inc., all of which are included elsewhere in this
Prospectus. The Company believes that the assumptions used in the following
statements provide a reasonable basis on which to present the pro forma
financial data. The pro forma combined financial data is provided for
informational purposes only and should not be construed to be indicative of
the Company's financial condition or results of operations had the
transactions and events described above been consummated on the dates assumed
and are not intended to project the Company's financial condition on any
future date or results of operations for any future period.

PRO FORMA COMBINED AND CONDENSED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended December 31, 1995
--------------------------------------------------------------------------------------
Actual
-------------------------------------------
Roberts Sam Melody
Dodge, Linder, Vacaville Pro Forma Pro Forma Pro
Company(1) Inc.(1) Inc.(1) Inc.(1) Adjustments Acquisitions Forma
---------- -------- ---------- ---------- ------------ ------------ ---------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales:
New vehicle. . . . . . . $ 53,277 $15,848 $12,656 $18,126 $(3,069)(6) $ 96,838 $
Used vehicle . . . . . . 44,061 12,151 10,234 6,015 - 72,461
Other operating
revenue. . . . . . . . 16,858 3,895 3,967 3,669 (518)(6) 27,871
-------- ------- ------- ------- ------- -------- --------
Total sales. . . . . 114,196 31,894 26,857 27,810 (3,587)(6) 197,170
Cost of sales. . . . . . . 93,253 27,270 22,646 24,858 (2,799)(6)(7) 165,228
-------- ------- ------- ------- ------- -------- --------

Gross profit . . . . . . . 20,943 4,624 4,211 2,952 (788) 31,942
Selling, general and
administrative . . . . . 16,735 3,828 3,928 4,254 (412)(2)(3)(6) 28,333
-------- ------- ------- ------- ------- -------- --------
Operating income (loss). . 4,208 796 283 (1,302) (376) 3,609
Other income (expense),
net. . . . . . . . . . . (55) (527) (347) (310) 1,358 (1)(2)(6) 119
-------- ------- ------- ------- ------- -------- --------
Income (loss) before
minority interest and
income taxes . . . . . . 4,153 269 (64) (1,612) 982 3,728
-------- ------- ------- ------- ------- -------- --------

Minority interest. . . . . (778) - - - - (778)
Income taxes . . . . . . . - - - - - -
-------- ------- ------- ------- ------- -------- --------
Net income (loss). . . . . 3,375 $ 269 $ (64) $(1,612) $ 982 $ 2,950 $ (3)
-------- ------- ------- ------- ------- -------- --------
-------- ------- ------- ------- ------- -------- --------
Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5)
Weighted average shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
--------
--------
</TABLE>

<PAGE>

PRO FORMA COMBINED AND CONDENSED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
Six Months Ended June 30, 1996
--------------------------------------------------------------------------------------
Actual
-------------------------------------------
Roberts Sam Melody
Dodge, Linder, Vacaville Pro Forma Pro Forma Pro
Company(1) Inc.(1) Inc.(1) Inc.(1) Adjustments Acquisitions Forma
---------- -------- ---------- ---------- ------------ ------------ ---------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales:
New vehicles . . . . . . $31,482 $ 9,771 $ 6,456 $ 9,147 $(1,013)(6) $ 55,843 $
Used vehicles. . . . . . 28,395 5,838 4,519 3,569 - 42,321
Other operating
revenues . . . . . . . 9,248 2,074 1,893 1,949 (242)(6) 14,922
------- ------- ------- ------- ------- -------- --------
Total sales. . . . . 69,125 17,683 12,868 14,665 (1,255)(6) 113,086
Cost of sales. . . . . . . 57,669 15,015 10,809 13,227 (1,386)(6)(7) 95,334
------- ------- ------- ------- ------- -------- --------
Gross profit . . . . . . . 11,456 2,668 2,059 1,438 131 17,752
Selling, general and (8)
administrative . . . . . 9,379 2,165 1,912 1,786 (339)(2)(3)(6) 14,903
------- ------- ------- -------- ------- --------
Operating income (loss). . 2,077 503 147 (348) 470 2,849
Other income (expense),
net. . . . . . . . . . . (174) (231) (103) (144) 686 (1)(2)(6) 34
------- ------- ------- -------- ------- -------- --------
Income (loss) before
minority interest and
income taxes . . . . . . 1,903 272 44 (492) 1,156 2,883
------- ------- ------- -------- ------- -------- --------
Minority interest. . . . . (317) - - - - (317) -
Income taxes . . . . . . . - - - - - - -
------- ------- ------- -------- ------- -------- --------
Net income (loss). . . . . $ 1,586 $ 272 $ 44 $ (492) $ 1,156 $ 2,566 $
------- ------- ------- -------- ------- -------- --------
------- ------- ------- -------- ------- -------- --------
Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
--------
--------
Weighted average shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>

- --------------------

(1) The Company will use the proceeds from the Offering primarily to acquire
dealerships in the future. The pro forma statements of operations shown
above assumes that approximately $ million will be used to acquire the
three new dealerships. Until the remaining proceeds are used to acquire
other dealerships, the Company intends to reduce floor plan debt with its
bank by approximately $ million [and to invest the remaining proceeds of
approximately $________ million in other cash equivalents]. See "Use of
Proceeds." Partially offsetting the decrease in floor plan financing will
be an increase in floor plan debt to finance the purchase of new vehicle
inventory related to the two new dealerships. See Footnotes 2 and 3 to the
Pro Forma Combined Balance Sheet below. Interest expense associated with
such debt is reflected in the acquired companies' actual results of
operations for each period.

(2) Reflects the Company's estimate of the net deductions from selling, general
and administrative expenses and reductions in interest expense which would
have occurred if the Offering had been effected as of the beginning of each
period and consists of (a) an elimination of certain owners tax payment
bonuses and (b) a net reduction in interest expense reflecting a lower
interest rate on floor plan debt available to the Company on the acquired
companies' flooring debt. The reduction in expenses include:

Year Ended Six Months Ended
December 31, 1995 June 30, 1996
----------------- ----------------
Management compensation. . . . . . $277,000 $292,000
Interest expense . . . . . . . . . $ 97,000 $ 49,000

The net reduction in interest expense was calculated based on an average
floor plan debt of approximately $6.5 million at the interest rate
differential in effect during each respective period.

(3) Reflects amortization as if Roberts Dodge, Inc., Sam Linder, Inc. and
Melody Vacaville, Inc. had been acquired as of January 1, 1995. The pro
forma amortization for the year ended December 31, 1995 and the six-month
period ended June 30, 1996 reflects additional amortization of
approximately $111,000 and $55,500, respectively, associated with
intangible assets, which assets consist largely of goodwill, resulting
from the acquisition of Roberts Dodge, Sam Linder, Inc. and Melody
Vacaville, Inc. Such costs are being amortized over a 40-year period.
See Note 4 to Pro Forma Combined and Condensed Balance Sheet

(4) Pro forma earnings per share are based upon the assumption that __________
shares of Common Stock are outstanding for each period. This amount
represents the shares to be issued in the Offering (_________) and the
number of shares of Common Stock owned by the Company's stockholders
immediately following the Restructuring (__________).

<PAGE>

(5) The Company and Pending Acquisitions are S Corporations and accordingly not
subject to federal and state income taxes during the period indicated.
This reflects the federal and state income taxes as if the Company were and
the Pending Acquisitions had been C Corporations based on a 38% effective
rate assumed during the period.

(6) Reflects adjustment to sales, cost of sales, selling, general and
administrative, and other expenses for General Motor products which Sam
Linder, Inc. has not received approval to sell when acquired by the
Company. Amounts total $3.6 million, $3.2 million, $246,000 and $36,000
and $1.3 million, $1.1 million, $103,000, and $24,000 for the year ended
December 31, 1995 and the six month period ended June 30, 1996,
respectively.

(7) Reflects the conversion of the Company, Sam Linder, Inc. and Melody
Vacaville, Inc. from the LIFO method of inventory accounting to the FIFO
method. Under the FIFO method, cost of sales would have been higher
(lower) by $419,000, and $(328,000) for the year ended December 31, 1995
and the six month period ended June 30, 1996, respectively. The Company
and Sam Linder, Inc. intend to convert to the FIFO accounting method
effective January 1, 1997.

(8) No adjustments have been made to reflect anticipated savings as a result of
reduced lease costs under the new lease agreements with Lithia Properties
from whom the Company leases substantially all of its facilities.

<PAGE>

PRO FORMA COMBINED AND CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
As of June 30, 1996
---------------------------------------------
Pro Forma
Actual Adjustments Pro Forma
---------- ----------- ----------
(In thousands)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . $ 3,819 $ - $
Receivables . . . . . . . . . . . . 2,472 -
Inventories . . . . . . . . . . . . 16,480 16,266 (4)(5)
Vehicles leased to others . . . . . 3,680 -
Other current assets. . . . . . . . 932 - (6) -
---------- ---------- ----------
Total current assets. . . . . . . . 27,383 16,266
Net property, plant and equipment. . . . 1,278 5,578 (4)
Vehicles leased to other, less current
portion. . . . . . . . . . . . . . . . 1,982 -
Goodwill, net; and other assets. . . . . 1,473 4,450 (4)
---------- ----------
Total assets. . . . . . . . . . . . $ 32,116 $ 26,294 $
---------- ---------- ----------
---------- ---------- ----------

LIABILITIES, MINORITY INTEREST AND OWNERS' SHAREHOLDERS' EQUITY
Current Liabilities:
Flooring notes payable. . . . . . . $ 13,723 $ - $
Current maturities of
long-term debt. . . . . . . . . . 2,207 -
Accounts payable. . . . . . . . . . 1,249 -
Accrued expenses and other
liabilities . . . . . . . . . . . 1,441 -
---------- ---------- ----------
Total current liabilities . . . . . 18,620 -
---------- ---------- ----------
Long-term debt, excluding current
maturities . . . . . . . . . . . . . . 8,262 23,901 (4)(7)
Other long-term liabilities. . . . . . . 2,299 1,950 (5)(6)
---------- ---------- ----------
Total liabilities . . . . . . . . . 29,181 25,851
---------- ---------- ----------
Minority interest. . . . . . . . . . . . 1,029 -
---------- ---------- ----------
Owners'/Shareholders' Equity:
Preferred stock. . . . . . . . . . . . . - -
Common stock . . . . . . . . . . . . . . 801 -
Retained earnings. . . . . . . . . . . . 1,105 443 (5)(6)(7)
---------- ---------- ----------
Total owners'/shareholders'
equity. . . . . . . . . . . . . . 1,906 443
---------- ---------- ----------
Total liabilities and owners'/
shareholders' equity. . . . . . . $ 32,116 $ 26,294 $
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

- --------------------

(1) Reflects the application of the estimated net proceeds of the Offering.
Approximately $________ million will be used to reduce acquired floor plan
debt of acquired companies, approximately $_________ million will be
utilized to acquire Roberts Dodge, Inc., Sam Linder, Inc. and Melody
Vacaville, Inc. See "Pending Acquisitions" and "Use of Proceeds."

(2) Reflects the issuance of __________ shares of Common Stock at an assumed
initial public offering price of $_________ per share, net of estimated
offering expenses.

(3) Reflects the Restructuring.

(4) Reflects the allocation of the Roberts Dodge, Inc., Sam Linder, Inc. and
Melody Vacaville, Inc. purchase price based on the estimated fair value of
assets acquired. The purchase price consists of the following:

Melody
Roberts Sam Vacaville,
Dodge, Inc. Linder, Inc. Inc.
----------- ------------ ----------
Estimated total consideration $8,194,000 $6,108,000 $6,861,000
Less estimated fair value of
assets acquired 6,394,000 5,308,000 5,011,000
---------- ---------- ----------
Excess of purchase price over
fair value of tangible assets
acquired $1,800,000 $ 800,000 $1,850,000
---------- ---------- ----------
---------- ---------- ----------

The Company is purchasing new vehicle and parts inventories, certain real
property and equipment, goodwill and dealer agreements, and may purchase
some or all of the used vehicle inventory. The excess of the purchase
price over the fair value of tangible assets acquired will be allocated to
intangible assets, primarily the dealer agreements and goodwill. Fair
value of assets acquired primarily represents the estimated fair value of
the parts inventory and certain property and equipment. Vehicle inventory,
which at June 30, 1996 approximated $___________, will be financed with
floor plan debt.

<PAGE>

(5) Reflects the conversion of the Company, Sam Linder, Inc. and Melody
Vacaville, Inc. from LIFO method of inventory accounting to the FIFO
method. Under the FIFO method, shareholders' equity would have been
higher by $3.2 million. The Company to convert to the FIFO accounting
method effective January 1, 1997.

(6) Represents the establishment of a deferred income tax asset of $997,000 and
a deferred income tax liability of $594,000 to effect the Company's
conversion to C Corporation status.

(7) Reflects the estimated distribution and payment of $_____ to its current
shareholders of substantially all of the undistributed commutative taxable
income through the date of the termination of the S Corporation election
that has been taxed or is taxable to its current shareholders and payment
of $3.3 million in notes to Principal Owners and other affiliates for all
previously taxed undistributed earning.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following should be read in conjunction with the Combined Financial
Statements of the Company and the notes thereto included elsewhere in this
Prospectus. The following includes a discussion of certain significant business
trends and uncertainties as well as other forward-looking statements. For a
discussion of important factors that could cause actual results to differ
materially from the forward-looking statements, see "Risk Factors."

GENERAL

The Company is the largest retailer of new and used vehicles in Southwest
Oregon, offering 14 domestic and imported makes of new automobiles and light
trucks at five locations. As an integral part of its operations, the Company
also arranges related finance and insurance and sells parts, service and
ancillary products. The Company has successfully acquired and integrated
several new dealer franchises in Southwest Oregon where it has achieved a
dominant market share. The Company is seeking to become a leading acquiror of
dealerships in the western United States. The Company has recently entered into
agreements to acquire an additional dealership in Eugene, Oregon, and
Salinas, and Vacaville, California.

The following table sets forth selected condensed financial data expressed
as a percentage of total sales for the periods indicated for the average
automotive dealer in the United States. 1996 data is not available.

AVERAGE U.S. DEALERSHIP

Year ended December 31,
-----------------------------
1993 1994 1995
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Sales:
New vehicles. . . . . . . . . . . . . . 60.0% 60.3% 58.6%
Used vehicles . . . . . . . . . . . . . 26.4 26.9 29.0
Parts and services sales, other . . . . 13.6 12.8 12.4
----- ----- -----
Total sales. . . . . . . . . . . . . 100.0% 100.0% 100.0%
Gross profit . . . . . . . . . . . . . . . . 13.4 13.1 12.9
Total dealership expense . . . . . . . . . . 11.8 11.3 11.5
----- ----- -----
Income before taxes. . . . . . . . . . . . . 1.6% 1.8% 1.4%
----- ----- -----
----- ----- -----
- --------------------
Source: AUTOMOTIVE EXECUTIVE/August 1996; NADA Industry Analysis Division

<PAGE>

The following table sets forth selected condensed financial data for the
Company expressed as a percentage of total sales for the periods indicated
below. Gross profit and pre-tax margins are presented on a FIFO basis and
before minority interest to permit comparisons to U.S. industry data.

LITHIA MOTORS, INC.

<TABLE>
<CAPTION>
Six Months Ended
Year ended December 31, June 30,
------------------------------ ------------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
New vehicles. . . . . . . . . . . . . . 46.3% 46.8% 46.7% 46.1% 45.5%
Used vehicles . . . . . . . . . . . . . 38.0 38.8 38.5 38.6 41.1
Parts and service sales . . . . . . . . 9.2 9.1 9.6 9.8 8.9
Finance, insurance and other. . . . . . 6.5 5.3 5.2 5.5 4.5
----- ----- ----- ----- -----

Total sales. . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit(1). . . . . . . . . . . . . . . 19.3 17.9 18.0 17.7 16.9
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . 16.4 13.9 14.7 14.5 13.6
----- ----- ----- ----- -----
Operating income(1). . . . . . . . . . . . . 2.9 4.0 3.3 3.2 3.3
Other income (expense), net. . . . . . . . . (0.4) 0.2 0.0 (0.1) (0.2)
----- ----- ----- ----- -----
Income before taxes and minority
interest(1). . . . . . . . . . . . . . . . 2.5% 4.2% 3.3% 3.1% 3.1%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>

- --------------------

(1) Using the FIFO method of accounting for inventory to permit comparisons to
U.S. industry data. The Company currently uses the LIFO method for tax and
financial reporting, purposes but will convert to the FIFO method effective
January 1, 1997.

New vehicle revenues include sales of new vehicles (other than "book only"
fleet sales) at retail. Used vehicle revenues include amounts received for used
vehicles sold to wholesale and retail customers. Finance, insurance and other
includes fees and commissions from finance and insurance ("F&I") transactions,
sales of the Company's extended service contracts for vehicles, and "book only"
fleet sales, net. The Company recognizes revenue attributable to sales of its
service contracts over the term of the contracts for accounting purposes,
although it receives payment in full at the time of the sale. For vehicle
financing contracts, the Company receives either a fee or a spread from the
lender for originating and assigning the loan but is assessed a chargeback fee
by the lender if the contract is cancelled, in most cases, within 120 days of
making the loan. Early cancellation can result from early repayment because of
refinancing the loan, selling or trade-in of the vehicle or default on the loan.

The Company currently utilizes the LIFO method of accounting for inventory,
but will convert to the FIFO method effective January 1, 1997. If the FIFO
method of inventory accounting had been used by the Company in prior periods,
income before taxes and minority interest would have been higher (lower) by
$556,000, $615,000, and ($426,000) for the years ended December 31, 1993, 1994,
and 1995, respectively and $(162,000) and $235,000 for the six months ended June
30, 1995 and 1996, respectively, from the reported results under the LIFO
method. In the analysis of interim and annual results, the Company has
provided a discussion of gross profits on FIFO as well on a LIFO basis because
management believes that in assessing trends and comparing the Company's
performance with prior periods or with industry data, FIFO data should be
considered. Further, commencing January 1, 1997, the Company will utilize the
FIFO method of accounting for both book and tax purposes.

At each of its dealership locations, the Company's management focuses on
maximizing profitability in each area of operations rather than on the volume of
vehicle sales. The key factors affecting the Company profitability are its
dominant market share for the new vehicle brands it sells and its focused
efforts to increase the sales of used vehicles, F&I and ancillary products.

The average gross profit margins obtained by franchised automobile dealers
in the United States on sales of new vehicles have declined from over 7.0% in
1991 to 6.5% in 1995. The Company's gross profit margin (on a FIFO basis) on
new vehicle sales was 12.8% for 1995 and 13.2% for the first six months of 1996.
The Company's gross profit margin on new vehicle sales has consistently been
higher than the industry average.

<PAGE>

The Company's gross profit margin (on a FIFO basis) on used vehicle sales
was 11.4% for 1995 and 10.0% for the first six months of 1996. Excluding sales
to wholesalers (which are frequently at or close to cost), the Company's gross
profit margin on a FIFO basis in 1995 and for the first six months of 1996 on
retail sales of used vehicles were 13.2% and 12.6%, respectively. The industry
average in 1995 was 11.5%. See "Business - Dealership Operations."

The Company's salary expense, employee benefit costs and advertising
expenses comprise the majority of its selling, general and administrative
("SG&A") expense. The Company's interest expense fluctuates based primarily on
the level of debt required to support the inventory of new and used vehicles at
its dealerships and vehicles leased to others.

The Company and its affiliated entities have been treated for federal
income tax purposes as S Corporations or as partnerships under the Internal
Revenue Code since their inception and, as a result, have not been subject to
federal or certain state income taxes. Accordingly, the following discussion of
the Company's historical results of operations does not include a discussion of
income tax expense. Immediately before the completion of this Offering, and in
connection with the Restructuring, the Company and its affiliated entities that
are S Corporations will terminate their status as S Corporations and will
thereafter be subject to federal and state income tax at applicable
C Corporation rates. Prior to 1994, the shareholders and members of the Company
and the affiliated entities each received substantial year-end tax payment
bonuses to provide the cash to pay income taxes on the Company's and affiliated
entities income which was taxable to the principals. Such payments were
reflected in SG&A expense. See "Management--Executive Compensation."

The Company has accounted for each of its acquisitions prior to 1993 by the
purchase method of accounting, and, as a result, does not include in its
financial statements the results of operations of these dealerships prior to the
date they were acquired by the Company. The combined financial statements of
the Company reflect the results of operations, financial position and cash flows
of each of the Company's dealerships and those of its affiliated entities whose
operations will be combined under the Restructuring, using an "as if" pooling of
interest basis of accounting.

SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995

REVENUES

Revenues increased in each of the Company's operating segments for the
first six months of 1996 as compared to the first six months of 1995, resulting
in total sales increasing 27.1% to $69.1 million. New vehicle sales revenue
increased 25.5% in the first six months of 1996 to $31.5 million, compared with
$25.1 million for the first six months of 1995. The increase in sales was due
primarily to increased unit sales (22.3%) which resulted from higher levels of
promotional activity for certain popular brands and, to a much lesser extent, an
increase in the average per unit sales price (2.6%).

Used vehicle sales increased by 35.2% in the first six months of 1996 to
$28.4 million, compared with $21.0 million in the first six months of 1995. The
increase in sales was due primarily to the availability in the 1996 period of an
increasing number of late-model used vehicles which were in high demand by
consumers. Increased used vehicle revenue was attributable primarily to unit
sales increases (25.1%) and, to a lesser extent, an increase in the average per
unit sales price (8.4%).

The Company's other operating revenue increased 11.2% to $9.2 million in
the first six months of 1996, from $8.3 million in the first six months of 1995,
due to an increased number of F&I transactions and to a lesser extent, increases
in service department maintenance and repairs.

GROSS PROFIT

Gross profit (on a LIFO basis) increased 17.4% for the first six months of
1996 to $11.5 million, compared with $9.8 million for the first six months of
1995, primarily because of the increase in new and used vehicle sales during the
period. Gross profit margin decreased from 17.9% for the first six months in
1995 to 16.8% for the first six months of 1996. The decrease in gross profit
margin was primarily caused by a reduction in profit margins on used vehicle
sales and other operating revenue, partially offset by an increase in gross
profit

<PAGE>

as a percentage of sales on new vehicles. Gross profit margin in 1995 was
favorably impacted by the reduction in new vehicle inventory during the period
which resulted in historically lower vehicle inventory costs flowing through
cost of sales.

Gross profit (on a FIFO basis) increased 21.8% for the first six months of
1996 to $11.7 million, compared with $9.6 million for the first six months of
1995, primarily because of the increase in new and used vehicle sales during the
period. Gross profit margin decreased from 17.7% for the first six months in
1995 to 16.9% for the first six months of 1996. The decrease in gross profit
margin was primarily caused by a reduction in profit margins on used vehicles
sales and other operating revenue, partially offset by an increase in gross
profit margin.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

The Company's SG&A expense increased to $9.3 million in the first six
months of 1996 compared to $7.9 million in the first six months of 1995. SG&A
as a percentage of sales decreased to 13.6% from 14.5%. The increase in SG&A
was due primarily to increased selling, or variable expense related to the
increase in sales, and to a lesser extent, an increase in compensation for
additional personnel and management in preparation for the Pending Acquisitions.
See "Pending Acquisitions."

INTEREST EXPENSE

The Company's interest expense increased by 11.3% to $649,00 for the first
six months of 1996, compared to $583,000 for the first six months of 1995. The
increase was due entirely to an increase in the average balances of flooring and
other notes outstanding for the first six months of 1996, offset partially by a
decrease in interest rates. The increase in the loan balances was due primarily
to additional borrowings to finance additional inventory and notes to Principal
Owners.

OTHER INCOME, NET

Other income, net, which consisted primarily of management fees and equity
in the income of Lithia Properties and other non-dealer service income,
decreased 21.1% from $484,000 to $382,000 for the first six-months of 1996.
This reduction is due to a non reoccurring lawsuit recovery in the prior period.

1995 COMPARED TO 1994

REVENUES

Revenue increased 4.6% to $114.2 million in 1995 from $109.3 million in
1994. New vehicle revenue increased 4.2%, while used vehicle revenue increased
4.0%. The increase in sales was due to per-unit price increases in new and used
vehicles, offset in part by a reduction in unit sales of 1.1%. Industry and
Company unit sales were essentially flat from 1994 to 1995.

The Company's other operating revenue increased 6.8% to $16.9 million 1995
compared to $15.8 million in 1994, primarily due to increases in service
department maintenance and repairs.

GROSS PROFIT

Gross profit (on a LIFO basis) increased 10.8% in 1995 to $20.9 million
from $18.9 million in 1994. Gross profit margin increased from 17.3% to 18.3%
in 1995. Gross profit margin in 1995 was favorably impacted by the reduction
in new vehicle inventory during the period which resulted in historically lower
vehicle inventory costs flowing through costs of goods sold.

Gross profit (on a FIFO basis) increased 5.1% in 1995 to $20.5 million
from $19.5 million in 1994. Gross profit margin, at 18.0%, was essentially
unchanged from 1994. Increases in gross profit margin on new vehicle sales
were offset by a reduction in the gross profit margin on new vehicles and parts
and service sales.

<PAGE>

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

The Company's SG&A expense increased 10.3% to $16.7 million or 14.7% of the
Company's revenues, in 1995, from $15.2 million, or 13.9% of the Company's
revenues in 1994. A reserve for workers' compensation claims, expense
associated with compensation, primarily from salaries and bonuses for the
Company's managers and, to a lesser extent, an increase in advertising expense,
accounted for a significant portion of the increase.

INTEREST EXPENSE

The Company's interest expense in 1995 increased 45.5% to $1.4 million from
$955,000 in 1994. The increase was due primarily to an increase in the
Company's average loan balances in 1995 as compared to 1994, and, to a lesser
extent, an increase in interest rates on borrowed funds. Loan balances
increased to support increased flooring of inventory, vehicles leased to others
and notes to Principal Owners incurred during the period.

OTHER INCOME, NET

Other income, net, consisted primarily of management fees derived from the
Company's management of Lithia Properties and equity in the income of Lithia
Properties and other non-dealers service income, increased 5.4% from the prior
year. This increase is attributable to primarily to receipt of a judgment in a
lawsuit brought by the Company.

1994 COMPARED TO 1993

REVENUES

Revenues increased 18.7% to $109.3 million in 1994 as compared with $92.1
million in 1993. New vehicle sales increased 19.9%, while used vehicle sales
increased 21.1% in 1994 compared to 1993. The increase in vehicle sales was due
to increased per unit sales prices and high consumer demand for new vehicles
(unit sales increase of 11.4%) as well as low-mileage, late-model used vehicles
(unit sales increase of 10.3%).

The Company's other operating revenue increased 9.2% to $15.8 million in
1994 compared to $14.5 million in 1993, primarily as a result of increases in
revenues derived from the Company's parts and service operations.

GROSS PROFIT

Gross profit (on a LIFO basis) increased 9.5% to $18.9 million in 1994 from
$17.3 million in 1993. Gross profit margin decreased to 17.3% in 1994 compared
to 18.7% in 1993. The decrease in gross profit margin occurred in all operating
segments.

Gross profit (on a FIFO basis) increased 9.6% to $19.5 million in 1994 from
$17.8 million in 1993. Gross profit margin decreased to 17.9% in 1994 compared
to 19.3% in 1993, occurred in all operating segments and was consistent with
industry trends.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

SG&A expense increased less than 1.0% in 1994. This represents a decline
in SG&A expense as a percentage of sales to 13.9% in 1994 compared to 16.4% in
1993. This decrease was primarily due to an increase in sales volumes and the
effect of special tax payment bonuses ($1.0 million) paid in 1993 to the owners
of the Company to fund personal income tax payments on earnings of the Company.
In 1994 and subsequent periods, such amounts were distributed as dividends or
other distributions and were not reflected as an administrative expense. This
decrease was offset by additional compensation and other benefits provided to
Company management.

<PAGE>

INTEREST EXPENSE

The Company's interest expense decreased 30.5% to $955,000 in 1994 from
$1.4 million in 1993. The decrease in interest expense was primarily due to
lower loan balances and a decrease in the Company's flooring interest rates.

OTHER INCOME, NET

Other income, net, for the period consisted primarily of management fees
derived from Lithia Properties and equity in the income of Lithia Properties and
other non-dealer service income, increased 35.9% to $1.1 million. This increase
is attributable to an increase in equity in the earnings of Lithia Properties,
advertising service income and administrative fees.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal needs for capital resources are to finance
acquisitions, capital expenditures and increased working capital requirements.
Historically, the Company has relied primarily upon internally generated cash
flows from operations, borrowings under its credit facility and borrowings from
its shareholders to finance its operations and expansion.

The Company currently has a credit facility with U.S. Bank, giving the
Company access to an aggregate of approximately $37.2 million of credit for
various purposes. The principal component of the credit facility is a Flooring
Line which permits the Company to borrow up to $27.9 million, based on the level
of the new and used vehicle inventories securing the line. The Flooring Line
bears interest at rates from prime (for new vehicles) to prime plus 0.5% (for
used vehicles). At June 30, 1996, the annualized rates of interest on the
Flooring Line were from 8.25% to 8.75%. The principal payments are due within
five business days of an automobile being sold. The Flooring Line also permits
the Company to borrow at the U.S. Bank's Interbank Offering Rate, which is the
rate offered to U.S. Bank for U.S. dollar deposits in the Eurodollar market
selected by U.S. Bank. These borrowings are available only in increments of
$500,000 and cannot be prepaid before the end of their terms (typically, 60 or
90 days) without substantial penalty. The rate is generally one percentage
point less than the standard rate available under the Flooring Line. The
Flooring Line expires on September 10, 1997. See Note 2 of the Notes to
Company's Combined Financial Statements. Management believes that the Flooring
Line provides the Company with financing at rates less than those available from
manufacturers and other sources.

The credit facility provides a line of credit permitting the Company to
borrow up to $1.0 million for the purpose of in-house financing of vehicle sales
and in-house leases (subject to a maximum amount equal to 75% of the total in-
house vehicle receivables under 60 days past due). See "Business--Dealership
Operations." The borrowings under this line of credit bear interest at prime
plus 1.0% (9.25% at June 30, 1996). See "Note 5 of the Notes to the Company's
Combined Financial Statements." An additional line of credit of $2.15 million
is available for the purchase of equipment, $1.4 million of which is available
for purchasing equipment associated with future or pending acquisitions. The
borrowings under this line of credit bear interest at prime plus 0.5% (8.75% at
June 30, 1996).

The credit facility also includes a Capital Line, a line of credit of $6.0
million to finance acquisitions. The Capital Line bears interest at prime plus
0.75% and is secured by the Company's inventory, receivables, equipment and real
property. During the first year in which the Capital Line is used, interest
only is payable monthly. After the first year, monthly payments are based on a
ten-year amortization, with final payment due five years from the first draw.
As of June 30, 1996, there were no borrowings under the Capital Line.

The Company has also established an additional $5.0 million unsecured line
of credit from Western Bank to finance additional acquisitions. The line bears
interest at prime plus 1.0%. As of June 30, 1996, there were no borrowings
under this line of credit.

<PAGE>

The Company had $24.2 million of debt outstanding at June 30, 1996,
consisting of $3.6 million in notes payable to the Principal Owners and other
affiliated parties, primarily to pay the undistributed Subchapter S earnings,
$1.0 million in term borrowings under fixed-rate notes secured by equipment,
$13.7 million in variable- rate borrowings under its credit facility and
$5.9 million outstanding on vehicles leased to others.

Capital expenditures, exclusive of acquisitions, were $134,000 in 1995 and
$223,000 for the first six months of 1996. The principal capital expenditures
in 1995 and the first six months of 1996 included equipment, building
improvements and computer equipment for use in the Company's dealerships.

The following table sets forth the estimated funds required to complete the
Pending Acquisitions, all anticipated prior to year-end 1996. Acquisition costs
are necessarily estimates as the actual purchase price will depend on inventory
levels at each acquired dealership upon closing. Estimates assumes the purchase
of used vehicles at each store location.

Pending Acquisitions Total Estimated Purchase Price
-------------------- ------------------------------
Roberts Dodge, Inc. $7,900,000
Sam Linder, Inc. $5,300,000
Melody Vacaville, Inc. $6,600,000

The Company anticipates that it will be able to satisfy its cash
requirements through December 1998, including its expected growth, primarily
with cash flow from operations, borrowings under the Flooring Line and the
Company's other lines of credit and the proceeds of this Offering.

SEASONALITY AND QUARTERLY FLUCTUATIONS

The Company's sales and operating results have historically varied during
each quarter of the year. Historically, sales have been lower in the fourth
quarter of each year largely due to consumer purchasing patterns during the
holiday season, inclement weather and the reduced number of business days during
the holiday season. As a result, financial performance for the Company is
generally lower during the fourth quarter than during the other quarters of each
fiscal year; however, this did not hold true for the year 1995. Management
believes that interest rates, levels of consumer debt, consumer buying patterns
and confidence, as well as general economic conditions, may also contribute to
fluctuations in sales and operating results. The timing of acquisitions may
cause substantial fluctuations of operating results from quarter to quarter.

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following tables set forth the Company's results of operations data (on
a LIFO Basis) for the quarterly periods presented. This presentation should be
read in conjunction with the audited and unaudited financial statements of the
Company and the Notes thereto appearing elsewhere in this Prospectus. Because
of the seasonal nature of the Company's business and based on the Company's past
experience, it expects its operating income for the fourth quarter to be lower
than that of other quarters.

Quarter Ended
------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1995 1995 1995 1995 1996 1996
-------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Sales:
New vehicles. . . . . . . $12,241 $12,840 $14,743 $13,453 $14,817 $16,665
Used vehicles . . . . . . 10,717 10,278 12,251 10,815 13,239 15,156
Other operating
revenues . . . . . . . 4,160 4,160 4,532 4,006 4,390 4,859
-------- -------- -------- -------- -------- --------
Total sales. . . . . . . . . 27,118 27,278 31,526 28,274 32,446 36,680
Cost of sales. . . . . . . . 22,264 22,369 25,734 22,886 26,965 30,705
-------- -------- -------- -------- -------- --------
Gross profit . . . . . . . . 4,854 4,909 5,792 5,388 5,481 5,975

<PAGE>

Selling, general and
administrative. . . . . . 3,895 3,961 4,309 4,570 4,517 4,797
-------- -------- -------- -------- -------- --------
Operating income . . . . . . 959 948 1,483 818 964 1,178
Other income (expense),
net . . . . . . . . . . . 165 (203) (91) 74 (145) (94)
-------- -------- -------- -------- -------- --------
Income before minority
interest. . . . . . . . . 1,124 745 1,392 892 819 1,084
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>

Total sales. . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . 82.1 82.0 81.6 80.9 83.1 83.7
-------- -------- -------- -------- -------- --------
Gross profit . . . . . . . . 17.9 18.0 18.4 19.1 16.9 16.3
Selling, general and
administrative. . . . . . 14.4 14.5 13.7 16.2 13.9 13.1
-------- -------- -------- -------- -------- --------
Operating income . . . . . . 3.5 3.5 4.7 2.9 3.0 3.2
Other income (expense),
net . . . . . . . . . . . 0.6 (0.7) (0.3) 0.3 (0.5) (0.3)
-------- -------- -------- -------- -------- --------
Income before minority
interest. . . . . . . . . 4.1% 2.7% 4.4% 3.2% 2.5% 3.0%
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>

INFLATION

The Company believes that the relatively moderate rate of inflation over
the past few years has not had a significant impact on the Company's revenues or
profitability. In the past, the Company has been able to maintain its profit
margins during inflationary periods.

NEW ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," which the Company will adopt for its fiscal year ending
December 31, 1996, will require "that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable." In the opinion of the Company's management, the
adoption of SFAS 121 will not have a material effect on the Company's financial
position or results of operations.

In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 ("SFAS 123"), which establishes a fair value based method of accounting
for stock-based compensation plans. The Company will continue to account for
employee stock options under APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES and therefore believes the statement will have no impact on the
Company's financial statements other than expanded footnote disclosure. SFAS
123 will be effective for fiscal years beginning after December 15, 1995.

<PAGE>

INDUSTRY

Domestic and foreign automobile manufacturers distribute their vehicles
through franchised dealerships. In 1995, franchised automobile dealers in the
United States sold over $290 billion in new cars and light trucks and over $180
billion in used vehicles. New vehicle sales grew at an average rate of 12.5%
from 1991 to 1995, while new vehicle unit sales, after growing at an average
rate of 7.1% each year from 1991 through 1994, declined 2.0% in 1995. From 1991
through 1995 used vehicle units and revenues grew at average rates of 1.8% and
12.3% respectively. See "Risk Factors; Cyclical Nature of Automobile Sales;
Concentration of Operations in Oregon." The following chart provides
information about new and used vehicle unit and dollar sales of U.S. franchised
dealerships for the years 1991 to 1995. Used vehicle sales reflect sales at
retail and wholesale from franchised dealerships and do not include sales by
independent used car and truck retailers. Sales by independent used vehicle
retailers were $77.2, $81.0, $100.3, $134.1 and $129.7 billion, respectively
from 1991 to 1995.

UNITED STATES FRANCHISED DEALERS' VEHICLES SALES
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(Units in millions; dollars in billions)
<S> <C> <C> <C> <C> <C>
New vehicle unit sales . . . . . . . . . 12.3 12.9 13.9 15.1 14.8
New vehicle sales revenue. . . . . . . . $ 182.9 $ 191.7 $ 225.1 $ 261.8 $ 293.3
Used vehicle unit sales. . . . . . . . . 14.6 14.6 14.8 15.1 15.7
Used vehicle sales revenue . . . . . . . $ 114.1 $ 130.0 $ 146.0 $ 167.8 $ 181.7

</TABLE>

Sources: NADA; CNW Market Research.

- --------------------

Dealerships sell new and used vehicles and offer a range of other services
and products, including repair and warranty work, replacement parts, extended
warranty coverage, financing and credit insurance. In 1995, of the average
dealership's revenue, new vehicles sales constituted 58.6%, used vehicles sales
29.0%, and sales of other products and services 12.4%, of total sales.
Automotive dealership profitability varies widely and depends, in part, on the
effective management of inventory, marketing, competition, quality control and
customer responsiveness. Since 1991, retail automobile dealerships in the
United States have earned on average between 12.9% and 14.1% gross profit margin
and between 1.0% and 1.6% net profit margin, on sales.

In recent years, manufacturers have offered attractive lease terms to
reduce the monthly costs of owning a new automobile, especially on short-term
vehicle leases. This has drawn consumers to such short-term leases, which has
had the effect of bringing the consumer back to the new vehicle market sooner
than if the purchase had been financed through longer-term debt financing. This
also provides new car dealerships with a steady source of late-model, off-lease
vehicles for their used car inventory and enables the parts and service
departments within each dealership to provide repair service under factory
warranty coverage for the term of the lease. Industry-wide, the percentage of
new vehicle retail sales that are leasing transactions has increased from 13.5%
in 1990 to 31.5% in 1995.

Several economic and industry factors have led to a consolidation of the
highly-fragmented vehicle dealership industry. Dealerships typically have been
owned and operated by one individual who controlled a single franchise. After
significant expansion in the number of franchised dealerships in the 1950's,
competitive and economic pressures during the 1970s and 1980s, particularly the
oil embargo of 1973 and the subsequent loss of market share experienced by U.S.
auto manufacturers to imported vehicles, many dealerships were forced to close
or sell to better-capitalized dealer groups. Continued competitive and economic
pressure on dealers, combined with the easing of restrictions against multiple
dealer ownership, has led to a further reduction in the number of franchised
dealerships.

According to industry data, the number of franchised dealerships has
declined from 36,336 dealerships in 1960 to 22,288 in 1996. While the number of
dealerships has decreased, there has been an increase in the formation of larger
dealer groups. Despite this consolidation, however, the Company estimates that
the largest 100 dealer groups generate less than 10% of total industry revenues
and control approximately 5% of all franchised dealerships in the retail
vehicle.

<PAGE>

The Company believes that the franchised automobile dealership industry
will continue to consolidate due to the increased capital required to operate
dealerships, the fact that many dealerships are owned by individuals nearing
retirement age and the desire of certain manufacturers to strengthen their brand
identity by consolidating their franchised dealerships. For example, General
Motors Corporation has announced its Network 2000 Channel Strategy (Project
2000) to close or consolidate 1,500 of its 8,400 franchised dealerships by the
year 2000. The Company believes that an opportunity exists for dealership
groups with significant equity capital and experience in identifying, acquiring
and professionally managing dealerships to acquire additional franchises either
for cash, stock, debt or a combination thereof. Publicly-owned dealership
groups, such as the Company, are able to offer prospective sellers
tax-advantaged transactions through the use of publicly-traded stock which may,
in certain circumstances, make them more attractive acquirors to prospective
sellers.

BUSINESS

GENERAL

Lithia Motors is the largest retailer of new and used vehicles in
Southwest Oregon, offering 14 domestic and imported makes of new automobiles
and light trucks at five locations. As an integral part of its operations,
the Company also arranges related financing and insurance and sells parts,
service and ancillary products. The Company has grown primarily by
successfully acquiring and integrating dealerships and by obtaining new
dealer franchises. Most of the Company's operations are currently located in
Medford, Oregon, where it has a market share of over 40%. The Company's
strategy is to become a leading acquiror of dealerships in medium-sized
markets in the western United States. The Company has recently entered into
agreements to acquire additional dealerships in Eugene, Oregon, Salinas,
California and Vacaville, California.

OPERATING STRATEGY

The Company's operating strategy consists of the following elements:

<PAGE>

EMPHASIZE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. The Company
generates substantial incremental revenue and achieves higher profitability
through the sale of certain ancillary products and services such as F&I,
extended service contracts and vehicle maintenance. Employees receive special
training and are compensated on a commission basis to sell such products and
services. The Company arranges competitive financing packages for vehicle
purchases and ancillary products and services. In 1995, the Company arranged
financing for 59% of its new vehicle sales and 69% of its used vehicle sales, as
compared to 42% and 51%, respectively, for the average automobile dealership in
the United States. The Company also sells extended service coverage and other
vehicle protection packages which the Company believes enhance the value of the
vehicle and provide a higher level of customer satisfaction.

GROWTH STRATEGY

To date, a significant percentage of the Company's growth has resulted
from acquisitions and the Company believes that acquisition opportunities
will continue to be available to well-capitalized, experienced dealership
organizations. The Company believes that its management team has
considerable experience in acquiring dealerships and implementing its
operating strategy to improve the performance and profitability of such
dealerships following the acquisition. The Company is continuing its
expansion in Oregon and has recently signed a purchase agreement to acquire
the sole Dodge franchise in Eugene, Oregon. The Company has also begun
expansion into selected markets in California with the signing of a purchase
agreement to acquire the sole Honda franchise in Salinas, located near the
Monterey Peninsula and the Toyota dealership in Vacaville. See "Risk Factors
- - Dependence on Acquisitions for Growth; Manufacturer's Consent to
Acquisitions" and "Pending Acquisitions."

<PAGE>

DEALERSHIP OPERATIONS

The Company owns and operates five dealership locations in southwest
Oregon, four in Medford and one in Grants Pass, Oregon. Each of the Company's
stores sell new and used vehicles and related automotive parts and services.
The Company's primary target market is comprised of middle-income customers
seeking moderately-priced vehicles. The Company offers 14 makes of new
vehicles, including Chrysler, Toyota, Plymouth, Dodge, Jeep/Eagle, Honda,
Saturn, Mazda, Pontiac, Lincoln, Mercury, Isuzu, Suzuki and Volkswagen.

The operations of each of the Company's locations are overseen by a general
manager, who has primary responsibility for all aspects of the operations of the
dealership, including new and used vehicle inventory, advertising and marketing,
and the selection of personnel. Each location is operated as a profit center
and the general manager's compensation is based on dealership profitability.
Each general manager reports directly to the Company's Chief Operating Officer.
In addition, each dealership's general sales manager, used vehicle manager,
parts manager, service manager and F&I managers report directly to the general
manager and are compensated in large part on profitability.

NEW VEHICLE SALES. The Company sells 14 domestic and imported brands
ranging from economy to luxury cars, as well as sport utility vehicles, minivans
and light trucks. In 1995, the Company sold 2,715 new vehicles with total sales
of $53.3 million, which constituted 46% of the Company's total revenues. The
following table sets forth, by manufacturer, the percentage of new vehicles sold
(net of "book only" fleet sales) by the Company during 1995.

1995 Percentage of
Manufacturer New Vehicle Sales
------------ ------------------

Chrysler (Chrysler, Plymouth, Dodge, Jeep/Eagle) . . 43.6%
Toyota . . . . . . . . . . . . . . . . . . . . . . . 23.3
Honda. . . . . . . . . . . . . . . . . . . . . . . . 11.2
Saturn . . . . . . . . . . . . . . . . . . . . . . . 9.0
Ford (Lincoln/Mercury) . . . . . . . . . . . . . . . 5.3
Mazda. . . . . . . . . . . . . . . . . . . . . . . . 2.7
General Motors (Pontiac) . . . . . . . . . . . . . . 2.1
Isuzu. . . . . . . . . . . . . . . . . . . . . . . . 2.0
Suzuki . . . . . . . . . . . . . . . . . . . . . . . 0.9
Volkswagen . . . . . . . . . . . . . . . . . . . . . 0.0 *
---
100.0%

- --------------------
* Franchise acquired in 1996.

The following table sets forth the sales and gross profit margins (on a
FIFO basis) for new vehicle sales for the periods presented.

COMPANY'S NEW VEHICLE SALES
First six
months
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Unit sales . . . . . . . 1,890 2,106 2,464 2,744 2,715 1,594
Sales revenue. . . . . . $28,946 $34,479 $42,663 $51,154 $53,277 $31,482
Gross profit margin* . . 9.6% 12.2% 12.8% 12.5% 12.8% 13.2%

</TABLE>
- --------------------
* On a FIFO basis

The Company purchases substantially all of its new car inventory directly
from manufacturers who allocate new vehicles to dealerships based on the amount
of vehicles sold by the dealership and by the dealership's market area. The
Company will also exchange vehicles with other dealers to accommodate customer
demand and to balance inventory.

<PAGE>

As required by law, the Company posts the manufacturer's suggested retail
price on every new vehicle. As is customary in the automobile industry, the
final sales price of a new vehicle is generally negotiated with the customer.
However, at the Company's Saturn dealership the Company does not deviate from
the posted price. The Company is continually evaluating its pricing practices
and policies in light of changing consumer preferences and competitive factors.

The Company also sells vehicles for delivery directly from the factory to a
fleet purchaser ("book only" fleet sales). The Company realizes substantially
less profit per vehicle than it does through retail sales. Only the net revenue
on "book only" fleet sales is included in the Company's revenue.

USED VEHICLE SALES. The Company offers a variety of makes and models of
used cars and light trucks, of varying model years and prices. Used vehicle
sales are an important part of the Company's overall profitability. In 1995,
the Company sold 5,144 used vehicles with total sales of $44.0 million which
constituted 39% of the Company's total revenue. The Company has made a
strategic commitment to emphasize used vehicle sales by the retention of a full-
time used vehicle manager at each of its locations and the allocation of
additional financing and display space to this effort. The Company also believes
there is substantial consumer demand for quality used vehicles, given the
escalating prices of new vehicles.

The Company sells used vehicles to retail customers and, in the case of
vehicles in poor condition or vehicles which have not sold within a reasonable
period of time, to other dealers and to wholesalers. As the table below
reflects, sales to other dealers and to wholesalers are frequently at or close
to cost and therefore affect the Company's overall gross profit margin on used
vehicle sales. Excluding wholesale transactions, the Company's gross profit
margin (on a FIFO basis) on used vehicle sales was 13.2% in 1995, as compared to
the industry average for 1995 of 11.5%. The following table reflects used
vehicle sale transactions of the Company from 1991 through June 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

COMPANY'S USED VEHICLE SALES
First six
months
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Retail unit sales. . . . . 2,375 2,640 3,076 3,372 3,302 1,839
Retail sales revenue . . . $18,762 $24,228 $29,680 $36,389 $36,997 $21,566
Retail gross margin* . . . 14.9% 16.2% 13.9% 13.5% 13.2% 12.6%

Wholesale unit sales . . . 1,028 1,294 1,642 1,834 1,842 1,363
Wholesale sales revenue. . $4,607 $5,702 $5,306 $5,999 $7,064 $6,829
Wholesale gross margin . . 1.9% 3.7% 3.0% 3.0% 2.4% 1.4%

Total unit sales . . . . . 3,403 3,934 4,718 5,206 5,144 3,202
Total sales revenue. . . . $23,369 $29,930 $34,986 $42,381 $44,061 $28,395
Total gross margin . . . . 12.3% 13.8% 12.3% 12.0% 11.4% 10.0%
</TABLE>
- --------------------
*On a FIFO basis.

The Company acquires the majority of its used vehicles through customer
trade-ins. The Company also acquires its used vehicles at "closed" auctions
which may be attended only by new car dealers and which offer off-lease, rental
and fleet vehicles, and at "open" auctions which offer repossessed vehicles and
vehicles being sold by other dealers.

The Company sells the majority of its used cars to retail purchasers. In
an effort to reach the Company's objective of two used vehicle sales for every
new vehicle sale, the Company employs innovative marketing programs, such as
"Priority You," which offers a 60-day/3,000-mile warranty and a 10-day/500-mile
"no questions asked" exchange program on every used vehicle it sells in order to
generate customer confidence in his or her purchasing decision. Each
dealership's used vehicle manager is responsible for the purchasing and pricing
his used vehicle inventory. The Company strives to sell each of its used
vehicles within 60-days of acquisition and financially motivates its used
vehicle managers to effect such sales within that period.

<PAGE>

VEHICLE FINANCING AND LEASING. The Company believes that its customers'
ability to obtain financing at its dealerships is critical to its ability to
sell new and used vehicles and ancillary products and services. The Company
provides a variety of financing and leasing alternatives in order to meet the
specific needs of each potential customer. The Company believes its ability to
obtain customer-tailored financing on a "same day" basis provides it with an
advantage over many of its competitors, particularly smaller competitors who
lack the resources to offer vehicle financing or who do not generate sufficient
volume to attract the diversity of financing sources that are available to the
Company. The Company's F&I managers have extensive knowledge regarding
available financing alternatives and sources and are specially trained to
determine the customer's financing needs to enable the customer to purchase or
lease an automobile. The Company seeks to finance or arrange financing for
every used vehicle it sells and has financed a larger percentage of its
transactions than the industry average. During 1995, the Company financed or
arranged for financing for over 59% of its new vehicle sales and 69% of its used
vehicle sales, compared to an industry average of 42% and 51%, respectively.

The Company maintains close relationships with a wide variety of financing
sources and arranges financing for its customers with those sources that are
best suited to satisfy its customers' particular needs. The Company also
utilizes financing sources, wherever possible, that maximize the Company's
revenues on the sale of the loan to such source. The interest rates available
and the required down payment, if any, depend to a large extent, upon the bank
or other institution providing the financing and the credit history of the
particular customer. Currently, the Company has relationships with 22 banks and
other financial institutions who are in a position to arrange financing for
automobile purchases or leases by the Company's customers. The Company's
managers have close working relationships with the third-party financing sources
which enables them to quickly determine a customer's credit position and confirm
the type and level of financing that the third party can commit to provide.
This process generally occurs within a matter of minutes while the customer is
still in the store, allowing the sales manager to assist the customer in making
a fully-informed decision regarding the terms of the sale.

In most cases, the Company arranges financing for its customers from third
party sources, which relieves the Company from any credit risk. However, in
certain circumstances where the Company believes the credit risk is manageable
and the risk-weighted income is expected to exceed the earnings available upon
the immediate sale of the finance contract, the Company will directly finance or
lease the automobile to such customer. In these cases, the Company bears the
risk of default by the borrower or lessee. Historically, the Company has
provided direct financing for less than 1.0% of its new and used vehicle sales
and has incurred insignificant losses related to such activities. The Company
intends to continue providing financing to certain of its customers and may
gradually expand its direct financing operations in circumstances where it
believes attractive returns can be achieved or other operational benefits can be
obtained.

ANCILLARY SERVICES AND PRODUCTS. The Company employs two to three F&I
managers at each dealership to market a number of ancillary products and
services to every purchaser of a new or used vehicle. Typically, these products
and services yield high profit margins and contribute significantly to improving
the overall profitability of the Company.

The Company offers extended service contracts which provide that, for a
predetermined and prepaid price, all designated repairs covered by the plan
during its term will be made by the Company at no additional charge above the
deductible. While all new vehicles are sold with the automobile manufacturer's
standard warranty, service plans provide additional coverage beyond the time
frame or scope of the manufacturer's warranty. Purchasers of used vehicles are
offered a similar extended service contract, even if the selected vehicle is no
longer under the manufacturer's warranty.

Substantially all of these contracts sold are written by the Company. The
Company manages the service and warranty obligations that it sells and provides
the parts and service (or pays the cost of others who may provide such parts and
services) for claims made under the contract. Most required services under the
contracts are provided by the Company thereby increasing the Company's sales of
parts and service. The Company's net service contract income has increased from
$575,000 in 1993 to $764,000 in 1995. Claims and cancellations have been less
than 16% of recognized service contract income in each of these years.

The Company offers its customers credit life, health and accident insurance
when they finance an automobile purchase. The Company receives a commission on
each policy sold. The Company also offers other ancillary products such as
protective coatings and automobile alarms.

<PAGE>

The Company also owns and operates two automobile rental facilities, Avis
Rent-A-Car, and Discount Auto & Truck Rental, Inc. located in Medford, Oregon.

PARTS AND SERVICE, PAINT AND BODY SHOP. The Company considers its parts
and service operations to be an integral part of its customer service program
and an important element of establishing customer loyalty. The Company provides
parts and service primarily for the new vehicle brands sold by the Company's
stores but may also service other vehicles. In 1995, the Company's parts and
service operations generated $11.0 million in revenues, or 10% of total
revenues, at a gross profit margin of 45% (on a FIFO basis). The Company
attributes its profitability in parts and service to its comprehensive
management system, including the use of a variable pricing structure designed to
reflect the difficulty and sophistication of different types of repairs. The
mark-ups on parts is based upon the cost and availability of a particular part.

The service and parts business is relatively stable and provides an
important recurring revenue stream to the Company's dealerships. The Company
also notifies owners of vehicles purchased at its dealerships when their
vehicles are due for periodic service, thereby encouraging preventive
maintenance rather than post-breakdown repairs. To a limited extent, revenues
from this department are countercyclical to new car sales as owners repair
existing vehicles rather than buy new vehicles. The Company believes this helps
mitigate the affects of a downturn in the new vehicle sales cycle.

The Company has in excess of 80 service bays throughout its network of
dealerships. All service facilities are equipped with technologically advanced
tools and diagnostic equipment and are staffed by factory-trained and certified
service technicians. The Company's dealerships feature various combinations of
fully-equipped service facilities capable of handling almost any type of vehicle
repair, from rebuilding engines and transmissions to routine maintenance
functions including oil changes, front-end alignments and inspections. All
dealerships offer lounges where service customers may relax or conduct business
while waiting for service to be performed.

The Company has operated a full-service paint and body shop since 1970.
The body shop services all of the Company's dealerships located in southwest
Oregon, other dealerships in the area that do not have a captive body shop, and
a number of major automotive casualty insurance companies that contract with the
Company to perform insurance repairs. A new 39,480 square-foot body and paint
facility is being constructed in Medford, Oregon, to handle the increased demand
for the Company's body and paint services. The new facility, to be completed in
Spring 1997, will have four paint booths as well as the latest technology, tools
and equipment. The facility will be leased to the Company pursuant to a long-
term lease from Lithia Properties. See "Properties" and "Certain Relationships
and Related Transactions."

SALES AND MARKETING

The Company emphasizes customer satisfaction throughout its organization
and continually seeks to maintain a reputation for quality and fairness. The
Company's sales force works closely with each customer to identify an
appropriate vehicle at a price affordable to that customer. The Company
believes that its "counseling" approach during the sales process increases the
likelihood that a customer will be satisfied with the vehicle purchased over a
longer time period and enables the Company to sell more vehicles at higher gross
profit margins.

The Company recently implemented a marketing program entitled "Priority
You," which provides the Company's retail customers six value-added services
which the Company believes are important to the overall satisfaction of the
customer, including a commitment to (i) provide a customer credit check within
10 minutes, (ii) complete a used vehicle appraisal within 30 minutes, (iii)
complete the paper work on a new vehicle purchase within 90 minutes, (iv)
provide a 10-day/500-mile "no questions asked" right of exchange on any used
vehicle, (v) provide a 60-day/3,000-mile warranty on all used vehicles, and (vi)
make a $20 per vehicle donation to a local charity or educational organization.
The Company believes "Priority You" will help differentiate it from traditional
dealerships and, thereby, increase customer traffic and develop customer
loyalty.

Advertising and marketing play a significant role in the success of the
Company. The competitive environment of the automobile dealership industry
requires that a substantial portion of each sales dollar be allocated to
advertising. However, as is the case with most new automobile dealerships,
approximately 75% of the Company's advertising and marketing expenses are paid
for by the automobile manufacturers. The manufacturers also provide the Company
with the benefit of market research, which assists the Company in developing its
own advertising and marketing campaigns. The Company believes that it receives
significant benefit from manufacturers'

<PAGE>

advertising, particularly in the medium-sized markets in which the Company's
stores are the only franchise representing the manufacturer.

The Company's marketing efforts generally focus on a wide range of
potential buyers. The Company offers a variety of new and used cars and light
trucks with at various prices and financing terms. The Company utilizes most
forms of media in its advertising, including television, newspaper, radio and
direct mail, including periodic mailers to previous customers. The Company
primarily uses advertising that focuses on developing its image as a reputable
dealer, offering quality service, affordable automobiles and financing for all
potential buyers. In addition, the Company's individual dealerships
periodically sponsor price discounts or other promotions designed to attract
additional customers. Each dealership has substantial control over the content
and timing of its promotions, although all advertising is coordinated by the
Company. As the Company owns several dealerships, it realizes cost savings on
its advertising expenses in the Medford, Oregon, market from volume discounts
and other media concessions.

The Company also benefits from a substantial amount of advertising through
cooperatives or associations, such as the Southern Oregon Toyota Dealers
Association. The Company participates as a member of these cooperatives or
associations whose members, among other things, pool their resources and
expertise together with that of the manufacturer to develop advertising aimed at
benefitting all of their members.

MANAGEMENT INFORMATION SYSTEM

The Company's financial information, operational and accounting data and
other related statistical information are consolidated, processed and maintained
at its headquarters in Medford, Oregon, on a network of server computers and
work stations. The flexible nature of the Company's installed network allows
for accumulation, processing and distribution of information using ADP, Inc.
computing programs. ADP, Inc. is a national software provider for many
companies including automotive dealers. All sales and expense information, and
other data related to the operations of each dealership or other Company
facility, are entered at each location. This system allows senior management to
access detailed information on a "real time" basis from all of the Company's
dealerships and other stores regarding, for example, the makes and models of
automobiles in its inventory, the mix of new and used automobile sales, the
number of automobiles being sold or leased, the percentage of vehicles for which
the Company arranged financing or sold ancillary products and services, the
profit margins being obtained on sales, and the relative performances of the
Company's dealerships to each other. Such information is also available to each
dealership's general manager. Reports can be generated that set forth and
compare revenue and expense data by department and by store, allowing management
to quickly analyze the results of operations, identify trends in the business,
and focus on areas that require attention or improvement. The Company believes
that its management information system also allows its general managers to
quickly respond to changes in consumer preferences and purchasing patterns,
thereby maximizing inventory turnover.

The Company believes that its management information system is a key factor
in successfully incorporating newly acquired businesses into the Company.
Following each acquisition, the Company installs its system at the dealership
location, thereby quickly making the financial, accounting and other operational
data easily accessible to senior management at the Company's corporate offices.
With access to such data, senior management can efficiently incorporate the
Company's operating strategy at the newly acquired dealership.

CASH MANAGEMENT

The Company employs cash management systems designed to maximize returns
and minimize interest expense. The Company's new vehicle flooring line is
supplied by the Company's bank, rather than by automobile manufacturers, unlike
many dealerships that do not have the financial condition or results of
operations that would permit them to obtain bank financing on terms more
favorable than those offered by manufacturers. As a result, the Company's
interest rate for flooring financing is 25 to 50 basis points below the rates
currently available to it from most manufacturers. In addition, in order to
minimize the outstanding balance under the Company's Flooring Line, all
available excess cash in the Company's various checking accounts are
automatically transferred at the end of each weekday to a central collateral
account U.S. Bank. These funds are used to pay down the balance under the
Flooring Line, thereby reducing the balance on which the Company is required to
pay interest and decreasing the Company's overall interest expense below what it
otherwise would be. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

41
<PAGE>

RELATIONSHIPS WITH AUTOMOBILE MANUFACTURERS

The Company has, either directly or through its subsidiaries, entered into
franchise or dealer sales and service agreements with each manufacturer of the
new vehicles it sells. The Company currently has agreements with Chrysler
Corporation (Chrysler, Plymouth, Dodge, Jeep/Eagle), American Honda Motor Co.
Inc. (Honda), American Isuzu Motors, Inc. (Isuzu), Ford Motor Company (Lincoln,
Mercury), General Motors Corporation (Pontiac), Mazda Motor of America, Inc.
(Mazda), Saturn Corporation (Saturn), Toyota Motor Distributors, Inc. (Toyota),
American Suzuki Motor Corporation (Suzuki) and Volkswagen of America
(Volkswagen).

The typical automotive franchise agreement specifies the locations at which
the dealer has the right and the obligation to sell vehicles and related parts
and products and to perform certain approved services in order to serve a
specified market area. The designation of such areas and the allocation of new
vehicles among dealerships are subject to the discretion of the manufacturer,
which generally does not guarantee exclusivity within a specified territory. A
franchise agreement may impose requirements on the dealer concerning such
matters as the showroom, the facilities and equipment for servicing vehicles,
the maintenance of inventories of vehicles and parts, the maintenance of minimum
net working capital, the training of personnel and the adherence to certain
performance standards established by the manufacturer regarding sales volume and
customer satisfaction. Compliance with these requirements is closely monitored
by each manufacturer. In addition, manufacturers require each dealership to
submit monthly and annual financial statements of operations. The franchise
agreements also grant the dealer the non-exclusive right to use and display
manufacturers' trademarks, service marks and designs in the form and manner
approved by each manufacturer.

Most franchise agreements expire after a specified period of time, ranging
from one to five years; however, some franchise agreements, including those with
Chrysler, have no termination date. The typical franchise agreement provides for
early termination or non-renewal by the manufacturer under certain circumstances
such as change of management or ownership without manufacturer consent,
insolvency or bankruptcy of the dealership, death or incapacity of the dealer
manager, conviction of a dealer manager or owner of certain crimes,
misrepresentation of certain information by the dealership or dealer manager or
owner to the manufacturer, failure to adequately operate the dealership, failure
to maintain any license, permit or authorization required for the conduct of
business, or material breach of other provisions of the franchise agreement
including the dealership's poor sales performance or low CSI ratings. The
dealer is typically entitled to terminate the franchise agreement at any time
without cause.

Each franchise agreement sets forth the name of the person approved by the
manufacturer to exercise full managerial authority over the dealership's
operations and the names and ownership percentages of the approved owners of the
dealership, and contains provisions requiring the manufacturer's prior approval
of changes in management or transfers of ownership of the dealership.
Accordingly, any significant change in ownership, including the sale of shares
by the Company to the public or the acquisition of a dealership from a third
party, is subject to the consent of the respective manufacturer. Prior to the
Offering, the Company will endeavor to obtain the approval of each relevant
manufacturer to proceed with the Restructuring and to conduct the Offering. The
Company must also request and receive approval from the relevant manufacturer
prior to the closing of an acquisition or the establishment of an automobile
dealership. See "Risk Factors -- Dependence on Automobile Manufacturers; --
Manufacturers' Consent to the Offering; -- Manufacturers' Consent to
Acquisitions."

COMPETITION

The new and used automobile dealership business in which the Company
operates is highly competitive. The automobile dealership industry is fragmented
and characterized by a large number of independent operators, many of whom are
individuals, families and small groups. In the sale of new vehicles, the
Company principally competes with other new automobile dealers in the same
general vicinity of the Company's dealership locations. Such competing
dealerships may offer the same or different models and makes of vehicles that
the Company sells. In the sale of used vehicles, the Company principally
competes with other used automobile dealers and with new automobile dealers that
operate used automobile lots in the same general vicinity of the Company's
dealership locations. The Company believes that there are approximately 14
other new automobile dealerships and 66 other used automobile stores within a
50-mile radius of Medford, Oregon, near which all of the Company's dealerships
are currently located. In addition, certain regional and national car rental
companies operate retail used car lots to dispose of their used rental cars.

<PAGE>

The Company also may face increased competition from certain automobile
"superstores," such as CarMax, a division of Circuit City Stores Inc., United
Auto Group, AutoNation USA and Driver's Mart Worldwide Inc. Such used
automobile superstores have emerged recently in various areas of the United
States and are beginning to expand nationally. However, the Company is not
aware of any of such superstores currently located in any region where the
Company operates dealerships. In addition, the Company competes to a lesser
extent with an increasing number of automobile dealers that sell vehicles
through nontraditional methods, such as through direct mail or via the Internet.

Due to the size and number of the automobile dealerships that the Company
owns, the Company is relatively larger than the independent operators with which
it currently competes. However, as it enters other markets, the Company, may
face competitors that are much larger and that have access to greater financial
resources. Historically, the Company's size has permitted it to attract
experienced and professional sales and service personnel and has provided the
Company the resources to compete effectively. The Company, however, does not
have any cost advantage in purchasing new vehicles from manufacturers and
typically relies on advertising and merchandising, sales expertise, service
reputation and location of its dealerships to sell new vehicles.

REGULATION

The Company's operations are subject to extensive regulation, supervision
and licensing under various federal, state and local statutes, ordinances and
regulations. Various state and regulatory agencies, such as OSHA, the EPA and
the Oregon Department of Justice, have jurisdiction over the operation of the
Company's dealerships, repair shops, body shops and other operations, with
respect to matters such as consumer protection, workers' safety and laws
regarding clean air and water.

The relationship between a franchised automobile dealership and a
manufacturer is governed by various federal and state laws established to
protect dealerships from the generally unequal bargaining power between the
parties. Federal laws, as well as Oregon and California state laws, prohibit a
manufacturer from terminating or failing to renew a franchise without good
cause. Under Oregon and California law, a manufacturer may not require a dealer
to accept any vehicle, part or accessory not voluntarily ordered by the dealer,
to refuse to deliver any new vehicle, part or accessory advertised by the
manufacturer as available, or to require monetary participation in any sales
promotion or advertising campaign. Manufacturers are also prohibited from
preventing or attempting to prevent any reasonable changes in the capital
structure or the manner in which a dealership is financed. Further, Oregon law
prohibits a manufacturer from failing to give effect to, or attempting to
prevent, the sale of the ownership or management, or an interest in the
ownership or management, of a dealership. Under California law, a dealer, or
any officer, partner or stockholder may sell or transfer any interest in the
dealership business provided that the sale or transfer of such interest does not
have the effect of a sale or transfer of the franchise, without the consent of
the manufacturer. Manufacturers are, however, entitled to object to a sale or
change of management where such an objection is related to material reasons
relating to the character, financial ability or business experience of the
proposed transferee. In both Oregon and California, a dealer is entitled to
seek judicial relief to prevent a manufacturer from establishing a competing
dealership of the same vehicle make within the dealer's relevant market area.

Automobile dealers and manufacturers are also subject to various federal
and state laws established to protect consumers, including so-called "Lemon
Laws" which require a manufacturer or the dealer to replace a new vehicle or
accept it for a full refund within one year after initial purchase if the
vehicle does not conform to the manufacturer's express warranties and the dealer
or manufacturer, after a reasonable number of attempts, is unable to correct or
repair the defect. Federal laws require certain written disclosures to be
provided on new vehicles, including mileage and pricing information. In
addition, the financing and insurance activities of the Company are subject to
certain statutes governing credit reporting, debt collection, and insurance
industry regulation.

The imported automobiles purchased by the Company are subject to United
States customs duties and, in the ordinary course of its business, the Company
may, from time to time, be subject to claims for duties, penalties, liquidated
damages, or other charges. Currently, United States customs duties are
generally assessed at 2.5% of the customs value of the automobiles imported, as
classified pursuant to the Harmonized Tariff Schedule of the United States.

As with automobile dealerships generally, and parts, service and body shop
operations in particular, the Company's business involves the use, handling and
contracting for recycling or disposal of hazardous or toxic substances or
wastes, including environmentally sensitive materials such as motor oil, waste
motor oil and filters,

<PAGE>

transmission fluid, antifreeze, freon, waste paint and lacquer thinner,
batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels.
The Company has also been required to remove aboveground and underground storage
tanks containing such substances or wastes. Accordingly, the Company is subject
to regulation by federal, state and local authorities establishing health and
environmental quality standards, and liability related thereto, and providing
penalties for violations of those standards. The Company is also subject to
laws, ordinances and regulations governing remediation of contamination at
facilities it operates or to which it sends hazardous or toxic substances or
wastes for treatment, recycling or disposal. The Company believes that it does
not have any material environmental liabilities and that compliance with
environmental laws, ordinances and regulations will not, individually or in the
aggregate, have a material adverse effect on the Company's results of operations
or financial condition. See "Risk Factors - Supervision and Regulation;
Environmental Matters."

EMPLOYEES
As of June 30, 1996, the Company employed approximately 340 persons on a
full-time equivalent basis. None of the Company's employees is represented by a
labor union or bound by a collective bargaining agreement. However, the service
department employees at Sam Linder, Inc., a dealership the Company is intending
to purchase later this year, are bound by a collective bargaining agreement.
See "Pending Acquisitions." The Company believes it has a good relationship
with its employees.

PROPERTIES

Substantially all of the Company's facilities currently are leased from
Lithia Properties LLC, an Oregon Limited Liability Company ("Lithia
Properties"), with aggregate monthly lease payments totalling approximately
$170,900. See "Certain Relationships and Related Transactions -- Lease of Real
Estate from Lithia Properties."

The Company's headquarters, which presently occupy approximately 4,700
square feet of space, are located in Medford, Oregon. The Company and its
various dealerships and other facilities occupy an aggregate of approximately 21
acres of land, providing approximately 185,000 square feet of building space.
Such properties consist primarily of automobile showrooms, display lots, service
facilities, two body and paint shops, rental agencies, supply facilities,
automobile storage lots, parking lots and offices. The Company believes its
facilities are currently adequate for its needs and are in good maintenance and
repair.

The following table sets forth each of the Company's facilities, all of
which are leased from Lithia Properties and the approximate square footage at
each facility, the acreage of each location and the annual rental rate for the
current and previous three years together with the rate to be effective January
1, 1997. Company in 1997, the Company will be responsible for all taxes,
insurance and maintenance with respect to the facilities. Previously, Lithia
Properties had been responsible for these payments. All facilities are located
in Medford, Oregon except for the Grants Pass Auto Center, located in Grants
Pass, Oregon. Minor parcels of land and the Avis Rent-A-Car facility are leased
from third parties.

<PAGE>

TOTAL TOTAL
BUILDING LAND-
DEALERSHIP/FACILITY SQUARE FT. ACRES
------------------- ---------- -----

Lithia Motors, Inc. 5,255 0.42
Lithia Honda Pontiac Suzuki
Isuzu Volkswagen 32,978 4.47
Lithia Toyota Lincoln Mercury 35,849 3.75
Lithia Dodge Chrysler Plymouth
Mazda Jeep/Eagle 47,446 4.25
Saturn of Southwest Oregon 11,226 2.33
Grants Pass Auto Center(Dodge)(1) 27,978 3.69
Lithia Body & Paint(2) 20,500 0.95
Lithia Body & Paint(3) 41,729 5.01
Thrift Auto Supply 11,230 0.46
Discount Auto & Truck Rental 2,778 0.31
------------------
(1) Acquired by Lithia Properties from the Company June 1, 1996.

(2) A new facility is under construction. The current facility will
be absorbed and utilized by the Lithia Dodge Chrysler Plymouth
Mazda Jeep/Eagle dealership.

(3) Under construction. To be occupied Spring 1997.

The following table sets forth information regarding the facilities of
the three proposed dealership acquisitions. See "Pending Acquisitions." The
Company may assign any right and obligation to purchase these properties to
Lithia Properties. If the properties are purchased by Lithia Properties, it
is anticipated such facilities would be leased to the Company on terms
similar to the Company's other new leases and at an initial monthly rental
rate equal to 1% of the purchase price of such properties.

TOTAL TOTAL
BUILDING LAND- TO BE
DEALERSHIP/FACILITY LOCATION SQUARE FT. ACRES PURCHASED/LEASED
- ------------------- -------- ---------- ----- ----------------
Roberts Dodge Eugene, Oregon 24,996 3.68 Purchased
Linder Honda Salinas, California 17,446 3.24 Lease/Purchase
Melody Toyota Vacaville, California 22,900 4.18 Lease

LITIGATION

The Company is, from time to time, a party to litigation that arises in the
normal course of its business operations. The Company does not believe it is
presently a party to litigation that will have a material adverse effect on its
business or operations.

<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of Lithia are as follows:

Year Elected or
Appointed
Director/Executive
NAME AGE POSITION Officer
- ------------------ --- -------- ------------------
Sidney B. DeBoer 53 Chairman, President, Chief 1968
Executive Officer and Secretary
M. L. Dick Heimann 53 Chief Operating Officer, 1970
Executive Vice President
Brian R. Neill 42 Chief Financial Officer 1995
R. Bradford Gray 45 Vice President- Acquisitions 1995

SIDNEY B. DEBOER. Mr. DeBoer has served as the Chairman, President, Chief
Executive Officer and Secretary of the Company since 1968. He also is a member
of various automobile industry organizations, including the President's Club of
the National Automobile Dealers Association, Oregon Auto Dealers Association,
Medford New Car Dealers Association, Chrysler Dealer Council, Toyota Dealer
Council and Honda Dealer Council.

M. L. DICK HEIMANN. Mr. Heimann has served as the Executive Vice President
and Chief Operating Officer of the Company since 1970. Prior to joining the
Company, he served as a district manager of Chrysler Corporation from 1967 to
1970. He is a member of various automobile industry organizations including the
Oregon Auto Dealers Association, the Jeep Dealer Council and the Medford New Car
Dealers Association, for which he has previously served as president. Mr.
Heimann is a graduate of University of Colorado with a Bachelor of Science in
Biology and Languages.

BRIAN R. NEILL. Mr. Neill has served as the Chief Financial Officer of the
Company since September 1995. Prior to joining the Company at that time, he
served as the Senior Vice President and Chief of Operations of Jackson County
Federal Bank in Medford, Oregon from 1977 to 1991. Mr. Neill, a graduate of
Northwest Christian College with a Bachelor of Science degree in Management, is
graduating from the NADA Dealer Candidate Academy in November 1996.

R. BRADFORD GRAY. Mr. Gray has served as the Vice President-Acquisitions
of the Company since 1995. From 1981 to 1995, he has served in various
capacities with the Company including, most recently, as General Manager of the
Company's Grants Pass (1991-1995) and Lithia Dodge (1989-1991) dealerships.
Since 1975, Mr. Gray has held various positions in the automobile sales
industry, including sales representative, sales manager and general manager.

The Company has committed to seek and elect at least two independent
directors to serve on the Board of Directors no later than 90 days after the
Offering. At this time no candidates have been asked to serve as directors.
All directors hold office until the next annual meeting of shareholders or until
their successors have been duly elected and qualified. Executive officers are
appointed by, and serve at the discretion of, the Board of Directors (the
"Board").

COMMITTEES OF THE BOARD

The Board will establish a Compensation Committee and an Audit Committee,
effective with the election of at least two independent directors. The
Compensation Committee will review and approve salaries for the executive
officers, any grants of stock options and other incentive compensation for
employees of the Company. The Audit Committee will recommend the selection of
auditors for the Company and will review the results of the audit and other
reports and services provided by the Company's independent auditors.

The Company intends to provide competitive compensation to its independent
directors and reimburses all directors for their reasonable out-of-pocket
expenses incurred in connection with their attendance at Board meetings.

<PAGE>

OTHER KEY PERSONNEL

All of the persons listed below have served the Company in these key
positions for over five years.

YEARS WITH CURRENT
NAME AGE THE COMPANY POSITION
- ------------------ --- ----------- --------
Stephen R. Philips 43 19 General Manager -
Toyota/Lincoln Mercury
Burt Frederickson 44 16 General Manager - Saturn
Bryan DeBoer 30 7 General Manager -
Honda/Pontiac/Suzuki/
Isuzu/Volkswagen
Don Jones, Jr. 33 7 General Manager -
Dodge/Chrysler/
Plymouth/Jeep/Eagle
Dorothy Crockett 47 16 Comptroller
Bill Daves 53 15 Vice President - Human
Resources - Training
and Development

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION. The following table shows compensation paid to the
Chief Executive Officer and each of the two other executive officers who had
total compensation during 1995 exceeding $100,000.

All of the persons listed below have served the Company in these key
positions for over five years.

SUMMARY COMPENSATION TABLE

Annual Compensation (1)
-------------------------
All Other
Name and Position Year Salary Bonus (2) Compensation
- ----------------- ---- --------- --------- ------------

Sidney B. DeBoer 1995 $ 331,125 $ 1,500 $ 2,310(3)
M. L. Dick Heimann 1995 $ 277,125 $ 1,500 $ 2,310(3)
R. Bradford Gray 1995 $ 189,060 $ 3,645 $ 5,981(4)

(1) For calendar year 1996, the officers shown in the table receive the
following annual salaries: Mr. DeBoer - $352,800; Mr. Heimann -$273,000;
and Mr. Gray - $192,000.
(2) Includes a "wellness bonus" of $1,500 for each of the named Executive
Officers. All full-time employees are entitled to an annual "wellness
bonus" equal to $150 per year for each year of employment (maximum of
$1,500) for undergoing a physical and other health counseling.
(3) Consists of amounts contributed by the Company to the accounts of Mr.
DeBoer and Mr. Heimann pursuant to the Company's 401(k) and Profit Sharing
Plan.
(4) Includes $2,310 contributed by the Company to the account of Mr. Gray
pursuant to the Company's 401(k) and Profit Sharing Plan, an automobile
allowance of $3,625 and an insurance premium payment of $46.

1996 STOCK INCENTIVE PLAN

In April, 1996, the Board and the Company's shareholders adopted the
Company's 1996 Stock Incentive Plan (the "Plan"). The Plan provides for the
granting of stock-based awards ("Awards") to executive officers (including those
who are directors), to other employees and to non-employee consultants of the
Company. Such Awards may take any form approved by the Board or by a committee
designated by the Board, including stock options, stock bonuses, stock
appreciation rights and restricted stock awards. Stock options granted under
the Plan may be either options that qualify as "incentive stock options", within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended
("Incentive Options"), or those that do not qualify as such "incentive stock
options" ("Non-qualified Options"). The Plan, which permits up to __________
shares of the Company's Class A Common Stock to be issued, terminates on April
4, 2006. As of the date hereof, stock options with respect to ___________
shares of Class A Common Stock were outstanding, constituting all of the Awards
granted under the Plan to date. An additional _______________ shares were
available for issuance under the Plan. As of the date of this prospectus,
options with respect to ___________ shares are exercisable.

<PAGE>

Shares of Class A Common Stock may be issued under the Plan for any lawful
consideration. To date, the Company has only granted stock options pursuant to
the Plan. The Plan is administered by the Board or by a Compensation Committee
of the Board. Subject to the terms of the Plan, the Board or the Compensation
Committee determines the persons to whom Awards are granted and the terms and
the number of shares covered by each Award.

The term of each option may not exceed ten years from the date the option
is granted, or five years in the case of an option granted to a holder of more
than 10% of the fully-diluted capital stock of the Company. Options may become
exercisable in whole at grant or in installments over time, as determined by the
Committee.

With respect to the stock options granted by the Company to date, such
options generally expire when the optionee ceases to be affiliated with the
Company. Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee. Each of the outstanding stock options under the
Plan provide that if the optionee is terminated without cause at any time when
Sidney B. DeBoer is not the chairman, president or chief executive officer of
the Company, then all options held by such optionee shall become fully vested
and exercisable for a period of three months following the termination of
employment.

The Plan provides that any Award may contain, at the discretion of the
Committee, a provision conditioning or accelerating the receipt of benefits
pursuant to such Award upon the occurrence of specified events, including
continued employment by the Company, a change in control, merger, dissolution or
liquidation of the Company, or the sale of substantially all of the Company's
assets. The acceleration of vesting of Awards in the event of a merger or other
similar event may be seen as an anti-takeover provision and may have the effect
of discouraging a proposal for merger, a takeover attempt or other efforts to
gain control of the Company.

Under the terms of the options issued to date, payment upon the exercise of
an option may be in cash, by check or by delivery of shares of Class A Common
Stock with a "fair market value," as defined in the Plan, equal to the aggregate
exercise price.

OPTION GRANTS. No option grants were made during 1995 to any of the
executive officers of the Company. In April 1996, the following grants of
options to acquire Class A Common Stock were made to executive officers:

Name Number of Shares Exercise Price Expiration Date
- ------------ ---------------- -------------- ---------------

Sidney B. DeBoer April 4, 2001
M.L. Dick Heimann April 4, 2001
R. Bradford Gray April 4, 2006
Brian R. Neill April 4, 2006

The options granted to Messrs Gray and Neill have a term of 10 years and
have exercise prices equal to the fair market value of the shares underlying
those options on the date the option was granted, as determined by an
independent valuation. The options granted to Messrs DeBoer and Heimann have a
term of 5 years and have exercise prices at 110% of such fair market value as
provided by the Plan. No other Awards have been made to executive officers
under the Plan.

OPTION EXERCISES. No options were outstanding during 1995 and no options
have been exercised in 1996 by any optionee.

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of June 30, 1996, and as adjusted to
reflect the sale of shares of the Company's Common Stock in this Offering,
certain information with respect to beneficial ownership of the Common Stock by
(i) each person or entity known by the Company to own beneficially more than 5%
of the Common Stock, (ii) each director of the Company, (iii) each executive
officer of the Company named in the summary compensation table, and (iv) all
directors and officers as a group. Except as indicated in footnotes to this
table, each of the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned by
them, subject to community property laws where applicable.

<PAGE>

Shares Beneficially Owned Shares Beneficially Owned
Before the Offering(1) After the Offering(1)
-------------------------------------------- --------------------------------------------------------
Class A Class B Class A Class B Percent of
-------------------- ---------------------- -------------------------------------------- Voting
Name and Address(2) Number Percent Number Percent Number Percent Number Percent Power
- ------------------- ------ ------- ------ ------- ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lithia Holding Company,
LLC (3) --- ---% ---% --- ---% 100% _____%
Sidney B. DeBoer(3) (4) 100% 100% 1.7% 100% ---%
M. L. Dick Heimann(3) (4) 100% --- ---% 1.7% --- ---% ---%
Brian R. Neill (5) 100% --- ---% * --- ---% *
R. Bradford Gray --- ---% --- ---% --- ---% --- ---% ---%
All directors and officers
as a group (4 persons) 100% 100% 4.1% 100% ---%
</TABLE>

* Less than 0.1%

(1) Assumes consummation of the Restructuring. See "Company Restructuring and
Prior S Corporation Status." Also assumes no exercise of the Underwriters'
over-allotment option. See "Underwriting".
(2) All such person can be reached c/o 360 E. Jackson Street, Medford, Oregon
97501.
(3) Lithia Holding's members consists of Messrs DeBoer, Heimann and Gray. Mr.
DeBoer, as the manager of Lithia Holding and pursuant to the terms of its
operating agreement, has the sole voting and investment power with respect
to all of the Class B Common Stock held.
(4) Each of Messrs DeBoer and Heimann hold an option to purchase
shares of Class A Common Stock at a exercise price of $ per
share, of which are exercisable within 60 days of this
Prospectus. See "Executive Compensation" and "1996 Stock Incentive Plan".
(5) Mr. Neill holds an option to acquire shares of Class A
Common Stock at $ per share, all of which are exercisable within
60 days of the date of this Prospectus.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

COMPANY RESTRUCTURING AND INDEBTEDNESS TO EXECUTIVE OFFICERS

The Company is currently owned by Sidney B. DeBoer (62.5%) and M. L. Dick
Heimann (37.5%). Mr. DeBoer and Mr. Heimann also own, with the same
ownership percentages, Lithia Rentals, Lithia Leasing, Lithia Chrysler
Plymouth Jeep Eagle, Inc., Discount Auto & Truck Rental, Inc. and Lithia TKV,
Inc. Further, Sidney B. DeBoer and Stephen R. Phillips have 0.01% and 19.99%
interests, respectively, in Lithia Toyota LLC, which is otherwise owned by
the Company. Similarly, Sidney B. DeBoer and R. Bradford Gray have 0.01% and
24.99% interests, respectively, in Lithia's Grants Pass Auto Center, L.L.C.
and Lithia Dodge, L.L.C.

Contemporaneously with the Offering, and pursuant to an Agreement of
Reorganization, the Company and the foregoing affiliated entities will
consummate a restructuring which will result in each of the Company's
dealerships and operating divisions becoming direct or indirect wholly-owned
subsidiaries of the Company. The Company will continue to be controlled by
Sidney B. DeBoer and M. L. Dick Heimann through their ownership of Lithia
Holding. See "Company Restructuring and Prior S Corporation Status," "Principal
Shareholders" and "Description of Capital Stock."

The Company and its affiliated corporations and limited liability
companies, which together directly or indirectly own and control the
Company's dealerships, are currently treated for federal and state income tax
purposes as subchapter S Corporations or partnerships under the Internal
Revenue Code of 1986, as amended. Accordingly, Sidney B. DeBoer, M. L. Dick
Heimann, R. Bradford Gray and Stephen R. Philips, the principal owners of the
Company and the affiliated entities, have been taxed directly on the earnings
of those entities. In December 1995, the Company and the affiliated entities
distributed to these individuals the Dividend Notes in the aggregate amount
of $3.9 million, representing approximately all of the previously taxed
undistributed earnings of those entities. See "Company Restructuring and
Prior S Corporation Status." The Dividend Notes bear interest at 9% per
annum, payable in ten equal annual installments beginning one year and ten
days after demand by the noteholders. Prior to completion of the Offering,
the Company and the affiliated entities intend to distribute additional
amounts to these individuals in an aggregate amount equal to the
undistributed taxable income of the Company and the affiliated entities from
January 1, 1996, through the effective date of the Restructuring. Any final
distribution of earnings will be paid at or shortly after the closing of the
Offering. Upon consummation of the Restructuring, the Company will assume
the obligations of the affiliated entities under the Dividend Notes. It is
anticipated that the Company will prepay the Dividend Notes at the time of
the purchase of Melody Vacaville, Inc. and will purchase Messrs. DeBoer's and
Heimann's stock of Lithia TKV, Inc. at their costs and make distributions of
the remaining undistributed earnings at or shortly following the closing of
the Offering using a portion of the proceeds of the Offering. See "Use of
Proceeds." The total amount to be paid to these individuals, including the
purchase of Lithia TKV, Inc., is expected to be approximately $6.0 million,
with the actual amount being dependent on the actual earnings of the

<PAGE>

Company and the affiliated entities through the date of Restructuring.
Dividends of $2.0 million were paid to those individuals in 1994 with respect to
prior Company and affiliated entity income.

LEASE OF REAL ESTATE FROM LITHIA PROPERTIES

Substantially all of the real property on which the Company's businesses
are located is owned by Lithia Properties, the members of which are the Company
(20%), Sidney B. DeBoer (35%), M.L. Dick Heimann (30%) and three of Mr. DeBoer's
children, who own 5% each. The Company and the affiliated entities paid an
aggregate of $2.1 million, $2.1 million and $2.2 million in lease payments to
Lithia Properties during the years ended December 31, 1993, 1994 and 1995,
respectively. For the years ending December 31, 1996, lease payments will total
$2.3 million of which $2.4 million represents the lease of the Company's
facilities in Grants Pass which were acquired by Lithia Properties on June 1,
1996, from Lithia Dodge, LLC. The Company and Lithia Properties have recently
entered into new lease agreements with respect to each facility, effective
January 1, 1997. The new leases have terms of 30 years and have aggregate
annual payments of $2.0 million. This amount includes approximately $304,000
for the lease of a body and paint facility currently under construction, and
expected to be completed in 1997. Lease payments will commence on such facility
upon completion of construction. Unlike in prior years, and commencing 1997,
the Company will be responsible for property taxes, insurance and maintenance
expenses. The initial payments are determined by a formula based on the fair
market value of the properties according to recent independent appraisals, and
approximate 1% of such fair market value per month. Lease payments are paid
monthly and will be adjusted each year beginning January 1998 to an amount equal
to any increase in the cost of living based on the "Consumer Price Index -
Pacific Cities and U. S. Average" (1967-100) published by the bureau of Labor
Statistics of the U. S. Department of Labor, for the City of Portland, Oregon.
If any improvements are made to the properties at the Company's request or with
its concurrence, then upon completion, the monthly lease payment shall be
adjusted as follows: If the improvements are of such a nature as to cause an
increase in the fair market value of the property, then the monthly lease
payment shall be increased by 1.0% of the increase in fair market value. If the
improvements do not materially increase the fair market value of the property,
then the monthly lease payment shall be increased by the amount which would
amortize the cost of the improvements over a 60-month period at 12% interest per
annum. For a more complete description of the Company's facilities, see
"Business."

MANAGEMENT CONTRACT WITH LITHIA PROPERTIES

The Company provides accounting, property management, and general
administrative services to Lithia Properties in connection with the management
of the facilities owned by Lithia Properties and leased to the Company or
related entities. The Company receives a monthly fee of $36,000 for its
services to Lithia Properties. In 1995, the Company received $288,000 under the
contract. The current Management Contract terminates on December 31, 1996.

GUARANTEE OF LITHIA PROPERTIES, INDEBTEDNESS

The Company guaranteed certain indebtedness of Lithia Properties, incurred
in connection with the purchase or refinancing of real property which secures
the loan. The loans have a total principal amount of $13.1 million with
interest rates from 8.25% to 10.0% and have terms of from 2 years to 12 years.

<PAGE>

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company's authorized capital stock consists of 100,000,000 shares of
Class A Common Stock, no par value, 25,000,000 shares of Class B Common Stock,
no par value, and 15,000,000 shares of Preferred Stock, no par value. The Board
of Directors may, by its own action, decrease the number of authorized shares of
Class B Common Stock. If it does so, the number of shares of Class A Common
Stock will automatically be increased on a share for share basis.

COMMON STOCK

Each share of Common Stock is designated as either Class A Common Stock or
Class B Common Stock. As of the date hereof, there are no shares of Class A
Common Stock outstanding and _______________ shares of Class B Common Stock
outstanding. All of the outstanding Class B Common Stock is held by Lithia
Holding. Upon completion of this Offering, there will be _____________ shares (
_____________ shares if the over-allotment options is exercised) of Class A
Common Stock and _______________ shares of Class B Common Stock outstanding.
The issued and outstanding shares of Class B Common Stock have been, and the
shares of Class A Common Stock offered hereby will be, duly authorized, validly
issued, fully paid and nonassessable.

Without the prior approval of shareholder holding over a majority of all
Class A Common Stock outstanding, no additional shares of Class B Common Stock
can be issued, except in conjunction with stock splits, reverse stock splits,
stock dividends, reclassification and similar transactions and events regarding
the Class A Common Stock that would otherwise have the effect of changing
conversion rights of the Class B Common Stock relative to the Class A Common
Stock (the "Adjustments").

Holders of Common Stock do not have any preemptive rights or rights to
subscribe for additional securities of the Company. Shares of Common Stock are
not redeemable, and there are no sinking fund provisions.

While the shares of Class A Common Stock are not convertible into any other
series or class of the Company's securities, each share of Class B Common Stock
is freely convertible into one share (subject to the Adjustments) of Class A
Common Stock at the option of the holder of the Class B Common Stock. All
shares of Class B Common Stock shall automatically convert to shares of Class A
Common Stock (on a share-for-share basis, subject to the Adjustments) on the
earliest record date for an annual meeting of the Company shareholders on which
the number of shares of Class B Common Stock outstanding is less than 1% of the
total number of shares of Common Stock outstanding. Shares of Class B Common
Stock may not be transferred to third parties (except for transfers to certain
family members and in other limited circumstances). Any purported transfer of
Class B Common Stock to a person who is not a permitted transferee under the
Articles of Incorporation is automatically void.

Subject to the preferences applicable to any Preferred Stock outstanding at
the time, holders of shares of Common Stock are entitled to dividends if, when
and as declared by the Board of Directors from funds legally available therefor,
and are entitled, in the event of liquidation, to share ratably in all assets
remaining after payment of liabilities and Preferred Stock preferences, if any.
Each share of Class A Common Stock and Class B Common Stock will be treated
equally with respect to dividends and distributions.

Holders of Class A Common Stock are entitled to one vote for each share
held of record, and holders of Class B Common Stock are entitled to ten votes
for each share held of record. The Class A Common Stock and Class B Common
Stock vote together as a single class on all matters submitted to a vote of
shareholders (including the election of directors), except that, the Oregon
Business Corporation Act would entitled either the Class A Common Stock or the
Class B Common Stock to vote as a separate voting group on any proposed
amendment of the Company's Articles of Incorporation otherwise requiring
shareholder approval if the proposed amendment would (i) increase or decrease
the aggregate number of authorized shares of the class, (ii) effect an exchange
or reclassification of all or part of the shares of the class into shares of
another class or create a right to do so, (iii) change the shares of all or part
of the class into a different number of shares of the same class, (iv) create a
new class having rights or preferences with respect to distributions or
dissolution that are prior to superior or substantially equal to shares of the
class or (v) otherwise alter the rights, preferences or limitations of all or
part of the shares of the class. In these circumstances, the class of Common
Stock to be altered shall vote on the

<PAGE>

amendment as a separate class. Shares of Common Stock do not have cumulative
voting rights with respect to the election of directors. Immediately after this
Offering, Lithia Holding will hold shares of Class B Common Stock constituting
approximately ___% of the voting power of the outstanding Common Stock, which
will allow it to control all actions to be taken by the shareholders, except as
noted above, including the election of all directors to the Board of Directors.
See "Principal Shareholders" and "Risk Factors--Control by Management."

PREFERRED STOCK

The Board of Directors may, without further action of the shareholders of
the Company, issue shares of Preferred Stock in one or more series and fix the
rights and preferences thereof, including the dividend rights, dividend rates,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), redemption price or prices, liquidation preferences
and the number of shares constituting any series or the designations of such
series, and increase or decrease the number of shares of any such series (but
not below the number of such shares then outstanding). The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of holders of any Preferred Stock that may be issued in the future.
Issuance of Preferred Stock provides desirable flexibility in connection with
possible acquisitions and other corporate purposes. However, the Board of
Directors, without further shareholder approval, can issue Preferred Stock with
voting and conversion rights that would adversely affect the voting power and
other rights of the holders of Common Stock. In addition, the Board of
Directors can issue and sell shares of Preferred Stock to designated persons,
the impact of which could make it more difficult for a holder of a substantial
block of Common Stock to remove incumbent directors or otherwise gain control of
the Company. The Company has no present plans to issue any shares of Preferred
Stock.

CERTAIN PROVISIONS OF THE OREGON BUSINESS CORPORATIONS ACT

Upon completion of the Offering, the Company will become subject to the
Oregon Control Share Act (Oregon Revised Statutes Sections 60.801-60.816). The
Oregon Control Share Act generally provides that a person (the "Acquiring
Person") who acquires voting stock of an Oregon corporation in a transaction
which results in such Acquiring Person holding more than 20%, 33-1/3% or 50% of
the total voting power of such corporation (a "Control Share Acquisition")
cannot vote the shares it acquires in the Control Share Acquisition ("control
shares") unless voting rights are accorded to such control shares by the holders
of a majority of the outstanding voting shares, excluding the control shares
held by the Acquiring Person and shares held by the Company's officers and
inside directors ("interested shares"), and by the holders of a majority of the
outstanding voting shares, including interested shares. This vote would be
required at the time an Acquiring Person's holdings exceed 20% of the total
voting power of a company, and again at the time the Acquiring Person's holdings
exceed 33-1/3% and 50%, respectively. The term "Acquiring Person" is broadly
defined to include persons acting as a group. A transaction in which voting
power is acquired solely by receipt of an immediately revocable proxy does not
constitute a "Control Share Acquisition."

The Acquiring Person may, but is not required to, submit to the Company an
"Acquiring Person Statement" setting forth certain information about the
Acquiring Person and its plans with respect to the Company. The Acquiring
Person Statement may also request that the Company call a special meeting of
shareholders to determine whether the control shares will be allowed to retain
voting rights. If the Acquiring Person does not request a special meeting of
shareholders, the issue of voting rights of control shares will be considered at
the next annual meeting or special meeting of shareholders that is held more
than 60 days after the date of the Control Share Acquisition. If the Acquiring
Person's control shares are accorded voting rights and represent a majority or
more of all voting power, shareholders who do not vote in favor of the
restoration of such voting rights will have the right to receive the appraised
"fair value" of their shares, which may not be less than the highest price paid
per share by the Acquiring Person for the control shares.

Upon completion of the Offering, the Company will also become subject to
the Oregon Business Combination Act (Oregon Revised Statutes Sections 60.825-
60.845). The Oregon Business Combination Act generally provides that in the
event a person or entity acquires 15% or more of the voting stock of an Oregon
corporation (an "Interested Shareholder"), the corporation and the Interested
Shareholder, or any affiliated entity, may not engage in certain business
combination transactions for a period of three years following the date the
person became an Interested Shareholder. Business combination transactions for
this purpose include (a) a merger or plan of share exchange, (b) any sale,
lease, mortgage or other disposition of the assets of the corporation where the
assets have an aggregate market value equal to 10% or more of the aggregate
market value of the corporation's assets or outstanding capital stock, and (c)
certain transactions that result in the issuance of capital stock of the
corporation

<PAGE>

to the Interested Shareholder. These restrictions do not apply if (i) the
Interested Shareholder, as a result of the transaction in which such person
became an Interested Shareholder, owns at least 85% of the outstanding voting
stock of the corporation (disregarding shares owned by directors who are also
officers and certain employee benefit plans), (ii) the Board of Directors
approves the share acquisition or business combination before the Interested
Shareholder acquired 15% or more of the corporation's voting stock, or (iii) the
Board of Directors and the holders of at least two-thirds of the outstanding
voting stock of the corporation (disregarding shares owned by the Interested
Shareholder) approve the transaction after the Interested Shareholder acquires
15% or more of the corporation's voting stock.

The Oregon Control Share Act and the Oregon Business Combination Act will
have the effect of encouraging any potential acquiror to negotiate with the
Company's Board of Directors and will also discourage certain potential
acquirors unwilling to comply with the provisions of these laws. A corporation
may provide in its articles of incorporation or bylaws that the laws described
above do not apply to its shares. The Company has not adopted such a provision
and does not currently intend to do so. These laws may make the Company less
attractive for takeover, and thus shareholders may not benefit from a rise in
the price of the Common Stock that a takeover could cause.

LIMITATION OF LIABILITY AND INDEMNIFICATION

As allowed by the Oregon Business Corporation Act, the Company's Articles
of Incorporation provide that the liability of the directors of the Company for
monetary damages will be eliminated to the fullest extent permissible under
Oregon law. This is intended to eliminate the personal liability of a director
for monetary damages in an action brought by or in the right of the Company for
breach of a director's duties to the Company or its shareholders except for
liability: (1) for any breach of the director's duty of loyalty to the Company
or its shareholders, (2) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; and (3) for any
unlawful distribution to shareholders; or (4) for any transaction from which the
director derived an improper personal benefit. This provision does not limit or
eliminate the rights of the Company or any shareholder to seek non-monetary
relief, such as an injunction or rescission, in the event of a breach of a
director's duty of care. This provision also does not affect the director's
responsibilities under any other laws, such as the federal or state securities
or environmental laws.

The Articles of Incorporation and the Bylaws also provide that the Company
shall indemnify, to the fullest extent permitted under Oregon law, any person
who has been made, or is threatened to be made, a party to an action, suit or
legal proceeding by reason of the fact that the person is or was a director or
officer of the Corporation. The Company has entered into separate
indemnification agreements with each of its directors and executive officers.
These agreements require the Company to indemnify its officers and directors to
the fullest extent permitted by law, including circumstances in which
indemnification would otherwise be discretionary. Among other things, the
agreements require the Company to indemnify directors, officers and such
employee against certain liabilities that may arise by reason of their status or
service as a director, officer or employee and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.

TRANSFER AGENT

The transfer agent for the Common Stock is ___________________________.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding _______
shares of Class A Common Stock (and any of the __________________ shares sold
which are subject to the over-allotment option) and ______________ shares of
Class B Common Stock. Of these shares, the shares of Class A Common Stock sold
in the Offering, except for any shares purchased by an "affiliate" of the
Company, as that term is defined in the rules and regulations under the
Securities Act of 1933, as amended (the "Securities Act"), will be freely
tradable without restriction or further registration under the Securities Act.
The remaining _____________ shares of Class B Common Stock outstanding were
issued and sold by the Company pursuant to an exemption provided under the
Securities Act and are restricted securities within the meaning of Rule 144
under the Securities Act (the "Restricted Shares"). The Restricted Shares may
be resold only in an Offering registered under the Securities Act, pursuant to
an exemption from such registration such as that provided by Rule 144 under the
Act, or, in certain circumstances, in private transactions outside of any public
trading market.

<PAGE>

In general, under Rule 144 a person (or persons whose shares must be
aggregated for purposes of the volume limitation under the rule), including any
affiliate, who has beneficially owned Restricted Shares for at least two years
would be entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the outstanding shares of the
Company's Common Stock (_____________ shares, assuming the issuance of ________
shares of Class A Common Stock in this Offering by the Company) or the reported
average weekly trading volume in the over-the-counter market for the four weeks
preceding the sale. Sales under Rule 144 are also subject to certain manner of
sale restrictions and notice requirements and to the availability of current
public information about the Company. It is not expected that such information
concerning the Company will be available until at least 90 days after the
closing date of the Offering. Future sales of such shares could have a material
adverse effect on the market price of the Company's Common Stock. Persons who
have not been affiliates of the Company for at least three months, and who have
held their shares for more than three years, are entitled to sell such shares
without any volume limitations, in reliance upon paragraph (k) of Rule 144.
Upon completion of the Restructuring, Lithia Holding will be deemed to have held
the ____________ shares of Class B Common Stock for more than three years, but
is an affiliate of the Company. Affiliates of the Company are subject to the
volume and other limitations with respect to all shares held by them, regardless
of whether such shares are Restricted Shares.

In addition, the Company has reserved _________________ shares of Class A
Common Stock for issuance pursuant to the Plan. Of this amount, _______________
shares are subject to outstanding options, ________________ of which are
exercisable as of the date of this Prospectus. The Company intends to file a
registration statement under the Act to register shares to be issued pursuant to
the Plan. Such registration statement is expected to be filed as soon as
practicable after the closing date of the Offering and will become effective
automatically upon filing. Shares issued upon exercise of outstanding stock
options after the effective date of the Plan's registration statement generally
will be eligible for resale in the open market, unless held by affiliates of the
Company.

Lithia Holding and each executive officer and director of the Company have
agreed not to sell or otherwise dispose of shares of Common Stock for a period
of 180 days following the closing date of the Offering without the consent of
Furman Selz LLC, one of the Representatives of the Underwriters. See
"Underwriting." After expiration of the lock-up period, all of such shares will
be eligible for sale in the public market, subject to the provisions of Rule
144, described above.

Prior to the Offering there has been no public trading market for the
Common Stock of the Company and no accurate predictions can be made as to the
effect, if any, that sales of Restricted Shares or shares issued under the Plan
may have on the prevailing market price of the Class A Common Stock from time to
time. See "Principal Shareholders" and "Management -- 1996 Stock Incentive
Plan." Sales of significant numbers of Restricted Shares or shares issued under
the Plan or the "overhang" resulting from the eligibility of such shares for
sale into the public trading markets could adversely affect prevailing market
prices and could impair the ability of the Company to raise additional capital
in the future through an Offering of its equity securities at a price acceptable
to the Company or use its equity securities as consideration in future
acquisitions.

UNDERWRITING

The underwriters named below (the "Underwriters"), for which Furman Selz
LLC, Dain Bosworth Incorporated and EVEREN Securities, Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions set forth in the Underwriting Agreement, to purchase from
the Company the number of shares of Class A Common Stock indicated below
opposite their respective names:

Number of
Underwriter Shares
----------- ---------
Furman Selz LLC ........................
Dain Bosworth Incorporated .............
EVEREN Securities, Inc. ................
_____________________ ..................
_____________________ ..................
_____________________ ..................
_____________________ ..................
---------
Total .............................
-----------
-----------

<PAGE>

The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the shares of Class A Common Stock listed above are
subject to the approval of certain legal matters by counsel and various other
conditions. The Underwriting Agreement also provides that the Underwriters are
committed to purchase all of the shares of Class A Common Stock offered hereby,
if any are purchased (except for any shares that may be purchased through
exercise of the Underwriters' over-allotment option which may be exercised by
the Underwriters in whole or in part).

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Class A Common Stock to the public at the initial public
offering price set forth on the cover of this Prospectus and to certain dealers
at such price less a concession not in excess of $ per share to certain
other dealers. After the Offering, the public offering price and other selling
terms may be changed by the Representatives. The Class A Common Stock is
offered subject to receipt and acceptance by the Underwriters, and to certain
other conditions, including the right to reject orders in whole or in part.

Prior to this Offering, there has been no public market for the Class A
Common Stock. Accordingly, the initial pubic offering price has been determined
by negotiation between the Company and the Representatives. Among the factors
considered in determining the initial public offering price were the Company's
present and historical results of operations, current financial condition,
estimates of the business potential and prospects of the Company, the condition
of the Company's target market, the experience of the Company's management, the
economics of the industry in general, the general condition of the equities
market at the time of the Offering and other relevant factors. There can be no
assurance that any active trading market will develop for the Class A Common
Stock or as to the price at which the Class A Common Stock may trade in the
public market from time to time subsequent to the Offering.

The Company has granted the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to _____________
additional shares of Class A Common Stock at the initial public offering price
set forth on the cover page of this Prospectus, less underwriting discounts and
commissions. To the extent the Underwriters exercise the option, each
Underwriter will have a firm commitment, subject to certain conditions, to
purchase such number of additional shares of Class A Common Stock as is
proportionate to such Underwriter's initial commitment to purchase shares from
the Company. The Underwriters may exercise such option solely to cover over-
llotments, if any, incurred in connection with the sale of shares of Class A
Common Stock offered hereby.

The Underwriting Agreement provides that the Company has agreed to
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments that the Underwriters may
be required to make in respect thereof.

All of the Company's executive officers and directors and Lithia Holding
have agreed that, for a period of 180 days after the day on which the
Registration Statement becomes effective by order of the Commission, they will
not, without the prior written consent of Furman Selz LLC, directly or
indirectly, offer for sale, sell, contract to sell, or grant any option to sell
(including, without limitation, any short sale), pledge, establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act,
transfer, assign or otherwise dispose of any shares of the Company's Class A
Common Stock or securities exchangeable for or convertible into shares of the
Company's Class A Common Stock, or any option, warrant or other right to acquire
such shares, or publicly announce the intention to do any of the foregoing.

The Representatives have advised the Company that the Underwriters do not
intend to confirm sales of Class A Common Stock offered by this Prospectus made
to any accounts over which they exercise discretionary authority.

The Company has applied for quotation of the Class A Common Stock on the
Nasdaq National Market under the symbol "LITH."

The foregoing is a brief summary of the provisions of the Underwriting
Agreement and does not purport to be a complete statement of its terms and
conditions. A copy of the form of Underwriting Agreement has been filed as an
exhibit to the Registration Statement.

<PAGE>

LEGAL MATTERS

The validity of the Company's Class A Common Stock being offered hereby
will be passed upon for the Company by Foster Pepper & Shefelman. Certain legal
matters will be passed upon for the Underwriters by Milbank, Tweed, Hadley &
McCloy, Los Angeles, California.

EXPERTS

The combined financial statements and schedules of Lithia Motors, Inc. and
affiliates as of December 31, 1994 and 1995, and for each of the years in the
three-year period then ended, and the combined financial statements of Roberts
Dodge, Inc. at December 31, 1995 and for each of the years in the two-year
period then ended included herein and elsewhere in the Registration Statement
have been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent auditors appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.

The financial statements of Sam Linder, Inc., included in this Prospectus
and in the Registration Statement, have been audited by Moss Adams LLP,
independent certified public accountants, to the extent and for the periods set
forth in their reports appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports given upon the
authority of said firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the Securities Act,
with respect to the Class A Common Stock offered hereby. This Prospectus, which
is part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the exhibits and financial schedules
thereto. Statements contained in this Prospectus as to the contents of any
contract or other document referred to herein are not necessarily complete, and
in each instance that a reference is made to a contract or other document filed
as an exhibit to the Registration Statement, each such statement is qualified in
all respects by such reference. A copy of the Registration Statement may be
examined without charge at the Commission's principal offices at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part thereof may be obtained
from the Public Reference Section of the Commission upon payment of certain fees
prescribed by the Commission. Copies of such materials may also be obtained
from the website that the Commission maintains at http://www.sec.gov.

No Manufacturer (as defined in this Prospectus) has been involved, directly
or indirectly, in the preparation of this Prospectus or in the Offering being
made hereby. No Manufacturer has made any statements or representations in
connection with the Offering or has provided any information or materials that
were used in connection with the Offering, and no Manufacturer has any
responsibility for the accuracy or completeness of this Prospectus.

The Company intends to furnish to its shareholders annual reports
containing consolidated financial statements audited by independent certified
public accountants and quarterly reports containing unaudited consolidated
financial information for the first three quarters of each year.

<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES

INDEX TO COMBINED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
HISTORICAL FINANCIAL STATEMENTS

Lithia Motors, Inc. and Affiliated Companies

Report of Independent Auditors'.......................................................................... F-1

Combined Balance Sheets.................................................................................. F-2

Combined Statements of Operations........................................................................ F-3

Combined Statements of Changes in Owners' Equity......................................................... F-4

Combined Statements of Cash Flows........................................................................ F-5

Notes to Combined Financial Statements................................................................... F-6

Roberts Dodge, Inc. and Affiliated Company

Independent Auditors' Report............................................................................. F-23

Combined Balance Sheets.................................................................................. F-24

Combined Statements of Operations........................................................................ F-25

Combined Statements of Changes in Owners' Equity......................................................... F-26

Combined Statements of Cash Flows........................................................................ F-27

Notes to Combined Financial Statements................................................................... F-28

Sam Linder, Inc.

Independent Auditors' Report............................................................................. F-36

Balance Sheet............................................................................................ F-37

Statements of Operations and Accumulated Deficit......................................................... F-38

Statement of Cash Flows.................................................................................. F-39

Notes to Financial Statements............................................................................ F-40

Melody Vacaville, Inc.

Report of Independent Auditors'.......................................................................... F-49

Balance Sheet............................................................................................ F-50

Statement of Operations.................................................................................. F-51

Statement of Stockholders Deficit........................................................................ F-52

Statement of Cash Flows.................................................................................. F-53

Notes to Financial Statements............................................................................ F-54
</TABLE>

<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Lithia Motors, Inc. and Affiliated Companies:

We have audited the accompanying combined balance sheets of Lithia Motors,
Inc. and Affiliated Companies as of December 31, 1994 and 1995, and the related
combined statements of operations, changes in owners' equity, and cash flows for
the years in the three-year period ended December 31, 1995. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Lithia Motors, Inc.
and Affiliated Companies as of December 31, 1994 and 1995 and the results of
their operations and their cash flows for the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.

KPMG PEAT MARWICK LLP

Portland, Oregon

March 8, 1996

F-1
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
-------------------- ------------------------
1994 1995 ACTUAL PROFORMA
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)

<CAPTION>
(NOTE 9)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 6,952 $ 9,350 $ 3,819 $ 3,819
Trade receivables.............................................. 1,289 1,744 2,322 2,322
Lease receivables, current portion............................. 125 140 150 150
Inventories.................................................... 19,132 17,700 16,480 16,480
Vehicles leased to others, current portion..................... 3,201 3,462 3,680 3,680
Notes receivable............................................... 78 127 14 14
Prepaid expenses and other..................................... 309 273 918 918
Deferred income taxes.......................................... -- -- -- 997
--------- --------- ----------- -----------
Total current assets......................................... 31,086 32,796 27,383 28,380
--------- --------- ----------- -----------
Property, plant and equipment, net............................... 3,070 3,234 1,278 1,278
Vehicles leased to others, less current portion.................. 1,724 1,864 1,982 1,982
Other assets:
Lease receivables, less current portion........................ 88 310 333 333
Notes receivable............................................... 88 146 261 261
Investment in affiliate........................................ 488 569 591 591
Other noncurrent assets........................................ 115 303 288 288
--------- --------- ----------- -----------
779 1,328 1,473 1,473
--------- --------- ----------- -----------
$ 36,659 $ 39,222 $ 32,116 $ 33,113
--------- --------- ----------- -----------
--------- --------- ----------- -----------

LIABILITIES, MINORITY INTEREST AND OWNERS' EQUITY
Current liabilities:
Notes payable.................................................. $ 390 $ 625 $ -- $ --
Flooring notes payable......................................... 21,218 19,590 13,723 13,723
Current maturities of long-term debt........................... 1,621 2,085 2,207 2,207
Trade payables................................................. 846 1,455 1,249 1,249
Accrued liabilities............................................ 974 1,280 1,441 1,441
Deferred income taxes.......................................... -- -- -- 594
--------- --------- ----------- -----------
Total current liabilities.................................... 25,049 25,035 18,620 19,214
Long-term debt, less current maturities........................ 6,748 10,743 8,262 11,000
Deferred revenue............................................... 1,462 1,782 2,238 2,238
Other long-term liabilities.................................... 61 62 61 61
--------- --------- ----------- -----------
Total liabilities............................................ 33,320 37,622 29,181 32,513
--------- --------- ----------- -----------
Commitments and contingency......................................
Minority interest................................................ 536 749 1,029 1,029
Owners' equity:
Common stock................................................... 751 801 801 801
Retained earnings.............................................. 2,052 50 1,105 (1,230)
--------- --------- ----------- -----------
Total owners' equity......................................... 2,803 851 1,906 (429)
--------- --------- ----------- -----------
$ 36,659 $ 39,222 $ 32,116 $ 33,113
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>

See accompanying notes to combined financial statements.

F-2
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES

COMBINED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales:
Vehicle.................................................. $ 77,649 $ 93,535 $ 97,338 $ 46,076 $ 59,877
Service, body, parts and other........................... 14,460 15,787 16,858 8,320 9,248
--------- --------- --------- --------- ---------
Net sales.............................................. 92,109 109,322 114,196 54,396 69,125
--------- --------- --------- --------- ---------
Cost of sales:
Vehicle.................................................. 67,161 81,234 83,487 39,763 52,244
Service, body, parts and other........................... 7,688 9,183 9,766 4,870 5,425
--------- --------- --------- --------- ---------
Cost of sales.......................................... 74,849 90,417 93,253 44,633 57,669
--------- --------- --------- --------- ---------
Gross profit........................................... 17,260 18,905 20,943 9,763 11,456
Selling, general and administrative........................ 15,122 15,174 16,735 7,860 9,379
--------- --------- --------- --------- ---------
Operating income....................................... 2,138 3,731 4,208 1,903 2,077
--------- --------- --------- --------- ---------
Other income (expense):
Equity in income of affiliate............................ 55 77 81 29 22
Interest income.......................................... 216 99 179 65 93
Interest expense......................................... (1,374) (954) (1,390) (583) (649)
Other, net............................................... 751 1,019 1,075 455 360
--------- --------- --------- --------- ---------
(352) 241 (55) (34) (174)
--------- --------- --------- --------- ---------
Income before minority interest........................ 1,786 3,972 4,153 1,869 1,903
Minority interest.......................................... (233) (458) (778) (383) (317)
--------- --------- --------- --------- ---------
Net income............................................. $ 1,553 $ 3,514 $ 3,375 $ 1,486 $ 1,586
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income data (unaudited):
Income before income taxes and minority interest, as
reported............................................... $ 1,786 $ 3,972 $ 4,153 $ 1,869 $ 1,903
Proforma income taxes.................................... (697) (1,521) (1,598) (719) (742)
--------- --------- --------- --------- ---------
Proforma net income before minority interest............. 1,089 2,451 2,555 1,150 1,161
Proforma minority interest............................... (142) (283) (479) (235) (193)
--------- --------- --------- --------- ---------
Proforma net income...................................... $ 947 $ 2,168 $ 2,076 $ 915 $ 968
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Proforma net income per share............................ $ 0.65 $ 0.29 $ 0.30
Shares used in computing proforma net income per share... 3,196 3,196 3,196
--------- --------- ---------
--------- --------- ---------
</TABLE>

See accompanying notes to combined financial statements.

F-3
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES

COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY

(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK
------------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1992................................................ 4,720 $ 799 $ 437 $ 1,236
Net income................................................................ -- -- 1,553 1,553
Issuance of common stock:
Lithia Rentals, Inc..................................................... 1,000 25 -- 25
Dividends................................................................. -- -- (1,630) (1,630)
----- ----- --------- ---------
Balance, December 31, 1993................................................ 5,720 824 360 1,184
Net income................................................................ -- -- 3,514 3,514
Issuance of common stock:
Lithia Rentals, Inc..................................................... 667 50 -- 50
Discount Auto and Truck Rental, Inc..................................... 1,000 20 -- 20
Cancellation of common stock:
Paul Phillips, Inc...................................................... (500) (143) 143 --
Dividends................................................................. -- -- (1,965) (1,965)
----- ----- --------- ---------
Balance, December 31, 1994................................................ 6,887 751 2,052 2,803
Net income................................................................ -- -- 3,375 3,375
Issuance of common stock:
Discount Auto and Truck Rental, Inc..................................... 2,500 50 -- 50
Dividends................................................................. -- -- (5,377) (5,377)
----- ----- --------- ---------
Balance, December 31, 1995................................................ 9,387 801 50 851
Net income (unaudited).................................................... -- -- 1,586 1,586
Dividends (unaudited)..................................................... -- -- (531) (531)
----- ----- --------- ---------
Balance, June 30, 1996 (unaudited)........................................ 9,387 $ 801 $ 1,105 $ 1,906
----- ----- --------- ---------
----- ----- --------- ---------
</TABLE>

See accompanying notes to combined financial statements.

F-4
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX-MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 1,553 $ 3,514 $ 3,375 $ 1,486 $ 1,586
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 1,803 1,954 1,832 785 960
(Gain) Loss on sale of assets............................. (184) (146) (305) 18 (142)
Minority interest in income............................... 233 458 778 383 317
Equity in income of Properties............................ (55) (77) (81) (29) (22)
Changes in operating assets and liabilities:
Trade and lease receivables............................. (682) 1,659 (692) (459) (611)
Inventories............................................. (5,177) (2,085) 1,432 3,977 1,220
Other current assets.................................... 13 (116) 27 80 (642)
Deposits to related parties............................. (3) 0 3 3 0
Other noncurrent assets................................. (55) 2 (188) (97) 15
Trade payables.......................................... 561 (1,793) 609 (377) (206)
Accrued liabilities..................................... 6 1,002 306 41 161
Other long-term liabilities............................. 153 358 321 228 455
Proceeds from sale of vehicles leased to others........... 4,254 5,289 4,757 2,056 3,382
Expenditures for vehicles leased to others................ (6,963) (6,764) (6,308) (3,255) (3,647)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities... (4,543) 3,205 5,866 4,840 2,826
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Notes receivable issued....................................... (135) (142) (190) (158) (446)
Principal payments received on notes receivable............... 142 309 83 49 444
Principal payments received on notes-related.................. 201 0 0 0 0
Proceeds from sale of assets.................................. 0 3 10 0 1,286
Capital expenditures.......................................... (108) (164) (524) (134) (223)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities... 100 6 (621) (243) 1,061
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on flooring notes payable......... 5,443 2,170 (1,628) (4,337) (5,867)
Net borrowings (repayments) on notes payable.................. 1,527 (2,312) 235 (390) (625)
Principal payments on long-term debt.......................... (3,244) (9,084) (8,070) (3,869) (7,251)
Proceeds from issuance of long-term debt...................... 3,973 11,300 12,529 4,966 4,892
Proceeds from issuance of common stock and minority
interest.................................................... 25 (73) 50 0 0
Principal payments received on notes receivable -- owners'.... 15 144 142 142 149
Dividends and distributions................................... (1,630) (1,965) (5,377) (1,518) (531)
Distribution to minority interest............................. (172) (298) (728) (315) (185)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities... 5,937 (118) (2,847) (5,321) (9,418)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents.. 1,494 3,093 2,398 (724) (5,531)
Cash and cash equivalents at beginning of period................ 2,365 3,859 6,952 6,952 9,350
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period...................... $ 3,859 $ 6,952 $ 9,350 $ 6,228 $ 3,819
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest...................... $ 1,375 $ 955 $ 1,390 $ 583 $ 649
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental schedule of noncash financing activities:
Cancellation of common stock.................................. $ -- $ 143 $ -- $ -- $ --
Issuance of notes receivable -- minority interest............. -- -- 678 678 --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

See accompanying notes to combined financial statements.

F-5
<PAGE>
LITHIA MOTORS, INC.

AND AFFILIATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

Lithia Motors, Inc. and Affiliated Companies (the Company) operate in
Medford and Grants Pass, Oregon and are primarily dealers in new and used
automobile and light-duty trucks. The Company serves customers located
principally in southern Oregon. In addition, the Company retails and wholesales
replacement parts and provides vehicle servicing, leasing and financing.

PRINCIPLES OF COMBINATION

The accompanying combined financial statements include the accounts of the
following entities who are affiliated through common ownership and management:

<TABLE>
<S> <C>
Lithia Motors, Inc. Subchapter S Corporation
Lithia TLM LLC Limited Liability Corporation
Lithia Dodge LLC Limited Liability Corporation
Lithia Grants Pass Auto Center LLC Limited Liability Corporation
Lithia Leasing, Inc. Subchapter S Corporation
Discount Auto and Truck Rental, Inc. Subchapter S Corporation
Lithia Rentals, Inc. Subchapter S Corporation
</TABLE>

Lithia TLM LLC, Lithia Dodge LLC and Lithia Grants Pass Auto Center LLC are
limited liability corporations majority owned by Lithia Motors, Inc.. The 20%,
25% and 25% minority interests in Lithia TLM LLC, Lithia Dodge LLC and Lithia
Grants Pass Auto Center LLC, respectively have been recorded in the accompanying
financial statements.

All significant intercompany accounts and transactions, consisting
principally of intercompany sales, have been eliminated upon combination.

As stipulated in the Operating Agreements ("the Agreements"), for Lithia TLM
LLC, Lithia Dodge LLC and Lithia's Grants Pass Auto Center LLC the term of the
Companies is for thirty years, terminating in 2025, unless terminated earlier.
In addition, the terms of the agreements limit the transferability of a member's
interest without the consent of the other members. Lithia Motors, Inc. is the
managing member of all Limited Liability Corporations referred to above.

As a limited liability company, each member's liability is limited to
amounts reflected in their respective member accounts.

CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, the Company considers contracts in
transit and all highly liquid debt instruments with a maturity of three months
or less when purchased to be cash equivalents.

F-6
<PAGE>
LITHIA MOTORS, INC.

AND AFFILIATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES

New vehicle, used vehicle and parts and accessories inventories are stated
at the lower of cost or market. Cost is determined by using the last-in,
first-out (LIFO) method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and are being depreciated over
their estimated useful lives principally on the straight-line basis.
Expenditures for maintenance, repairs and minor renewals are expensed as
incurred, while significant renewals and betterments are capitalized. When an
asset is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the account, and any gain or loss is credited or
charged to income.

INCOME TAXES

The Company is currently an S Corporation for federal and state income tax
reporting purposes. Federal and state income taxes on the income of an S
Corporation are generally by the individual stockholders rather than the
corporation.

The Company's S Corporation status will terminate immediately prior to the
effectiveness of the proposed IPO of its common stock discussed in note 12. At
this time the Company will establish its net deferred tax liabilities and record
an accompanying charge to income tax expense. The accompanying statements of
income for the year ended December 31, 1995, and the six-months ended June 30,
1996, reflect provisions for income taxes on an unaudited pro forma basis, using
the asset and liability method, as if the Company had been a C Corporation,
fully subject to federal and state income taxes.

Under the asset and liability method, deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred income tax assets and liabilities
of changes in tax rates is recognized in income in the period that includes the
enactment date.

ENVIRONMENTAL LIABILITIES AND EXPENDITURES

Accruals for environmental matters, if any, are recorded in operating
expenses when it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated. Accrued liabilities are exclusive
of claims against third parties and are not discounted.

In general, costs related to environmental remediation are charged to
expense. Environmental costs are capitalized if the costs increase the value of
the property and/or mitigate or prevent contamination from future operations.

F-7
<PAGE>
LITHIA MOTORS, INC.

AND AFFILIATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA NET INCOME PER SHARE

Pro forma net income per share is computed using pro forma net income (as
described in note 9) and is based on the weighted average number of shares of
common stock outstanding and common equivalent shares from stock options
outstanding using the treasury stock method. In accordance with certain
Securities and Exchange Commission (SEC) Staff Accounting Bulletins, such
computations include all common and common equivalent shares issued within 12
months of the offering date as if they were outstanding for all periods
presented using the treasury stock method and the anticipated IPO price.

INTERIM FINANCIAL STATEMENTS

The accompanying unaudited financial statements for the six-months ended
June 30, 1996 and 1995 have been prepared on substantially the same basis as the
audited financial statements, and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
information set forth therein.

FINANCIAL INSTRUMENTS

The carrying amount of cash equivalents, trade receivables, trade payable
and short term borrowing approximate fair value because of the short-term nature
of these instruments. The fair value of long-term debt was estimated by
discounting the future cash flows using market interest rates and does not
differ significantly from that reflected in the financial statements.

Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.

ADVERTISING

The Company expenses production and other costs of advertising as incurred.

CONCENTRATIONS OF CREDIT RISK

Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base.

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash deposits. The Company
generally limits its exposure to credit risk from balances on deposit in
financial institutions in excess of the FDIC-insured limit.

F-8
<PAGE>
LITHIA MOTORS, INC.

AND AFFILIATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MANAGEMENT ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
December 31, 1995 and 1994 and revenues and expenses during the three-year
period ended December 31, 1995. The actual outcome of the estimates could differ
from the estimates made in the preparation of the financial statements.

REVENUE RECOGNITION

Revenue from service contract insurance sold by the Company is recorded as
deferred revenue upon initial receipt and recognized as income on a prorated
basis over the term of the policy. Income from finance and insurance commissions
is recorded separately on an accrual basis. Revenue from the sale of cars is
recognized upon delivery, when the sales contract is signed and down payment has
been received. Fleet sales of vehicles are shown on a net basis in other
revenue.

(2) INVENTORIES AND RELATED NOTES PAYABLE

The new and used vehicle inventory collateralizing related notes payable and
other inventory were as follows:

<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
JUNE 30,
1994 1995 1996
---------------------- ---------------------- ----------------------
INVENTORY NOTES INVENTORY NOTES INVENTORY NOTES
COST PAYABLE COST PAYABLE COST PAYABLE
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
New and demonstrator
vehicles.................. $ 16,776 $ 17,172 $ 13,972 $ 15,346 $ 12,549 $ 12,905
Used vehicles.............. 6,847 4,046 7,532 4,244 7,839 818
Parts and accessories...... 831 -- 1,092 -- 1,223 --
----------- --------- ----------- --------- ----------- ---------
Inventories at FIFO........ 24,454 21,218 22,596 19,590 21,611 13,723
Less LIFO reserve for new
and used vehicles and
parts inventories......... 5,322 -- 4,896 -- 5,131 --
----------- --------- ----------- --------- ----------- ---------
Inventories at LIFO........ $ 19,132 $ 21,218 $ 17,700 $ 19,590 $ 16,480 $ 13,723
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
</TABLE>

If the first-in, first-out (FIFO) method of inventory accounting were used
by the Company, net income would have been higher (lower) by $557, $615 and
$(426) and $235 for the years ended December 31, 1993, 1994 and 1995 and the
six-month period ended June 30, 1996, respectively.

F-9
<PAGE>
LITHIA MOTORS, INC.

AND AFFILIATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)

(2) INVENTORIES AND RELATED NOTES PAYABLE (CONTINUED)
Flooring notes payable consist of 8.5% to 9% flooring notes secured by new
and used vehicles. The flooring arrangements permit the Company to borrow up to
$21,900 in 1995 and 1994 and $27,900 for the six-month period ended June 30,
1996, restricted by new and used vehicle levels. The notes are due within five
days of the vehicle being sold or after the vehicle has been in inventory for
one year for new vehicles, six months for program vehicles, and on a revolving
basis for used vehicles.

(3) PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Buildings and improvements...................................... $ 1,373 $ 1,445 $ --
Service and equipment........................................... 1,224 1,431 1,468
Furniture, signs and fixtures................................... 1,634 1,607 1,701
--------- --------- -----------
4,231 4,483 3,169
Less accumulated depreciation................................... 1,587 1,840 1,892
--------- --------- -----------
2,644 2,643 1,277
Land............................................................ 426 591 --
--------- --------- -----------
$ 3,070 $ 3,234 $ 1,277
--------- --------- -----------
--------- --------- -----------
</TABLE>

(4) VEHICLES LEASED TO OTHERS AND RELATED LEASE RECEIVABLES

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Vehicles leased to others..................................... $ 6,201 $ 6,678 $ 6,941
Less accumulated depreciation................................. (1,276) (1,352) (1,279)
--------- --------- ---------
4,925 5,326 5,662
Less current portion, net................................... 3,201 3,462 3,680
--------- --------- ---------
$ 1,724 $ 1,864 $ 1,982
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-10
<PAGE>
LITHIA MOTORS, INC.

AND AFFILIATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)

(4) VEHICLES LEASED TO OTHERS AND RELATED LEASE RECEIVABLES (CONTINUED)
Lease receivables result from customer leases of vehicles under agreements
which qualify as operating and direct-financing leases. Future minimum lease
income from non-cancelable long-term leases and direct-financing leases are as
follows:

<TABLE>
<CAPTION>
DIRECT-
OPERATING FINANCING
----------- -----------
<S> <C> <C>
Year ending December 31:
1996.................................................................. $ 1,563 $ 140
1997.................................................................. 884 118
1998.................................................................. 220 91
1999.................................................................. 44 51
2000 and thereafter................................................... 8 50
----------- -----
$ 2,719 $ 450
----------- -----
----------- -----
</TABLE>

(5) NOTES PAYABLE

Notes payable consist of a 9.25% credit line with a bank for the in-house
financing of vehicle sales and leases. The Company may borrow up to $1,000 or
75% of the total in-house vehicle receivables under 60 days past due.

F-11
<PAGE>
LITHIA MOTORS, INC.

AND AFFILIATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)

(6) LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Notes payable to officer and director,
interest at 9%; due in ten equal annual
installments beginning one year and ten
days subsequent to demand by the
note holder................................................. $ 925 $ 3,865 $ 3,262
Notes payable to related parties other than
officer and director, interest at 8.0% to
9.0%; due in ten equal annual installments
beginning at various times subsequent to
demand by the note holder................................... 827 1,234 316
Notes payable in monthly installments, including
interest at 9%; maturing at various dates
through 2000; secured by equipment.......................... 1,092 1,404 1,039
Notes payable in monthly installments, including
interest at 8.75% to 10%; maturing at
various dates through 2000; secured by
vehicles leased to others................................... 4,409 5,466 5,852
Mortgages payable in monthly installments of
$105, including interest at 7.5% to 12%;
maturing at various dates through 2013;
secured by land and buildings............................... 1,092 858 --
Other......................................................... 24 1 --
--------- --------- ---------
8,369 12,828 10,469
Less current maturities....................................... 1,621 2,085 2,207
--------- --------- ---------
$ 6,748 $ 10,743 $ 8,262
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-12
<PAGE>
LITHIA MOTORS, INC.

AND AFFILIATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)

(6) LONG-TERM DEBT (CONTINUED)
The schedule of future principal payments on long-term debt after December
31, 1995 is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Year ending:
1996.......................................................................... $ 2,085
1997.......................................................................... 4,740
1998.......................................................................... 1,036
1999.......................................................................... 790
2000 and thereafter........................................................... 4,177
------------
$ 12,828
------------
------------
</TABLE>

(7) MINORITY INTEREST

For the years ended December 31, 1994 and 1995 and the six-month period
ended June 30, 1996, the Company held notes receivable of $142, $678 and $565,
respectively, from minority owners' of the Company. These notes are secured by
the minority owners' interest in the Company and bear interest at .5% over prime
rate and 10.5% respectively. The amount of the receivables are shown on the
balance sheet as a reduction to minority interest.

(8) OWNERS' EQUITY

CAPITAL STRUCTURE

The capital structure of the corporations included in the combined balance
sheet at December 31, 1994 is as follows:

<TABLE>
<CAPTION>
NO PAR COMMON STOCK
-------------------------------------
AUTHORIZED ISSUED OUTSTANDING
----------- --------- -------------
<S> <C> <C> <C>
Lithia Motors, Inc.......................................... 1,000 240 120
Lithia Leasing, Inc......................................... 1,000 100 100
Discount Auto and Truck Rental, Inc......................... 10,000 4,000 4,000
Lithia Rentals, Inc......................................... 5,000 2,667 2,667
</TABLE>

The capital structure of the corporations included in the combined balance
sheet at December 31, 1995 is as follows:

<TABLE>
<CAPTION>
NO PAR COMMON STOCK
-------------------------------------
AUTHORIZED ISSUED OUTSTANDING
----------- --------- -------------
<S> <C> <C> <C>
Lithia Motors, Inc.......................................... 1,000 240 120
Lithia Leasing, Inc......................................... 1,000 100 100
Discount Auto and Truck Rental, Inc......................... 10,000 6,500 6,500
Lithia Rentals, Inc......................................... 5,000 2,667 2,667
</TABLE>

F-13
<PAGE>
LITHIA MOTORS, INC.

AND AFFILIATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)

(9) PRO FORMA INCOME TAXES

The unaudited pro forma amounts included in the accompanying pro forma
balance sheet as of June 30, 1996, reflect the following unaudited pro forma
adjustments:

- Provisions for income taxes as if the Company had been a C Corporation,
fully subject to federal and state income taxes.

- A current deferred income tax asset of $997 and a deferred income tax
liability of $594, established to effect the Company's conversion to C
Corporation status. The net of these amounts will be credited to income
tax expense as a nonrecurring credit upon the Company's conversion to C
Corporation status but have been excluded from the pro forma statement of
income.

- A $2,738 S Corporation distribution payable to the current stockholders.
This amount represents estimated undistributed S Corporation earnings of
the Company from January 1, 1996 through the completion of the proposed
IPO and the amount of the stockholders' S Corporation tax bases.

The pro forma provision for income taxes reflects the income tax expense
that would have been reported if the Company had been a C Corporation. The
components of unaudited pro forma income taxes are as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX-MONTHS
------------------------------- ENDED JUNE
1993 1994 1995 30, 1996
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Pro forma income taxes:
Current:
Federal........................................... $ 490 $ 1,292 $ 1,487 $ 693
State............................................. 102 269 309 144
--------- --------- --------- -----
Total current................................... 592 1,561 1,796 837
--------- --------- --------- -----
Deferred:
Federal........................................... 87 (33) (164) (79)
State............................................. 18 (7) (34) (16)
--------- --------- --------- -----
Total deferred.................................. 105 (40) (198) (95)
--------- --------- --------- -----
Total pro forma income taxes.................... $ 697 $ 1,521 $ 1,598 $ 742
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>

F-14
<PAGE>
LITHIA MOTORS, INC.

AND AFFILIATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)

(9) PRO FORMA INCOME TAXES (CONTINUED)
The following tabulation reconciles the expected corporate federal income
tax expense (computed by multiplying the Company's income before minority
interest by 34%) to the Company's unaudited pro forma income tax expense:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX-MONTHS
------------------------------- ENDED JUNE
1993 1994 1995 30, 1996
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Expected pro forma income tax expense................. $ 607 $ 1,350 $ 1,412 $ 647
State income taxes, net of federal tax effect......... 78 173 181 83
Other, net............................................ 12 (2) 5 12
--------- --------- --------- -----
$ 697 $ 1,521 $ 1,598 $ 742
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the unaudited pro forma deferred income tax assets and liability as
of June 30, 1996, are presented below:

<TABLE>
<CAPTION>
Pro forma deferred income tax assets:
<S> <C>
Allowance and accruals................................................. $ 997
---------
Total deferred income tax assets................................... 997

Pro forma deferred income tax liability:
Property and equipment, principally due to differences in
depreciation......................................................... (594)
---------
Pro forma net deferred income tax liability........................ $ 403
---------
---------
</TABLE>

(10) COMMITMENTS AND CONTINGENCY

RECOURSE PAPER

The Company is contingently liable to banks for recourse paper from the
financing of vehicle sales. The contingent liability at December 31, 1994 and
1995 was approximately $77 and $206, respectively.

OPERATING LEASES

Substantially all of the Companies operations are conducted in leased
facilities under noncancelable operating leases with Lithia Properties, LLC a
related party (note 13). These leases expire at various dates through 1996. At
the end of the lease term, all of the leases are renewable at the then fair
rental value for periods of five to seven years.

F-15
<PAGE>
LITHIA MOTORS, INC.

AND AFFILIATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)

(10) COMMITMENTS AND CONTINGENCY (CONTINUED)
The minimum rental commitments under operating leases after December 31,
1995 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1995
-------------
<S> <C>
1996............................................................................ $ 2,265
</TABLE>

Rental expense for all operating leases was $1,849, $1,888 $1,993 and $1,023
for the years ended December 31, 1993, 1994 and 1995 and the six-month period
ended June 30, 1996, respectively.

F-16
<PAGE>
LITHIA MOTORS, INC.

AND AFFILIATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)

(11) PROFIT SHARING PLAN

The Company has a defined contribution plan and trust (the 401(k) and profit
sharing plan) covering substantially all full-time employees. Effective May 1,
1995, the Plan was amended to include a 401(k) component for eligible employees.
The annual contribution to the plan is at the discretion of the Board of
Directors of Lithia Motors, Inc. Contributions of $100, $100, $84 and $46 were
paid for the years ended December 31, 1993, 1994, 1995 and the six-month period
ended June 30, 1996, respectively. Employees may contribute up to 15% of
compensation to the plan under certain circumstances.

(12) INVESTMENT IN UNCONSOLIDATED AFFILIATE

The Company has an investment in Lithia Properties, LLC, the members of
which are the Company (20%), Sidney DeBoer (35%), M.L. Dick Heimann (30%) and
three of Mr. DeBoer's children (5% each). This investment is accounted for using
the equity method. The following table summarizes activity in the Company's
investment through June 30, 1996:

<TABLE>
<S> <C>
Investment in affiliate, December 31, 1993........................... $ 411
Equity in affiliate.................................................. 77
Distributions from affiliate......................................... --
---------
Investment in affiliate, December 31, 1994........................... 488
Equity in affiliate.................................................. 81
Distributions from affiliate......................................... --
---------
Investment in affiliate, December 31, 1995........................... 569
Equity in affiliate.................................................. 22
Distributions from affiliate......................................... --
---------
Investment in affiliate, June 30, 1996............................... $ 591
---------
---------
</TABLE>

(13) RELATED PARTY TRANSACTIONS

Substantially all of the real property on which the Company's business is
located is owned by Lithia Properties, LLC, (note 12). The Company, leases its
facilities under various lease agreements from Lithia Properties, LLC (note 10).
Rental expense for these operating leases was $1,849, $1,888, $1,993 and $1,023
for the years ended December 31, 1993, 1994 and 1995 and the six-month period
ended June 30, 1996, respectively. Recorded in other assets deposits relating to
these operating leases of $178, $175 and $175 for the years ended December 31,
1994 and 1995 and the six-month period ended June 30, 1996, respectively
relating to these operating leases is recorded in other current assets.

The Company provides management services to Lithia Properties, LLC. Other
income includes management fees of $288 for the years ended December 31, 1993,
1994 and 1995 and $144 for the six-month period ended June 30, 1996,
respectively.

F-17
<PAGE>
LITHIA MOTORS, INC.

AND AFFILIATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)

(13) RELATED PARTY TRANSACTIONS (CONTINUED)
Lithia Properties, LLC leases certain equipment to the Company. Selling,
general and administrative expense includes equipment rental expense of $27,
$26, $27 and $10 for the years ended December 31, 1993, 1994 and 1995 and the
six-month period ended June 30, 1996, respectively.

The Company has notes payable included in long-term debt of $925, $3,865 and
$3,262 for the years ended December 31, 1994 and 1995 and the six-month period
ended June 30, 1996, respectively, to certain officers and directors. These
notes accrue interest at 9% and are due in ten equal annual installments
beginning one year and ten days subsequent to demand by the noteholder.

The Company has agreed to guarantee certain indebtedness of Lithia
Properties LLC incurred in connection with purchases of real property which
secures the loan. The total indebtedness is approximately $11,917.

(14) SUBSEQUENT EVENTS (UNAUDITED)

STOCK INCENTIVE PLAN

In April, 1996, the Board and the Company's shareholders adopted the
Company's 1996 Stock Incentive Plan (the Plan). The Plan provides for the
granting of stock-based awards to executive officers (including those who are
directors), to other employees and non-employee consultants of the Company.
Either non-qualified or incentive stock options may be issued under this plan
and are exercisable for a period of up to ten years from the date of grant. The
Plan is permitted to issue up to 500 shares of the Company's Class A common
stock. The following table summarizes stock option activity through June 30,
1996:

<TABLE>
<CAPTION>
PRICE
SHARES RANGE
----------- -------------
<S> <C> <C>
Outstanding options at December 31, 1995........................................ -- $ --
Granted......................................................................... 320.5 4.14 - 4.55
Exercised....................................................................... -- --
Canceled........................................................................ -- --
----- -------------
Outstanding options at June 30, 1996............................................ 320.5 $ 4.14 - 4.55
----- -------------
----- -------------
</TABLE>

At June 30, 1996, no outstanding options were exercisable.

STOCKHOLDER DISTRIBUTIONS

As an S Corporation, the Company has made distributions to its stockholders
partially to provide them with funds to pay income taxes on corporate earnings.
Immediately prior to the completion of the proposed IPO, the Company intends to
declare a distribution payable to existing stockholders of the Company. This
distribution represents undistributed S Corporation earnings of the Company
through the completion of the proposed IPO and the amount of the stockholders' S
Corporation tax bases.

F-18
<PAGE>
LITHIA MOTORS, INC.

AND AFFILIATED COMPANIES

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)

(14) SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
RESTRUCTURING

On April 5, 1996, Lithia Motors, Inc. authorized 25,000 shares of Series B
common stock and 100,000 shares of Series A common stock of which 3,000 and 0,
respectively are outstanding. On October 8, the Board of Directors approved the
filing of a registration statement with the SEC permitting the Company to sell
shares of its Class A common stock. Prior to completion of the offering, the
Company and other affiliated companies will consummate a restructuring which
will result in each of the Company's dealerships and operating divisions
becoming direct or indirect wholly-owned subsidiaries and Lithia Holdings, LLC
owning all of the outstanding Class B common stock of the Company.

ACQUISITIONS

The Company has signed definitive agreements to purchase two additional
dealerships described below. These purchases are subject to normal closing
conditions and the approval of the appropriate factories.

The Company has agreed to pay $2.25 million plus the new car and parts
inventory at seller's cost for Roberts Dodge, a Dodge dealer in Eugene, Oregon.
In addition, the Company will purchase the real property on which the dealership
is located for $2.3 million.

The Company has agreed to pay $1.05 million plus the new car and parts
inventory at seller's cost for Sam Linder, Inc. a Honda, Cadillac, and
Oldsmobile dealership in Salinas, California. In addition, the Company will
purchase the real property on which the dealership is located for $2.33 million.
Closing is scheduled to occur on or before November 1, 1996.

LINE OF CREDIT

The Company obtained a secured line of credit from a bank in the principal
amount of $6.0 million which will be utilized to fund the cash portion of the
acquisitions described above. The credit line bears interest at prime plus 75
basis points with interest due monthly during the first year "draw down" period,
after which monthly payments are based on a ten-year amortization schedule, with
final payment due five years from the initial advance.

F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Roberts Dodge, Inc. and Affiliated Company:

We have audited the accompanying combined balance sheets of Roberts Dodge,
Inc. and Affiliated Company as of December 31, 1995, and the related combined
statements of operations, changes in owners' equity, and cash flows for the
years in the two-year period ended December 31, 1995. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Roberts Dodge, Inc.
and Affiliated Company as of December 31, 1995 and the results of their
operations and their cash flows for the years in the two-year period ended
December 31, 1995, in conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Portland, Oregon
September 17, 1996

F-20
<PAGE>
ROBERTS DODGE, INC.

AND AFFILIATED COMPANY

COMBINED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 2,220 $ 1,202
Trade receivables, net.............................................................. 555 785
Inventories......................................................................... 4,383 4,766
Prepaid expenses and other.......................................................... 7 42
------ -----------
Total current assets.......................................................... 7,165 6,795
------ -----------
Property, plant and equipment, net.................................................... 1,413 1,452
Other assets:
Goodwill............................................................................ 22 20
Stockholder advances................................................................ -- 178
Other noncurrent assets............................................................. 156 174
------ -----------
178 372
------ -----------
$ 8,756 $ 8,619
------ -----------
------ -----------
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Notes payable....................................................................... $ -- $ 200
Flooring notes payable.............................................................. 4,241 4,149
Current maturities of long-term debt................................................ 1,970 1,470
Trade payables...................................................................... 407 182
Accrued liabilities................................................................. 213 496
------ -----------
Total current liabilities..................................................... 6,831 6,497
Long-term debt, less current maturities............................................... 1,125 1,056
------ -----------
Total liabilities............................................................. 7,956 7,553
------ -----------
Commitments and contingency
Owners' equity:
Common stock, no par value, 10,000 shares authorized, 100 shares issued and
outstanding....................................................................... 250 250
Retained earnings................................................................... 550 816
------ -----------
Total owners' equity.......................................................... 800 1,066
------ -----------
$ 8,756 $ 8,619
------ -----------
------ -----------
</TABLE>

See accompanying notes to combined financial statements.

F-21
<PAGE>
ROBERTS DODGE, INC.

AND AFFILIATED COMPANY

COMBINED STATEMENTS OF OPERATIONS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales:
Vehicle............................................................. $ 26,383 $ 27,999 $ 14,233 $ 15,609
Service, parts and other............................................ 3,588 3,895 1,920 2,074
--------- --------- --------- ---------
29,971 31,894 16,153 17,683
--------- --------- --------- ---------
Cost of sales:
Vehicle............................................................. 23,526 25,086 12,602 13,827
Service, parts and other............................................ 2,104 2,184 1,055 1,188
--------- --------- --------- ---------
25,630 27,270 13,657 15,015
--------- --------- --------- ---------
Gross profit.................................................... 4,341 4,624 2,496 2,668
Selling, general and administrative................................... 3,654 3,828 1,946 2,165
--------- --------- --------- ---------
Operating income................................................ 687 796 550 503
--------- --------- --------- ---------
Other income (expense):
Interest income..................................................... 27 101 15 78
Interest expense.................................................... (477) (602) (299) (302)
Other, net.......................................................... (29) (26) (20) (7)
--------- --------- --------- ---------
(479) (527) (304) (231)
--------- --------- --------- ---------
Net income...................................................... $ 208 $ 269 $ 246 $ 272
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

See accompanying notes to combined financial statements.

F-22
<PAGE>
ROBERTS DODGE, INC.

AND AFFILIATED COMPANY

COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK
------------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993................................................. 1 $ 250 $ 135 $ 385
Net income................................................................. -- -- 208 208
Distributions.............................................................. -- -- (37) (37)
--
----- ----- ---------
Balance, December 31, 1994................................................. 1 250 306 556
Net income................................................................. -- -- 269 269
Distributions.............................................................. -- -- (24) (24)
--
----- ----- ---------
Balance, December 31, 1995................................................. 1 250 551 801
Net income (unaudited)..................................................... -- -- 272 272
Distributions (unaudited).................................................. -- -- (7) (7)
--
----- ----- ---------
Balance, June 30, 1996 (unaudited)......................................... 1 $ 250 $ 816 $ 1,066
--
--
----- ----- ---------
----- ----- ---------
</TABLE>

See accompanying notes to combined financial statements.

F-23
<PAGE>
ROBERTS DODGE, INC.

AND AFFILIATED COMPANY

COMBINED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 208 $ 269 $ 246 $ 272
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization....................................... 87 125 50 49
Changes in assets and liabilities:
(Increase) decrease in trade receivables.......................... (10) (73) 142 (230)
(Increase) decrease in inventories................................ (1,139) 239 (54) (383)
(Increase) decrease in other current assets....................... (13) 8 (12) (35)
Increase (decrease) in trade payables............................. 73 153 (26) (224)
Increase (decrease) in accrued liabilities........................ 54 20 293 283
Increase in other non current assets.............................. (130) (50) (177) (196)
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities.......................................... (870) 691 462 (464)
--------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures.................................................... (88) (201) (118) (86)
--------- --------- --------- ---------
Net cash used in investing activities........................... (88) (201) (118) (86)
--------- --------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on flooring
notes payable......................................................... 1,340 (40) (359) (92)
Net borrowings (repayments) on notes payable............................ -- -- 25 200
Principal payments on long-term debt.................................... (151) (135) (62) (569)
Proceeds from issuance of long-term debt................................ -- 1,936 83 --
Distributions........................................................... (37) (24) (22) (7)
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities.......................................... 1,152 1,737 (335) (468)
--------- --------- --------- ---------
Net increase (decrease) in cash........................................... 194 2,227 9 (1,018)
Cash (book overdraft), beginning of period................................ (201) (7) (7) 2,220
--------- --------- --------- ---------
Cash (book overdraft), end of period...................................... $ (7) $ 2,220 $ 2 $ 1,202
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

See accompanying notes to combined financial statements.

F-24
<PAGE>
ROBERTS DODGE, INC. AND AFFILIATED COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

Roberts Dodge, Inc. and Affiliated Company's (the Company) is an Oregon
Corporation. Its principal business is the retail sales of new Dodge automobiles
obtained through an exclusive dealer agreement with Chrysler Motors Corporation
(Chrysler) and the sale of used cars. In addition, the Company retails and
wholesales replacement parts and provides vehicle servicing. The Company
operates in the Eugene, Oregon area.

PRINCIPLES OF COMBINATION

The accompanying combined financial statements include the accounts of the
following entities which are affiliated through common ownership:

- Roberts Dodge, Inc.

- Sole proprietorship - real estate

All significant intercompany accounts and transactions, consisting
principally of intercompany sales, have been eliminated upon combination.

CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, the Company considers contracts in
transit and all highly liquid debt instruments with a maturity of three months
or less when purchased to be cash equivalents.

INVENTORIES

Vehicles are stated at the lower of cost or market, cost being determined on
a specific identification basis. Parts are stated at the lower of cost or
market, cost being determined on the first-in, first-out (FIFO) basis.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and is being depreciated over
their estimated useful lives on the declining balance and straight-line basis.
Expenditures for maintenance, repairs and minor renewals are expensed as
incurred, while significant renewals and betterments are capitalized. When an
asset is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the account, and any gain or loss is credited or
charged to income.

FEDERAL INCOME TAXES

The Company is organized as a sub-chapter S-Corporation under the Internal
Revenue Code; therefore, the income earned by Roberts Dodge, Inc. is reported on
the personal tax returns of the stockholders. Consequently, no provision for
income taxes has been recorded in the accompanying financial statements.

F-25
<PAGE>
ROBERTS DODGE, INC. AND AFFILIATED COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MAJOR SUPPLIER AND DEALER AGREEMENT

The Company purchases substantially all of its new vehicles and inventory
from Chrysler at the prevailing prices charged by the automaker to all
franchised dealers. The Company's overall sales could be impacted by the
automaker's ability or unwillingness to supply the dealership with an adequate
supply of popular models.

The Dealer Agreement generally limits the location of the dealership and
retains automaker approval rights over changes in dealership management and
ownership. The automaker is also entitled to terminate the agreement if the
dealership is material breach of the terms.

INTERIM FINANCIAL STATEMENTS

FINANCIAL INSTRUMENTS

ADVERTISING

The Company expenses production and other costs of advertising as incurred.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject Roberts Dodge to
concentrations of credit risk consist principally of cash deposits.
Concentrations of credit risk with respect to customer receivables are limited
primarily to Chrysler Financial Corp. and financial institutions such as
regional banks.

MANAGEMENT ESTIMATES

F-26
<PAGE>
ROBERTS DODGE, INC. AND AFFILIATED COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
actual outcome of the estimates could differ from the estimates made in the
preparation of the financial statements.

REVENUE RECOGNITION

Revenues from vehicle and parts sales and from service operations are
recognized at the time the vehicle is delivered to the customer or service is
completed.

RECOGNITION OF FINANCE FEES AND INSURANCE COMMISSIONS

The Company arranges financing for its customers' vehicle purchases and
arranges insurance in connection therewith. Financing contracts are reviewed by
the dealership and are forwarded to Chrysler Financial Corp. and other financial
institutions. The Company receives a fee from the financial institution for
arranging the financing and receives a commission for the sale of an insurance
policy. The Company is charged back (chargebacks) for a portion of this fee
should the customer terminate the finance or insurance contract before its'
scheduled term. Finance fees and insurance commissions, net of chargebacks, are
classified with Service, Parts and Other revenue in the accompanying statement
of operations.

(2) INVENTORIES AND RELATED NOTES PAYABLE

The new and used vehicle inventory collateralizing related notes payable and
other inventory were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
---------------------- ----------------------
INVENTORY NOTES INVENTORY NOTES
COST PAYABLE COST PAYABLE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
New and demonstrator vehicles....................... $ 2,899 $ 3,464 $ 3,310 $ 3,562
Used vehicles....................................... 1,180 777 1,203 587
Parts and accessories............................... 304 -- 253 --
----------- --------- ----------- ---------
$ 4,383 $ 4,241 $ 4,766 $ 4,149
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>

The automaker finances new and used vehicle purchases by the Company. Floor
plan financing bears interest at prime plus 1% (approximately 9.25% at June 30,
1996). The notes are collateralized by all of the Company's tangible and
intangible personal property, including but not limited to, substantially all
new, used and demonstrator vehicles, parts and accessories inventory, accounts
receivable, and all machinery and equipment. The notes are generally due within
ten days of the sale of the vehicles or within three days after receiving the
sales proceeds, whichever is sooner. Accordingly, floor plan financing is
classified as current in the accompanying balance sheet.

F-27
<PAGE>
ROBERTS DODGE, INC. AND AFFILIATED COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 (UNAUDITED)

(3) PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------- -----------
<S> <C> <C>
Buildings and improvements........................................... $ 1,047 $ 1,047
Service and equipment................................................ 204 206
Furniture, signs and fixtures........................................ 69 69
Construction-in-progress............................................. -- 84
------ -----------
1,320 1,406
Less accumulated depreciation........................................ 328 375
------ -----------
992 1,031
Land................................................................. 421 421
------ -----------
$ 1,413 $ 1,452
------ -----------
------ -----------
</TABLE>

(4) NOTES PAYABLE

The Company has a $500 revolving line of credit with Chrysler Financial
Corp. which is scheduled to mature on April 15, 1997. Outstanding borrowings by
the Company totaled $200 at June 30, 1996 (unaudited). There were no outstanding
borrowings at December 31, 1995. Advances under the credit line accrue interest
at variable rates (9.5% at June 30, 1996) and are subject to the collateral and
guaranty provisions in the Chrysler credit arrangement described in note 5.

F-28
<PAGE>
ROBERTS DODGE, INC. AND AFFILIATED COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 (UNAUDITED)

(5) LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------- -----------
<S> <C> <C>
Note payable to Chrysler, interest at 11% or if higher, prime plus
1%, monthly installments of $11, maturing in 1997................... $ 74 $ 45
Note payable to Chrysler, due in monthly installments of $1 plus
interest at prime plus 5%........................................... 15 10
Demand notes payable to stockholder, interest at prime less 1.25%.... 1,807 1,318
Note payable to Chrysler, monthly installments of $1 plus interest at
10.25%.............................................................. 46 41
Note payable to Chrysler, due in monthly installments of $15
including interest at 9%............................................ 1,144 1,105
Other................................................................ 9 7
------ -----------
3,095 2,526
Less current maturities.............................................. 1,970 1,470
------ -----------
$ 1,125 $ 1,056
------ -----------
------ -----------
</TABLE>

The schedule of future principal payments on long-term debt after December
31, 1995 is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1995
-------------
<S> <C>
Year ending:
1996.......................................................................... $ 1,970
1997.......................................................................... 120
1998.......................................................................... 110
1999.......................................................................... 110
2000 and thereafter........................................................... 785
------
$ 3,095
------
------
</TABLE>

The Chrysler notes described above, and the revolving line of credit with
Chrysler are personally guaranteed by the stockholders of the Company.
Substantially all assets of the Company have been pledged as collateral for the
notes. In addition, Chrysler requires guarantees from companies related through
common ownership. The Company has guaranteed certain term notes for Roberts
Ford, Inc. and Frontier Motors, Inc. The combined balances of these obligations
are reflected on the books of the respective companies and totaled $950 at
September 17, 1996.

Interest paid to stockholders totaled $32 and $50 for the year ended
December 31, 1995 and the six-month period ended June 30, 1996 (unaudited),
respectively.

F-29
<PAGE>
ROBERTS DODGE, INC. AND AFFILIATED COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 (UNAUDITED)

(6) COMMITMENTS AND CONTINGENCY

RECOURSE PAPER

The Company is contingently liable to Chrysler Financial Corp. for recourse
paper from the financing of vehicle sales. The contingent liability at December
31, 1995 and the six-month period ended June 30, 1996 (unaudited) was
approximately $331 and $143, respectively.

(7) PROFIT SHARING PLAN

Effective January 1, 1994, the Company established a 401(k) profit-sharing
plan covering substantially all employees. Contributions to the plan include
elective salary reduction by the employees, and matching contributions up to a
stated percentage and discretionary amounts by the Company. Company
contributions totaled $7, $37, and $22 for the years ended December 31, 1994,
1995 and six-month period ended June 30, 1996 (unaudited), respectively.

(8) SUBSEQUENT EVENTS

Roberts Dodge has executed a purchase and sale agreement whereby it has
agreed to sell substantially all of its assets to Lithia Motors, Inc. The
purchase price will consist of cash consideration of approximately $2.25 million
for fixed assets and intangible assets, plus an additional amount for the new
car and parts inventory valued at the seller's cost. The purchase price is
payable as (i) $1.75 million plus the cost of the new car and parts inventory in
cash at closing and (ii) a promissory note for $500,000, with interest at 8.5%
per annum, payable in equal monthly installments for five years. The Company is
not assuming any material liabilities as part of the acquisition. In addition,
the Company will purchase the real property on which the dealership is located
for $2.33 million, payable in cash at closing.

Closing is scheduled to occur on or before November 1, 1996. The purchase is
subject to normal closing conditions and the approval of Chrysler.

(9) RELATED PARTY TRANSACTIONS

R & R Advertising (R & R) is an advertising agency owned by a stockholder of
the Company. The Company purchases all their television and radio advertising
through this agency. Approximately 50% of total advertising expense is purchased
through R & R. Advertising expense was $527, $463 and $193 for the years ended
December 31, 1994 and 1995 and the six-month period ended June 30, 1996
(unaudited), respectively.

At June 30, 1996, trade receivables included a $200 balance due from
Frontier Motors, Inc., a dealership owned 70% by the stockholder's of the
Company.

F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Stockholder

Sam Linder, Inc.

We have audited the accompanying balance sheet of Sam Linder, Inc. (dba Sam
Linder Cadillac-Honda-Oldsmobile) as of December 31, 1995, and the related
statements of operations and accumulated deficit and cash flows for each of the
years in the two-year period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sam Linder, Inc. as of
December 31, 1995, and the results of its operations and cash flows for each of
the years in the two-year period ended December 31, 1995, in conformity with
generally accepted accounting principles.

Moss Adams LLP

Seattle, Washington

September 17, 1996

F-31
<PAGE>
SAM LINDER, INC.
(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)
BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ JUNE 30,
1996
------------
(UNAUDITED)
<S> <C> <C>
ASSETS

Current Assets
Cash and cash equivalents............................... $ 1,128,900 $ 537,200
Receivables............................................. 537,300 471,600
Inventories............................................. 2,433,400 2,931,100
Notes receivable........................................ 170,000 129,100
Prepaid expenses and other.............................. 19,000 60,700
------------ ------------
Total current assets.................................. 4,288,600 4,129,700
Property, Plant and Equipment, net........................ 270,600 354,400
Other Assets.............................................. 33,700 32,000
------------ ------------
$ 4,592,900 $ 4,516,100
------------ ------------
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Flooring notes payable.................................. $ 2,287,100 $ 2,430,600
Current maturities of obligation under capital lease.... -- 21,500
Trade payables.......................................... 468,500 355,400
Accrued liabilities..................................... 209,200 318,600
Advances from stockholder............................... 1,461,500 1,163,000
------------ ------------
Total current liabilities............................. 4,426,300 4,289,100
Obligation Under Capital Lease, less current maturities... -- 104,200
------------ ------------
Total liabilities..................................... 4,426,300 4,393,300
------------ ------------
Stockholders' Equity
Common stock, $2,000 par value, 2,500 shares authorized,
500 shares issued and outstanding..................... 1,000,000 1,000,000
Accumulated deficit..................................... (833,400 ) (877,200)
------------ ------------
Total stockholders' equity............................ 166,600 122,800
------------ ------------
$ 4,592,900 $ 4,516,100
------------ ------------
------------ ------------
</TABLE>

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

F-32
<PAGE>
SAM LINDER, INC.
(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------- ---------------------------
1994 1995 1995 1996
------------- ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
SALES
Vehicle............................................. $ 16,112,600 $ 22,889,800 $ 9,494,000 $ 10,975,400
Service, body and parts............................. 2,692,300 2,550,600 1,283,500 1,446,700
Finance and lease................................... 620,300 1,417,000 528,800 446,000
------------- ------------- ------------ -------------
19,425,200 26,857,400 11,306,300 12,868,100
------------- ------------- ------------ -------------
COST OF SALES
Vehicle............................................. 14,808,400 20,936,700 8,588,700 9,945,200
Service, body and parts............................. 1,448,600 1,393,500 703,000 669,500
Finance and lease................................... 124,000 315,800 169,600 194,100
------------- ------------- ------------ -------------
16,381,000 22,646,000 9,461,300 10,808,800
------------- ------------- ------------ -------------
Gross profit...................................... 3,044,200 4,211,400 1,845,000 2,059,300

SELLING, GENERAL AND ADMINISTRATIVE 3,038,700 3,928,000 1,824,200 1,912,000
------------- ------------- ------------ -------------
Operating income.................................. 5,500 283,400 20,800 147,300
------------- ------------- ------------ -------------
OTHER INCOME (EXPENSE)
Interest expense.................................... (227,800) (346,700) (183,700) (103,800)
Other, net.......................................... (3,400) (800) 500 200
------------- ------------- ------------ -------------
(231,200) (347,500) (183,200) (103,600)
------------- ------------- ------------ -------------
NET (LOSS) INCOME..................................... (225,700) (64,100) (162,400) 43,700

ACCUMULATED DEFICIT
Beginning of period................................. (542,000) (769,300) (769,300) (833,400)
Dividends........................................... (1,500) -- -- (87,500)
------------- ------------- ------------ -------------
End of period....................................... $ (769,300) $ (833,400) $ (931,700) $ (877,200)
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
</TABLE>

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

F-33
<PAGE>
SAM LINDER, INC.
(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)
STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income................................................. $(225,700) $ (64,100) $(162,400) $ 43,700
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities
Depreciation and amortization................................... 92,700 92,500 51,400 47,600
Change in allowance for doubtful accounts....................... -- 86,000 89,000 (2,000)
Changes in assets and liabilities
(Increase) decrease in receivables.............................. (159,700) (14,900) 94,700 67,700
(Increase) decrease in inventories.............................. 446,500 (235,200) (61,700) (497,700)
(Increase) decrease in other current assets..................... 3,500 (6,200) (113,800) (41,700)
(Increase) decrease in other noncurrent assets.................. 3,600 (4,700) (3,100) 1,700
Increase (decrease) in trade payables........................... (91,500) 261,300 123,300 (113,100)
Increase (decrease) in accrued liabilities...................... 70,500 (40,700) 15,900 109,400
Increase in accrued interest on advances from stockholder....... 103,800 140,200 70,100 140,200
--------- --------- --------- ---------
Net cash provided by (used in) operating activities......... 243,700 214,200 103,400 (244,200)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net collections (increase) of notes receivable.................... (300) 316,200 161,900 40,900
Acquisition of property and equipment............................. (3,900) (17,800) (8,300) --
--------- --------- --------- ---------
Net cash provided by (used in) investing activities......... (4,200) 298,400 153,600 40,900
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on flooring notes payable............. 81,500 143,300 (655,300) 143,500
Principal payments on long-term debt.............................. (40,000) (73,300) (64,000) --
Net borrowings (repayments) on advances from stockholder.......... (195,200) 180,000 200,000 (438,700)
Principal payments on obligations under capital lease............. -- -- -- (5,700)
Dividends paid.................................................... (1,500) -- -- (87,500)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities......... (155,200) 250,000 (519,300) (388,400)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 84,300 762,600 (262,300) (591,700)
CASH AND CASH EQUIVALENTS
Beginning of period............................................... 282,000 366,300 366,300 1,128,900
--------- --------- --------- ---------
End of period..................................................... $ 366,300 $1,128,900 $ 104,000 $ 537,200
--------- --------- --------- ---------
--------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest.......................... $ 124,000 $ 206,500 $ 113,600 $ 103,800
--------- --------- --------- ---------
--------- --------- --------- ---------
Cash paid during the period for income taxes...................... $ 800 $ 800 $ 800 $ 800
--------- --------- --------- ---------
--------- --------- --------- ---------
Non-cash investing and financing activities:
Equipment acquired through capital lease........................ $ -- $ -- $ -- $ 131,400
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

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

F-34
<PAGE>
SAM LINDER, INC.

(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF BUSINESS -- Sam Linder, Inc., dba Sam Linder
Cadillac-Honda-Oldsmobile (the Company), was established as a corporation on
November 30, 1989. The purpose of the Company is to engage in retail sales of
new Cadillac, Honda and Oldsmobile vehicles obtained through dealership
agreements, used vehicles, parts and service. The Company sells to individuals
and commercial businesses located primarily in the Salinas, California area.

CASH AND CASH EQUIVALENTS -- For purposes of reporting cash flows, the
Company considers contracts in transit and all highly liquid debt instruments
with a maturity of three months or less when purchased to be cash equivalents.

INVENTORIES -- New vehicle, used vehicle and parts and accessories
inventories are stated at the lower of cost or market. Cost is determined by
using the last-in, first-out (LIFO) method.

PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost and are
being depreciated over their estimated useful lives, principally using the
straight-line method. Expenditures for maintenance, repairs and minor renewals
are expensed as incurred, while significant renewals and betterments are
capitalized. When an asset is retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the account, and any gain or loss
is credited or charged to income.

INCOME TAXES -- The Company, with the consent of its stockholder, has
elected to be an S Corporation under the Internal Revenue Code and California
Revenue and Taxation Code. In lieu of corporate income taxes, the stockholders
of an S Corporation are taxed on their proportionate share of the Company's
taxable income or receive a deduction for their proportionate share of the
Company's taxable loss. The Company is subject to a 1.5% California franchise
tax on taxable income, with a minimum amount of $800 payable annually.

INTERIM FINANCIAL STATEMENTS -- The accompanying unaudited financial
statements for the six-months ended June 30, 1995 and 1996 have been prepared on
substantially the same basis as the audited financial statements, and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial information set forth therein.

ADVERTISING -- The Company expenses production and other costs of
advertising as incurred. Advertising expense for the years ended December 31,
1995 and 1994 were $386,100 and $190,700, respectively. Advertising expense for
the six months ended June 30, 1996 and 1995 were $189,900 (unaudited) and
$150,000 (unaudited), respectively.

CONCENTRATIONS OF CREDIT RISK -- Concentration of credit risk with respect
to trade receivables is limited due to the large number of customers comprising
the Company's customer base. Receivables arising from vehicle sales are secured
by the related vehicle. Receivables arising from all other sales are unsecured
open accounts.

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash deposits. At December
31, 1995, the Company has deposits in excess of amounts insured by the FDIC.

MANAGEMENT ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 1995 and June 30, 1996 and revenues and

F-35
<PAGE>
SAM LINDER, INC.

(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expenses during the years ended December 31, 1994 and 1995 and the six month
periods ended June 30, 1995 and 1996. The actual outcome of the estimates could
differ from the estimates made in the preparation of the financial statements.

REVENUE RECOGNITION -- Revenue from the sale of cars is recognized upon
delivery, when the sales contract is signed and down payment has been received.
Income from finance and insurance commissions is recorded separately on an
accrual basis.

MAJOR SUPPLIER AND DEALER AGREEMENT -- The Company purchases substantially
all of its new vehicles and inventory from automakers at the prevailing prices
charged by the automakers to all franchised dealers. The Company's overall sales
could be impacted by the automaker's ability or unwillingness to supply the
dealership with an adequate supply of popular models. The Dealer Agreement
generally limits the location of the dealership and retains automaker approval
rights over changes in dealership management and ownership. The automaker is
also entitled to terminate the agreement if the dealership is material breach of
the terms.

NOTE 2 -- RECEIVABLES

<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C>
Trade receivables................................................. $ 482,900 $ 373,900
Finance reserves.................................................. 54,700 91,700
Employee receivables.............................................. 26,700 31,000
------------ -----------
564,300 496,600
Less allowance for doubtful accounts.............................. 27,000 25,000
------------ -----------
$ 537,300 $ 471,600
------------ -----------
------------ -----------
</TABLE>

NOTE 3 -- NOTES RECEIVABLE

<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C>
VARIOUS NOTES RECEIVABLE ARISING FROM IN-HOUSE FINANCING OF USED VEHICLE SALES, with
payments of principal and interest required either weekly, semi-monthly, or monthly
and terms range from twelve to twenty-four months. Interest rates range from 8.9% to
19.75%, and the notes are collateralized by the related vehicles.................... $ 272,000 $ 231,100
NOTE RECEIVABLE FROM RELATED PARTY, with interest at .5% above prime plus .50% due
monthly, principal due on demand, unsecured......................................... 50,000 50,000
------------ -----------
322,000 281,100
Less allowance for doubtful accounts.................................................. 152,000 152,000
------------ -----------
$ 170,000 $ 129,100
------------ -----------
------------ -----------
</TABLE>

F-36
<PAGE>
SAM LINDER, INC.

(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- INVENTORIES AND RELATED NOTES PAYABLE

The new and used vehicle inventory collateralizing related notes payable and
other inventory are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
-------------------------- --------------------------
INVENTORY NOTES INVENTORY NOTES
COST PAYABLE COST PAYABLE
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
New and demonstrator vehicles............................ $ 1,800,800 $ 2,287,100 $ 2,297,000 $ 2,430,600
Used vehicles............................................ 1,059,300 -- 1,132,900 --
Parts and accessories.................................... 225,800 -- 181,800 --
------------ ------------ ------------ ------------
Inventories at FIFO...................................... 3,085,900 2,287,100 3,611,700 2,430,600
Less LIFO reserve for new and used vehicles and parts
inventories............................................. 652,500 -- 680,600 --
------------ ------------ ------------ ------------
Inventories at LIFO...................................... $ 2,433,400 $ 2,287,100 $ 2,931,100 $ 2,430,600
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>

If the specific identification and the first-in, first-out (FIFO) methods
had been used in the accompanying financial statements, net loss would have
decreased by $65,900 and $122,000 to net income of $1,800 and net loss of
$103,700 for the years ended December 31, 1995 and 1994, respectively. Net
income would have increased by $28,100 and net loss would have decreased by
$32,900 to net income of $71,800 and net loss of $129,500 for the six months
ended June 30, 1996 and 1995, respectively (unaudited). Stockholder's equity
would have increased to $819,100 and $803,400 (unaudited) at December 31, 1995
and June 30, 1996.

Notes payable consist of floor plan notes to Bank of America National Trust
and Savings Association, secured by new and used vehicle inventories. The notes
are payable on specific dates after sale of units, with monthly curtailments
including interest at the bank's reference rate plus .75% (8.75% at December 31,
1995). The floor plan agreement requires the Company to meet certain financial
covenants as defined by the agreement. The Company must maintain a current ratio
of 1.25 to 1.0, working capital of $850,000, tangible net worth of $2,000,000
and a ratio of liabilities to tangible net worth of 2.25 to 1.0, all as defined
in the agreement. Additional restrictions apply to incurring direct or
contingent debt, capital expenditures and changes in ownership. Floor plan notes
payable are guaranteed by the Company's majority stockholder.

The Company recognized manufacturers' floor plan interest expense subsidies
of approximately $82,000 and $51,000 for the years ended December 31, 1995 and
1994, respectively, and $15,000 and $9,000 for the six months ended June 30,
1996 and 1995, respectively (unaudited). These amounts have been offset against
floor plan interest expense in the accompanying statements of operations.

F-37
<PAGE>
SAM LINDER, INC.

(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
DECEMBER
31, 1995
---------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C>
Company vehicles............................. $ 32,500 $ 32,500
Equipment.................................... 206,300 206,300
Furniture and fixtures....................... 299,000 299,000
Leasehold improvements....................... 278,600 278,600
Signs........................................ 13,700 13,700
Equipment under capital lease................ -- 131,400
---------- -----------
830,100 961,500
Less accumulated depreciation and
amortization............................... 559,500 607,100
---------- -----------
$ 270,600 $ 354,400
---------- -----------
---------- -----------
</TABLE>

NOTE 6 -- OBLIGATION UNDER CAPITAL LEASE

At June 30, 1996, future minimum lease payments for equipment under a
capital lease agreement are as follows:

<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- ----------------------------------------------------------------------------------
<S> <C>
1997.............................................................................. $ 33,000
1998.............................................................................. 33,000
1999.............................................................................. 33,000
2000.............................................................................. 33,000
2001.............................................................................. 22,000
----------
Total minimum lease payments...................................................... 154,000
Less imputed interest............................................................. 28,300
----------
Present value of minimum lease payments........................................... 125,700
----------
Less current maturities........................................................... 21,500
----------
$ 104,200
----------
----------
</TABLE>

F-38
<PAGE>
SAM LINDER, INC.

(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 -- TRANSACTIONS WITH RELATED PARTIES

NOTE RECEIVABLE -- As further discussed in Note 3, a note receivable is due
from an entity owned by the Company's majority stockholder.

ADVANCES -- Advances from the majority stockholder are unsecured and due on
demand after December 31, 1996. Interest on the advances has been accrued at the
rate of 6% per annum. At December 31, 1995 and June 30, 1996, $600,000 of the
advances have been subordinated to Bank of America National Trust and Savings
Association.

MANAGEMENT SERVICES FEE -- In 1996, the Company paid $100,000 to an entity
affiliated through common ownership for management services to be provided
during 1996. The amount paid is being amortized monthly, with $50,000 being
charged to operations for the six months ended June 30, 1996.

LEASE AGREEMENT -- As further discussed in Note 8, the Company leases its
premises from the majority stockholder.

NOTE 8 -- COMMITMENTS AND CONTINGENCY

The Company is obligated under a noncancellable operating lease with the
stockholder for the rental of its facilities through November 1999. The Company
is also obligated under a noncancellable operating sublease for the rental of a
car lot through August 1997. An option exists to extend this lease to August
2000.

The Company leases equipment under noncancellable agreements which expire in
May, 2000. Following is a schedule of the approximate future minimum lease
payments under the above noncancellable operating leases:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, STOCKHOLDER OTHER TOTAL
- ---------------------------------------------------------- ----------- --------- ----------
<S> <C> <C> <C>
1996 (six months)......................................... $ 120,000 $ 15,000 $ 135,000
1997...................................................... 240,000 34,000 274,000
1998...................................................... 240,000 7,000 247,000
1999...................................................... 220,000 2,000 222,000
2000...................................................... -- 2,000 2,000
----------- --------- ----------
$ 820,000 $ 60,000 $ 880,000
----------- --------- ----------
----------- --------- ----------
</TABLE>

F-39
<PAGE>
SAM LINDER, INC.

(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 -- COMMITMENTS AND CONTINGENCY (CONTINUED)
Rental expense incurred on operating leases amounted to approximately
$285,000 and $280,000 for the years ended December 31, 1995 and 1994,
respectively, with $240,000 being attributable to the lease with the stockholder
for each of the years. Rental expense incurred on operating leases amounted to
approximately $136,000 for the six months ended June 30, 1996 and 1995, with
$120,000 being attributable to the lease with the stockholder in each of the six
month periods.

ENVIRONMENTAL -- Substantially all of the Company's facilities are subject
to federal, state and local provisions regulating the discharge of materials
into the environment. Compliance with these provisions has not had, nor does the
Company expect such compliance to have, any material effect upon the capital
expenditures, net income, financial condition or competitive position of the
Company. Management believes that its current practices and procedures for the
control and disposition of such wastes comply with applicable federal and state
requirements.

During the year ended December 31, 1995, the Company removed its underground
gasoline and used motor oil storage tanks and cleaned up minor contamination
surrounding the tanks. The Company does not expect to incur any further
liability related to this clean-up. The Company has no plans to seek
reimbursement from the State of California for the clean-up under SB 2004, the
Underground Storage Tank Clean-up Fund.

Accruals for environmental matters are recorded in operating expenses when
it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated.

NOTE 9 -- FAIR VALUE OF SIGNIFICANT FINANCIAL INSTRUMENTS

The carrying amount of cash equivalents, trade receivables, trade payables
and flooring notes payable approximate fair value because of the short-term
nature of these instruments.

The carrying amounts and estimated fair values of the Company's significant
financial instruments, none of which are held for trading purposes, are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996 (UNAUDITED)
-------------------------- --------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets
Notes receivable............................. $ 170,000 $ 170,000 $ 129,100 $ 129,100
Financial liabilities
Flooring notes payable....................... $ 2,287,100 $ 2,287,100 $ 2,430,600 $ 2,430,600
</TABLE>

The carrying amounts shown in the above table are included in the balance
sheet under the indicated captions.

F-40
<PAGE>
SAM LINDER, INC.

(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 -- FAIR VALUE OF SIGNIFICANT FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:

Notes Receivable -- The fair values are based on the current rates offered
by the Company for loans of the same remaining maturities with similar risks and
collateral requirements.

Flooring Notes Payable -- The carrying amounts approximate fair value
because the interest rate fluctuates with the lender's prime rate.

Advances From Stockholder -- It is not practicable to determine the fair
value of advances from the majority stockholder, as the related party nature of
the transaction impacts the repayment terms.

NOTE 10 -- LABOR AGREEMENT

Mechanics account for approximately 25% of the Company's work force and are
covered by a collective bargaining agreement. This agreement was renewed in June
1996 for a three year period.

NOTE 11 -- SUBSEQUENT EVENT

Sam Linder, Inc. has executed a purchase and sale agreement whereby it has
agreed to sell substantially all if its assets to Lithia Motors, Inc. The
purchase price will consist of cash consideration of approximately $1,049,000
for property, plant and equipment and intangible assets, plus an amount for
parts inventory. In addition, the purchaser will acquire the new vehicle
inventories at the cost paid to the manufacturer and used vehicle inventories at
a negotiated value. The sale is subject to customary closing conditions and
approval of the change in ownership by the franchisers.

F-41
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Stockholders
Melody Vacaville, Inc.

We have audited the accompanying balance sheet of Melody Vacaville, Inc. (dba
Melody Toyota-Kia Vacaville) as of December 31, 1995, and the related statements
of operations, stockholders' deficit and cash flows for each of the years in the
two-year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Melody Vacaville, Inc. as of
December 31, 1995, and the results of its operations and cash flows for each of
the years in the two-year period ended December 31, 1995, in conformity with
generally accepted accounting principles.

Moss Adams LLP
Seattle, Washington
October 25, 1996

F-49

<PAGE>

MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)

BALANCE SHEET

ASSETS
December 31, June 30,
1995 1996
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 2,013,200 $ 2,201,800
Receivables 553,000 888,000
Inventories 4,137,900 4,223,000
Prepaid expenses and other 89,200 129,100
----------- -----------
Total current assets 6,793,300 7,441,900

PROPERTY AND EQUIPMENT, net 256,000 230,500
----------- -----------
$ 7,049,300 $ 7,672,400
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Flooring notes payable $ 4,054,600 $ 4,447,300
Current maturities of long-term debt 306,300 285,400
Note payable to related party - 50,000
Trade payables, including retained bank checks 2,343,200 3,054,400
Accrued liabilities 233,700 214,700
----------- -----------
Total current liabilities 6,937,800 8,051,800

LONG-TERM DEBT, less current maturities 584,900 586,000
----------- -----------
Total liabilities 7,522,700 8,637,800
----------- -----------

STOCKHOLDERS' DEFICIT
Common stock, no par value, 200,000 shares
authorized, 100,000 shares issued and
outstanding 1,881,000 1,881,000
Additional paid-in capital 282,000 282,000
Note receivable from stockholder (85,200) (85,200)
Accumulated deficit (2,551,200) (3,043,200)
----------- -----------
Total stockholders' deficit (473,400) (965,400)
----------- -----------
$ 7,049,300 $ 7,672,400
----------- -----------
----------- -----------

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

F-50

<PAGE>

MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)

STATEMENT OF OPERATIONS

Year Ended Six Months Ended
December 31, June 30,
--------------------------- ---------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
SALES
Vehicle $ 33,518,500 $ 24,141,500 $ 13,541,600 $ 12,715,800
Service and parts 3,478,300 2,608,400 1,358,500 1,396,000
Finance and lease 1,735,200 1,060,500 590,900 552,700
----------- ------------ ----------- ----------
38,732,000 27,810,400 15,491,000 14,664,500
----------- ------------ ----------- ----------
COST OF SALES
Vehicle 30,723,200 22,858,400 12,499,500 12,150,300
Service and parts 1,889,900 1,426,800 775,800 784,300
Finance and lease 880,400 572,900 294,200 292,300
----------- ------------ ----------- ----------
33,493,500 24,858,100 13,569,500 13,226,900
----------- ------------ ----------- ----------
Gross profit 5,238,500 2,952,300 1,921,500 1,437,600
SELLING, GENERAL AND
ADMINISTRATIVE 4,800,400 4,254,400 2,062,600 1,785,200
----------- ------------ ----------- ----------
Operating income (loss) 438,100 (1,302,100) (141,100) (347,600)
----------- ------------ ----------- ----------
OTHER INCOME (EXPENSE)
Interest expense (393,400) (474,700) (254,600) (161,400)
Other, net 53,300 165,000 43,100 17,000
----------- ------------ ----------- ----------
(340,100) (309,700) (211,500) (144,400)
----------- ------------ ----------- ----------
NET INCOME (LOSS) $ 98,000 $ (1,611,800) $ (352,600) $ (492,000)
----------- ------------ ----------- ----------
----------- ------------ ----------- ----------

</TABLE>

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

F-51

<PAGE>

MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)

STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>

Note
Common Stock Additional Receivable
------------------------ Paid-In From Accumulated
Shares Amount Capital Stockholder Deficit Total
--------- ------------ ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 (Unaudited) 36,328 $ 1,531,000 $ - $ - $ (573,100) $ 957,900
Note receivable from stockholder - - 85,200 (85,200) - -
Net income for the year ended
December 31, 1994 - - - - 98,000 98,000
--------- ------------ ---------- ---------- ------------- -----------
Balance, December 31, 1994 36,328 1,531,000 85,200 (85,200) (475,100) 1,055,900
Net loss for the year ended
December 31, 1995 - - - - (1,611,800) (1,611,800)
Distribution to stockholder - - - - (464,300) (464,300)
Capital contribution - - 196,800 - - 196,800
Issuance of common stock 12,109 350,000 - - - 350,000
Stock split 51,563 - - - - -
--------- ------------ ---------- ---------- ------------- -----------
Balance, December 31, 1995 100,000 1,881,000 282,000 (85,200) (2,551,200) (473,400)
Net loss for the six months ended
June 30, 1996 - - - - (492,000) (492,000)
--------- ------------ ---------- ---------- ------------- -----------

Balance, June 30, 1996 100,000 $ 1,881,000 $ 282,000 $ (85,200) $ (3,043,200) $ (965,400)
--------- ------------ ---------- ---------- ------------- -----------
--------- ------------ ---------- ---------- ------------- -----------

</TABLE>

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

F-52

<PAGE>

MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)

STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

Year Ended Six Months Ended
December 31, June 30,
-------------------------- --------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ 98,000 $(1,519,400) $ (352,600) $ (492,000)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities
Depreciation and amortization 111,100 109,900 35,900 46,400
Change in allowance for doubtful accounts - 56,000 20,000 (24,500)
(Gain) loss on disposition of fixed assets 1,500 (181,000) 14,500 -
Changes in assets and liabilities
(Increase) decrease in receivables (206,200) 394,600 (179,200) (310,500)
(Increase) decrease in inventories (1,397,700) 913,000 (1,062,200) (85,100)
(Increase) decrease in other current assets (17,200) (15,400) (57,700) (39,900)
Increase (decrease) in trade payables (77,000) 2,051,000 916,800 711,200
Increase (decrease) in accrued liabilities 84,700 (180,900) (83,800) (19,000)
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities (1,402,800) 1,627,800 (748,300) (213,400)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of land - 600,000 - -
Acquisition of property and equipment (163,100) (20,300) (14,000) (20,900)
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities (163,100) 579,700 (14,000) (20,900)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on flooring notes payable 1,180,100 (350,900) 1,169,600 392,700
Principal payments on long-term debt (99,900) (547,800) (125,700) (111,100)
Proceeds from long-term debt - 580,000 - 141,300
Dividends paid - (464,300) - -
Issuance of common stock - 350,000 - -
Contribution of capital - 196,900 - -
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities 1,080,200 (236,100) 1,043,900 422,900
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (485,700) 1,971,400 281,600 188,600

CASH AND CASH EQUIVALENTS
Beginning of period 527,500 41,800 41,800 2,013,200
----------- ----------- ----------- -----------
End of period $ 41,800 $ 2,013,200 $ 323,400 $ 2,201,800
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for interest $ 393,400 $ 474,700 $ 254,600 $ 165,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash paid during the period for income taxes $ 800 $ 800 $ 800 $ 800
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------

</TABLE>

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

F-53

<PAGE>

MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)

NOTES TO FINANCIAL STATEMENTS

NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF BUSINESS - Melody Vacaville, Inc., dba Melody
Toyota-Kia Vacaville (the Company), was established as a corporation on January
16, 1990, under the name Wilson/Malasoma, Inc. In March 1993, the name of the
corporation was changed to Melody Vacaville, Inc. Through October 1995, majority
ownership of the Company was held by an individual who also owned another
automotive dealership. In November 1995, the majority stockholder sold his
interest in the Company to the minority stockholder. Subsequent to the stock
transaction, a stock split was declared, resulting in an increase in the number
of shares which the Company is authorized to issue from 100,000 to 200,000. The
48,437.33 shares outstanding prior to the split were converted into 100,000
shares.

The purpose of the Company is to engage in retail sales of new Toyota
and Kia vehicles obtained through dealership agreements, used vehicles, parts
and service. The Company sells to individuals and commercial businesses located
primarily in the Vacaville, California area.

MAJOR SUPPLIER AND DEALER AGREEMENT - The Company purchases
substantially all of its new vehicles and inventory from automakers at the
prevailing prices charged by the automakers to all franchised dealers. The
Company's overall sales could be impacted by the automaker's ability or
unwillingness to supply the dealership with an adequate supply of popular
models. The Dealer Agreement generally limits the location of the dealership
and retains automaker approval rights over changes in dealership management and
ownership. The automaker is also entitled to terminate the agreement if the
dealership is material breach of the terms.

The Company is presently operating under a dealer agreement with Toyota,
which expires on November 1, 1997. The agreement requires the Company to
maintain specified sales, net working capital, and debt to equity, among other
matters. If the Company is in compliance with the terms of the agreement on
November 1, 1997, Toyota will enter into a new standard six-year dealer
agreement with the Company.

At December 31, 1995 and June 30, 1996, the Company is not in compliance
with certain covenants included in the dealer agreement. Further, financial
information previously provided to Toyota includes various false representations
as to the financial position of the Company. Under the terms of the agreement,
Toyota may treat this as an event that will terminate the dealer agreement. If
the agreement is terminated, the Company will not be able to continue its
existence, unless a suitable replacement franchise is obtained. However, as
further discussed in Note 11, the Company is in the process of selling the
majority of its operating assets and transferring the dealer agreement to an
unrelated entity.

F-54

<PAGE>

MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, the
Company considers contracts in transit and all highly liquid debt instruments
with a maturity of three months or less when purchased to be cash equivalents.
Bank checks written but not released as of the balance sheet dates are included
in flooring notes payable or accounts payable, depending on the original
classification of the liability being paid.

INVENTORIES - New vehicle, used vehicle and parts and accessories
inventories are stated at the lower of cost or market. Cost for new vehicles is
determined by using the last-in, first-out (LIFO) method. Cost for used
vehicles is based on the specifically identified amounts. For parts
inventories, cost is based on current catalog prices, which approximates cost
determined using the first-in, first-out method.

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and
are being depreciated over their estimated useful lives, principally using the
straight-line method. Expenditures for maintenance, repairs and minor renewals
are expensed as incurred, while significant renewals and betterments are
capitalized. When an asset is retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the account, and any gain or
loss is credited or charged to income.

INCOME TAXES - The Company, with the consent of its stockholders, has
elected to be an S Corporation under the Internal Revenue Code and California
Revenue and Taxation Code. In lieu of corporate income taxes, the stockholders
of an S Corporation are taxed on their proportionate share of the Company's
taxable income or receive a deduction for their proportionate share of the
Company's taxable loss. The Company is subject to a 1.5% California franchise
tax on taxable income, with a minimum amount of $800 payable annually.

As discussed in Note 8, a portion of a transaction involving the former
majority stockholder has been treated as dividend. Since a proportionately
equal distribution was not paid to the minority stockholder, this could be
considered an event which could terminate the Company's S election. In
addition, other tax-related elections made by the Company could also be
jeopardized. If the S election were to be terminated, the Company would be
required to pay Federal income and state of California franchise tax on taxable
income. These financial statements do not include any adjustments that may be
necessary should the S election be terminated.

F-55

<PAGE>

NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

INTERIM FINANCIAL STATEMENTS - The accompanying unaudited financial
statements for the six-months ended June 30, 1995 and 1996 have been prepared on
substantially the same basis as the audited financial statements, and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial information set forth therein.

ADVERTISING - The Company expenses production and other costs of
advertising as incurred. Advertising expense for the years ended December 31,
1995 and 1994 were $700,000 and $854,000, respectively. Advertising expense for
the six months ended June 30, 1996 and 1995 were $271,000 (unaudited) and
$332,000 (unaudited), respectively.

CONCENTRATIONS OF CREDIT RISK - Concentration of credit risk with
respect to trade receivables is limited due to the large number of customers
comprising the Company's customer base. Receivables arising from vehicle sales
are secured by the related vehicle. Receivables arising from all other sales
are unsecured open accounts.

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash deposits. In the
normal course of business, the Company has balances in excess of federally
insured amounts.

MANAGEMENT ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 1995 and June 30, 1996 and revenues and expenses
during the years ended December 31, 1994 and 1995 and the six month periods
ended June 30, 1995 and 1996. The actual outcome of the estimates could differ
from the estimates made in the preparation of the financial statements.

REVENUE RECOGNITION - Revenue from the sale of vehicles is recognized
upon delivery, when the sales contract is signed and down payment has been
received. Income from finance and insurance commissions is recorded separately
on an accrual basis.

F-56

<PAGE>

NOTE 2 - RECEIVABLES

Receivables consist of the following:

December 31, June 30,
1995 1996
------------ ----------
(Unaudited)
Trade receivables $ 423,700 $ 480,600
Finance reserves 192,300 211,000
Employee receivables 5,200 81,500
Insurance settlement receivable - 118,300
Advances to majority stockholder 77,800 118,100
--------- ----------
699,000 1,009,500
Less allowance for doubtful accounts 146,000 121,500
--------- ----------
$ 553,000 $ 888,000
--------- ----------
--------- ----------

The insurance settlement receivable represents management's estimate of
the proceeds to be realized from a claim arising from the theft of a
Company-owned vehicle. The vehicle, a 1992 Lamborghini with a recorded cost of
approximately $178,000, was stolen on June 24, 1996. A loss of $60,000 has been
recognized in the statement of operations for the six months ended June 30,
1996, representing the difference between the recorded cost and the estimated
insurance proceeds. Related debt of $107,100 is included in long-term debt at
June 30, 1996 ($120,800 at December 31, 1995).

NOTE 3 - NOTE RECEIVABLE FROM MAJORITY STOCKHOLDER

A note receivable from majority stockholder is due October 1, 1998.
Interest at the same rate charged under the Company's flooring agreement is
payable monthly. The note is secured by the stockholder's shares of the
Company's common stock. Since this amount represents a portion of funds due
from the stockholder for additional paid-in capital, it is reflected as an
increase to stockholders' deficit at December 31, 1995 and June 30, 1996.

F-57

<PAGE>

NOTE 4 - INVENTORIES AND FLOORING NOTES PAYABLE

The new and used vehicle inventory collateralizing related notes payable
and other inventory are as follows:

December 31, 1995 June 30, 1996
------------------------- --------------------------
Inventory Notes Inventory Notes
Cost Payable Cost Payable
----------- ----------- ----------- -----------
(Unaudited)
New and demonstrator
vehicles $ 2,812,000 $ 3,045,900
Used vehicles 1,290,700 1,185,300
Parts and accessories 309,600 331,100
----------- -----------
Inventories at FIFO 4,412,300 4,562,300

Less LIFO reserve for
new vehicle
inventories 274,400 339,300
----------- -----------
Inventories at LIFO $ 4,137,900 $ 4,054,600 $ 4,223,000 $ 4,447,300
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------

If the specific identification and the first-in, first-out (FIFO)
methods had been used in the accompanying financial statements, net loss would
have increased by $47,400, to net loss of $1,659,200 for the year ended December
31, 1995, and net income would have increased by $92,400 to $190,400 for the
year ended December 31, 1994. Net loss would have decreased by $64,800 and
increased by $24,000 to net loss of $427,200 and $376,600 for the six months
ended June 30, 1996 and 1995, respectively (unaudited). Stockholder's deficit
would have decreased to $199,000 and $626,100 (unaudited) at December 31, 1995
and June 30, 1996, respectively.

Notes payable consist of floor plan notes to Primus Automotive Financial
Services, Inc., (Primus) secured by new and used vehicle inventories, parts
inventories, accounts receivable and furniture, fixtures and equipment, among
other items. The notes are payable on demand, or if no demand is made, on
specific dates after sale of units, with monthly curtailments including interest
at Primus' prime rate plus .75% to 1.5%, depending on the vehicles being
financed. Floor plan notes payable are guaranteed by the Company's majority
stockholder.

F-58

<PAGE>

NOTE 4 - INVENTORIES AND RELATED NOTES PAYABLE (CONTINUED)

The Company recognized manufacturers' floor plan interest expense
subsidies of approximately $75,000 for the six months ended June 30, 1996
(unaudited). These amounts have been offset against floor plan interest expense
in the accompanying statements of operations. There were no interest subsidies
for periods prior to December 31, 1995.

NOTE 5 - PROPERTY AND EQUIPMENT

December 31, June 30,
1995 1996
------------ -----------
(Unaudited)
Company vehicles $ 34,500 $35,000
Equipment 231,300 231,900
Furniture and fixtures 321,600 336,700
Leasehold improvements 122,800 127,500
---------- ----------
710,200 731,100
Less accumulated depreciation and amortization 454,200 500,600
---------- ----------
$256,000 $230,500
---------- ----------
---------- ----------

NOTE 6 - LONG-TERM DEBT

Long-term debt consists of the following:

December 31, June 30,
1995 1996
------------ -----------
(Unaudited)
TERM NOTE PAYABLE TO PRIMUS AUTOMOTIVE
FINANCIAL SERVICES, INC., due in monthly
installments of $10,000, plus interest at 1.5%
above prime (8.75% at June 30, 1996). The
note is guaranteed by the stockholders, and is
subject to cross-default provisions included in
the flooring agreement described in Note 4. $ 590,000 $ 530,000

F-59

<PAGE>

NOTE 6 - LONG-TERM DEBT (CONTINUED)

December 31, June 30,
1995 1996
------------ -----------
(Unaudited)
UNSECURED AMOUNTS PAYABLE TO MAJORITY
STOCKHOLDER, due aggregate in monthly
installments of $2,030, with interest at
10.75% and 13.50%. The amounts were
loaned to the Company as part of the
contribution of vehicles discussed in Note 7. $ - $ 82,000

UNSECURED NOTE PAYABLE TO MINORITY
STOCKHOLDER, due in monthly installments
of $4,395, including interest at 8%. 177,000 150,400

NOTE PAYABLE TO TOYOTA MOTOR CREDIT
CORPORATION, due in monthly installments
of $3,354, including interest at 6.25%.
Collateralized by a 1992 Lamborghini,
which was stolen in June 1996 (Note 2).
Due to the theft of the collateral, the entire
note is classified as a current liability at
June 30, 1996. 120,800 107,100

OTHER 3,400 1,900
--------- ---------
891,200 871,400
Current portion 306,300 285,400
--------- ---------
Long-term portion $ 584,900 $ 586,000
--------- ---------
--------- ---------

The notes payable to stockholders are subordinated to Primus Automotive
Financial Services, Inc. (Note 4).

Scheduled annual principal maturities on these notes are as follows:

Year Ending December 31,
- ------------------------
Stockholders Other Total
------------ ---------- --------
1996 (six months) $ 28,100 $ 169,100 $ 197,200
1997 60,200 120,000 180,200
1998 66,000 120,000 186,000
1999 58,800 120,000 178,800
2000 19,200 110,000 129,200
----------- ------------ ---------
$ 232,300 $ 639,100 $ 871,400
----------- ------------ ---------
----------- ------------ ---------

F-60

<PAGE>

NOTE 7 - TRANSACTIONS WITH RELATED PARTIES

ADVANCES TO MAJORITY STOCKHOLDER - Advances to the majority stockholder
(Note 2) are unsecured, noninterest bearing and due on demand.

NOTE RECEIVABLE FROM STOCKHOLDER - As further discussed in Note 3, a
note receivable is due from the Company's majority stockholder.

NOTE PAYABLE - A note payable to the estate of a relative of the
minority stockholder is due 60 days from demand, with interest at 12.5% per
annum payable monthly. The note is collateralized by used car inventory.

NOTES PAYABLE TO STOCKHOLDERS - As discussed in Note 6, the Company has
two notes payable to the Company's stockholders.

EXTENDED WARRANTY CONTRACTS - The Company sells various extended
warranty products to its customers. A portion of these contracts are ultimately
reinsured by an entity related through common ownership. Extended warranty
premiums ceded to the reinsurance company amounted to $12,000 for the year ended
December 31, 1995, and $43,000 for the six months ended June 30, 1996
(unaudited). A different related entity was used to reinsure the extended
warranty products prior to the stock transaction described in Note 1.
Information regarding the volume of insurance premiums ceded to that entity is
not available.

LEASE AGREEMENT - As further discussed in Note 8, the Company leases its
premises from the minority stockholder and the former majority stockholder.

CONTRIBUTION OF VEHICLES - In 1996, the majority stockholder contributed
a 1977 Ferrari and a 1984 Rolls Royce to the Company, in exchange for a
reduction in amounts due from the stockholder for advances made. The vehicles
were recorded at a value of $33,500 and $27,250, respectively. Subsequently,
the stockholder obtained a personal loan, using the vehicles as collateral. The
funds, amounting to approximately $91,000, were then loaned to the Company (Note
6). While the stockholder continues to be listed as the owner of record of
these vehicles, it is his intention that title will be transferred to the
Company upon sale.

SALE OF LAND AND DISTRIBUTION OF PROCEEDS - Concurrent with the stock
transaction described in Note 1, the Company sold certain land for $600,000,
resulting in a gain of $108,000 being recognized in 1995. Directly from escrow,
funds amounting to approximately $450,000 were distributed to the former
majority owner. The remaining funds, amounting to approximately $125,000, were
distributed to a dealership owned by the former majority owner in payment of
intercompany accounts payable.

F-61

<PAGE>

NOTE 7 - TRANSACTIONS WITH RELATED PARTIES (CONTINUED)

AFFILIATED DEALERSHIP - Through November 1995, the Company had various
transactions with another dealership owned by a stockholder (Note 1). The
Company and the related dealership conducted various transactions, including
trading of new and used vehicles. In addition, the dealerships shared certain
common administrative functions. These transactions are summarized as follows:
<TABLE>
<CAPTION>

Year ended December 31,
----------------------- Six months ended
1994 1995 June 30, 1995
----------- --------- -------------
<S> <C> <C> <C>
Sales of vehicles to affiliate $ 1,508,000 $ 763,000 $ 705,000
Purchases of vehicles from affiliate 1,856,000 719,000 643,000
Payments to affiliate for shared services 184,000 69,000 54,000
Receipts from affiliate for shared expenses 45,000 54,000 39,000

</TABLE>

NOTE 8 - COMMITMENTS AND CONTINGENCY

LEASES - The Company is obligated under a noncancellable operating lease
with the former majority stockholder and the current minority stockholder for
the rental of its facilities through March 2001. The lease payment is subject
to annual increases based on changes in the Consumer Price Index. The Company
has an option to renew the lease for an additional five years.

The Company also leases equipment under noncancellable agreements which
expire through 1998.

Following is a schedule of the approximate future minimum lease payments
under the above noncancellable operating leases:

Year Ending December 31, Facilities Other Total
------------------------ ----------- -------- ----------
1996 (six months) $ 215,200 $ 24,700 $ 239,900
1997 430,400 49,400 479,800
1998 430,400 12,000 442,400
1999 430,400 - 430,400
2000 430,400 - 430,400
2001 107,600 - 107,600
----------- -------- ----------
$ 2,044,400 $ 86,100 $2,130,500
----------- -------- ----------
----------- -------- ----------

F-62

<PAGE>

NOTE 8 - COMMITMENTS AND CONTINGENCY (CONTINUED)

Rental expense incurred on operating leases amounted to approximately
$470,000 and $462,000 for the years ended December 31, 1995 and 1994,
respectively, with $413,000 and $405,000 being attributable to the lease with
the related parties for each of the years. Rental expense incurred on operating
leases amounted to approximately $231,000 and $235,000 for the six months ended
June 30, 1996 and 1995, respectively, with $207,000 being attributable to the
lease with the related parties in each of the six month periods.

ENVIRONMENTAL - Substantially all of the Company's facilities are
subject to federal, state and local provisions regulating the discharge of
materials into the environment. Compliance with these provisions has not had,
nor does the Company expect such compliance to have, any material effect upon
the capital expenditures, net income, financial condition or competitive
position of the Company. Management believes that its current practices and
procedures for the control and disposition of such wastes comply with applicable
federal and state requirements.

NOTE 9 - FAIR VALUE OF SIGNIFICANT FINANCIAL INSTRUMENTS

Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.

The carrying amount of cash equivalents, trade receivables, trade
payables and flooring notes payable approximate fair value because of the short-
term nature of these instruments. It is not practicable to estimate the fair
values of advances to the majority stockholder, the note receivable from
stockholder, or notes payable to related parties, as the relationship of the
parties to the Company influences the terms of the instruments, and similar
instruments are not generally available.

F-63

<PAGE>

NOTE 9 - FAIR VALUE OF SIGNIFICANT FINANCIAL INSTRUMENTS
(CONTINUED)

The carrying amounts and estimated fair values of the Company's
significant financial instruments, none of which are held for trading purposes,
are as follows:

December 31, 1995 June 30, 1996 (Unaudited)
------------------------ -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- ------------
Financial liabilities
Flooring notes payable $ 4,054,600 $ 4,054,600 $ 3,239,900 $ 3,239,900
Long-term debt 301,200 301,200 341,400 341,400
Note payable - Primus 590,000 590,000 530,000 530,000

The carrying amounts shown in the above table are included in the
balance sheet under the indicated captions.

The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:

FLOORING NOTES PAYABLE - The carrying amounts approximate fair value
because the interest rate fluctuates with the lender's prime rate.

NOTE PAYABLE TO PRIMUS - The carrying amount approximates fair value
because the interest rate fluctuates with the lender's prime rate.

NOTE 10 - SUBSEQUENT EVENT

Melody Vacaville, Inc. has executed a purchase and sale agreement
whereby it has agreed to sell substantially all if its assets to Lithia Motors,
Inc. The purchase price will consist of cash consideration of approximately
$2,300,000 for property and equipment and intangible assets, plus an amount for
parts inventory. In addition, the purchaser will acquire the new vehicle
inventories at the cost paid to the manufacturer and used vehicle inventories at
a negotiated value. The sale is subject to customary closing conditions and
approval of the change in ownership by the franchisers.

F-64
<PAGE>

[Description of "Priority You" Marketing Campaign]

[Inside Back Cover of Prospectus]

<PAGE>

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY ANY
SECURITIES OTHER THAN THE SHARES OF CLASS A COMMON STOCK TO WHICH IT RELATES OR
AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE OF THIS PROSPECTUS OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE.

----------------------------------------------------

TABLE OF CONTENTS
Page
----

PROSPECTUS SUMMARY........................................................... 3
RISK FACTORS................................................................. 8
COMPANY RESTRUCTURING AND PRIOR S CORPORATION STATUS ........................ 13
PENDING ACQUISITIONS......................................................... 15
USE OF PROCEEDS.............................................................. 15
DIVIDEND POLICY.............................................................. 16
CAPITALIZATION............................................................... 17
DILUTION..................................................................... 17
SELECTED COMBINED FINANCIAL DATA............................................. 19
PRO FORMA COMBINED AND CONDENSED FINANCIAL DATA.............................. 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................................... 26
INDUSTRY..................................................................... 34
BUSINESS......................................................................35
MANAGEMENT................................................................... 46
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................... 49
DESCRIPTION OF CAPITAL STOCK................................................. 51
SHARES ELIGIBLE FOR FUTURE SALE.............................................. 53
UNDERWRITING................................................................. 54
LEGAL MATTERS................................................................ 56
EXPERTS...................................................................... 56
ADDITIONAL INFORMATION....................................................... 56

UNTIL ______________, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

_______________ SHARES

[LOGO]

LITHIA MOTORS, INC.

CLASS A COMMON STOCK

PROSPECTUS

FURMAN SELZ

DAIN BOSWORTH INCORPORATED

EVEREN SECURITIES, INC.

_________, 1996

<PAGE>

PART II
(Items not required in Prospectus)

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the fees and expenses incurred by the
Company in connection with the Offering. Except for the SEC registration fees,
NASD filing fees, and Nasdaq initial listing fees, all expenses are estimates:

SEC Registration Fees. . . . . . . . .$12,769
NASD Filing Fees . . . . . . . . . . . .4,203
Nasdaq Initial Listing Fee . . . . . . 20,725
Blue Sky Fees and Expenses
(including legal fees). . . . . . . 15,000
Costs of Printing. . . . . . . . . . .100,000
Accounting Fees and Expenses . . . . .175,000
Legal Fees . . . . . . . . . . . . . .275,000
Miscellaneous Expenses . . . . . . . .192,303
--------

Total Expenses. . . . . . . . . . $795,000
--------
--------

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS

As an Oregon corporation, the Company is subject to the Oregon Business
Corporation Act (the "Business Corporation Act"). Under the Business
Corporation Act, a corporation may provide in its Articles of Incorporation or
in its Bylaws for the indemnification of directors and officers against
liability where the director or officer has acted in good faith and with a
reasonable belief that actions taken were in the best interests of the
corporation or at least not adverse to the corporation's best interests and, if
in a criminal proceeding, the individual had no reasonable cause to believe that
the conduct in question was unlawful. Under the Business Corporation Act, a
corporation may not indemnify an officer or director against liability in
connection with a claim by or in the right of the corporation in which such
officer or director was adjudged liable to the corporation or in connection with
any other proceeding in which the officer or director was adjudged liable for
receiving an improper personal benefit; however, a corporation may indemnify
against the reasonable expenses associated with such proceeding. A corporation
may not indemnify against breaches of the duty of loyalty. The Business
Corporation Act provides for mandatory indemnification of directors against all
reasonable expenses incurred in the successful defense of any claim made or
threatened whether or not such claim was by or in the right of the corporation.
A court may order indemnification if it determines that the director or officer
is fairly and reasonably entitled to indemnification in view of all the relevant
circumstances whether or not the director or officer met the good faith and
reasonable belief standards of conduct set out in the statute. Unless otherwise
stated in the Articles of Incorporation, officers of the corporation are also
entitled to the benefit of the above statutory provisions.

The Business Corporation Act also provides that the corporation may, by so
providing in its Articles of Incorporation, eliminate or limit the personal
liability of a director to the corporation or its shareholders for monetary
damages for conduct as a director, provided that the Articles of Incorporation
may not eliminate or limit liability for any breach of the director's duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, any unlawful distribution, or any
transaction from which the director received an improper personal benefit.

In accordance with Oregon law, the Articles of Incorporation of the Company
provide that directors are not personally liable to the corporation or its
shareholders for monetary damages for conduct as a director, except for (i) any
breach of a director's duty of loyalty to the corporation, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) any distribution to shareholders which is unlawful,
or (iv) any transaction from which the director received an improper personal
benefit.

The Articles of Incorporation also provide for indemnification of any
person who is or was a party, or is threatened to be made a party, to any civil,
administrative or criminal proceeding by reason of the fact that the person is
or was a director or officer of the corporation or any of its subsidiaries, or
is or was serving at the request of the corporation as a director, officer,
partner, agent or employee of another corporation or entity, against

II-1

<PAGE>

expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement, actually and reasonably incurred by that person if (i) the person
acted in good faith and in a manner reasonably believed to not be opposed to the
best interests of the corporation, or (ii) the act or omission giving rise to
such action or proceeding is ratified, adopted or confirmed by the corporation,
or the benefit thereof was received by the corporation. Indemnification is
available under this provision of the Articles of Incorporation in the case of
derivative actions, unless the person is adjudged to be liable for gross
negligence or deliberate misconduct in the performance of the person's duty to
the corporation. To the extent a director, officer, employee or agent
(including an attorney) is successful on the merits or otherwise in defense of
any action to which this provision is applicable, the person is entitled to
indemnification for expenses actually and reasonably incurred by the person in
connection with that defense.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

On April 5, 1996, the Company issued __________ shares of Class B Common
Stock pursuant to the terms of a Plan of Recapitalization under which Sidney B.
DeBoer exchanged 75 shares of the Company's Common Stock for __________ shares
of Class B Common Stock and M. L. Dick Heimann exchanged 45 shares of the
Company's Common Stock for __________ shares of Class B Common Stock. The
issuance of these securities was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933, as amended.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits.

The index of exhibits being filed with this Registration
Statement is attached on page Z-1.

(b) Financial Statement Schedules

None.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes that:

(A) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required
by the Underwriter to permit prompt delivery to each purchaser.

(B) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared it effective.

(C) For the purpose of determining any liability under the Securities Act
of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

(D) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, (the "Act") may be permitted to
directors, officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of

II-2

<PAGE>

appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.

II-3

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Medford,
state of Oregon, on October 31, 1996.

LITHIA MOTORS, INC.

By /s/ Sidney B. DeBoer
------------------------------------------
Sidney B. DeBoer, President

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
ON OCTOBER 31, 1996

/s/ Sidney B. DeBoer /s/ M. L. Dick Heimann
- ----------------------------------------- -----------------------------------
Sidney B. DeBoer, Chairman, President, M.L. Dick Heimann, Director
Chief Executive Officer and Director
(Principal Executive Officer)

/s/ Brian R. Neill
- -----------------------------------------
Brian R. Neill, Chief Financial Officer
(Principal Financial and Accounting Officer)

<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
-------
<S> <C>
*1.1 Form of Underwriting Agreement

3.1 Restated Articles of Incorporation of Lithia Motors, Inc.

3.2 Bylaws of Lithia Motors, Inc.

*4.1 Specimen Common Stock certificate

*5.1 Opinion of Foster Pepper & Shefelman

**10.1 1996 Stock Incentive Plan

**10.2.1 Incentive Stock Option Agreement

**10.2.2 Non-Qualified Stock Option Agreement

**10.2.3 Incentive Stock Option Agreement

**10.3.1 Chrysler Corporation Chrysler Sales and Service Agreement, dated
January 10, 1994, between Chrysler Corporation and Lithia
Chrysler Plymouth Jeep Eagle, Inc. (standard provisions are in
Exhibit 10.3.2 hereto)(1)

**10.3.2 Chrysler Corporation Dealer Agreement Standard Provisions

**10.4.1 Honda Automobile Dealer Sales and Service Agreement dated August
11, 1994, between American Honda Motor Company, Inc. and Lithia
Motors, Inc. dba Lithia Honda (standard provisions are in Exhibit
10.4.2 hereto)

**10.4.2 American Honda Automobile Dealer's Standard Agreement

10.5.1 Isuzu Dealer Sales and Service Agreement, dated June 5, 1996
between American Isuzu Motors, Inc. and Lithia Motors, Inc.

**10.5.2 Isuzu Dealer Sales and Service Agreement General Provisions

10.6.1 Mercury Sales and Service Agreement, dated December 28, 1979,
between Ford Motor Company and Lithia Motors, Inc. (General
provisions are in Exhibit 10.6.5 hereto)(2)

*10.6.2 Amendment, dated May 22, 1989, to Mercury Sales and Service
Agreement and Lincoln Sales and Service Agreement

**10.6.3 Ford Motor Company Imported Vehicle Sales and Service Agreement,
dated July 2, 1984, between Ford Motor Company and Lithia Motors,
Inc. dba Lithia Toyota, Lincoln-Mercury (General provisions are
in Exhibit 10.6.4 hereto)

**10.6.4 Ford Motor Company Imported Vehicle Sales and Service Agreement
General Provisions

*10.6.5 Mercury Sales and Service Agreement General Provisions(2)
</TABLE>

Z-1

<PAGE>

<TABLE>
<S> <C>
**10.7.1 General Motors Corporation Dealer Sales and Service Agreement,
dated March 12, 1993, between General Motors Corporation Pontiac
Division and Lithia Motors, Inc. dba Lithia Pontiac

**10.7.2 General Motors Dealer Sales and Service Agreement Standard
Provisions

**10.8.1 Mazda Dealer Agreement, dated April 11, 1994 between Mazda Motor
of America, Inc. and Lithia Dodge, L.L.C. dba Lithia Mazda

**10.8.2 Letter, dated September 29, 1995 extending Mazda Dealer Agreement
between Mazda Motor of America, Inc. and Lithia Dodge, L.L.C. dba
Lithia Mazda

**10.9.1 Saturn Distribution Corporation Dealer Agreement, dated September
12, 1991, between Saturn Distribution Corporation and Medford
Dodge dba Saturn of Medford

**10.10.1 Toyota Dealer Agreement, dated January 30, 1990, between Toyota
Motor Distributors, Inc. and Lithia Motors, Inc. dba Medford
Toyota

10.10.2 Toyota Dealer Agreement Standard Provisions

*10.10.3 Agreement, dated September 30, 1996, between Toyota Motor Sales,
U.S.A., Inc. and Lithia Motors, Inc.

10.11.1 Suzuki Term Dealer Sales and Service Agreement, dated May 13,
1996, between American Suzuki Motor Corporation and Lithia
Motors, Inc. dba Lithia Suzuki

**10.13.1 Asset Purchase Agreement, dated August 2, 1996, between Lithia
Motors, Inc. and Roberts Dodge, Inc.

**10.13.2 Land Sale Contract, dated August 2, 1996, between Lithia
Properties, L.L.C. and Milford G. Roberts, Sr. and Sandra L.
Roberts

*10.13.3 Assignment of Land Sale Contract, dated , between
Lithia Properties, LLC and Lithia Motors, Inc.

*10.14.1 Purchase and Sale Agreement between Lithia Motors, Inc. and
Sam Linder, Inc.

*10.15.1 Reorganization Agreement, dated as of October 10, 1996, by
and among Lithia Motors, Inc., LGPAC, Inc., Lithia DM, Inc.,
Lithia MTLM, Inc., Lithia HPI, Inc., Lithia SSO, Inc., Lithia
Rentals, Inc., Discount Auto Truck Rental, Inc., Lithia Auto
Services, Inc., Lithia Holding Company L.L.C., Sidney B. DeBoer,
M.L. Dick Heimann, R. Bradford Gray, and Steve Philips

10.16.1 Alternative Rate Option Promissory Note by Lithia Motors, Inc.,
Lithia TLM, LLC, Lithia Dodge, L.L.C., and Lithia's Grants Pass
Auto Center, L.L.C., to United States National Bank of Oregon in
the amount of $18 million(3)

10.16.2 Promissory Note by Lithia Motors, Inc. to United States National
Bank of Oregon in the amount of $6.0 million(4)

10.16.3 Promissory Note by Lithia Leasing, Inc. to United States National
Bank of Oregon in the amount of $1.4 million (5)
</TABLE>

Z-2

<PAGE>

<TABLE>
<S> <C>
10.17.1 Promissory Note between Lithia Motors, Inc. and Sidney B. DeBoer
in the amount of $500,000(6)

10.17.2 Subordination Agreement between Lithia Motors, Inc., Sidney B.
DeBoer and United States National Bank(7)

10.18.1 Floor Plan Accommodation Agreement (Security Agreement) between
Lithia Motors, Inc. and United States National Bank of Oregon(8)

10.18.2 Corporate Resolution to Guarantee of Lithia Motors, Inc. (9)

*10.19.1 Commercial Guaranty under which Sidney B. DeBoer is the guarantor
of obligations of Lithia Motors, Inc. to United States National
Bank of Oregon(10)

10.20.1 Management Contract between Lithia Leasing, Inc. and Lithia
Properties LLC.

*10.21.1 Commercial Lease, dated September 20, 1996, between Lithia
Properties, L.L.C. and Lithia Motors, Inc.(11)

*10.22.1 Commercial Lease, effective January 1, 1997, between Lithia
Properties, L.L.C. and Lithia Motors, Inc.(12)

*10.23.1 Commercial Security Agreement, dated September 9, 1996, between
Lithia Motors, Inc. and United States National Bank

*10.24.1 Agreement for Purchase and Sale of Business, dated October 7,
1996, between Lithia Motors, Inc. and Melody Vacaville, Inc.

*10.24.2 Commercial Lease, dated April 1, 1992, between Billy J. Wilson,
et al. and Wilson/Malasoma, Inc., and Assignment of Lease,
dated , relating to the Vacaville, California
facility.

*21.1 Subsidiaries of Lithia Motors, Inc.

23.1 Consent of KPMG Peat Marwick LLP relating to Lithia Motors, Inc.

23.2 Consent of KPMG Peat Marwick LLP relating to Roberts Dodge, Inc.

23.3 Consent of Moss Adams LLP relating to Sam Linder, Inc.

23.4 Consent of Moss Adams LLP relating to Melody Vacaville, Inc.

23.5 Consent of Foster Pepper & Shefelman (included in Exhibit 5.1).

**24.1 Powers of Attorney

**27.1 Financial Data Schedules
</TABLE>

- ------------
* To be filed by amendment

** Previously filed

(1) Substantially identical agreements exist between Chrysler
Corporation and Lithia Chrysler Plymouth Jeep Eagle, Inc., and
between Chrysler Corporation and Lithia's Grants Pass Auto Mart,
with respect to Jeep, Eagle, Dodge and Plymouth sales and
service, and between Chrysler Corporation and Medford Dodge with
respect to Dodge sales and service.

(2) A substantially identical agreement exists between the same
parties with respect to Lincoln Sales and Services.

(3) Substantially identical notes exist between the same parties in
amounts of $2.0 million, $2.5 million, and $5.0 million.

(4) A substantially identical note exists between the same parties in
the amount of 400,000.

(5) Substantially identical notes exist between the same parties in
amounts of $750,000, and $1.0 million.

(6) A substantially identical note exists between Lithia Motors, Inc.
and Manfred L. Heimann in the same amount.

(7) A substantially identical agreement exists between Lithia Motors,
Inc. and Manfred L. Heimann.

Z-3

<PAGE>

(8) Substantially identical agreements exist between United States
National Bank of Oregon and each of Lithia TLM, LLC, Lithia
Dodge, L.L.C., Lithia's Grants Pass Auto Center, L.L.C., and
Lithia Leasing, Inc.

(9) A substantially identical guarantee exists under which Lithia's
Grants Pass Auto Center, L.L.C. is the Guarantor.

(10) A substantially identical guaranty exists under which Manfred L.
Heimann is the Guarantor of Lithia Motors, Inc.

(11) Substantially identical leases of the same date exist between
Lithia Properties L.L.C. and

(i) Lithia TLM, L.L.C. and Lithia MTLM, Inc., relating to the
properties located in Medford, Oregon at 360 E. Jackson St.,
400 N. Central Ave., 325 E. Jackson St., 343-345 Apple St.,
440-448 Front St., 3rd & Front St. and 344 Bartlett,
collectively at a lease rate of $42,828 per month;

(ii) Lithia Motors, Inc. dba Lithia Body and Paint, relating
to the properties in Medford, Oregon, located at 4th & Bartlett,
235 Bartlett, 220 N. Bartlett, and 275 E. 5th; and in Grants
Pass, Oregon, at 1470 N.E. 7th, collectively at a lease rate of
$16,890 per month;

(iii) Discount Auto and Truck Rental, Inc., relating to
properties located in Medford, Oregon, at 326 N. Bartlett,
315 & 321 Apple St., and in Grants Pass, Oregon, at 1470 N.E.
7th, collectively at a lease rate of $2,609 per month;

(iv) Lithia Dodge, L.L.C. and Lithia DM, Inc., relating to
properties located in Medford, Oregon, at 322 E. 4th, 315 &
324 E. 5th St., 225, 319 & 323 E. 6th, Riverside & 4th,
Riverside & 6th, and 129 N. Riverside, collectively at a
lease rate of $53,490 per month;

(v) Lithia Grants Pass Auto Center and L.L.C., LCGAC, Inc.,
relating to the property located in Grants Pass, Oregon, at
1421 N.E. 6th at a lease rate of $25,625 per month;

(vi) Lithia Motors, Inc. and Lithia SSO, Inc., relating to
properties located in Medford, Oregon, at 400, 705-717 N.
Riverside Ave., 712 and 716 Pine St., and 502 Maple St.,
collectively at a lease rate of $20,048 per month;

(vii) Lithia Motors, Inc. dba Thrift Auto Supply, relating to
the properties located in Medford, Oregon, at 801 N. Riverside
Ave, and 503 Maple St., collectively at a lease rate of
$6,265 per month; and

(viii) Lithia Motors, Inc. and Lithia HPI, Inc., relating to
properties located in Medford, Oregon, at 700 and 800 N.
Central Ave, 217 and 220 N. Beatty St., 710 and 815-817
Niantic St., and 311 & 313 Maple St., collectively at a lease
rate of $30,350 per month.

(12) Substantially identical leases exist between Lithia Properties
L.L.C. and

(ii) Lithia Motors, Inc. dba Lithia Body and Paint, relating to
the properties in Medford, Oregon, located at 4th & Bartlett,
235 Bartlett, 220 N. Bartlett, and 275 E. 5th; and in Grants
Pass, Oregon, at 1470 N.E. 7th, collectively at a lease rate of
$ per month;

(iii) Discount Auto and Truck Rental, Inc., relating to
properties located in Medford, Oregon, at 326 N. Bartlett, 315 &
321 Apple St., and in Grants Pass, Oregon, at 1470 N.E. 7th,
collectively at a lease rate of $ per month;

(v) Lithia Grants Pass Auto Center and L.L.C., LCGAC, Inc.,
relating to the property located in Grants Pass, Oregon, at
1421 N.E. 6th at a lease rate of $25,625 per month;

Z-4

<PAGE>

EXHIBIT 3.1

RESTATED ARTICLES OF INCORPORATION

LITHIA MOTORS, INC.

The following Restated Articles of Incorporation of Lithia Motors, Inc.
(the "Corporation") amend and supersede the heretofore existing Articles of
Incorporation, including all amendments made thereto.

ARTICLE I: NAME OF CORPORATION

The name of the corporation is Lithia Motors, Inc.

ARTICLE II: NUMBER OF AUTHORIZED SHARES

The total number of shares of stock of all classes which the corporation
shall have the authority to issue is one hundred forty million (140,000,000)
shares, consisting of fifteen million (15,000,000) shares of a single class of
preferred stock with no par value, one hundred million (100,000,000) shares of
Class A Common Stock with no par value, and twenty-five million (25,000,000)
shares of Class B Common Stock with no par value. After any shares of Class A
Common Stock are issued and outstanding, the Board of Directors of the
corporation shall not, without the vote or consent of the holders of the
corporation's Class A Common Stock, issue any shares of Class B Common Stock
except as provided by Article III, Section 2.

ARTICLE III: RIGHTS AND LIMITATIONS OF CAPITAL STOCK

The relative rights and limitations of each class of capital stock shall be
as set forth in this Article III.

SECTION 1. VOTING OF CLASS A AND CLASS B STOCK

(a) In all elections of directors, and in all other matters as to
which the vote or consent of shareholders of the corporation shall be required
or shall be taken, each holder of one or more shares of Class A Common Stock
shall be entitled to one (1) vote for each share of the Class A Common Stock
then held.

(b) In all elections of directors, and in all other matters as to
which the vote or consent of shareholders of the corporation shall be required
or shall be taken, each holder of one or more shares of Class B Common Stock
shall be entitled to ten (10) votes for each share of the Class B Common Stock
then held.

<PAGE>

(c) Except as otherwise required by law, the holders of shares of
Class A Common Stock and the holders of shares of Class B Common Stock shall
vote together as one class on all matters submitted to a vote of the
corporation's shareholders.

SECTION 2. DIVIDENDS AND DISTRIBUTIONS WITH RESPECT TO CLASS A AND
CLASS B STOCK. The holders of shares of Class A Common Stock and the holders of
shares of Class B Common Stock shall be entitled to receive whatever dividends,
payable in cash or otherwise, are lawfully declared by the Board of Directors
from time to time with respect to those shares. Shares of Class A Common Stock
and Class B Common Stock shall have equal rights to share in and receive any
dividends, liquidation proceeds and other distributions made by the corporation
with respect to the corporation's common stock. In furtherance of and not
limiting the foregoing, in the event that the holders of shares of Class A
Common Stock are entitled to receive a dividend or distribution payable in whole
or in part in additional shares of Class A Common Stock, the holders of shares
of Class B Common Stock shall be entitled to receive a proportionately equal
dividend or distribution payable in shares of Class B Common Stock.

SECTION 3. RESTRICTIONS ON TRANSFER OF CLASS B STOCK

(a) Except as provided in subsection 3(b) of this Article III, no
person holding shares of Class B Common Stock or any beneficial interest therein
(a "Class B Holder") may transfer any interest in such Class B shares to any
person other than a "Permitted Transferee". Neither the corporation nor the
transfer agent, if any, for the Class B Common Stock (the "Transfer Agent"),
shall register the transfer of any interest in shares of Class B Common Stock,
except to a "Permitted Transferee" of the transferor.

(b) For purposes of this Section 3, the term "Permitted Transferee"
shall mean and include the corporation and also shall have the following
meanings in the indicated circumstances:

(1) In the case of a Class B Holder who is a natural person
holding record and beneficial ownership of one or more shares of Class B
Common Stock, "Permitted Transferee" means:

(i) The spouse of that Class B Holder (the "Spouse").

(ii) A lineal descendant of a great grandparent of that
Class B Holder or of the Spouse (a "Descendant").

(iii) The trustee of a trust (including a voting trust)
maintained for the benefit of any one or more of the following
persons, and for no other person: (A) that Class B Holder, (B) the
Spouse, (C) one or more Descendants, or (D) an organization to which
contributions are deductible for federal income, estate or gift tax
purposes (a "Charitable Organization"). A trust described in the
preceding sentence may grant a general or special power of appointment
to the Spouse or to one or more of the Descendants. A trust described
in the first sentence of this subsection 3(b)(1)(iii) may permit trust
assets to be used to pay taxes, legacies and other obligations of the
trust or of the estate of the Class B Holder which are payable by
reason of the death of the Class B Holder, the Spouse or a Descendant.
In order to be a "Permitted Transferee", a trust which is otherwise
described in this subsection 3(b)(1)(iii) must prohibit any transfer
(other than the granting of a power of appointment as provided in the
second sentence of this subsection 3(b)(1)(iii)) of any beneficial
interest in shares of Class B Common Stock to any person other than
"Permitted Transferees" as defined in clauses

<PAGE>

(A) through (D) of this subsection 3(b)(1)(iii). A trust which
satisfies all of the conditions of this subsection 3(b)(1)(iii) shall
be referred to herein as a "Trust".

(iv) Any Charitable Organization, including but not
limited to a Charitable Organization established by that Class B
Holder or a Descendant.

(v) An Individual Retirement Account, as defined in
Section 408(a) of the Internal Revenue Code, with respect to which
that Class B Holder is a participant or beneficiary, but only if that
Class B Holder is vested with the power to direct the investment of
funds deposited into that Individual Retirement Account and to control
the voting of securities held by that Individual Retirement Account
(an "IRA").

(vi) A pension, profit sharing, stock bonus or other
type of plan or trust with respect to which that Class B Holder is a
participant or beneficiary and which satisfies the requirements for
qualification under Section 401 of the Internal Revenue Code, but only
if that Class B Holder is vested with the power to direct the
investment of funds deposited into that plan or trust and to control
the voting of securities held by that plan or trust (a "Plan").

(vii) A corporation all of the outstanding capital stock
of which is owned by persons who are included in one or more of the
following classes of permitted owners: (A) that Class B Holder, (B)
the Spouse, (C) one or more Descendants, (D) any Permitted Transferee
of that Class B Holder (determined pursuant to this subsection 3(b)),
(E) any other Class B Holder, and/or (F) a Permitted Transferee of any
other Class B Holder (determined pursuant to this subsection 3(b)).
If 50% or more of the voting shares of a corporation described in the
preceding sentence (or of any survivor of a merger or consolidation of
such a corporation), are acquired in the aggregate by one or more
persons who are not included in one or more of the classes of
permitted owners described in the preceding sentence, then all shares
of Class B Common Stock then held by that corporation shall be deemed
without further act on any person's part to be converted into shares
of Class A Common Stock in accordance with the provisions of
subsection 4(b) of this Article III, and any and all stock
certificates representing those shares of Class B Common Stock shall
thereupon cease to represent shares of Class B Common Stock and shall
thereafter be deemed for all purposes to represent an identical number
of shares of Class A Common Stock.

(viii) A partnership in which more than fifty percent
(50%) of the capital interests and more than fifty percent (50%) of
the voting interests are owned by persons who are included in one or
more of the following classes of permitted owners: (A) that Class B
Holder, (B) the Spouse, (C) one or more Descendants, (D) any Permitted
Transferee of that Class B Holder (determined pursuant to this
subsection 3(b)), (E) any other Class B Holder, and/or (F) a
Permitted Transferee of any other Class B Holder (determined pursuant
to this subsection 3(b)). If 50% or more of the capital interests or
50% or more of the voting interests in a partnership described in the
preceding sentence are acquired in the aggregate by one or more
persons who are not included in one or more of the classes of
permitted owners described in the preceding sentence, then all shares
of Class B Common Stock then held by that partnership shall be deemed
without further act on any person's part to be converted into shares
of Class A Common Stock in accordance with the provisions of
subsection 4(b) of this Article III, and any and all stock
certificates representing those shares of Class B Common Stock shall
thereupon cease to represent shares of Class B Common Stock and shall
thereafter be deemed for all purposes to represent an identical number
of shares of Class A Common Stock.

<PAGE>

(ix) A limited liability company in which more than fifty
percent (50%) of the capital interests and more than fifty percent
(50%) of the voting interests are owned by persons who are included in
one or more of the following classes of permitted owners: (A) that
Class B Holder, (B) the Spouse, (C) one or more Descendants, (D) any
Permitted Transferee of that Class B Holder (determined pursuant to
this subsection 3(b)), (E) any other Class B Holder, and/or (F) a
Permitted Transferee of any other Class B Holder (determined pursuant
to this subsection 3(b)). If 50% or more of the capital interests or
50% or more of the voting interests in a limited liability company
described in the preceding sentence are acquired in the aggregate by
one or more persons who are not included in one or more of the classes
of permitted owners described in the preceding sentence, then all
shares of Class B Common Stock then held by that limited liability
company shall be deemed without further act on any person's part to be
converted into shares of Class A Common Stock in accordance with the
provisions of subsection 4(b) of this Article III, and any and all
stock certificates representing those shares of Class B Common Stock
shall thereupon cease to represent shares of Class B Common Stock and
shall thereafter be deemed for all purposes to represent an identical
number of shares of Class A Common Stock.

(x) Another Class B Holder or another Class B Holder's
Permitted Transferee (determined pursuant to this subsection 3(b)).

(xi) In the event of the death of a Class B Holder, that
Class B Holder's estate and heirs.

(2) In the case of a Class B Holder which is holding shares of
Class B Common Stock as trustee of an IRA, a Plan or a Trust other than a
Trust described in subsection 3(b)(3) of this Article III, each of the
following shall be a "Permitted Transferee": (a) any participant in or
beneficiary of such IRA, such Plan or such Trust, (b) the person who
transferred those shares of Class B Common Stock to such IRA, such Plan or
such Trust, and (c) a Permitted Transferee of any person described in
clause (a) or (b) of this subsection 3(b)(2).

(3) In the case of a Class B Holder which is holding shares of
Class B Common Stock as trustee pursuant to a Trust which is irrevocable on
the "Issue Date" (as defined in subsection 3(d)(6)), "Permitted Transferee"
means any person in existence on the Issue Date to whom or for whose
benefit principal may be distributed either during the term of that Trust
or at the end of the term of that Trust, whether by power of appointment or
otherwise.

(4) In the case of a Class B Holder which is holding record (but
not beneficial) ownership of shares of Class B Common Stock as nominee for
the person who is the beneficial owner thereof on the "Issue Date",
"Permitted Transferee" means that beneficial owner and a Permitted
Transferee of that beneficial owner (determined pursuant to this
subsection 3(b)).

(5) In the case of a Class B Holder which is a partnership
holding record and beneficial ownership of shares of Class B Common Stock,
"Permitted Transferee" means any person who is a partner of that
partnership at the time that partnership first becomes a Class B Holder,
and also means any Permitted Transferee of that partner (determined
pursuant to this subsection 3(b)).

(6) In the case of a Class B Holder which is a limited liability
company holding record and beneficial ownership of shares of Class B Common
Stock, "Permitted Transferee" means any person who is a member of that
limited liability company at the time that

<PAGE>

limited liability company first becomes a Class B Holder, and also means
any Permitted Transferee of that member (determined pursuant to this
subsection 3(b)).

(7) In the case of a Class B Holder which is a corporation
(other than a Charitable Organization described in subsection 3(b)(1)(iv))
holding record and beneficial ownership of shares of Class B Common Stock
(a "Corporate Holder"), "Permitted Transferee" means: (a) any person who
is a shareholder of that Corporate Holder at the time the Corporate Holder
first becomes a Class B Holder, or any Permitted Transferee of any such
shareholder (determined pursuant to this subsection 3(b)); and (b) the
survivor (the "Survivor") of a merger or consolidation of that Corporate
Holder, but only for so long as that Survivor is controlled, directly or
indirectly, by: (i) those shareholders of the Corporate Holder who are
shareholders of the Corporate Holder at the time the Corporate Holder first
becomes a Class B Holder, and/or (ii) any Permitted Transferees of such
shareholders (determined pursuant to this subsection 3(b)).

(8) In the case of a Class B Holder which is the estate of a
deceased Class B Holder which held record and beneficial ownership of
shares of Class B Common Stock at the time of death, and in the case of a
Class B Holder which is the estate of a bankrupt or insolvent Class B
Holder which held record and beneficial ownership of shares of Class B
Common Stock at the time of bankruptcy or insolvency, "Permitted
Transferee" means a Permitted Transferee of that deceased, bankrupt or
insolvent Class B Holder (determined pursuant to this subsection 3(b)).

(9) In the case of any Class B Holder who desires to gift one or
more shares of Class B Common Stock to any other Class B Holder or to any
Permitted Transferee of any other Class B Holder (determined pursuant to
this subsection 3(b)), "Permitted Transferee" means any such other donee
Class B Holder or Permitted Transferee.

(10) In the case of any Class B Holder, "Permitted Transferee"
means any person which will hold record (but not beneficial) ownership of
shares of Class B Common Stock as nominee for that Class B Holder or a
Permitted Transferee of that Class B Holder (determined pursuant to this
subsection 3(b)).

(11) Only those persons specifically identified as "Permitted
Transferees" in the preceding provisions of this subsection 3(b) shall be
"Permitted Transferees" for purposes of this Section 3.

(c) Notwithstanding any contrary provision set forth in this Section
3, any Class B Holder may pledge that Holder's shares of Class B Common Stock to
a pledgee pursuant to a bona fide pledge of those shares as collateral security
for indebtedness due to the pledgee, provided that such shares shall not be
transferred to, registered in the name of, or voted by, the pledgee and shall
remain subject to the provisions of this Section 3. In the event foreclosure or
other similar action by a pledgee shall cause record or beneficial ownership of
pledged Class B Common Stock to be transferred to a person who is not a
Permitted Transferee of the pledgor, such pledged shares of Class B Common Stock
shall be converted into shares of Class A Common Stock at the moment of transfer
of ownership, in accordance with the provisions of subsection 4(b).

(d) For purposes of this Article III:

(1) The relationship between any two persons which is derived by
or through legal adoption shall be considered a natural relationship.

<PAGE>

(2) Each joint owner of shares of Class B Common Stock and each
owner of a community property interest in shares of Class B Common Stock
shall be considered a "Class B Holder" of such shares.

(3) A minor for whom shares of Class B Common Stock are held
pursuant to a Uniform Transfer to Minors Act or similar law shall be
considered to be the Class B Holder of such shares (and the custodian of
those shares shall not be considered to be a Class B Holder of those
shares).

(4) Unless otherwise specified, the term "person" means and
includes natural persons, corporations, partnerships, unincorporated
associations, firms, joint ventures, limited liability companies, trusts
and all other entities.

(5) The term "transfer" shall mean and include any form of
voluntary or involuntary sale, exchange, gift, bequest, devise, assignment,
disposition, pledge, hypothecation, encumbrance, appointment, grant of
voting power or proxy, or other conveyance of any and every kind, including
but not limited to conveyances by operation of law.

(6) With respect to particular shares of Class B Common Stock,
the "Issue Date" shall be the date on which those shares of Class B Common
Stock are first issued by the corporation.

(e) Any purported transfer of shares of Class B Common Stock to any
person who is not a Permitted Transferee shall be void and of no effect, and the
purported transferee shall have no rights as a shareholder of the corporation
and no other rights against or with respect to the corporation. The corporation
may, as a condition to the transfer or the registration of transfer of shares of
Class B Common Stock to a purported Permitted Transferee, require the furnishing
of such affidavits or other proof as the corporation deems necessary to
establish that such transferee is a Permitted Transferee. Each certificate
representing shares of Class B Common Stock shall be endorsed with a legend
which states that shares of Class B Common Stock are not transferable to any
person other than certain restricted transferees and are subject to certain
restrictions as set forth in the Restated Articles of Incorporation filed by the
corporation with the Secretary of State of the State of Oregon.

SECTION 4. CONVERSION OF CLASS B COMMON STOCK

(a) Each holder of one or more shares of Class B Common Stock shall
have the right and option at any time to convert one or more shares of Class B
Common Stock into an equivalent number of fully paid and nonassessable shares of
Class A Common Stock (i.e. one share of Class B Common Stock for one share of
Class A Common Stock). Such right shall be exercised by the surrender to the
corporation (at any time during normal business hours at the principal executive
offices of the corporation or at the office of the Transfer Agent) of the
certificate representing the share(s) of Class B Common Stock to be converted,
accompanied by: (1) a written notice stating the election by the holder thereof
to convert, and (2) instruments of transfer (if so required by the corporation
or the Transfer Agent), in form satisfactory to the corporation and to the
Transfer Agent, duly executed by such holder or such holder's duly authorized
attorney, and (3) transfer tax stamps or funds therefor (if required pursuant to
subsection 4(f)).

(b) Subject to, and without limiting the effect of, subsection 3(e),
if there is any transfer or other change in the beneficial ownership (as
determined under Rule 13d-3 promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended) of any share
of Class B Common Stock or of any interest in any share of Class B Common Stock,
and if the new beneficial owner of that share of Class B Common Stock is not a
"Permitted Transferee" (as defined

<PAGE>

in subsection 3(b) of this Article III) of the person who shall have been the
beneficial owner of that share of Class B Common Stock immediately prior to
that change in beneficial ownership, then each such share of Class B Common
Stock shall thereupon be converted automatically into one (1) fully paid and
nonassessable share of Class A Common Stock, and any and all stock
certificates representing each such share of Class B Common Stock shall
thereupon cease to represent shares of Class B Common Stock and shall
thereafter be deemed for all purposes to represent an identical number of
shares of Class A Common Stock.

(1) A determination by the Secretary of the corporation that a
change in beneficial ownership of one or more shares of Class B Common
Stock requires conversion under this subsection 4(b) shall be conclusive.
If the Secretary of the corporation determines that a change in beneficial
ownership of one or more shares of Class B Common Stock requires conversion
under this subsection 4(b), then the Secretary of the corporation shall
promptly request that each holder of record of each such share of Class B
Common Stock deliver to the corporation for conversion hereunder, and each
such holder shall thereupon be required, within ten (10) days following
that request, to deliver to the corporation for conversion hereunder, the
certificate representing each such share of Class B Common Stock, together
with instruments of transfer, in form satisfactory to the corporation and
Transfer Agent, duly executed by such holder or such holder's duly
authorized attorney, and together with transfer tax stamps or funds
therefor (if required pursuant to subsection 4(f)).

(2) Notwithstanding any other provision of this Article III, the
transfer to any person of capital interests, voting interests or other
membership interests in a limited liability company which holds record and
beneficial ownership of shares of Class B Common Stock shall not cause or
be deemed to have caused any change in the beneficial ownership of any
share(s) of Class B Common Stock or of any interest(s) in share(s) of
Class B Common Stock which are owned by that limited liability company,
unless and until such time as 50% or more of the capital interests or 50%
or more of the voting interests in that limited liability company are held
by one or more persons who would not be "Permitted Transferees" (as
determined under subsection 3(b)(6)) of that limited liability company. If
at any time the Secretary of the corporation determines that 50% or more of
the capital interests or 50% or more of the voting interests in a limited
liability company (which holds record and beneficial ownership of shares of
Class B Common Stock) are acquired or held by one or more persons who would
not be "Permitted Transferees" (as determined under subsection 3(b)(6)) of
that limited liability company, then all shares of Class B Common Stock
then held by that limited liability company shall be converted
automatically into an equivalent number of shares of Class A Common Stock
in accordance with the provisions of this subsection 4(b), and any and all
stock certificates representing those shares of Class B Common Stock shall
thereupon cease to represent shares of Class B Common Stock and shall
thereafter be deemed for all purposes to represent an identical number of
shares of Class A Common Stock.

(c) If, on the record date for any annual meeting of shareholders,
the number of shares of Class B Common Stock then outstanding is less than one
percent (1%) of the aggregate number of shares of Class B Common Stock and
Class A Common Stock then outstanding, as determined by the Secretary of the
corporation, then each share of Class B Common Stock then outstanding shall
thereupon automatically be converted into one (1) fully paid and nonassessable
share of Class A Common Stock, and each share of Class B Common Stock then
authorized but unissued shall thereupon automatically be deemed an authorized
but unissued share of Class A Common Stock. Upon making such determination, the
Secretary of the corporation shall promptly request that each holder of record
of one or more shares of Class B Common Stock deliver to the corporation for
conversion hereunder, and each such holder shall thereupon be required, within
ten (10) days following that request, to deliver to the corporation for
conversion hereunder, the certificates representing all shares of Class B Common
Stock held by such

<PAGE>

holder, together with instruments of transfer in form satisfactory to the
corporation and Transfer Agent, duly executed by such holder or such holder's
duly authorized attorney, and together with transfer tax stamps or funds
therefor (if required pursuant to subsection 4(f)).

(d) As promptly as practicable following the surrender for conversion
of a certificate representing shares of Class B Common Stock in the manner
provided in subsections (a), (b) or (c) of this Section 4 and the payment in
cash of any amount required by the provisions of subsection 4(f), the
corporation will deliver or cause to be delivered at the office of the Transfer
Agent, to or upon the written order of the holder of such certificate, a
certificate or certificates representing the number of full shares of Class A
Common Stock issuable upon such conversion, issued in such name or names as such
holder may direct. In the case of a conversion under subsection 4(a), the
conversion shall be deemed to have been made immediately prior to the close of
business on the date of the surrender of the certificate representing the
converted shares of Class B Common Stock. In the case of a conversion under
subsection 4(b), the conversion shall be deemed to have been made on the date
that the beneficial ownership of such share(s) has changed as set forth in
subsection 4(b). In the case of a conversion under subsection 4(c), the
conversion shall be deemed to have occurred on the annual meeting record date on
which the condition set forth in subsection 4(c) is determined by the Secretary
of the corporation to have occurred. Upon the date of any conversion under
subsection 4(b), all rights of the holder of the converted share(s) of Class B
Common Stock shall cease, and the new beneficial owner(s) of such shares shall
be treated for all purposes as having become the record holder(s) of the shares
of Class A Common Stock issued in the conversion. Upon the date of any
conversion under subsection 4(c), all rights of the holders of shares of Class B
Common Stock shall cease, and such holders shall be treated for all purposes as
having become the record holders of the shares of Class A Common Stock issued in
the conversion.

(e) The corporation covenants that it will at all times reserve and
keep available, solely for the purpose of enabling the issuance upon conversion
of all outstanding shares of Class B Common Stock, a number of shares of Class A
Common Stock which is equal to the number of then-outstanding shares of Class B
Common Stock. The preceding sentence shall not preclude the corporation from
satisfying its obligations in respect of the conversion of outstanding shares of
Class B Common Stock by delivery of purchased shares of Class A Common Stock
which are held in the treasury of the corporation. The corporation covenants
that if any shares of Class A Common Stock required to be reserved for purposes
of conversion hereunder shall require registration with or the approval of any
governmental authority under any federal or state law before such shares of
Class A Common Stock may be issued upon conversion, then the corporation will
cause such shares to be duly registered or approved. Prior to delivery of
shares of Class A Common Stock which are required to be delivered in connection
with the conversion of shares of Class B Common Stock, the corporation will
endeavor to list those shares of Class A Common Stock upon each national
securities exchange upon which the outstanding Class A Common Stock is listed at
the time of such delivery. The corporation covenants that all shares of Class A
Common Stock which are issued upon conversion of shares of fully paid and
nonassessable Class B Common Stock shall, upon issue, be fully paid and
nonassessable.

(f) The issuance of certificates for shares of Class A Common Stock
upon conversion of shares of Class B Common Stock shall be made without charge
for any stamp or other similar tax in respect of such issuance. However, if any
such certificate is to be issued in a name other than the person in whose name
the converted shares of Class B Common Stock are registered immediately prior to
conversion, then the person or persons requesting the issuance thereof shall pay
to the corporation the amount of any tax which may be payable in connection with
any transfer involved in such issuance, or shall establish to the satisfaction
of the corporation that such tax has been paid.

SECTION 5. PREFERRED STOCK. The Board of Directors of the corporation
shall have the authority at any time, without action of the shareholders, to
adopt and file articles of amendment which provide for the issuance of shares of
preferred stock in one or more series. The Board of Directors may

<PAGE>

establish, fix and/or alter the designations, powers, preferences,
qualifications, limitations, restrictions and/or relative rights applicable
to any series of preferred stock, including, without limitation, dividend
rights (and whether dividends are cumulative), conversion rights( if any),
voting rights (including the number of votes, if any, per share, as well as
the number of members, if any, of the Board of Directors or the percentage of
members, if any, of the Board of Directors each series of preferred stock may
be entitled to elect), rights and terms of redemption (including sinking fund
provisions, if any), redemption price and liquidation preferences of any
wholly unissued series of preferred stock, and the number of shares
constituting any such series and the designation thereof. The Board of
Directors also is authorized to increase or decrease the number of shares of
any series of preferred stock subsequent to the issuance of shares of such
series, but not below the number of shares of such series then outstanding.
Notwithstanding the preceding sentences of this Section 5, the Board of
Directors shall have no power to alter the rights of any shares of preferred
stock then outstanding without the consent of the holders of a majority of
the outstanding shares the rights of which are to be altered. Shares of
preferred stock which are redeemed, purchased or otherwise acquired by the
corporation may be reissued except as otherwise provided by law.

SECTION 6. DISTRIBUTIONS UPON LIQUIDATION. In the event of any
dissolution, liquidation or winding up of the affairs of the corporation in
accordance with applicable law, whether voluntary or involuntary, and after
payment or provision for payment of the debts and other liabilities of the
corporation, the holders of each series of preferred stock, if any, shall be
entitled to receive, out of the net assets of the corporation, an amount for
each share of preferred stock which is equal to the required amount which shall
have been fixed and determined by the Board of Directors in the resolution or
resolutions creating such shares and series, plus an amount equal to all
dividends accrued and unpaid on shares of such series to the date fixed for
distribution, and no more, before any of the assets of the corporation shall be
distributed or paid over to the holders of Class A or Class B Common Stock.
After payment in full of such amounts to the holders of preferred stock of all
series, the remaining assets and funds of the corporation shall be divided among
and paid to the holders of shares of Class A Common Stock and Class B Common
Stock, with each share of Class A and Class B Common Stock being treated equally
for such purposes. If, upon such dissolution, liquidation or winding up, the
assets of the corporation distributable as aforesaid among the holders of
preferred stock of all series shall be insufficient to permit full payment of
the required preferential amounts to those holders, then the corporation's
assets shall be distributed ratably among the holders of shares of preferred
stock in proportion to the respective total amounts which the holders are
entitled to receive as provided in this Section 6.

ARTICLE IV: MANAGEMENT OF CORPORATION

The following provisions are inserted for the management of the business
and for the conduct of the affairs of the corporation, and for further
definition, limitation and regulation of the powers of the corporation and of
its directors and shareholders:

SECTION 1. ELECTION OF DIRECTORS. Except to the extent that these
Restated Articles of Incorporation grant to the holders of any series of
preferred stock the right (voting separately by class or series) to elect
additional directors under specified circumstances, the number of directors of
the corporation shall be as fixed from time to time by or pursuant to the Bylaws
of the corporation. Each director shall serve until his or her successor is
duly elected and qualified or until his or her earlier death, resignation or
removal. The election of directors need not be by written ballot unless
required by the Bylaws of the corporation.

SECTION 2. REMOVAL OF DIRECTORS. Except to the extent that these
Restated Articles of Incorporation grant to the holders of any series of
preferred stock the right (voting separately by class

<PAGE>

or series) to elect directors under specified circumstances, any director or
directors may be removed from office at any time, with or without cause, by
the affirmative vote of not less than a majority of the total number of votes
represented by the then outstanding shares of capital stock of the
corporation entitled to vote generally in the election of directors, voting
together as a single class. Unless previously filled by the vote of at least
a majority of the total number of votes represented by the then outstanding
shares of capital stock of the corporation entitled to vote generally in the
election of directors (voting together as a single class), any vacancy in the
Board of Directors resulting from any such removal may be filled by vote of a
majority of the directors then in office, even if less than a quorum, and any
directors so chosen shall hold office until the next annual shareholders
meeting and until their successors shall have been elected and qualified or
until their earlier death, resignation or removal.

SECTION 3. RIGHT OF PREFERRED STOCK TO VOTE FOR DIRECTORS.
Notwithstanding the foregoing paragraphs of this Article IV, if at any time the
Board of Directors of the corporation shall have adopted and filed articles of
amendment which give to the holders of any series of preferred stock issued by
the corporation the right (voting separately by class or series) to elect
directors at an annual or special meeting of shareholders, then the election,
term of office, filling of vacancies and other features of such directorships
shall be governed by the terms of those articles of amendment applicable thereto
(as those articles may be amended from time to time).

SECTION 4. CALLING OF MEETINGS. Special meetings of shareholders of
the corporation for any purpose may be called at any time by: (i) a majority of
the Board of Directors, or (ii) the President of the corporation, or (iii) one
or more shareholders who, in the aggregate, own shares representing ten percent
(10%) or more of the total votes of all shares then outstanding. No other
person or persons shall have authority to call a special meeting of the
shareholders of the corporation.

ARTICLE V: NO PREEMPTIVE RIGHTS

No holder of shares of any class shall have any preemptive or preferential
right to subscribe to or otherwise acquire any shares of stock of the
corporation, or any obligations or securities convertible into or carrying
options or warrants to purchase shares of stock of the corporation, whether now
or hereafter authorized and whether unissued or held by the corporation as
treasury stock (whether or not the issuance or sale of any such shares,
obligations or securities would adversely affect such shareholder's
proportionate voting power), other than any rights which the Board of Directors
in its discretion may from time to time grant.

ARTICLE VI: ELECTIONS OR ACTIONS BY WRITTEN CONSENT

Any election of directors or other action by the shareholders of the
corporation may be effected at an annual or special meeting of shareholders or
by written consent of the shareholders given in lieu of such a meeting. The
record date with respect to the determination of shareholders entitled to
consent in writing to any action shall be the first date on which a signed
written consent setting forth the action to be taken or proposed to be taken is
delivered to the corporation by delivery to its registered office in Oregon, to
its principal place of business, or to an officer or agent of the corporation
having custody of the book in which proceedings of meetings of shareholders are
recorded. Any action by written consent shall be deemed effective as of the day
on which written consents, signed by all shareholders, are delivered to the
corporation by delivery to its registered office in Oregon, to its principal
place of business, or to an officer or agent of the corporation having custody
of the book in which proceedings of meetings of shareholders are recorded. Any
delivery which is made to the corporation's registered office under this
Article VI shall be by hand or by certified or registered mail, return receipt
requested.

<PAGE>

ARTICLE VII: LIMITATION ON LIABILITY OF DIRECTORS

No director of the Corporation is personally liable to the Corporation or
its shareholders for monetary damages for conduct as a director, except for the
following:

(a) Any breach of the director's duty of loyalty to the Corporation or its
shareholders;

(b) Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

(d) Any transaction from which the director derived an improper personal
benefit.

This Article VII does not limit or eliminate the liability of a director
for any act or omission occurring before the effective date of this Article VII.
No amendment to or repeal of this Article VII may make any director of the
Corporation personally liable to the Corporation or its shareholders for
monetary damages for any act or omission as a director occurring before the
effective date of that amendment or repeal. This Article VII is intended to
limit the liability of any director of the Corporation to the greatest extent
authorized under the Oregon Business Corporation Act. Any further limitation on
the liability of directors authorized under any amendment to the Oregon Business
Corporation Act is incorporated into this Article VII on the effective date of
that amendment.

ARTICLE VIII: INDEMNIFICATION

SECTION 1. NON-DERIVATIVE ACTIONS. Subject to the provisions of
Sections 3, 5 and 6 of this Article VIII, the Corporation shall indemnify any
person who was or is a party to or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative, (including all appeals) (other than
an action by or in the right of the Corporation) by reason of or arising from
the fact that the person is or was a director or officer of the Corporation or
one of its subsidiaries, or is or was serving at the request of the Corporation
as a director, officer, partner, or trustee of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against reasonable expenses (including attorney's fees), judgments,
fines, penalties, excise taxes assessed with respect to any employee benefit
plan and amounts paid in settlement actually and reasonably incurred by the
person to be indemnified in connection with such action, suit or proceeding if
the person acted in good faith, did not engage in intentional misconduct, and,
with respect to any criminal action or proceeding, did not know the conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith or, with respect to any criminal action or proceeding, that the person
knew that the conduct was unlawful.

SECTION 2. DERIVATIVE ACTIONS. Subject to the provisions of Sections
3, 5 and 6 of this Article VIII, the Corporation shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit (including all appeals) by or in the right of the
Corporation to procure a judgment in its favor by reason of or arising from the
fact that the person is or was a director or officer of the Corporation or one
of its subsidiaries, or is or was serving at the request of the Corporation as a
director, officer, partner, or trustee of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against reasonable expenses (including attorneys' fees) actually
incurred by the person to be indemnified in connection with

<PAGE>

the defense or settlement of such action or suit if the person acted in good
faith, provided, however, that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged
to be liable for deliberate misconduct in the performance of that person's
duty to the Corporation, for any transaction in which the person received an
improper personal benefit, for any breach of the duty of loyalty to the
Corporation, or for any distribution to shareholders which is unlawful under
the Oregon Business Corporation Act, or successor statute, unless and only to
the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.

SECTION 3. DETERMINATION OF RIGHT TO INDEMNIFICATION IN CERTAIN CASES.
Subject to the provisions of Sections 5 and 6 of this Article VIII,
indemnification under Sections 1 and 2 of this Article VIII shall not be made by
the Corporation unless it is expressly determined that indemnification of the
person who is or was an officer or director, or is or was serving at the request
of the Corporation as a director, officer, partner, or trustee of another
foreign or domestic corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, is proper in the circumstances because the
person has met the applicable standard of conduct set forth in Sections 1 or 2
of this Article VIII. That determination may be made by any of the following:

(a) By the Board of Directors by majority vote of a quorum consisting
of directors who are not or were not parties to the action, suit or proceeding;

(b) If a quorum cannot be obtained under paragraph (a) of this
subsection, by majority vote of a committee duly designated by the Board of
Directors consisting solely of two or more directors not at the time parties to
the action, suit or proceeding (directors who are parties to the action, suit or
proceeding may participate in designation of the committee);

(c) By special legal counsel selected by the Board of Directors or
its committee in the manner prescribed in (a) or (b) or, if a quorum of the
Board of Directors cannot be obtained under (a) and a committee cannot be
designated under (b) the special legal counsel shall be selected by majority
vote of the full Board of Directors, including directors who are parties to the
action, suit or proceeding;

(d) If referred to them by Board of Directors of the Corporation by
majority vote of a quorum (whether or not such quorum consists in whole or in
part of directors who are parties to the action, suit or proceeding), by the
shareholders; or

(e) By a court of competent jurisdiction.

SECTION 4. INDEMNIFICATION OF PERSONS OTHER THAN OFFICERS OR DIRECTORS.
Subject to the provisions of Section 6 of this Article VIII, in the event any
person not entitled to indemnification under Sections 1 and 2 of this Article
VIII was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding of a type referred to in
Sections 1 or 2 of this Article VIII by reason of or arising from the fact that
such person is or was an employee or agent (including an attorney) of the
Corporation or one of its subsidiaries, or is or was serving at the request of
the Corporation as an employee or agent (including an attorney) of another
foreign or domestic corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, the Board of Directors of the Corporation by a
majority vote of a quorum (whether or not such quorum consists in whole or in
part of directors who were parties to such action, suit or proceeding) or the
stockholders of the Corporation by a majority vote of the outstanding shares
upon referral to them by the Board of Directors of the Corporation by a majority
vote of a quorum (whether or not such quorum consists in whole or in part of
directors who were parties to such action, suit or proceeding) may, but shall
not be required to, grant to such person a right of indemnification to the
extent described in Sections 1 or 2

<PAGE>

of this Article VIII as if the person were acting in a capacity referred to
therein, provided that such person meets the applicable standard of conduct
set forth in such Sections. Furthermore, the Board of Directors may
designate by resolution in advance of any action, suit or proceeding, those
employees or agents (including attorneys) who shall have all rights of
indemnification granted under Sections 1 and 2 of this Article VIII.

SECTION 5. SUCCESSFUL DEFENSE. Notwithstanding any other provision of
Sections 1, 2, 3 or 4 of this Article VIII, but subject to the provisions of
Section 6 of this Article VIII, to the extent a director, officer, or employee
is successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 1, 2 or 4 of this Article VIII, or in defense
of any claim, issue or matter therein, that person shall be indemnified against
expenses (including attorneys fees) actually and reasonably incurred by him in
connection therewith.

SECTION 6. CONDITION PRECEDENT TO INDEMNIFICATION UNDER SECTIONS 1, 2,
4 OR 5. Any person who desires to receive the benefits otherwise conferred by
Sections 1, 2, 4 or 5 of this Article VIII shall promptly notify the Corporation
that the person has been named a defendant to an action, suit or proceeding of a
type referred to in Sections 1, 2, 4, or 5 of this Article VIII and intends to
rely upon the right of indemnification described in Sections 1, 2, 4 or 5 of
this Article VIII. The notice shall be in writing and mailed, via registered or
certified mail, return receipt requested, to the President of the Corporation at
the executive offices of the Corporation or, in the event the notice is from the
President, to the registered agent of the Corporation. Failure to give the
notice required hereby shall entitle the Board of Directors of the Corporation
by a majority vote of a quorum (consisting of directors who, insofar as
indemnity of officers or directors is concerned, were not parties to such
action, suit or proceeding, but who, insofar as indemnity of employees or agents
is concerned, may or may not have been parties) or, if referred to them by the
Board of Directors of the Corporation by a majority vote of a quorum (consisting
of directors who, insofar as indemnity of officers or directors is concerned,
were not parties to such action, suit or proceeding, but who, insofar as
indemnity of employees or agents is concerned, may or may not have been
parties), the shareholders of the Corporation by a majority of the votes
entitled to be cast by holders of shares of the Corporation's stock which have
unlimited voting rights to make a determination that such a failure was
prejudicial to the Corporation in the circumstances and that, therefore, the
right to indemnification referred to in Sections 1, 2 or 4 of this Article VIII
shall be denied in its entirety or reduced in amount.

SECTION 7. ADVANCES FOR EXPENSES. Expenses incurred by a person
indemnified hereunder in defending a civil, criminal, administrative or
investigative action, suit or proceeding (including all appeals) or threat
thereof, may be paid by the Corporation in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of such person to repay such expenses if it shall ultimately be determined that
the person is not entitled to be indemnified by the Corporation and a written
affirmation of the person's good faith belief that he or she has met the
applicable standard of conduct. The undertaking must be a general personal
obligation of the party receiving the advances but need not be secured and may
be accepted without reference to financial ability to make repayment.

SECTION 8. INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation or one of its subsidiaries or is or was serving at the
request of the Corporation as a director, officer, partner, trustee, employee or
agent of another foreign or domestic corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise against any liability asserted
against and incurred by that person in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
that person against such liability under the provisions of this Article or under
the Oregon Business Corporation Act.

<PAGE>

SECTION 9. PURPOSE AND EXCLUSIVITY. The indemnification referred to in
the various Sections of this Article VIII shall be deemed to be in addition to
and not in lieu of any other rights to which those indemnified may be entitled
under any statute, rule of law or equity, agreement, vote of the stockholders or
Board of Directors or otherwise. The Corporation is authorized to enter into
agreements of indemnification. The purpose of this Article VIII is to augment
the provisions of the Oregon Business Corporation Act dealing with
indemnification.

SECTION 10. SEVERABILITY. If any of the provisions of this Article VIII
are found, in any action, suit or proceeding, to be invalid or ineffective, the
validity and the effect of the remaining provisions shall not be affected.

ARTICLE IX: ARTICLES AND BYLAWS

SECTION 1. RESTATED ARTICLES OF INCORPORATION. The corporation
reserves the right to alter, amend, repeal or rescind any provision contained in
these Restated Articles of Incorporation in any manner now or hereafter
permitted by law, and all rights conferred on shareholders herein are granted
subject to this reservation. The affirmative vote of the holders of not less
than a majority of the total number of votes represented by the then outstanding
shares of capital stock of the corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
amend or repeal these Restated Articles of Incorporation, or to adopt any
provision inconsistent with the purpose or intent of Articles IV through IX or
Section 1 of Article III of these Restated Articles of Incorporation.

SECTION 2. BYLAWS. In furtherance and not in limitation of the powers
conferred by the Oregon Business Corporation Act, the Board of Directors shall
have the power to make, alter, amend, repeal or rescind the Bylaws of the
corporation, subject to the power of the shareholders to alter, amend, repeal or
rescind any Bylaw made by the Board of Directors.

DATED effective the ____________________ day of October, 1996.

<PAGE>

EXHIBIT 3.2

BYLAWS

LITHIA MOTORS, INC.

ARTICLE 1.

SHAREHOLDERS' MEETINGS

Section 1.1 ANNUAL MEETING. The annual meeting of the shareholders
will be held in April or May of every year on such date and at such time as
is be determined by the Board of Directors. The annual meeting of the
shareholders will be held at the principal office of the Corporation or at
such other place as may be determined by the Board of Directors. At such
meeting the shareholders entitled to vote will elect a Board of Directors and
transact such other business as may come before the meeting.

Section 1.2 SPECIAL MEETINGS. Special meetings of shareholders will be
held at any time on call of the President or the Board of Directors, or on
demand in writing by shareholders of record holding shares with at least 10
percent of the votes entitled to be cast on any matter proposed to be
considered at the special meeting.

Section 1.3 NOTICE. Written notice stating the place, date and time of
the meeting, and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, will be delivered not less than ten nor more
than sixty days before the date of the meeting, either personally or by mail,
by or at the direction of the President or the Secretary, to each shareholder
of record entitled to vote at such meeting. If mailed, the notice will be
deemed to be delivered when deposited in the United States mail addressed to
the shareholder at the shareholder's address as it appears on the current
shareholder records of the Corporation, with postage prepaid.

Section 1.4 WAIVER OF NOTICE. A shareholder may, at any time, waive
any notice required by these Bylaws, the Articles of Incorporation or the
Oregon Business Corporation Act. Except as otherwise provided by this
Section 1.4, the waiver must be in writing, must be signed by the shareholder
and must be delivered to the Corporation for inclusion in the minutes and
filing in the corporate records. A shareholder's attendance at a meeting
waives any objection to (a) lack of notice or defective notice, unless the
shareholder objects at the beginning of the meeting to holding the meeting or
transacting business at the meeting and (b) consideration of any matter at
the meeting that is not within the purpose or purposes described in the
notice of a special meeting, unless the shareholder objects to considering
the matter when it is first presented.

Section 1.5 VOTING. Except as otherwise provided in the Articles of
Incorporation, each shareholder will be entitled to one vote, in person or by
proxy, on each matter voted on at a shareholder's meeting for each share of
stock outstanding in such shareholder's name on the records of the
Corporation which is entitled to vote on such matter. Unless held as trustee
or in another fiduciary capacity, shares may not be voted if held by another
corporation in which the Corporation holds a majority of the shares entitled
to vote for directors of such other corporation. The Board of Directors, by
a resolution duly

<PAGE>

adopted by them, may require the use of written ballots at any annual or
special meeting of the shareholders. In the absence of such a resolution,
written ballots will not be required.

Section 1.6 QUORUM; VOTE REQUIRED. A majority of the shares entitled
to vote on a matter, represented in person or by proxies, will constitute a
quorum with respect to that matter at any meeting of the shareholders. If a
quorum is present, action on a matter, other than the election of directors,
is approved if the votes cast in favor of the action exceed the votes cast in
opposition, unless the vote of a greater number is required by the Oregon
Business Corporation Act or the Articles of Incorporation. Election of
directors is governed by Section 2.1 of these Bylaws. Unless otherwise
provided in the Articles of Incorporation, a majority of votes represented at
a meeting of shareholders, whether or not a quorum, may adjourn the meeting
to a different time, date, or place. No further notice of the adjourned
meeting is required if the new time, date, and place is announced at the
meeting prior to adjournment and the date is set 120 days or less from the
date of the original meeting.

Section 1.7 ACTION WITHOUT MEETING. Any action required or permitted
to be taken at a meeting of shareholders may be taken without a meeting if a
written consent, or consents, describing the action taken is signed by all of
the shareholders entitled to vote on the action and is delivered to the
Corporation for inclusion in the minutes and filing with the corporate
records. The action is effective when the last shareholder signs the consent,
unless the consent specifies an earlier or later effective date. A consent
signed under this section has the effect of a meeting vote and may be
described as such in any document. Unless a record date for determining the
shareholders entitled to take action without a meeting is otherwise
established, the record date for that purpose is the date the first
shareholder signs the consent. If the Oregon Business Corporation Act
requires that notice of a proposed action be given to non-voting shareholders
and that the action is to be taken by unanimous consent of the shareholders,
at least 10 days written notice of the proposed action will be given to
non-voting shareholders before the action is taken.

ARTICLE 2.

BOARD OF DIRECTORS

Section 2.1 NUMBER AND ELECTION OF DIRECTORS. The Board of Directors
will consist of not less than two members and not more than seven members.
The number of directors will be established within this range from time to
time by the Board of Directors. A decrease in the number of directors will
not have the effect of shortening the term of any incumbent director. At
each annual meeting, the shareholders will elect directors by a plurality of
the votes cast by the shares entitled to vote in the election. Each director
will be elected to hold office until the next annual meeting of shareholders
and until the election and qualification of a successor, subject to prior
death, resignation or removal.

Section 2.2 VACANCIES. Unless otherwise provided by the Articles of
Incorporation or unless previously filled by the vote of at least a majority
of the total number of votes represented by the then outstanding shares of
capital stock of the Corporation entitled to vote generally in the election
of directors (voting together as a single class, any vacancy occurring in the
Board of Directors, including both a vacancy resulting from removal of a
director or from an increase in the number of directors, may be filled by
vote of a majority of the remaining directors then in office, even if less
than a quorum. Any director elected to fill a vacancy will serve until the
next annual shareholders meeting and until the successors have been elected
and qualified, subject to prior death, resignation or removal.

Section 2.3 ANNUAL MEETING. An annual meeting of the Board of
Directors will be held without notice immediately after the adjournment of
the annual meeting of the shareholders or at another time designated by the
Board of Directors upon notice in the same manner as provided in Section 2.5.
The

<PAGE>

annual meeting will be held at the principal office of the Corporation or at
such other place as the Board of Directors may designate.

Section 2.4 REGULAR MEETINGS. The Board of Directors may provide by
resolution for regular meetings. Unless otherwise required by such
resolution, regular meetings may be held without notice of the date, time,
place or purpose of the meeting.

Section 2.5 SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the President, the Chief Executive Officer or any
member of the Board of Directors. Notice of each special meeting will be
given to each director, either by oral or in written notification actually
received not less than 24 hours prior to the meeting or by written notice
mailed by deposit in the United States mail, first class postage prepaid,
addressed to the director at the director's address appearing on the records
of the Corporation not less than 72 hours prior to the meeting. Special
meetings of the directors may also be held at any time when all members of
the Board of Directors are present and consent to a special meeting. Special
meetings of the directors will be held at the principal office of the
Corporation or at any other place designated by a majority of the Board of
Directors.

Section 2.6 TELEPHONIC MEETINGS. The Board of Directors may permit
directors to participate in a meeting by any means of communication by which
all of the persons participating in the meeting can hear each other at the
same time. Participation in such a meeting will constitute presence in
person at the meeting.

Section 2.7 WAIVER OF NOTICE. A director may, at any time, waive any
notice required by these Bylaws, the Articles of Incorporation or the Oregon
Business Corporation Act. Except as otherwise provided in this Section 2.7,
the waiver must be in writing, must be signed by the director, must specify
the meeting for which notice is waived, and must be delivered to the
Corporation for inclusion in the minutes and filing in the corporate records.
A director's attendance at a meeting waives any required notice, unless the
director at the beginning of the meeting or promptly upon the director's
arrival objects to holding the meeting or transacting business at the meeting
and does not thereafter vote for or assent to any action taken at the meeting.

Section 2.8 QUORUM. A majority of the number of directors that has
been established by the Board of Directors pursuant to Section 2.1 of these
Bylaws will constitute a quorum for the transaction of business.

Section 2.9 VOTING. The act of the majority of the directors present
at a meeting at which a quorum is present will for all purposes constitute
the act of the Board of Directors, unless otherwise provided by the Articles
of Incorporation or these Bylaws.

Section 2.10 ACTION WITHOUT MEETING. Unless otherwise provided by the
Articles of Incorporation, any action required or permitted to be taken at a
Board of Directors meeting may be taken without a meeting if a written
consent, or consents, describing the action taken is signed by each director
and included in the minutes and filed with the corporate records. The action
is effective when the last director signs the consent, unless the consent
specifies an earlier or later effective date. A consent signed under this
section has the effect of an act of the Board of Directors at a meeting and
may be described as such in any document.

Section 2.11 REMOVAL OF DIRECTORS. Unless otherwise provided by the
Articles of Incorporation, the shareholders, at any meeting of the
shareholders called expressly for that purpose, may remove any director from
office, with or without cause, by the affirmative vote of not less than a
majority of the total number of votes represented by the then outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class.

<PAGE>

Section 2.12 POWERS OF DIRECTORS. The Board of Directors will have the
sole responsibility for the management of the business of the Corporation.
In the management and control of the property, business and affairs of the
Corporation, the Board of Directors is vested with all of the powers
possessed by the Corporation itself, so far as this delegation of power is
not inconsistent with the Oregon Business Corporation Act, the Articles of
Incorporation, or these Bylaws. The Board of Directors will have the power
to determine what amount constitutes net earnings of the Corporation, what
amount will be reserved for working capital and for any other purpose, and
what amount, if any, will be declared as dividends. Such determinations by
the Board of Directors will be final and conclusive except as otherwise
expressly provided by the Oregon Business Corporation Act or the Articles of
Incorporation. The Board of Directors may designate one or more officers of
the Corporation who will have the power to sign all deeds, leases, contracts,
mortgages, deeds of trust and other instruments and documents executed by and
binding upon the Corporation. In the absence of a designation of any other
officer or officers, the Chief Executive Officer is so designated.

Section 2.13 COMMITTEES. Unless the Articles of Incorporation provide
otherwise, a majority of the Board of Directors may designate from among its
members an Executive Committee and any number of other committees. Each
committee must consist of two or more directors and will have such powers and
will perform such duties as may be delegated and assigned to the committee by
the Board of Directors. No committee will have the authority of the Board of
Directors with respect to (a) approving dividends or other distributions to
shareholders, except as permitted by (h), below, (b) amending the Articles of
Incorporation, except as permitted by (j), below (c) adopting a plan of
merger, (d) recommending to the shareholders the sale, lease, exchange, or
other disposition of all or substantially all the property and assets of the
Corporation other than in the usual and regular course of its business, (e)
recommending to the shareholders a voluntary dissolution of the Corporation
or a revocation thereof, (f) approving or proposing to shareholders other
actions required to be approved by the shareholders, (g) approving a plan of
merger which does not require shareholder approval, (h) authorizing or
approving any reacquisition of shares of the Corporation, except pursuant to
a formula or method prescribed by the Board of Directors, (i) authorizing or
approving the issuance, sale or contract for sale of shares of the
Corporation's stock except either pursuant to a stock option or other stock
compensation plan or where the Board of Directors has determined the maximum
number of shares and has expressly delegated this authority to the committee,
(j) determining the designation and relative rights, preferences and
limitations of a class or series of shares, unless the Board of Directors has
determined a maximum number of shares and expressly delegated this authority
to the committee, (k) adopting, amending or repealing Bylaws for the
Corporation, or (l) filling vacancies on the Board of Directors or on any of
its committees or (m) taking any other action which the Oregon Business
Corporation Act prohibits a committee of a board of directors to take. The
provisions of Sections 2.4, 2.5, 2.6, 2.7, 2.8, 2.9, and 2.10 of the Bylaws
will also apply to all committees of the Board of Directors. Each committee
will keep written records of its activities and proceedings. All actions by
committees will be reported to the Board of Directors at the next meeting
following the action and the Board of Directors may ratify, revise or alter
such action, provided that no rights or acts of third parties will be
affected by any such revision or alteration.

Section 2.14 CHAIRMAN OF THE BOARD. The Board of Directors may elect
one of its members to be Chairman of the Board of Directors. The Chairman
will advise and consult with the Board of Directors and the officers of the
Corporation as to the determination of policies of the Corporation, will
preside at all meetings of the Board of Directors and of the shareholders,
and will perform such other functions and responsibilities as the Board of
Directors may designate from time to time.

<PAGE>

ARTICLE 3.

OFFICERS

Section 3.1 COMPOSITION. The officers of this Corporation will consist
of at least a President and a Secretary and may also include a separate Chief
Executive Officer, one or more Vice Presidents and a Treasurer, each of whom
will be elected by the Board of Directors at the annual meeting of the Board
of Directors or at any regular meeting of the Board of Directors or at any
special meeting called for that purpose. Other officers and assistant
officers and agents may be elected or appointed by or in the manner directed
by the Board of Directors as the Board of Directors may deem necessary or
appropriate. Any vacancies occurring in any office of this Corporation may
be filled by election or appointment by the Board of Directors at any regular
meeting or any special meeting called for that purpose. Each officer will
hold his or her office until the next annual meeting of the Board of
Directors and until the election and qualification of a successor in such
office, subject to prior death, resignation or removal.

Section 3.2 CHIEF EXECUTIVE OFFICER. The Board of Directors may
designate one of the officers of the Corporation or the Chairman of the Board
of Directors to serve as the Chief Executive Officer of the Corporation. The
Chief Executive Officer will be responsible for implementing the policies and
goals of the Corporation as stated by the Board of Directors and will have
general supervisory responsibility and authority over the property, business
and affairs of the Corporation. Unless otherwise provided by the Board of
Directors, the Chief Executive Officer will have the authority to hire and
fire employees and agents of the Corporation and to take such other actions
as the Chief Executive Officer deems to be necessary or appropriate to
implement the policies, goals and directions of the Board of Directors.

Section 3.3 PRESIDENT. In the absence of a specific designation by the
Board of Directors of a separate Chief Executive Officer, the President will
have all the responsibilities and authority of the Chief Executive Officer as
set forth in Section 3.1 and may be referred to as the Corporation's Chief
Executive Officer. The President may sign any documents and instruments of
the Corporation which require the signature of the President under the Oregon
Business Corporation Act, the Articles of Incorporation or these Bylaws. The
President will also have such responsibilities and authority as may be
delegated to the President by the Chief Executive Officer or prescribed by
the Board of Directors. At the request of the Chairman of the Board of
Directors or in the Chairman's absence, the President will preside at
meetings of the Board of Directors and at meetings of the shareholders. Upon
the death, resignation or removal of the President, the Board of Directors
may appoint a Vice President or another person to serve as an "acting" or
"interim" President to serve as such until the position is filled by action
of the Board of Directors. Unless otherwise provided by the Board of
Directors, an "acting" or "interim" President will have all responsibilities
and authority of the President.

Section 3.4 VICE PRESIDENT. A Vice President will have such
responsibilities and authority as may be prescribed by the Board of Directors
or as may be delegated by the Chief Executive Officer or the President to
such Vice President. If at any time there is more than one Vice President,
the Board of Directors may designate the order of seniority or the areas of
responsibility of such Vice Presidents. A Vice President (or if more than
one, the Vice Presidents in order of seniority by designation or order of
appointment) will have all of the powers and perform all of the duties of the
President during the absence or disability of the President.

Section 3.5 SECRETARY. The Secretary will keep the minutes and records
of all the meetings of the shareholders and directors and of all other
official business of the Corporation. The Secretary will give notice of
meetings to the shareholders and directors and will perform such other duties
as may be prescribed by the Board of Directors.

<PAGE>

Section 3.6 TREASURER. The Treasurer will receive all moneys and funds
of the Corporation and deposit such moneys and funds in the name of and for
the account of the Corporation with one or more banks designated by the Board
of Directors or in such other short-term investment vehicles as may from time
to time be designated or approved by the Board of Directors. The Treasurer
will keep accurate books of account and will make reports of financial
transactions of the Corporation to the Board of Directors, and will perform
such other duties as may be prescribed by the Board of Directors. If the
Board of Directors elects a Vice President, Finance or a Chief Financial
Officer, the duties of the office of Treasurer may rest in that officer.

Section 3.7 REMOVAL. The directors, at any regular meeting or any
special meeting called for that purpose, may remove any officer from office
with or without cause; provided, however, that no removal will impair the
contract rights, if any, of the officer removed or of this Corporation or of
any other person or entity.

ARTICLE 4.

STOCK AND OTHER SECURITIES

Section 4.1 CERTIFICATES. All stock and other securities of this
Corporation will be represented by certificates which will be signed by the
President or a Vice President and the Secretary or an Assistant Secretary of
the Corporation, and which may be sealed with the seal of the Corporation or
a facsimile thereof.

Section 4.2 TRANSFER AGENT AND REGISTRAR. The Board of Directors may
from time to time appoint one or more Transfer Agents and one or more
Registrars for the stock and other securities of the Corporation. The
signatures of the President or a Vice President and the Secretary or an
Assistant Secretary upon a certificate may be facsimiles if the certificate
is manually signed by a Transfer Agent, or registered by a Registrar.

Section 4.3 TRANSFER. Title to a certificate and to the interest in
this Corporation represented by that certificate can be transferred only (a)
by delivery of the certificate endorsed by the person designated by the
certificate to be the owner of the interest represented thereby either in
blank or to a specified person or (b) by delivery of the certificate and a
separate document containing a written assignment of the certificate or a
power of attorney to sell, assign or transfer the same, signed by the person
designated by the certificate to be the owner of the interest represented
thereby either in blank or to a specified person.

Section 4.4 NECESSITY FOR REGISTRATION. Prior to presentment for
registration upon the transfer books of the Corporation of a transfer of
stock or other securities of this Corporation, the Corporation or its agent
for purposes of registering transfers of its securities may treat the
registered owner of the security as the person exclusively entitled to vote
the securities; to receive any notices to shareholders; to receive payment of
any interest on a security, or of any ordinary, extraordinary, partial
liquidating, final liquidating, or other dividend, or of any other
distribution, whether paid in cash or in securities or in any other form; and
otherwise to exercise or enjoy any or all of the rights and powers of an
owner.

Section 4.5 FIXING RECORD DATE. The Board of Directors may fix in
advance a date as record date for the purpose of determining the registered
owners of stock or other securities (a) entitled to notice of or to vote at
any meeting of the shareholders or any adjournment thereof; (b) entitled to
receive payment of any interest on a security, or of any ordinary,
extraordinary, partial liquidating, final liquidating, or other dividend, or
of any other distribution, whether paid in cash or in securities or in any
other form; or (c) entitled to otherwise exercise or enjoy any or all of the
rights and powers of an owner,

<PAGE>

or in order to make a determination of registered owners for any other proper
purpose. The record date will be not more than 70 days and, in the case of a
meeting of shareholders, not less than 10 days prior to the date on which the
particular action which requires such determination of registered owners is
to be taken.

Section 4.6 RECORD DATE FOR ADJOURNED MEETING. A determination of
shareholders entitled to notice of or to vote at a meeting of the
shareholders is effective for any adjournment of the meeting unless the Board
of Directors fixes a new record date. A new record date must be fixed if a
meeting of the shareholders' is adjourned to a date more than 120 days after
the date fixed for the original meeting.

Section 4.7 LOST CERTIFICATES. In case of the loss or destruction of a
certificate of stock or other security of this Corporation, a duplicate
certificate may be issued in its place upon such conditions as the Board of
Directors may prescribe.

ARTICLE 5.

AMENDMENTS

Unless otherwise provided in the Articles of Incorporation, the Bylaws
of the Corporation may be amended or repealed by the directors, subject to
amendment or repeal by action of the shareholders, at any regular meeting or
at any special meeting called for that purpose, provided notice of the
proposed change is given in the notice of the meeting or notice thereof is
waived in writing.

ARTICLE 6.

SEVERABILITY

If any provision of these Bylaws is found, in any action, suit or
proceeding, to be invalid or ineffective, the validity and the effect of the
remaining provisions will not be affected.

Adopted by action of the Board of Directors of Lithia Motors, Inc. as of
October 10, 1996.

----------------------------------------
Sidney B. DeBoer, Secretary

<PAGE>
EXHIBIT 10.5.1

DEALERSHIP STANDARDS ADDENDUM

FOR

LITHIA MOTORS, INC.
dba LITHIA ISUZU

EFFECTIVE FROM AND AFTER June 5, 1996 UNTIL AMENDED

In accordance with Section 5 of our Isuzu Dealer Sales and Service Agreement
with you dated June 5, 1996 and Article III of the Isuzu Dealer Sales and
Service Agreement Additional Provisions thereto, you agree to:

1. Furnish to us, on or before the tenth day of each month, on such forms
or by such means as we may designate, complete and accurate financial
and operating statements reflecting your true financial condition as
of the end of the preceding month and for that portion of the fiscal
year then ended.

2. Maintain flooring arrangements with an approved Bank or Financial
Institution providing a wholesale flooring line of $600,000
exclusively for the purchase of Isuzu vehicles.

3. Maintain a new vehicle showroom located at 700 North Central, Medford,
OR for the display and sale of Isuzu vehicles. Said showroom to be a
minimum of 1,200 square feet, and sufficient in design to display at
least two (2) Isuzu vehicles.

4. Install and maintain standard signs as required by us for an Isuzu
dealership, including brand, fascia, exterior service and parts, and
interior parts signs where allowable under the then current local sign
ordinance.

5. Having your service management and technicians attend specified Isuzu
sponsored service training programs.

6. Having your sales and management personnel attend Isuzu sponsored
product training sessions.

7. Maintain a designated area in the service department located at 700
North Central, Medford, OR, for servicing Isuzu vehicles. This shall
be coordinated with our designated representative and subject to our
approval.

8. Maintain a specified area in the parts department located at 700 North
Central, Medford, OR, for storage of Isuzu parts. This shall be
coordinated with our designated representative and subject to our
approval.

9. Maintain Net Working Capital of $94,850 in excess of the combined
current net working capital requirement of other manufacturers you may
also represent. Additionally, having and maintaining Net Working
Capital in the amount required by Isuzu as determined by a revised
standard working capital formula.

<PAGE>

10. Maintain and utilize the Isuzu-Net Dealer Communication System for the
submission of required monthly financial statements, parts orders,
warranty claims, retail sales reporting, and all other functions which
from time to time American Isuzu Motors, Inc. may deem necessary.

American Isuzu Motors, Inc. reserves the right to amend the foregoing dealership
standards at any time upon written notice to you.

Lithia Motors, Inc.
dba Lithia Isuzu
700 North Central
Medford, OR 97501

By [Signature]
-------------------------------------

Its [President Sec-Treas.]
------------------------------------

AMERICAN ISUZU MOTORS, INC.

By [Signature]
-------------------------------------

Its Senior Vice President/General
Manager Sales and Service
------------------------------------

<PAGE>
EXHIBIT 10.6.1

FORD MOTOR COMPANY

SEATTLE DISTRICT

Mercury Sales and Service Agreement

AGREEMENT made as of the 28TH day of DECEMBER, 1979, by and between
JACOBSON LINCOLN-MERCURY, INC., A CORPORATION DELAWARE doing business as VALLEY
LINCOLN-MERCURY and with a principal place of business at 143 S. RIVERSIDE,
MEDFORD, JACKSON, OREGON, 97501.

(hereinafter called the "Dealer") and Ford Motor Company, a Delaware corporation
with its principal place of business at Dearborn, Michigan (hereinafter called
the "Company").

PREAMBLE

The purpose of this agreement is to (i) establish the Dealer as an
authorized dealer in COMPANY PRODUCTS including VEHICLES (as herein defined),
(ii) set forth the respective responsibilities of the Company in producing and
selling those products to the Dealer and of the Dealer in reselling and
providing service for them and (iii) recognize the interdependence of both
parties in achieving their mutual objectives of satisfactory sales, service and
profits by continuing to develop and retain a broad base of satisfied owners of
COMPANY PRODUCTS.

In entering into this agreement, the Company and the Dealer recognize that
the success of the Company and of each of its authorized dealers depends largely
on the reputation and competitiveness of COMPANY PRODUCTS and dealers' services,
and on how well each fulfills its responsibilities under this agreement.

It is the opinion of the Company that sales and service of COMPANY PRODUCTS
usually can best be provided to the public through a system of independent
franchised dealers, with each dealer fulfilling his responsibilities in a given
locality from properly located, adequate, well-equipped and attractive
dealerships, which are staffed by competent personnel and provided with the
necessary working capital. The Dealer recognizes that, in such a franchise
system, the Company must plan for the establishment and maintenance of the
numbers, locations and sizes of dealers necessary for satisfactory and proper
sales and service representation in each market area as it exists and as it
develops and changes. At the same time, the Company endeavors to provide each
of its dealers with a reasonable profit opportunity based on the potential for
sales and service of COMPANY PRODUCTS within his locality.

The Company endeavors to make available to its dealers a variety of quality
products, responsive to broad wants and needs of the buying public, which are
attractively styled, of sound engineering design and produced on a timely basis
at competitive prices. The development, production and sale of such products
require that the Company and its manufacturing sources make large continuing
investments in plants, equipment, tools and other facilities, engineering and
styling research and development, quality control procedures, trained personnel
and marketing programs. Heavy commitments must also be made in advance for raw
materials and finished parts. For purposes of making these investments and
commitments, planning production and estimating costs for

<PAGE>

setting prices, the Company assumes in advance an estimated volume of sales for
each of its products. Within each year, it develops monthly production
schedules from basic orders submitted by its franchised dealers for the
following month and its and their best estimates of the market for subsequent
months.

In turn, each of the Company's franchised dealers makes important
investments or commitments in retail sales and service facilities and equipment,
in working capital, in inventories for vehicles, parts and accessories, and
trained sales and service personnel based on annual planning volumes for their
markets.

If satisfactory volumes for either the Company or a dealer are not
realized, each may suffer because of commitments already made and the cost of
manufacturing and of selling each product may be increased. Each month each
dealer must forecast and give the Company a basic order for the products needed
to serve his market. During the month each dealer should submit specific orders
for products covered by his basic order. If dealers' specific orders for any
product are greater than or different from their basic orders, the Company seeks
to revise production schedules to the extent feasible, and to allocate fairly
any product in short supply, but inevitably both the Company and its dealers
suffer loss of profits to the extent they cannot meet market demands. Thus, the
automotive business is a high risk business in which the Company, its
manufacturing sources and its dealers can succeed only through cooperative and
competitive effort in their respective areas of manufacturing, sales, service
and customer satisfaction.

Since it is the dealer who deals directly with, and develops the sale of
COMPANY PRODUCTS to, the consuming public, the Company substantially relies on
its dealers to provide successful sales and merchandising programs, competent
service operations and effective owner relations programs. To do this, dealers
must carry out their responsibilities of establishing and maintaining adequate
wholesale and retail finance plans, new and used vehicle sales programs, parts
and service sales programs, personnel training and supportive capitalization and
working capital. To assist its dealers in these responsibilities, the Company
establishes and periodically updates standards of operation and planning guides
based on its experience and current conditions. It also offers sales and
service training courses, advice as to facilities, counseling in the various
phases of dealership operations and, through other agreements and the activities
of its affiliates, assistance in financing, new and used vehicle merchandising,
parts and service merchandising, leasing, daily rentals and facilities
development. It also conducts national advertising, promotional and other
marketing programs and assists dealers in developing complementary group and
individual programs.

To enable the Company to provide such assistance, it requires dealers to
submit uniform and accurate sales, operating and financial reports from which it
can derive and disseminate analytical and comparative operating data and advice
to dealers. The Company also solicits dealers to bring to its attention through
their National Dealer Council organization any mutual dealer problems or
complaints as they arise.

Because the Company relies heavily on its dealers for success, it reserves
the right to cease doing business with any dealer who is not contributing
sufficiently to such success. Similarly, the Company recognizes that its
dealers look to it to provide competitive products and programs and that, if it
does not do so, any dealer may elect to cease doing business with the Company.

The Company has elected to enter into this agreement with the Dealer with
confidence in the Dealer's integrity and ability, his intention to carry out his
responsibilities set forth in this agreement, and his desire to provide
courteous, competent and satisfying sales and service representation to
consumers for COMPANY PRODUCTS, and in reliance upon his representations as to
the persons who will participate in the ownership and management of the
dealership.

<PAGE>

The Dealer has elected to enter into this agreement with the Company with
confidence in its integrity and ability, its intention to provide competitive
products and assist the Dealer to market them successfully, and its desire to
maintain high quality dealers.

Both parties recognize that the rights of the Dealer and the Company under
this agreement are defined and limited by the terms of this agreement and
applicable law.

The Company and the Dealer further acknowledge that their methods of
operation and business practices have an important effect on the reputation of
the Dealer, the Company, COMPANY PRODUCTS and other franchised dealers of the
Company. The Company and the Dealer also acknowledge that certain practices are
detrimental to their interests, such as deceptive, misleading or confusing
advertising, pricing, merchandising or business practices, or misrepresenting
the characteristics, quality, condition or origin of any item of sale.

It is the expectation of each of the parties that by entering into this
agreement, and by the full and faithful observance and performance of its
duties, a mutually satisfactory relationship will be established and maintained.

IN CONSIDERATION of the mutual agreements and acknowledgements hereinafter
made, the parties hereto agree as follows:

A. The Company hereby appoints the Dealer as an authorized dealer at
retail in VEHICLES and at retail and wholesale in other COMPANY PRODUCTS and
grants the Dealer the privilege of buying COMPANY PRODUCTS from the Company for
sale in its DEALERSHIP OPERATIONS (as herein defined). The Company also grants
to the Dealer the privilege of displaying, at approved locations), the Company's
trademarks and trade names applicable to COMPANY PRODUCTS. The Dealer hereby
accepts such appointment.

B. Subject to and in accordance with the terms and conditions of this
agreement, the Company shall sell COMPANY PRODUCTS to the Dealer and the Dealer
shall purchase COMPANY PRODUCTS from the Company.

C. The Ford Motor Company Mercury Sales and Service Agreement Standard
Provisions (Form "LM-7939a SALES OFC 4-72"), a duplicate original of which is
attached to the Dealer's duplicate original of this agreement, have been read
and agreed to by the Company and by the Dealer, and such Standard Provisions and
any duly executed and delivered supplement or amendment thereto, are hereby made
a part of this agreement with the same force and effect as if set forth herein
in full.

D. This agreement shall bind the Company when it bears the facsimile
signature of the General Manager, and the manual countersignature of the General
Sales Manager, Market Representation Manager, or a Regional or District Sales
Manager, of the Lincoln-Mercury Division of the Company and a duplicate original
thereof is delivered personally or by mail to the Dealer or the Dealer's
principal place of business.

E. The Dealer acknowledges that (i) this agreement may be executed only
in the manner provided in paragraph D hereof, (ii) no one except the General
Manager, the General Sales Manager, or Market Representation Manager of the
Lincoln-Mercury Division of the Company, or the Secretary or an Assistant
Secretary of the Company, is authorized to make or execute any other agreement
relating to the subject matter hereof on behalf of the Company, or in any manner
to enlarge, vary or modify the terms of this agreement, and then only by an
instrument

<PAGE>

in writing, and (iii) no one except the General Manager of the
Lincoln-Mercury Division of the Company, or the Secretary or an Assistant
Secretary of the Company, is authorized to terminate this agreement on behalf of
the Company, and then only by an instrument in writing.

F. In view of the personal nature of this agreement and its objectives
and purposes, the Company expressly reserves to itself the right to execute a
Mercury Sales and Service Agreement with individuals or other entities
specifically selected and approved by the Company. Accordingly, this agreement
and the rights and privileges conferred on the Dealer hereunder are not
transferable, assignable or salable by the Dealer and no property right or
interest, direct or, indirect, is sold, conveyed or transferred to the Dealer
under this agreement. This agreement has been entered into by the Company with
the Dealer in reliance (i) upon the representation and agreement that the
following person(s), and only the following person(s), shall be the principal
owners of the Dealer:

NAME HOME PERCENTAGE
ADDRESS OF INTEREST

Lithia Motors, Inc. 360 E. Jackson, Medford, OR 100%
- ------------------------------------------------------------------------------
(ownership: J.L. Koken-10%; M.L. Heimann-15%; A.W. DeBoer-25%;
- ------------------------------------------------------------------------------
R.G. DeBoer-25%; S.B. DeBoer-25%, controlling trustee for all stock)
- ------------------------------------------------------------------------------

(ii) upon the representation and agreement that the following person(s), and
only the following person(s), shall have full managerial authority for the
operating management of the Dealer in the performance of this agreement:

NAME HOME TITLE
ADDRESS

S.B. DeBoer 401 S. Modoc, Medford, OR 97501 President, G.M.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------

and (iii) upon the representation and agreement that the following person(s),
and only the following person(s), shall be the remaining owners of the Dealer:

NAME HOME PERCENTAGE
ADDRESS OF INTEREST

- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------

The Dealer shall give the Company prior notice of any proposed change in the
said ownership or managerial authority, and immediate notice of the death or
incapacity of any such person. No such change or notice, and no assignment of
this agreement or of any right or interest herein, shall be effective against
the Company unless and until embodied in an appropriate amendment to or
assignment of this agreement, as the case may be, duly executed and delivered by
the Company and by the Dealer. The Company shall not unreasonably withhold its
consent to any such change.

G. (Strike out either subparagraph (1) or (2) whichever is not
applicable.)

(1) This agreement shall continue in force and effect from the date of its
execution until terminated by either party under the provisions of paragraph 17
hereof.

<PAGE>

(2) This agreement shall continue in force and effect for a term
commencing on the date of its execution and expiring __________ unless sooner
terminated under the provisions of paragraph 17 hereof.

H. Both the Company and the Dealer assume and agree to carry out and
perform their respective responsibilities under this agreement.

IN WITNESS WHEREOF the parties hereto have duly executed this agreement in
duplicate as of the day and year first above written.

FORD MOTOR COMPANY
General Manager, VALLEY LINCOLN-MERCURY
Lincoln-Mercury Division
By [Signature]
----------------------------

Countersigned by (Title) [President]
[Signature] -----------------------
- -----------------------------------
Initials
- --------

<PAGE>

EXHIBIT 10.10.2

TOYOTA DEALER AGREEMENT
STANDARD PROVISIONS

The Standard Provisions set forth below are expressly incorporated in and made a
part of the Toyota Dealer Agreement.

XIII. SALE OF TOYOTA PRODUCTS TO DEALER

A. DEALER'S RIGHT TO PURCHASE TOYOTA PRODUCTS

DEALER shall have the right to purchase Toyota Products from
DISTRIBUTOR subject to the provisions of paragraph XIII(B)
herein.

B. DISTRIBUTOR'S OBLIGATION TO SELL TOYOTA PRODUCTS

DISTRIBUTOR agrees to use its best efforts to provide Toyota
Products to DEALER in such quantities and types as may be
required by DEALER to fulfill its obligations with respect to the
sale and servicing of Toyota Products under this Agreement,
subject to available supply from IMPORTER, DISTRIBUTOR's
marketing requirements, and any change or discontinuance with
respect to any Toyota Product.

DISTRIBUTOR and DEALER recognize that certain Toyota Products may
not be available in sufficient supply from time to time because
of factors which are beyond the control of DISTRIBUTOR and
IMPORTER. Where such a shortage is determined by DISTRIBUTOR to
exist, DISTRIBUTOR will endeavor to allocate the affected Toyota
Product(s) among its dealers in a fair and equitable manner,
which it shall determine in its sole discretion. DISTRIBUTOR
agrees to provide DEALER with an explanation of the method used
to distribute such products and, upon written request, will
advise DEALER of DISTRIBUTOR's total sales of new motor vehicles,
by series, in DEALER's region, and to DEALER individually.

C. DELIVERY OF TOYOTA PRODUCTS

1. Mode and Place of Delivery

DISTRIBUTOR shall select the distribution points and the
mode of transportation and shall pay carrier(s) for all
charges in effecting delivery of Toyota Products to DEALER.
DISTRIBUTOR will invoice DEALER for Destination Freight
Charges or such functional equivalent as DISTRIBUTOR may in
its discretion establish, and DEALER agrees to reimburse
DISTRIBUTOR therefor.

<PAGE>

2. Diversion Charges

If DISTRIBUTOR is required to divert any Toyota Product
which DEALER has agreed to purchase and which is not
cancelled prior to shipment by DISTRIBUTOR, because of
DEALER's failure or refusal to accept such product, DEALER
agrees to assume responsibility for and pay any charges
incurred by DISTRIBUTOR as a result of such diversion.
DEALER's responsibility for such charges shall not exceed
the charge of returning any such product to the point of
original shipment by DISTRIBUTOR plus all charges for
demurrage, storage or other charges related to such
diversion.

DEALER also agrees to assume responsibility for and shall
pay any and all charges for demurrage, storage or other
charges accruing after arrival of shipment at the
distribution point established by DISTRIBUTOR.

3. Delay or Failure of Delivery

DISTRIBUTOR shall not be liable for delay or failure to
deliver Toyota Products which it has previously agreed to
deliver, where such delay or failure to deliver is the
result of any event beyond the control of DISTRIBUTOR or
IMPORTER, including but not limited to any law or regulation
of any governmental entity, acts of God, foreign or civil
wars, riots, interruptions of navigation, shipwrecks, fires,
floods, storms, strikes, lockouts, or other labor troubles,
embargoes, blockades, or delay or failure of FACTORY,
IMPORTER or other suppliers of DISTRIBUTOR to deliver Toyota
Products.

4. Damage Claims Against Carriers

Upon request by DEALER and as may be mutually agreed upon by
the parties, DISTRIBUTOR agrees to assist DEALER in recovery
against any carrier for loss or damage to Toyota Products
shipped hereunder.

D. PRICES AND OTHER TERMS OF SALE

DISTRIBUTOR shall have the right from time to time to establish
and revise prices and other terms for its sales of Toyota
Products to DEALER. Revised prices, terms or provisions shall
apply to any Toyota Product not shipped by DISTRIBUTOR at the
time the notice of such change is given to DEALER (in the case of
Toyota Motor Vehicles) or upon issuance of a new or modified
parts price list or through change notices, letters, bulletins or
revision sheets (in the case of parts, options and accessories).

E. CHANGE OF DESIGN, OPTIONS OR SPECIFICATIONS

DEALER understands and agrees that there may be changes in the
design or specifications of any Toyota Product or in the
availability of options in any Toyota Product and that
DISTRIBUTOR is under no obligation to provide notice of same or
to make any similar change upon any product previously purchased
by or shipped to DEALER. No change shall be considered a model
year change unless so specified by FACTORY.
<PAGE>

F. DISCONTINUANCE OF MANUFACTURE

The manufacture and production of all or part of any Toyota
Product, whether motor vehicle, parts, options, or accessories,
including any model, series, or body style of any Toyota Motor
Vehicle, may be discontinued at any time without any obligation
or liability to DEALER on the part of FACTORY, IMPORTER, or
DISTRIBUTOR by reason thereof.

XIV. PROMOTING AND SELLING TOYOTA PRODUCTS

A. RESPONSIBILITIES OF THE DEALER

DEALER shall actively and effectively promote, through DEALER's
own advertising and sales promotion activities, the purchase of
Toyota Products by CUSTOMERS in DEALER's primary area of
responsibility. Nothing contained in this Agreement, however,
shall limit or be construed to limit the geographical area in
which, or the persons to whom, DEALER may sell or promote the
sale of Toyota Products.

The primary area of responsibility is a geographic area which
DISTRIBUTOR shall designate from time to time and is solely a
tool used by DISTRIBUTOR to evaluate DEALER's performance of its
sales and service obligations hereunder.

DEALER agrees that: it has no right or interest in any primary
area of responsibility that DISTRIBUTOR may designate;
DISTRIBUTOR may add new dealers to, or relocate dealers in, the
primary area of responsibility designated for DEALER; and
DISTRIBUTOR may, in its sole discretion, change DEALER's primary
area of responsibility from time to time.

B. SALES OPERATIONS

1. Sales Organization

To enable DEALER to fulfill it responsibilities
satisfactorily under paragraph XIV(A) of this section,
DEALER agrees to organize and maintain an adequate and
trained sales organization.

2. Fair Dealing

DISTRIBUTOR has selected DEALER because of its integrity and
commitment to fair dealing. DEALER shall at all times
maintain a high standard of ethics in advertising, promoting
and selling Toyota Products and shall not engage in any
misrepresentation or unfair or deceptive trade practices.

3. Disclosure as to Prices of Toyota Products

DEALER agrees to explain to purchasers of Toyota Products
the items which make up the purchase price and to give such
purchasers itemized invoices and any other information
required by law. DEALER further agrees that it will not
make any misleading statements or misrepresentations as to
the items which make up the total selling price
<PAGE>

of any Toyota Motor Vehicle, or as to the prices related to
such items. DEALER also agrees not to charge CUSTOMERS for
any services for which the DEALER is reimbursed by DISTRIBUTOR
and/or IMPORTER, including pre-delivery inspection and
adjustment services, without disclosing the fact of such
reimbursement to the CUSTOMER.

4. Product Warranties

DEALER understands and agrees that the only warranties of
FACTORY, IMPORTER or DISTRIBUTOR that shall be applicable to
each new Toyota Product sold to DEALER by DISTRIBUTOR shall
be the written warranty or warranties expressly furnished by
FACTORY, IMPORTER or DISTRIBUTOR and/or as stated in the
Toyota Warranty Policies and Procedures Manual, as it may be
revised from time to time. Except for its limited liability
under such written warranty or warranties, neither FACTORY,
IMPORTER nor DISTRIBUTOR assumes any other warranty,
obligation or liability. DEALER is not authorized to assume
any additional warranty obligations or liabilities on behalf
of DISTRIBUTOR, FACTORY or IMPORTER. Any such additional
obligations assumed by DEALER shall be solely the
responsibility of DEALER.

5. Disclosure Regarding Dealer Installed Items

DEALER recognizes that its CUSTOMERS have a right to expect
that any product that they purchase from DEALER meets the
high quality standards associated with DISTRIBUTOR,
IMPORTER, FACTORY, the Toyota Marks and Toyota Products in
general. Accordingly, DEALER agrees that, if it sells any
equipment, part or accessory that is not a Genuine Toyota
part or accessory, it shall disclose such fact to the
CUSTOMER and shall advise the CUSTOMER that the item is not
included in warranties furnished by IMPORTER or FACTORY. In
all cases, the purchaser's contract of purchase and sale
will include written notice of such disclosure. In
addition, DEALER will clearly explain to the CUSTOMER the
extent of any warranty covering the equipment, part or
accessory involved and will deliver a copy of such warranty
to the CUSTOMER.

C. ASSISTANCE PROVIDED BY DISTRIBUTOR

1. Sales Training Assistance

To assist DEALER in the fulfillment of its sales
responsibilities under this Agreement, DISTRIBUTOR agrees to
offer general and specialized sales management and sales
training programs for the benefit and use of DEALER's sales
organization. When requested by DISTRIBUTOR, DEALER's
personnel shall participate in such programs.

2. Sales Promotion Assistance

In order that authorized Toyota dealers may be assured of
the benefits of comprehensive advertising and promotion of
Toyota Products,
<PAGE>

DISTRIBUTOR agrees to establish and
maintain general advertising and promotion programs and will
from time to time make sales promotion and campaign
materials available to DEALER to promote the sales of such
Toyota Products at a reasonable charge where applicable.

3. Field Sales Personnel Assistance

To assist DEALER in handling its sales responsibilities
under this Agreement, DISTRIBUTOR agrees to provide trained
field sales personnel to advise and counsel DEALER on sales-
related subjects, including merchandising, training and
sales management.

D. EVALUATION OF DEALER'S SALES PERFORMANCE

DISTRIBUTOR will evaluate DEALER's sales performance within
DEALER's primary area of responsibility on an annual basis.
DISTRIBUTOR agrees to review such evaluations with DEALER and, if
requested, to furnish copies thereof, so that DEALER may take
prompt action if necessary to improve its sales performance to
such levels as DISTRIBUTOR may reasonably require.

In evaluating DEALER's sales performance, DISTRIBUTOR may, at its
discretion, include the following considerations:

1. Achievement of fair and reasonable sales objectives as
DISTRIBUTOR may establish at its discretion;

2. A comparison of sales and/or registrations of Toyota Motor
Vehicles to sales and/or registrations of other line makes:
(a) in DEALER's primary area of responsibility; and (b) in
DISTRIBUTOR's region or any area thereof as DISTRIBUTOR may
reasonably establish;

3. A comparison of sales and/or registration of Toyota Motor
Vehicles to sales and/or registrations of Toyota Motor
Vehicles of other Toyota dealers of comparable size which
DISTRIBUTOR shall select in its sole discretion;

4. The trend of DEALER's sales performance over a reasonable
period of time;

5. The manner in which DEALER has conducted its sales
operations, including advertising, sales promotions and
total CUSTOMER satisfaction;

6. The availability of new motor vehicles to DEALER from
DISTRIBUTOR; and

7. Significant local conditions that may have affected DEALER's
performance.
<PAGE>

XV. SERVICING TOYOTA MOTOR VEHICLES

A. DEALER'S SERVICING OBLIGATIONS

DEALER and DISTRIBUTOR agree that the future growth of sales of
Toyota Motor Vehicles is in part dependent upon CUSTOMER
satisfaction with vehicle servicing. DEALER recognizes that
DISTRIBUTOR entered into this Agreement with DEALER in reliance
upon DEALER's ability and commitment to fair dealing and
professional servicing. DEALER agrees, therefore, to take all
reasonable steps to provide service and parts for all Toyota
Motor Vehicles, regardless of where purchased, and whether or not
under warranty; insure that necessary repairs on CUSTOMER
vehicles are accurately diagnosed and professionally performed;
see that the CUSTOMER is advised and his or her consent is
obtained prior to the initiation of any repairs; and, assure that
the CUSTOMER is treated courteously and fairly at all times.

1. Warranty and Policy Service

Warranty and policy service shall be performed in accordance
with the Toyota Warranty Policies and Procedures Manual.
DISTRIBUTOR agrees to compensate DEALER for all warranty and
policy work, including labor and diagnosis, in accordance
with procedures and at rates to be announced from time to
time by DISTRIBUTOR and in accordance with applicable law.
DEALER agrees that such rates shall constitute full and
complete payment to DEALER for such work. Both parties
agree that warranty and policy service is provided for the
benefit of CUSTOMERS and DEALER agrees that the CUSTOMER
shall not be obligated to pay any charges for warranty or
policy work, except as required by law.

2. Changes In Reimbursement Rates

DISTRIBUTOR and DEALER recognize that it may be necessary
from time to time to adjust the rates at which DEALER is
reimbursed for labor and diagnosis in connection with
warranty and policy service performed on CUSTOMERS'
vehicles. In the event DEALER seeks to readjust such
reimbursement rates, DEALER agrees to make the appropriate
application to DISTRIBUTOR and to comply with such
applicable procedures or policies as may be set forth in the
Toyota Warranty Policies and Procedures Manual.

3. New Motor Vehicle Pre-delivery Service

DEALER agrees that prior to delivery of a new Toyota Motor
Vehicle to any purchaser, DEALER shall be responsible for
verifying that the pre-delivery service has been performed
in accordance with IMPORTER'S Schedule of Operations
published in the applicable Technical Services Bulletin.
DEALER shall be reimbursed by DISTRIBUTOR for such pre-
delivery service at an authorized labor and/or diagnosis
rate established by DISTRIBUTOR and according to the pre-
delivery service time allowances as established by IMPORTER
or as required by law.
<PAGE>

4. Independent Warranty or Service Contract Protection

If DEALER sells warranty or service contract protection for
a Toyota Motor Vehicle to its CUSTOMER which is independent
of that provided by IMPORTER or FACTORY and which covers a
period of time and Toyota Products also covered by the
limited warranty provided by IMPORTER or FACTORY:

a. At the time of sale, DEALER shall conspicuously
disclose in writing upon CUSTOMER's purchase order the
extent to which the independent warranty or service
contract protection purchased by the CUSTOMER overlaps
with that provided by IMPORTER or FACTORY; and

b. Whenever a CUSTOMER who purchases such independent
warranty or service contract protection seeks service
on a Toyota Product during the period of time that such
Product is also covered by the limited warranty
provided by IMPORTER or FACTORY, DEALER expressly
agrees that it will not apply for, and will not be
entitled to, reimbursement under such limited warranty
unless DEALER advises the CUSTOMER in writing, on all
copies of the repair order, that the service was
provided pursuant to IMPORTER's limited warranty and
not by the independent warranty or service contract
protection that the CUSTOMER purchased.

5. Use of Parts and Accessories

DEALER understands that it has the right to sell, install or
use products which are not Genuine Toyota Parts or
Accessories.

DEALER agrees, however, that its CUSTOMERS have a right to
expect that any part or accessory which it sells, installs
or uses in the repair or servicing of Toyota Motor Vehicles
meets the high quality standards of Genuine Toyota Parts or
Accessories. Therefore, in cases where DEALER does not
sell, install or use a Genuine Toyota Part or Accessory,
DEALER will only utilize such other parts or accessories as:

a. Will not adversely affect the mechanical operation of
the Toyota Motor Vehicles being serviced or repaired;
and

b. Are equivalent in quality and design to Genuine Toyota
Parts or Accessories.

DEALER agrees that it will not represent or offer to sell
as new Genuine Toyota Parts or Accessories, any parts or
accessories used by it in the repair or servicing of
Toyota Motor Vehicles which are not in fact Genuine
Toyota Parts or Accessories.

<PAGE>

6. Disclosures as to Parts and Accessories

In order to avoid confusion and to minimize potential
CUSTOMER dissatisfaction, in any case where DEALER does not
sell, install or use a Genuine Toyota Part or Accessory in
connection with the repair or servicing of a CUSTOMER's
Toyota Motor Vehicle, and instead sells, installs or uses a
non-Genuine Toyota Part or Accessory, it shall disclose such
fact to the CUSTOMER and shall advise the CUSTOMER that the
item is not included in warranties furnished by IMPORTER or
FACTORY. Such disclosure and advice shall be in writing,
conspicuous and set forth on CUSTOMER's copy of the service
or repair order. In addition, DEALER will clearly explain
to the CUSTOMER the extent of any warranty covering the
parts or accessories involved and will deliver a copy of
such warranty to the CUSTOMER.

7. Campaign Inspections and Corrections

DEALER agrees to perform campaign inspections and/or
corrections for owners and users of all Toyota Products that
qualify for such inspections and/or corrections. DEALER
further agrees to comply with all of the procedures relating
thereto set forth in the Toyota Warranty Policies and
Procedures Manual. DISTRIBUTOR agrees to reimburse DEALER
for all replacement parts and/or other materials required
and used in connection therewith and for labor in accordance
with the applicable provisions of the Toyota Warranty
Policies and Procedures Manual.

8. Compliance With Safety and Emission Control Requirements

DEALER agrees to comply with and operate consistently with
all applicable provisions of the National Traffic and Motor
Vehicle Safety Act of 1966 and the Federal Clean Air Act, as
amended, including applicable rules and regulations issued
from time to time thereunder, and all other applicable
federal, state and local motor vehicle safety and emission
control statutes, rules and regulations.

In the event that the laws of the state in which DEALER is
located require motor vehicle dealers or distributors to
install in new or used motor vehicles, prior to the retail
sale thereof, any safety devices or other equipment not
installed or supplied as standard equipment by FACTORY,
IMPORTER or DISTRIBUTOR, then DEALER, prior to its sale of
any Toyota Motor Vehicles on which such installations are so
required, shall properly install such devices or equipment
on such Toyota Motor Vehicles. DEALER shall comply with
state and local laws pertaining to installation of such
equipment, including, without limitation, the reporting
thereof.

In the interest of motor vehicle safety and emission
control, DISTRIBUTOR agrees to provide to DEALER, and DEALER
to DISTRIBUTOR, such information and assistance as may
reasonably be requested by the other in connection with the
performance of obligations imposed on either party by the
National Traffic and Motor Vehicle Safety Act of 1966 and
the Federal Clean Air Act, as amended, and the
<PAGE>

rules and regulations issued thereunder, and all other
applicable federal, state and local motor vehicle safety and
emission control statutes, rules and regulations.

9. Compliance With Consumer Protection Statutes, Rules and
Regulations

Because certain CUSTOMER complaints may have legal
significance for or impose liability upon DEALER,
DISTRIBUTOR or IMPORTER under various repair or replace, or
other consumer protection laws, rules and regulations,
DEALER agrees to provide promptly notice of such complaints
and take such other steps as DISTRIBUTOR or IMPORTER may
reasonably require. DEALER will do nothing to affect
adversely DISTRIBUTOR's or IMPORTER's rights under such
laws, rules and regulations.

B. SERVICE AND PARTS OPERATIONS

1. Service and Parts Organization

To enable DEALER to fulfill its responsibilities
satisfactorily under paragraph XV(A) herein, DEALER agrees
to organize and maintain a complete service and parts
organization, including a qualified service manager and a
qualified parts manager and a sufficient number of competent
CUSTOMER relations, service and parts personnel. DEALER
further agrees that the foregoing personnel will meet such
educational, management and technical training standards as
IMPORTER may establish or approve.

2. Handling of Service Complaints

DEALER recognizes that it is uniquely positioned to convey
to purchasers of Toyota Products the concern of DEALER,
DISTRIBUTOR, IMPORTER and FACTORY for the CUSTOMER's
satisfaction. DEALER, therefore, agrees to acknowledge,
investigate and handle all complaints from CUSTOMERS in a
manner which will enhance the goodwill of such CUSTOMERS
towards DEALER, DISTRIBUTOR, IMPORTER and Toyota Products.
Furthermore, DEALER agrees to participate in and cooperate
with such dispute resolution procedures as IMPORTER may
designate from time to time.

3. Service Equipment and Special Tools

DEALER agrees to provide and maintain adequate service
equipment and such special tools as are specified in
IMPORTER's minimum equipment standard listing, as amended
from time to time, and maintain same in good repair and
proper calibration to enable DEALER to fulfill its service
responsibilities under this Agreement.

4. Parts Inventory

DEALER and DISTRIBUTOR recognize that the owners and users
of Toyota Motor Vehicles may reasonably expect that DEALER
will have
<PAGE>

Genuine Toyota Parts or Accessories immediately available for
purchase or installation. DEALER, therefore, agrees to carry
in stock at all times during the term of this Agreement a
complete inventory of Genuine Toyota Parts or Accessories, as
listed in DISTRIBUTOR's current inventory guide, to enable
DEALER to meet its CUSTOMER's needs and to fulfill its service
responsibilities under this Agreement.

C. ASSISTANCE PROVIDED BY DISTRIBUTOR

1. Service Training Assistance

To assist DEALER in the fulfillment of its service and parts
responsibilities, DISTRIBUTOR from time to time shall offer
general and specialized service and technical training
programs and materials. When requested by DISTRIBUTOR,
DEALER's personnel shall participate in such programs.

2. Service Manuals and Materials

DISTRIBUTOR agrees to make available to DEALER, for use by
DEALER's service and parts organization, copies of such
DEALER service manuals and bulletins, publications and
technical data as IMPORTER and DISTRIBUTOR shall deem to be
necessary for the needs of DEALER's service organization.
DEALER shall have the responsibility of keeping such
manuals, publications and data current and available for
consultation by its service employees.

3. Field Service Personnel Assistance

To assist DEALER in handling service responsibilities under
this Agreement, DISTRIBUTOR agrees to make available field
service personnel who will, from time to time, advise and
counsel DEALER on service-related subjects, including
product quality, technical adjustment, repair and
replacement of product components, customer relations,
warranty administration, service and parts merchandising,
training and service management.

D. EVALUATION OF DEALER'S SERVICE PERFORMANCE

Because of the importance of DEALER's service performance to the
purposes and objectives of this Agreement, DISTRIBUTOR will
periodically evaluate DEALER's performance of its
responsibilities for service in areas such as consumer
satisfaction, service management and operating procedures,
personnel, new vehicle pre-delivery service, parts operation,
tools and equipment, and service and parts facilities.
DISTRIBUTOR agrees to review such evaluations with DEALER, and if
requested, to provide a copy thereof, so that DEALER may take
prompt action if necessary to improve its service performance to
satisfactory levels as DISTRIBUTOR may reasonably require.
<PAGE>

XVI. DEALERSHIP FACILITIES AND LOCATIONS

A. RESPONSIBILITIES OF DEALER

DEALER and DISTRIBUTOR agree that it is important to establish
and maintain an effective network of authorized Toyota dealers.
Accordingly, DISTRIBUTOR has entered into this Agreement in
reliance upon DEALER's representation that it will establish and
maintain dealership facilities and operations at the locations
identified in paragraph VII that are satisfactory as to space,
appearance, amenities, layout, equipment, signage and are
otherwise in accordance with IMPORTER'S minimum facilities
standards, as amended from time to time.

B. OPERATING HOURS

DEALER recognizes that the transportation, service and
maintenance needs of CUSTOMERS served by the DEALER can be met
properly only if DEALER keeps its dealership premises open for
business during hours which are reasonable and convenient for
such CUSTOMERS. Accordingly, DEALER agrees to maintain its
respective dealership operations open for business during all
days and hours which are customary and lawful for such operations
in the community or locality in which DEALER is located and in
accordance with industry standards.

C. MINIMUM VEHICLE INVENTORIES

Subject to the ability of DISTRIBUTOR to supply Toyota Motor
Vehicles to DEALER, DEALER agrees that it shall, at all times,
maintain at least the minimum inventory of Toyota Motor Vehicles
as may be established by DISTRIBUTOR from time to time. DEALER
also agrees that it shall have available at all times, for
purposes of display and demonstration, the number of Toyota Motor
Vehicles of the most current models as may be established by
DISTRIBUTOR from time to time, and shall, at all times, maintain
such Motor Vehicles in showroom ready condition.

D. SIGNS

Subject to applicable governmental ordinances, regulations and
statutes, DEALER agrees to erect and maintain, at the dealership
location(s), entirely at DEALER's expense standard authorized
product and service signs of types recommended by DISTRIBUTOR, as
well as such other authorized signs as are necessary to advertise
the dealership operations effectively and as recommended by
DISTRIBUTOR.

E. PLANNING ASSISTANCE FOR DEALERSHIP PREMISES

To assist DEALER in planning, establishing and maintaining the
dealership premises, DISTRIBUTOR will make available to DEALER,
upon request, sample copies of building layout plans, facility
planning recommendations, and an applicable identification
program covering the placement, installation and maintenance of
recommended signs. In addition, representatives of DISTRIBUTOR
will be available to DEALER from time to time to counsel and
<PAGE>

advise DEALER and dealership personnel in connection with
DEALER's planning and equipping the dealership premises.

F. EVALUATION OF DEALERSHIP FACILITIES

DISTRIBUTOR will periodically evaluate DEALER's performance of
its responsibilities under paragraphs VII and XVI herein. In
making such evaluations, DISTRIBUTOR will consider: the actual
building and land space provided by DEALER for the performance of
its responsibilities under this Agreement; compliance with
DISTRIBUTOR's current requirements for dealership operations; the
appearance, condition, layout and signage of the dealership
facilities; and such other factors, if any, as in DISTRIBUTOR's
opinion may directly relate to the DEALER's performance of its
responsibilities under this Agreement. DISTRIBUTOR will discuss
such evaluations with DEALER, and upon request will provide a
copy of same, so that the DEALER may take prompt action, if
necessary, to comply with IMPORTER's minimum facility standards.

XVII. CAPITALIZATION REQUIREMENTS

DEALER recognizes that its ability to conduct operations successfully
on a day-to-day basis depends to a great extent upon the net working
capital and flooring and lines of credit which DEALER maintains.

A. NET WORKING CAPITAL

The amount and structure of the net working capital required to
conduct the business of DEALER properly depends upon many
factors, including the nature, size and volume of DEALER's
vehicle sales, service and parts operations. Therefore, DEALER
agrees to establish and maintain actual net working capital in an
amount not less than the minimum net working capital specified in
a separate Minimum Net Working Capital Agreement made between
DEALER and DISTRIBUTOR and executed by DEALER and DISTRIBUTOR
concurrently with this Agreement. If, because of changed
conditions, it should become necessary to revise the minimum
amount of net working capital deemed to be necessary to conduct
DEALER's business properly, DISTRIBUTOR shall have the right to
revise DEALER's minimum net working capital requirements to be
used in dealership's operations and DEALER agrees to meet the new
standard within a reasonable period of time.

B. FLOORING AND LINES OF CREDIT

DEALER recognizes that its ability to fulfill its obligations
under this Agreement is dependent upon its maintenance of
flooring and lines of credit which are sufficient to sustain its
ongoing operations. Accordingly, DEALER agrees, at all times, to
obtain, maintain and increase as DISTRIBUTOR may require,
adequate flooring and lines of credit from any reputable
financial institution or other credit source. Subject to the
foregoing obligations, DEALER is free to do its financing
business, wholesale or retail or both, with whomever it chooses
and to the extent it desires.
<PAGE>

XVIII. ACCOUNTS, RECORDS AND REPORTS

A. UNIFORM ACCOUNTING SYSTEM

DISTRIBUTOR uses the operating information provided by its
dealers to develop composite operating statistics which are
useful to dealers and to DISTRIBUTOR in assessing DEALER's
progress in meeting its obligations hereunder and to provide a
basis for recommendations which DISTRIBUTOR may make to DEALER
from time to time to assist it in improving its dealership
operations. It is necessary, therefore, that authorized dealers
provide information which is true and accurate and based upon
common accounting principles. Accordingly, DEALER agrees to
maintain a uniform accounting system designated by DISTRIBUTOR,
and in accordance with the Toyota Accounting Manual, as amended
from time to time. In addition, DEALER agrees that it will
furnish to DISTRIBUTOR, by the tenth (10th) of each month, in a
format prescribed by DISTRIBUTOR, a complete and accurate
financial and operating statement covering the preceding month
and calendar year-to-date operations and showing the true and
accurate condition of DEALER's business. DEALER shall also
promptly furnish to DISTRIBUTOR a copy of any adjusted financial
or operating statement prepared by or for DEALER.

B. SALES REPORTING

In order to evaluate correctly current market trends and other
developments, to provide meaningful advice and recommendations to
DEALER, to provide the information necessary for DISTRIBUTOR to
evaluate DEALER's sales performance and to enable DISTRIBUTOR to
maintain a fair and equitable vehicle distribution system,
DISTRIBUTOR requires sales reporting which is true, accurate and
up-to-date. Accordingly, DEALER agrees to:

1. Accurately report to DISTRIBUTOR, with such relevant
information as DISTRIBUTOR may reasonably require, the
delivery of each new motor vehicle to a purchaser by the end
of the day in which the vehicle is delivered to the
purchaser thereof; and

2. Furnish DISTRIBUTOR with such other reports as DISTRIBUTOR
may reasonably require from time to time; and

3. Participate in good faith in any dispute resolution program
which DISTRIBUTOR or IMPORTER in its discretion may
establish to resolve specific sales reporting and/or sales
credit disputes.

C. ELECTRONIC DATA PROCESSING REQUIREMENTS

To facilitate the accurate and prompt reporting of such relevant
dealership operational and financial data as DISTRIBUTOR may
require, DEALER agrees to install and maintain electronic data
processing facilities which are compatible with and which will
facilitate the transmission and reception of such data on the
computer network utilized by DISTRIBUTOR.
<PAGE>

D. SALES AND SERVICE RECORDS

DEALER agrees to keep complete, accurate and current records
regarding the sale and servicing of Toyota Products for a minimum
of five years, exclusive of any retention period required by any
governmental entity. In order that the policies and procedures
relating to the application for reimbursement for warranty and
policy work may be applied uniformly to all dealers, DEALER
agrees to prepare, keep current and retain records in support of
requests for reimbursement for warranty and policy work performed
by DEALER in accordance with the policies and procedures
prescribed in the Toyota Warranty Policies and Procedures Manual
and standards established by DISTRIBUTOR consistent with said
manual.

E. EXAMINATION OF DEALERSHIP ACCOUNTS AND RECORDS

DEALER agrees that DISTRIBUTOR shall have the right, at all
reasonable times and during regular business hours, to inspect
the dealership facilities and to examine, audit and to reproduce
all records, accounts and all supporting data relating to the
sale, sales reporting, service and repair of Toyota Products by
DEALER. If requested by DEALER, DISTRIBUTOR agrees to discuss
and to provide a copy of the report of the examination or audit
of DEALER.

F. CONFIDENTIALITY

DISTRIBUTOR agrees that it shall not provide any data or
documents submitted to it by DEALER to any third party, except
IMPORTER, unless authorized by DEALER, required by law, or
required to generate composite data for analytical purposes.

XIX. DISPLAY AND USE OF TRADEMARKS, SERVICE MARKS AND TRADE NAMES

A. USE BY DEALER

DISTRIBUTOR grants to DEALER the nonexclusive privilege of
displaying or otherwise using the various Toyota Marks, including
the name Toyota utilized by IMPORTER and DISTRIBUTOR, in
connection with the selling or offering for sale of Toyota
Products and the servicing of Toyota Motor Vehicles by DEALER at
the location(s) approved herein.

DEALER agrees, however, that it shall promptly discontinue the
display and use of any such Toyota Marks, and shall change the
manner in which any Toyota Marks are displayed and used, when for
any reason, it is requested to do so by DISTRIBUTOR. DEALER also
agrees that it may use the Toyota Marks only at such locations
and for such purposes as are approved herein. DEALER further
agrees that such Toyota Marks may be used as part of the name
under which DEALER's business is conducted only with the prior
written approval of DISTRIBUTOR.

B. DISCONTINUANCE OF USE

Upon termination, non-renewal, or expiration of this Agreement,
DEALER agrees that it shall immediately:
<PAGE>

1. Discontinue the use of the word Toyota and the Toyota Marks,
or any semblance of same, including without limitation, the
use of all stationery and other printed material referring
in any way to Toyota or bearing any Toyota Mark;

2. Discontinue any use of the word Toyota or the Toyota Marks,
or any semblance of same, as part of its business or
corporate name, and file a change or discontinuance of such
name with appropriate authorities;

3. Remove all product signs bearing said word(s) or Toyota
Marks at DEALER's sole cost and expense;

4. Cease representing itself as an authorized Toyota Dealer;
and

5. Refrain from any action, including without limitation any
advertising, stating or implying that it is authorized to
sell or distribute Toyota Products.

In the event DEALER fails to comply with the terms and conditions
of this paragraph, DISTRIBUTOR shall have the right to enter upon
DEALER's premises and remove, without liability, all such product
signs bearing the word Toyota or any Toyota Marks. DEALER agrees
that it shall reimburse DISTRIBUTOR for any costs and expenses
incurred in connection therewith, including reasonable attorneys
fees.

XX. TERMINATION OF AGREEMENT

A. VOLUNTARY TERMINATION

DEALER may voluntarily terminate this Agreement at any time by
written notice to DISTRIBUTOR. Termination shall be effective
thirty (30) days after DISTRIBUTOR receives such notice unless
otherwise waived in writing by DISTRIBUTOR.

B. TERMINATION FOR CAUSE

1. Immediate Termination

DEALER and DISTRIBUTOR agree that the following conduct is
within DEALER's control and is so contrary to the spirit,
purposes and objectives of this Agreement as to warrant its
immediate termination. Accordingly, DEALER agrees that if
it engages in any of the following types of conduct,
DISTRIBUTOR shall have the right to terminate this Agreement
immediately:

a. If dealership is closed for a period of seven (7)
consecutive days, except in the event such closure or
cessation of operation is caused by some physical event
beyond the control of the DEALER, such as strikes,
civil war, riots, fires, floods, earthquakes, or other
acts of God;
<PAGE>

b. If DEALER becomes insolvent, or files any petition
under any bankruptcy law, or executes an assignment for
the benefit of creditors, or appoints a receiver or
trustee or another officer having similar powers is
appointed for DEALER and is not removed within thirty
days from his appointment thereto or there is any levy
under attachment or execution or similar process which
is not vacated or removed by payment or bonding within
ten (10) days;

c. If DEALER, or any Owner or officer of DEALER, is
convicted of any felony or for any violation of law
which in DISTRIBUTOR's opinion tends to adversely
affect the ownership, operation, management,
reputation, business, or interests of DEALER or
DISTRIBUTOR, or to impair the goodwill associated with
the Toyota Marks. Such violations of law may include,
without limitation, any finding or adjudication by any
court of competent jurisdiction or government agency
that DEALER has engaged in a misrepresentation or
unfair or deceptive trade practice.

d. Any misrepresentation to DISTRIBUTOR by DEALER or any
DEALER Owner or General Manager in applying for this
Agreement or for approval as Owner or General Manager
of DEALER;

e. Submission by DEALER to DISTRIBUTOR or IMPORTER of
false reports, statements or claims for reimbursement,
sales incentives, refunds, rebates or credits;
submission of false financial information or false
sales reporting data; or the making or submission by
DEALER of a false report or statement relating to pre-
delivery preparation, testing, warranties, servicing,
repairing, or maintenance required by DISTRIBUTOR or
IMPORTER;

f. Failure of DEALER to obtain or maintain any license, or
the suspension or revocation of any license, necessary
for the conduct by DEALER of its business pursuant to
this Agreement;

2. Termination Upon Sixty Days Notice

DEALER and DISTRIBUTOR agree that the following conduct
violates the terms and conditions of this Agreement and, if
DEALER engages in such conduct DISTRIBUTOR shall have the
right to terminate this Agreement upon sixty days notice:

a. Any attempted or actual sale, transfer or assignment by
DEALER of this Agreement or any of the rights granted
DEALER hereunder, or any attempted or actual transfer,
assignment or delegation by DEALER of any of the
responsibilities assumed by it under this Agreement
without the prior written approval of DISTRIBUTOR;
<PAGE>

b. Any removal, withdrawal or change, whether voluntary or
involuntary, in the General Manager with ownership of
DEALER without the prior written approval of
DISTRIBUTOR;

c. The conduct, directly or indirectly, of any dealership
operation at any location other than those specifically
approved herein for such operation without the prior
written approval of DISTRIBUTOR;

d. Failure of DEALER to pay DISTRIBUTOR for any Toyota
Products in accordance with the terms and conditions of
sale;

e. Failure of DEALER to establish or maintain during the
existence of this Agreement: required net working
capital or adequate flooring and lines of credit;

f. Any dispute, disagreement or controversy between or
among partners, managers, officers or stockholders of
DEALER which, in the reasonable opinion of DISTRIBUTOR,
adversely affects the ownership, operation, management,
business, reputation or interests of DEALER or
DISTRIBUTOR;

g. Retention by DEALER of any General Manager, who in
DISTRIBUTOR's reasonable opinion is not competent or,
if previously approved by DISTRIBUTOR, no longer
possesses the requisite qualifications for the position
or who has acted in a manner contrary to the continued
best interests of both DEALER and DISTRIBUTOR;

h. Impairment of the reputation or financial standing of
DEALER or any of its management subsequent to the
execution of this Agreement;

i. Refusal to permit DISTRIBUTOR to examine or audit
DEALER's accounts and records as provided herein upon
receipt by DEALER from DISTRIBUTOR of written notice
requesting such permission or information.

j. Failure of DEALER to furnish accurate sales or
financial information and related supporting data in a
timely fashion; or

k. Breach or violation by DEALER of any other term or
provision of this Agreement.

3. Termination For Failure of Performance

If, upon evaluation of DEALER's performance pursuant to
paragraphs XIV(D), XV(D) and XVI(F) herein, DISTRIBUTOR
concludes that DEALER has failed to perform adequately its
sales or service responsibilities or to provide adequate
dealership facilities, DISTRIBUTOR shall notify DEALER in
writing of such failure(s) and will endeavor to review
promptly with DEALER the nature and extent
<PAGE>

of such failure(s), and will grant DEALER 180 days or
such other period as may be required by law to correct
such failure(s). If DEALER fails or refuses to correct
such failure(s) or has not made substantial progress
towards remedying such failure(s) at the expiration of
such period, DISTRIBUTOR may terminate this Agreement
upon sixty (60) days notice or such other notice as may
be required by law.

4. Termination of DISTRIBUTOR

This Agreement shall terminate upon the effective date of
the termination or expiration of DISTRIBUTOR's right to
distribute Toyota Products. DEALER understands that
IMPORTER has undertaken to assure DEALER that in the event
of termination or expiration of DISTRIBUTOR's right to
distribute Toyota Products, IMPORTER or its designee will
offer DEALER a new agreement of no less than one year's
duration containing the terms of the Dealer Agreement then
prescribed by IMPORTER and any terms in DEALER's then
current agreement relating uniquely to DEALER.

5. Termination Upon Death or Incapacity

a. Notice

Subject to certain exceptions identified below,
DISTRIBUTOR near terminate this Agreement in the event
of the death of an Owner or upon the incapacity of any
Owner who is also the General Manager identified
herein, upon written notice to DEALER and such Owner's
legal representative. DISTRIBUTOR shall provide such
notices within a reasonable time after Owner's death or
incapacity. Termination hereunder shall be effective
ninety (90) days from the date of such notice.

b. Succession to Ownership After Death of Owner

In the event that Owner's interest in dealership passes
directly to any person or persons ("Heirs") who wish to
succeed to Owner's interest, then Owner's legal
representative must notify DISTRIBUTOR within 90 days
of the date of notice of termination hereunder of such
person's or persons' intent to succeed Owner. In
addition, one of the following conditions must be
satisfied:

(1) the Owner's legal representative must also request
DISTRIBUTOR's approval of one of the Heirs to
become the new General Manager; or

(2) the General Manager of DEALER identified herein
must remain unchanged; or

(3) the Owner's legal representative must designate
for DISTRIBUTOR's approval a new DEALER General
Manager.
<PAGE>

The effect of such notice from Owner's legal
representative shall be to suspend the notice of
termination issued hereunder.

Upon receipt of such notice, DISTRIBUTOR shall request
any person identified by the Owner's legal
representative as intending to succeed Owner and the
designated candidate for General Manager, if any, to
submit an application and to provide all personal and
financial information that DISTRIBUTOR may reasonably
and customarily require in connection with the review
of such applications. All requested information must
be provided promptly and in no case later than 30 days
after receipt of such request. Upon the submission of
all requested information, DISTRIBUTOR agrees to review
such application(s) pursuant to the then current
criteria generally applied by DISTRIBUTOR in qualifying
dealer owners and/or general managers. DISTRIBUTOR
shall either approve or disapprove the application(s)
within ninety (90) days of full compliance with all of
DISTRIBUTOR's requests for information. If DISTRIBUTOR
approves the application(s), it shall offer to enter
into a new Toyota Dealer Agreement with DEALER or its
successor in interest in the form then currently in
use, except that Heir(s) and the designated General
Manager, if any, shall be identified as the new
Owner(s) and/or General Manager. The new agreement
shall be for a term of twelve (12) months. In the
event that DISTRIBUTOR does not approve of the
designated Heir or any other candidate for General
Manager, or if the Owner's legal representative
withdraws his or her notice of a person or persons to
succeed as Owner(s) or if the legal representative, or
any proposed Owner-successor or designated candidate
for General Manager fails to timely provide the
required information, DISTRIBUTOR may reinstate the
notice of termination by written notice to Heir.

c. Succession Upon Incapacity of Owner

The parties agree that, as used herein, incapacity
shall refer to any physical or mental ailment which, in
DISTRIBUTOR's opinion, adversely affects Owner's
ability to meet his or her obligations under this
Agreement. Termination for incapacity shall apply only
where the incapacitated owner is also the General
Manager identified herein.

Prior to the effective date of any notice of
termination hereunder, an incapacitated Owner, or his
or her legal representative, may propose a new
candidate for the position of General Manager to
DISTRIBUTOR. Such proposal shall be in writing and
shall suspend the pending notice of termination until
DISTRIBUTOR advises DEALER of its approval or
disapproval of the new candidate. Any such proposed
candidate for General Manager must submit all personal
and financial information that DISTRIBUTOR may
reasonably and customarily require in connection with
its review of such applications. All requested
<PAGE>

information must be provided promptly and in no case
later than thirty (30) days after receipt of such
request. Upon submission of all requested information,
DISTRIBUTOR agrees to review such application pursuant
to the then current criteria generally applied by
DISTRIBUTOR in qualifying dealer owners and/or general
managers. DISTRIBUTOR shall either approve or
disapprove the application within ninety (90) days of
full compliance with all of DISTRIBUTOR's requests for
information. If DISTRIBUTOR approves the application,
it shall offer to enter into a new Toyota Dealer
Agreement with DEALER or its successor in interest in
the form then currently in use, except that the
candidate shall be identified as new General Manager.
The new agreement shall be for a term of twelve (12)
months. In the event that DISTRIBUTOR disapproves such
candidate or candidate withdraws his or her application
to be General Manager or fails to timely provide the
required information, DISTRIBUTOR may reinstate the
notice of termination by written notice to the
incapacitated Owner or his or her legal representative.

6. Approval of Successor Prior to Death or Incapacity of Owner

DISTRIBUTOR recognizes that a DEALER Owner may wish to
designate a person to succeed himself in case of death or
incapacity. Accordingly, Owner may nominate on a form
provided by DISTRIBUTOR a candidate to assume ownership
and/or management of the dealership upon the death or
incapacity of the requesting Owner.

As soon as practicable after such nomination, DISTRIBUTOR
will request such personal and financial information from
Owner and/or candidate as it reasonably and customarily may
require in evaluating candidates for ownership and/or
management qualifications. Owner agrees that DISTRIBUTOR
may apply criteria then currently used by DISTRIBUTOR in
qualifying owners and/or general managers of authorized
dealers. Upon receipt of all requested information,
DISTRIBUTOR shall either approve or disapprove such
candidate. If DISTRIBUTOR initially approves the candidate,
said approval shall remain in effect for the term of this
Agreement. DISTRIBUTOR agrees that DEALER may renominate
the candidate after the termination of this Agreement and
DISTRIBUTOR will review such nomination: (1) so long as
DISTRIBUTOR and DEALER have entered into a new Toyota Dealer
Agreement; and (2) the proposed candidate continues to
comply with the then current criteria used by DISTRIBUTOR in
qualifying such candidates. If DISTRIBUTOR does not
initially qualify the candidate, DISTRIBUTOR agrees to
review the reason(s) for its decision with Owner. Owner is
free at any time to renew its nomination. However, in such
instance, the candidate must again qualify pursuant to then
current criteria. Owner may, by written notice, withdraw a
nomination at any time, even if DISTRIBUTOR previously has
qualified said candidate.
<PAGE>

In any case where Owner designates a successor pursuant to
this paragraph and that person is not the same person as the
Heir, as defined in paragraph XX(B)(5)(b), then DISTRIBUTOR
shall proceed as though Owner had withdrawn his nomination
of a successor pursuant to this paragraph.

C. NOTICE OF TERMINATION

Any notice of termination under paragraph XX shall be in writing
and shall be mailed to the person(s) designated to receive such
notice return receipt requested or shall be delivered in person.
Except as otherwise provided in paragraph XX(B)(5), such notice
shall be effective on the date of receipt. DISTRIBUTOR need not
state all grounds on which it relies in its termination of
DEALER. DISTRIBUTOR's failure to refer to additional grounds for
termination shall not constitute a waiver of its right to rely
upon such grounds.

If any period of notice of termination required hereunder is less
than that required by applicable law, the period of notice
required hereunder shall be deemed to be the minimum period
required by such laws.

D. CONTINUANCE OF BUSINESS RELATIONS

Upon receipt of any notice of termination or non-renewal, DEALER
agrees to conduct itself and its operations until the effective
date of termination or nonrenewal in a manner which will not
injure the reputation or goodwill of the Toyota Marks or
DISTRIBUTOR. The continuance of business relations between
DISTRIBUTOR and DEALER or the sale or delivery of Toyota Products
to DEALER after termination, expiration or non-renewal of this
Agreement shall not be construed as a waiver of the termination
or a renewal, extension or continuation of this Agreement.

E. REPURCHASE PROVISIONS

1. DISTRIBUTOR's Obligations

Upon the expiration or prior termination of this Agreement,
DISTRIBUTOR shall have the right to cancel any and all
shipments of Toyota Products scheduled for delivery to
DEALER, and DISTRIBUTOR shall repurchase from DEALER the
following:

a. New, unused, unmodified and undamaged current model
Toyota Motor Vehicles then unsold in DEALER's
inventory. The prices of such Motor Vehicles shall be
the same as those at which they were originally
purchased by DEALER, less all prior refunds or other
allowances made by DISTRIBUTOR to DEALER with respect
thereto.

b. New, unused and undamaged Toyota parts and accessories
then unsold in DEALER's inventory which are in good and
saleable condition, provided that they are listed in
the then current Toyota Dealer Parts Price List. The
prices for such parts and accessories shall be the
prices last established by DISTRIBUTOR
<PAGE>

for the sale of identical parts or accessories to dealers
in the area in which DEALER is located.

c. Tools and equipment recommended by IMPORTER and then
owned by DEALER which are especially designed for
servicing Toyota Motor Vehicles. The prices for such
tools and equipment will be the price paid by DEALER
less appropriate depreciation or such other price as
the parties may negotiate.

d. Signs which DISTRIBUTOR has recommended for
identification of DEALER. The price of such signs
shall be the price paid by DEALER less appropriate
depreciation or such other price as the parties may
negotiate.

2. Responsibilities of Dealer

DISTRIBUTOR's obligations to repurchase the items set forth
in paragraph XX(E)(1), are contingent upon DEALER fulfilling
its responsibilities as set forth herein.

a. Within thirty days after the date of expiration or the
effective date of termination of this Agreement DEALER
shall deliver or mail to DISTRIBUTOR a detailed
inventory of all items referred to in the
paragraph XX(E)(1) which it requests DIStRIBUTOR to
repurchase and shall certify that such list is true and
accurate. In the event that DEALER fails to supply
such a list to DISTRIBUTOR within such period,
DISTRIBUTOR shall have the right to enter upon DEALER's
premises, without liability, for the purpose of
compiling such an inventory list and DEALER shall
reimburse DISTRIBUTOR for any costs and expenses
incurred in connection therewith.

b. DEALER shall request repurchase only of those items
which were purchased by DEALER from DISTRIBUTOR, unless
DISTRIBUTOR agrees otherwise.

c. DEALER agrees that products to be repurchased by
DISTRIBUTOR from DEALER shall be delivered by DEALER to
DISTRIBUTOR's place of business at DEALER's expense.
If DEALER fails to do so, DISTRIBUTOR may transfer such
products and deduct the cost therefor from the
repurchase price.

d. DEALER agrees to execute and deliver to DISTRIBUTOR
instruments satisfactory to DISTRIBUTOR conveying good
and marketable title to the aforesaid property to
DISTRIBUTOR. If such property is subject to any lien
or charge of any kind, DEALER agrees to procure the
discharge in satisfaction thereof prior to the
repurchase of such property by DISTRIBUTOR. DEALER
further agrees to comply with the requirements of any
state or federal laws which relate to the repurchase
including bulk sales or transfer laws.
<PAGE>

e. DEALER agrees that it must remove, at its own expense,
all signage including all Toyota marks before it is
eligible for payment hereunder.

3. Payment by DISTRIBUTOR

DISTRIBUTOR will pay DEALER for such items as DEALER may
request repurchase and which qualify hereunder as soon as
practicable upon DEALER's compliance with the obligations
set forth herein and upon computation of any outstanding
indebtedness of DEALER to DISTRIBUTOR. DISTRIBUTOR shall
have the right to offset from any amounts due to DEALER
hereunder the total sum of DEALER's outstanding indebtedness
to DISTRIBUTOR.

If DEALER disagrees with DISTRIBUTOR's valuation of any item
herein, and DEALER and DISTRIBUTOR shall have not resolved
their disagreement within sixty (60) days of the effective
date of termination or expiration of this Agreement,
DISTRIBUTOR shall pay to DEALER the amount to which it
reasonably believes DEALER is entitled. DEALER's exclusive
remedy to recover any additional sums which it believes is
due under this paragraph shall be by arbitration in
accordance with the commercial arbitration rules of the
American Arbitration Association. The site of the
arbitration shall be the office of the American Arbitration
Association in the locality of DISTRIBUTOR's principal place
of business or Regional Office.

XXI. RIGHT OF FIRST REFUSAL OR OPTION TO PURCHASE

A. RIGHTS GRANTED

DEALER recognizes the importance of the approved locations to
DISTRIBUTOR's authorized dealer network and to the effective sale
and servicing of Toyota Products in DEALER's primary area of
responsibility. Accordingly, DEALER agrees that in the event
that DISTRIBUTOR refuses to approve a transfer or sale of any
ownership interest in the dealership, pursuant to paragraph VI,
DISTRIBUTOR shall have the right of first refusal or an option to
purchase the dealership assets, including any leasehold interest
or realty, as provided herein.

B. EXERCISE OF DISTRIBUTOR'S RIGHTS

If DISTRIBUTOR exercises its right of first refusal or option to
purchase the dealership, it must advise DEALER in writing of its
decision within thirty (30) days of its refusal to approve any
sale or transfer pursuant to paragraph VI. DEALER agrees that
DISTRIBUTOR shall have the right to assign its right to exercise
its option to purchase or right of first refusal to any third
party it may select and hereby guarantees the full payment of the
purchase price by such assignee.
<PAGE>

C. THE NATURE OF DISTRIBUTOR'S RIGHTS

If DISTRIBUTOR has refused to approve the transfer or sale of
DEALER's ownership or assets and DEALER has entered into a
bona fide arm's length written agreement governing such transfer
or sale, DISTRIBUTOR's right under this paragraph shall be a
right of first refusal, permitting DISTRIBUTOR to assume the
buyer's rights and obligations under such written agreement. The
purchase price and other terms of sale shall be those set forth
in such agreement and any related documents. DISTRIBUTOR may
request and DEALER agrees to provide any and all supporting
documents relating to the transfer which DISTRIBUTOR may require
to assess the bona fides of the agreement. Refusal to provide
such documentation or to state that no such documents exist shall
create the presumption that the buy/sell agreement is not a bona
fide agreement.

If DISTRIBUTOR has refused to approve the transfer or sale of
DEALER's ownership or assets and DEALER has not entered into a
bona fide arm's length written agreement governing such transfer
or sale, then DISTRIBUTOR shall have the option to purchase the
principal assets of DEALER utilized in the dealership operations,
including real estate and/or leasehold interest, and to terminate
this Agreement. The purchase price shall be the fair market
value as negotiated by the parties. If the parties are unable to
reach a negotiated sale in a reasonable time, the price and other
terms of sale shall be established exclusively by arbitration in
accordance with the commercial arbitration rules of the American
Arbitration Association. The site of the arbitration shall be
the office of the American Arbitration Association in the
locality of DISTRIBUTOR's principal place of business or Regional
Office.

D. DEALER'S OBLIGATIONS

Upon DISTRIBUTOR's exercise of its right or option and tender of
the purchase price hereunder, DEALER shall transfer the affected
real property by warranty deed conveying marketable title free
and clear of all liens, claims, mortgages, encumbrances,
tenancies and occupancies. The warranty deed shall be in proper
form for recording and DEALER shall deliver complete possession
of the property and the deed at time of closing. DEALER shall
also furnish to DISTRIBUTOR copies of any easements, licenses or
other documents affecting the property or dealership operations
and shall assign any permits or licenses which are necessary for
the use of the property or the conduct of such DEALER operations.

DEALER also agrees to execute and deliver to DISTRIBUTOR
instruments satisfactory to DISTRIBUTOR conveying title to all
personal property, including leasehold interests, involved in the
transfer or sale to DISTRIBUTOR. If any personal property is
subject to any lien or charge of any kind, DEALER agrees to
procure the discharge and satisfaction thereof prior to the
transfer or sale of such property to DISTRIBUTOR.
<PAGE>

XXII. DEFENSE AND INDEMNIFICATION

A. DEFENSE AND INDEMNIFICATION BY DISTRIBUTOR AND/OR IMPORTER

DISTRIBUTOR agrees to assume the defense of DEALER and to
indemnify and hold DEALER harmless in any lawsuit naming DEALER
as a defendant and involving any Toyota Product when the lawsuit
also involves allegations of:

1. Breach of warranty provided by FACTORY, IMPORTER or
DISTRIBUTOR, bodily injury or property damage arising out of
an occurrence allegedly caused solely by a defect in design,
manufacture or assembly of a Toyota Product (except for
tires not manufactured by FACTORY), provided that the defect
could not reasonably have been discovered by DEALER during
the pre-delivery service of the Toyota Product required
under paragraph XV(A)(3) of this Agreement; or

2. Any misrepresentation or misleading statement or unfair or
deceptive trade practice of DISTRIBUTOR or IMPORTER; or

3. Any substantial damage to a Toyota Product purchased by
DEALER from DISTRIBUTOR which was repaired by DISTRIBUTOR
and where DEALER had not been notified of such damage in
writing prior to the delivery of the subject vehicle, part
or accessory to a retail CUSTOMER; and

Provided:

4. That DEALER delivers to DISTRIBUTOR, in a manner to be
designated by DISTRIBUTOR, within ten (10) days of the
service of any summons or complaint, copies of such
documents and request in writing a defense and/or
indemnification therein (except as provided in
paragraph XXII(D));

5. That the complaint does not involve allegations of DEALER
misconduct, including but not limited to, improper or
unsatisfactory service or repair, misrepresentation, or any
claim of DEALER's unfair or deceptive trade practice;

6. That the Toyota Product which is the subject of the lawsuit
was not altered by or for DEALER;

7. That DEALER agrees to cooperate fully in the defense of such
action as DISTRIBUTOR may reasonably require; and,

8. That DEALER agrees that DISTRIBUTOR may offset any recovery
on DEALER's behalf against any indemnification that may be
required hereunder.
<PAGE>

B. DEFENSE AND INDEMNIFICATION BY DEALER

DEALER agrees to assume the defense of DISTRIBUTOR, IMPORTER and
FACTORY and to indemnify and hold them harmless in any lawsuit
naming DISTRIBUTOR, IMPORTER or FACTORY as a defendant when the
lawsuit involves allegations of:

1. DEALER's alleged failure to comply, in whole or in part,
with any obligation assumed by DEALER pursuant to this
Agreement;

2. DEALER's alleged negligent or improper repairing or
servicing of a new or used Toyota Motor Vehicle or
equipment, or such other motor vehicles or equipment as may
be sold or serviced by DEALER;

3. DEALER's alleged breach of any contact or warranty other
than that provided by DISTRIBUTOR, IMPORTER or FACTORY;

4. DEALER's alleged misleading statements, misrepresentations,
or deceptive or unfair trade practices;

5. Any modification or alteration made by or on behalf of
DEALER to a Toyota Product, except those made pursuant to
the express instruction or with the express approval of
DISTRIBUTOR or IMPORTER; and

Provided:

6. That DISTRIBUTOR, IMPORTER or FACTORY delivers to DEALER,
within ten (10) days of the proper service of any summons or
complaint, copies of such documents, and requests in writing
a defense and/or indemnification therein (except as provided
in paragraph XXII(D));

7. That DISTRIBUTOR, IMPORTER or FACTORY agree to cooperate
fully in the defense of such action as DEALER may reasonably
require; and,

8. That the complaint does not involve allegations of liability
premised upon separate DISTRIBUTOR, IMPORTER or FACTORY
conduct or omissions.

C. CONDITIONAL DEFENSE AND/OR INDEMNIFICATION

In agreeing to defend and/or indemnify each other, DEALER and
DISTRIBUTOR may make their agreement conditional on the continued
existence of the state of facts as then known to such party and
may provide for the withdrawal of such defense and/or
indemnification at such time as facts arise which, if known at
the time of the original request for a defense and/or
indemnification, would have caused either DEALER or DISTRIBUTOR
to refuse such request.

The party withdrawing from its agreement to defend and/or
indemnify shall give timely notice of its intent to withdraw.
Such notice shall be in writing and shall be effective upon
receipt. Moreover, the withdrawing party shall be responsible
<PAGE>

for all costs and expenses of defense up to the date of receipt
of the notice of withdrawal.

D. THE EFFECT OF SUBSEQUENT DEVELOPMENTS

In the event that subsequent developments in a case make clear
that the allegations which initially precluded a request or an
acceptance of a request for a defense and/or indemnification are
no longer at issue therein or are without foundation, any party
having a right to a defense and/or indemnification hereunder may
tender such request for a defense and indemnification to the
other party. Neither DEALER nor DISTRIBUTOR shall be required to
agree to such subsequent request for a defense and/or
indemnification where that party would be unduly prejudiced by
such delay.

E. TIME TO RESPOND AND RESPONSIBILITIES OF THE PARTIES

DEALER and DISTRIBUTOR shall have thirty (30) days from the
receipt of a request for a defense and/or indemnification to
conduct an investigation to determine whether or not, or under
what conditions, it may agree to defend and/or indemnify pursuant
to this paragraph. If local rules require a response to the
complaint in the lawsuit prior to the time provided hereunder for
a response to such request the requesting party shall take all
steps necessary, including obtaining counsel, to protect its own
interest in the lawsuit until DEALER or DISTRIBUTOR assumes the
requested defense and/or indemnification. In the event that
DEALER or DISTRIBUTOR agrees to assume the defense and/or
indemnification of a lawsuit, such party shall have the right to
engage and direct counsel of its own choosing and, except in
cases where the request is made pursuant to paragraph XXII(D)
herein, shall have the obligation to reimburse the requesting
party for all reasonable costs and expenses, including attorney
fees, incurred prior to such assumption.

XXIII. GENERAL PROVISIONS

A. NEW DEALERS

Both parties understand and agree that additional authorized
Toyota dealers may be appointed in or near the primary area of
responsibility served by DEALER when DISTRIBUTOR determines that
new dealers are warranted, based upon such reasonable criteria as
DISTRIBUTOR may establish in its sole discretion.

B. TAXES

DEALER agrees that it shall be responsible for and shall duly pay
all sales taxes, use taxes, excise taxes and other governmental
or municipal charges imposed, levied or based upon the sale of
Toyota Products by DISTRIBUTOR to DEALER and shall maintain
accurate records of same for reporting purposes.

C. NOTICES

Except as otherwise specifically provided herein, any notice
required to be given by either party to the other under or in
connection with this Agreement shall be in writing and delivered
personally or by certified mail, return receipt requested
<PAGE>

and shall be effective from the date of mailing. Notices to
DEALER shall be directed to DEALER or its representative at
DEALER's place of business identified herein. Notices to
DISTRIBUTOR shall be directed to the president of DISTRIBUTOR
at its place of business identified herein.

D. NO IMPLIED WAIVERS

Any failure of either party at any time to require performance by
the other party of any provision herein shall in no way affect
the right of such party to require such performance at any time
thereafter, nor shall any waiver by either party of a breach of
any provision herein constitute a waiver of any succeeding breach
of the same or any other provision, nor constitute a waiver of
the provision itself.

E. DEALER NOT AN AGENT OR REPRESENTATIVE

DEALER is an independently owned business entity. This agreement
does not make DEALER the agent or legal representative of
DISTRIBUTOR, IMPORTER or FACTORY for any purpose whatsoever.
DEALER is not granted any express or implied right or authority
to assume or to create any obligation or responsibility on behalf
of or in the name of DISTRIBUTOR, IMPORTER or FACTORY or to bind
it in any manner whatsoever.

F. SOLE AGREEMENT OF THE PARTIES

There are no other agreements or understandings, either oral or
written, between the parties affecting this Agreement or relating
to the sale or servicing of Toyota Products, except as otherwise
specifically provided for or referred to in this Agreement.

This Agreement cancels and supersedes all previous agreements
between the parties relating to the subject matters covered
herein.

No change or addition to, or deletion of, any portion of this
Agreement shall be valid or binding upon the parties hereto
unless the same is approved in writing by an officer of each of
the parties hereto.

G. NEW AND SUPERSEDING DEALER AGREEMENTS

In the event any new and superseding form of dealer agreement is
offered by DISTRIBUTOR to authorized Toyota dealers generally at
any time prior to the expiration of the term of this Agreement,
DISTRIBUTOR may, by written notice to DEALER, replace this
Agreement with a new agreement in the new and superseding form
for a term not less than the then unexpired term of this
Agreement.

H. ASSIGNMENT OF RIGHTS OR DELEGATION OF DUTIES

Except as provided in this Agreement, neither this Agreement nor
the rights or obligations of either party hereunder may be sold,
assigned, delegated or otherwise transferred without the written
approval of the other party.
<PAGE>

I. SEVERABILITY

If any term or provision of this Agreement, or the application
thereof to any person or circumstance, shall to any extent found
to be invalid, void or unenforceable, the remaining provisions
and any application thereof shall nevertheless continue in full
force and effect without being impaired or invalidated in any
way.

J. RELEASE

Because the success of the relationship between DISTRIBUTOR and
DEALER depends upon the mutual understanding, cooperation, trust
and confidence of both DISTRIBUTOR and DEALER, each party hereby
releases the other from any and all claims, causes of action or
otherwise that it may have against the other for money damages
arising from any event occurring prior to the date of execution
of this Agreement, except for any accounts payable by one party
to the other as a result of the purchase of any Toyota Products,
audit adjustments or reimbursement for any services. This
release does not extend to claims which either party does not
know or reasonably suspect to exist in its favor at the time of
execution of this Agreement.

K. NO FRANCHISE FEE

DEALER agrees and warrants that it has paid no fee, nor has it
provided any goods or services in lieu of same, to DISTRIBUTOR in
consideration of entering into this Agreement and that the sole
consideration for DISTRIBUTOR's entering into this Agreement was
DEALER's ability, integrity, assurance of personal services and
expressed intention to deal fairly and equitably with DISTRIBUTOR
and the public and any other promises recited herein.

XXIV. DEFINITIONS

The parties agree that the following terms, as used in this Agreement,
shall be defined exclusively as set forth below.

A. AGREEMENT: This Agreement consists of the Toyota Dealer
Agreement entered into by DEALER and DISTRIBUTOR and includes the
Standard Provisions. The various headings used in this Agreement
are for organizational purposes only and in any case where the
heading and the related text shall conflict, the text shall
govern.

B. AUTHORIZED TOYOTA DEALER: Dealers who are authorized by
DISTRIBUTOR to sell and service Toyota Products, and to use the
Toyota Marks in connection therewith, pursuant to a duly executed
Toyota Dealer Agreement.

C. DEALER FACILITIES: The buildings, improvements, fixtures and
equipment situated at the approved DEALER locations.

D. DEALER LOCATION: The location or locations, and any facilities
located thereon, identified in paragraph VII which DISTRIBUTOR
has approved for the dealership operations specified therein.

<PAGE>
E. DEALERSHIP OPERATIONS: All dealer functions contemplated by this
Agreement. These include, without limitation, sale and servicing
of Toyota Products, use and display of Toyota Marks, advertising
and promotion of Toyota Products, rental and leasing of Toyota
Motor Vehicles, sale of used cars, body shop work, and financing
or insurance services, whether conducted directly or indirectly
by DEALER.

F. GENERAL MANAGER: The person identified in paragraph V of the
Agreement.

G. OWNER: The person(s) identified in paragraph IV of the
Agreement.

H. GENUINE TOYOTA PARTS OR ACCESSORIES: All Toyota parts,
accessories and equipment manufactured by or on behalf of FACTORY
or specifically approved by IMPORTER for use in servicing Toyota
Motor Vehicles and sold by DISTRIBUTOR to authorized Toyota
dealers.

I. STANDARD PROVISIONS: The Standard Provisions are a part of all
Toyota Dealer Agreements and are fully incorporated therein by
the express provision of paragraph IX of the Agreement. The
Standard Provisions commence with paragraph XIII to reflect
continuity with the twelve paragraphs of the Agreement.

J. TOYOTA MARKS: The various Toyota trademarks, service marks,
names, logos and designs which DEALER is authorized by
DISTRIBUTOR to use in the sale and servicing of Toyota Products.

K. TOYOTA MOTOR VEHICLES: All automobiles, trucks, vans,
cab/chassis or other motor vehicles which IMPORTER, in its sole
discretion, sells to DISTRIBUTOR for resale to authorized Toyota
dealers.

L. TOYOTA PRODUCTS: All Toyota Motor Vehicles, parts, accessories
and equipment which IMPORTER, in its sole discretion, sells to
DISTRIBUTOR for resale to authorized Toyota dealers.

M. TOYOTA WARRANTY POLICIES AND PROCEDURES MANUAL: The current
publication issued by IMPORTER known as the Toyota Warranty
Policies and Procedures Manual, as it may be revised or
supplemented from time to time.

<PAGE>
EXHIBIT 10.11.1

TERM DEALER SALES AND SERVICE AGREEMENT

THIS AGREEMENT, effective the 13th day of May, 1996 is entered into by and
between AMERICAN SUZUKI MOTOR CORPORATION, Automotive Division, a California
Corporation (hereinafter referred to as "SUZUKI"), having its principal office
at 3251 East Imperial Highway, Brea, California, and LITHIA MOTORS, INC., A
CORPORATION DULY INCORPORATED UNDER THE LAWS OF THE STATE OF OREGON, and doing
business as LITHIA SUZUKI (hereinafter referred to as "DEALER"), having its
principal office at 700 N. CENTRAL AVENUE, MEDFORD, OR 97501-5817.

PURPOSE OF AGREEMENT

It is acknowledged by both SUZUKI and DEALER that the purpose of this
Agreement is to establish DEALER as an authorized dealer of Suzuki Products and
to provide for the sale, lease and servicing of Suzuki Products by DEALER. It
is of utmost importance to SUZUKI that Suzuki products are sold and serviced in
a manner which promotes consumer satisfaction and confidence. It is hereby
understood and acknowledged that DEALER desires an opportunity to qualify for a
three-year American Suzuki Motor Corporation Dealer Sales and Service Agreement
for Suzuki Four Wheel Vehicle Products. DEALER understands, acknowledges and
accepts that DEALER must first fulfill all of DEALER's undertakings as
hereinafter set forth.

In furtherance of the purpose of this Agreement, the parties acknowledge
that SUZUKI is the exclusive distributor in the United States (except Hawaii) of
Suzuki Four Wheel Vehicles and Parts and Accessories therefor manufactured by
Suzuki Motor Co., Ltd., a corporation incorporated under the laws of Japan.

It is of utmost important to SUZUKI that Suzuki Products are sold and
serviced in a manner which promotes consumer satisfaction and confidence.
DEALER desires to become one of SUZUKI's authorized dealers. SUZUKI, based on
the representations and promises of DEALER, and in reliance on DEALER's
integrity, ability and expressed intention to deal fairly with SUZUKI and the
consumer, has accepted DEALER as an authorized retail dealer of Suzuki Products.

DEALER acknowledges Vat SUZUKI has"selected DEALER as an authorized SUZUKI
dealer and has granted to it a Dealership for Suzuki Products and related rights
pursuant to this Agreement solely in reliance upon the undertaking of DEALER to
fulfill its responsibilities to any third party or parties.

This Agreement sets forth the rights and responsibilities of SUZUKI and
DEALER. The relationship between SUZUKI and DEALER shall be that of vendor and
purchaser. DEALER is not the agent or legal representative of SUZUKI or Suzuki
Motor Co., Ltd. for any purpose whatsoever. DEALER does not have any express or
implied rights of authority to assume or create any obligations or
responsibilities on behalf of, or in the name of, SUZUKI or Suzuki Motor Co.,
Ltd.

THEREFORE, subject to the terms and conditions of this Agreement, based on
the foregoing facts and in consideration of the mutual promises and other
valuable consideration, the receipt of which is hereby acknowledged, the parties
hereto agree as follows:

11. RIGHTS GRANTED TO DEALER

<PAGE>

Subject to the terms of this Agreement, SUZUKI hereby appoints DEALER as a
nonexclusive authorized dealer for Suzuki Products and grants DEALER the
right to:

A. Sell, lease and service Suzuki Products to the satisfaction of SUZUKI
from the Dealership Facilities and Locations as set forth in the
Facility Standards Addendum and Section X herein.

B. Identify itself as an authorized Suzuki Dealer utilizing Suzuki-
approved signage at the Dealership Facilities; and

C. Use the name "Suzuki" and the Suzuki trademarks in the advertising,
promotion, sales, leasing and servicing of Suzuki Products in the
manner herein provided.

SUZUKI hereby reserves the unrestricted right to sell Suzuki Products and to
grant the privilege of using the Suzuki name and trademarks to other dealers and
entities, wherever they may be located.

12. RESPONSIBILITIES ACCEPTED BY DEALER

DEALER accepts its appointment as an authorized Suzuki Dealer and, in
consideration of its appointment and subject to other conditions and
provisions of the Agreement, agrees to:

A. Establish and maintain Dealership Facilities to the satisfaction of
SUZUKI as set forth herein and in the Facility Standards Addendum and
the Dealer Minimum Standards Addendum at the locations set forth
herein;

B. Sell, lease and promote Suzuki Products subject to, and in accordance
with, the terms and conditions of this Agreement;

C. Service, in a manner satisfactory to SUZUKI, Suzuki Products subject
to, and in accordance with, the terms and conditions of this
Agreement; and

D. Build and maintain public confidence and respect in DEALER, SUZUKI and
Suzuki Products by maintaining the highest ethical standards of
advertising, business practices and conduct.

13. TERM

This Agreement shall come into full force and effect at SUZUKI headquarters
in Brea, California when executed by SUZUKI and, subject to its earlier
termination, in accordance with the provisions of this Agreement, shall
continue in full force and effect for ONE YEAR expiring on MAY 13, 1997
subject to the provisions of Section 11.00 of the Standard Provisions only
upon the condition that DEALER complies and completes all the terms and
conditions of this Agreement.

14. OWNERSHIP OF DEALER

DEALER represents and warrants and this Agreement is conditioned upon, and
is entered into by SUZUKI upon the representations and warranties of DEALER
that:

A. Dealer is an OREGON CORPORATION (indicate whether a sole proprietor, a
partnership, a corporation or other type of organization)

<PAGE>

B. The following person(s) and only said person(s) own and will continue
to own, throughout the term of this Agreement, the following interest
in ownership of the Dealership:

Percentage State Whether Partner
Name Of Interest Officer or Director
---- ----------- ---------------------

SIDNEY B. DEBOER 62.5% PRES./SEC./TREAS./CEO
MANFRED L. HEIMANN 37.5% VICE PRESIDENT

C. DEALER intends to carry on business under the name(s) of LITHIA
SUZUKI.

DEALER warrants that the appropriate registration or fictitious business
name statement reflecting the name in Paragraph (C) above has been filed
with the proper state authorities for the conduct of business under the
name by DEALER.

15. MANAGEMENT OF DEALERSHIP

A. SUZUKI enters into this Agreement on DEALER's representation that
SIDNEY B. DEBOER and no other person, shall be General Manager and
shall have full managerial authority and responsibility for the
operation and management of all phases of the business of the
Dealership with authority to make all decisions on behalf of DEALER
with respect to the operation of the Dealership and the performance of
this Agreement.

16. CHANGE IN OWNERSHIP OR MANAGEMENT

SUZUKI has entered into this Agreement in reliance on DEALER's
representation that the persons identified as Owners and/or General Manager
in Sections IV and V herein possess the ability, experience and other
personal qualifications requisite for the performance of this Agreement.
Therefore, if there is to be a change in the person(s) named as having full
ownership and/or full managerial authority as General Manager and
responsibility for the operation and management of the Dealership, DEALER
must give prior written notice of the change to SUZUKI, (except a change
caused by death, in which case DEALER or the DEALER's legal representative
shall give immediate written notice to SUZUKI). No such change or notice
shall alter or modify any of the provisions in this Agreement until
embodied in an appropriate written amendment and executed by all parties.
SUZUKI will not unreasonably withhold consent to a change in ownership or
management, provided that SUZUKI receives all information requested by it
concerning the prospective owner(s) and/or General Manager, and provided
that the prospective owner(s) and/or General Manager meet(s) all SUZUKI
financial qualifications and other qualifications in effect at the time of
the proposed change.

17. LICENSING OF DEALER

If any state, city or other jurisdiction where the Dealership operations
are to be located and conducted requires DEALER to obtain and maintain a
license for the conduct of Dealership operations as set forth herein, this
Agreement shall not be valid until and unless DEALER shall have first
provided to SUZUKI certification of the issuance of such license(s) to
DEALER. DEALER shall immediately notify SUZUKI in writing of failure to
obtain or maintain any such licenses or renewal thereof. DEALER shall
further notify SUZUKI in writing if any license

<PAGE>

that DEALER has obtained pursuant to this Paragraph is suspended or
revoked and the date and reasons therefor.

18. INCORPORATION OF STANDARD PROVISIONS

The Suzuki Dealer Sales and Service Agreement Standard Provisions
accompanying this Agreement are incorporated herein by this reference and
made a part of this Agreement with the same force and effect as if fully
set forth at this point.

19. INCORPORATION OF DOCUMENTS AS PART OF AGREEMENT

The Dealer Application, Facility Standards Addendum, Dealer Minimum
Standards Addendum and Dealer Updates are incorporated by this reference
and made a part of this Agreement with the same force and effect as if all
the representations and warranties in the Dealer Application, and all terms
and conditions of the Facility Standards Addendum, Dealer Minimum Standards
Addendum and Dealer Updates were set forth in full herein. The DEALER
represents and warrants and SUZUKI enters into this Agreement in reliance
upon those representations and warranties that all representations and
warranties made by the DEALER in the Dealer Application, Facility Standards
Addendum and Dealer Minimum Standards Addendum are true and correct as of
the date of execution of this Agreement.

20. CONDITIONS OF SUZUKI'S OFFER

If this Agreement is not terminated prior to its expiration date as set
forth above, SUZUKI hereby offers to enter into A three-year American
Suzuki Corporation Dealer Sales and Service Agreement with DEALER in such
form as shall be in use by SUZUKI at that time. This offer may be accepted
by DEALER fulfilling all of the following conditions during the term of
this Agreement and at the expiration thereof, each of which DEALER
recognizes, understands and agrees as being reasonable and necessary:

(a) Provide through acquisition or construction, and maintain the
following facilities for the Suzuki Dealership and for the sale,
leasing and servicing of Suzuki Products:

700 N. CENTRAL AVENUE
MEDFORD, OR 97501-5817

Dealer shall not establish or conduct any Dealership operations which are
the subject of this Agreement, including the display, sale, leasing or
servicing of Suzuki Products, at any location or facility other than as set
forth above or in the Facility Standards Addendum.

(b) Complete the acquisition and installation, at the Dealership
Facilities, of improvements, signs, furniture and furnishings, tools
and equipment as recommended by SUZUKI for the Dealership;

<PAGE>

(d) Furnish SUZUKI, on forms or in the format designated by SUZUKI, by the
tenth (10th) day of each month, with the financial and operating
statements set forth in Section 3.04 of the Standard Provisions;

(e) Comply with all other of SUZUKI's standards of DEALER to operate the
Dealership and qualify in all other aspects for a Suzuki three-year
Dealer Sales and Service Agreement;

(f) Comply with all federal, state and local governmental statutes,
ordinances, rules, regulations and standards to conduct business as an
authorized Suzuki Dealer at the Dealership Facilities;

(g) Other Conditions:

- COMPLETE AND MAINTAIN A MINIMUM OF TWO (2) SUZUKI TRAINED
TECHNICIANS IN PRODUCT INTRO AND EFI TO SERVICE THE SUZUKI
PRODUCT LINE DURING THE TERM OF THIS AGREEMENT.

- MAINTAIN AVERAGE MONTHLY DISTRICT, REGION, OR NATIONAL TOTAL
SALES PER DEALER, WHICHEVER IS HIGHEST, DURING THE ENTIRE TERM OF
THE TERM DEALER SALES AND SERVICE AGREEMENT.

- PURSUANT TO SECTION 5.02 OF THE SUZUKI STANDARD PROVISIONS,
DEALER AGREES TO OBTAIN AND MAINTAIN ADEQUATE FLOORING
ARRANGEMENTS CONFORMING TO THE REQUIREMENTS ESTABLISHED and
APPROVED BY SUZUKI, IN NO EVENT LESS THAN $500,000.

- Utilize Suzuki financial statement and submit by the 20th of each
month to National AND Regional Offices during the term of this
agreement.

- Maintain approved Suzuki signage in accordance with paragraph
2.02 of the Standard Provisions of the Dealer Sales and Service
Agreement.

- Maintain Suzuki Information Center during the term of this
agreement. Maintain Suzuki SCAT System during the term of this
agreement.

Should DEALER fail to fulfill each and every condition set forth in this
Paragraph during the term of the Agreement and prior to the expiration
thereof, the above offer made by SUZUKI shall be automatically revoked on
the expiration date set forth in Paragraph III without further notice to
dealer.

21. EFFECT OF LEGAL PROCEEDINGS ON SUZUKI'S OFFER TO DEALER

Should a proceeding of any nature be filed with or initiated in any court
or administrative body seeking to prevent or delay SUZUKI from entering
into a Dealer Sales and Service Agreement with DEALER and/or seeking
damages resulting from SUZUKI doing so, SUZUKI shall be under no obligation
to enter into such Agreement during the pendency of such proceeding.
Furthermore, if, as a result of such proceeding, SUZUKI shall be ordered or
prevented from entering into such an Agreement with Dealer, the offer
contained in Section X herein shall be void and SUZUKI shall have no
liability to DEALER whatsoever for any damages which DEALER may incur as a
result thereof.

<PAGE>

22. BREACH OF AGREEMENT BY DEALER

Should DEALER fail to comply with and fully and completely carry out all of
the terms and conditions of this Agreement, including those incorporated by
reference, such failure shall constitute a material breach of this
Agreement, and SUZUKI shall be under no obligation whatsoever to DEALER to
extend this Agreement in whole or in part, to enter into a regular three
year Dealer Sales and Service Agreement with DEALER or be under any other
obligation or have any liability to DEALER whatsoever.

23. ONLY AGREEMENT

Unless expressly referred to and incorporated herein, this Agreement
cancels and supersedes all previous contracts, agreements and
understandings between SUZUKI and DEALER with respect to Suzuki Products,
and there are no promises, representations, understandings or agreements
except as stated herein.

IN WITNESS WHEREOF the parties hereto have executed this Agreement this 13th day
of May, 1996.

AMERICAN SUZUKI MOTOR
CORPORATION
Automotive Division

By: [Signature]
------------------------------------
M. Nagura, President
Name and Title

LITHIA MOTORS, INC. DBA
LITHIA SUZUKI
Dealer Entity Name

BY: [Signature]
------------------------------------
President

BY: [Signature]
------------------------------------
Secretary

<PAGE>

EXHIBIT 10.16.1

ALTERNATIVE RATE _______
PROMISSORY NOTE
(PRIME RATE IBOR)

$18,000,000.00 Date: September 9, 1996
- ------------------ -----------------

LITHIA MOTORS, INC., LITHIA TLM, L.L.C., LITHIA DODGE, L.L.C., LITHIA'S GRANTS
PASS AUTO CENTER, L.L.C. ("Borrower")

UNITED STATES NATIONAL BANK OF OREGON ("Lender")

1. TYPE OF CREDIT
This note is given to evidence Borrower's obligation to repay all sums which
Lender may from time to time advance to Borrower ("Advances") under a:

___ single disbursement loan. Amounts loaned to Borrower hereunder will be
disbursed in a single Advance in the amount shown in Section 2.

_X_ revolving line of credit. No Advances shall be made which create a maximum
amount outstanding at any one time which exceeds the maximum amount shown
in Section 2. However, Advances hereunder may be borrowed, repaid and
reborrowed, and the aggregate Advances loaned hereunder from time to time
may exceed such maximum amount.

___ non-revolving line of credit. Each Advance made from time to time
hereunder shall reduce the maximum amount available shown in Section 2.
Advances loaned hereunder which are repaid may not be reborrowed.

2. PRINCIPAL BALANCE
The unpaid principal balance of all Advances outstanding under this note
("Principal Balance") at one time shall not exceed
**Eighteen Million and no/100's*********************.
- ----------------------------------------------------

3. PROMISE TO PAY
For value received Borrower promises to pay to Lender or order at DEALER FINANCE
DIVISION , the Principal Balance of this note, with interest thereon at the
rate(s) specified in Sections 4 and 11 below.

4. INTEREST RATE
The interest rate on the Principal Balance outstanding may vary from time to
time pursuant to the provisions of this note. Subject to the provisions of this
note, Borrower shall have the option from time to time of choosing to pay
interest at the rate or rates and for the applicable periods of time based on
the rate options provided herein: PROVIDED, however, that once Borrower notifies
Lender of the rate option chosen in accordance with the provisions of this note,
such notice shall constitute Borrower's irrevocable request for an Advance
hereunder at the rate option specified in such notice. The rate options are the
Prime Borrowing Rate and the IBOR Borrowing Rate, each as defined herein.

a. THE PRIME BORROWING RATE
i. The Prime Borrowing Rate is a per annum rate equal to Lender's
prime rate plus 0.0% per annum.
ii. Whenever Borrower desire to use the Prime Borrowing Rate option,
Borrower shall give Lender notice orally or in writing in accordance with
Section 15 of this note, which notice shall specify the requested disbursement
date and principal amount of the Advance, and that Borrower has chose the Prime
Borrowing Rate option.
iii. Prepayments of all or any part of the Principal Balance bearing
interest at the Prime Borrowing Rate may be made at any time without penalty.
Upon prepayment of any such principal amount, Borrower must also pay all accrued
interest thereon to the date of prepayment.

<PAGE>
iv. Subject to Section 11 of this note, interest shall accrue on the
unpaid Principal Balance at the Prime Borrowing Rate unless and except to the
extent that the IBOR Borrowing Rate is in effect.

b. THE IBOR BORROWING RATE
i. The following terms shall have the following meanings:
"Business Day" means any day other than a Saturday, Sunday, or
other day that commercial banks in Portland, Oregon or New York City are
authorized or required by law to close.
"IBOR Amount" means each principal amount for which Borrower
chooses to have the IBOR Borrowing Rate apply for any specified IBOR Interest
Period.
"IBOR Interest Period" means as to any IBOR Amount, a period of
1, 2, OR 3 months commencing on the date the IBOR Borrowing Rate becomes
applicable thereto; PROVIDED, however, that: (A) no IBOR Interest Period shall
be selected which would extend beyond 1/1/98 ; (B) no IBOR Interest Period
shall extend beyond the date of any principal payment required under Section 6
of this note, unless the sum of the principal amounts bearing interest at the
Prime Borrowing Rate, plus IBOR Amounts with IBOR Interest Periods ending on or
before the scheduled date of such principal payment, plus principal amounts
remaining unborrowed under a line of credit, equals or exceeds the amount of
such principal payment; (C) any IBOR Interest Period which would otherwise
expire on a day which is not a Business Day; unless the result of such extension
would be to extend such IBOR Interest Period into another calendar month, in
which event the IBOR Interest Period shall end on the immediately preceding
Business Day; and (D) any IBOR Interest Period that begins on the last Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such IBOR Interest Period)
shall end on the last Business Day of a calendar month.
ii. The IBOR Borrowing Rate is Lender's IBOR Rate plus 1.75% per
annum. Lender's IBOR Rate for any IBOR Interest Period is the rate per annum
(computed on the basis of a 360-day year and the actual number of days elapsed)
equal to the arithmetic average (rounded upward to the nearest 1/16 of 1%) of
the rates per annum determined by Lender as of the times specified in Section
4(b)(iii) on the date two (2) Business Days prior to the first day of such IBOR
Interest Period as the rates offered to Lender by three Eurodollar money market
dealers in such Eurodollar market as may be selected by Lender for U.S. dollar
deposits to be delivered on the first day of such IBOR Interest Period for the
number of months therein: PROVIDED, however, that Lender's IBOR Rate shall be
adjusted to take into account the maximum reserves required to be maintained for
Eurocurrency liabilities by banks during each such IBOR Interest Period as
specified in Regulation D of the Board of Governors of the Federal Reserve
System or any successor regulation.
iii. Borrower may obtain IBOR Borrowing Rate quotes from Lender
between 8:00 a.m. and 12:00 noon (Portland, Oregon time) on any Business Day.
Any IBOR Borrowing Rate quoted (A) before 10:00 a.m. shall be based on Lender's
IBOR Rate determined as of approximately 8:00 a.m. on such day, and Borrower may
request an Advance at such rate only by giving Lender notice in accordance with
Section 4(b)(iv) before 10:00 a.m. on such day; and (B) between 10:00 a.m. and
12:00 noon shall be based on Lender's IBOR Rate determined as of approximately
10:00 a.m. on such day, and Borrower may request an Advance at such rate only be
giving Lender notice in accordance with section 4(b)(iv) not later that 12:00
noon on such day.
iv. Whenever Borrower desires to use the IBOR Borrowing Rate option,
Borrower shall give Lender irrevocable notice (either in writing or orally and
promptly confirmed in writing) between 8:00 a.m. and 12:00 noon (Portland,
Oregon time) two (2) Business Days in advance of the desired effective date of
such rate. Any oral notice shall be given by, and in written notice or
confirmation of an oral notice shall be signed by, the person(s) authorized in
Section 15 of this note, and shall specify the requested effective date of the
rate, IBOR Interest Period and IBOR Amount, and where Borrower is requesting a
new Advance at the IBOR Borrowing Rate under a line of credit, conversion of any
portion of the Principal Balance bearing interest at the Prime Borrowing Rate to
an IBOR Amount, or a new IBOR Interest Period for an outstanding IBOR Amount.
Notwithstanding any other term of this note, Borrower may elect the IBOR
Borrowing Rate in the minimum principal amount of $ 500,000.00 and in integral
multiple of $ 100,000.00 ; PROVIDED, however, that no more than THREE separate
IBOR Interest Periods may be in effect at any one time.
v. Borrower may not prepay all or any part of any IBOR Amount(s).
vi. If at any time Lender's IBOR Rate is unascertainable or
unavailable to Lender or if IBOR Rate loans become unlawful, the option to
select the IBOR Borrowing Rate shall terminate immediately. If the IBOR
Borrowing Rate is then in effect, (A) it shall terminate automatically with
respect to all IBOR Amounts (i) on the last day of each then applicable IBOR
Interest Period, if Lender may lawfully continue to maintain such loans, or (ii)
immediately if Lender may not lawfully continue to maintain such loans through
such day, and (B) subject to Section 11, the Prime Borrowing Rate automatically
shall become effective as to such amounts upon such termination.
<PAGE>

vii. If at any time after the date hereof (A) any revision in or
adoption of any applicable law, rule, regulation or in the interpretation or
administration thereof (i) shall subject Lender or its Eurodollar lending office
to any tax, duty, or other charge, or change to the basis of taxation of
payments to Lender with respect to any loans bearing interest based on Lender's
IBOR Rate, or (ii) shall impose or modify any reserve, insurance, special
deposit, or similar requirements against assets of, deposits with or for the
account of, or credit extended by Lender or its Eurodollar lending office, or
impose on Lender or its Eurodollar lending office any other condition affecting
any such loans, and (B) the result of any of the foregoing is (i) to increase
the cost to Lender of making or maintaining any such loans or (ii) to reduce the
amount of any sum receivable under this note by Lender or its Eurodollar lending
office, Borrower shall pay Lender within 15 days after demand by Lender such
additional amount as will compensate Lender for such increased cost or
reduction. The determination hereunder by Lender of such additional amount
shall be conclusive in the absence of manifest error. If Lender demands
compensation under this Section 4(b)(vii), Borrower may upon three (3) Business
Days' notice to Lender pay the accrued interest on all IBOR Amounts, together
with any additional amounts payable under Section 4(b)(vii). Subject to Section
11, upon Borrower's paying such accrued interest and additional costs, the Prime
Borrowing Rate immediately shall be effective with respect to the unpaid
principal balance of such IBOR Amounts.
viii. Upon any termination of any IBOR Borrowing Rate (including
but not limited to conversion to another rate) or payment of all or any portion
of any IBOR Amount on a date other than the last day of the then applicable IBOR
Interest Period, including without limitation (A) acceleration under Section 11
or (B) repayment in response to a notice under Section 4(b)(vii), Borrower shall
pay to Lender on demand such amount as Lender reasonably determines (determined
as though 100% of the applicable IBOR Amount had been funded in the applicable
Eurodollar market) is equivalent to all direct or indirect losses, expenses,
liabilities, or reductions in yield to Lender resulting therefrom, whether
incurred in connection with liquidation or reemployment of funds or otherwise.
ix. If Borrower chooses the IBOR Borrowing Rate, Borrower shall pay
interest based on such rate, plus any other applicable taxes or charges
hereunder, even though Lender may have obtained the funds loaned to Borrower
from sources other than the applicable Eurodollar market. Lender's
determination of the IBOR Borrowing Rate and any such taxes or charges shall be
conclusive in the absence of manifest error.
x. Notwithstanding any other term of this note, Borrower may not
select the IBOR Borrowing Rate if an event of default hereunder has occurred and
is continuing.
xi. Nothing contained in this note, including without limitation the
determination of any IBOR Interest Period or Lender's quotation of any IBOR
Borrowing Rate, shall be construed to prejudice Lender's right, if any, to
decline to make any requested Advance or to require payment on demand.

5. COMPUTATION OF INTEREST
All interest under Section 4 and Section 11 will be computed at the applicable
rate based on a 360-day year and applied to the actual number of days elapsed.

6. PAYMENT SCHEDULE

a. PRINCIPAL
Principal shall be paid
_X_ on demand.
___ on demand, or if no demand, on _________.
___ on _____________________________________.
___ subject to Section 7, in installments of
_______________________ each, plus accrued interest
_______________________ each including accrued interest beginning on
___________ and on the same day of each _________ thereafter until
___________ when the entire Principal Balance plus interest thereon
shall be due and payable.
_______________________________________________________________.

b. INTEREST
i. Interest on all amounts bearing interest at the Prime Borrowing
Rate shall be paid:
_X_ on the 1st day of OCTOBER and on the same day of each MONTH
thereafter prior to maturity and at maturity.
___ at maturity.
___ at the time each principal installment is due and at
maturity.

<PAGE>

___________________________________________________.
ii. Interest on all IBOR Borrowing Rate Amounts shall be paid :
_X_ on the last day of the applicable IBOR Interest Period and if
such IBOR Interest Period is longer than three months, on the
last day of each three month period occurring during such IBOR
Interest Period, and at maturity.
___ on the ____ day of ______ and on the same day of each ____
thereafter prior to maturity and at maturity.
___ at maturity.
___ at the time each principal instalment is due and at maturity.
_____________________________________________________.

7. CHANGE IN PAYMENT AMOUNT
If the interest rate on this note is subject to change in accordance with
Section 4, the holder of this note may, from time to time, in holder's sole
discretion, increase or decrease the amount of each of the installments
remaining unpaid at the time of each change in rate to an amount holder in its
sole discretion deems necessary to continue amortizing the Principal Balance at
the same rate established by the installment amount specified in Section 6 (a),
whether or not a "balloon" payment may also be due upon maturity of this note.
Holder shall notify the undersigned of each change in writing. Whether or not
the installment amount is increased under this Section 7, Borrower understands
that, as a result of increases in the rate of interest in accordance with
Section 4, the final payment due, whether or not a "balloon payment", shall
include the entire Principal Balance and interest thereon then outstanding, and
may be substantially more than the installment specified in Section [7].

8. ALTERNATE PAYMENT DATE
Notwithstanding any other term of this note, if in any month there is no day on
which a scheduled payment would otherwise be due (e.g. February 31), such
payment shall be paid on the last banking day of that month.

9. PAYMENT BY AUTOMATIC CHARGE
___ Please automatically deduct the amount of all principal and interest
payments from account number ________. If there are insufficient funds in the
account to pay the automatic deduction in full, Lender may allow the account to
become overdrawn, or Lender may reverse the automatic deduction. Borrower will
pay all the fees on the account which result from the automatic deductions,
including any overdraft/NSF charges. If for any reason Lender does not charge
the account for a payment, or if an automatic payment is revered, the payment is
still due according to the note. If the account is a Money Market Account, the
number of withdrawals from that account is limited as set out in the agreement.
Lender may cancel the automatic deduction at any time in its discretion.

Provided, however, if no account number is entered above, Borrower does not want
to make payments by automatic charge.

10. LENDER'S PRIME RATE
Lender's prime rate is the rate of interest which Lender from time to time
establishes as its prime rate and is not, for example, the lowest rate of
interest which Lender collects from any borrower or class of borrowers. When
Lender's prime rate is applicable under Section 4(a) or 11(b), the interest rate
hereunder shall be adjusted without notice effective on the day Lender's prime
rate changes, but in no event shall the rate of interest be higher than allowed
by law.

11. DEFAULT
a. Without prejudice to any right of Lender to require payment on demand
or to decline to make any requested Advance, each of the following shall be an
event of default: (i) Borrower fails to make any payment when due (ii) Borrower
fails to perform or comply with any term, covenant or obligation in this note or
any agreement related to this note, or in any other agreement or loan Borrower
has with Lender. (iii) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this note or perform
Borrower's obligations under this note or any related documents. (iv) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect. (v) Borrower
becomes insolvent, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (vi) Any creditor tries to take any of Borrower's property on
or in which

<PAGE>

Lender has a lien or security interest. This includes a garnishment of any
of Borrower's accounts with Lender. (vii) Any of the events described in this
default section occurs with respect to any guarantor of this note or any
guaranty of Borrower's indebtedness to Lender ceases to be, or is asserted
not to be, in full force and effect. (viii) Lender in good faith deems itself
insecure. If this note is payable on demand, the inclusion of specific
events of default shall not prejudice Lender's right to require payment on
demand or to decline to make any requested Advance.

b. Without prejudice to any right of Lender to require payments on
demand, upon the occurrence of an event of default, Lender may declare the
entire unpaid Principal Balance on this note and all accrued unpaid interest
immediately due and payable, without notice. Upon default, including failure to
pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this note to a rate equal
to the Prime Borrowing Rate plus 5%. The interest rate will not exceed the
maximum rate permitted by applicable law. In addition, if any payment of
principal or interest is 19 or more days past due, Borrower will be charged a
late charge of 5% of the delinquent payment.

12. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND
Holder's record shall, at any time, be conclusive evidence of the unpaid
Principal Balance and interest owing on this note. Notwithstanding any other
provisions of this note, in the event holder makes Advances hereunder which
result in an unpaid Principal Balance on this note which at any time exceeds the
maximum amount specified in Section 2, Borrower agrees that all such Advances,
with interest, shall be payable on demand.

13. LINE OF CREDIT PROVISIONS
If the type of credit indicated in Section 1 is a revolving line of credit or a
non-revolving line of credit, Borrower agrees that Lender is under no obligation
and has not committed to make any Advances hereunder. Each Advance hereunder
shall be made at the sole option of the Lender.

14. DEMAND NOTE
If this note is payable on demand, Borrower acknowledges and agrees that (a)
Lender is entitled to demand Borrower's immediate payment in full of all amounts
owing hereunder and (b) neither anything to the contrary contained herein or in
any other loan documents (including but not limited to, provision relating to
defaults, rights of cure, default rate of interest, installment payments, late
charges, periodic review of Borrower's financial condition, and covenants) nor
any act of Lender pursuant to any such provision shall limit or impair Lender's
right or ability to require Borrower's payment in full of all amounts owing
hereunder immediately upon Lender's demand.

15. REQUESTS FOR ADVANCES
a. Any Advance may be made or interest rate option selected upon the
request of Borrower (if an individual), any of the undersigned (if Borrower
consists of more than one individual), any person or persons authorized in
subsection (b) of this Section 15, and any person or persons otherwise
authorized to execute and deliver promissory notes to Lender on behalf of
Borrower.
b. Borrower hereby authorizes any ONE of the following individuals to
request Advances and to select interest rate options:
SIDNEY DEBOER
MANFRED HEIMANN
DOROTHY CROCKETT
unless Lender is otherwise instructed in writing.
c. All Advances made pursuant to this Section 15 shall be disbursed by
deposit directly to Borrower's account number N/A at N/A, branch of Lender, or
by cashier's check issued to Borrower.
d. Borrower agrees that Lender shall have no obligation to verify the
identity of any person making any request pursuant to Section 15 and Borrower
assumes all risks of the validity and authorization of such requests. In
consideration of Lender agreeing, at its sole discretion, to make Advances upon
such requests, Borrower promises to pay holder, in accordance with the
provisions of this note, the Principal Balance together with interest thereon
and other sums due hereunder, although any Advances may have been requested by a
person or persons not authorized to do so.

16. PERIODIC REVIEW
Lender will review Borrower's credit accommodations periodically. At the time
of the review, Borrower will furnish Lender with any additional information
regarding Borrower's financial condition and business operations that Lender
requests. This information may include but is not limited to, financial
statements, tax returns, lists of assets and

<PAGE>
liabilities, agings of receivables and payables, inventory schedules, budgets
and forecasts. If upon review, Lender, in its sole discretion, determines
that there has been a material adverse change in Borrower's financial
condition, Borrower will be in default. Upon default, Lender shall have all
rights specified herein.

17. NOTICES
Any notice hereunder may be given by ordinary mail, postage paid and addressed
to Borrower at the last known address of Borrower as shown on holder's records.
If Borrower consists of more that one person, notification of any of said
persons shall be compete notification of all. Notice may be given either before
or reasonably soon after the effective date of the change.

18. ATTORNEY FEES
Whether or not litigation or arbitration is commenced, Borrower promises to pay
all costs of collecting overdue amounts. Without limiting the foregoing, in the
event that holder consults an attorney regarding the enforcement of any of its
rights under this note or any document securing the same, or if this note is
placed in the hands of an attorney for collection or if suit or litigation is
brought to enforce this note or any document securing the same, Borrower
promises to pay all costs thereof including such additional sums as the court or
arbitrator(s) may adjudge reasonable as attorney fees, including without
limitation, costs and attorney fees incurred in any appellate court, in any
proceeding under the bankruptcy code, or in any receivership and post-judgement
attorney fees incurred in enforcing any judgment.

19. WAIVERS; CONSENT
Each party hereto, whether maker, co-maker, guarantor or otherwise, waives
diligence, demand, presentment for payment, notice or non-payment, protest and
notice of protest and waives all defenses based on suretyship or impairment of
collateral. Without notice to Borrower and without diminishing or affecting
Lender's rights or Borrower's obligations hereunder, Lender may deal in any
manner with any person who at any time is liable for, or provides any real or
personal property collateral for, any indebtedness of Borrower to Lender,
including the indebtedness evidenced by this note. Without limiting the
foregoing, Lender may, in its sole discretion: (a) make secured or unsecured
loans to Borrower and agree to any number of waivers, modifications, extensions
and renewals of any length of such loans, including the loan evidenced by this
note; (b) impair, release (with or without substitution of new collateral), fail
to perfect a security interest in, fail to preserve the value of, fail to
dispose of in accordance with applicable law, any collateral provided by any
person; (c) sue, fail to sue, agree not to sue, release, and settle or
compromise with, any person.

20. JOINT AND SEVERAL LIABILITY
All undertakings of the undersigned Borrowers are joint and several and are
binding upon any marital community of which any of the undersigned are members.
Holder's rights and remedies under this note shall be cumulative.

21. ARBITRATION
a. Either Lender or Borrower may require that all disputes, claims,
counterclaims and defenses, including those based on or arising from any alleged
tort ("Claims") relating in any way to this note or any transaction of which
this note is a part (the "Loan"), be settled by binding arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association and Title 9 of the U.S. Code. All Claims will be subject to the
statutes of limitation applicable if they were litigated. This provision is
void if the Loan, at the time of the proposed submission to arbitration, is
secured by real property located outside of Oregon or Washington, or if the
effect of the arbitration procedure (as opposed to any Claims of Borrower) would
be to materially impair Lender's ability to realize on any collateral securing
the Loan.
b. If arbitration occurs and each party's Claim is less that $100,000,
one neutral arbitrator will decide all issues; if any party's Claim is $100,000
or more, three neutral arbitrators will decide all issues. All arbitrators will
be active Oregon State Bar members in good standing. All arbitration hearings
will be held in Portland, Oregon. In addition to all other powers, the
arbitrator(s) shall have the exclusive right to determine all issues of
arbitrability. Judgment on any arbitration award may be entered in any court
with jurisdiction.
c. If either party disputes any judicial proceeding relating to the Loan,
such actions shall not be a waiver of the right to submit any Claims to
arbitration. In addition, each has the right before, during and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or non-
judicial foreclosure against real or personal property collateral; and (iv)
provisional remedies, including injunction, appointment of receiver, attachment,
claim and delivery and replevin.
<PAGE>

22. GOVERNING LAW
This note shall be governed by and construed and enforced in accordance with the
laws of the State of Oregon without regard to conflict of law principles;
provided, however, that to the extent that Lender has greater rights or remedies
under Federal law, this provision shall not be deemed to deprive Lender of such
rights and remedies as may be available under Federal law.

23. DISCLOSURE
BY OREGON STATUTE (ORS 41.580), THE FOLLOWING DISCLOSURE IS REQUIRED;
UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY LENDERS
AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT
FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR

<PAGE>

SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS
CONSIDERATION AND BE SIGNED BY THE LENDER TO BE ENFORCEABLE.

EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS
DOCUMENT.

Lithia Motors, Inc.
By: /s/ President
-----------------

Lithia Dodge, L.L.C., By: Lithia Motors, Inc., Managing Member
By: /s/ President
---------------

Lithia's Grants Pass Auto Center, L.L.C., By: Lithia Motors, Inc., Managing
Member
By: /s/ President
-----------------

Lithia TLM, L.L.C., By: Lithia Motors, Inc., Managing Member
By: /s/ President
-------------------

For valuable consideration, Lender agrees to the terms of the arbitration
provision set forth in this note.
United States National Bank of Oregon
By: /s/ Vice President
---------------------

<PAGE>

EXHIBIT 10.16.2

PROMISSORY NOTE

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$6,000,000.00 09-09-1996 5311162 16245
- -------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>

BORROWER: LITHIA MOTORS, INC. LENDER: UNITED STATES NATIONAL BANK OF OREGON
360 E. JACKSON DEALER FINANCE DIVISION
MEDFORD, OR 97504 131 E. MAIN
MEDFORD, OR 97501
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Principal Amount: $6,000,000.00 Date of Note: September 9, 1996

PROMISE TO PAY. LITHIA MOTORS, INC. ("BORROWER") PROMISES TO PAY TO UNITED
STATES NATIONAL BANK OF OREGON ("LENDER"), OR ORDER, IN LAWFUL MONEY, OF THE
UNITED STATES OF AMERICA, ON DEMAND, THE PRINCIPAL AMOUNT OF SIX MILLION &
00/100 DOLLARS ($6,000,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER
WITH INTEREST ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE.
INTEREST SHALL BE CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF
EACH ADVANCE.

PAYMENT. BORROWER WILL PAY THIS LOAN IMMEDIATELY UPON LENDER'S DEMAND. IN
ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ALL ACCRUED UNPAID
INTEREST DUE AS OF EACH PAYMENT DATE, BEGINNING OCTOBER 10, 1996, WITH ALL
SUBSEQUENT INTEREST PAYMENTS TO BE DUE ON THE SAME DAY OF EACH MONTH AFTER
THAT. Interest on this Note is computed on a 365/360 simple interest basis;
that is, by applying the ratio of the annual interest rate over a year of 360
days multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will
pay Lender at Lender's address shown above or at such other place as Lender
may designate in writing.

VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is Lender's Prime Rate
(the "Index"). This is the rate Lender charges, or would charge, on 90-day
unsecured loans to the most creditworthy corporate customers. This rate may
or may not be the lowest rate available from Lender at any given time.
Lender will tell Borrower the current Index rate upon Borrower's request.
Borrower understands that Lender may make loans based on other rates as well.
The interest rate change will not occur more often than each day. THE
INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL
BE AT A RATE OF 0.750 PERCENTAGE POINTS OVER THE INDEX.

PREPAYMENT. Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to
make payments of accrued unpaid interest. Rather, they will reduce the
principal balance due.

DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to perform promptly at the
time and strictly in the manner provided in this Note or any agreement
related to this Note, or in any other agreement or loan Borrower has with
Lender. (c) Any representation or statement made or furnished to Lender by
Borrower or on Borrower's behalf is false or misleading in any material
respect. (d) Borrower becomes insolvent, a receiver is appointed for any part
of Borrower's property, Borrower makes an assignment for the benefit of
creditors, or any proceeding is commenced either by Borrower or against
Borrower under any bankruptcy or insolvency laws. (e) Borrower is in default
under any other notes, security agreement, lease agreement or lease schedule,
loan agreement or other agreement, whether now existing or hereafter made,
between Borrower and U.S. Bancorp or any direct or indirect subsidiary of
U.S. Bancorp. (f) Any creditor tries to take any of Borrower's property on or
in which Lender has a lien or security interest. This includes a garnishment
of any of Borrower's

<PAGE>

accounts with Lender. (g) Any of the events described in this default section
occurs with respect to any guarantor of this Note. (h) Lender in good faith
deems itself insecure.

If any default, other than a default in payment, is curable and if Borrower
has not been given a notice of a breach of the same provision of this Note
within the preceding twelve (12) months, it may be cured (and no event of
default will have occurred) if Borrower, after receiving written notice from
Lender demanding cure of such default: (a) cures the default within fifteen
(15) days; or (b) if the cure requires more than fifteen (15) days,
immediately initiates steps which Lender deems in Lenders sole discretion to
be sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.

LENDERS RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including
failure to pay upon final maturity, Lender, at its option, may also, if
permitted under applicable law, increase the variable interest rate on this
Note to 5.750 percentage points over the Index. The interest rate will not
exceed the maximum rate permitted by applicable law. Lender may hire or pay
someone else to help collect this Note if Borrower does not pay. Borrower
also will pay Lender that amount. This includes, subject to any limits under
applicable law, Lender's attorneys' fees and Lender's legal expenses whether
or not there is a lawsuit, including attorneys' fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgment collection
services. If not prohibited by applicable law, Borrower also will pay any
court costs, in addition to all other sums provided by law. THIS NOTE HAS
BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF OREGON. IF
THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF JACKSON COUNTY, THE STATE OF OREGON. SUBJECT
TO THE PROVISIONS ON ARBITRATION, THIS NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OREGON.

RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's
accounts with Lender (whether checking, savings, or some other account),
including without limitation all accounts held jointly with someone else and
all accounts Borrower may open in the future, excluding however all IRA and
Keogh accounts, and all trust accounts for which the grant of a security
interest would be prohibited by law. Borrower authorizes Lender, to the
extent permitted by applicable law, to charge or setoff all sums owing on
this Note against any and all such accounts.

LINE OF CREDIT. This Note evidences a straight line of credit. Once the
total amount of principal has been advanced, Borrower is not entitled to
further loan advances. Advances under this Note, as well as directions for
payment from Borrower's accounts, may be requested orally or in writing by
Borrower or by an authorized person. Lender may, but need not, require that
all oral requests be confirmed in writing. Borrower agrees to be liable for
all sums either: (a) advanced in accordance with the instructions of an
authorized person or (b) credited to any of Borrower's accounts with Lender,
regardless of the fact that persons other than those authorized to borrow
have authority to draw against the accounts. The unpaid principal balance
owing on this Note at any time may be evidenced by endorsements on this Note
or by Lender's internal records, including daily computer print-outs. Lender
will have no obligation to advance funds under this Note if: (a) Borrower or
any guarantor is in default under the terms of this Note or any agreement
that Borrower or any guarantor has with Lender, including any agreement made
in connection with the signing of this Note; (b) Borrower or any guarantor
ceases doing business or is insolvent; (c) any guarantor seeks, claims or
otherwise attempts to limit, modify or revoke such guarantor's guarantee of
this Note or any other loan with Lender; (d) Borrower has applied funds
provided pursuant to this Note for purposes other than those authorized by
Lender; or (e) Lender in good faith deems itself insecure under this Note or
any other agreement between lender and Borrower.

ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND
CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT OR CLASS IN NATURE,
ARISING FROM THIS NOTE OR OTHERWISE, INCLUDING WITHOUT LIMITATION CONTRACT
AND TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN
ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to take or
dispose of any collateral securing this Note shall constitute a waiver of
this arbitration agreement or be prohibited by this arbitration agreement.
This includes, without limitation, obtaining injunctive relief or a temporary
restraining order; foreclosing by notice and sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal

<PAGE>

09-09-1996 PROMISSORY NOTE
Loan No (Continued)

property, including taking or disposing of such property with or without
judicial process pursuant to Article 9 of the Uniform Commercial Code. Any
disputes, claims, or controversies concerning the lawfulness or
reasonableness of any act or exercise of any right, concerning any collateral
securing this Note, including any claim to rescind, reform, or otherwise
modify any agreement relating to the collateral securing this Note, shall
also be arbitrated, provided however that no arbitrator shall have the right
or the power to enjoin or restrain any act of any party. Judgment upon any
award rendered by any arbitrator may be entered in any court having
jurisdiction. Nothing In this Note shall preclude any party from seeking
equitable relief from a court of competent jurisdiction. The statute of
limitations, estoppel, waiver, laches, and similar doctrines which would
otherwise be applicable in an action brought by a party shall be applicable
in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of an action for these purposes.
The Federal Arbitration Act shall apply to the construction, interpretation,
and enforcement of this arbitration provision.

GENERAL PROVISIONS. This Note is payable on demand. The inclusion of
specific default provisions or rights of Lender shall not preclude Lender's
right to declare payment of this Note on its demand. Lender may delay or
forgo enforcing any of its rights or remedies under this Note without losing
them. Borrower and any other person who signs, guarantees or endorses this
Note, to the extent allowed by law, waive presentment, demand for payment,
protest and notice of dishonor. Upon any change in the terms of this Note,
and unless otherwise expressly stated in writing, no party who signs this
Note, whether as maker, guarantor, accommodation maker or endorser, shall be
released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any
party or guarantor or collateral; or impair, fail to realize upon or perfect
Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All
such parties also agree that Lender may modify this loan without the consent
of or notice to anyone other than the party with whom the modification is
made.

UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY US
(LENDER) AFTER OCTOBER 3,1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS
WHICH ARE NOT FOR PERSONAL FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY
THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE
SIGNED BY US TO BE ENFORCEABLE.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETE COPY
OF THE NOTE.

BORROWER:

LITHIA MOTORS, INC.

BY:
---------------------------------------------------------
LITHIA MOTORS, INC., BY: SIDNEY B. DEBOER, PRESIDENT

<PAGE>

09-09-1996 PROMISSORY NOTE
Loan No (Continued)

LENDER:

UNITED STATES NATIONAL BANK OF OREGON

BY:
---------------------------------------------
AUTHORIZED OFFICER

<PAGE>

EXHIBIT 10.16.3

PROMISSORY NOTE

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,400,000.00 09-09-1996 16245
- --------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability
of this document to any particular loan or item.
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------

</TABLE>

BORROWER: LITHIA LEASING, INC. LENDER: UNITED STATES NATIONAL BANK OF OREGON
360 JACKSON STREET DEALER FINANCE DIVISION
MEDFORD, OR 97504 131 EAST MAIN
MEDFORD, OR 97501
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

Principal Amount: $1,400,000.00 Date of Note: September 9, 1996

PROMISE TO PAY. LITHIA LEASING, INC. ("BORROWER") PROMISES TO PAY TO UNITED
STATES NATIONAL BANK OF OREGON ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE
UNITED STATES OF AMERICA, ON DEMAND, THE PRINCIPAL AMOUNT OF ONE MILLION FOUR
HUNDRED THOUSAND & 00/100 DOLLARS ($1,400,000.00) OR SO MUCH AS MAY BE
OUTSTANDING, TOGETHER WITH INTEREST ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE
OF EACH ADVANCE. INTEREST SHALL BE CALCULATED FROM THE DATE OF EACH ADVANCE
UNTIL REPAYMENT OF EACH ADVANCE.

PAYMENT. BORROWER WILL PAY THIS LOAN IMMEDIATELY UPON LENDER'S DEMAND. IN
ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ALL ACCRUED UNPAID
INTEREST DUE AS OF EACH PAYMENT DATE, BEGINNING OCTOBER 10, 1996, WITH ALL
SUBSEQUENT INTEREST PAYMENTS TO BE DUE ON THE SAME DAY OF EACH MONTH AFTER
THAT. Interest on this Note is computed on a 365/360 simple interest basis;
that is, by applying the ratio of the annual interest rate over a year of 360
days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will
pay Lender at Lender's address shown above or at such other place as Lender
may designate in writing.

VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is Lender's Prime Rate (the
"Index"). This is the rate Lender charges, or would charge, on 90-day unsecured
loans to the most creditworthy corporate customers. This rate may or may not be
the lowest rate available from Lender at any given time. Lender will tell
Borrower the current Index rate upon Borrower's request. Borrower understands
that Lender may make loans based on other rates as well. The interest rate
change will not occur more often than each day. THE INTEREST RATE TO BE APPLIED
TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 0.500
PERCENTAGE POINTS OVER THE INDEX.

PREPAYMENT. Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to make
payments of accrued unpaid interest. Rather, they will reduce the principal
balance due.

DEFAULT. Borrower will be in default if any of the following happens:
(a) Borrower fails to make any payment when due. (b) Borrower breaks any
promise Borrower has made to Lender, or Borrower fails to perform promptly at
the time and strictly in the manner provided in this Note or any agreement
related to this Note, or in any other agreement or loan Borrower has with
Lender. (c) Any representation or statement made or furnished to Lender by
Borrower or on Borrower's behalf is false or misleading in any material respect.
(d) Borrower becomes insolvent, a receiver is appointed for any part of
Borrower's property, Borrower makes an assignment for the benefit of creditors,
or any proceeding is commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (e) Borrower is in default under any other note,
security agreement, lease agreement or lease schedule, loan agreement or other
agreement, whether now existing or hereafter made, between Borrower and U.S.
Bancorp or any direct or indirect subsidiary of U.S. Bancorp. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any of the events described in this default section occurs
with respect to any guarantor of this Note. (h) Lender in good faith deems
itself insecure.

<PAGE>

If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.

LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 5.500
percentage points over the Index. The interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. If not
prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO
LENDER AND ACCEPTED BY LENDER IN THE STATE OF OREGON. IF THERE IS A LAWSUIT,
BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THIS
COURTS OF JACKSON COUNTY, THE STATE OF OREGON. SUBJECT TO THE PROVISIONS ON
ARBITRATION, THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF OREGON.

RIGHTS OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.

LINE OF CREDIT. This Note evidences a straight line of credit. Once the total
amount of principal has been advanced, Borrower is not entitled to further loan
advances. Advances under this Note, as well as directions for payment from
Borrower's accounts, may be requested orally or in writing by Borrower or by an
authorized person. Lender may, but need not, require that all oral requests be
confirmed in writing. Borrower agrees to be liable for all sums either:
(a) advanced in accordance with the instructions of an authorized person or
(b) credited to any of Borrower's accounts with Lender, regardless of the fact
that persons other than those authorized to borrow have authority to draw
against the accounts. The unpaid principal balance owing at any time may be
evidenced by endorsements on this Note or by Lender's internal records,
including daily computer print-outs. Lender will have no obligation to advance
funds under this Note if: (a) Borrower or any guarantor is in default under the
terms of this Note or any agreement that Borrower or any guarantor has with
Lender, including any agreement made in connection with the signing of this
Note; (b) Borrower or any guarantor ceases doing business or is insolvent;
(c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke
such guarantor's guarantee of this Note or any other loan with Lender;
(d) Borrower has applied funds provided pursuant to this Note for purposes other
than those authorized by Lender; or (e) Lender in good faith deems itself
insecure under this Note or any other agreement between Lender and Borrower.

ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND
CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE,
ARISING FROM THIS NOTE OR OTHERWISE, INCLUDING WITHOUT LIMITATION CONTRACT AND
TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN
ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to take or
dispose of any collateral securing this Note shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; foreclosing by notice and sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any collateral securing this Note, including
any claim to rescind, reform, or otherwise modify any agreement relating to the
collateral securing this Note, shall also be arbitrated, provided however that
no arbitrator shall have the right or the power to enjoin or restrain any act of
any party. Judgment upon any award rendered by any arbitrator may be entered in
any court having jurisdiction. Nothing in this Note shall preclude any party
from seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches, and similar doctrines which
would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an arbitration
proceeding shall

<PAGE>

be deemed the commencement of an action for these purposes. The Federal
Arbitration Act shall apply to the construction, interpretation, and enforcement
of this arbitration provision.

PERIODIC REVIEW. Lender will review the loan periodically. At the time of the
review, Borrower will furnish Lender with any additional information regarding
Borrower's financial condition and business operations that Lender requests.
This information may include, but is not limited to, financial statements, tax
returns, lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets and forecasts. If upon review, Lender, in its sole
discretion, determines that there has been a material adverse change in
Borrower's financial condition, Borrower will be in default. Upon default,
Lender shall have all rights specified herein.

DEMAND NOTE. BORROWER ACKNOWLEDGES AND AGREES THAT (A) THIS NOTE IS A DEMAND
NOTE, AND LENDER IS ENTITLED TO DEMAND BORROWER'S IMMEDIATE PAYMENT IN FULL OF
ALL AMOUNTS OWING HEREUNDER, (B) NEITHER ANYTHING TO THE CONTRARY CONTAINED
HEREIN OR IN ANY OTHER LOAN DOCUMENTS (INCLUDING BUT NOT LIMITED TO, PROVISIONS
RELATING TO DEFAULTS, RIGHTS OF CURE, DEFAULT RATE OF INTEREST, INSTALLMENT
PAYMENTS, LATE CHARGES, PERIODIC REVIEW OF BORROWER'S FINANCIAL CONDITION, AND
COVENANTS) NOR ANY ACT OF LENDER PURSUANT TO ANY SUCH PROVISIONS SHALL LIMIT OR
IMPAIR LENDER'S RIGHT OR ABILITY TO REQUIRE BORROWER'S PAYMENT IN FULL OF ALL
AMOUNTS OWING HEREUNDER IMMEDIATELY UPON LENDER'S DEMAND, AND (C) UPON LENDER
MAKING ANY SUCH DEMAND, LENDER SHALL HAVE NO OBLIGATION TO MAKE ANY ADVANCE
UNDER THIS NOTE OR UNDER THE LOAN DOCUMENTS.

GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive presentment, demand for payment, protest and notice of
dishonor. Upon any change in the terms of this Note, and unless otherwise
expressly stated in writing, no party who signs this Note, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.

UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY US (LENDER)
AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT
FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S
RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY US TO BE
ENFORCEABLE.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.

BORROWER:

LITHIA LEASING, INC.

BY:
-------------------------------
SIDNEY DEBOER, PRESIDENT

LENDER:

UNITED STATES NATIONAL BANK OF OREGON

BY:
-------------------------------
AUTHORIZED OFFICER

<PAGE>

EXHIBIT 10.17.1

Medford, Oregon 97501 August 31, 1996

Lithia Motors, Inc, severally promises to pay to the order of Sydney B. DeBoer,
234 Vista Street, Ashland, OR 97520, $500,000.00 Dollars

Interest rate is to be 1/2 over U.S. National Bank Prime rate, adjusted as of
the first of each month, but no more than 12% per annum from dated of note,
until paid. Note is payable in 10 equal annual installments. The first payment
to be due on the 10th day of the onth following 1 years notice and demand by
note holder, and a like payment the same date of each year thereafter, until the
whole sum, principal and interest has been paid; if any of said installments is
not so paid, all principal and interest to become immediately due and
collectible at the option of the holder of the note.

If this note is placed in the hands of an attorney for collection, Lithia Motors
promises and agrees to pay holder's reasonable attorney's fees and collection
costs, even though no suit or action is filed hereon; however, if a suit or an
action is filed, the amount of such attorney's fees shall be fixed by court, or
courts in which the suit is filed, including any appeal therein, is tried, heard
or decided.

LITHIA MOTORS, INC.
-------------------------------------

By: /s/ Sidney B. DeBoer
-------------------------------------
Sidney B. DeBoer, President

<PAGE>

EXHIBIT 10.17.2

SUBORDINATION AGREEMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$400,000.00 09-09-1996 RVA 5311162 16245
- ---------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular
loan or item.
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Borrower: Lithia Motors, Inc. Lender: United States National Bank
360 E. Jackson of Oregon
Medford, OR 97504 Dealer Finance Division
131 E. Main Medford, OR 97501

Creditor: Sidney B. DeBoer
234 Vista Street
Ashland, OR 97520

THIS SUBORDINATION AGREEMENT IS ENTERED INTO AMONG LITHIA MOTORS, INC.
("BORROWER"), WHOSE ADDRESS IS 360 E. JACKSON, MEDFORD, OR 97504; UNITED STATES
NATIONAL BANK OF OREGON ("LENDER"), WHOSE ADDRESS IS 131 E. MAIN, MEDFORD, OR
975O1; AND SIDNEY B. DEBOER ("CREDITOR"), WHOSE ADDRESS IS 234 VISTA STREET,
ASHLAND, OR 97520. As of this date, September 9, 1996, Borrower is indebted to
Creditor in the AGGREGATE AMOUNT OF FIVE HUNDRED THOUSAND & 00/100 DOLLARS
($500,000.00). This amount is the total indebtedness of every kind from Borrower
to Creditor. Borrower and Creditor each want Lender to provide financial
accommodations to Borrower in the form of (a) new credit or loan advances, (b)
an extension of time to pay or other compromises regarding all or part of
Borrower's present indebtedness to Lender, or (c) other benefits to Borrower.
Borrower and Creditor each represent and acknowledge to Lender that Creditor
will benefit as a result of these financial accommodations from Lender to
Borrower, and Creditor acknowledges receipt of valuable consideration for
entering into this Agreement. BASED ON THE REPRESENTATIONS AND ACKNOWLEDGMENTS
CONTAINED IN THIS AGREEMENT, CREDITOR AND BORROWER AGREE WITH LENDER AS FOLLOWS:

DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.

AGREEMENT. The word "Agreement" means this Subordination Agreement, as
this Subordination Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Subordination
Agreement from time to time.

BORROWER. The word "Borrower" means Lithia Motors, Inc.

CREDITOR. The word "Creditor" means Sidney B. DeBoer.

LENDER. The word "Lender" means United States National Bank of Oregon, its
successors and assigns.

SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.

SUBORDINATED INDEBTEDNESS. The words "Subordinated Indebtedness" mean and
include without limitation all present and future indebtedness,
obligations, liabilities, claims, rights, and demands of any kind which may
be now or hereafter owing from BORROWER TO CREDITOR. The term
"Subordinated Indebtedness" is
<PAGE>
used in its broadest sense and includes without limitation all principal,
all interest, all costs and attorneys' fees, all sums paid for the purpose
of protecting the rights of a holder of security (such as a secured party
paying for insurance on collateral if the owner fails to do so), all
contingent obligations of Borrower (such as a guaranty), and all other
obligations, secured or unsecured, of any nature whatsoever.

SUPERIOR INDEBTEDNESS. The words "Superior Indebtedness" mean and include
without limitation all present and future indebtedness, obligations,
liabilities, claims, rights, and demands of any kind which may be now or
hereafter owing from BORROWER TO LENDER. The term "Superior Indebtedness"
is used in its broadest sense and includes without limitation all
principal, all interest, all costs and attorneys' fees, all sums paid for
the purpose of protecting Lender's rights in security (such as paying for
insurance on collateral if the owner fails to do so), all contingent
obligations of Borrower (such as a guaranty), all obligations arising by
reason of Borrower's accounts with Lender (such as an overdraft on a
checking account), and all other obligations of Borrower to Lender, secured
or unsecured, of any nature whatsoever.

SUBORDINATION. ALL SUBORDINATED INDEBTEDNESS OF BORROWER TO CREDITOR IS AND
SHALL BE SUBORDINATED IN ALL RESPECTS TO ALL SUPERIOR INDEBTEDNESS OF BORROWER
TO LENDER. If Creditor holds one or more Security Interests, whether now
existing or hereafter acquired, in any of Borrower's real property or personal
property, Creditor also subordinates all its Security Interests to all Security
Interests held by Lender, whether the Lender's Security Interest or Interests
exist now or are acquired later.

PAYMENTS TO CREDITOR. Borrower will not make and Creditor will not accept, at
any time while any Superior Indebtedness is owing to Lender, (a) any payment
upon any Subordinated Indebtedness, (b) any advance, transfer, or assignment of
assets to Creditor in any form whatsoever that would reduce at any time or in
any way the amount of Subordinated Indebtedness, or (c) any transfer of any
assets as security for the Subordinated Indebtedness, except upon Lender's prior
written consent.

In the event of any distribution, division, or application, whether partial or
complete, voluntary or involuntary, by operation of law or otherwise, of all or
any part of Borrower's assets, or the proceeds of Borrower's assets, in whatever
form, to creditors of Borrower or upon any Indebtedness of Borrower, whether by
reason of the liquidation, dissolution or other winding-up of Borrower, or by
reason of any execution sale, receivership, insolvency, or bankruptcy
proceeding, assignment for the benefit of creditors, proceedings for
reorganization, or readjustment of Borrower or Borrower's properties, then and
in such event, (a) the Superior Indebtedness shall be paid in full before any
payment is made upon the Subordinated Indebtedness, and (b) all payments and
distributions, of any kind or character and whether in cash, property, or
securities, which shall be payable or deliverable upon or in respect of the
Subordinated Indebtedness shall be paid or delivered directly to Lender for
application in payment of the amounts then due on the Superior Indebtedness
until the Superior Indebtedness shall have been paid in full.

In order that Lender may establish its right to prove claims and recover for its
own account dividends based on the Subordinated Indebtedness, Creditor does
hereby assign all its right, title, and interest in such claims to Lender.
Creditor further agrees to supply such information and evidence, provide access
to and copies of such of Creditor's records as may pertain to the Subordinated
Indebtedness, and execute such instruments as may be required by Lender to
enable Lender to enforce all such claims and collect all dividends, payments, or
other disbursements which may be made on account of the Subordinated
Indebtedness. For such purposes, Creditor hereby irrevocably authorizes Lender
in its discretion to make and present for or on behalf of Creditor such proofs
of claims on account of the Subordinated Indebtedness as Lender may deem
expedient and proper and to vote such claims in any such proceeding and to
receive and collect any and all dividends, payments, or other disbursements made
thereon in whatever form the same may be paid or issued and to apply the same on
account of the Superior Indebtedness.

Should any payment, distribution, security, or proceeds thereof be received by
Creditor at any time on the Subordinated Indebtedness contrary to the terms of
this Agreement, Creditor immediately will deliver the same to Lender in
precisely the form received (except for the endorsement or assignment of
Creditor where necessary) for application on or to secure the Superior
Indebtedness, whether it is due or not due, and until so delivered the same
shall be held in trust by Creditor as property of Lender. In the event Creditor
fails to make any such endorsement or assignment, Lender, or any of its officers
on behalf of Lender, is hereby irrevocably authorized by Creditor to make the
same.
<PAGE>
09-09-1996 SUBORDINATION AGREEMENT
Loan No (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDITOR'S NOTES. Creditor agrees to deliver to Lender, at Lender's
request, all notes of Borrower to Creditor, or other evidence of the
Subordinated Indebtedness, now held or hereafter acquired by Creditor,
while this Agreement remains in effect. At Lender's request, Borrower also
will execute and deliver to Creditor a promissory note evidencing any book
account or claim now or hereafter owed by Borrower to Creditor, which note
also shall be delivered by Creditor to Lender. Creditor agrees not to
sell, assign, pledge or otherwise transfer any of such notes except subject
to all the terms and conditions of this Agreement.

CREDITOR'S REPRESENTATIONS AND WARRANTIES. Creditor represents and
warrants to Lender that: (a) no representations or agreements of any kind
have been made to Creditor which would limit or qualify in any way the
terms of this Agreement; (b) this Agreement is executed at Borrower's
request and not at the request of Lender; (c) Lender has made no
representation to Creditor as to the creditworthiness of Borrower; and (d)
Creditor has established adequate means of obtaining from Borrower on a
continuing basis information regarding Borrower's financial condition.
Creditor agrees to keep adequately informed from such means of any facts,
events, or circumstances which might in any way affect Creditor's risks
under this Agreement, and Creditor further agrees that Lender shall have no
obligation to disclose to Creditor information or material acquired by
Lender in the course of its relationship with Borrower.

CREDITOR'S WAIVERS. Creditor waives any right to require Lender: (a) to
make, extend, renew, or modify any loan to Borrower or to grant any other
financial accommodations to Borrower whatsoever; (b) to make any
presentment, protest, demand, or notice of any kind, including notice of
any nonpayment of the Superior Indebtedness or of any nonpayment related to
any Security Interests, or notice of any action or nonaction on the part of
Borrower, Lender, any surety, endorser, or other guarantor in connection
with the Superior Indebtedness, or in connection with the creation of new
or additional Superior Indebtedness; (c) to resort for payment or to
proceed directly or at once against any person, including Borrower; (d) to
proceed directly against or exhaust any Security Interests held by Lender
from Borrower, any other guarantor, or any other person; (e) to give notice
of the terms, time, and place of any public or private sale of personal
property security held by Lender from Borrower or to comply with any other
applicable provisions of the Uniform Commercial Code; (f) to pursue any
other remedy within Lender's power; or (g) to commit any act or omission of
any kind, at any time, with respect to any matter whatsoever.

LENDER'S RIGHTS. Lender may take or omit any and all actions with respect
to the Superior Indebtedness or any Security Interests for the Superior
Indebtedness without affecting whatsoever any of Lender's rights under this
Agreement. In particular, without limitation, Lender may, without notice
of any kind to Creditor, (a) make one or more additional secured or
unsecured loans to Borrower; (b) repeatedly alter, compromise, renew,
extend, accelerate, or otherwise change the time for payment or other terms
of the Superior Indebtedness or any part thereof, including increases and
decreases of the rate of interest on the Superior Indebtedness; extensions
may be repeated and may be for longer than the original loan term; (c) take
and hold Security Interests for the payment of the Superior Indebtedness,
and exchange, enforce, waive, and release any such Security Interests, with
or without the substitution of new collateral; (d) release, substitute,
agree not to sue, or deal with any one or more of Borrower's sureties,
endorsers, or guarantors on any terms or manner Lender chooses; (e)
determine how, when and what application of payments and credits, shall be
made on the Superior Indebtedness; (f) apply such security and direct the
order or manner of sale thereof, as Lender in its discretion may determine;
and (g) assign this Agreement in whole or in part.

DEFAULT BY BORROWER. If Borrower becomes insolvent or bankrupt, this
Agreement shall remain in full force and effect. In the event of a
corporate reorganization or corporate arrangement of Borrower under the
provisions of the Bankruptcy Code, as amended, this Agreement shall remain
in full force and effect and the court having jurisdiction over the
reorganization or arrangement is hereby authorized to preserve such
priority and subordination in approving any such plan of reorganization or
arrangement. Any default by Borrower under the terms of the Subordinated
Indebtedness also shall be a default under the terms of the Superior
Indebtedness to Lender.
<PAGE>
09-09-1996 SUBORDINATION AGREEMENT
Loan No (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DURATION AND TERMINATION. This Agreement will take effect when received by
Lender, without the necessity of any acceptance by Lender, in writing or
otherwise, and will remain in full force and effect until Creditor shall
notify Lender in writing at the address shown above to the contrary. Any
such notice shall not affect the Superior Indebtedness owed Lender by
Borrower at the time of such notice, nor shall such notice affect Superior
Indebtedness thereafter granted in compliance with a commitment made by
Lender to Borrower prior to receipt of such notice, nor shall such notice
affect any renewals of or substitutions for any of the foregoing. Such
notice shall affect only indebtedness of Borrower to Lender arising after
receipt of such notice and not arising from financial assistance granted by
Lender to Borrower in compliance with Lender's obligations under a
commitment. Any notes lodged with Lender pursuant to the section titled
"Creditor's Notes" above need not be returned until this Agreement has no
further force or effect.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a
part of this Agreement:

APPLICABLE LAW. This Agreement has been delivered to Lender and
accepted by Lender in the State of Oregon. If there is a lawsuit,
Creditor and Borrower agree upon Lender's request to submit to the
jurisdiction of the courts of Jackson County, State of Oregon.
Subject to the provisions on arbitration, this Agreement shall be
governed by and construed in accordance with the laws of the State of
Oregon. No provision contained in this Agreement shall be construed
(a) as requiring Lender to grant to Borrower or to Creditor any
financial assistance or other accommodations, or (b) as limiting or
precluding Lender from the exercise of Lender's own judgment and
discretion about amounts and times of payment in making loans or
extending accommodations to Borrower.

AMENDMENTS. This Agreement constitutes the entire understanding and
agreement of the parties as to the matters set forth in this
Agreement. No alteration of or amendment to this Agreement shall be
effective unless made in writing and signed by Lender, Borrower, and
Creditor.

ARBITRATION. LENDER AND CREDITOR AND BORROWER AGREE THAT ALL
DISPUTES, CLAIMS AND CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL,
JOINT, OR CLASS IN NATURE, ARISING FROM THIS AGREEMENT OR OTHERWISE,
INCLUDING WITHOUT LIMITATION CONTRACT AND TORT DISPUTES, SHALL BE
ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN ARBITRATION
ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to take or dispose
of any Collateral shall constitute a waiver of this arbitration
agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a
temporary restraining order; foreclosing by notice and sale under any
deed of trust or mortgage, obtaining a writ of attachment or
imposition of a receiver, or exercising any rights relating to
personal property, including taking or disposing of such property with
or without judicial process pursuant to Article 9 of the Uniform
Commercial Code. Any disputes, claims, or controversies concerning
the lawfulness or reasonableness of any act, or exercise of any right,
concerning any Collateral, including any claim to rescind, reform, or
otherwise modify any agreement relating to the Collateral, shall also
be arbitrated, provided however that no arbitrator shall have the
right or the power to enjoin or restrain any act of any party.
Judgment upon any award rendered by any arbitrator may be entered in
any court having jurisdiction. Nothing in this Agreement shall
preclude any party from seeking equitable relief from a court of
competent jurisdiction. The statute of limitations, estoppel, waiver,
laches, and similar doctrines which would otherwise be applicable in
an action brought by a party shall be applicable in any arbitration
proceeding, and the commencement of an arbitration proceeding shall be
deemed the commencement of an action for these purposes. The Federal
Arbitration Act shall apply to the construction, interpretation, and
enforcement of this arbitration provision.

ATTORNEYS' FEES; EXPENSES. Creditor and Borrower agree to pay upon
demand all of Lender's costs and expenses, including attorneys' fees
and Lender's legal expenses incurred in connection with the
enforcement of this Agreement. Lender may pay someone else to help
enforce this Agreement, and Creditor and Borrower shall pay the costs
and expenses of such enforcement. Costs and expenses include Lender's
attorneys' fees and legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal
<PAGE>
09-09-1996 SUBORDINATION AGREEMENT
Loan No (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
expenses for bankruptcy proceedings (and including efforts to modify
or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Creditor and
Borrower also shall pay all court costs and such additional fees as
may be directed by the court.

SUCCESSORS. This Agreement shall extend to and bind the respective
heirs, personal representatives, successors and assigns of the parties
to this Agreement, and the covenants of Borrower and Creditor
respecting subordination of the Subordinated Indebtedness in favor of
Lender shall extend to, include, and be enforceable by any transferee
or endorsee to whom Lender may transfer any or all of the Superior
Indebtedness.

WAIVER. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is given in writing and signed by
Lender. No delay or omission on the part of Lender in exercising any
right shall operate as a waiver of such right or any other right. A
waiver by Lender of a provision of this Agreement shall not prejudice
or constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing
between Lender and Creditor, shall constitute a waiver of any of
Lender's rights or of any of Creditor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance
shall not constitute continuing consent to subsequent instances where
such consent is required and in all cases such consent may be granted
or withheld in the sole discretion of Lender.

BORROWER AND CREDITOR ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS
SUBORDINATION AGREEMENT, AND BORROWER AND CREDITOR AGREE TO ITS TERMS.
THIS AGREEMENT IS DATED AS OF SEPTEMBER 9, 1996.

BORROWER:

LITHIA MOTORS, INC.

BY:
------------------------------------------
LITHIA MOTORS, INC.,
BY: SIDNEY B. DEBOER, PRESIDENT

BY:
------------------------------------------
LITHIA'S GRANTS PASS AUTO CENTER, L.L.C.,
BY: LITHIA MOTORS, INC. MANAGING MEMBER
BY: SIDNEY DEBOER, PRESIDENT

BY:
------------------------------------------
LITHIA DODGE L.L.C.,
BY: LITHIA MOTORS, INC.
MANAGING MEMBER
BY: SIDNEY DEBOER, PRESIDENT

BY:
------------------------------------------
LITHIA TLM L.L.C.,
BY: LITHIA MOTORS, INC.
MANAGING MEMBER
BY: SIDNEY DEBOER, PRESIDENT
<PAGE>
09-09-1996 SUBORDINATION AGREEMENT
Loan No (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDITOR:

SIDNEY B. DEBOER
BY:
------------------------------------------

LENDER:

UNITED STATES NATIONAL BANK OF OREGON

BY:
------------------------------------------
AUTHORIZED OFFICER

<PAGE>

EXHIBIT 10.18.1

FLOOR PLAN ACCOMMODATION AGREEMENT
(Security Agreement)

- -------------------------------------------------------------------------------
DEALER PRINCIPAL PLACE OF BUSINESS
LITHIA MOTORS, INC. 360 E. JACKSON
MEDFORD, OR 97504
- -------------------------------------------------------------------------------

Executed at MEDFORD State of OREGON this 9TH day of SEPTEMBER 1996.

Dealer Is engaged In the business of selling and leasing personal properly, and
from time to time will require financial assistance to floor its inventory
personal property held for sale or lease. In order to induce UNITED STATES
NATIONAL BANK OF OREGON (hereinafter "Lender") to make loans to Dealer from time
to time to facilitate the purchase or retention of inventory held for sale or
lease, Dealer agrees as follows:

1.0 COLLATERAL

Dealer hereby grants to Lender a security interest in

1.1 All inventory of Dealer held for sale or lease (including but not
limited to trade-ins, repossessions, and inventory held for display or
demonstration purposes), whether now owned or hereafter acquired;

1.2 All accounts, chattel paper including but not limited to contracts and
leases generated from the sale or lease of all inventory) and general
intangibles, whether now owned or hereafter acquired; and

1.3 Proceeds of all the foregoing.
(hereinafter collectively "the Collateral").

2.0 OBLIGATIONS

2.1 The security interest granted hereby is to secure payment and
performance of all liabilities and obligations of Dealer to Lender of every kind
and description, direct or indirect, absolute or contingent (including but not
limited to obligations as guarantor, surety or endorser), due or to become due
whether now existing or hereafter arising (hereinafter "Obligations").

3.0 LOANS; PROMISSORY NOTES

3.1 Insofar as Dealer may request and Lender may be willing in its
discretion to make loans to Dealer, each such loan shall be evidenced by
Dealer's promissory note payable on such terms as Lender may accept.

3.2 Lender may, in its discretion, prepare a Schedule of Collateral
Security, either in connection with a promissory note or otherwise, identifying
advances made by the Lender with regard to particular items of Collateral. The
existence or utilization of any such Schedules shall not affect the extent of
the security interest granted under paragraphs 1 and 2 above.

3.3 Dealer agrees that all loans by Lender hereunder will be used either
to acquire or retain ownership of inventory and/or to pay Obligations of Dealer
to Lender. Lender is authorized to disburse any loan made hereunder to persons
supplying inventory to Dealer without any authorization other than contained
herein.

3.4 Dealer understands that although Dealer may execute and deliver
promissory notes to Lender which are payable on demand, Lender may, prior to
demand, require curtailment payments on such notes.

<PAGE>

3.5 Regardless of the maturity of any note, immediately upon disposition
(by sale, lease or otherwise) of any Collateral, Dealer agrees to pay Lender in
cash the amount, together with accrued interest thereon, which Lender has
specifically loaned or advanced against the Collateral which has been disposed
of.

4.0 LOCATION, MAINTENANCE AND INSPECTION OF COLLATERAL

4.1 Dealer will keep all Collateral on premises owned or leased by Dealer
at all times except while such property is in transit or while such property is
being moved from one of premises owned or leased by Dealer to another such
premises. Regardless of this paragraph 4.1 Dealer may part with the possession
of certain units of Collateral for reasonable periods of time as may be
necessary for demonstration purposes, provided that the Dealer has first
received written permission from the Lender to use the units for this purpose.

4.2 Dealer shall maintain all Collateral in good condition and repair and
not commit or permit damage to or destruction of any of the Collateral Lender
and its designated representatives and agents shall have the right at all
reasonable times to examine, inspect, and audit the Collateral, wherever
located.

4.3 Dealer will immediately report to Lender any event causing loss of or
unusual depreciation in value of Collateral. Dealer will deliver to Lender from
time to time such reports concerning Collateral as Lender may request.

5.0 PLACES OF BUSINESS; INSPECTION OF RECORDS; NOTIFICATION OF ACCOUNT DEBTORS

5.1 Dealer will promptly notify Lender in writing of any addition to,
change in, or discontinuance of, its place or places of business.

5.2 Lender shall be permitted to examine all records and books of account
pertaining to the Collateral at any reasonable time.

5.3 Lender may at any time notify account debtors on any Collateral that
the Collateral has been assigned to Lender and that the proceeds thereof shall
be paid to Lender. Upon request of Lender, Dealer will so notify such account
debtors and will indicate on all billings to such account debtors that the
amounts are payable to Lender.

6.0 DISPOSITION OF COLLATERAL

6.1 Dealer may sell Collateral in the ordinary course of business for cash
or on terms approved in advance by Lender except that no Collateral shall be
sold on open account without the express permission of Lender.

6.2 Immediately upon any sale, lease or other disposition of any
Collateral, regardless of the terms thereof, Dealer agrees to pay to Lender in
cash the amount, together with interest accrued thereon, which Lender has
specifically named or advanced against the Collateral so disposed of.

6.3 Dealer shall hold the entire proceeds of all dispositions of
Collateral in trust for Lender and immediately deliver such proceeds to Lender
and render a full accounting to Lender with respect to such proceeds.

7.0 FINANCING STATEMENTS: CERTIFICATES OF TITLE

7.1 Whenever requested by Lender, Dealer will execute one or more
financing statements satisfactory to Lender. A carbon, photographic or other
reproduction of this security agreement or any financing statement shall be
sufficient as a financing statement.

7.2 If any Collateral is covered or may be covered by a certificate of
title, Dealer will deliver the certificate of title or certificate of origin to
the Lender with the necessary authority to enable the Lender to have a
certificate of title issued with its security interest noted thereon.

8.0 INSURANCE; TAXES; LIENS

<PAGE>

8.1 Dealer assumes all risk of loss to the Collateral and shall insure the
Collateral at its own expense against loss by fire, theft, and other risks
designated by Lender for at least the cost of such Collateral, including
collision insurance on demonstrators with deductible amount as approved by the
Lender. Each policy shall be with a company and in a form acceptable to the
Lender with the Lender's loss payable clause attached, and each policy shall be
delivered to Lender.

8.2 Dealer will promptly pay when due all taxes, assessments and liens
upon the Collateral.

8.3 Upon Dealer's failure to pay any amounts required to be paid
hereunder, including insurance, taxes, assessments and liens on the Collateral,
Lender may make such payments and any amount so paid shall be secured by all
Collateral, shall be due on demand and shall bear interest until paid at such
lawful rate as Lender may fix. In the event Lender must obtain insurance for
any of the Collateral, Dealer will perform all repair work at its actual cost
with respect to the Collateral made necessary on account of any casualty covered
by insurance.

9.0 EVENTS OF DEFAULT

The following shall constitute Events of Default:

9.1 Default in the performance of any covenant or condition of this
Agreement or of any agreement, note or other instrument executed in connection
with this Agreement;

9.2 Nonpayment by Dealer when due of all or any part of Dealer's
Obligations to Lender and specifically nonpayment of any amount due hereunder
upon sale by Dealer of any of the Collateral;

9.3 Default by Dealer in the performance of any other obligation to Lender
whether or not in connection with this Agreement;

9.4 Any warranty or representation furnished to Lender proves to have been
false when furnished;

9.5 Loss, theft, damage, destruction, loan, consignment, mortgage, pledge
or sale of any of the Collateral (except as expressly herein permitted in the
ordinary course of business) or operation or use thereof except for display or
demonstration purposes with Lender's written permission;

9.6 Insolvency of Dealer, assignment by Dealer for the benefit of
creditors, filing by Dealer of a voluntary petition in bankruptcy, adjudication
that Dealer is bankrupt or appointment of receiver for assets of Dealer;

9.7 Continued decline in Dealer's net worth which, in Lender's opinion,
substantially increases Lender's risk;

9.8 Inadequacy of or decline in value of the Collateral or unsafe use or
misuse thereof which, In the Lender's opinion, substantially increases the
Lender's risk; or

9.9 Lender in good faith deems itself insecure such that it believes the
prospect of it receiving payment or performance under this Agreement is
impaired.

10.0 RIGHTS AND REMEDIES ON DEFAULT

In the event of any default by Dealer as defined in paragraph 9 above:

10.1 All Obligations of Dealer to Lender, whether represented by notes or
otherwise or whether incurred hereunder or otherwise shall, at Lender's option,
become immediately due and payable, except that in the case of an event of
default described in paragraph 9.6 above, such acceleration shall be automatic
and not optionable.

10.2 Lender may take possession of Collateral without legal process.

<PAGE>

10.3 Lender may require that Dealer assemble the Collateral and make it
available to Lender at a place reasonably convenient to both Dealer and Lender,
and Dealer waives all claims for damages arising from such taking.

10.4 With respect to any Collateral, Lender may give notice to Dealer of
its intention to sell the same and may, not more than five (5) days after the
serving or sending of such notice, sell the same for Dealer's account at public
or private sale and may, at a public sale, itself become a purchaser. Such
property may be sold in one or more sales, as Lender shall elect. The proceeds
of any such sale, whether public or private, shall be applied (i) to the payment
of the expenses of retaking, holding, preparing for the disposition of such
property including legal fees and expenses: (ii) then to the satisfaction of all
of Dealer's Obligations to Lender whether created pursuant to this Agreement or
otherwise; (iii) then to the satisfaction of subordinate security interests in
accordance with the Uniform Commercial Code of the state in which Lender is
located. Any surplus shall be paid to Dealer. Dealer shall be liable to Lender
for any deficiency. Notice of sale shall be deemed sufficiently given if in
writing and either (i) personally handed to Dealer, or (ii) sent by postpaid
ordinary mail to the Dealer's last known business address.

10.5 Lender shall have such other rights to which it is entitled by law.

10.6 All rights granted hereunder shall be cumulative.

11.0 ADDITIONAL SECURITY

11.1 Regardless of the adequacy of any security which Lender may at any
time hold hereunder and regardless of the adequacy of any other security which
Lender may obtain at any of its offices from Dealer in connection with any other
transaction, all deposits or other monies due from Lender to Dealer at any of
its offices shall constitute additional security for, and may be set off against
all Obligations secured hereby even though said Obligations may not then be due.

11.2 Any and all instruments, documents, policies and certificates of
insurance, securities, goods, accounts receivable, choses in action, cash,
property and the proceeds thereof owned by Dealer or in which Dealer has an
interest, which now or hereafter are at any time in possession or control of
Lender at any of its offices or in transit by mail or carrier to or from Lender
or in the possession of any third party acting in Lender's behalf, without
regard to whether Lender received the same in pledge, for safekeeping, as agent
for collection or transmission or otherwise or whether Lender has conditionally
released the same, shall constitute additional security for all Obligations
hereunder and may be applied at any time to any Obligations which are then due
whether by acceleration or otherwise.

11.3 Dealer hereby assigns to Lender all of its rights to any rebates,
credits, factory holdbacks, and incentive payments which may become due to
Dealer by the factory or distributor with respect to any of the Collateral, and
will pay the full amount of any such rebates, credits, factory holdbacks, and
incentive payments to Lender, as soon as the same are received for application
on Dealer's Obligations. Lender may collect any rebates, credits, factory
holdbacks or incentive payments directly from the factory or distributor whether
or not Dealer is in default on any Obligation to Lender, and may give
appropriate instructions to the factory or distributor for that purpose.

11.4 All reserves, however created, of Dealer in possession of Lender shall
also constitute additional security for Dealer's Obligations to Lender.

12.0 MISCELLANEOUS

12.1 Lender's waiver in any instance of any right hereunder shall not be
deemed a waiver of such right in any subsequent instance.

12.2 If Lender brings a suit or action to enforce the terms of this
Agreement or to recover damages for the breach hereof, it shall be entitled to
recover in addition to costs and disbursements allowed by law, such sums as the
court may adjudge reasonable for Lender's attorneys' fees in such suit or action
or on any appeal.

<PAGE>

12.3 This Agreement is hereby substituted for any prior Floor Plan
Accommodation Agreement heretofore executed by Dealer and Lender. Any notes
heretofore delivered by Dealer to Lender which refer to a prior Floor Plan
Accommodation Agreement shall be secured not only by such agreement but also by
this Floor Plan Accommodation Agreement (Security Agreement).

12.4 This Agreement shall inure to the benefit of and bind the successor
and assigns of Dealer and Lender.

12.5 The various headings in this Agreement are for purposes of convenience
only and are not considered a part hereof.

12.6 This Agreement constitutes the entire agreement between Lender and
Dealer and supersedes all prior and contemporaneous agreements, understandings,
representations, negotiations and discussions, whether oral or written, between
Lender and Dealer regarding the subject matter hereof. This Agreement may not
be modified in any manner except by a writing signed by an authorized
representative of the party being bound thereby.

13.0 APPOINTMENT OF ATTORNEY IN FACT

13.1 Dealer hereby appoints any officer of Lender as its true and lawful
attorney to sign and deliver to Lender on behalf of Dealer any note, financing
statement or any other writing which may be necessary or convenient in
connection herewith.

- -------------------------------------------------------------------------------
LENDER DEALER
UNITED STATES NATIONAL BANK OF OREGON LITHIA MOTORS, INC.
- -------------------------------------------------------------------------------
BY TITLE BY OFFICER, FIRM, MEMBER, OWNER

X X
---------------------------- -----------------------------
- -------------------------------------------------------------------------------

<PAGE>

EXHIBIT 10.18.2

CORPORATE RESOLUTION TO GUARANTEE

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
$5,288,154.00 06/11/1996 7275 5310685 52393
- ----------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>

Borrower: Lithia Properties, L.L.C. Lender: United States National
360 E. Jackson Bank of Oregon
Medford, OR 97504 Dealer Finance Division
131 E. Main
Medford, OR 97501

Guarantor: Lithia Motors, Inc.
360 E. Jackson
Medford, OR 97501

I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF LITHIA MOTORS, INC.
(THE "CORPORATION"), HEREBY CERTIFY that the Corporation is organized and
existing under and by virtue of the laws of the State of Oregon with its
principal office at 360 E. Jackson, Medford, OR 97501.

I FURTHER CERTIFY that at a meeting of the Directors of the Corporation,
duly called and hold on _____________________, at which a quorum was present and
voting, or by other duly authorized corporate action in lieu of a meeting, the
following resolutions were adopted:

BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:

NAME POSITION ACTUAL SIGNATURE

Sidney B. DeBoer President X
-----------------------
acting for and on behalf of the Corporation and as its act and deed be, and he
or she hereby is, authorized and empowered:

GUARANTY. To guarantee or act as surety for loans or other financial
accommodations to Lithia Properties, L.L.C. from United States National
Bank of Oregon ("Lender") on such guarantee or surety terms as may be
agreed upon between the officers or employees of this Corporation and
Lender and in such sum or sums of money as in his or her judgment should be
guaranteed or assured, without limit (the "Guaranty").

GRANT SECURITY. To mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the Guaranty, any
property now or hereafter belonging to the Corporation or in which the
Corporation now or hereafter may have an interest, including without
limitation all real property and all personal property (tangible or
intangible) of the Corporation. Such property may be mortgaged, pledged,
transferred, endorsed, hypothecated, or encumbered at the time such loans
are obtained or such indebtedness is incurred, or at any other time or
times, and may be either in addition to or in lieu of any property
theretofore mortgaged, pledged, transferred, endorsed, hypothecated, or
encumbered. The provisions of these Resolutions authorizing or relating to
mortgage, transfer, endorsement hypothecation, granting of a security
Interest in, or In any way encumbering, the assets of the Corporation shall
include without limitation, doing so in order to lend collateral security
for the Indebtedness, now or hereafter existing, and of any nature
whatsoever, of Lithia Properties, L.L.C. to Lender. The Corporation has
considered the value to itself of lending collateral in support of such
indebtedness, and the Corporation represents to Lender that the Corporation
is benefited by doing so.

<PAGE>

EXECUTE SECURITY DOCUMENTS. To execute and deliver to Lender the forms of
mortgage, deed of trust, pledge agreement, hypothecation agreement, and
other security agreements and financing statements which may be submitted
by Lender, and which shall evidence the terms and conditions under and
pursuant to which such liens and encumbrances, or any of them, are given;
and also to execute and deliver to Lender any other written instrument, any
chattel paper, or any other collateral, of any kind or nature, which he or
she may in his or her discretion deem reasonably necessary or proper in
connection with or pertaining to the giving of the liens and encumbrances.

FURTHER ACTS. To do and perform such other acts and things and to execute
and deliver such other documents and agreements as he or she may in his or
her discretion deem reasonably necessary or proper in order to carry into
effect the provisions of these Resolutions.

BE IT FURTHER RESOLVED, that the Corporation will notify Lender in writing
at Lender's address shown above (or such other addresses as Lender may designate
from time to time) prior to any (a) change in the name of the Corporation, (b)
change in the assumed business name(s) of the Corporation, (c) change in the
management of the Corporation, (d) change in the authorized signer(s) or (e)
change in any other aspect of the Corporation that directly or indirectly
relates to any agreements between the Corporation and Lender. No change in the
name of the Corporation will take affect until star Lender has been notified.

BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these Resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Lender may rely on these Resolutions until written notice of his or
her revocation shall have been delivered to and received by Lender. Any such
notice shall not affect any of the Corporation's agreements or commitments in
effect at the time notice is given.

I FURTHER CERTIFY that the officer, employee, or agent named above is duly
elected, appointed or employed by or for the Corporation, as the case may be,
and occupies the position set opposite the name; that the foregoing Resolutions
now stand of record on the books of the Corporation; and that the Resolutions
are in full force and effect and have not been modified or revoked in any manner
whatsoever.

IN TESTIMONY WHEREOF, I HAVE HEREBY SET MY HAND ON JUNE 11, 1996 AND ATTEST
THAT THE SIGNATURES SET OPPOSITE THE NAMES LISTED ABOVE ARE THEIR GENUINE
SIGNATURES.

CERTIFIED TO AND ATTESTED BY:

X
---------------------------------------

NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, it is advisable to have
this certificate signed by a second Officer or Director of the Corporation.

- --------------------------------------------------------------------------------

<PAGE>

EXHIBIT 10.20.1

MANAGEMENT CONTRACT

THIS AGREEMENT made and entered into this 1st day of October, 1996, by and
between LITHIA MOTORS, INC., hereinafter designated as "First Party", and LITHIA
PROPERTIES, L.L.C., designated as "Party of the Second Part". This agreement
supersedes all prior management agreements and amendments.

Party of The First Part, an entity having expertise and skills in various
specialties that are of need by Party of the Second Part, does herewith enter
into a formal agreement to furnish and provide services as herein outlined for
compensation as here set forth:

I. DESCRIPTION OF SERVICES:

1. Furnishing of bookkeeping and accounting services on a daily, monthly
and annual basis.

2. Furnishing of computer services to facilitate the aforesaid
bookkeeping and accounting activities.

3. Furnishing full computer and computer software services, including
required expertise in surveillance, maintenance and repair of same.

4. Developing software packages and arranging purchases of
supplies, software and hardware, as needed for both the ADP and Altos computers.

5. Instructing Party of the Second Part personnel in the use of computer
hardware and software.

6. Creating and maintaining the management information system reports to
facilitate dissemination of information on sales goals and achievements to
appropriate Party of the Second Part personnel.

7. Preparing, maintaining and supervising books involving investments as
well as the administering and procurement of investments.

8. Organizing, supervising and detailing preliminary information needed
for business tax returns, financial statements and other corporate records for
income tax and loan requirements.

9. Planning, handling and overseeing all advertising for company sales
efforts.

10. Providing executive management services of top level officers. These
services shall include the full range of executive authority and surveillance to
assure that all company policies have been appropriately conducted and carried
out.

<PAGE>

It is recognized that these services of high level performance are critical
to the successful operation of this company, and such services are required
without limitation in order to effect an optimum result for the company. Such
services shall entail intensive time and effort on the part of executive
management.

11. Providing supervisory management services on a department head level
including, but not limited to, sales advertising office and audit, Bill Daves
shall act as head of sales and advertising department, functioning in a full
time consultation basis. Dorothy Crockett shall head the office and auditing
department and shall function on a full time basis. Nothing herein shall
preclude Party of the First Part from obtaining replacements for any of said
department heads at the exclusive discretion and choice of Party of the First
Part.

II. COMPENSATION TO PARTY OF THE FIRST PART FOR THE FOREGOING SERVICES:

For services rendered, LITHIA PROPERTIES, L.L.C., agrees to pay the sum of
$36,000.00 per month. If Party of the First Part provides services by its
employees beyond the normal management functions as provided for herein then
Party of the First Part shall be compensated at 111% of said employee's salary
for the time period he/she devotes beyond the normal functions to Party of the
Second Part. From time-to-time both parties may agree to compensation in
amounts other than stated above for unusual situations and without the necessity
of modification of this agreement.

II24. GENERAL STATEMENT OF RESPONSIBILITIES OF PARTY OF THE FIRST PART:

Party of the First Part shall conscientiously attend to all of the services
and detail set forth above and shall exercise its discretion in terms of
providing the services here contemplated. Notwithstanding name and ownership
similarities, as between the parties hereto, each is an independent contractor.
Neither is employee, agent or servant of the other, so that except as herein
provided, there shall not be considered the imputation of vicarious liability
unto the other because of the acts or omissions on the part of one.

IV. RESPONSIBILITY OF PARTY OF THE SECOND PART:

Party of the Second Part shall promptly furnish to Party of the First Part
all documents and records required for the management and consultation services
here described. Any and all occurrences that would impact on the
responsibilities and duties of Party of the First Part shall be forthwith and
immediately communicated by Party of the Second Part, their agents, servants and
employees, unto the appropriate employees of Party of the First Part.

<PAGE>

Party of the First Part shall not be required to advance funds for the
account of Party of the Second Part. However, should Party of the First Part
make payments for the account of the other party, upon notification to the
obligated part, that party shall immediately remit unto Party of the First Part
sufficient funds to remove any deficit or to cure any advance.

All payments required from Party of the Second Part, not limited only to
the compensation due Party of the First Part, shall be timely paid and, where
required on a monthly basis, shall be paid prior to the tenth day of the month
immediately following the month that the obligation was incurred.

V. TERM OF AGREEMENT:

This agreement shall commence on the date hereof and shall continue until
December 31, 1996 whereupon this agreement shall

<PAGE>

terminate. Further, it is acknowledged that this agreement may be changed from
time to time as necessity dictates.

IN WITNESS of the understanding and agreement of the parties, they have
entered into this agreement this 1st day of October, 1996.

PARTY OF THE FIRST PART: PARTY OF THE SECOND PART:
LITHIA MOTORS, INC. LITHIA PROPERTIES, L.L.C.

[Signature] [Signature]
- ------------------------------ -------------------------------

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
Lithia Motors, Inc. and Affiliated Companies

We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" and "Selected Combined Financial Data"
in the prospectus.

/s/ KPMG Peat Marwick LLP

Portland, Oregon
October 31, 1996

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
Roberts Dodge, Inc. and Affiliated Companies

We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.

/s/ KPMG Peat Marwick LLP

Portland, Oregon
October 31, 1996

<PAGE>

EXHIBIT 23.3

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 17, 1996 on our audits of the financial
statements of Sam Linder, Inc. in the Lithia Motors, Inc. Registration
Statement (No. 333-14031) dated October 31, 1996 for the registration of
Common Stock.

Moss Adams LLP

Seattle, Washington
October 31, 1996

<PAGE>

EXHIBIT 23.4

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 17, 1996 on our audits of the financial
statements of Melody Vacaville, Inc. in the Lithia Motors, Inc. Registration
Statement (No. 333-14031) dated October 31, 1996 for the registration of
Common Stock.

Moss Adams LLP

Seattle, Washington
October 31, 1996