UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


             [ X ][X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the Quarterly Period Ended November 30, 2003May 31, 2004

                                       OR

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

                         Commission File Number: 1-31420

                                  CARMAX, INC.
             (Exact name of registrant as specified in its charter)

              VIRGINIA                                        54-1821055
  (State or other jurisdiction of                          (I.R.S. Employer
   incorporation or organization)                         Identification No.)

   4900 COX ROAD, GLEN ALLEN, VIRGINIA                          23060
 (Address of principal executive offices)                     (Zip code)

                                 (804) 747-0422
              (Registrant's telephone number, including area code)

                                       N/A
                     (Former name, former address and former
                   fiscal year, if changed since last report)


Indicate by check mark whether the Registrantregistrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrantregistrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

      Yes   X                                                     No
          -----                                                      -----

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

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.


            Class                                  Outstanding at December 31, 2003June 30, 2004
- -----------------------------                      ------------------------------------------------------------
Common Stock, par value $0.50                              103,742,884104,012,604


An Index is included on Page 2 and a separate Exhibit Index is included on Page
28.29.



                          CARMAX, INC. AND SUBSIDIARIES

                                      INDEX

 


                                                  CARMAX, INC. AND SUBSIDIARIES
                                                  -----------------------------

                                                        TABLE OF CONTENTS
                                                        -----------------

                                                                                                                      Page
                                                                                                                       No.
                                                                                                                       ---
PART I.           FINANCIAL INFORMATION
                  ---------------------

      Item 1.     Consolidated Financial Statements:

                     Consolidated Statements of Earnings -
                     Three Months Ended May 31, 2004 and Nine Months Ended November 30, 2003 and 2002                                                          3

                     Consolidated Balance Sheets -
                     November 30, 2003May 31, 2004, and February 28, 200329, 2004                                                               4

                     Consolidated Statements of Cash Flows -
                     NineThree Months Ended November 30,May 31, 2004 and 2003 and 2002                                                          5

                     Notes to Consolidated Financial Statements                                                        6

      Item 2.     Management's Discussion and Analysis of Financial Condition and Results
                  of Operations                                                                                       14

      Item 3.     Quantitative and Qualitative Disclosures About Market Risk                                         24

      Item 4.     Controls and Procedures                                                                             25


PART II.          OTHER INFORMATION
                  -----------------

      Item 1.     Legal Proceedings                                                                                   26

      Item 4.     Submission of Matters to a Vote of Security Holders                                                 26

      Item 6.     Exhibits and Reports on Form 8-K                                                                    2627


SIGNATURES                                                                                                            2728
- ----------


EXHIBIT INDEX                                                                                                         2829
- -------------











Page 2 of 2829



                                              PART I. FINANCIAL INFORMATION

                                              ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS



                                             CARMAX, INC. AND SUBSIDIARIES
                                             -----------------------------
                                     Consolidated Statements of Earnings (Unaudited)
                                     -----------------------------------------------
                                         (Amounts in(In thousands except per share data)


                                                                                   Three Months Ended Nine Months Ended
                                                          November 30                                    November 30
                                         ------------------------------------------      ------------------------------------------
                                           2003       %(1)         2002May 31

                                                                          2004         %(1)           2003       %(1)       2002         %(1)
                                           ----       ----         ----        ----
                                                                          ----         ----           ----       ----
Sales and operating revenues:
     Used vehicle sales                                              $    797,752985,375      74.4     $   690,318      73.7    $ 2,626,620    75.5   $ 2,212,925      73.2890,142      75.9
     New vehicle sales                                                    122,681     11.4        117,849      12.6        398,680    11.5       402,053      13.3136,765      10.3         136,399      11.6
     Wholesale vehicle sales                                              111,352     10.4         87,493       9.3        325,080     9.3       277,617       9.2156,871      11.8         100,733       8.6
     Other sales and revenues                                              39,749      3.7         41,159       4.4        130,446     3.7       130,709       4.3
                                       ----------     ----    -----------      ----    -----------    ----   -----------      ----45,979       3.5          45,561       3.9
                                                                     ------------------------------------------------
Net sales and operating revenues                                        1,071,5341,324,990     100.0       936,819     100.0      3,480,826   100.0     3,023,3041,172,835     100.0
Cost of sales                                                           945,292     88.2        829,879      88.6      3,043,7081,157,760      87.4       2,665,410      88.2
                                       ----------     ----    -----------      ----    -----------    ----   -----------      ----1,025,064      87.4
                                                                     ------------------------------------------------
Gross profit                                                              126,242     11.8        106,940      11.4        437,118167,230      12.6         357,894      11.8147,771      12.6
CarMax Auto Finance income 17,649(Notes 3 and 4)                                 21,816       1.6          19,220       2.1         66,074     1.9        61,168       2.0
    (Notes 5 and 6)25,748       2.2
Selling, general, and administrative expenses                             114,282     10.7        101,810      10.9        350,549    10.1       292,844       9.7

Gain on franchise dispositions, net         1,207      0.1              -         -            746       -             -         -130,688       9.9         115,553       9.9
Interest expense                                                              493         -             -            299         -          1,137       -         1,714754       0.1
Interest income                                                                16453         -             274122         -
                                                                     468       -           568         -
                                       ----------     ----    -----------      ----    -----------    ----   -----------      ----------------------------------------------------
Earnings before income taxes                                               30,980      2.9         24,325       2.6        152,72057,918       4.4          125,072       4.157,334       4.9
Provision for income taxes                                                 11,927      1.1          9,608       1.0         58,79722,588       1.7          49,403       1.6
                                       ----------     ----    -----------      ----    -----------    ----   -----------      ----22,074       1.9
                                                                     ------------------------------------------------
Net earnings                                                         $     19,053      1.8    $    14,717       1.6    $    93,92335,330       2.7     $    75,669       2.5
                                       ==========     ====    ===========      ====    ===========    ====   ===========      ====35,260       3.0
                                                                     ================================================

Weighted average common shares (Note 3)7):
     Basic                                                                103,647                 103,047                  103,428               102,973
                                       ==========             ===========              ===========103,864                   103,156
                                                                     ============               ===========
     Diluted                                                              105,955                 104,516                  105,526               104,602
                                       ==========             ===========              ===========105,774                   104,762
                                                                     ============               ===========
Net earnings per share (Note 3)7):
     Basic                                                           $       0.180.34               $      0.14              $      0.91           $      0.73
                                       ==========             ===========              ===========0.34
                                                                     ============               ===========
     Diluted                                                         $       0.180.33               $      0.14              $      0.89           $      0.72
                                       ==========             ===========              ===========0.34
                                                                     ============               ===========


(1) Percentages are calculated asEach percentage represents a percentageratio of the applicable amount to net sales and
    operating revenues. Percentages may not total due to rounding.

See accompanying notes to consolidated financial statements.



Page 3 of 2829







                                                 CARMAX, INC. AND SUBSIDIARIES
                                                 -----------------------------
                                                  Consolidated Balance Sheets
                                                  ---------------------------
                                                (Amounts in(In thousands except share data)


                                                                                    Nov. 30, 2003May 31, 2004          Feb. 28, 2003
                                                                                     -------------29, 2004
                                                                                    ------------          -------------
                                                                                    (Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents (Note 2)                                                   $     54,96261,676          $     34,61561,643
Accounts receivable, net                                                                   60,853                56,44992,624                72,358
Automobile loan receivables held for sale (Note 6)                                         18,997                 3,5794)                                         25,137                18,781
Retained interests in securitized receivables (Note 6)                                    135,004               135,0164)                                    126,431               145,988
Inventory                                                                                 449,744               466,450523,666               466,061
Prepaid expenses and other current assets                                                   10,328                12,636
                                                                                       ----------            ----------6,959                 8,650
                                                                                     ------------          ------------

Total current assets                                                                      729,888               708,745836,493               773,481

Property and equipment, net                                                               239,553               187,158267,509               244,064
Deferred income taxes                                                                           3,505                     -                   185
Other assets                                                                               20,360                21,714
                                                                                       ----------            ----------19,255                19,287
                                                                                     ------------          ------------

TOTAL ASSETS                                                                         $  993,306              $917,617
                                                                                       ==========            ==========1,123,257          $  1,037,017
                                                                                     ============          ============

LIABILITIES AND STOCKHOLDERS'SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable                                                                     $127,899            $    117,587156,408          $    145,517
Accrued expenses and other current liabilities                                             49,984                44,68250,226                55,674
Accrued income taxes                                                                       9,355                     -21,891                 4,050
Deferred income taxes                                                                      28,677                29,78331,957                32,711
Short-term debt                                                                            6,267                56,051
                                                                                       ----------            ----------28,182                 4,446
                                                                                     ------------          ------------

Total current liabilities                                                                 222,182               248,103288,664               242,398

Long-term debt, excluding current installments                                            100,000               100,000
Deferred revenue and other liabilities                                                     13,319                10,90414,713                13,866
Deferred income taxes                                                                         376                     -
                                                                                     4,041
                                                                                       ----------            ----------------------          ------------

TOTAL LIABILITIES                                                                         335,501               363,048

Stockholders' equity (Note 1):403,753               356,264
                                                                                     ------------          ------------

Shareholders' equity:
Common stock, $0.50 par value $0.50; authorized:value; 350,000,000 shares;shares authorized;
       103,972,950 and 103,778,461 shares issued and outstanding 103,727,592 shares at
       November 30, 2003,May 31, 2004, and 103,083,047 shares at February 28, 2003                        51,864                51,54229, 2004, respectively                                   51,986                51,889
Capital in excess of par value                                                            481,736               472,745485,456               482,132
Retained earnings                                                                         124,205                30,282
                                                                                       ----------            ----------182,062               146,732
                                                                                     ------------          ------------

TOTAL STOCKHOLDERS'SHAREHOLDERS' EQUITY                                                                657,805               554,569
                                                                                       ----------            ----------719,504               680,753
                                                                                     ------------          ------------

Commitments and contingent liabilities (Note 1)6)                                                 -                     -

TOTAL LIABILITIES AND STOCKHOLDERS'SHAREHOLDERS' EQUITY                                           $  993,3061,123,257          $  917,617
                                                                                       ==========            ==========1,037,017
                                                                                     ============          ============

See accompanying notes to consolidated financial statements.

Page 4 of 2829




                                            CARMAX, INC. AND SUBSIDIARIESCarMax, inc. and subsidiaries
                                            -----------------------------
                                  Consolidated Statements of Cash Flows (Unaudited)
                                  -------------------------------------------------
                                                   (Amounts in(In thousands)


                                                                                NineThree Months Ended November 30May 31
                                                                              2004                    2003
                                                                          2002
                                                                            --------                -------------------             -----------
Operating Activities:
- ---------------------
Net earnings                                                              $   93,92335,330              $   75,66935,260
Adjustments to reconcile net earnings to net
    cash provided by operating activities:
    Depreciation and amortization                                              12,253                  11,9504,282                   4,063
    Amortization of restricted stock awards                                       94                      45
    (Gain) loss31                      32
    Gain on disposition of assets                                                (588)                    118(62)                      -
    Provision for deferred income taxes                                         (8,652)                  1,227(193)                 (6,974)
    Changes in operating assets and liabilities:
       Increase in accounts receivable, net                                  (4,404)                 (9,118)(20,266)                (17,491)
       Increase in automobile loan receivables held
         for sale                                                             (15,418)                (13,716)(6,356)                (16,849)
       Decrease (increase) in retained interests in securitized
         receivables                                                          12                 (19,847)
       Decrease (increase)19,557                 (10,004)
       (Increase) decrease in inventory                                      16,706                  (2,512)(57,605)                 36,064
       Decrease (increase) in prepaid expenses and
         other current assets                                                  2,308                  (5,432)1,691                   4,172
       Decrease (increase) in other assets                                                   1,999                    (847)32                   1,423
       Increase in accounts payable, accrued
         expenses and other current liabilities,
         and accrued income taxes                                             30,390                  32,82025,336                  41,856
       Increase in deferred revenue and other liabilities                        2,415                   2,384
                                                                        ------------            ------------847                   1,080
                                                                          ----------              ----------
Net cash provided by operating activities                                      131,038                  72,741
                                                                        ------------            ------------2,624                  72,632
                                                                          ----------              ----------

Investing Activities:
- ---------------------
Purchases of property and equipment                                          (137,201)                (71,318)(46,455)                (34,901)
Proceeds from sales of property and equipment                                 72,496                  37,926
                                                                        ------------            ------------18,790                       -
                                                                          ----------              ----------
Net cash used in investing activities                                        (64,705)                (33,392)
                                                                        ------------            ------------(27,665)                (34,901)
                                                                          ----------              ----------


Financing Activities:
- ---------------------
DecreaseIncrease (decrease) in short-term debt, net                                   (49,784)                 (5,355)
Issuance of long-term debt                                                         -                 100,000
Payments on long-term debt                                                         -                 (77,782)23,736                 (41,519)
Equity issuances, net                                                          3,798                     556
Dividends paid (Note 1)                                                            -                 (28,400)
                                                                        ------------            ------------1,338                   1,202
                                                                          ----------              ----------
Net cash used inprovided by (used in) financing activities                           (45,986)                (10,981)
                                                                        ------------            ------------25,074                 (40,317)
                                                                          ----------              ----------

Increase (decrease) in cash and cash equivalents                                  20,347                  28,36833                  (2,586)
Cash and cash equivalents at beginning of year                                61,643                  34,615
                                                                          3,286
                                                                        ------------            ----------------------              ----------
Cash and cash equivalents at end of period                                $   54,96261,676              $   31,654
                                                                        ------------            ------------32,029
                                                                          ==========              ==========


See accompanying notes to consolidated financial statements.

Page 5 of 2829




                          CARMAX, INC. AND SUBSIDIARIES
                          -----------------------------
                   Notes to Consolidated Financial Statements
                   ------------------------------------------
                                   (Unaudited)
1.   Basis of Presentation
   ---------------------

Prior to October 1, 2002,Background
     ----------

     CarMax, Inc. ("CarMax" and "the company"), including its wholly owned
     subsidiaries, is the leading specialty retailer of used cars and light
     trucks in the United States. CarMax was the first used vehicle retailer to
     offer a wholly
ownedlarge selection of quality used vehicles at low, "no-haggle" prices
     using a customer-friendly sales process in an attractive, modern sales
     facility. CarMax also sells new vehicles under various franchise
     agreements. CarMax provides its customers with a full range of related
     services, including the financing of vehicle purchases through its own
     finance operation, CarMax Auto Finance ("CAF"), and third-party lenders;
     the sale of extended warranties; and vehicle repair service.

     CarMax was formerly a subsidiary of Circuit City Stores, Inc. ("Circuit
     City Stores"City"). On that
date,October 1, 2002, the CarMax business was separated from Circuit
     City Stores  through a transaction  in
which each share of Circuit  City  Stores,  Inc.-CarMax  Group  Common Stock was
redeemed in exchange for one share of CarMax,  Inc.  common stock.  In addition,
each  holder of  Circuit  City  Stores,  Inc.-Circuit  City Group  Common  Stock
received as a tax-free distribution  a 0.313879  share of CarMax,  Inc.  common
stock for each share of Circuit City Group Common Stock.  Also, the CarMax board
of directors  approved a one-time  special  dividend payment of $28.4 million to
Circuit City Stores on the separation  date.transaction. As a result of the separation, all
of the businesses,  assets,  and liabilities of the CarMax Group are now held in
CarMax,
     Inc.,  which  is became an independent, separately traded public company.

CarMax's  assets and  liabilities  are  accounted for at the  historical  values
carried by Circuit  City  Stores  prior to the  separation.  These  consolidated
financial  statements are presented as if CarMax  existed as an entity  separate
from the other businesses of Circuit City Stores during the periods presented.

In conjunction with the separation,  all outstanding  CarMax Group stock options
and  restricted  stock  were  replaced  with  CarMax,  Inc.  stock  options  and
restricted  stock  with the same  terms and  conditions,  exercise  prices,  and
restrictions  as the  CarMax  Group  stock  options  and  restricted  stock they
replaced.

At the  separation  date,  Circuit City Stores and CarMax  executed a transition
services agreement and a tax allocation  agreement.  In the transition  services
agreement,  Circuit City Stores agreed to provide to CarMax  services  including
human resources, payroll, benefits administration, tax services, computer center
support, and telecommunications. The agreement specified initial service periods
ranging from six to twenty four months,  with varying renewal  options.  The tax
allocation  agreement provided that the pre-separation taxes attributable to the
business of each party be borne solely by that party.

2.   Accounting Policies
     -------------------

     Principles of Consolidation. CarMax's consolidated financial statements
     conform to accounting principles generally accepted in the United States of
     America. The interim period consolidated financial statements are
     unaudited; however, in the opinion of management, all adjustments, which
     consist only of normal, recurring adjustments necessary for a fair
     presentation of the interim consolidated financial statements, have been
     included. All significant intercompany balances and transactions have been
     eliminated.

     The fiscal year end balance sheet data were derived from the audited
     consolidated financial statements included in the company's annual reportAnnual Report
     on Form 10-K for the fiscal year ended February 28, 2003.

3. Net Earnings per Share
   ----------------------

CarMax was a wholly owned subsidiary of Circuit City Stores for a portion of the
quarter and nine months ended  November  30, 2002.  Earnings per share for these
periods have been presented29, 2004. The Notes to
     reflect the capital structure  effective with the
separation  of  CarMax  from  Circuit  City  Stores.   All  earnings  per  share
calculations  have  been  computed  as if the  separation  had  occurred  at the
beginning of the periods presented.

Page 6 of 28


Reconciliations of the numerator and denominator of the basic and diluted net
earnings per share are presented below:
                                                                         Three Months Ended                 Nine Months Ended
                                                                             November 30                       November 30
     (Amounts in thousands except per share data)                      2003            2002              2003           2002
     --------------------------------------------------------------------------------------------------------------------------

     Weighted average common shares.............................      103,647         103,047           103,428         102,973
     Dilutive potential common shares:
        Options.................................................        2,294           1,466             2,086           1,620
        Restricted stock........................................           14               3                12               9
                                                                  ---------------------------       ---------------------------
     Weighted average common shares
        and dilutive potential common shares....................      105,955         104,516           105,526         104,602
                                                                  ===========================       ===========================

     Net earnings available to common shareholders..............  $    19,053     $    14,717       $    93,923     $    75,669
     Basic net earnings per share...............................  $      0.18     $      0.14       $      0.91     $      0.73
     Diluted net earnings per share.............................  $      0.18     $      0.14       $      0.89     $      0.72

Certain options were  outstanding and not includedConsolidated Financial Statements contained in the computationAnnual Report should be
     read in conjunction with these consolidated financial statements.

     Cash and Cash Equivalents. Cash equivalents of diluted
net earnings per share  because the options'  exercise  prices$41.6 million and $48.9
     million at May 31, 2004, and February 29, 2004, respectively, consisted of
     highly liquid debt securities with original maturities of three months or
     less. Included in cash equivalents at May 31, 2004, and February 29, 2004,
     were greater than
the average market pricerestricted cash deposits of the common shares. As of November 30, 2003,  options$13.0 million, which were associated with
     certain insurance deductibles. Additional restricted cash related to
     purchase  18,364  shares of common  stocksecuritized auto loan receivables at prices  ranging  from $35.23 to
$43.44 per share were  outstandingMay 31, 2004, and not included in the  calculation.  As of
November 30, 2002,  options to purchase  1,046,510 shares at prices ranging from
$19.16 to $43.44 per share were outstandingFebruary 29, 2004,
     was $6.8 million and not included in the calculation.

4.$6.4 million, respectively.

     Stock-Based Compensation
   ------------------------Compensation. The company accounts for its stock-based
     compensation plans under the recognition and measurement principles of
     Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
     Employees," and related interpretations. Under this opinion and related
     interpretations, compensation expense is recorded on the date of grant and
     amortized over the period of service only if the market value of the
     underlying stock on the grant date exceeds the exercise price. No stock
     option-based employee compensation cost is reflected in net earnings, as
     options granted under those plans had an exercise priceprices equal to the market
     value of the underlying common stock on the date of grant. The following
     table illustrates the effect on net earnings and net earnings per share as
     if the fair valuefair-value-based method of accounting had been applied to all
     outstanding stock awards in each reported period as follows:period:

Page 6 of 29





                                                                                 Three Months Ended Nine Months Ended
                                                                     November 30                         November 30
     (Amounts inMay 31
     (In thousands except per share data)                                          2004            2003
     2002                  2003           2002
     ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

     Net earnings, as reported   ............................reported.............................................   $   19,05335,330         $   14,717            $   93,923       $   75,66935,260                       .

     Total additional stock-based compensation expenses
         determined under fair value basedthe fair-value-based method
         for all awards, net of related tax effects ..........      1,822         1,190                 5,077            3,298
                                                              ------------------------            ---------------------------effects........................        2,607              1,538
                                                                              --------------------------------

     Pro forma net earnings  ...............................earnings................................................   $   17,23132,723         $   13,527            $   88,846       $   72,371
                                                              ========================            ===========================33,722
                                                                              ================================

     Earnings per share:
         Basic, as reported..................................reported................................................   $     0.180.34         $     0.14            $     0.91       $     0.730.34
         Basic, pro forma....................................forma..................................................   $     0.170.32         $     0.13            $     0.86       $     0.700.33

         Diluted, as reported................................reported..............................................   $     0.180.33         $     0.14            $     0.89       $     0.720.34
         Diluted, pro forma..................................forma................................................   $     0.160.31         $     0.13            $     0.84       $     0.69

Page 7 of 28
0.32

     The pro forma effect on the thirdfirst quarter  and the first nine months of fiscal 20042005 may not be
     representative of the pro forma effects on net earnings and net earnings
     per share for future periods.

     5.Reclassifications. Certain prior year amounts have been reclassified to
     conform to the current year's presentation.

3.   CarMax Auto Finance Income
     --------------------------

     The company's finance operation, CarMax Auto Finance ("CAF"),CAF, originates automobile loans to
     prime-rated customers at competitive market rates of interest. The company
     sells substantially all of the loans it originates each month in
     a securitization transactiontransactions as discussed in Note 6.4. The majority of the
profit
     contribution from CAF is generated by the spread between the interest rate
     charged to the customer and the company's cost of funds. A gain, recorded
     at the time of theeach securitization transaction, results from recording a
     receivable approximately equal to the present value of the expected
     residual cash flows generated by the securitized receivables. The cash
     flows are calculated taking into account expected prepayment and default
     rates.

     CarMax Auto Finance income was as follows:
                                                                                     Three Months Nine Months
                                                                       Ended November 30             Ended November 30
     (Amounts inMay 31
     (In millions)                                                                       2004           2003
     2002          2003             2002
     ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

     Gains on sales of loans.....................................loans......................................................    $  12.915.5          $ 15.9         $  50.8         $ 49.6
                                                                     ---------------------         ----------------------19.7
                                                                                      -----------------------------

     Other income:
        Servicing fee income.....................................       5.6            4.5            16.0           12.6income......................................................        6.0             5.1
        Interest income..........................................       3.4            2.3            12.4            9.6
                                                                     ---------------------         ----------------------income...........................................................        5.0             5.1
                                                                                      -----------------------------
     Total other income..........................................       9.0            6.8            28.5           22.2
                                                                     ---------------------         ----------------------income...........................................................       11.0            10.2
                                                                                      -----------------------------

     Direct expenses:
        CAF payroll and fringe benefit expense...................       2.0            1.7             6.0            5.1expense....................................        2.2             1.9
        Other direct CAF expenses................................expenses.................................................        2.5             2.1
                                                                                      1.8             7.2            5.5
                                                                     ---------------------         ---------------------------------------------------
     Total direct expenses.......................................       4.2            3.5            13.2           10.6
                                                                     ---------------------         ----------------------expenses........................................................        4.7             4.1
                                                                                      -----------------------------

     CarMax Auto Finance income..................................income...................................................    $  17.621.8          $ 19.2         $  66.1         $ 61.2
                                                                     =====================         ======================25.7
                                                                                      =============================

     Amounts in the table above may not total due to rounding.

Page 7 of 29



     CarMax Auto Finance income does not include any allocation of indirect
     costs or income. The company presents this information on a direct basis to
     avoid making arbitrary decisions regarding the indirect benefit or costs
     that could be attributed to CAF. Examples of indirect costs not included
     are retail store expenses, retail financing commissions, and corporate
     expenses such as human resources, administrative services, marketing,
     information systems, accounting, legal, treasury, and executive payroll.

6.4.   Securitizations
     ---------------

     The company uses a securitization program to fund substantially all of the
     automobile loan receivables originated by CarMax Auto Finance.CAF. The company sells the
     automobile loan receivables to a wholly owned, bankruptcy-remote, special
     purpose entity that transfers an undivided interest in the receivables to a
     group of third-party investors. The special purpose entity and investors
     have no recourse to the company's assets forassets. The company's risk is limited to
     the principal  amount of the loans beyondretained interests on the company's retained interests.consolidated balance sheets. The
     investors issue commercial paper supported by the transferred receivables,
     and the proceeds from the sale of the commercial paper are used to pay for
     the securitized receivables. This program is referred to as the warehouse
     facility.

     The company periodically uses public securitizations to refinance the
     receivables previously securitized through the warehouse facility. This

Page 8 of 28


frees up capacity in the warehouse facility. In a
     public securitization, a pool of automobile loan receivables is sold to a
     bankruptcy-remote, special purpose entity that in turn transfers the
     receivables to a special purpose securitization trust. The securitization
     trust issues asset-backed securities, secured or otherwise supported by the
     transferred receivables, and the proceeds from the sale of the securities
     are used to pay for the securitized receivables. The earnings impact of
     refinancing receivables in a public securitization has not been material to
     the operations of the company. However, because securitization structures
     could change from time to time, this may not be representative of the
     potential impact of future securitizations.

     The transfers of receivables are accounted for as sales in accordance with
     SFASStatement of Financial Accounting Standards ("SFAS") No. 140, "Accounting
     for Transfers and Servicing of Financial Assets and Extinguishments of
     Liabilities." When the receivables are securitized, the company recognizes
     a gain or loss on the sale of the receivables as described in Note 5.3.

                                                                                Three Months Nine Months
                                                                   Ended November 30                  Ended November 30
     (Amounts inMay 31
     (In millions)                                                                     2004              2003
     2002                  2003           2002
     -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
     Net loans originated..................................originated.......................................................    $  327.8386.0         $   301.2368.9
     Loans sold.................................................................    $  1,084.5437.0         $   895.3
     Loans sold............................................  $   338.0       $   292.2           $   1,074.4      $  875.1358.0
     Gains on sales of loans...............................loans....................................................    $   12.915.5         $    15.9           $      50.8      $   49.619.7
     Gains on sales of loans as a percentage of loans sold..........................        3.8%            5.4%                  4.7%          5.7%sold......................         3.5%              5.5%


     Retained Interests. The company retains various interests in the automobile
     loan receivables that it securitizes. The retained interests, presented as
     current assets on the company's consolidated balance sheets, serve as a
     credit enhancement for the benefit of the investors in the securitized
     receivables. These retained interests include the present value of the
     expected residual cash flows generated by the securitized receivables, or
     "interest-only strip receivables," the restricted cash on deposit in
     various reserve accounts, and an undivided ownership interest in the
     receivables securitized through the warehouse facility and certain public
     securitizations, or "required excess receivables," as described below. The
     cash reserves and required excess receivables are generally 2% to 4% of
     managed receivables. The special purpose entities and the investors have no
     recourse to the company's assets beyondassets. The company's risk is limited to the
     retained interests.interests on the company's consolidated balance sheets. The fair
     value of the retained interests may fluctuate depending uponon the performance
     of the securitized receivables.

     RetainedThe fair value of retained interests balances  consistedwas $126.4 million as of the
following:

                                                                      As of November 30             AsMay 31, 2004,
     and $146.0 million as of February 28
     (Amounts in millions)                                           2003           2002           2003            2002
     --------------------------------------------------------------------------------------------------------------------
     Interest-only strip receivables............................  $   85.1       $   83.1        $   88.3       $   74.3
     Restricted cash............................................      33.4           39.2            33.3           34.7
     Required excess receivables................................      16.5           18.2            13.4           11.7
                                                                  -------------------------------------------------------
     Total retained interests in securitized receivables........  $  135.0       $  140.5        $  135.0       $  120.7
                                                                  =======================================================
     Amounts in the table above may not total due to rounding.29, 2004. The retained interests had a
     weighted average life of 1.5 years as of November
30, 2003,May 31, 2004, and 1.6 years as of February 28, 2003.29,
     2004. As defined in SFAS No. 140, the weighted average life in periods (for
     example, months or years) of prepayablepre-payable assets is calculated by

Page 8 of 29


     multiplying the principal collections expected in each future period by the
     number of periods until that future period, summing those products, and
     dividing the sum by the initial principal balance. Supplemental
credit enhancements which consistThe following is a
     detailed explanation of cash reserves and excess receivables are
generally 2% to 4%the components of managed receivables.retained interests.

     Interest-only strip receivables. Interest-only strip receivables represent
     -------------------------------
     the
- -------------------------------- present value of residual cash flows the company expects to receive
     over the life of the securitized receivables. The value of these
     receivables is determined by estimating the future cash flows using
     management's projectionsassumptions of

Page 9 of 28
 key factors, such as finance charge income,
     default rates, prepayment rates, and discount rates appropriate for the
     type of asset and risk. The value of interest-only strip receivables may be
     affected by external factors, such as changes in the behavior patterns of
     customers, changes in the strength of the economy, and developments in the
     interest rate markets; therefore, actual performance may differ from these
     projections.assumptions. Management evaluates the performance of the receivables
     relative to these assumptions on a regular basis. Any financial impact
     resulting from a change in performance is recognized in earnings in the
     period in which it occurs.

     Restricted cash. Restricted cash represents amounts on deposit in various
     - --------------------------------
     reserve accounts established for the benefit of the securitization
     investors. The amounts on deposit in the reserve  accounts are used to pay various amounts,
including  principal  and  interest  to  investors,  inIn the event that the cash generated by the securitized
     receivables in a given period iswas insufficient to pay the interest,
     principal, and other required payments, the balances on deposit in the
     reserve accounts would be used to pay those amounts. In general, each of
     the company's securitizations requires that an amount equal to a specified
     percentage of the initial receivables balance be deposited in a reserve
     account on the closing date and that any excess cash generated by the
     receivables be used to fund the reserve account to the extent necessary to
     maintain the required amount. If the amount on deposit in the reserve
     account exceeds the required amount, an amount equal to that excess is
     released through the special purpose entity to the company. In the public
     securitizations, the amount required to be on deposit in the reserve
     account must equal or exceed a specified floor amount. The reserve account
     remains at the floor amount until the investors are paid in full, at which
     time the remaining reserve account balance is released through the special
     purpose entity to the company. The amount required to be maintained in the
     public securitization reserve accounts may increase depending upon the
     performance of the securitized receivables. The amount on deposit in
     restricted cash accounts was $29.9 million as of May 31, 2004, and $34.8
     million as of February 29, 2004.

     Required excess receivables. The warehouse facility and certain public
     - -------------------------------------------------------
     securitizations require that the total value of the securitized receivables
     exceed, by a specified amount, the principal amount owed to the investors.
     The required excess receivables balance represents this specified amount.
     Any cash flows generated by the required excess receivables are used, if
     needed, to make payments to the investors. The unpaid principal balance
     related to the required excess receivables was $23.3 million as of May 31,
     2004, and $28.8 million as of February 29, 2004.

     Key Assumptions Used in Measuring Retained Interests and Sensitivity
     Analysis. The following table shows the key economic assumptions used in
     measuring the fair value of the retained interests at November  30, 2003,May 31, 2004, and a
     sensitivity analysis showing the hypothetical effect on the interest-only strip receivablesretained
     interests if there were unfavorable variations from the assumptions used.
     Key economic assumptions at November 30, 2003,May 31, 2004, are not materially different from
     assumptions used to measure the fair value of the retained interests at the
     time of securitization. These sensitivities are hypothetical and should be
     used with caution. In this table, the effect of a variation in a particular
     assumption on the fair value of the retained interests is calculated
     without changing any other assumption; in actual circumstances, changes in
     one factor may result in changes in another, which might magnify or
     counteract the sensitivities.

                                                                              Impact on Fair                Impact on Fair
                                                    Assumptions                Value of 10%                  Value of 20%
     (Dollar amounts in(In millions)                                      Used                  Adverse Change                Adverse Change
     ---------------------------------------------------------------------------------------------------------------------
     Prepayment rate........................         1.45%-1.55%                   $5.3                         $ 9.9$10.0
     Cumulative default rate................         2.00%-2.50%                   $3.9$4.2                         $ 7.98.4
     Annual discount rate...................             12.0%                     $2.0                         $ 4.0

Page 9 of 29



     Prepayment rate. The company uses the Absolute Prepayment Model or "ABS" to
-
     ----------------
     estimate prepayments. This model assumes a rate of prepayment each month
     relative to the original number of receivables in a pool of receivables.
     ABS further assumes that all the receivables are the same size and amortize
     at the same rate and that each receivable in each month of its life will
     either be paid as scheduled or prepaid in full. For example, in a pool of
     receivables originally containing 10,000 receivables, a 1% ABS rate means
     that 100 receivables prepay each month.

     Page 10 of 28
Cumulative default rate. Cumulative default rate or "static pool" net
     -----------------------
     losses are
- ------------------------ calculated by dividing the total projected future credit losses of a
     pool of receivables by the original pool balance.

     Continuing Involvement with Securitized Receivables. The company continues
     to manage the automobile loan receivables that it securitizes. The company
     receives servicing fees of approximately 1% of the outstanding principal
     balance of the securitized receivables. The servicing fees specified in the
     securitization agreements adequately compensate the company for servicing
     the securitized receivables. Accordingly, no servicing asset or liability
     has been recorded. The company is at risk for the retained interests in the
     securitized receivables. If the securitized receivables do not perform as
     originally projected, the value of the retained interests would be
     impacted. The assumptions used to value the retained interests, as well as
     a sensitivity analysis, are detailed in the "Key Assumptions Used in
     Measuring Retained Interests and Sensitivity Analysis" section of this
     footnote. Supplemental information about the managed receivables is shown
     in the following tables:

                                                                       As of November 30May 31             As of February 29 or 28
     (Amounts in(In millions)                                                 2004            2003           20022004            2003
     2002
     ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
     Loans securitized..........................................securitized.....................................   $   2,153.92,283.2     $   1,760.01,960.3        $2,200.4       $1,859.1       $1,489.4
     Loans held for sale or investment..........................          36.4            34.0investment.....................          55.0            32.6            48.2           19.6
                                                              13.9
                                                                   ---------------------------     ----------------------------------------------------------------------------------------
     Ending managed receivables.................................receivables............................   $   2,190.32,338.2     $   1,794.01,992.9        $2,248.6       $1,878.7
                                                              $1,503.3
                                                                   ===========================        =====================================================================================
     Accounts 31+ days past due.................................due............................   $      35.235.3     $      25.928.7        $   27.631.4       $   22.327.6
     Past due accounts as a percentage of
         ending managed receivables..............................          1.61%receivables                                  1.51%           1.44%           1.40%          1.47%          1.48%


                                                                                      Three Months Nine Months
                                                                      Ended November 30                 Ended November 30
     (Amounts inMay 31
     (In millions)                                                                      2004             2003
     2002              2003           2002
     -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
     Average managed receivables...............................receivables.................................................   $   2,161.42,299.8     $   1,748.8      $   2,057.4   $   1,651.71,942.5
     Credit losses on managed receivables......................         6.0              4.9             15.5          12.3receivables........................................   $       4.0     $       4.2
     Annualized credit losses as a percentage of
         average managed receivables.........................        1.11%            1.12%            1.00%         0.99%receivables.............................................          0.70%           0.86%


     Selected Cash Flows from Securitized Receivables. The table below
     summarizes certain cash flows received from and paid to the automobile loan
     securitizations:

                                                                                       Three Months Nine Months
                                                                          Ended November 30            Ended November 30
     (Amounts inMay 31
     (In millions)                                                                    2004              2003
     2002           2003         2002
     -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
     o   Proceeds from new securitizations.............................securitizations......................................   $    286.5375.5       $    254.0      $   918.5     $  741.6296.0
     o   Proceeds from collections reinvested in
             revolving period securitizations..........................securitizations...................................   $    120.5144.1       $    105.6      $   400.2     $  364.2152.2
     o   Servicing fees received.......................................received................................................   $      5.55.9       $      4.5      $    15.7     $   12.34.9
     o   Other cash flows received from retained interests:
             Interest-only strip receivables...........................receivables....................................   $     23.823.6       $     15.0      $    59.4     $   49.016.8
             Cash reserve releases, net................................net.......................................     $      6.89.9       $      3.0      $    15.0     $   13.12.4

Page 10 of 29




     Proceeds from new securitizations. Proceeds from new securitizations
     - -------------------------------------------------------------------
     represent receivables newly securitized through the warehouse facility
     during the period. Receivables initiallyPreviously securitized receivables that are periodically
     refinanced through the warehouse facility that are periodically refinancedor in public securitizations are
     not considered new securitizations for this table.

     Proceeds from collections. Proceeds from collections reinvested in
     - ---------------------------------------------------
     revolving period securitizations represent principal amounts collected on
     receivables securitized through the warehouse facility, which are used to
     fund new originations.

     Page 11 of 28
Servicing fees. Servicing fees received represent cash fees paid to the
     - -----------------------------
     company to service the securitized receivables.

     Other cash flows received from retained interests. Other cash flows
     -------------------------------------------------
     received
- -------------------------------------------------- from retained interests represent cash received by the company
     from securitized receivables other than servicing fees. It includes cash
     collected on interest-only strip receivables and amounts released to the
     company from restricted cash accounts.

     Financial Covenants and Performance Triggers. Certain securitization
     agreements include various financial covenants and performance triggers,  while other
securitization   agreements,   such   as  a   public   securitization   with   a
senior-subordinated structure, do not include financial covenants or performance
triggers.
     For thosesuch agreements,  with  financial  covenants  and  performance
triggers, the company must meet financial covenants relating to
     minimum tangible net worth, maximum total liabilities to tangible net worth
     ratio, minimum tangible net worth to managed assets ratio, minimum current
     ratio, minimum cash balance or borrowing capacity, and minimum fixed charge
     coverage ratio. Certain securitized receivables must meet performance tests
     relating to portfolio yield, default rates, and delinquency rates. If these
     financial covenants and/or performance tests are not met, in addition to
     other consequences, the company may be unable to continue to securitize
     receivables through the warehouse facility or it may be terminated as
     servicer under the public  securitizations. At November  30,  2003,May 31, 2004, the company was in
     compliance with these financial covenants, and the securitized receivables
     were in compliance with these performance triggers.

7.5.   Financial Derivatives
     ---------------------

     The company enters into amortizing fixed-pay interest rate swaps relating
     to its automobile loan receivable securitizations   to  convert   variable-rate   financing  costs  to  fixed-rate
obligationssecuritizations. Swaps are used to better
     match funding costs to the fixed-rate receivables being securitized by
     converting variable-rate financing costs in the warehouse facility.facility to
     fixed-rate obligations. During the thirdfirst quarter of fiscal 2004,2005, the
     company entered into eightsix 40-month amortizing interest rate swaps and one
     18-month amortizing interest rate swap with initial notional amounts
     totaling approximately $351.5$392.7 million. The amortized notional amount of
     all outstanding swaps related to the automobile loan receivable
     securitizations was approximately $285.1$327.1 million at November  30,  2003,May 31, 2004, and
     $473.2$551.8 million at February 28, 2003.29, 2004. At November 30, 2003,May 31, 2004, the fair value of
     swaps was a net asset of $0.9$1.4 million, which was included in accounts
     receivable. At February 28,
2003,29, 2004, the fair value of swaps was a net
     liability of $2.6$2.0 million, which was included in accounts payable.

     The market and credit risks associated with interest rate swaps are similar
     to those relating to other types of financial instruments. Market risk is
     the exposure created by potential fluctuations in interest rates. The
     company does not anticipate significant market risk from swaps as they are
     used on a monthly basis to match funding costs to the use of the funding.
     Credit risk is the exposure to nonperformance of another party to an
     agreement. The company mitigates credit risk by dealing with highly rated
     bank counterparties.

Page 11 of 29





6.   Retirement Plans
     ----------------

     The company has a noncontributory defined benefit pension plan (the
     "pension plan") covering the majority of full-time employees. The company
     also has an unfunded nonqualified plan (the "restoration plan") that
     restores retirement benefits for certain senior executives who are affected
     by the Internal Revenue Code limitations on benefits provided under the
     pension plan. The liabilities for these plans are included in accrued
     expenses and other current liabilities in the consolidated balance sheets.
     The components of net pension expense were as follows:

                                                                         Three Months Ended May 31
                                                       Pension Plan          Restoration Plan               Total
                                                       ------------          ----------------         ------------------
     (In thousands)                                   2004       2003        2004        2003           2004       2003
     ----------------------------------------------------------------------------------------------------------------------
     Service cost...............................    $1,684     $1,382         $80         $58         $1,764     $1,440
     Interest cost..............................       538        420          54          32            592        452
     Expected return on plan assets.............      (352)      (223)         --          --           (352)      (223)
     Amortization of prior year
         service cost...........................         9          9          --          --              9          9
     Recognized actuarial loss..................       184        162          38          13            222        175
                                                ---------------------------------------------------------------------------

     Net pension expense........................    $2,063     $1,750        $172        $103         $2,235     $1,853
                                                ===========================================================================

     The company contributed $1.3 million to the pension plan during the second
     quarter of fiscal 2005. Minimum required contributions for the remainder of
     fiscal 2005 are currently estimated to be $2.2 million. The company may
     elect to make contributions in excess of the minimum required amounts.

7.   Earnings per Share
     ------------------

     Reconciliations of the numerator and denominator of basic and diluted
     earnings per share are presented below:
                                                                                         Three Months Ended May 31
     (In thousands except per share data)                                                  2004              2003
     -----------------------------------------------------------------------------------------------------------------

     Weighted average common shares...............................................        103,864           103,156
     Dilutive potential common shares:
        Options...................................................................          1,896             1,599
        Restricted stock..........................................................             14                 7
                                                                                       -------------------------------
     Weighted average common shares
        and dilutive potential common shares......................................        105,774           104,762
                                                                                       ===============================

     Net earnings available to common shareholders................................     $   35,330        $   35,260
     Basic net earnings per share.................................................     $     0.34        $     0.34
     Diluted net earnings per share...............................................     $     0.33        $     0.34

     Certain options were outstanding and not included in the computation of
     diluted earnings per share because the options' exercise prices were
     greater than the average market price of the common shares. As of May 31,
     2004, options to purchase 2,116,895 shares of common stock with exercise
     prices ranging from $28.38 to $43.44 per share were outstanding and not
     included in the calculation. As of May 31, 2003, options to purchase
     1,031,827 shares with exercise prices ranging from $18.60 to $43.44 per
     share were outstanding and not included in the calculation.


Page 12 of 29
8.   Recent Accounting Pronouncements
     --------------------------------

     In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial  instruments  entered into or modified  after
May 31, 2003,  and  otherwise is effective at the beginning of the first interim
period  beginning after June 15, 2003. The application of the provisions of SFAS
No. 150 have not and are not expected to have a material impact on the company's
financial position, results of operations, or cash flows.

In December 2003, the FASBFinancial Accounting Standards Board ("FASB") issued
     FASB Interpretation ("FIN") No. 46 (revised December 2003), "Consolidation
     of Variable Interest Entities." This revised interpretation retains the
     original FIN No. 46 requirements for consolidating variable interest
     entities by the primary beneficiary of

Page 12 of 28
 the entity if the equity investors
     in the entity do not have the characteristics of a controlling financial
     interest or do not have sufficient equity at risk for the entity to finance
     its activities without additional subordinated financial support from other
     parties. The revised interpretation adds the requirement for consolidating
     an entity where the equity investors' voting rights are not proportionate
     to their economic interests and where the activities of the entity involve
     or are conducted on behalf of an investor with a disproportionately small
     voting interest. This revised interpretation is effective for all entities
     no later than the end of the first reporting period that ends after March
     15, 2004. However,  for reporting periods ending after December 15, 2003, aThe company must apply either the original or this revised  interpretation to those entities
that are considered to be special-purpose  entities.  A company that has already applied the original  FIN No. 46 to an entity may  continue to do so until the
effective date of the revised interpretation.  The company currently is applying
the  original FIN No. 46, which has not had
     a material impact on the company's financial position, results of
     operations, or cash flows.








The company has not
fully analyzed the new guidance and,  therefore,  cannot determine whether there
will be an impact on its  financial  position,  results of  operations,  or cash
flows at this time.

In  December  2003,  the FASB issued SFAS No. 132  (revised  2003),  "Employers'
Disclosures  about  Pensions and Other  Postretirement  Benefits."  This revised
statement  retains the disclosures  required by the original SFAS No. 132, which
standardized  employers'  disclosures  about  pensions and other  postretirement
benefits,  and requires additional disclosures concerning the economic resources
and obligations related to pension plans and other postretirement  benefits. The
provisions of the original SFAS No. 132 remain in effect until the provisions of
this revised  statement  are adopted.  This revised  statement is effective  for
fiscal  years  ending  after  December  15,  2003.  The company  will revise its
disclosures  to  meet  the  requirements  under  this  revised  standard  in the
financial statements for the fiscal year ended February 29, 2004.

9. Reclassifications
   -----------------

Certain  prior year  amounts  have been  reclassified  to conform to the current
year's presentation.




Page 13 of 2829





                                     ITEM 2.

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


The following Management's Discussion and Analysis ("MD&A") is provided as a
supplement to, and should be read in conjunction with, our audited consolidated
financial statements, the accompanying notes, and the MD&A included in the
company's Annual Report on Form 10-K for the fiscal year ended February 29,
2004.

In this discussion, "we," "our," "us," "CarMax," "CarMax, Inc.," and
"the company" refer to CarMax, Inc. and its wholly owned subsidiaries, unless
the context requires otherwise. Amounts and percentspercentages in the tables may not
total due to rounding.

BUSINESS OVERVIEW

CarMax is the nation's leading specialty retailer of used vehicles. As of May
31, 2004, we operated 52 used car superstores in 25 markets, including 8 large
markets and 17 mid-sized markets. We also operated 12 new car franchises, all of
which were integrated or co-located with our used car superstores. During the
twelve month period ended May 31, 2004, we sold 228,407 used cars, representing
91% of the total 250,009 vehicles sold during that period.

Prior to October 1, 2002, CarMax was a wholly owned subsidiary of Circuit City
Stores, Inc. ("Circuit City Stores"City"). On that date, CarMax was separated from Circuit
City Stores through a transaction in which each share of Circuit City
Stores, Inc.-CarMax Group Common Stock was redeemed in exchange for one share of
CarMax, Inc. common stock. In addition, each holder of Circuit City Stores,
Inc.-Circuit City Group Common Stock received as a tax-free distribution a
0.313879 share of CarMax, Inc. common stock for each share of Circuit City Group
Common Stock. Also, the CarMax board of directors approved a one-time special
dividend payment of $28.4 million to Circuit City Stores on the separation date.transaction. As a result of the separation, all of the businesses, assets, and liabilities of
the CarMax Group are now held in CarMax, Inc., which is
became an independent, separately traded public company.

The CarMax consumer offer is unique in the auto retailing marketplace. It gives
consumers a way to shop for cars the same way they shop for items at other
"big-box" retailers. Our consumer offer is structured around four core equities,
including low, no-haggle prices; a broad selection; high quality; and
customer-friendly service. We generate revenues, income, and cash flows by
retailing used and new vehicles and associated items including vehicle
financing, extended warranties, and vehicle repair service. Vehicle financing
for prime rated customers is provided through CarMax Auto Finance ("CAF") and
Bank of America. We provide financing for non-prime rated customers through
three third-party lenders, and we periodically test additional non-prime and
sub-prime lenders. Vehicles purchased through our appraisal process
that do not meet our retail standards are sold at on-site wholesale auctions.

We are still at an early stage in the national rollout of our retail concept.
The primary drivers for our earnings growth will be increased vehicle unit sales
from comparable stores and from new stores as we expand geographically. In
fiscal 2005, we plan to open as many as ten superstores, representing an
approximate 20% increase in our store base. During the quarter ended May 31,
2004, we opened three superstores.

Fiscal 2005 First Quarter Highlights
- ------------------------------------

In the first quarter of fiscal 2005, net sales and operating revenues increased
to $1.32 billion from $1.17 billion in the first quarter of fiscal 2004 and net
earnings were flat at $35.3 million, or $0.33 per share for this year's first
quarter, compared with $35.3 million, or $0.34 per share, in the prior year's
quarter. The 13% increase in net sales and operating revenues reflected:
 o      A 3% decline in comparable store used unit sales.
 o      The sales contribution from the approximately ten new stores not yet
        included in the comparable store base.
 o      A 56% increase in wholesale vehicle sales, driven largely by
        improvements in the rate of appraisal purchases completed per appraisal
        offers made and higher wholesale prices.

Page 14 of 29



Our gross profit margin was stable at 12.6%, as improvements in used vehicle and
wholesale vehicle margins were offset by declines in new vehicle and other
margins. In the second quarter of fiscal 2004, we implemented a change in our
appraisal cost recovery ("ACR") methodology that resulted in increased gross
margins for used and wholesale vehicles and the elimination of our appraisal
purchase processing fee, which previously was a component of other sales and
revenues. CAF income declined 15% to $21.8 million from $25.7 million,
reflecting the anticipated impact of our funding costs rising more rapidly than
rates charged to consumers. Selling, general, and administrative expenses as a
percentage of sales (the "SG&A ratio") was 9.9% in the first quarter of fiscal
2005, consistent with last year, despite the deleveraging effect of the
comparable store used unit sales decline. The quarter benefited from shifts in
the timing of certain planned spending; however, we expect to incur a portion of
these expenses during the balance of the year.

Net cash provided by operations was $2.6 million in the current quarter compared
with $72.6 million in the first quarter of last year. The decline related
primarily to changes in inventory. In the first quarter of this year,
inventories increased modestly more than normal, reflecting the
slower-than-expected used vehicle sales. In last year's first quarter, a
higher-than-normal inventory balance at the beginning of the year contributed to
a decrease in inventories by the end of the quarter despite new store openings
and the normal seasonal inventory build. During the first quarter of fiscal
2005, we completed a public securitization of CAF receivables totaling $600
million and the sale-leaseback of one store for proceeds of approximately $19
million.

FORWARD-LOOKING STATEMENTS

The company cautions readers that the statements contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations
regarding the company's future business plans, operations, opportunities, or
prospects, including without limitation any statements or factors regarding
expected sales, margins, or earnings, are forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based upon management's
current knowledge and assumptions about future events and involve risks and
uncertainties that could cause actual results to differ materially from
anticipated results. For more details on factors that could affect expectations,
see the company's Annual Report on Form 10-K for the fiscal year ended February
28, 2003,29, 2004, and its quarterly and current reports as filed with or furnished to
the Securities and Exchange Commission.

CRITICAL ACCOUNTING POLICIES

For a discussion of our critical accounting policies see "Critical Accounting
Policies" in Management's Discussion and Analysis included in the CarMax, Inc.
20032004 Annual Report to Shareholders, which is included as Exhibit 13.1 to the
Annual Report on Form 10-K for the fiscal year ended February 28, 2003.29, 2004. These
policies relate to the calculation of the fair value of retained interests in
securitization transactions, revenue recognition, income taxes, the defined
benefit retirement plans,plan, and insurance liabilities.

RESULTS OF OPERATIONS

Reclassifications. Certain prior year amounts have been reclassified to conform
to the current year's presentation.

Seasonality. CarMax's operations, in common with other retailers in general, are
subject to seasonal influences. Historically, CarMax has experienced more of its
net sales in the first half of the fiscal year. The net earnings of any quarter
are seasonally disproportionate to net sales since administrative and certain
operating expenses remain relatively constant during the year. Therefore,
quarterly results should not be relied upon as necessarily indicative of results
for the entire fiscal year.


Page 1415 of 2829




Net Sales and Operating Revenues
- --------------------------------

Total sales for the thirdfirst quarter of fiscal 20042005 increased 14%13% to $1.07$1.32 billion
from $936.8 million in last year's third quarter. For the nine months ended
November 30, 2003, total sales increased 15% to $3.48 billion from $3.02$1.17 billion in last year's first nine months.quarter.

                                                                          Three Months Ended November 30             Nine Months Ended November 30
(Amounts inMay 31
(In millions)                                                      2003        %       20022004         %         2003           %
2002     %
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Used vehicle sales....................sales........................................    $     797.8            $690.3                  $2,626.6          $2,212.9985.4      74.4     $  890.1        75.9
New vehicle sales.....................       122.7             117.8                     398.7             402.1
                                          ------------------------------------------------------------------------------sales.........................................          136.8      10.3        136.4        11.6
                                                              ----------------------------------------------
Total retail vehicle sales............       920.4   85.9      808.1    86.3           3,025.3   86.9    2,615.0   86.5
                                          ------------------------------------------------------------------------------sales................................        1,122.1      84.7      1,026.5        87.5

Wholesale vehicle sales...............       111.4   10.4       87.5     9.3             325.1    9.3      277.6    9.2
                                          ------------------------------------------------------------------------------sales...................................          156.9      11.8        100.7         8.6

Other sales and revenues:
   Extended warranty revenue..........        17.7              16.6                      58.7              51.5revenues.............................           21.1      1.6          19.9         1.7
   Service department sales...........        17.3              13.9                      51.4              45.2sales...............................           20.4      1.5          16.4         1.4
   Third-party finance fees...........         4.7               3.7                      15.0              12.5fees...............................            4.5      0.3           4.8         0.4
   Appraisal purchase processing feesfees.....................            -        7.0                       5.3              21.5
                                          -------------------------------------------------------------------------------             4.4         0.4
                                                              ----------------------------------------------
Total other sales and revenues........        39.7    3.7       41.2     4.4             130.4    3.7      130.7    4.3
                                          ------------------------------------------------------------------------------revenues............................           46.0      3.5          45.6         3.9
                                                              ----------------------------------------------

Total net sales and operating revenues...........................    $1,071.5revenues....................    $   1,325.0    100.0      $936.8$1,172.8       100.0
                                                              $3,480.8   100.0  $3,023.3.  100.0
                                         =============================================================================================================================


Total Retail Vehicle Sales. Total retail vehicle sales increased 9% in the first
- --------------------------
quarter of fiscal 2005 to $1.12 billion. The overall increase in retail vehicle
sales primarily reflects the addition of 12 used car superstores since the
beginning of fiscal 2004, including a replacement store in Los Angeles. The
decrease in used car vehicle sales as a percentage of net sales and operating
revenues reflects the 3% decrease in used unit comparable store sales and the
strong increase in wholesale sales. New car vehicle sales were flat, as
comparable store sales growth was offset by the impact of our disposal of four
new car franchises in fiscal 2004.

Total retail vehicle unit and dollar changes for the first quarter of fiscal
2005 and 2004 were as follows:

                                                                     Three Months Ended May 31
                                                                      2004                2003
                                                                  --------------------------------
Vehicle units:
     Used vehicles................................................      7 %                23%
     New vehicles.................................................     (1)%                 3%
Total ............................................................      7 %                21%

Vehicle dollars:
     Used vehicles................................................     11 %                21%
     New vehicles.................................................      0 %                 3%
Total ............................................................      9 %                18%



Page 16 of 29


Comparable store used unit sales growth is a primary
- ---------------------------
driverone of CarMax'sthe key drivers of our
profitability. A CarMax store is included in comparable store retail sales in
the store's fourteenth full month of operation. Comparable store retail vehicle unit and
dollar sales changes for the thirdfirst quarter ended 2005 and first
nine months of fiscal 2004 and 2003 were as follows:

                                                                     Three Months Nine Months
                                                        Ended November 30                      Ended November 30May 31
                                                                      2004                2003
                                                                  2002                2003             2002
                                                     -----------------------------------------------------------------------------------------------
Vehicle units:
     Used vehicles.....................    2 vehicles................................................     (3)%                8 %                6 %10%
     New vehicles.................................................     11 %                 New vehicles......................    2 %              (16)%3%
Total ............................................................     (2)%                 (5)%
             Total................................    2 %                5 %                5 %             9 %9%

Vehicle dollars:
     Used vehicles.....................    4 %                8 %                7 %            11 %
                New vehicles......................    5 %              (17)%vehicles................................................      0 %                 (4)9%
     New vehicles.................................................     12 %                 Total................................    43%
Total ............................................................      2 %                 3 %                6 %             9 %

The third quarter, which encompasses the new car model-year changeover period,
has historically been our most volatile and challenging quarter. Sales at the
beginning of the quarter were slower than expected.8%


We believe that this was a
result of flatter than normal wholesale prices through mid-October, which meant
that some ofexperienced considerable volatility in our used car sales in the first
quarter, particularly in April and May. The decrease in comparable store used
units in the first quarter of fiscal 2005 reflects the overall softness in
customer traffic we experienced broadly across our store base. Some of the
factors that may have contributed to the softer retail sales were higher
gasoline prices, were likely less competitive withan increase in mortgage interest rates reducing cash available
for big-ticket purchases from refinancings, seasonally stronger wholesale
vehicle prices, and short-term disruptions from new car closeout models than usual. We also believe there was a shift to more normal
fall seasonality in the pace of wholesale pricing declines following two
exceptionally good fall seasons in fiscal 2002 and 2003, which were driven by
sharper-than-normal wholesale pricing declines during the preceding summer
months. In response to the slower sales pace, we reduced our margin targets on
selected cars at mid-quarter in order to improve our competitive price position.
As a result, sales responded favorably, which allowed us to achieve the high end
of our revised sales expectations.manufacturers'
incentives. The company's new car sales performance for our continuing
franchises was generally in line withat or above industry performance for the brands we sell.

The reported new car comparable sales and
units were reduced by both the April 2003 sale of the Kenosha, Wis., Jeep
franchise and the July 2002 sale of the Kenosha Nissan franchise. Because the
company has multiple new car franchises within the Kenosha auto mall, we have
not adjusted our comparable sales base for the impact of disposing of any one
franchise within this location.

Page 15 of 28


Total retail vehicle unit and dollar sales changes for the third quarter and
first nine months of fiscal 2004 and 2003 were as follows:

                                                      Three Months                         Nine Months
                                                   Ended November 30                    Ended November 30
                                                2003              2002                2003             2002
                                                --------------------------------------------------------------
        Vehicle units:
           Used vehicles.....................   13 %                17 %              18 %               17 %
           New vehicles......................    1 %               (20)%              (3)%              (10)%
        Total................................   12 %                12 %              16 %               14 %

        Vehicle dollars:
           Used vehicles.....................   16 %                17 %              19 %               18 %
           New vehicles......................    4 %               (21)%              (1)%              (10)%
        Total................................   14 %                 9 %              16 %               13 %


For the third quarter and nine months ended November 30, 2003, the overall
increase in retail sales reflects growth in comparable store used unit sales as
well as growth in new stores not yet included in the comparable store base.

Wholesale Vehicle Sales. ThirdThe first quarter increase in wholesale vehicle sales
growth- -----------------------
was generated by
- ------------------------
several factors, including increased wholesaledue in large part to enhancements to our systems support for buyers and the
processes that our sales consultants use to deliver appraisals to customers. We
believe that these enhancements have contributed to the continuing increase in
our rate of appraisal traffic resulting frompurchases completed per appraisal offers made.
Additionally, the expansion of the company's store base, increased consumer response to the
CarMax vehicle appraisal offer, and a stronger than normalrising wholesale
pricing environment, and a calendar shift that resulted in an additional day of
wholesale auctions at several stores added to the first half of the quarter.wholesale vehicle sales
increase.

Other Sales and Revenues. Other sales and revenues include extended warranty
- -------------------------
revenue,------------------------
revenues, service department sales, third-party finance fees, and, up through the
second quarter of fiscal 2004, appraisal purchase processing fees collected from
customers foron the purchase of their vehicles.

Extended warranty revenue, service
department sales, and third-party finance fees increased due to the company's
strong retail sales growth. However, the elimination of the appraisal purchase
processing fee in the second quarter of fiscal 2004 resulted in a decrease in
total other sales and revenues.

Appraisal purchase processing fees collected from customers were designed to cover some of the costs of
our appraisal and wholesale operations. During the first quarter of fiscal 2004,
CarMaxwe tested an alternative method for recovering these costs. Based on the test results,costs, and during the
second quarter the appraisal purchase processing fees were discontinued across
our entire store base. Under the revised appraisal cost recovery ("ACR")ACR method, instead of charging the
customer the appraisal purchase processing fee, the company adjustswe adjust the price of itsour
purchase offer to allow for full recovery of our costs, thereby reducing the
acquisition costcosts of used and wholesale vehicles and increasing used vehicle and
wholesale vehicle gross profit margins. The intent of changing to this method is to
recover all costs, including the related costs of land on whichwhere we hold vehicles
prior to being soldbefore their sale at the wholesale auctions, while also making our offer more transparent toauctions.

Overall, other sales and revenues were flat as growth in service and extended
warranty revenues were offset by last year's ACR change. Service and extended
warranty revenues benefited from the consumergrowth in the store base and the increase
in retail vehicle sales. Third-party finance fees increased as a result of the
growth in sales during the quarter, but were reduced by eliminatingdiscounts associated
with a fee.subprime lender test.

Page 17 of 29





Supplemental information related to vehicle sales follows:

Retail Unit Sales
- -----------------
                                                                            Three Months Nine Months
                                                             Ended November 30                   Ended November 30May 31
                                                                           2004                  2003
                                                                        2002             2003               2002
                                                      ---------------------------------------------------------------------------------------------------
Used vehicles.................................      51,361            45,274          169,556            143,461vehicles.....................................................         62,353               58,045
New vehicles..................................       5,079             5,051           16,804             17,276
                                                      -----------------------------------------------------------------
     Total.........................................      56,440            50,325          186,360            160,737
                                                      =================================================================

Page 16 of 28
vehicles......................................................          5,844                5,883
                                                                        ----------------------------------
Total ............................................................         68,197               63,928
                                                                        ==================================


Average Retail Selling Prices
- -----------------------------
                                                                            Three Months Nine Months
                                                               Ended November 30                  Ended November 30May 31
                                                                           2004                  2003
                                                                        2002              2003               2002
                                                      ---------------------------------------------------------------------------------------------------
Used vehicles.................................    $   15,393        $   15,176       $   15,382         $   15,354vehicles.....................................................        $15,663              $15,266
New vehicles..................................    $   23,968        $   23,241       $   23,566         $   23,216
     Weighted average..............................    $   16,165        $   15,985       $   16,120         $   16,199vehicles......................................................        $23,224              $23,063
Total vehicles....................................................        $16,311              $15,983


Retail Vehicle Sales Composition
     --------------------------------Mix
- ------------------------
                                                                            Three Months Nine Months
                                                               Ended November 30                  Ended November 30May 31
                                                                           2004                  2003
                                                                         2002               2003             2002
                                                      -------------------------------------------------------------------------------------------------
Vehicle units:
      Used vehicles............................vehicles...............................................          91%                   90%                91%
      89%
          New vehicles.............................vehicles................................................           9                     10                 9
                                                                         11
                                                      -------------------------------------------------------------------------------------------------
Total ....................................................................................................         100%                  100%
                                                                        100%             100%
                                                      ===================================================================================================

Vehicle dollars:
      Used vehicles............................vehicles...............................................          88%                   87%
      85%                87%              85%
          New vehicles.............................vehicles................................................          12                    13
                                                                         15                 13               15
                                                      ----------------------------------------------------------------
     Total.........................................---------------------------------
Total.............................................................         100%                  100%
                                                                         100%             100%
                                                      =================================================================================================


Retail  Stores.  In the thirdfirst quarter of fiscal 2004,2005,  CarMax opened a standardthree  standard-sized  superstores,  entering the
- --------------
superstore in Memphis, Tenn.Indianapolis,  Ind.,  and  Columbia,  S.C.,  markets,  and adding a satellite superstore in the Chicago market.
During the fourth quarter, CarMax plans to add a satellite superstore in the Las
Vegas market (mid fourth quarter), a standard superstore in Louisville (late
fourth quarter), and a satellitethird  superstore  in the Los Angeles  market (earlymarket.  In
addition, CarMax opened a satellite superstore in the fourth quarter) that will co-locate the company's two remaining stand-alone
new car franchises.Winston-Salem, N.C. in June.

The following tables provide detail on the CarMax retail stores and new car
franchises:

                                             Estimate
    Store Mix                              Feb. 28, 2005          May 31, 2004          Feb. 29, 2004        Nov.  30,May 31, 2003
Feb . 28, 2003        Nov. 30, 2002
    -------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------
Mega superstores(1)................................................    13                    13                     13                   13
Standard superstores(2)........................................    29                    27                     24                   23                     19                    1921
Satellite superstores(3)......................................    17                    12                     1012                    8                     6
Co-located new car stores................stores....................     3                     2                      23                      3                    2
Stand-alone new car stores...............stores...................     0                     0                      0                    2
                                                2                     2
                                                -----------------------------------------------------------------------------
    Total--------------------------------------------------------------------------
Total........................................    62                    55                     52                   50                     44                    42
                                                =============================================================================46
                                                ==========================================================================


(1) 70,000 to 95,000 square feet on 20 to 35 acres
(2) 40,000 to 60,000 square feet on 10 to 25 acres
(3) 10,000 to 20,000 square feet on 4 to 7 acres


Page 18 of 29
Estimate
         New Car Franchises                 Feb. 29, 2005          May 31, 2004          Feb. 29, 2004          Nov. 30,May 31, 2003
Feb . 28, 2003        Nov. 30, 2002
    -------------------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------------------------------------
Integrated/co-located
     new car franchises..................     9franchises......................     7                    12                     15                    1512                    14
Stand-alone new car franchises...........franchises...............     0                     0                      0                     2
                                                2                     2
                                                -----------------------------------------------------------------------------
Total....................................     9                    14                     17                    17Total........................................     7                    12                     12                    16
                                                =============================================================================
Page 17 of 28



Gross Profit Margin
- -------------------

The total gross profit margin was 11.8%12.6% of sales in the thirdfirst quarter of fiscal
20042005 and 11.4% in the thirdfirst quarter of fiscal 2003. Total gross profit margin
was 12.6% of sales for the nine months ended November 30, 2003, and 11.8% for
the nine months ended November 30, 2002.2004.

                                                                            Three Months Nine Months
                                                        Ended November 30                           Ended November 30May 31
                                                                         2004                    2003               2002                     2003               2002
                                                                    %(1)    $ per unit(2)   %(1)     $ per unit(2)
                                                                  %(1)  $ per unit(2) %(1)  $ per unit(2)
                                               ---------------------------------------     ----------------------------------------------------------------------------------
Used vehicle gross profit margin...........    10.9       1,693     10.6        1,610        11.3     1,754   10.8       1,663margin............................        11.8       1,864        11.1         1,699
New vehicle gross profit margin............     3.8         925      4.4        1,027         3.9       914    4.2         973
                                               ---------------------------------------     -------------------------------------margin.............................         3.5         828         3.7           861
                                                                  ---------------------------------------------
Total retail vehicle gross profit margin...    10.0       1,624      9.7        1,551        10.3     1,679    9.8       1,589margin....................        10.8       1,775        10.1         1,622

Wholesale vehicle gross profit margin......     9.9         338      3.6          123         9.8       335    4.9         171margin.......................        11.6         439         9.5           332

Other gross profit margin..................    59.3        NM(3)    62.5         NM(3)       70.8      NM(3)  68.0        NM(3)
                                               ---------------------------------------     -------------------------------------margin...................................        61.0         412        75.8           540
                                                                  ---------------------------------------------

Total gross profit margin..................    11.8        NM(3)    11.4         NM(3)margin...................................        12.6       NM(3)  11.8        NM(3)
                                               =======================================     =====================================2,452        12.6         2,312
                                                                  =============================================

(1) Gross profit margin percentages are calculatedCalculated as a percentage of its respective sales or revenue.
(2) Dollars per unit are calculatedCalculated as category gross profit margin dollars divided by itsthe respective unit sales.
(3) Not meaningful.units
    sold, except the other and total categories, which are divided by retail units sold.


Used Vehicle Gross Profit Margin. For the three months ended November 30, 2003,
- ---------------------------------
the usedUsed vehicle profit margin per unit increased
compared with- --------------------------------
in the prior yearfirst quarter of fiscal 2005 as a result of the change in the ACR
methodology offset in part by declines in
used car margins before the ACR change. The decline in used car margins before
the change was due to the selected supplemental markdowns initiated in
mid-October that were taken to reestablish the price position of our used cars
and stimulate sales. For the nine month period ended November 30, 2003, used
vehicle profit margin per unit increased as a result of the changewe made beginning in the ACR
methodology, consistent sales performance, and better inventory management. The
ACR methodology allows us to recoversecond quarter of fiscal 2004, which
decreased the expense of our appraisal, buying, and
wholesale operating processes by factoring those costs into the purchase offers
we make. The acquisition cost of used vehicles purchased directly from
consumersconsumers. Absent the ACR change, the first quarter 2005 gross margin per used
unit would have been flat with last year's first quarter.

New Vehicle Gross Profit Margin. New vehicle profit margin per unit decreased
due to the implementation- -------------------------------
slightly as a result of the new appraisal cost recovery method.heightened competitive market with strong
manufacturers' incentives.

Wholesale Vehicle Gross Profit Margin. ForIn first quarter fiscal 2005, the
three and nine month periods
- --------------------------------------
ended November 30, 2003, the-------------------------------------
wholesale vehicle gross profit margin per unit increased compared with the same periods last year primarily due to the
implementation of our new ACR methodology. Themethodology discussed previously, as well as
somewhat higher seasonal wholesale pricing during the quarter. Under the new ACR
methodology, the acquisition cost of a wholesale vehiclevehicles decreased resulting in
higher wholesale gross margins due to the new ACR
methodology discussed previously. The increases in wholesale margins were
partially offset by corresponding decreases in other margins. Our intent is to
recover all costs related to our consumer offer to buy cars directly from
consumers, including the cost of appraisals, buying, wholesaling, and the
related land costs on which we hold vehicles prior to being sold at the
wholesale auctions. Previously, we had not been fully recovering these land
costs. The stronger than normal wholesale pricing environment in the first half
of the quarter also contributed to our increased wholesale margins, as we
received higher prices at our in-store wholesale auctions.

Other Gross Profit Margin. Third quarterThe decrease in other gross profit margin declinedwas
- --------------------------
despite a year-over-year improvement in the principal component elements,-------------------------
primarily due to a shift in the mix of the underlying components. Service sales,
which are the only category within other sales and revenues that do not carry
100% gross margins, became a larger percentage of the other category following the elimination of the appraisal purchase processing fee.


Compared with the
prior year, third quarter service margins improved reflecting increased service
sales and the benefits of our new electronic repair order ("ERO") system. Last
year's service sales and costs were adversely impacted by the rollout of the ERO
system. Third-party warranty commissions and third-party finance fees both
benefited from the growth in used car sales.

Page 18 of 28
CarMax Auto Finance Income
- --------------------------

CarMax Auto Finance ("CAF") is the company's finance operation.

CAF's lending business is limited to providing prime auto loans for CarMax'sour used and
new car sales. Because the purchase of an automobile is traditionally reliant on
the consumer's ability to obtain on-the-spot financing, it is important to our
business that such financing be available to creditworthy customers. While
financing can also be obtained from third-party sources, we are concerned that
total reliance on third parties can create an unacceptable volatility and
business risk. Furthermore, we believe that our processes and systems, the
transparency of our pricing, and our vehicle quality provide a unique and ideal

Page 19 of 29


environment in which to procure high-quality auto loan receivables, both for CAF
and for third-party lenders. CAF provides CarMax withus the opportunity to capture
additional profits and cash flows from auto loan receivables while managing the
company'sour
reliance on third-party finance sources.

CAF income does not include any allocation of indirect costs or income. We
present this information on a direct basis to avoid making arbitrary decisions
regarding the indirect benefit or costs that could be attributed to this
operation. Examples of indirect costs not included are retail store expenses,
retail financing commissions, and corporate expenses such as human resources,
administrative services, marketing, information systems, accounting, legal,
treasury, and executive payroll.

For the thirdfirst quarter and first nine months of fiscal 20042005 and 2003,2004, CarMax Auto Finance income was as
follows:

                                                                                Three Months Nine Months
                                                                 Ended November 30                    Ended November 30
(Amounts inMay 31
(In millions)                                                          2003       %       20022004        %            2003             %
2002     %
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gains on sales of loans(1)..................................................................  $    12.9      3.815.5       3.5       $   15.9    5.4     $ 50.8    4.7   $  49.6    5.7
                                                       ---------------------------------     ------------------------------19.7             5.5
                                                                  --------------------------------------------------

Other income:(2)
     Servicing fee income..............................     5.6income.......................................        6.0       1.0            4.5    1.0       16.0    1.0      12.6    1.05.1             1.1
     Interest income...................................     3.4      0.6       2.3    0.5       12.4    0.8       9.6    0.8
                                                       ---------------------------------     ------------------------------income............................................        5.0       0.9            5.1             1.1
                                                                  --------------------------------------------------
Total other income....................................     9.0      1.7       6.8    1.6       28.5    1.8      22.2    1.8
                                                       ---------------------------------     ------------------------------income..............................................       11.0       1.9           10.2             2.1
                                                                  --------------------------------------------------

Direct expenses:(2)
     CAF payroll and fringe benefit expense............     2.0expense.....................        2.2       0.4            1.7    0.4        6.0    0.4       5.11.9             0.4
     Other direct CAF expenses.........................expenses..................................        2.5       0.4            2.1             0.4
                                                                  1.8    0.4        7.2    0.5       5.5    0.4
                                                       ---------------------------------     --------------------------------------------------------------------------------
Total direct expenses.................................     4.2expenses...........................................        4.7       0.8            3.54.1             0.8
                                                                  13.2    0.9      10.6    0.9
                                                       ---------------------------------     --------------------------------------------------------------------------------

CarMax Auto Finance income(3).........................income (3)..................................  $    17.621.8       1.6       $   19.2    2.125.7             2.2
                                                                  ==================================================

Loans sold......................................................  $      66.1    1.9437.0              $    61.2    2.0
                                                       =================================     ==============================

Loans sold............................................ $     338.0        $     292.2        $   1,074.4     $     875.1358.0
Average managed receivables...........................receivables.....................................  $    2,161.42,299.8              $  1,748.8        $   2,057.4     $   1,651.71,942.5
Net sales and operating revenues......................revenues................................  $    1,071.51,325.0              $  936.8        $   3,480.8     $   3,023.31,172.8
Ending managed receivables balance....................receivable balance...............................  $    2,190.32,338.2              $  1,794.0        $   2,190.3     $   1,794.01,992.9

Percent columns indicate:
(1) Percent of loans sold
(2) Annualized percent of averageaveraged managed receivables
(3) Percent of net sales and operating revenues

Page 19 of 28


CAF originates automobile loans to CarMax customers at competitive market rates
of interest. The majority of the profit contribution from CAF is generated by the
spread between the interest rate charged to the customer and the cost of funds.
Substantially all of the loans originated by CAF each month are sold in
securitization transactions as described in Note 64 of the Notes to
the company's interim
consolidated financial statements.Consolidated Financial Statements. A gain, recorded at the time of the
securitization transaction, results from recording a receivable approximately
equal to the present value of the expected residual cash flows generated by the
securitized receivables. The cash flows are calculated taking into account
expected prepayment and default rates.

ForCarMax Auto Finance income for the three months ended November 30, 2003,first quarter of fiscal 2005 decreased 15% to
$21.8 million from $25.7 million in last year's first quarter. The decrease
resulted from a return to more normal spread levels as CAF's cost of funds
increased more rapidly than consumer loan rates. Included in CAF income decreased 8%was the
favorable impact of the repurchase of the receivables related to $17.6
million from $19.2 million for the same period last year.2001-1
securitization. Gains on sales of loans decreased $3.0 million. The anticipated reduction in spreads resulting
from rising costs of funds generated gains on loans sold of 3.8% compared with
last year's gains on loans sold of 5.4%. The resulting 30% reduction in gains as
a percentwere 3.5% of loans sold more than offset the benefit of the increase in loans
sold generated by increased vehicle sales. The increases in other income and in
direct expenses were proportionate to the increase in managed receivables.

For the nine months ended November 30, 2003, CAF income increased 8% to $66.1
million from $61.2 million for the same period last year. Gains on sales of
loans increased by $1.2 million, with the majority of the increase occurring in the first
quarter of fiscal 20042005 while gains on loans originated and sold during the
quarter were 3.8%.

In May, CAF exercised its option to repurchase the receivables related to the
2001-1 securitization and sold them into the warehouse facility. These loans
carry relatively high interest rates as they were originated over three years
ago when spreads remained at abnormallyconsumer interest rates were higher than they are today. The high

levels. Spread compression in the second and third quartersPage 20 of 29


interest rates combined with a relatively low short-term funding cost resulted
in a
decreasean earnings benefit of approximately 1 cent per share when the remaining
loans were sold into the warehouse facility. However, the gain on the sale of
these loans reduced the overall gain percentage for the quarter as the short
remaining term of the loans results in gainslower net cash flows as a percent of loans sold in these quarters compared with
the
prior year.newly-originated loans.

The compression of the spread was partially offset by an increase in
loans sold driven by higher sales. The increaseschange in other income and inother direct expenses werewas proportionate to the
increasechange in managed receivables.

The company isWe are at risk for the performance of the managed securitized receivables
managed to the
extent that it maintainswe maintain a retained interest in the receivables. Supplemental
information on our portfolio of managed receivables is shown in the following
tables:

                                                                      As of November 30May 31                As of February 29 or 28
(Amounts in(In millions)                                                      2004            2003             20022004           2003            2002
- ---------------------------------------------------------------------------------------------------------------------------
Loans securitized..........................................   $   2,153.92,283.2     $   1,760.01,960.3      $   1,859.12,200.4    $   1,489.41,859.1
Loans held for sale or investment..........................          36.4            34.055.0            32.6             48.2           19.6
                                                              13.9
                                                              -------------------------------------------------------------------------------------------------------------------------
Ending managed receivables.................................   $   2,190.32,338.2     $   1,794.01,992.9      $   1,878.72,248.6    $   1,503.31,878.7
                                                              =============================================================
Accounts 31+ days past due.................................   $      35.235.3     $      25.928.7      $      27.631.4    $      22.327.6
Past due accounts as a percentage of
     ending managed receivables..............................          1.61%receivables............................          1.51%           1.44%            1.40%          1.47%          1.48%


                                                                                     Three Months Nine Months
                                                                   Ended November 30                  Ended November 30
(Amounts inMay 31

(In millions)                                                                       2004                  2003            2002              2003             2002
- ---------------------------------------------------------------------------------------------------------------------------
Average managed receivables................................receivables..............................................       $   2,161.42,299.8            $   1,748.8        $   2,057.4    $   1,651.71,942.5
Credit losses on managed receivables.......................receivables.....................................       $       6.04.0            $       4.9        $      15.5    $      12.34.2
Annualized credit losses as a percentage of
         average managed receivables.............................          1.11%          1.12%              1.00%          0.99%receivables.....................................              0.70%                  0.86%

If the managed receivables do not perform in accordance with the assumptions
used in determining the fair value of the retained interests, earnings could be
impacted. As of November 30, 2003, past due accountsAnnualized losses as a percentage of endingaverage managed receivables
were higher thandecreased in the first quarter compared to the same period last year; however,
delinquencies were in line with expectations and were not indicative offiscal 2004. This
change reflects both a changedecrease in the performancerate of the receivables. In the third quarter, we adjusted the
cumulative default rate assumptions for certain pools of receivables. We
increased the loss rates for two of our older pools of receivables to reflect
slightly higher losses at the end of the pools' lives. We also increased the
loss rate on current originations from 1.85% to 2.00%, reflecting current
economic conditions, including weakdefaults as well as an increase
in recovery rates that have stabilized at
historically low levels. There has been no change in the credit quality of the
receivables, which is at the high end of our historical range. The changes
resulted in no material impact on earnings or the fair value of retained
interests. Details concerning the assumptions used to value the retained
interests and the sensitivity to adverse changes in the performance of the
managed receivables are included in Note 6 to the company's interim consolidated
financial statements.

Page 20 of 28
rates.

Selling, General and Administrative Expenses
- --------------------------------------------

ForDespite the three months ended November 30, 2003, selling, general, and
administrative expenses as a percentdeleveraging impact of negative used unit comparable sales, the SG&A
ratio was 9.9% of net sales and operating revenues were
10.7% compared with 10.9% in the same period last year. For the nine months
ended November 30, 2003, the selling, general, and administrative expense ratio
was 10.1% compared with 9.7% in the corresponding period last year. The selling,
general, and administrative expense ratio for the three months and nine months
ended November 30, 2002, included costs of $4.5 million and $7.6 million,
respectively, associated with the separation of CarMax from Circuit City Stores.
Excluding these costs, the selling, general, and administrative expense ratio
would have been 10.4% in last year's third quarter and 9.4% in the first nine
monthsquarters of
lastfiscal 2005 and fiscal 2004. The first quarter of fiscal 2005 benefited from
shifts in the timing of certain planned spending, such as relocation expense and
other expenses associated with our store growth. We expect to incur a portion of
these expenses during the balance of the year. The current year's selling, general, and administrative expenseAdditionally, the SG&A ratio
reflects the expected higher level of operating expenses associated with being a
stand-alone company following the October 1, 2002, separation from Circuit City
Stores. Compared with last year, we estimate stand-alone costs were
approximately $1.5 million higher in the current year's quarter and
approximately $13.5 million higher in the first nine months.

As anticipated, the fiscal 2004 selling, general, and administrative expense
ratio has been adversely affected by the resumption of our store growth plan and
thesubstantial increase in the number of store openings. New stores typically experience
higherwholesale vehicle sales, which have lower
selling general, and administrative expense ratioscosts than stores in the
comparable store base, reflecting the fact that new stores have not been open
long enough to ramp up to their expected mature sales levels. Higher total
pre-opening expenses and costs related to building our management team bench
strength to support future store growth also contributed to the higher current
year selling, general, and administrative expense ratios.

Interest Expense
- ----------------

Interest expense was zero for the third quarter of fiscal 2004 compared with
$0.3 million in the same period last year. As a result of the company's level of
capital spending, all interest incurred during the third quarter of fiscal 2004
was capitalized. For the nine months ended November 30, 2003, interest expense
was $1.1 million, compared with $1.7 million in the same period last year.retail vehicle sales.

Income Taxes
- ------------

The effective income tax rate decreased to 38.5% for the third quarter and the
nine months ended November 30, 2003, from 39.5% for the same periods last year.
In the previous fiscal year, the effective tax rate was higher because the costs
related to the October 2002 separation from Circuit City Stores were not
deductible.

Net Earnings
- ------------

Third quarter fiscal 2004 net earnings increased 29% to $19.1 million from $14.7
million39.0% in the thirdfirst quarter of fiscal 2003. For the nine months ended November
30, 2003, net earnings increased 24% to $93.9 million from $75.7 million. The
increases2005 and
38.5% in the first quarter and year-to-date net earnings were the result of strong
sales growth, increased used vehicle gross margins, and the absencefiscal 2004. The increase resulted from geographic
expansion into states with higher tax rates, including having a larger
percentage of non-tax
deductible separation expenses, offsetstores located in part by the incremental costs of being
a stand-alone company.unitary tax states.

Operations Outlook
- ------------------

CarMax continues to demonstrate that its consumer offer and business model can
produce strong sales and earnings growth. In addition to the fourthree standard-sized superstores and twoone satellite superstoressuperstore
opened thus far in the first nine months of the
year,fiscal 2005, we plan to open one standard-sized used car superstoreapproximately two standard
superstores and onethree to four satellite superstore insuperstores during the fourth quarterbalance of the
fiscal 2004. In addition, in Los Angeles, we
intendyear, bringing total fiscal 2005 store openings to co-locate our two remaining stand-alone new car franchises with a new
satellite used car superstore in the fourth quarter.approximately nine to
ten.

Page 21 of 2829



In the first nine months ofDuring fiscal 2004,2005, we soldstill plan to sell our Jeep franchiseFord Franchise in Kenosha, Wis.,
and our Nissan franchise in Greenville, S.C. We also returned the
Mitsubishi new car franchise operation in Nashville, Tenn., to the manufacturer.
We stillwe plan to sell or return theour remaining four Mitsubishi new car franchises; however, this process may not be completed until the end of calendar
year 2004. In addition, we plan to sell the Ford franchise in Kenosha, Wis., and
one of our Chrysler-Jeep franchises in the Atlanta market.franchises.
The sale or return of
the integrated new car franchises will create more space for
used car sales expansion, which is more profitable for us.

During the fiscal year ending February 28, 2005, the company plans to expand its
used car superstore base by approximately 20%, opening approximately 10 used car
superstores. Planned entries into new mid-sized markets include Indianapolis,
Ind.; Columbia, S.C.; Austin, Tex; and Albuquerque, N.M. Satellite superstore
additions are planned for Winston Salem, N.C.; Fayetteville, N.C.; Miami, Fla.;
and Richmond, Va. CarMax also plans to add a standard superstore and a satellite
superstore in the Los Angeles market on sites that were land-banked when the
company suspended growth in 1999.

Comparable store used unit sales growth is a primary driver of CarMax's
profitability. Assuming average winter weather, we expect fourth quarterWe anticipate used vehicle unit comparable store growthsales in the range of
5 percent- -5% to 7 percent, bringing+1% for the year's used unit comparable store growth expectation to the range of 6
percent or 7 percent. In addition, with thirdsecond quarter funds rising faster than
consumer rates, we experienced a compression in spreads generally in line with
our projections. We expect the CAF spread to be near the mid-point of our
normalized 3.5% to 4.5% range in the fourth quarter. Based on this, we
anticipate fourth quarterand net earnings per share to befor the second
quarter in the range of 1930 cents to 22 cents, bringing35 cents. We have chosen to provide
significantly wider ranges for the expected year to date net earnings to be in the range
of $1.08 to $1.11 per share. In addition, ifsecond quarter's comparable unit performance
and EPS expectations because the sales volatility we continue to experience is
making forecasting more difficult than usual. We have also chosen not to provide
our outlook for the second half of our new car franchises
occur in the fourth quarter, 1 cent could be addedfiscal year until we see a more
consistent trend that would allow us to our fourth quarter
earnings per share.issue an updated forecast.

RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting pronouncements applicable to the company,
see Note 8 of the Notes to the Consolidated Financial Statements set forth
elsewhere in this report.

Financial ConditionStatements.

FINANCIAL CONDITION

Liquidity and Capital Resources
- -------------------------------

Operating Activities. For the first ninethree months of fiscal 2004,2005, CarMax
generated
- -----------------------------------------
generated cash from operating activities of $131.0$2.6 million. In the same period
last year, CarMax generated cash from operating activities of $72.7$72.6 million. The
fiscal 2004 improvement2005 change primarily resulted from an increase in net earnings, a decrease
in inventory andoffset by a
decrease in retained interests in securitized receivables. Our inventory balance
decreased because we disposedat the end of three new car franchises
and improved inventory management at our remaining new vehicle franchise
locations. Retained interests in securitized receivables was relatively flat for
the nine months ended November 30, 2003, versus an increasefirst quarter of $19.8 million for
the nine months ended November 30, 2002. This change was primarilyfiscal 2005 increased due to the more normalized spread environmentgrowth of
our store base and normal seasonal build. In addition, inventory at CAF and the timingend of
the securitization
transactions.quarter was modestly higher than planned due to lower than expected sales
during the quarter. A decrease in inventory during last year's first quarter
resulted from a higher-than-normal inventory balance at the beginning of the
quarter and a return to more normal levels by the end of the quarter. The
decrease in retained interests was due to a decrease in gain on sale spreads,
reserve requirements, and required sellers interest.

Investing Activities. Net cash used in investing activities was $64.7$27.7 million in
- -----------------------------------------
the ninethree months ended November 30, 2003,May 31, 2004, compared with $33.4$34.9 million in the first
ninethree months of last fiscal year. Capital expenditures were $137.2$46.5 million and
$71.3$34.9 million for the ninethree months ended November 30,May 31, 2004 and 2003, and 2002,
respectively.

Page 22 of 28

The increase in capital expenditures reflects the increase in our store base
associated with the resumption of our growth plan.

Additionally, someIn the first quarter of fiscal 2005, the increase is associated with the initial expenditures associated with our future
corporate headquarters site in Richmond, Va. Totalcompany generated net proceeds from
sales of property and equipment were $72.5of $18.8 million for the nine months ended November 30,
2003, compared with $37.9 million in the prior year period. The majority of the
sale proceeds relateprimarily due to a
sale-leaseback transactions. In the second quarter of
fiscal 2004, the company entered into sale-leaseback transactionstransaction involving three properties valued at approximately $25 million. The transactions wereone property. This transaction was
structured as an operating leaseslease with an initial lease terms of 15 years with four,
five-year renewal options. In the third quarter of fiscal 2004, the company
entered into sale-leaseback transactions involving three properties valued at
approximately $49 million. These transactions were structured as operating
leases with initial lease termsterm of 20 years with
four, five-year renewal options.

At November 30, 2003, we owned a total of four CarMax superstores. In
December 2003, CarMax entered into sale-leaseback transactions involving three
of these properties valued at approximately $33.2 million.

Financing Activities. Net cash used inprovided by financing activities was $46.0 million in$25.1
- ---------------------
the first nine months of fiscal 2004, compared with $11.0--------------------
million in the first ninethree months of fiscal 2005, compared with net cash used of
$40.3 million in the first three months of last fiscal year. In the first ninethree
months of fiscal 2005, we increased total outstanding debt by $23.7 million. In
the first three months of fiscal 2004, we used cash generated from operations to
reduce total outstanding debt by $49.8$41.5 million.

In the first nine months of fiscal 2003, we increased total outstanding
debt by $16.9 million and paid a one-time dividend of $28.4 million to Circuit
City in conjunction with the separation transaction.

At November 30, 2003, theThe aggregate principal amount of securitized automobile loan receivables funded through
securitizations, which are discussed in Notes 3 and 4 of the Notes to
Consolidated Financial Statements, totaled $2.15 billion.$2.28 billion at May 31, 2004, and
$1.96 billion at May 31, 2003. During the thirdfirst quarter of fiscal 2004,2005, the
company completed a public securitization of automobile loan receivables securitization.receivables. The
total value of the automobile loan receivables securitized through this public
offering was $600.0$600 million. At November 30, 2003,May 31, 2004, the unused capacity of the
$825.0 million warehouse facility which matures inlimit was

Page 22 of 29


$825 million and unused warehouse capacity totaled $497 million. In June 2004,
the warehouse facility was $539.5
million. CarMax anticipatesrenewed and the expiration date was extended to June
2005. We anticipate that itwe will be able to renew, expand, or enter into new
securitization arrangements to meet the future needs of the automobile loan
finance operation.

CarMaxThe company maintains a $300 million credit facility secured by vehicle
inventory. As of November 30, 2003,May 31, 2004, the amount outstanding under this credit facility
was $106.3$128.2 million, with the remainder fully available to the company. CarMax
expectsThis
facility expires in May 2006.

We expect that proceeds from securitization transactions,transactions; sale-leaseback
transactions, its credit facility,transactions; current and, if needed, additional credit facilities if needed,facilities; and cash
generated by operations will be sufficient to fund capital expenditures and
working capital of the company for the foreseeable future.






















Page 23 of 2829




                                     ITEM 3.

                          QUANTITATIVE AND QUALITATIVE
                          ----------------------------
                          DISCLOSURES ABOUT MARKET RISK
                          -----------------------------

Market Risk

Automobile Installment Loan Receivables. At November 30, 2003,May 31, 2004, and February 28,29, 2004,
- ----------------------------------------
2003,---------------------------------------
all loans in the portfolio of automobile loan receivables were fixed-rate
installment loans. Financing for these automobile loan receivables is achieved
through asset securitization programs that, in turn, issue both fixed- and
floating-rate securities. Interest rate exposure relating to floating ratefloating-rate
securitizations is managed through the use of interest rate swaps. Receivables
held for investment or sale are financed with working capital. Generally,
changes in interest rates associated with underlying swaps will not have a
material impact on earnings. However, changes in interest rates associated with
underlying swaps may have a material impact on cash and cash flows.

Credit risk is the exposure to nonperformance of another party to an agreement.
Credit risk is mitigated by dealing with highly rated bank counterparties. The
market and credit risks associated with financial derivatives are similar to
those relating to other types of financial instruments. Refer to Note 75 of the
Notes to the
company's consolidated financial statementsConsolidated Financial Statements for a description of these items.

The total principal amount of ending managed receivables securitized or held for
investment or sale as of November 30, 2003,May 31, 2004, and February 28, 2003,29, 2004, was as follows:


(Amounts in(In millions)                                            November 30May 31              February 28
          ---------------------------------------------------------------------------------------------------29
- -----------------------------------------------------------------------------------------

Fixed-rate securitizations................................securitizations.......................   $   1,868.41,955.2             $   1,385.11,647.9
Floating-rate securitizations
     synthetically altered to fixed.........................          285.1                   473.2fixed..............         327.1                   551.8
Floating-rate securitizations.............................            0.4                     0.8securitizations....................           0.9                     0.7
Held for investment (1)...................................           17.4                    16.0..........................          29.9                    29.4
Held for sale (2).........................................           19.0                     3.6
                                                                        -------------------------------------
          Total.....................................................................................          25.1                    18.8
                                                    ---------------------------------------
Total............................................   $   2,190.32,338.2             $   1,878.7
                                                                        =====================================
(1) The majority is held by a bankruptcy-remote special purpose entity. (2) Held by a bankruptcy-remote special purpose entity. Interest Rate Exposure. CarMax also has interest rate risk from changing - ----------------------- interest rates related to our outstanding debt. Substantially all of the debt is floating rate debt based on LIBOR. A 100 basis point increase in market interest rates would not have had a material effect on our third quarter results of operations or cash flows. Page 24 of 28 Item 4. CONTROLS AND PROCEDURES ----------------------- The company maintains disclosure controls and procedures ("disclosure controls") that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including the chief executive officer ("CEO") and chief financial officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the company evaluated the effectiveness of the design and operation of its disclosure controls. This evaluation was performed under the supervision and with the participation of management, including our CEO and CFO. Based upon that evaluation, the CEO and CFO concluded that the company's disclosure controls were effective as of the evaluation date. There was no change in the company's internal control over financial reporting that occurred during the quarter ended November 30, 2003, that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. Page 25 of 282,248.6 ======================================= (1) The majority is held by a bankruptcy-remote special purpose entity. (2) Held by a bankruptcy-remote special purpose entity. Interest Rate Exposure. We also have interest rate risk from changing interest - ---------------------- rates related to our outstanding debt. Substantially all of the debt is floating-rate debt based on LIBOR. A 100-basis point increase in market interest rates would not have had a material effect on our first quarter fiscal 2005 results of operations or cash flows. Page 24 of 29 ITEM 4. CONTROLS AND PROCEDURES ----------------------- The company maintains disclosure controls and procedures ("disclosure controls") that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including the chief executive officer ("CEO") and the chief financial officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the company evaluated the effectiveness of the design and operation of its disclosure controls. This evaluation was performed under the supervision and with the participation of management, including our CEO and CFO. Based upon that evaluation, the CEO and CFO concluded that the company's disclosure controls were effective as of the end of such period. There was no change in the company's internal control over financial reporting that occurred during the quarter ended May 31, 2004, that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. Page 25 of 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings CarMax is subject to various legal proceedings, claims, and liabilities that arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations of CarMax. Item 4. Submission of Matters to a Vote of Security Holders (a) The annual meeting of the company's shareholders was held June 29, 2004. (b) At the annual meeting, the shareholders of the company elected Keith D. Browning, James F. Clingman, Jr., Hugh G. Robinson, Richard L. Sharp, and Thomas G. Stemberg as directors for three-year terms. The elections were approved by the following votes: Votes Votes Directors For Withheld ------------------------------------------------------------------ Keith D. Browning 96,808,654 1,395,052 James F. Clingman, Jr. 96,910,418 1,293,288 Hugh G. Robinson 96,496,816 1,706,890 Richard L. Sharp 97,967,321 236,385 Thomas G. Stemberg 96,823,084 1,380,622 ------------------------------------------------------------------ The following directors had terms of office that did not expire at the 2004 annual meeting: Jeffrey E. Garten W. Robert Grafton William S. Kellogg Austin Ligon Beth A. Stewart William R. Tiefel (c) At the annual meeting, the shareholders approved an amendment to the CarMax, Inc. 2002 Employee Stock Purchase Plan. The results of the voting were as follows: Votes Votes Broker For Against Abstentions Non-Votes ------------------------------------------------------------ 70,054,152 688,084 206,617 27,254,853 Page 26 of 29 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 CarMax, Inc. Amended and Restated Articles of Incorporation, effective June 6, 2002, filed as Exhibit 3.1 to CarMax's Current Report on Form 8-K, filed October 3, 2002 (File No. 1-31420), incorporated herein by this reference. 3.2 CarMax, Inc. Bylaws, as amendedArticles of Amendment to the Amended and restated September 23, 2003,Restated Articles of Incorporation, effective June 6, 2002, filed as Exhibit 3.2 to CarMax's QuarterlyCurrent Report on Form 10-Q,8-K, filed October 15, 2003 (Filed3, 2002 (File No. 1-31420), incorporated herein by this reference. 3.3 CarMax, Inc. Bylaws, as amended and restated June 29, 2004, filed herewith. 10.1 CarMax, Inc. 2002 Employee Stock Purchase Plan, as amended and restated June 29, 2004, filed herewith. 10.2 CarMax, Inc. Benefit Restoration Plan, as amended and restated January 19, 2004, filed herewith. 31.1 Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed herewith. 31.2 Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed herewith. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, filed herewith. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed herewith. (b) Reports on Form 8-K The company filed a report on Form 8-K pursuant to Items 5 and 7 on October 15, 2003.May 12, 2004. During the thirdfirst quarter, the company also furnished reports on Form 8-K pursuant to Item 12 on September 5, 2003,March 4, 2004, and September 22, 2003.March 30, 2004. Page 2627 of 2829 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CARMAX, INC. By: /s/ Austin Ligon ------------------------------------------------------------- Austin Ligon President and Chief Executive Officer By: /s/ Keith D. Browning ------------------------------------------------------------- Keith D. Browning Executive Vice President and Chief Financial Officer January 13,July 12, 2004 Page 2728 of 2829 EXHIBIT INDEX ------------- 3.3 CarMax, Inc. Bylaws, as amended and restated June 29, 2004, filed herewith. 10.1 CarMax, Inc. 2002 Employee Stock Purchase Plan, as amended and restated June 29, 2004, filed herewith. 10.2 CarMax, Inc. Benefit Restoration Plan, as amended and restated January 19, 2004, filed herewith. 31.1 Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed herewithherewith. 31.2 Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed herewithherewith. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, filed herewithherewith. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed herewithherewith. Page 2829 of 2829