10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2008
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                to

Commission File Number 000-50404

LKQ CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	36-4215970
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
120 NORTH LASALLE STREET, SUITE 3300, CHICAGO, IL	60602
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (312) 621-1950

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

Yes  x No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o No  x

At May 5, 2008, the registrant had issued and outstanding an aggregate of 135,463,538 shares of Common Stock.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

LKQ CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Condensed Balance Sheets

(In thousands, except share and per share data)

	March 31,		December 31,
	2008		2007
Assets
Current Assets:
Cash and equivalents	$	85,410	$	74,241
Receivables, net	133,894		125,572
Inventory	331,427		320,238
Deferred income taxes	19,731		18,809
Prepaid income taxes	—		6,344
Prepaid expenses	9,504		8,088
Total Current Assets	579,966		553,292
Property and Equipment, net	224,292		217,059
Intangibles
Goodwill	843,558		825,881
Other intangibles, net	73,925		74,951
Other Assets	21,274		21,472
Total Assets	$	1,743,015	$	1,692,655
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	62,963	$	68,871
Accrued expenses	73,154		73,172
Income taxes payable	11,181		—
Deferred revenue	5,343		4,844
Current portion of long-term obligations	17,452		16,936
Total Current Liabilities	170,093		163,823
Long-Term Obligations, Excluding Current Portion	634,151		641,526
Deferred Income Tax Liability	26,862		25,607
Other Noncurrent Liabilities	10,011		11,922
Commitments and Contingencies
Stockholders’ Equity:
Common stock, $0.01 par value, 500,000,000 shares authorized, 135,381,538 and 134,149,066 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively.	1,354		1,341
Additional paid-in capital	727,117		705,778
Retained earnings	172,917		142,039
Accumulated other comprehensive income	510		619
Total Stockholders’ Equity	901,898		849,777
Total Liabilities and Stockholders’ Equity	$	1,743,015	$	1,692,655

See notes to unaudited consolidated condensed financial statements.

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LKQ CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Condensed Statements of Income

(In thousands, except per share data )

	Three Months Ended
	March 31,
	2008			2007
Revenue	$	491,908		$	235,318
Cost of goods sold	268,594			128,222
Gross margin	223,314			107,096
Facility and warehouse expenses	44,502			25,610
Distribution expenses	44,769			22,175
Selling, general and administrative expenses	64,103			28,732
Restructuring expenses	1,174			—
Depreciation and amortization	7,258			3,317
Operating income	61,508			27,262
Other (income) expense:
Interest expense, net	10,301			1,733
Other income, net	(269		)	(648		)
Total other expense	10,032			1,085
Income before provision for income taxes	51,476			26,177
Provision for income taxes	20,598			10,383
Net income	$	30,878		$	15,794
Net income per share:
Basic	$	0.23		$	0.15
Diluted	$	0.22		$	0.14
Weighted average common shares outstanding:
Basic	134,558			106,633
Diluted	139,682			112,004

See notes to unaudited consolidated condensed financial statements.

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LKQ CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Condensed Statements of Cash Flows

(In thousands )

	Three Months Ended March 31,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	30,878		$	15,794
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization	7,875			3,453
Stock-based compensation expense	1,304			1,167
Deferred income taxes	399			686
Excess tax benefit from exercise of stock options	(1,103		)	(157		)
Other adjustments	(68		)	3
Changes in operating assets and liabilities, net of effects from purchase transactions:
Receivables	(8,338		)	(8,167		)
Inventory	(8,772		)	(10,807		)
Prepaid income taxes/income taxes payable	18,625			7,453
Other operating assets and liabilities	(8,448		)	1,005
Net cash provided by operating activities	32,352			10,430
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and other long term assets	(13,196		)	(9,080		)
Cash used in acquisitions	(4,186		)	(14,574		)
Net cash used in investing activities	(17,382		)	(23,654		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	939			202
Repurchase and retirement of redeemable common stock	—			(1,125		)
Excess tax benefit from exercise of stock options	1,103			157
Debt issuance costs	(173		)	—
Net (repayments) borrowings of long-term debt	(5,549		)	15,840
Net cash (used in) provided by financing activities	(3,680		)	15,074
Effect of exchange rate changes on cash and equivalents	(121		)	—
Net increase in cash and equivalents	11,169			1,850
Cash and equivalents, beginning of period	74,241			4,031
Cash and equivalents, end of period	$	85,410		$	5,881
Supplemental disclosure of cash flow information:
Notes issued in connection with business acquisitions	$	—		$	750
Stock issued in connection with business acquisitions	18,006			—
Cash paid for income taxes, net of refunds	1,506			2,234
Cash paid for interest	10,311			1,594

See notes to unaudited consolidated condensed financial statements.

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LKQ CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Condensed Statements of Stockholders’ Equity and Other Comprehensive Income

(In thousands )

								Accumulated
	Common Stock							Other			Total
	Shares			Additional		Retained		Comprehensive			Stockholders’
	Issued	Amount		Paid-In Capital		Earnings		Income			Equity
BALANCE, December 31, 2007	134,149	$	1,341	$	705,778	$	142,039	$	619		$	849,777
Net income	—	—		—		30,878		—			30,878
Unrealized loss on change in fair value of interest rate swap agreements, net of tax of $65	—	—		—		—		(99		)	(99		)
Foreign currency translation	—	—		—		—		(10		)	(10		)
Total comprehensive income	—	—		—		—		—			30,769
Stock issued in business acquisition	838	8		17,998		—		—			18,006
Stock issued as director compensation	1	1		30		—		—			31
Stock-based compensation expense	—	—		1,114		—		—			1,114
Activity related to restricted stock awards	190	2		157		—		—			159
Exercise of stock options, including related tax benefits of $1,103	203	2		2,040		—		—			2,042
BALANCE, March 31, 2008	135,381	$	1,354	$	727,117	$	172,917	$	510		$	901,898

See notes to unaudited consolidated condensed financial statements.

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LKQ Corporation and Subsidiaries

Notes to Unaudited Consolidated Condensed Financial Statements

Note 1.  Interim Financial Statements

The unaudited financial statements presented in this report represent the consolidation of LKQ Corporation, a Delaware corporation, and its subsidiaries. LKQ Corporation is a holding company and all operations are conducted by subsidiaries. When the terms “the Company,” “we,” “us,” or “our” are used in this document, those terms refer to LKQ Corporation and its consolidated subsidiaries. All intercompany transactions and accounts have been eliminated.

We have prepared the accompanying Unaudited Consolidated Condensed Financial Statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. Accordingly, certain information related to our significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These Unaudited Consolidated Condensed Financial Statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Operating results for interim periods are not necessarily indicative of the results that can be expected for any subsequent interim period or for a full year.  These interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our most recent report on Form 10-K for the year ended December 31, 2007 filed with the SEC.

Note 2.  Significant Accounting Policies

Revenue Recognition

Revenue is recognized when products are shipped and title has transferred, subject to an allowance for estimated returns, discounts and allowances that we estimate based upon historical information. We have recorded a reserve for estimated returns, discounts and allowances of approximately $8.3 million and $7.5 million at March 31, 2008 and December 31, 2007, respectively.

Receivables

We have recorded a reserve for uncollectible accounts of approximately $4.0 million and $4.3 million at March 31, 2008 and December 31, 2007, respectively.

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Inventory

Inventory consists of the following (in thousands):

	March 31,		December 31,
	2008		2007
Salvage products	$	124,693	$	111,775
Aftermarket and refurbished products	200,705		201,408
Core facilities inventory	6,029		7,055
	$	331,427	$	320,238

Intangibles

Intangible assets consist primarily of goodwill (the cost of purchased businesses in excess of the fair value of the net assets acquired), and other specifically identifiable intangible assets such as the tradename acquired in connection with our acquisition of  Keystone Automotive Industries, Inc. (“Keystone”) during the fourth quarter of 2007, covenants not to compete and trademarks.

The change in the carrying amount of goodwill during the three months ended March 31, 2008 is as follows (in thousands):

Balance as of December 31, 2007	$	825,881
Adjustment of previously recorded goodwill	1,484
Exchange rate effects	(762		)
Business acquisitions	16,955
Balance as of March 31, 2008	$	843,558

We adjusted previously recorded goodwill primarily due to a final inventory valuation adjustment of approximately $0.4 million for a business acquired during the second quarter of 2007 and the establishment of additional reserves in connection with our Keystone restructuring activities (see Note 9) of approximately $1.0 million.

Other intangible assets totaled approximately $73.9 million and $75.0 million, net of accumulated amortization of $2.0 million and $1.0 million, at March 31, 2008 and December 31, 2007, respectively.  Amortization expense was approximately $1.0 million during the three months ended March 31, 2008. The amount for the corresponding 2007 period was immaterial. Estimated annual amortization expense is $3.8 million for each of the years 2008 through 2012.

Depreciation Expense

Included in Cost of Goods Sold is depreciation expense associated with refurbishing and smelting operations.

Stock-Based Compensation

We account for stock-based compensation in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”).

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The fair value of stock options has been estimated using the Black-Scholes option-pricing model. The following table summarizes the assumptions used to compute the weighted average fair value of stock option grants:

	Three Months Ended
	March 31,
	2008			2007
Expected life (in years)	6.4			6.4
Risk-free interest rate	3.27		%	4.39		%
Volatility	39.3		%	40.0		%
Dividend yield	0		%	0		%
Weighted average fair value of options granted	$	8.51		$	4.75

Expected life – The expected life represents the period that our stock-based awards are expected to be outstanding. Due to the limited information available regarding historical exercise experience, we have elected to use the simplified expected term method as permitted by the SEC Staff Accounting Bulletin No. 107 (“SAB 107”), as amended by Staff Accounting Bulletin No. 110 (“SAB 110”).

Risk-free interest rate – We base the risk free interest rate used in the Black-Scholes option-pricing model on the implied yield currently available on U.S. Treasury zero-coupon issues with the same or substantially equivalent remaining term as the expected life of the options granted.

Expected volatility – We use the trading history and historical volatility of our common stock, and because of limited historical data available on the price of our own publicly traded shares, the volatility of similar entities whose share prices are publicly available in determining an estimated volatility factor for the Black-Scholes option-pricing model.

Expected dividend yield –We have not declared and have no plans to declare cash dividends and have therefore used a zero value for the expected dividend yield in the Black-Scholes option-pricing model.

Estimated forfeitures – When estimating forfeitures, we consider voluntary and involuntary termination behavior as well as analysis of historical forfeitures.  For options granted in 2008, a forfeiture rate of 8.0% has been used for valuing employee option grants, while a forfeiture rate of 0% has been used for valuing executive officer option grants.

The components of pre-tax stock-based compensation are as follows (in thousands):

	Three Months Ended March 31,
	2008		2007
Stock options	$	1,114	$	1,149
Restricted stock	159		—
Stock issued in lieu of quarterly cash compensation for non-employee directors	31		18
Total stock-based compensation	$	1,304	$	1,167

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The following table sets forth the total stock-based compensation expense included in the accompanying Unaudited Consolidated Condensed Statements of Income (in thousands):

	Three Months Ended
	March 31,
	2008			2007
Cost of goods sold	$	3		$	3
Facility and warehouse expenses	473			238
Selling, general and administrative expenses	828			926
	1,304			1,167
Income tax benefit	(522		)	(455		)
Total stock based compensation, net of tax	$	782		$	712

We have not capitalized any stock-based compensation cost during the three months ended March 31, 2008 and 2007.  As of March 31, 2008, unrecognized compensation expense related to unvested stock options and restricted stock is expected to be recognized as follows (in millions):

	Stock Options		Restricted Stock		Total
Remainder of 2008	$	3.5	$	0.6	$	4.1
2009	4.5		0.7		5.2
2010	4.2		0.7		4.9
2011	3.3		0.7		4.0
2012	2.4		0.8		3.2
	$	17.9	$	3.5	$	21.4

SFAS 123R requires any reduction in taxes payable resulting from tax deductions that exceed the recognized compensation expense (excess tax benefits) to be classified as financing cash flows. We have included $1.1 million and $0.2 million of excess tax benefits in its cash flows from financing activities for the three months ended March 31, 2008 and 2007, respectively.

Segments

The following table sets forth our revenue by product category (in thousands):

	Three Months Ended
	March 31,
	2008		2007
Recycled products	$	152,895	$	129,308
Aftermarket and refurbished products	272,263		60,826
Other	66,750		45,184
	$	491,908	$	235,318

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Recent Accounting Pronouncements

Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) as it pertains to financial assets and liabilities. In accordance with the provisions of FASB Staff Position 157-2, we elected to defer the adoption of SFAS 157 relating to the fair value of non-financial assets and liabilities. We are currently evaluating the impact, if any, of applying SFAS 157 to our non-financial assets and liabilities. SFAS 157 established a framework for reporting fair value and expands disclosures required for fair value measurements. Although the adoption of SFAS 157 did not have a significant impact on our consolidated financial position, results of operations or cash flows, we are now required to provide additional disclosures as part of our financial statements. These additional disclosures are provided in Note 10.

Effective January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). The adoption of SFAS 159 did not have a significant impact on our consolidated financial position, results of operations or cash flows.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). Under SFAS 141R, companies will be required to, among other things,  recognize the assets acquired, liabilities assumed, including contractual contingencies, and contingent consideration at fair value on the date of acquisition. SFAS 141R also requires that acquisition-related expenses be expensed as incurred, restructuring costs be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred income tax asset valuation allowances and acquired income tax uncertainties after the measurement period be included in income tax expense. SFAS 141R will be effective in calendar 2009 and will change our accounting for business combinations upon adoption. We are currently assessing the impact that the adoption of SFAS 141R will have on our consolidated financial position, results of operations, and cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133” (“SFAS 161”). SFAS 161 requires enhanced disclosures about derivative and hedging activities and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We are currently assessing the impact that the adoption of SFAS 161 will have on our consolidated financial position, results of operations, and cash flows.

Note 3.  Capital Structure

On September 25, 2007, we completed the sale of 23,600,000 shares of our common stock pursuant to a registration statement filed with the Securities and Exchange Commission. Pursuant to the same registration statement, the selling stockholders named in the registration statement sold 4,000,000 shares of our common stock. We received $349.5 million, net of underwriting discount, and net of offering related expenses of approximately $0.7 million, for the common stock we issued and sold. We did not receive any proceeds from the sale of shares by the selling stockholders. We also received approximately $2.8 million in proceeds from the exercise of 1,000,000 stock options by certain members of management in connection with the offering.

On November 5, 2007, our Board of Directors approved a two-for-one split of our common stock payable as a stock dividend. Each stockholder of record at the close of business on November 16, 2007 received an additional share of common stock for every outstanding share held. The payment date was December 3, 2007, and the common stock began trading on a split-adjusted basis on December 4, 2007. All share and per share amounts for all periods presented have been adjusted to reflect the stock split.

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On March 4, 2008, in connection with a business acquisition, we issued 838,073 shares of our common stock.

Note 4.  Stock-Based Compensation Plans

We have two stock-based compensation plans, the LKQ Corporation 1998 Equity Incentive Plan (the “Equity Incentive Plan”) and the Stock Option and Compensation Plan for Non-Employee Directors (the “Director Plan”). Under the Equity Incentive Plan, both qualified and nonqualified stock options, stock appreciation rights, restricted stock, performance shares and performance units may be granted.  Under the Director Plan, directors can receive stock option grants.

Stock options expire 10 years from the date they are granted. Most of the options granted under the Equity Incentive Plan vest over a period of five years. Options granted under the Director Plan vest six months after the date of grant.  We expect to issue new shares of common stock to cover future stock option exercises.

On January 11, 2008, we issued 190,000 shares of restricted stock to key employees. The grant-date fair value of the awards was approximately $3.6 million, or $19.14 per share. Vesting of the awards is subject to a continued service condition, with 20% of the awards vesting each year on the anniversary of the grant date. The fair value of each share of restricted stock awarded was equal to the market value of a share of our common stock on the grant date.

A summary of transactions in our stock-based compensation plans for the three months ended March 31, 2008 is as follows:

	Restricted			Stock Options
	Shares and					Weighted
	Options		Restricted			Average
	Available		Shares	Number		Exercise
	For Grant		Outstanding	Outstanding		Price
Balance, December 31, 2007	6,852,680		—	11,032,102		$	5.06
Granted	(1,583,750	)	190,000	1,393,750		19.14
Exercised	—		—	(203,030	)	4.63
Cancelled	35,165		—	(35,165	)	13.23
Balance, March 31, 2008	5,304,095		190,000	12,187,657		$	6.65

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The following table summarizes information about outstanding and exercisable stock options at March 31, 2008:

	Outstanding				Exercisable
		Weighted				Weighted
		Average	Weighted			Average	Weighted
		Remaining	Average			Remaining	Average
Range of		Contractual	Exercise			Contractual	Exercise
Exercise Prices	Shares	Life (Yrs)	Price		Shares	Life (Yrs)	Price
$ 0.75	278,000	2.8	$	0.75	278,000	2.8	$	0.75
2.00 - 2.50	1,446,070	4.4	2.10		1,445,870	4.4	2.10
3.13 - 3.99	2,306,400	3.4	3.51		2,131,200	3.2	3.52
4.16 - 4.72	4,454,502	6.4	4.43		4,112,682	6.4	4.44
7.56 - 8.64	246,000	7.5	7.59		243,000	7.5	7.59
9.33 - 12.42	1,978,060	8.3	10.04		710,860	8.3	10.18
18.87 - 21.45	1,478,625	9.8	19.12		—	9.6	18.87
	12,187,657	6.3	$	6.65	8,921,612	5.4	$	4.27

At March 31, 2008, a total of 12,080,834 options with an average exercise price of $6.57 and a weighted average remaining contractual life of 6.2 years were expected to vest. The total grant-date fair value of options that vested during the three months ended March 31, 2008 was approximately $1.0 million.

The aggregate intrinsic value (market value of stock less option exercise price) of outstanding, expected to vest and exercisable stock options at March 31, 2008 is $192.8 million, $192.1 million and $162.4 million, respectively. The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $22.47 on March 31, 2008, which would have been received by the option holders had all option holders exercised their options as of that date. This amount changes based upon the fair market value of our common stock. The total intrinsic value of stock options exercised was $3.1 million during the three months ended March 31, 2008. There were 58,940 stock options exercised during the three months ended March 31, 2007 with an intrinsic value of $0.4 million.

Note 5.Long-Term Obligations

Long-Term Obligations consist of the following (in thousands):

	March 31,			December 31,
	2008			2007
Senior secured debt financing facility:
Term loans payable	$	646,464		$	650,252
Revolving credit facility	—			—
Notes payable to individuals in monthly installments through November 2010, interest at 3.5% to 10.0%	5,139			8,210
	651,603			658,462
Less current maturities	(17,452		)	(16,936		)
	$	634,151		$	641,526

On February 17, 2004, we entered into an unsecured revolving credit facility that originally was scheduled to mature in February 2007, replacing a secured credit facility that would have expired

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on June 30, 2005. This revolving credit facility initially had a maximum availability of $75 million, which was amended to $100 million on January 31, 2005. On June 1, 2005, the agreement was further amended to increase the maximum availability to $135 million, extend the maturity date to June 1, 2010 and modify certain other terms. On April 25, 2007, the agreement was further amended to increase the maximum availability to $205.0 million, to provide, with the consent of the participating banks, for a further increase in the maximum availability to $305.0 million, to extend the maturity to April 25, 2012, and to modify certain other terms. On May 30, 2007, the agreement was further amended and restated to enable us, among other things, to borrow funds in either U.S. or Canadian dollars.   On October 12, 2007, we entered into a new senior secured debt financing facility and the unsecured credit agreement was terminated. We were in compliance with all covenants as of each quarterly reporting period through September 30, 2007.

In order to finance our acquisition of Keystone and to re-finance our unsecured credit facility, we obtained a senior secured debt financing facility (“Credit Agreement”) from Lehman Brothers Inc. (“Lehman”) and Deutsche Bank Securities, Inc. (“Deutsche Bank”) on October 12, 2007, which was amended on October 26, 2007. The Credit Agreement has a six year term and includes a $610 million term loan, a $40 million Canadian currency term loan, a $100 million U.S. dollar revolving credit facility, and a $15 million dual currency facility for drawings of either U.S. dollars or Canadian dollars. The Credit Agreement also provides for the issuance of letters of credit of up to $35 million in U.S. dollars and up to $10 million in either U.S. or Canadian dollars, for a swing line credit facility of $25 million under the $100 million revolving credit facility, and the opportunity for us to add additional term loan facilities and/or increase the $100 million revolving credit facility’s commitments, provided that such additions or increases do not exceed $150 million in the aggregate. The letter of credit facilities and the swing line facility are part of the revolving credit facilities identified above and use of such facilities is taken into account when determining availability under such credit facilities. All of the obligations under the Credit Agreement are unconditionally guaranteed by each of our domestic subsidiaries. Obligations under the Credit Agreement, including the related guarantees, are collateralized by a security interest in substantially all of our domestic assets and our U. S. subsidiaries and a pledge of not more than 65% of the total outstanding voting interests of any direct or indirect non-U.S. subsidiary of ours that is a “controlled foreign corporation.”  Amounts under each term loan facility are due and payable in quarterly installments of increasing amounts beginning in 2008, with the balance payable in full at the end of year six. Amounts due under each revolving credit facility will be due and payable at the end of year six. We are also required to prepay the term loan facilities upon the sale of certain assets, upon the incurrence of certain debt, upon receipt of certain insurance and condemnation proceeds, and with up to 50% of our excess cash flow, with the amount of such excess cash flow determined based upon our total leverage ratio.

Indebtedness made and payable in U.S. dollars under the Credit Agreement bears interest, at our option, at (i) a base rate (the higher of (x) the rate that is the prime lending rate as set forth on the British Banking Association Reuters Page 5 or, under certain circumstances, such other comparable page as the agents may choose, as in effect from time to time, and (y) 0.5% in excess of the overnight federal funds rate) plus an applicable margin currently of 1.25% per annum, or (ii) a Eurodollar rate as determined by the administrative agent for the respective interest period plus an applicable margin currently of 2.25% per annum, except that indebtedness in respect of swing line loans bears interest only at the rate referred to in clause (i). Indebtedness made and payable in Canadian dollars under the Credit Agreement is made, at our option, as bankers’ acceptance loans or loans that bear interest at a rate equal to the rate per annum of interest publicly quoted or established as the “prime rate” of Deutsche Bank AG Canada Branch for commercial loans in Canadian dollars to its Canadian borrowers (which does not necessarily represent the lowest or best rate actually available) plus an applicable margin currently of 1.25% per annum.  Under each bankers’ acceptance loan, each Canadian lender will purchase a bill of exchange, including a depository bill issued in accordance with the Depository Bills and Notes Act (Canada),

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denominated in Canadian dollars and discount notes, and we will sell such bill of exchange, at the applicable discount rate which, (1) in respect of any bill of exchange accepted by a lender named on Schedule I to the Bank Act (Canada), is the average of the annual rates for bankers’ acceptances having the same specified term and face amount as the loan to be made to us that is reported by the Reuters Screen CDOR Page as of 10:00 a.m. on such day (or the next preceding business day if such day is not a business day) (or if not reported by the Reuters Screen, then will be the average of the discount rate offered by the five largest (by assets) Canadian charter banks) and (2) in respect of any other lender, the CDOR described above plus .10%.  We will also pay an acceptance fee for each bankers’ acceptance loan currently equal to 2.25% per annum.  The applicable margin and acceptance fee for loans under the revolving credit facilities are subject to a decrease of 0.25% based upon our total leverage ratio and the interest rate option chosen. Interest will be payable quarterly in arrears, except that interest based on a Eurodollar rate or bankers’ acceptance loans is payable in arrears on the last day of the relevant interest period and, for any Eurodollar interest period longer than three months, quarterly. Any default in the payment of principal, interest, or other overdue amounts bears interest at 2% above the rate otherwise applicable (or, if there is no applicable rate, at 2% above the base rate referred to in clause (i) above for loans made in U.S. dollars and the “prime rate” referred to in the second sentence of this paragraph for loans made in Canadian dollars). All overdue amounts are payable on demand.

The Credit Agreement contains customary representations and warranties, and contains customary covenants that restrict our ability to, among other things (i) incur liens, (ii) incur any indebtedness (including guarantees or other contingent obligations), (iii) engage in mergers and consolidations, (iv) engage in sales, transfers, and other dispositions of property and assets (including sale-leaseback transactions), (v) make loans, acquisitions, joint ventures, and other investments, (vi) make dividends and other distributions to, and redemptions and repurchases from, equity holders, (vii) prepay, redeem, or repurchase certain debt, (viii) make changes in the nature of our business, (ix) amend our organizational documents, or amend or otherwise modify certain of our debt documents, (x) change our fiscal quarter and fiscal year ends, (xi) enter into transactions with LKQ’s affiliates, (xii) make dividends, loans, and other transfers by subsidiaries of LKQ, and (xiii) issue certain equity interests. The Credit Agreement also requires us to comply with certain financial and affirmative covenants.

 The Credit Agreement contains events of default that include (i) the Company’s failure to pay principal when due or interest, fees, or other amounts after grace periods, (ii) covenant defaults, (iii) the Company’s material breach of any representation or warranty, (iv) cross defaults to certain other indebtedness, (v) bankruptcy, insolvency, or other similar proceedings, (vi) the Company’s inability to pay debts, (vii) judgment defaults of $15 million or more, (viii) customary ERISA and environmental defaults, (ix) actual or asserted invalidity of any material provision of the loan documentation or impairment of a portion of the collateral, (x) failure of subordinated indebtedness to be validly and sufficiently subordinated, and (xi) a change of control.

The weighted-average interest rate on borrowings outstanding against the Company’s senior secured credit facility at March 31, 2008 and December 31, 2007 was 5.30% and 7.53%, respectively. Borrowings against the senior secured credit facility totaled $646.5 million and $650.3 million at March 31, 2008 and December 31, 2007, respectively, $12.5 million and $10.0 million of which are classified as current maturities, respectively.

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During March 2008, we entered into the following interest rate swap agreements in order to hedge a portion of the variable interest rate risk on our variable rate term loans :

Notional Amount	Effective Date	Maturity Date	Fixed Interest Rate
$ 200,000,000	April 14, 2008	April 14, 2011	2.74	%
$ 50,000,000	April 14, 2008	April 14, 2010	2.43	%

Beginning on the effective dates of the interest rate swap agreements, we will, on a monthly basis through the maturity date, pay the fixed interest rate and receive a variable rate of interest based on the London InterBank Offered Rate (“LIBOR”) on the notional amount.  The interest rate swap agreements qualify as cash flow hedges, as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS 133”).  As of March 31, 2008, the fair market value of these market contracts was approximately negative $0.2 million. The fair market value of the interest rate swaps is subject to changes in value due to changes in interest rates.

Note 6.  Commitments and Contingencies

We are obligated under noncancelable operating leases for corporate office space, warehouse and distribution facilities, trucks and certain equipment. The future minimum lease commitments under these leases at March 31, 2008 are as follows (in thousands):

Nine months ended December 31, 2008	$	33,398
Years ended December 31:
2009	35,737
2010	27,105
2011	19,257
2012	13,592
2013	10,791
Thereafter	19,262
	$	159,142

Litigation and Related Contingencies

On December 2, 2005, Ford Global Technologies, LLC (“Ford”) filed a complaint under Section 337 of the Tariff Act of 1930 with the United States International Trade Commission (“USITC”) against Keystone and five other named Respondents, including four Taiwan-based manufacturers. On December 12, 2005, Ford filed an Amended Complaint. Both the Complaint and the Amended Complaint contended that Keystone and the other Respondents infringed 14 design patents that Ford alleges cover eight parts on the 2004-2005 Ford F-150 truck (the “Ford Design Patents”). Ford asked the USITC to issue a permanent general exclusion order excluding from entry into the United States all automotive parts that infringe the Ford Design Patents and that are imported into the United States, sold for importation in the United States, or sold within the United States after importation. Ford also sought a permanent order directing Keystone and the other Respondents to cease and desist from, among other things, selling, marketing, advertising, distributing and offering for sale imported automotive parts that infringe the Ford Design Patents. On December 28, 2005, the USITC issued a Notice of Investigation based on Ford’s Amended Complaint. The USITC’s Notice of Investigation was published in the Federal Register on January 4, 2006.

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On January 23, 2006, Keystone filed its Response to the Complaint and Notice of Investigation. In the Response, Keystone denied, among other things, that any of the Ford Design Patents is valid and/or enforceable and, accordingly, denied each and every allegation of infringement. Keystone further asserted several affirmative defenses.  In interlocutory rulings, the Administrative Law Judge (“ALJ”) struck Keystone’s affirmative defenses of patent exhaustion, permissible repair, license and patent misuse and Keystone’s affirmative defense that each of the patents is invalid for failure to comply with the ornamentality requirement of 35 U.S.C.§171. Additionally, the ALJ granted Ford’s request to drop four patents from the investigation. A hearing before the ALJ took place the last week of August 2006.

On December 4, 2006, the ALJ issued an Initial Determination upholding seven of Ford’s design patents and declaring the remaining three design patents to be invalid. Both Ford and the Company petitioned the USITC to review and set aside portions of the ALJ’s Initial Determination. Keystone’s petition also sought review of the ALJ’s interlocutory rulings concerning certain of its affirmative defenses. On March 20, 2007, the USITC decided not to review the ALJ’s Initial Determination.

On June 6, 2007, the USITC issued its Notice of Final Determination. The Notice of Final Determination denied Respondents’ petition for reconsideration and their motion for leave to supplement their petition. In addition, the USITC issued a general exclusion order prohibiting the importation of certain automotive parts found to infringe the seven Ford design patents found valid. The USITC’s decision became final on August 6, 2007 upon the expiration without action of the 60-day Presidential review period.  On May 18, 2007, Ford filed a Notice of Appeal with the United States Federal Circuit Court of Appeals with regard to the three patents declared invalid in the ALJ’s Initial Determination. On August 23, 2007, the Respondents filed a Notice of Appeal with the United States Federal Court of Appeals.   The appeals were consolidated, and the parties have submitted their respective briefs to the appellate court.

On May 2, 2008, Ford filed with the USITC another complaint under section 337 of the Tariff Act of 1930. The complaint alleges that LKQ Corporation, Keystone Automotive Industries, Inc., and six other entities import and sell certain automotive parts relating to the 2005 Ford Mustang that infringe eight Ford design patents. The USITC has 30 days from the date of filing to determine whether it is going to institute an investigation.

We will continue to defend the December 2005 action, and intend to defend the May 2008 action, vigorously. At the time the exclusion order was issued in the December 2005 action, the parts that are subject to the order comprised only a minimal amount of our sales. Similarly, the parts that relate to the May 2008 action comprise only a minimal amount of our sales. However, as such parts become incorporated into more vehicles over time, it is likely that the amount of our sales of such parts will increase or would have increased substantially. If the design patents in question are ultimately upheld as valid and infringed, it is not anticipated that the loss of sales of these parts over time will be materially adverse to our financial condition, cash flows or results of operations. However, depending upon the nature and extent of any adverse ruling, auto manufacturers may attempt to assert similar allegations based upon design patents on a significant number of parts for several of their models, which over time could have a material adverse impact on the entire aftermarket parts industry.

In July 2007, two class action lawsuits captioned Lynch v. Keystone Automotive Industries, Inc., Case No. BC374399, and Shoys v. Keystone Automotive Industries, Inc., Case No. BC374480, were filed in the Superior Court of the State of California, County of Los Angeles in connection with our acquisition of Keystone. On September 17, 2007, Keystone entered into a conditional memorandum of understanding with plaintiffs’ counsel and the other named defendants in the actions pursuant to which the parties agreed to settle the actions, subject to certain conditions, including confirmatory discovery and court approval of the final settlement. On April 28, 2008, the court approved the settlement, which was covered by insurance, other than our costs for the $250,000 deductible and approximately $100,000 in fees and expenses.

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We also have certain other contingent liabilities resulting from litigation, claims and other commitments and is subject to a variety of environmental and pollution control laws and regulations incident to the ordinary course of business. We believe that the probable resolution of such contingencies will not materially affect our financial position, results of operations or cash flows.

Note 7.  Earnings Per Share

The following chart sets forth the computation of earnings per share (in thousands, except per share amounts):

	Three Months Ended
	March 31,
	2008		2007
Net income	$	30,878	$	15,794
Denominator for basic earnings per share- Weighted-average shares outstanding	134,558		106,633
Effect of dilutive securities:
Stock options	5,031		5,371
Nonvested restricted shares	93		—
Denominator for diluted earnings per share- Adjusted weighted-average shares outstanding	139,682		112,004
Earnings per share, basic	$	0.23	$	0.15
Earnings per share, diluted	$	0.22	$	0.14

The following chart sets forth the number of employee stock options outstanding but not included in the computation of diluted earnings per share because their effect would have been antidilutive (in thousands):

	Three Months Ended March 31,
	2008	2007
Antidilutive securities:
Stock options	1,486	2,122

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Note 8.  Business Combinations

During the three month period ended March 31, 2008, we acquired a 100% equity interest in each of two businesses in the recycled OEM parts business, including on March 4, 2008, Texas Best Diesel, L.P., a recycled OEM heavy truck parts business.  The aggregate consideration for these businesses totaled approximately $4.2 million in cash and $18.0 million in stock issued. The acquisitions enabled us to serve new market areas and become a provider of recycled OEM heavy truck parts.

During the three month period ended March 31, 2007, we acquired a 100% equity interest in each of four businesses (two in the recycled OEM automotive parts business, one in the aftermarket automotive parts business and, on January 1, 2007, Northern Light Refinishing, Inc., a business that refurbishes and distributes head and tail light assemblies) for an aggregate of $14.5 million in cash and $0.8 million in notes issued. The acquisitions enabled us to serve new market areas and become a significant provider of refurbished headlight assemblies.

On October 12, 2007, we completed our acquisition of 100% of the outstanding common stock of Keystone. The acquisition of Keystone enabled us to become the largest nationwide provider of aftermarket collision replacement products and refurbished bumper covers and wheels.

The acquisitions are being accounted for under the purchase method of accounting and are included in the Company’s financial statements from the dates of acquisition.  The purchase prices were allocated to the net assets acquired based upon estimated fair market values at the dates of acquisition. In connection with acquisitions made subsequent to March 31, 2007, the purchase price allocations are preliminary as the Company is in the process of determining the following: 1) whether any operations acquired will be closed or combined with existing operations; 2) valuation amounts for certain of the inventories and fixed assets acquired and the fair value of liabilities assumed; and 3) the final estimation of the tax basis of the entities acquired. During the quarter ended March 31, 2008, the Company made adjustments to the preliminary purchase allocations to finalize the inventory valuations and the estimated tax basis for certain of the businesses acquired in 2007 and to adjust restructuring reserves directly related to the Keystone acquisition (see Note 9). These adjustments increased goodwill related to these 2007 acquisitions by approximately $1.5 million.

The purchase price allocations for acquisitions completed and adjustments made to preliminary purchase price allocations during the three months ended March 31, 2008 and 2007 are as follows (in thousands):

	2008			2007
Receivables, net	$	311		$	247
Inventory	2,783			3,746
Prepaid expenses and other assets	11			17
Property and equipment	1,943			1,029
Goodwill	18,439			10,670
Current liabilities assumed	(1,295		)	(465		)
Purchase price payable in subsequent period	—			(20		)
Notes issued	—			(750		)
Stock issued (See Note 3)	(18,006		)	—
Payment of prior year purchase price payable	—			100
Cash used in acquisitions, net of cash acquired	$	4,186		$	14,574

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We recorded goodwill of $18.4 million during the three month period ended March 31, 2008, none of which is expected to be deductible for income tax purposes. All of the $10.7 million of goodwill recorded during the three month period ended March 31, 2007 is expected to be deductible for income tax purposes.

The following pro forma summary presents the effect of the businesses acquired during 2008 and 2007 as though the businesses had been acquired as of January 1, 2007 and is based upon unaudited financial information of the acquired entities (in thousands, except per share data):

	Three Months Ended March 31,
	2008		2007
Revenue as reported	$	491,908	$	235,318
Revenue of purchased businesses for the period prior to acquisition:
Keystone, net of eliminations	—		199,286
Other acquisitions	2,054		16,441
Pro forma revenue	$	493,962	$	451,045
Net income as reported	$	30,878	$	15,794
Net income of purchased businesses for the period prior to acquisition, including adjustments for interest and amortization:
Keystone	659		2,871
Other acquisitions	360		815
Pro forma net income	$	31,897	$	19,480
Earnings per share-basic as reported	$	0.23	$	0.15
Effect of purchased businesses for the period prior to acquisition:
Keystone	0.01		0.02
Other acquisitions	—		0.01
Pro forma earnings per share-basic	$	0.24	$	0.18
Earnings per share-diluted as reported	$	0.22	$	0.14
Effect of purchased businesses for the period prior to acquisition:
Keystone	0.01		0.02
Other acquisitions	—		0.01
Pro forma earnings per share-diluted	$	0.23	$	0.17

Unaudited pro forma supplemental information is based upon accounting estimates and judgments that we believe are reasonable. Revenue between LKQ and Keystone has been eliminated. The unaudited pro forma supplemental information also includes purchase accounting adjustments (including a $2.2 million increase in Keystone’s reported cost of goods sold during the three months ended March 31, 2007 resulting from a write-up of Keystone’s inventory to fair value and adjustments to depreciation on acquired property and equipment), amortization expense associated with the Keystone tradename, adjustments to interest expense, and the related tax effects. These pro forma results are not necessarily indicative either of what would have occurred if the acquisitions had been in effect for the period presented or of future results.

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Note 9. Restructuring and Integration Costs

We have undertaken certain restructuring activities in connection with our acquisition of Keystone during the fourth quarter of 2007. The restructuring activities primarily include reductions in staffing levels resulting from the elimination of duplicative functions and staffing and the closure of excess facilities resulting from overlap with existing LKQ facilities. To the extent these restructuring activities are associated with Keystone operations, they are being accounted for in accordance with EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” (“EITF 95-3”). Restructuring activities associated with our existing operations are being accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated With Exit or Disposal Activities.”

 In connection with the Keystone restructuring activities, as part of the cost of the acquisition, we established reserves as detailed below. In accordance with EITF 95-3, we intend to finalize our restructuring plans no later than one year from the date of our acquisition of Keystone. Upon finalization of restructuring plans or settlement of obligations for less than the expected amount, any excess reserves will be reversed with a corresponding decrease in goodwill.  Accrued acquisition expenses are included in Other accrued expenses in the accompanying Consolidated Balance Sheet.

The changes in accrued acquisition expenses directly related to the Keystone acquisition during 2007 and the three months ended March 31, 2008 are as follows (in thousands):

	Severance Related Costs			Excess Facility Costs			Other			Total
Reserves established	$	11,233		$	2,823		$	488		$	14,544
Payments	(1,727		)	(85		)	(488		)	(2,300		)
Balance at December 31, 2007	9,506			2,738			—			12,244
Reserves established	575			452			—			1,027
Payments	(575		)	(423		)	—			(998		)
Balance at March 31, 2008	$	9,506		$	2,767		$	—		$	12,273

The severance related costs are expected to be paid in 2008. The excess facility costs are expected to be paid over the remaining terms of the leases through 2013.

Restructuring and integration costs associated with our existing operations are included in Restructuring expenses on the accompanying Consolidated Condensed Statements of Income.  These costs, which include severance costs and costs associated with the closure of existing facilities that overlap with acquired Keystone facilities, as well as costs to migrate systems, train employees and standardize processes and procedures, totaled approximately $1.2 million during the three months ended March 31, 2008.

Note 10. Fair Value Measurements

SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

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We use the market approach to value our financial assets and liabilities, and there were no changes in valuation techniques during the three months ended March 31, 2008.  The following table presents information about our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2008 (in thousands):

	Balance as of
	March 31,		Fair Value Measurements as of March 31, 2008
	2008		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	60,599	$	60,599	$	—	$	—
Cash surrender value of life insurance	4,925		—		4,925		—
Total Assets	$	65,524	$	60,599	$	4,925	$	—-
Liabilities:
Interest rate swap	$	164	$	—	$	164	$	—
Deferred compensation liabilities	4,659		—		4,659		—
Total Liabilities	$	4,823	$	—-	$	4,823	$	—-

Note 11. Income Taxes

We calculate our interim income tax provision in accordance with Accounting Principles Board Opinion No. 28, “Interim Financial Reporting” and FASB Interpretation No. 18, “Accounting for Income Taxes in Interim Periods.” At the end of each interim period, we estimate our annual effective tax rate and apply that rate to our interim earnings. We also record the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and the effects of changes in tax laws or rates, in the interim period in which they occur.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgments. Such judgments include, but are not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in state and foreign jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.

Our effective tax rate for the three months ended March 31, 2008 was 40.0% compared with 39.7% for the comparable prior year period.

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

Overview

We provide replacement systems, components, and parts needed to repair vehicles (cars and trucks). Buyers of vehicle replacement products have the option to purchase from primarily three sources: new products produced by original equipment manufacturers (“OEMs”), which are commonly known as OEM products; new products produced by companies other than the OEMs, which are sometimes referred to generically as “aftermarket” products; and recycled products originally produced by OEMs, which we refer to as recycled OEM products. We participate in the market for recycled OEM products as well as the market for collision repair aftermarket products. We obtain aftermarket products and salvage vehicles from a variety of sources, and we dismantle the salvage vehicles to obtain a comprehensive range of vehicle products that we distribute into the vehicle repair market. We also refurbish bumpers, wheels, head lamps and tail lamps.

We are the largest nationwide provider of recycled OEM products and related services, with sales, processing, and distribution facilities that reach most major markets in the U.S. In October 2007, we acquired Keystone Automotive Industries, Inc., the nation’s leading distributor of aftermarket collision parts. As a result, we are the largest nationwide provider of aftermarket collision replacement products, and refurbished bumper covers and wheels. We believe there are opportunities for growth in both product lines through acquisitions and internal development.

Our revenue, cost of goods sold, and operating results have fluctuated on a quarterly and annual basis in the past and can be expected to continue to fluctuate in the future as a result of a number of factors, some of which are beyond our control. Factors that may affect our operating results include, but are not limited to:

·fluctuations in the pricing of new OEM replacement products;

·the availability and cost of inventory;

·variations in vehicle accident rates;

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·competition in the vehicle replacement parts industry;

·changes in state or federal laws or regulations affecting our business;

·changes in the types of replacement parts that insurance carriers will accept in the repair process;

·our ability to integrate and manage all of our acquisitions, including Keystone, successfully, and unanticipated costs of integration;

·fluctuations in fuel prices;

·changes in the demand for our products and the supply of our inventory due to severity of weather and seasonality of weather patterns;

·the amount and timing of operating costs and capital expenditures relating to the maintenance and expansion of our business, operations, and infrastructure; and

·declines in the value of our assets.

Due to the foregoing factors, our operating results in future periods can be expected to fluctuate. Accordingly, our historical results of operations may not be indicative of future performance.

Acquisitions

Since our inception in 1998 we have pursued a growth strategy of both organic growth and acquisitions. We have pursued acquisitions that we believe will help drive profitability, cash flow and stockholder value. Our principal focus for acquisitions is companies that will expand our geographic presence and our ability to provide a wider choice of alternative vehicle replacement products and services to our customers.

In the first quarter of 2008, we acquired two businesses in the recycled OEM parts business. These business acquisitions enabled us to expand our presence in an existing market and become a provider of recycled OEM heavy truck parts.

Sources of Revenue

Since 2005, our revenue from the sale of vehicle replacement products and related services, and since February 2008, heavy truck parts,  has ranged between 83% and 91% of our total revenue, of which between 5% and 11% of our total revenue has come from our self-service facilities. We sell the majority of our vehicle replacement products to collision repair shops and mechanical repair shops. Our vehicle replacement products include engines, transmissions, front-ends, doors, trunk lids, bumpers, hoods, fenders, grilles, valances, wheels, head lamps, and tail lamps. We sell extended warranty contracts for certain mechanical products. These contracts cover the cost of parts and labor and are sold for periods of six months, one year, or two years. We defer the revenue from such contracts and recognize it ratably over the term of the contracts. The demand for our products and services is influenced by several factors, including the number of vehicles in operation, the number of miles being driven, the frequency and severity of vehicle accidents, availability and pricing of new parts, seasonal weather patterns, and local weather conditions. Additionally, automobile insurers exert significant influence over collision repair shops as to how an insured vehicle is repaired and the cost level of the products used in the repair process. Accordingly, we consider automobile insurers to be key demand drivers of our products. While they are not our direct customers, we do provide insurance companies services in an effort to promote the increased usage of alternative replacement products in the repair process. Such services include the review of vehicle repair order estimates, as well as direct quotation services to their adjusters. There is no standard price for recycled OEM products, but rather a pricing structure that varies from day to day based upon such factors as product availability, quality, demand, new OEM replacement product prices, the age of the vehicle being repaired, and competitor pricing. The pricing for aftermarket and refurbished products is determined based on a number of factors, including availability, quality, demand, new OEM replacement product prices, and competitor pricing.

Since 2005, approximately 9% to 17% of our revenue has been obtained from other sources. These include bulk sales to mechanical remanufacturers, scrap sales, sales of aluminum ingots and sows, and sales of damaged vehicles to vehicle repairers. Our revenue from other sources has increased since 2004 primarily due to our obtaining an aluminum smelter through a business acquisition in 2006, higher scrap sales from our recycle and wheel operations, and higher bulk sales of certain products.

When we obtain mechanical products from dismantled vehicles and determine they are damaged, or when we have a surplus of a certain mechanical product type, we sell them in bulk to mechanical remanufacturers. The majority of these products are sorted by product type and model type. Examples of such products are engine blocks and heads, transmissions, starters, alternators, and air

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conditioner compressors. After we have recovered all the products we intend to resell, the remaining materials are crushed and sold to scrap processors.

Cost of Goods Sold

Our cost of goods sold for recycled OEM products includes the price we pay for the salvage vehicle and, where applicable, auction, storage, and towing fees. We are facing increasing competition in the purchase of salvage vehicles from shredders and scrap recyclers, internet-based buyers, and others. Our cost of goods sold also includes labor and other costs we incur to acquire and dismantle such vehicles. Since 2005, our labor and labor-related costs related to acquisition and dismantling have accounted for approximately 9% to 10% of our cost of goods sold for vehicles we dismantle. The acquisition and dismantling of salvage vehicles is a manual process and, as a result, energy costs are not material.

Our cost of goods sold for aftermarket products includes the price we pay for the parts, freight, and other inventoried costs such as import fees and duties, where applicable. Our aftermarket products are acquired from a number of vendors. Our cost of goods sold for refurbished wheels, bumpers and lights includes the price we pay for inventory, freight, and costs to refurbish the parts, including direct and indirect labor, rent, depreciation and other overhead costs related to refurbishing operations.

In the event we do not have a recycled OEM product or suitable aftermarket product in our inventory to fill a customer order, we attempt to purchase the part from a competitor. We refer to these parts as brokered products. Since 2005, the revenue from brokered products that we sell to our customers has ranged from 2% to 8% of our total revenue. The gross margin on brokered product sales as a percentage of revenue is generally less than half of what we achieve from sales of our own inventory because we must pay higher prices for these products.

Some of our mechanical products are sold with a standard six-month warranty against defects. We record the estimated warranty costs at the time of sale using historical warranty claim information to project future warranty claims activity and related expenses. Our warranty activity during the first three months of 2008 was as follows (in thousands):

Balance as of January 1, 2008	$	580
Warranty expense	905
Warranty claims	(915		)
Balance as of March 31, 2008	$	570

We also sell separately priced extended warranty contracts for certain mechanical products. The expense related to extended warranty claims is recognized when the claim is made.

Expenses

Our facility and warehouse expenses primarily include our costs to operate our distribution, self-service, and warehouse facilities. These costs include labor for both plant management and facility and warehouse personnel, stock-based compensation, facility rent, property and liability insurance, utilities, and other occupancy costs.

Our distribution expenses primarily include our costs to deliver our products to our customers. Included in our distribution expense category are labor costs for drivers, local delivery and transfer truck rentals and subcontractor costs, vehicle repairs and maintenance, insurance, and fuel.

Our selling and marketing expenses primarily include our advertising, promotion, and marketing costs; salary and commission expenses for sales personnel; sales training; telephone and other communication expenses; and bad debt expense. Since 2005, personnel costs have accounted for approximately 77% to 80% of our selling and marketing expenses. Most of our recycled OEM product sales personnel are paid on a commission basis. The number and quality of our sales force is critical to our ability to respond to our customers’ needs and increase our sales volume. Our objective is to continually evaluate our sales force, develop and implement training programs, and utilize appropriate measurements to assess our selling effectiveness.

Our general and administrative expenses include primarily the costs of our corporate and regional offices that provide corporate and field management, treasury, accounting, legal, payroll, business development, human resources, and information systems functions. These costs include wages and benefits for corporate, regional and administrative personnel, stock-based compensation, long term incentive compensation, accounting, legal and other professional fees, office supplies, telephone and other communication costs, insurance and rent.

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Seasonality

Our operating results are subject to quarterly variations based on a variety of factors, influenced primarily by seasonal changes in weather patterns. During the winter months we tend to have higher demand for our products because there are more weather related accidents. In addition, the cost of salvage vehicles tends to be lower as more weather related accidents occur generating a larger supply of total loss vehicles.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these financial statements requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, assumptions, and judgments, including those related to revenue recognition, inventory valuation, allowance for doubtful accounts, goodwill impairments, self-insurance programs, contingencies, stock-based compensation, and accounting for income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities and our recognition of revenue. Actual results may differ from these estimates.

Revenue Recognition

We recognize and report revenue from the sale of vehicle replacement products when they are shipped and title has transferred, subject to a reserve for returns, discounts, and allowances that management estimates based upon historical information. A replacement product would ordinarily be returned within a few days of shipment. Our customers may earn discounts based upon sales volumes or sales volumes coupled with prompt payment. Allowances are normally given within a few days following product shipment. We analyze historical returns and allowances activity by comparing the items to the original invoice amounts and dates. We use this information to project future returns and allowances on products sold.

We also sell separately priced extended warranty contracts for certain mechanical products. Revenue from these contracts is deferred and recognized ratably over the term of the contracts.

Inventory Accounting

Salvage Inventory.  Salvage inventory is recorded at the lower of cost or market. Our salvage inventory cost is established based upon the price we pay for a vehicle, and includes buying; dismantling; and, where applicable, auction, storage, and towing fees. Inventory carrying value is determined using the average cost to sales percentage at each of our facilities and applying that percentage to the facility’s inventory at expected selling prices. The average cost to sales percentage is derived from each facility’s historical vehicle profitability for salvage vehicles purchased at auction or from contracted rates for salvage vehicles acquired under direct procurement arrangements.

Aftermarket and Refurbished Product Inventory.  Aftermarket and refurbished product inventory is recorded at the lower of cost or market. Our aftermarket inventory cost is based on the average price we pay for parts, and includes expenses incurred for freight and buying, where applicable. For items purchased from foreign sources, import fees and duties and transportation insurance are also included. Our refurbished product inventory cost is based on the average price we pay for wheel cores, and includes expenses incurred for freight, buying and refurbishing overhead.

For all inventory, our carrying value is reduced regularly to reflect the age and current anticipated demand for our products. If actual demand differs from our estimates, additional reductions to our inventory carrying value would be necessary in the period such determination is made.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts, the aging of the accounts receivable, and our historical experience. Our allowance for doubtful accounts at March 31, 2008 was approximately $4.0 million, which represents 2.9% of gross receivables. If actual defaults are higher than our historical experience, our allowance for doubtful accounts may be insufficient to cover the uncollectible receivables, which would have an adverse impact on our operating results in the period of occurrence. A 10% change in the 2007 annual write-off rate would result in a change in the estimated allowance for doubtful accounts of approximately $0.2 million. For our vehicle replacement parts operations, our exposure to uncollectible accounts receivable is limited because the majority of our sales are to a large number of small customers that are generally geographically dispersed. We also have certain customers in our vehicle replacement parts operations that pay for products at the time of delivery. The aluminum smelter and our mechanical core operation sell in larger quantities to a small number

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of distributors, foundry customers and remanufacturers. As a result, our exposure to uncollectible accounts receivable is greater in these operations. We control credit risk through credit approvals, credit limits, and monitoring policies.

Goodwill Impairment

We record goodwill as a result of our acquisitions. Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), requires us to analyze our goodwill for impairment at least annually. The determination of the value of goodwill requires us to make estimates and assumptions that affect our consolidated financial statements. In assessing the recoverability of our goodwill, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. We perform goodwill impairment tests annually in the fourth quarter and between annual tests whenever events may indicate that an impairment exists. In response to changes in industry and market conditions, we may be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill.

Our goodwill would be considered impaired if the net book value of a reporting unit exceeded its estimated fair value. The fair value estimates are primarily established using a discounted cash flow methodology, supported by comparative market multiples where appropriate. As of March 31, 2008, we had $843.6 million in goodwill subject to future impairment tests. If we were required to recognize goodwill impairments in future periods, we would report those impairment losses as part of our operating results. We determined that no adjustments were necessary when we performed our annual impairment testing in the fourth quarter of 2007. A 10% decrease in the fair value estimates used in the fourth quarter of 2007 impairment test would not have changed this determination.

Self-Insurance Programs

We self-insure a portion of employee medical benefits under the terms of our employee health insurance program. We also self-insure a portion of automobile, general liability, and workers’ compensation claims. We have purchased both aggregate (in some cases) and specific (in all cases) stop-loss insurance coverage from third party insurers in order to limit our total liability exposure. The cost of the stop-loss insurance is expensed over the contract periods.

We record an accrual for the claims expense related to our employee medical benefits, automobile, general liability, and workers’ compensation claims based upon the expected amount of all such claims. If actual claims are higher than what we anticipated, our accrual might be insufficient to cover our claims costs, which would have an adverse impact on our operating results in that period.

Contingencies

We are subject to the possibility of various loss contingencies arising in the ordinary course of business resulting from litigation, claims and other commitments, and from a variety of environmental and pollution control laws and regulations. We consider the likelihood of loss or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. We accrue an estimated loss contingency when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We determine the amount of reserves, if any, with the assistance of our outside legal counsel. We regularly evaluate current information available to us to determine whether the accruals should be adjusted. If the amount of an actual loss were greater than the amount we have accrued, the excess loss would have an adverse impact on our operating results in the period that the loss occurred. If the loss contingency is subsequently determined to no longer be probable, the amount of loss contingency previously accrued would be included in our operating results in the period such determination was made.

Accounting for Income Taxes

All income tax amounts reflect the use of the liability method. Under this method, deferred tax assets and liabilities are determined based upon the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. We operate in multiple tax jurisdictions with different tax rates, and we determine the allocation of income to each of these jurisdictions based upon various estimates and assumptions.

We record a provision for taxes based upon our effective income tax rate. We record a valuation allowance to reduce our deferred tax assets to the amount that we expect is more likely than not to be realized. We consider historical taxable income, expectations, and risks associated with our estimates of future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance. We had a valuation allowance of $0.6 million and $0.7 million at March 31, 2008 and December 31, 2007, respectively, against our deferred tax assets. Should we determine that it is more likely than not that we would be able to realize all of our deferred tax assets in the future, an adjustment to the net deferred tax asset would increase income in the period such determination was made. Conversely, should we determine that it is more likely than not that we would not be able to realize all of our deferred tax assets in the future, an adjustment to the net deferred tax assets would decrease income in the period such determination was made.

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We adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), effective January 1, 2007. FIN 48 establishes a threshold for the financial statement recognition and measurement of tax positions taken or expected to be taken in tax returns. Only those positions that meet the more-likely-than-not recognition threshold may be recognized in the financial statements. We recognize interest accrued relating to unrecognized tax benefits in our income tax expense. As a result of the implementation of FIN 48, we recorded a $0.4 million increase in the liability for unrecognized tax benefits, an increase in deferred tax assets of $0.1 million and a decrease of $0.3 million in the January 1, 2007 retained earnings balance. Prior to 2007, we recorded accruals for tax contingencies and related interest when it was determined that it was probable that we had incurred a liability and the amount could reasonably be estimated based on specific events such as an audit by a taxing authority. In the normal course of business we will undergo tax audits by various tax jurisdictions. Such audits often require an extended period of time to complete and may result in income tax adjustments if changes to the allocation are required between jurisdictions with different tax rates. Under existing GAAP, changes in accruals for uncertainties arising from the resolution of pre-acquisition contingencies of acquired businesses are charged or credited to goodwill. Adjustments to other tax accruals we make are generally recognized in the period they are determined. Under proposed Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), changes in accruals for uncertainties arising from the resolution of pre-acquisition contingencies of acquired businesses will be recorded in earnings in the period the changes are determined after the effective date of SFAS 141R. See “Recently Issued Accounting Pronouncements” for further discussion of SFAS 141R.

Stock-Based Compensation

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), a revision of SFAS 123. SFAS 123R supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS 95, “Statement of Cash Flows.” SFAS 123R requires us to measure compensation cost for all share-based payments (including employee stock options) at fair value and to recognize the cost over the vesting period, and was effective for us on January 1, 2006. In March 2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC staff position concerning the application of SFAS 123R, including interpretive guidance. We implemented the provisions of SFAS 123R and SAB 107 in the first quarter of 2006 using the modified prospective method, pursuant to which prior periods are not restated. Compensation expense for all share-based payments granted or modified after the effective date is recognized prospectively based upon the requirements of SFAS 123R and compensation expense for all unvested share-based payments as of January 1, 2006 that were issued subsequent to the filing of our registration statement for our initial public offering in October 2003 is recognized prospectively based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, “Accounting for Stock-Based Compensation,” net of estimated forfeitures. We have elected to recognize compensation expense for all awards on a straight-line basis over the requisite service period of the award.

Several key factors and assumptions affect the valuation models currently utilized for valuing our stock option awards under SFAS 123R. We have been in existence since early 1998 and have been a public company since October 2003. As a result, we do not have the historical data necessary to consider using a lattice valuation model at this time. We have therefore elected to use the Black-Scholes valuation model. In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”) to amend the SEC’s views discussed in SAB 107 regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with SFAS No. 123R. We will continue to use the simplified method until we have the historical data necessary to provide a reasonable estimate of expected life in accordance with SAB 107, as amended by SAB 110. For expected term, we have what SAB 107 defines as “plain-vanilla” stock options, and therefore used a simple average of the vesting period and the contractual term for options granted subsequent to January 1, 2006 as permitted by SAB 107. Volatility is a measure of the amount by which our stock price is expected to fluctuate during the expected term of the option. For volatility, we considered our own volatility for the limited time we have been a public company as well as the disclosed volatilities of companies that are considered comparable to us. Our forfeiture assumption is based on historical forfeiture rates both pre-IPO and since we have been a public company. SFAS 123R requires that forfeitures be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The dividend yield represents the dividend rate expected to be paid over the option’s expected term, and we currently have no plans to pay dividends. The risk-free interest rate is based on zero-coupon U.S. government issues available at the time each option is granted that have a remaining life approximately equal to the option’s expected life. Key assumptions used in determining the fair value of stock options granted in January 2008 were: expected term of 6.4 years; risk-free interest rate of 3.27%; dividend yield of 0%; forfeiture rate of 6.7%; and volatility of 39.3%.

Recently Issued Accounting Pronouncements

In July 2006, the FASB issued FIN 48. FIN 48 provides guidance on the measurement, recognition, and disclosure of tax positions taken or expected to be taken in a tax return. FIN 48 provides that a tax position should only be recognized if it is more likely than not that the position will be sustained upon examination by the appropriate taxing authority. This interpretation also provides guidance on derecognition, classification, interest and penalties, transition and disclosure. We adopted FIN 48 in the first quarter of 2007, which resulted in an increase in the liabilities for unrecognized tax benefits of $0.4 million, an increase in our deferred tax assets of $0.1 million, and a decrease in our beginning retained earnings of $0.3 million.

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In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP 157-1”) and FSP 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-1 amends SFAS 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis, until the calendar year 2009. The measurement and disclosure requirements related to financial assets and liabilities were effective beginning in calendar year 2008. We adopted SFAS 157 in the first quarter of 2008 and its adoption did not have a significant impact on our consolidated financial position, results of operations, or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, and amends SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” SFAS 159 is effective for fiscal years beginning after November 15, 2007.  We adopted SFAS 159 in the first quarter of 2008 and its adoption did not have a significant impact on our consolidated financial position, results of operations, or cash flows.

In December 2007, the SEC issued SAB 110 to amend the SEC’s views discussed in SAB 107 regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with SFAS No. 123R. We will continue to use the simplified method until we have the historical data necessary to provide a reasonable estimate of expected life in accordance with SAB 107, as amended by SAB 110.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). Under SFAS 141R, companies will be required to, among other things, recognize the assets acquired, liabilities assumed, including contractual contingencies, and contingent consideration at fair value on the date of acquisition. SFAS 141R also requires that acquisition related expenses be expensed as incurred, restructuring costs be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred income tax asset valuation allowances and acquired income tax uncertainties after the measurement period be expensed in income tax expense. SFAS 141R will be effective in calendar 2009 and will change our accounting for business combinations upon adoption. We are currently assessing the impact that adoption of SFAS 141R will have on our consolidated financial position, results of operations, and cash flows.

Segment Reporting

Over 95% of our operations are conducted in the U.S. During 2004, we acquired a recycled OEM products business with locations in Guatemala and Costa Rica. In May and July 2007, we acquired two recycled OEM products businesses located in Canada. Keystone has bumper refurbishing operations in Mexico and two aftermarket products businesses in Canada. Revenue generated and properties located outside of the U.S. are not material. We manage our operations geographically. Our vehicle replacement products operations are organized into ten operating segments, eight for recycled OEM products, one for aftermarket products and one for refurbished products. These segments are aggregated into one reportable segment because they possess similar economic characteristics and have common products and services, customers, and methods of distribution. Our vehicle replacement products operations account for over 93% of our revenue, earnings, and assets.

Results of Operations

The following table sets forth statement of operations data as a percentage of total revenue for the periods indicated:

	Three Months Ended March 31,
	2008		2007
Statement of Income Data:
Revenue	100.0	%	100.0	%
Cost of goods sold	54.6	%	54.5	%
Gross margin	45.4	%	45.5	%
Facility and warehouse expenses	9.0	%	10.9	%
Distribution expenses	9.1	%	9.4	%
Selling, general and administrative expenses	13.0	%	12.2	%
Restructuring expenses	0.2	%	—
Depreciation and amortization	1.5	%	1.4	%
Operating income	12.5	%	11.6	%
Other expense, net	2.0	%	0.5	%
Income before provision for income taxes	10.5	%	11.1	%
Net income	6.3	%	6.7	%

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Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

Revenue.Our revenue increased 109.0% to $491.9 million for the three month period ended March 31, 2008, from $235.3 million for the comparable period of 2007. The increase in revenue was primarily due to the higher volume of products we sold and business acquisitions. Since the October 2007 acquisition of Keystone, we have been integrating the sale and distribution of our pre-existing aftermarket, wheel and reconditioned light product offerings with Keystone and with our recycled parts in more locations in order to provide a wider selection of products to our customers. Organic revenue growth was approximately 9% in the three month period ended March 31, 2008, and was calculated assuming we had owned Keystone in the three month period ended March 31, 2007. The integration of our pre-existing aftermarket and wheel operations with Keystone prevents us from measuring revenue growth between Keystone and our pre-existing businesses since the acquisition.

Cost of Goods Sold.Our cost of goods sold increased 109.5% to $268.6 million in the three month period ended March 31, 2008, from $128.2 million in the comparable period of 2007. The increase in cost of goods sold was primarily due to increased volume of products sold. As a percentage of revenue, cost of goods sold increased from 54.5% to 54.6%.

Gross Margin.Our gross margin increased 108.5% to $223.3 million in the three month period ended March 31, 2008, from $107.1 million in the comparable period of 2007. Our gross margin increased primarily due to increased volume. As a percentage of revenue, gross margin decreased from 45.5% to 45.4%.

Facility and Warehouse Expenses.Facility and warehouse expenses increased 73.8% to $44.5 million in the three month period ended March 31, 2008, from $25.6 million in the comparable period of 2007. Our facility and warehouse expenses increased primarily due to $9.4 million in higher wages and fringe benefits resulting from increased headcount and stock option expenses for field personnel and $6.1 million related to higher facility rent, taxes, and utilities. Our acquisition of Keystone accounted for a majority of the increases. As a percentage of revenue, facility and warehouse expenses decreased from 10.9% to 9.0%, as we achieved greater leverage from combining Keystone with our existing LKQ operations.

Distribution Expenses.Distribution expenses increased 101.9% to $44.8 million in the three month period ended March 31, 2008, from $22.2 million in the comparable period of 2007. Our distribution expenses increased primarily due to $11.1 million of higher wage and benefit costs from an increase in the number of employees, higher fuel costs of $5.1 million,  higher truck rentals and repairs of $2.9 million, and higher third party freight of $2.2 million. Our acquisition of Keystone accounted for the majority of the increases. As a percentage of revenue, our distribution expenses decreased from 9.4% to 9.1%. The decrease is attributable to the continued integration of the sale and distribution of our aftermarket, wheel and reconditioned light product offerings with recycled parts in more locations as well as combining our pre-existing businesses with Keystone operations.

Selling, General, and Administrative Expenses.Selling, general, and administrative expenses increased 123.1% to $64.1 million in the three month period ended March 31, 2008, from $28.7 million in the comparable period of 2007. The majority of the expense increase was a result of an increase in labor and labor-related expenses of $25.7 million due primarily to higher sales commission expenses and increased headcount. Our selling expenses tend to rise as revenue increases due to our commissioned sales forces. Our remaining selling, general and administrative expenses increased due primarily to higher professional fees of $2.4 million, telephone expense of $1.5 million, advertising and promotion of $1.2 million and travel expenses of $1.2 million. Our acquisition of Keystone accounted for a majority of the increases. As a percentage of revenue our selling, general, and administrative expenses increased from 12.2% to 13.0%.

Restructuring Expenses.  Restructuring expenses totaled $1.2 million in the three month period ended March 31, 2008. We had no restructuring expenses in the comparable period of 2007. The restructuring expenses are the result of our integration of Keystone into pre-existing LKQ operations, and include $0.1 million of severance and relocation costs for LKQ employees, LKQ facility closure costs and moving expenses of $0.8 million for pre-existing LKQ facilities, and professional fees of $0.3 million.

Depreciation and Amortization.Depreciation and amortization increased 118.8% to $7.3 million in the three month period ended March 31, 2008, from $3.3 million in the comparable period of 2006. Our acquisition of Keystone accounted for the majority of the increase in depreciation and amortization expense, including $0.9 million of amortization of the Keystone trade name.

Operating Income.Operating income increased 125.6% to $61.5 million in the three month period ended March 31, 2008 from $27.3 million in the comparable period of 2007. As a percentage of revenue, operating income increased from 11.6% to 12.5%.

Other (Income) Expense.  Total other expense, net increased 824.6% to $10.0 million for the three month period ended March 31, 2008, from $1.1 million for the comparable period of 2007.  As a percentage of revenue, net other expense increased from 0.5% to 2.0%. Net interest expense increased 494.4% to $10.3 million for the three month period ended March 31, 2008, from $1.7 million for the comparable period of 2007.  Our average bank borrowings were approximately $553.3 million higher at March 31, 2008 as compared to March 31, 2007, due primarily to acquisitions.  Other income decreased $0.4 million, to $0.3 million in the three

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month period ended March 31, 2008, from $0.6 million for the comparable period of 2007. Included in other income in the three month period ended March 31, 2007 was approximately $0.6 million of proceeds recognized from a corporate owned life insurance policy.

Provision for Income Taxes.The provision for income taxes increased 98.4% to $20.6 million in the three month period ended March 31, 2008, from $10.4 million in the comparable period of 2007, due primarily to improved operating results. Our effective tax rate was 40.0% in 2008 and 39.7% in 2007. The increase in our effective income tax rate in 2008 was due primarily to the recognition in 2007 of nontaxable life insurance proceeds of approximately $0.6 million.

Liquidity and Capital Resources

Our primary sources of ongoing liquidity are cash flow from our operations and our credit facility. At March 31, 2008 we had $85.4 million in cash and cash equivalents. On September 25, 2007 we completed a public offering of 27.6 million shares of our common stock, with 23.6 million shares sold by us and 4.0 million shares sold by selling stockholders. We received approximately $349.5 million in net proceeds from the offering, after deducting underwriting discounts and expenses of the offering. We paid all amounts outstanding under our revolving credit facility at that time and temporarily invested the remaining proceeds in cash equivalents pending the acquisition of Keystone on October 12, 2007.

In order to finance our acquisition of Keystone and to re-finance our unsecured credit facility, we obtained a senior secured debt financing facility (“Credit Agreement”) from Lehman Brothers Inc. (“Lehman”) and Deutsche Bank Securities, Inc. (“Deutsche Bank”) on October 12, 2007, which was amended on October 26, 2007. The Credit Agreement has a six year term and includes a $610 million term loan, a $40 million Canadian currency term loan, a $100 million U.S. dollar revolving credit facility, and a $15 million dual currency facility for drawings of either U.S. dollars or Canadian dollars. The Credit Agreement also provides for the issuance of letters of credit of up to $35 million in U.S. dollars and up to $10 million in either U.S. or Canadian dollars, for a swing line credit facility of $25 million under the $100 million revolving credit facility, and the opportunity for us to add additional term loan facilities and/or increase the $100 million revolving credit facility’s commitments, provided that such additions or increases do not exceed $150 million in the aggregate. The letter of credit facilities and the swing line facility are part of the revolving credit facilities identified above and use of such facilities is taken into account when determining availability under such credit facilities. All of the obligations under the Credit Agreement are unconditionally guaranteed by each of our domestic subsidiaries. Obligations under the Credit Agreement, including the related guarantees, are collateralized by a security interest in substantially all of our domestic assets and our U.S. subsidiaries and a pledge of not more than 65% of the total outstanding voting interests of any direct or indirect non-U.S. subsidiary of ours that is a “controlled foreign corporation.” Amounts under each term loan facility are due and payable in quarterly installments of increasing amounts beginning in 2008, with the balance payable in full at the end of year six. Amounts due under each revolving credit facility will be due and payable at the end of year six. We are also required to prepay the term loan facilities upon the sale of certain assets, upon the incurrence of certain debt, upon receipt of certain insurance and condemnation proceeds, and with up to 50% of our excess cash flow, with the amount of such excess cash flow determined based upon our total leverage ratio.

Indebtedness made and payable in U.S. dollars under the Credit Agreement bears interest, at our option, at (i) a base rate (the higher of (x) the rate that is the prime lending rate as set forth on the British Banking Association Reuters Page 5 or, under certain circumstances, such other comparable page as the agents may choose, as in effect from time to time, and (y) 0.5% in excess of the overnight federal funds rate) plus an applicable margin currently of 1.25% per annum, or (ii) a Eurodollar rate as determined by the administrative agent for the respective interest period plus an applicable margin currently of 2.25% per annum, except that indebtedness in respect of swing line loans bears interest only at the rate referred to in clause (i). Indebtedness made and payable in Canadian dollars under the Credit Agreement is made, at our option, as bankers’ acceptance loans or loans that bear interest at a rate equal to the rate per annum of interest publicly quoted or established as the “prime rate” of Deutsche Bank AG Canada Branch for commercial loans in Canadian dollars to its Canadian borrowers (which does not necessarily represent the lowest or best rate actually available) plus an applicable margin currently of 1.25% per annum. Under each bankers’ acceptance loan, each Canadian lender will purchase a bill of exchange, including a depository bill issued in accordance with the Depository Bills and Notes Act (Canada), denominated in Canadian dollars and discount notes, and we will sell such bill of exchange, at the applicable discount rate which, (1) in respect of any bill of exchange accepted by a lender named on Schedule I to the Bank Act (Canada), is the average of the annual rates for bankers’ acceptances having the same specified term and face amount as the loan to be made to us that is reported by the Reuters Screen CDOR Page as of 10:00 a.m. on such day (or the next preceding business day if such day is not a business day) (or if not reported by the Reuters Screen, then will be the average of the discount rate offered by the five largest (by assets) Canadian charter banks) and (2) in respect of any other lender, the CDOR described above plus 0.10%. We will also pay an acceptance fee for each bankers’ acceptance loan currently equal to 2.25% per annum. The applicable margin and acceptance fee for loans under the revolving credit facilities are subject to a decrease of 0.25% based upon our total leverage ratio and the interest rate option chosen. Interest will be payable quarterly in arrears, except that interest based on a Eurodollar rate or bankers’ acceptance loans is payable in arrears on the last day of the relevant interest period and, for any Eurodollar interest period longer than three months, quarterly. Any default in the payment of principal, interest, or other overdue amounts bears interest at 2% above the rate otherwise applicable (or, if there is no applicable rate, at 2% above the base rate referred to in clause (i) above for loans made in U.S. dollars and the “prime rate” referred to in the second sentence of this paragraph for loans made in Canadian dollars). All overdue amounts are payable on demand.

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The Credit Agreement contains customary representations and warranties, and contains customary covenants that restrict our ability to, among other things (i) incur liens, (ii) incur any indebtedness (including guarantees or other contingent obligations), (iii) engage in mergers and consolidations, (iv) engage in sales, transfers, and other dispositions of property and assets (including sale-leaseback transactions), (v) make loans, acquisitions, joint ventures, and other investments, (vi) make dividends and other distributions to, and redemptions and repurchases from, equity holders, (vii) prepay, redeem, or repurchase certain debt, (viii) make changes in the nature of our business, (ix) amend our organizational documents, or amend or otherwise modify certain of our debt documents, (x) change our fiscal quarter and fiscal year ends, (xi) enter into transactions with LKQ’s affiliates, (xii) make dividends, loans, and other transfers by subsidiaries of LKQ, and (xiii) issue certain equity interests. The Credit Agreement also requires us to comply with certain financial and affirmative covenants.

We generated $32.4 million of cash flow from operating activities in 2008 and believe that cash flow from operating activities and availability under our Credit Agreement will be adequate to fund our short term liquidity needs. Our liquidity needs are primarily to fund working capital requirements and to expand our facilities and network. The procurement of inventory is the largest operating use of our funds. We normally pay for salvage vehicles acquired at salvage auctions and under some direct procurement arrangements at the time that we take possession of the vehicles. We normally pay for aftermarket parts purchases at the time of shipment or on standard payment terms, depending on the manufacturer and payment options offered. Wheel cores acquired from third parties are normally paid on standard payment terms. We acquired approximately 39,200 and 31,800 wholesale salvage vehicles in the three month periods ended March 31, 2008 and 2007, respectively. In addition, we acquired approximately 56,100 and 44,500 salvage vehicles for our self-service retail operations in the three month periods ended March 31, 2008 and 2007, respectively. Our purchases of aftermarket parts and wheels totaled approximately $132.1 million and $27.7 million in the three month periods ended March 31, 2008 and 2007, respectively, with the increase principally due to our acquisition of Keystone.

We intend to continue to evaluate markets for potential growth through the internal development of redistribution centers, processing facilities, and warehouses, through further integration of aftermarket, refurbished and recycled OEM product facilities, and through selected business acquisitions. Our future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of our internal development efforts and the success of those efforts, the costs and timing of expansion of our sales and marketing activities, and the costs and timing of future business acquisitions.

Net cash provided by operating activities totaled $32.4 million for the three month period ended March 31, 2008, compared to $10.4 million for the same period of 2007. Cash was provided by net income adjusted for non-cash items. Working capital uses of cash, net of effects of purchase acquisitions, included increases in receivables, inventory and other current assets and liabilities, partially offset by an increase in income taxes payable. Receivables increased primarily due to increased revenue and $1.7 million for an insurance claim receivable for property destroyed in a fire loss. Inventory increased primarily due to increases in salvage inventory as we took advantage of favorable supplies at the salvage auctions. Other current liabilities decreased primarily due to accelerating some of Keystone’s vendor payments in order to take advantage of discounts offered for earlier payment.

Net cash used in investing activities totaled $17.4 million for the three month period ended March 31, 2008, compared to $23.7 million for the same period of 2007. We invested $4.2 million of cash in two acquisitions in 2008 compared to $14.6 million for four acquisitions in the comparable period of 2007. Net property and equipment and other long term asset purchases increased $4.1 million in 2008.

Net cash used in financing activities totaled $3.7 million for the three month period ended March 31, 2008, compared to $15.1 million provided by financing activities for the same period of 2007. Exercises of stock options and warrants provided $0.9 million and $0.2 million, in the three month periods ended March 31, 2008 and 2007, respectively. The excess tax benefit from share-based payment arrangements provided $1.1 million and $0.2 million of cash in the three month periods ended March 31, 2008 and 2007, respectively. We repaid $2.5 million of term loans under our Credit Agreement in the three month period ended March 31, 2008, while we repaid $3.1 million of long-term debt obligations. We borrowed $17.0 million under our bank credit facility in the three month period ended March 31, 2007, primarily to fund acquisitions, while we repaid $1.2 million of long-term debt obligations.

We may in the future borrow additional amounts under our credit facility or enter into new or additional borrowing arrangements. We anticipate that any proceeds from such new or additional borrowing arrangements will be used for general corporate purposes, including to develop and acquire businesses and operating facilities; to further the integration of our aftermarket,  refurbishing and recycled OEM product facilities; to expand and improve existing facilities; to purchase property, equipment, and inventory; and for working capital.

We estimate that our capital expenditures for full year 2008, excluding business acquisitions, will be approximately $65.0 million to $75.0 million. We expect to use these funds for several major facility expansions, improvement of current facilities, real estate acquisitions and systems development projects. We anticipate that net cash provided by operating activities for 2008 will be in excess of $85.0 million.

We believe that our current cash and equivalents, cash provided by operating activities, and funds available under our credit facility will be sufficient to meet our current operating and capital requirements. However, we may, from time to time, raise additional

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funds through public or private financing, strategic relationships, or other arrangements. There can be no assurance that additional funding, or refinancing of our credit facility, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to existing stockholders, and debt financing, if available, may involve restrictive covenants in addition to those to which we are subject under our current credit facility. Our failure to raise capital if and when needed could have a material adverse impact on our business, operating results, and financial condition.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements. Words such as “may,” “will,” “plan,” “should,” “expect,” “anticipate,” “believe,” “if,” “estimate,” “intend,” “project” and similar words or expressions are used to identify these forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. However, these forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause our actual results, performance or achievements to be materially different. These factors include, among other things:

·the risk that Keystone’s business will not be integrated successfully or that LKQ will incur unanticipated costs of integration;

·the ability to maintain Keystone’s vendor  relationships and retain key employees;

·uncertainty as to changes in U.S. general economic activity and the impact of these changes on the demand for our products;

·fluctuations in the pricing of new OEM replacement parts;

·the availability and cost of inventory;

·variations in vehicle accident rates;

·changes in state or federal laws or regulations affecting our business;

·changes in the types of replacements parts that insurance carriers will accept in the repair process;

·changes in the demand for our products and the supply of our inventory due to severity of weather and seasonality of weather patterns;

·the amount and timing of operating costs and capital expenditures relating to the maintenance and expansion of our business, operations and infrastructure;

·increasing competition in the automotive parts industry;

·our ability to increase or maintain revenue and profitability at our facilities;

·uncertainty as to our future profitability on a consolidated basis;

·uncertainty as to the impact on our industry of any terrorist attacks or responses to terrorist attacks;

·our ability to operate within the limitations imposed by financing arrangements;

·our ability to obtain financing on acceptable terms to finance our growth;

·our ability to integrate and successfully operate recently acquired companies and any companies acquired in the future and the risks associated with these companies;

·declines in the values of our assets;

·fluctuations in fuel prices; and

·our ability to develop and implement the operational and financial systems needed to manage our growing operations.

Other matters set forth in this Quarterly Report may also cause our actual future results to differ materially from these forward-looking statements. We cannot assure you that our expectations will prove to be correct. In addition, all subsequent written

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and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements mentioned above. You should not place undue reliance on these forward-looking statements. All of these forward-looking statements are based on our expectations as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our results of operations are exposed to changes in interest rates primarily with respect to borrowings under our credit facility, where interest rates are tied to either the prime rate or LIBOR. In the three month period ended March 31, 2008, we implemented a policy to manage our exposure to variable interest rates on a portion of our outstanding variable rate debt instruments through the use of interest rate swap contracts. These contracts convert a certain portion of our variable rate debt to fixed rate, matching effective and maturity dates to specific debt instruments. All of our interest rate swap contracts have been executed with a bank that we believe is creditworthy and are denominated in currency that matches the underlying debt instrument.  Net interest payments or receipts from interest rate swap contracts will be included as adjustments to interest expense in our consolidated income statement. As of March 31, 2008, two interest rate swap contracts representing a total of $250 million of notional amount were outstanding with effective dates of April 14, 2008 and with maturity dates through April 2011. Both of these contracts are designated as cash flow hedges and modify the variable rate nature of that portion of our variable rate debt. The fair market value of our outstanding interest rate swap contracts at March 31, 2008 was approximately negative $164,000, and the value of such contracts is subject to changes in interest rates.

We are also exposed to currency fluctuations with respect to the purchase of aftermarket parts in Taiwan. While all transactions with manufacturers based in Taiwan are conducted in U.S. dollars, changes in the relationship between the U.S. dollar and the New Taiwan dollar might impact the purchase price of aftermarket parts. We might not be able to pass on any price increases to customers. Under our present policies, we do not attempt to hedge this currency exchange rate exposure.

Our investment in our operations in Central America and Canada are not material, and we do not attempt to hedge our foreign currency risk related to such operations.

Item 4. Controls and Procedures

As of March 31, 2008, the end of the period covered by this report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of LKQ Corporation’s management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the Securities and Exchange Commission within the required time periods. There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1.Legal Proceedings.

On May 2, 2008, Ford Global Technologies, LLC (“FGT”) filed with the United States International Trade Commission (“ITC”) another complaint under section 337 of the Tariff Act of 1930.  The complaint alleges that LKQ Corporation, Keystone Automotive Industries, Inc., and six other entities import and sell certain automotive parts relating to the 2005 Ford Mustang that infringe eight FGT design patents.  The ITC has 30 days from the date of filing to determine whether it is going to institute an investigation.

On April 28, 2008, the Superior Court of the State of California approved the settlement of the two class action lawsuits captioned Lynch v. Keystone Automotive Industries, Inc., Case No. BC374399, and Shoys v. Keystone Automotive Industries, Inc., Case No. BC374480.

Item 6.  Exhibits

Exhibits

Exhibit Number	Description of Exhibit
10.1	ISDA 2002 Master Agreement between JP Morgan Chase Bank, National Association and LKQ Corporation, and related Schedule.
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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, on May 8, 2008.

LKQ CORPORATION

/s/ Mark T. Spears

Mark T. Spears

Executive Vice President and Chief Financial Officer

(As duly authorized officer and Principal Financial Officer)

/s/ Frank P. Erlain

Frank P. Erlain

Vice President — Finance and Controller

(As duly authorized officer and Principal Accounting Officer)

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EX-10.1

Exhibit 10.1

ISDAÒ

International Swaps and Derivatives Association, Inc.

2002 MASTER AGREEMENT

dated as of  March 20, 2008

JPMORGAN CHASE BANK, NATIONAL ASSOCIATION and LKQ CORPORATION

have entered and/or anticipate entering into one or more transactions (each a “Transaction”) that are or will be
governed by this 2002 Master Agreement, which includes the schedule (the “Schedule”), and the documents and
other confirming evidence (each a “Confirmation”) exchanged between the parties or otherwise effective for the
purpose of confirming or evidencing those Transactions. This 2002 Master Agreement and the Schedule are together
referred to as this “Master Agreement”.

Accordingly, the parties agree as follows:—

1.             Interpretation

(a)           Definitions. The terms defined in Section 14 and elsewhere in this Master Agreement will have themeanings therein specified for the purpose of this Master Agreement.

(b)           Inconsistency. In the event of any inconsistency between the provisions of the Schedule and the otherprovisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between theprovisions of any Confirmation and this Master Agreement, such Confirmation will prevail for the purpose of therelevant Transaction.

(c)           Single Agreement. All Transactions are entered into in reliance on the fact that this Master Agreement andall Confirmations form a single agreement between the parties (collectively referred to as this “Agreement”), and theparties would not otherwise enter into any Transactions.

2.             Obligations

(a)           General Conditions.

(i)      Each party will make each payment or delivery specified in each Confirmation to be made by it,
subject to the other provisions of this Agreement.

(ii)     Payments under this Agreement will be made on the due date for value on that date in the place ofthe account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freelytransferable funds and in the manner customary for payments in the required currency. Where settlement isby delivery (that is, other than by payment), such delivery will be made for receipt on the due date in themanner customary for the relevant obligation unless otherwise specified in the relevant Confirmation orelsewhere in this Agreement.

(iii)    Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that noEvent of Default or Potential Event of Default with respect to the other party has occurred and is continuing(2) the condition precedent that no Early Termination Date in respect of the relevant Transaction hasoccurred or been effectively designated and (3) each other condition specified in this Agreement to be acondition precedent for the purpose of this Section 2(a)(iii).

(b)           Change of Account. Either party may change its account for receiving a payment or delivery by givingnotice to the other party at least five Local Business Days prior to the Scheduled Settlement Date for the payment ordelivery to which such change applies unless such other party gives timely notice of a reasonable objection to suchchange.

(c)           Netting of Payments. If on any date amounts would otherwise be payable:—

(i)      in the same currency; and

(ii)     in respect of the same Transaction,

by each party to the other, then, on such date, each party’s obligation to make payment of any such amount will beautomatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by oneparty exceeds the aggregate amount that would otherwise have been payable by the other  party, replaced by anobligation upon the party by which the larger aggregate amount would have been payable to pay to the other party theexcess of the larger aggregate amount over the smaller aggregate amount.

The parties may elect in respect of two or more Transactions that a net amount and payment obligation will bedetermined in respect of all amounts payable on the same date in the same currency in respect of those Transactions,regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the
Schedule or any Confirmation by specifying that “Multiple Transaction Payment Netting” applies to the Transactions
identified as being subject to the election (in which case clause (ii) above will not apply to such Transactions). If
Multiple Transaction Payment Netting is applicable to Transactions, it will apply to those Transactions with effect
from the starting date specified in the Schedule or such Confirmation, or, if a starting date is not specified in theSchedule or such Confirmation, the starting date otherwise agreed by the parties in writing.  This election may bemade separately for different groups of Transactions and will apply separately to each pairing of Offices through
which the parties make and receive payments or deliveries.

(d)           Deduction or Withholding for Tax.

(i)      Gross-Up. All payments under this Agreement will be made without any deduction or withholding
for or on account of any Tax unless such deduction or withholding is required by any applicable law, as
modified by the practice of any relevant governmental revenue authority, then in effect. If a party is so
required to deduct or withhold, then that party (“X”) will:—

(1)      promptly notify the other party (“Y”) of such requirement;

(2)      pay to the relevant authorities the full amount required to be deducted or withheld
(including the full amount required to be deducted or withheld from any additional amount paid byX to Y under this Section 2(d)) promptly upon the earlier of determining that such deduction orwithholding is required or receiving notice that such amount has been assessed
against Y;

(3)      promptly forward to Y an official receipt (or a certified copy), or other documentation
reasonably acceptable to Y, evidencing such payment to such authorities; and

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(4)      if such Tax is an Indemnifiable Tax, pay to Y, in addition to the payment to which Y is
otherwise entitled under this Agreement, such additional amount as is necessary to ensure that the
net amount actually received by Y (free and clear of Indemnifiable Taxes, whether assessed against
X or Y) will equal the full amount Y would have received had no such deduction or withholding
been required. However, X will not be required to pay any additional amount to Y to the extent that
it would not be required to be paid but for:—

 (A)  the failure by Y to comply with or perform any agreement contained in
Section 4(a)(i), 4(a)(iii) or 4(d); or

(B)    the failure of a representation made by Y pursuant to Section 3(f) to be accurate
and true unless such failure would not have occurred but for (I) any action taken by a
taxing authority, or brought in a court of competent jurisdiction, after a Transaction is
entered into (regardless of whether such action is taken or brought with respect to a party
to this Agreement) or (II) a Change in Tax Law.

(ii)     Liability. If:—

(1)      X is required by any applicable law, as modified by the practice of any relevant
governmental revenue authority, to make any deduction or withholding in respect of which X wouldnot be required to pay an additional amount to Y under Section 2(d)(i)(4);

(2)      X does not so deduct or withhold; and

(3)      a liability resulting from such Tax is assessed directly against X,

then, except to the extent Y has satisfied or then satisfies the liability resulting from such Tax, Y will
promptly pay to X the amount of such liability (including any related liability for interest, but including any
related liability for penalties only if Y has failed to comply with or perform any agreement contained in
Section 4(a)(i), 4(a)(iii) or 4(d)).

3.             Representations

Each party makes the representations contained in Sections 3(a), 3(b), 3(c), 3(d), 3(e) and 3(f) and, if specified in the
Schedule as applying, 3(g) to the other party (which representations will be deemed to be repeated by each party on
each date on which a Transaction is entered into and, in the case of the representations in Section 3(f), at all times
until the termination of this Agreement).  If any “Additional Representation” is specified in the Schedule or any
Confirmation as applying, the party or parties specified for such Additional Representation will make and, if
applicable, be deemed to repeat such Additional Representation at the time or times specified for such Additional Representation.

(a)           Basic Representations.

(i)      Status. It is duly organised and validly existing under the laws of the jurisdiction of its organisation
or incorporation and, if relevant under such laws, in good standing;

(ii)     Powers. It has the power to execute this Agreement and any other documentation relating to thisAgreement to which it is a party, to deliver this Agreement and any other documentation relating to thisAgreement that it is required by this Agreement to deliver and to perform its obligations under thisAgreement and any obligations it has under any Credit Support Document to which it is a party and hastaken all necessary action to authorise such execution, delivery and performance;

3

(iii)    No Violation or Conflict. Such execution, delivery and performance do not violate or conflict with
any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or
other agency of government applicable to it or any of its assets or any contractual restriction binding on or
affecting it or any of its assets;

(iv)    Consents. All governmental and other consents that are required to have been obtained by it with
respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are
in full force and effect and all conditions of any such consents have been complied with; and

(v)     Obligations Binding. Its obligations under this Agreement and any Credit Support Document to
which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their
respective terms (subject to applicable bankruptcy, reorganisation, insolvency, moratorium or similar laws
affecting creditors’ rights generally and subject, as to enforceability, to equitable principles of general
application (regardless of whether enforcement is sought in a proceeding in equity or at law)).

(b)           Absence of Certain Events. No Event of Default or Potential Event of Default or, to its knowledge,
Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur
as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to
which it is a party.

(c)           Absence of Litigation. There is not pending or, to its knowledge, threatened against it or any of its Credit
Support Providers or any of its applicable Specified Entities any action, suit or proceeding at law or in equity or
before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality,
validity or enforceability against it of this Agreement or any Credit Support Document to which it is a party or its
ability to perform its obligations under this Agreement or such Credit Support Document.

(d)           Accuracy of Specified Information. All applicable information that is furnished in writing by or on behalf
of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the
information, true, accurate and complete in every material respect.

(e)           Payer Tax Representation. Each representation specified in the Schedule as being made by it for the
purpose of this Section 3(e) is accurate and true.

(f)            Payee Tax Representations. Each representation specified in the Schedule as being made by it for the
purpose of this Section 3(f) is accurate and true.

(g)           No Agency. It is entering into this Agreement, including each Transaction, as principal and not as agent of
any person or entity.

4.             Agreements

Each party agrees with the other that, so long as either party has or may have any obligation under this Agreement or
under any Credit Support Document to which it is a party:—

(a)           Furnish Specified Information. It will deliver to the other party or, in certain cases under clause (iii)
below, to such government or taxing authority as the other party reasonably directs:—

(i)      any forms, documents or certificates relating to taxation specified in the Schedule or any
Confirmation;

(ii)     any other documents specified in the Schedule or any Confirmation; and

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(iii)    upon reasonable demand by such other party, any form or document that may be required or
reasonably requested in writing in order to allow such other party or its Credit Support Provider to make a
payment under this Agreement or any applicable Credit Support Document without any deduction or
withholding for or on account of any Tax or with such deduction or withholding at a reduced rate (so long as
the completion, execution or submission of such form or document would not materially prejudice the legal
or commercial position of the party in receipt of such demand), with any such form or document to be
accurate and completed in a manner reasonably satisfactory to such other party and to be executed and to be
delivered with any reasonably required certification,

in each case by the date specified in the Schedule or such Confirmation or, if none is specified, as soon as reasonably
practicable.

(b)           Maintain Authorisations. It will use all reasonable efforts to maintain in full force and effect all consents of
any governmental or other authority that are required to be obtained by it with respect to this Agreement or any
Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become
necessary in the future.

(c)           Comply with Laws. It will comply in all material respects with all applicable laws and orders to which it may
be subject if failure so to comply would materially impair its ability to perform its obligations
under this Agreement or any Credit Support Document to which it is a party.

(d)           Tax Agreement. It will give notice of any failure of a representation made by it under Section 3(f) to be
accurate and true promptly upon learning of such failure.

(e)           Payment of Stamp Tax. Subject to Section 11, it will pay any Stamp Tax levied or imposed upon it or in
respect of its execution or performance of this Agreement by a jurisdiction in which it is incorporated, organised,
managed and controlled, or considered to have its seat, or where an Office through which it is acting for the purpose
of this Agreement is located (“Stamp Tax Jurisdiction”), and will indemnify the other party against any Stamp Tax
levied or imposed upon the other party or in respect of the other party’s execution or performance of this Agreement
by any such Stamp Tax Jurisdiction which is not also a Stamp Tax Jurisdiction with respect to the other party.

5.             Events of Default and Termination Events

(a)           Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support
Provider of such party or any Specified Entity of such party of any of the following events constitutes (subject to
Sections 5(c) and 6(e)(iv)) an event of default (an “Event of Default”) with respect to such party:—

(i)      Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this
Agreement or delivery under Section 2(a)(i) or 9(h)(i)(2) or (4) required to be made by it if such failure isnot remedied on or before the first Local Business Day in the case of any such payment or the first Local
Delivery Day in the case of any such delivery after, in each case, notice of such failure is given to the party;

(ii)     Breach of Agreement; Repudiation of Agreement..

(1)       Failure by the party to comply with or perform any agreement or obligation (other than an
obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 9(h)(i)(2)
or (4) or to give notice of a Termination Event or any agreement or obligation under Section 4(a)(i),
4(a)(iii) or 4(d)) to be complied with or performed by the party in accordance with this Agreement
if such failure is not remedied within 30 days after notice of such failure is given to the party; or

(2)       the party disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges
the validity of, this Master Agreement, any Confirmation executed and delivered by that party or any

5

Transaction evidenced by such a Confirmation (or such action is taken by any person or entity
appointed or empowered to operate it or act on its behalf);

(iii)      Credit Support Default.

(1)       Failure by the party or any Credit Support Provider of such party to comply with or
perform any agreement or obligation to be complied with or performed by it in accordance with any
Credit Support Document if such failure is continuing after any applicable grace period has elapsed;

(2)       the expiration or termination of such Credit Support Document or the failing or ceasing ofsuch Credit Support Document, or any security interest granted by such party or such Credit
Support Provider to the other party pursuant to any such Credit Support Document, to be in fullforce and effect for the purpose of this Agreement (in each case other than in accordance with itsterms) prior to the satisfaction of all obligations of such party under each Transaction to which suchCredit Support Document relates without the written consent of the other party; or

(3)      the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in
whole or in part, or challenges the validity of, such Credit Support Document (or such action is
taken by any person or entity appointed or empowered to operate it or act on its behalf);

(iv)    Misrepresentation. A representation (other than a representation under Section 3(e) or 3(f)) madeor repeated or deemed to have been made or repeated by the party or any Credit Support Provider of suchparty in this Agreement or any Credit Support Document proves to have been incorrect or misleading in anymaterial respect when made or repeated or deemed to have been made or repeated;

(v)     Default under Specified Transaction.  The party, any Credit Support Provider of such party or anyapplicable Specified Entity of such party:—

(1)           defaults (other than by failing to make a delivery) under a Specified Transaction or any
credit support arrangement relating to a Specified Transaction and, after giving effect to anyapplicable notice requirement or grace period, such default results in a liquidation of, an
acceleration of obligations under, or an early termination of, that Specified Transaction;

(2)           defaults, after giving effect to any applicable notice requirement or grace period, in makingany payment due on the last payment or exchange date of, or any payment on early termination of, a
Specified Transaction (or, if there is no applicable notice requirement or grace period, such default
continues for at least one Local Business Day);

(3)           defaults in making any delivery due under (including any delivery due on the last delivery
or exchange date of) a Specified Transaction or any credit support arrangement relating to a
Specified Transaction and, after giving effect to any applicable notice requirement or grace period,
such default results in a liquidation of, an acceleration of obligations under, or any early termination
of, all transactions outstanding under the documentation applicable to that Specified Transaction; or

(4)           disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity
of, a Specified Transaction or any credit support arrangement relating to a Specified Transaction
that is, in either case, confirmed or evidenced by a document or other confirming evidence executed
and delivered by that party, Credit Support Provider or Specified Entity (or such action is taken by
any person or entity appointed or empowered to operate it or act on its behalf);

6

(vi)    Cross Default.  If “Cross Default” is specified in the Schedule as applying to the party, the
occurrence or existence of:—

(1)          a default, event of default or other similar condition or event (however described) inrespect of such party, any Credit Support Provider of such party or any applicable Specified Entityof such party under one or more agreements or instruments relating to Specified Indebtedness ofany of them (individually or collectively) where the aggregate principal amount of such agreements
or instruments, either alone or together with the amount, if any, referred to in clause (2) below is
not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in
such Specified Indebtedness becoming, or becoming capable at such time of being declared, due
and payable under such agreements or instruments before it would otherwise have been due and
payable; or

(2)          a default by such party, such Credit Support Provider or such Specified Entity(individually or collectively) in making one or more payments under such agreements orinstruments on the due date for payment (after giving effect to any applicable notice requirement orgrace period) in an aggregate amount, either alone or together with the amount, if any, referred to inclause (1) above, of not less than the applicable Threshold Amount;

(vii)   Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified
Entity of such party:—

(1) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) becomes
insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay itsdebts as they become due; (3) makes a general assignment, arrangement or composition with or forthe benefit of its creditors; (4)(A) institutes or has instituted against it, by a regulator, supervisor orany similar official with primary insolvency, rehabilitative or regulatory jurisdiction over it in the
jurisdiction of its incorporation or organisation or the jurisdiction of its head or home office, a
proceeding seeking a judgment of insolvency or bankruptcy or any other relief under anybankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition ispresented for its winding-up or liquidation, by it or such regulator, supervisor or similar official, or
(B) has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any
other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights,
or a petition is presented for its winding-up or liquidation, and such proceeding or petition is
instituted or presented by a person or entity not described in clause (A) above and either (I) results
in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an
order for its winding-up or liquidation or (II) is not dismissed, discharged, stayed or restrained
in each case within 15 days of the institution or presentation thereof; (5) has a resolution passed for its
winding-up, official management or liquidation (other than pursuant to a consolidation
amalgamation or merger); (6) seeks or becomes subject to the appointment of an administrator,provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or forall or substantially all its assets; (7) has a secured party take possession of all or substantially all itsassets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued
on or against all or substantially all its assets and such secured party maintains possession,or any such process is not dismissed, discharged, stayed or restrained, in each case within 15 daysthereafter; (8) causes or is subject to any event with respect to it which, under the applicable laws ofany jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) above
(inclusive); or (9) takes any action in furtherance of, or indicating its consent to, approval of, oracquiescence in, any of the foregoing acts; or

7

(viii)   Merger Without Assumption. The party or any Credit Support Provider of such party consolidates
or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, or reorganises,
reincorporates or reconstitutes into or as, another entity and, at the time of such consolidation,
amalgamation, merger, transfer, reorganisation, reincorporation or reconstitution:—

(1)           the resulting, surviving or transferee entity fails to assume all the obligations of such party
or such Credit Support Provider under this Agreement or any Credit Support Document to which itor its predecessor was a party; or

(2)           the benefits of any Credit Support Document fail to extend (without the consent of the
other party) to the performance by such resulting, surviving or transferee entity of its obligations
under this Agreement.

(b)           Termination Events. The occurrence at any time with respect to a party or, if applicable, any Credit
Support Provider of such party or any Specified Entity of such party of any event specified below constitutes (subject
to Section 5(c)) an Illegality if the event is specified in clause (i) below, a Force Majeure Event if the event is
specified in clause (ii) below, a Tax Event if the event is specified in clause (iii) below, a Tax Event Upon Merger if
the event is specified in clause (iv) below, and, if specified to be applicable, a Credit Event Upon Merger if the event
is specified pursuant to clause (v) below or an Additional Termination Event if the event is specified pursuant to
clause (vi) below:—

(i)      Illegality. After giving effect to any applicable provision, disruption fallback or remedy specified
in, or pursuant to, the relevant Confirmation or elsewhere in this Agreement, due to an event or circumstance
(other than any action taken by a party or, if applicable, any Credit Support Provider of such party)
occurring after a Transaction is entered into, it becomes unlawful under any applicable law (including
without limitation the laws of any country in which payment, delivery or compliance is required by either
party or any Credit Support Provider, as the case may be), on any day, or it would be unlawful if the relevant
payment, delivery or compliance were required on that day (in each case, other than as a result of a breach
by the party of Section 4(b)):—

(1)       for the Office through which such party (which will be the Affected Party) makes and
receives payments or deliveries with respect to such Transaction to perform any absolute or
contingent obligation to make a payment or delivery in respect of such Transaction, to receive a
payment or delivery in respect of such Transaction or to comply with any other
material provision of this Agreement relating to such Transaction; or

(2)       for such party or any Credit Support Provider of such party (which will be the Affected
Party) to perform any absolute or contingent obligation to make a payment or delivery which such
party or Credit Support Provider has under any Credit Support Document relating to such
Transaction, to receive a payment or delivery under such Credit Support Document or to comply
with any other material provision of such Credit Support Document;

(ii)     Force Majeure Event. After giving effect to any applicable provision, disruption fallback orremedy specified in, or pursuant to, the relevant Confirmation or elsewhere in this Agreement, by reason offorce majeure or act of state occurring after a Transaction is entered into, on any day:—

(1)       the Office through which such party (which will be the Affected Party) makes and receivespayments or deliveries with respect to such Transaction is prevented from performing any absolute
or contingent obligation to make a payment or delivery in respect of such Transaction, from
receiving a payment or delivery in respect of such Transaction or from complying with any other
material provision of this Agreement relating to such Transaction (or would be so prevented if such
payment, delivery or compliance were required on that day), or it becomes impossible or

8

impracticable for such Office so to perform, receive or comply (or it would be impossible or
impracticable for such Office so to perform, receive or comply if such payment, delivery or
compliance were required on that day); or

(2)       such party or any Credit Support Provider of such party (which will be the Affected Party)
is prevented from performing any absolute or contingent obligation to make a payment or delivery
which such party or Credit Support Provider has under any Credit Support Document relating to
such Transaction, from receiving a payment or delivery under such Credit Support Document or
from complying with any other material provision of such Credit Support Document (or would be
so prevented if such payment, delivery or compliance were required on that day), or it becomes
impossible or impracticable for such party or Credit Support Provider so to perform, receive or
comply (or it would be impossible or impracticable for such party or Credit Support Provider so to
perform, receive or comply if such payment, delivery or compliance were required on that day),

so long as the force majeure or act of state is beyond the control of such Office, such party or such Credit
Support Provider, as appropriate, and such Office, party or Credit Support Provider could not, after using all
reasonable efforts (which will not require such party or Credit Support Provider to incur a loss, other than
immaterial, incidental expenses), overcome such prevention, impossibility or impracticability;

(iii)    Tax Event.  Due to (1) any action taken by a taxing authority, or brought in a court of competent
jurisdiction, after a Transaction is entered into (regardless of whether such action is taken or brought with
respect to a party to this Agreement) or (2) a Change in Tax Law, the party (which will be the Affected
Party) will, or there is a substantial likelihood that it will, on the next succeeding Scheduled Settlement Date
(A) be required to pay to the other party an additional amount in respect of an Indemnifiable Tax under
Section 2(d)(i)(4) (except in respect of interest under Section 9(h) or (B) receive a payment from which an
amount is required to be deducted or withheld for or on account of a Tax (except in respect of interest under
Section 9(h) and no additional amount is required to be paid in respect of such Tax under Section 2(d)(i)(4)
(other than by reason of Section 2(d)(i)(4)(A) or (B));

(iv)    Tax Event Upon Merger. The party (the “Burdened Party”) on the next succeeding Scheduled
Settlement Date will either (1) be required to pay an additional amount in respect of an Indemnifiable Taxunder Section 2(d)(i)(4) (except in respect of interest under Section 9(h)) or (2) receive a payment fromwhich an amount has been deducted or withheld for or on account of any Tax in respect of which the otherparty is not required to pay an additional amount (other than by reason of Section 2(d)(i)(4)(A) or (B)), ineither case as a result of a party consolidating or amalgamating with, or merging with or into, or transferringall or substantially all its assets (or any substantial part of the assets comprising the business conducted by it
as of the date of this Master Agreement) to or reorganising, reincorporating or reconstituting into or as,
another entity (which will be the Affected Party) where such action does not constitute a Merger Without
Assumption;

(v)     Credit Event Upon Merger. If “Credit Event Upon Merger” is specified in the Schedule asapplying to the party, a Designated Event (as defined below) occurs with respect to such party, any CreditSupport Provider of such party or any applicable Specified Entity of such party (in each case, “X”) and such
Designated Event does not constitute a Merger Without Assumption, and the creditworthiness of X or, if
applicable, the successor, surviving or transferee entity of X, after taking into account any applicable Credit
Support Document, is materially weaker immediately after the occurrence of such Designated Event than
that of X immediately prior to the occurrence of such Designated Event (and, in any such event, such party
or its successor, surviving or transferee entity, as appropriate, will be the Affected Party). A “Designated
Event” with respect to X means that:—

(1)       X consolidates or amalgamates with, or merges with or into, or transfers all or substantiallyall its assets (or any substantial part of the assets comprising the business conducted by X as of the

9

date of this Master Agreement) to, or reorganises, reincorporates or reconstitutes into or as, anotherentity;

(2)       any person, related group of persons or entity acquires directly or indirectly the beneficial
ownership of (A) equity securities having the power to elect a majority of the board of directors (or
its equivalent) of X or (B) any other ownership interest enabling it to exercise control of X; or

(3)       X effects any substantial change in its capital structure by means of the issuance,
incurrence or guarantee of debt or the issuance of (A) preferred stock or other securities convertible
into or exchangeable for debt or preferred stock or (B) in the case of entities other than
corporations, any other form of ownership interest; or

(vi)          Additional Termination Event. If any “Additional Termination Event” is specified in the Schedule
or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party orAffected Parties will be as specified for such Additional Termination Event in the Schedule or suchConfirmation).

(c)           Hierarchy of Events.

(i)            An event or circumstance that constitutes or gives rise to an Illegality or a Force Majeure Event will
not, for so long as that is the case, also constitute or give rise to an Event of Default under Section 5(a)(i),
5(a)(ii)(1) or 5(a)(iii)(1) insofar as such event or circumstance relates to the failure to make any payment or
delivery or a failure to comply with any other material provision of this Agreement or a Credit Support
Document, as the case may be.

(ii)           Except in circumstances contemplated by clause (i) above, if an event or circumstance which would
otherwise constitute or give rise to an Illegality or a Force Majeure Event also constitutes an Event of
Default or any other Termination Event, it will be treated as an Event of Default or such other Termination
Event, as the case may be, and will not constitute or give rise to an Illegality or a Force Majeure Event.

(iii)          If an event or circumstance which would otherwise constitute or give rise to a Force Majeure Event
also constitutes an Illegality, it will be treated as an Illegality, except as described in clause (ii) above, and
not a Force Majeure Event.

(d)           Deferral of Payments and Deliveries During Waiting Period.  If an Illegality or a Force Majeure Event has
occurred and is continuing with respect to a Transaction, each payment or delivery which would otherwise be
required to be made under that Transaction will be deferred to, and will not be due until:—

(i)            the first Local Business Day or, in the case of a delivery, the first Local Delivery Day (or the first
day that would have been a Local Business Day or Local Delivery Day, as appropriate, but for the
occurrence of the event or circumstance constituting or giving rise to that Illegality or Force Majeure Event)
following the end of any applicable Waiting Period in respect of that Illegality or Force Majeure Event, as
the case may be; or

(ii)           if earlier, the date on which the event or circumstance constituting or giving rise to that Illegality or
Force Majeure Event ceases to exist or, if such date is not a Local Business Day or, in the case of a delivery,
a Local Delivery Day, the first following day that is a Local Business Day or Local Delivery Day, as
appropriate.

(e)           Inability of Head or Home Office to Perform Obligations of Branch. If (i) an Illegality or a Force
Majeure Event occurs under Section 5(b)(i)(1) or 5(b)(ii)(1) and the relevant Office is not the Affected Party’s head
or home office, (ii) Section 10(a) applies, (iii) the other party seeks performance of the relevant obligation or

10

compliance with the relevant provision by the Affected Party’s head or home office and (iv) the Affected Party’s head
or home office fails so to perform or comply due to the occurrence of an event or circumstance which would, if that
head or home office were the Office through which the Affected Party makes and receives payments and deliveries
with respect to the relevant Transaction, constitute or give rise to an Illegality or a Force Majeure Event, and such
failure would otherwise constitute an Event of Default under Section 5(a)(i) or 5(a)(iii)(1) with respect to such party
then, for so long as the relevant event or circumstance continues to exist with respect to both the Office referred to in
Section 5(b)(i)(1) or 5(b)(ii)(1), as the case may be, and the Affected Party’s head or home office, such failure will
not constitute an Event of Default under Section 5(a)(i) or 5(a)(iii)(1).

6.             Early Termination; Close-Out Netting

(a)           Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party
(the “Defaulting Party”) has occurred and is then continuing, the other party (the “Non-defaulting Party”) may, by not
more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier
than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If,
however, “Automatic Early Termination” is specified in the Schedule as applying to a party, then an Early
Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect
to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto,
(8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the
relevant petition upon the occurrence with respect to such party of an Event of Default specified in
Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).

(b)           Right to Terminate Following Termination Event.

(i)      Notice. If a Termination Event other than a Force Majeure Event occurs, an Affected Party will,promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Eventand each Affected Transaction, and will also give the other party such other information about thatTermination Event as the other party may reasonably require. If a Force Majeure Event occurs, each party
will, promptly upon becoming aware of it, use all reasonable efforts to notify the other party, specifying the
nature of that Force Majeure Event, and will also give the other party such other information about that
Force Majeure Event as the other party may reasonably require.

(ii)     Transfer to Avoid Termination Event.  If a Tax Event occurs and there is only one Affected Party
or if a Tax Event Upon Merger occurs and the Burdened Party is the Affected Party, the Affected Party will,
as a condition to its right to designate an Early Termination Date under Section 6(b)(iv), use all reasonable
efforts (which will not require such party to incur a loss, other than immaterial, incidental expenses) to
transfer within 20 days after it gives notice under Section 6(b)(i) all its rights and obligations under this
Agreement in respect of the Affected Transactions to another of its Offices or Affiliates so that such
Termination Event ceases to exist.

If the Affected Party is not able to make such a transfer it will give notice to the other party to that effect
within such 20 day period, whereupon the other party may effect such a transfer within 30 days after the
notice is given under Section 6(b)(i).

Any such transfer by a party under this Section 6(b)(ii) will be subject to and conditional upon the prior
written consent of the other party, which consent will not be withheld if such other party’s policies in effect
at such time would permit it to enter into Transactions with the transferee on the
terms proposed.

(iii)    Two Affected Parties. If a Tax Event occurs and there are two Affected Parties, each party will use
all reasonable efforts to reach agreement within 30 days after notice of such occurrence is given under
Section 6(b)(i) to avoid that Termination Event.

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(iv)    Right to Terminate.

(1)               If:—

(A)      a transfer under Section 6(b)(ii) or an agreement under Section 6(b)(iii), as the
 case may be, has not been effected with respect to all Affected Transactions within 30 days
 after an Affected Party gives notice under Section 6(b)(i); or

(B)       a Credit Event Upon Merger or an Additional Termination Event occurs, or a Tax
Event Upon Merger occurs and the Burdened Party is not the Affected Party,

the Burdened Party in the case of a Tax Event Upon Merger, any Affected Party in the case of a
Tax Event or an Additional Termination Event if there are two Affected Parties, or the Non-
affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if
there is only one Affected Party may, if the relevant Termination Event is then continuing, by not
more than 20 days notice to the other party, designate a day not earlier than the day such notice is
effective as an Early Termination Date in respect of all Affected Transactions.

(2)     If at any time an Illegality or Force Majeure Event has occurred and is then continuing
and any applicable Waiting Period has expired:—

(A)        Subject to clause (B) below, either party may, by not more than 20 days notice to
the other party, designate (I) a day not earlier than the day on which such notice becomes
effective as an Early Termination Date in respect of all Affected Transactions or (II) by
specifying in that notice the Affected Transactions in respect of which it is designating the
relevant day as an Early Termination Date, a day not earlier than two Local Business Days
following the day on which such notice becomes effective as an Early Termination Date in
respect of less than all Affected Transactions.  Upon receipt of a notice designating an
Early Termination Date in respect of less than all Affected Transactions, the other party
may, by notice to the designating party, if such notice is effective on or before the day so
designated, designate that same day as an Early Termination Date in respect of any or all
other Affected Transactions.

(b)         An Affected Party (if the Illegality or Force Majeure Event relates to performance
by such party or any Credit Support Provider of such party of an obligation to make any
payment or delivery under, or to compliance with any other material provision of, the
relevant Credit Support Document) will only have the right to designate an Early
Termination Date under Section 6(b)(iv)(2)(A) as a result of an Illegality under
Section 5(b)(i)(2) or a Force Majeure Event under Section 5(b)(ii)(2) following the prior
designation by the other party of an Early Termination Date, pursuant to
Section 6(b)(iv)(2)(A), in respect of less than all Affected Transactions.

(c)           Effect of Designation.

(i)      If notice designating an Early Termination Date is given under Section 6(a) or 6(b), the Early
Termination Date will occur on the date so designated, whether or not the relevant Event of Default or
Termination Event is then continuing.

(ii)     Upon the occurrence or effective designation of an Early Termination Date, no further payments or
deliveries under Section 2(a)(i) or 9(h)(i) in respect of the Terminated Transactions will be required to be
made, but without prejudice to the other provisions of this Agreement. The amount,
if any, payable in respect of an Early Termination Date shall be determined pursuant to Sections 6(e) and 9(h)(ii).

12

(d)           Calculations; Payment Date.

(i)      Statement. On or as soon as reasonably practicable following the occurrence of an Early
Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) andwill provide to the other party a statement (1) showing, in reasonable detail, such calculations (including anyquotations, market data or information from internal sources used in making such calculations),
(2) specifying (except where there are two Affected Parties) any Early Termination Amount payable and
(3) giving details of the relevant account to which any amount payable to it is to be paid. In the absence ofwritten confirmation from the source of a quotation or market data obtained in determining a Close-out
Amount, the records of the party obtaining such quotation or market data will be conclusive evidence of theexistence and accuracy of such quotation or market data.

(ii)     Payment Date. An Early Termination Amount due in respect of any Early Termination Date will,
together with any amount of interest payable pursuant to Section 9(h)(ii)(2), be payable (1) on the day on
which notice of the amount payable is effective in the case of an Early Termination Date which is designated
or occurs as a result of an Event of Default and (2) on the day which is two Local Business Days after the
day on which notice of the amount payable is effective (or if there are two Affected Parties, after the day on
which the statement provided pursuant to clause (i) above by the second party to provide such a statement is
effective) in the case of an Early Termination Date which is designated as a result of a Termination Event.

(e)           Payments on Early Termination. If an Early Termination Date occurs, the amount, if any, payable in
respect of that Early Termination Date (the “Early Termination Amount”) will be determined pursuant to this
Section 6(e) and will be subject to Section 6(f).

(i)      Events of Default. If the Early Termination Date results from an Event of Default, the Early
Termination Amount will be an amount equal to (1) the sum of (A) the Termination Currency Equivalent of
the Close-out Amount or Close-out Amounts (whether positive or negative) determined by the Non-
defaulting Party for each Terminated Transaction or group of Terminated Transactions, as the case may be,
and (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less
(2) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If the Early
Termination Amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it
is a negative number, the Non-defaulting Party will pay the absolute value of the Early Termination Amount
to the Defaulting Party.

(ii)     Termination Events.  If the Early Termination Date results from a Termination Event:—

(1)      One Affected Party. Subject to clause (3) below, if there is one Affected Party, the Early
Termination Amount will be determined in accordance with Section 6(e)(i), except that references
to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the
Affected Party and to the Non-affected Party, respectively.

(2)      Two Affected Parties. Subject to clause (3) below, if there are two Affected Parties, each
party will determine an amount equal to the Termination Currency Equivalent of the sum of the
Close-out Amount or Close-out Amounts (whether positive or negative) for each Terminated
Transaction or group of Terminated Transactions, as the case may be, and the Early Termination
Amount will be an amount equal to (A) the sum of (I) one-half of the difference between the higher
amount so determined (by party “X”) and the lower amount so determined (by party “Y”) and
(II) the Termination Currency Equivalent of the Unpaid Amounts owing to X less (B) the
Termination Currency Equivalent of the Unpaid Amounts owing to Y.  If the Early Termination
Amount is a positive number, Y will pay it to X, if it is a negative number, X will pay the absolute
value of the Early Termination Amount to Y.

13

(3)      Mid-Market Events. If that Termination Event is an Illegality or a Force Majeure Event,
then the Early Termination Amount will be determined in accordance with clause (1) or (2) above,
as appropriate, except that, for the purpose of determining a Close-out Amount or Close-out
Amounts, the Determining Party will:—

(A) if obtaining quotations from one or more third parties (or from any of the
Determining Party’s Affiliates), ask each third party or Affiliate (I) not to take account of
the current creditworthiness of the Determining Party or any existing Credit Support
Document and (II) to provide mid-market quotations; and

(B)   in any other case, use mid market values without regard to the creditworthiness of
the Determining Party.

(iii)    Adjustment for Bankruptcy. In circumstances where an Early Termination Date occurs because
Automatic Early Termination applies in respect of a party, the Early Termination Amount will be subject to
such adjustments as are appropriate and permitted by law to reflect any payments or deliveries
made by one party to the other under this Agreement (and retained by such other party) during the period
from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii).

(iv)   Adjust for Illegality or Force Majeure Event. The failure by a party or any Credit Support
Provider of such party to pay, when due, any Early Termination Amount will not constitute an Event of
Default under Section 5(a)(i) or 5(a)(iii)(1) if such failure is due to the occurrence of an event or
circumstance which would, if it occurred with respect to payment, delivery or compliance related to a
Transaction, constitute or give rise to an Illegality or a Force Majeure Event.  Such amount will (1) accrue
interest and otherwise be treated as an Unpaid Amount owing to the other party if subsequently an Early
Termination Date results from an Event of Default, a Credit Event Upon Merger or an Additional
Termination Event in respect of which all outstanding Transactions are Affected Transactions and
(2) otherwise accrue interest in accordance with Section 9(h)(ii)(2).

(v)     Pre-Estimate. The parties agree that an amount recoverable under this Section 6(e) is a reasonable
pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of
protection against future risks and except as otherwise provided in this Agreement, neither party will be
entitled to recover any additional damages as a consequence of the termination of the Terminated
Transactions.

(f)            Set-Off.  Any Early Termination Amount payable to one party (the “Payee”) by the other party (the
“Payer”), in circumstances where there is a Defaulting Party or where there is one Affected Party in the case where
either a Credit Event Upon Merger has occurred or any other Termination Event in respect of which all outstanding
Transactions are Affected Transactions has occurred, will, at the option of the Non-defaulting Party or the Non-
affected Party, as the case may be (“X”) (and without prior notice to the Defaulting Party or the Affected Party, as the
case may be), be reduced by its set-off against any other amounts (“Other Amounts”) payable by the Payee to the
Payer (whether or not arising under this Agreement, matured or contingent and irrespective of the currency, place of
payment or place of booking of the obligation).  To the extent that any Other Amounts are so set off, those Other
Amounts will be discharged promptly and in all respects.  X will give notice to the other party of any set-off effected
under this Section 6(f).

For this purpose, either the Early Termination Amount or the Other Amounts (or the relevant portion of such
amounts) may be converted by X into the currency in which the other is denominated at the rate of exchange at which
such party would be able, in good faith and using commercially reasonable procedures, to purchase the relevant
amount of such currency.

14

If an obligation is unascertained, X may in good faith estimate that obligation and set off in respect of the estimate,subject to the relevant party accounting to the other when the obligation is ascertained.

Nothing in this Section 6(f) will be effective to create a charge or other security interest.  This Section 6(f) will bewithout prejudice and in addition to any right of set-off, offset, combination of accounts, lien, right of retention orwithholding or similar right or requirement to which any party is at any time otherwise entitled or subject (whether byoperation of law, contract or otherwise).

7.             Transfer

Subject to Section 6(b)(ii), and to the extent permitted by applicable law, neither this Agreement nor any interest or
obligation in or under this Agreement may be transferred (whether by way of security or otherwise) by either party
without the prior written consent of the other party, except that:—

(a)           a party may make such a transfer of this Agreement pursuant to a consolidation or amalgamation with, or
merger with or into, or transfer of all or substantially all its assets to, another entity (but without prejudice to any
other right or remedy under this Agreement); and

(b)           a party may make such a transfer of all or any part of its interest in any Early Termination Amount payable
to it by a Defaulting Party, together with any amounts payable on or with respect to that interest and any other rights
associated with that interest pursuant to Sections 8, 9(h) and 11.

Any purported transfer that is not in compliance with this Section 7 will be void.

8.             Contractual Currency

(a)           Payment in the Contractual Currency. Each payment under this Agreement will be made in the relevant
currency specified in this Agreement for that payment (the “Contractual Currency”). To the extent permitted by
applicable law, any obligation to make payments under this Agreement in the Contractual Currency will not be
discharged or satisfied by any tender in any currency other than the Contractual Currency, except to the extent such
tender results in the actual receipt by the party to which payment is owed, acting in good faith and using
commercially reasonable procedures in converting the currency so tendered into the Contractual Currency, of the full
amount in the Contractual Currency of all amounts payable in respect of this Agreement. If for any reason the
amount in the Contractual Currency so received falls short of the amount in the Contractual Currency payable in
respect of this Agreement, the party required to make the payment will, to the extent permitted by applicable law,
immediately pay such additional amount in the Contractual Currency as may be necessary to compensate for the
shortfall. If for any reason the amount in the Contractual Currency so received exceeds the amount in the Contractual
Currency payable in respect of this Agreement, the party receiving the payment will refund promptly the amount of
such excess.

(b)           Judgments. To the extent permitted by applicable law, if any judgment or order expressed in a currency
other than the Contractual Currency is rendered (i) for the payment of any amount owing in respect of this
Agreement, (ii) for the payment of any amount relating to any early termination in respect of this Agreement or (iii) in
respect of a judgment or order of another court for the payment of any amount described in (i) or (ii) above,
the party seeking recovery, after recovery in full of the aggregate amount to which such party is entitled pursuant to
the judgment or order, will be entitled to receive immediately from the other party the amount of any shortfall of the
Contractual Currency received by such party as a consequence of sums paid in such other currency and will refund
promptly to the other party any excess of the Contractual  Currency received by such party as a consequence of sums
paid in such other currency if such shortfall or such excess arises or results from any variation between the rate of
exchange at which the Contractual Currency is converted into the currency of the judgment or order for the purpose
of such judgment or order and the rate of exchange at which such party is able, acting in good faith and using

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commercially reasonable procedures in converting the currency received into the Contractual Currency, to purchase
the Contractual Currency with the amount of the currency of the judgment or order actually received by such party.

 (c)          Separate Indemnities. To the extent permitted by applicable law, the indemnities in this Section 8
constitute separate and independent obligations from the other obligations in this Agreement, will be enforceable as
separate and independent causes of action, will apply notwithstanding any indulgence granted by the party to which
any payment is owed and will not be affected by judgment being obtained or claim or proof being made for any other
sums payable in respect of this Agreement.

(d)           Evidence of Loss. For the purpose of this Section 8, it will be sufficient for a party to demonstrate that it
would have suffered a loss had an actual exchange or purchase been made.

9.             Miscellaneous

(a)           Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with
respect to its subject matter. Each of the parties acknowledges that in entering into this Agreement it has not relied
on any oral or written representation, warranty or other assurance (except as provided for or referred to in this
Agreement) and waives all rights and remedies which might otherwise be available to it in respect thereof, except that
nothing in this Agreement will limit or exclude any liability of a party for fraud.

(b)           Amendments. An amendment, modification or waiver in respect of this Agreement will only be effective if
in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or
confirmed by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system.

(c)           Survival of Obligations. Without prejudice to Sections 2(a)(iii) and 6(c)(ii), the obligations of the parties
under this Agreement will survive the termination of any Transaction.

(d)           Remedies Cumulative. Except as provided in this Agreement, the rights, powers, remedies and privileges
provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided
by law.

(e)           Counterparts and Confirmations.

(i)      This Agreement (and each amendment, modification and waiver in respect of it) may be executedand delivered in counterparts (including by facsimile transmission and by electronic messaging system), eachof which will be deemed an original.

(ii)     The parties intend that they are legally bound by the terms of each Transaction from the moment
they agree to those terms (whether orally or otherwise). A Confirmation shall be entered into as soon aspracticable and may be executed and delivered in counterparts (including by facsimile transmission) or becreated by an exchange of telexes, by an exchange of electronic messages on an electronic messaging systemor by an exchange of e-mails, which in each case will be sufficient for all purposes to evidence a bindingsupplement to this Agreement. The parties will specify therein or through another effective means that anysuch counterpart, telex or electronic message or e-mail constitutes a Confirmation.

(f)            No Waiver of Rights. A failure or delay in exercising any right, power or privilege in respect of this
Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or
privilege will not be presumed to preclude any subsequent or further exercise, of that right, power or privilege or the
exercise of any other right, power or privilege.

(g)           Headings. The headings used in this Agreement are for convenience of reference only and are not to affect
the construction of or to be taken into consideration in interpreting this Agreement.

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(h)           Interest and Compensation.

(i)            Prior to Early Termination. Prior to the occurrence or effective designation of an Early
Termination Date in respect of the relevant Transaction:—

(1)           Interest on Defaulted Payments. If a party defaults in the performance of any payment
obligation, it will, to the extent permitted by applicable law and subject to Section 6(c), pay interest
(before as well as after judgment) on the overdue amount to the other party on demand in the same
currency as the overdue amount, for the period from (and including) the original due date for
payment to (but excluding) the date of actual payment (and excluding any period in respect of
which interest or compensation in respect of the overdue amount is due pursuant to clause (3)(B) or
(C) below), at the Default Rate.

(2)           Compensation for Defaulted Deliveries. If a party defaults in the performance of any
obligation required to be settled by delivery, it will on demand (A) compensate the other party to
the extent provided for in the relevant Confirmation or elsewhere in this Agreement and (B) unless
otherwise provided in the relevant Confirmation or elsewhere in this Agreement, to the extent
permitted by applicable law and subject to Section 6(c), pay to the other party interest (before as
well as after judgment) on an amount equal to the fair market value of that which was required to be
delivered in the same currency as that amount, for the period from (and including) the originally
scheduled date for delivery to (but excluding) the date of actual delivery (and excluding any period
in respect of which interest or compensation in respect of that amount is due pursuant to clause (4)
below), at the Default Rate. The fair market value of any obligation referred to above will be
determined as of the originally scheduled date for delivery, in good faith and using commercially
reasonable procedures, by the party that was entitled to take delivery.

(3)           Interest on Deferred Payment. If:—

(A)          a party does not pay any amount that, but for Section 2(a)(iii), would have been
payable, it will, to the extent permitted by applicable law and subject to Section 6(c) and
clauses (B) and (C) below, pay interest (before as well as after judgment) on that amount
to the other party on demand (after such amount becomes payable) in the same currency as
that amount, for the period from (and including) the date the amount would, but for
Section 2(a)(iii), have been payable to (but excluding) the date the amount actually
becomes payable, at the Applicable Deferral Rate;

(B)           a payment is deferred pursuant to Section 5(d), the party which would otherwise
have been required to make that payment will, to the extent permitted by applicable law,
subject to Section 6(c) and for so long as no Event of Default or Potential Event of Default
with respect to that party has occurred and is continuing, pay interest (before  as well as
after judgment) on the amount of the deferred payment to the other party on demand (after
such amount becomes payable) in the same currency as the deferred payment, for the
period from (and including) the date the amount would, but for Section 5(d), have been
payable to (but excluding) the earlier of the date the payment is no longer deferred
pursuant to Section 5(d) and the date during the deferral period upon which an Event of
Default or Potential Event of Default with respect to that party occurs, at the Applicable
Deferral Rate; or

(C)           a party fails to make any payment due to the occurrence of an Illegality or a Force
Majeure Event (after giving effect to any deferral period contemplated by clause (B)
above), it will, to the extent permitted by applicable law, subject to Section 6(c) and for so
long as the event or circumstance giving rise to that Illegality or Force Majeure Event

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continues and no Event of Default or Potential Event of Default with respect to that party
has occurred and is continuing, pay interest (before as well as after judgment) on the
overdue amount to the other party on demand in the same currency as the overdue amount,
for the period from (and including) the date the party fails to make the payment due to the
occurrence of the relevant Illegality or Force Majeure Event (or, if later, the date the
payment is no longer deferred pursuant to Section 5(d)) to (but excluding) the earlier of the
date the event or circumstance giving rise to that Illegality or Force Majeure Event ceases
to exist and the date during the period upon which an Event of Default or Potential Event
of Default with respect to that party occurs (and excluding any period in respect of which
interest or compensation in respect of the overdue amount is due pursuant to clause (B)
above), at the Applicable Deferral Rate.

(4)           Compensation for Deferred Deliveries. If:—

(A)          a party does not perform any obligation that, but for Section 2(a)(iii), would have
been required to be settled by delivery;

(B)           a delivery is deferred pursuant to Section 5(d); or

(C)           a party fails to make a delivery due to the occurrence of an Illegality or a Force
Majeure Event at a time when any applicable Waiting Period has expired,

the party required (or that would otherwise have been required) to make the delivery will, to the
extent permitted by applicable law and subject to Section 6(c), compensate and pay interest to the
other party on demand (after, in the case of clauses (A) and (B) above, such delivery is required) if
and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement

(ii)           Early Termination. Upon the occurrence or effective designation of an Early Termination Date in
respect of a Transaction:—

(1)           Unpaid Amounts. For the purpose of determining an Unpaid Amount in respect of the
relevant Transaction, and to the extent permitted by applicable law, interest will accrue on the
amount of any payment obligation or the amount equal to the fair market value of any obligation
required to be settled by delivery included in such determination the same currency as that
amount, for the period from (and including) the date the relevant obligation was (or would have
been but for Section 2(a)(iii) or 5(d)) required to have been performed to (but excluding) the
relevant Early Termination Date, at the Applicable Close-out Rate.

(2)           Interest on Early Termination Amounts. If an Early Termination Amount is due in respect
of such Early Termination Date, that amount will, to the extent permitted by applicable law, be paid
together with interest (before as well as after judgment) on that amount in the Termination
Currency, for the period from (and including) such Early Termination Date to (but excluding) the
date the amount is paid, at the Applicable Close-out Rate.

(iii)          Interest Calculation. Any interest pursuant to this Section 9(h) will be calculated on the basis of
daily compounding and the actual number of days elapsed.

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 10.         Offices; Multibranch Parties

(a)           If Section 10(a) is specified in the Schedule as applying, each party that enters into a Transaction through an
Office other than its head or home office represents to and agrees with the other party that, notwithstanding the place
of booking office or its jurisdiction of incorporation or organisation, its obligations are the same in terms of recourse against
it as if it had entered into the Transaction through its head or home office, except that a party will not have recourse
to the head or home office of the other party in respect of any payment or delivery deferred pursuant to Section 5(d)
for so long as the payment or delivery is so deferred. This representation and agreement will be deemed to be
repeated by each party on each date on which the parties enter into a Transaction.

 (b)          If a party is specified as a Multibranch Party in the Schedule, such party may, subject to clause (c) below,
enter into a Transaction through, book a Transaction in and make and receive payments and deliveries with respect to
a Transaction through any Office listed in respect of that party in the Schedule (but not any other Office unless
otherwise agreed by the parties in writing).

(c)           The Office through which a party enters into a Transaction will be the Office specified for that party in the
relevant Confirmation or as otherwise agreed by the parties in writing, and, if an Office for that party is not specified
in the Confirmation or otherwise agreed by the parties in writing, its head or home office. Unless the parties
otherwise agree in writing, the Office through which a party enters into a Transaction will also be the Office in which
it books the Transaction and the Office through which it makes and receives payments and deliveries with respect to
the Transaction. Subject to Section 6(b)(ii), neither party may change the Office in which it books the Transaction or
the Office through which it makes and receives payments or deliveries with respect to a Transaction without the prior
written consent of the other party.

11.          Expenses

A Defaulting Party will on demand indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees, execution fees and Stamp Tax, incurred by such other party by reason of the
enforcement and protection of its rights under this Agreement or any Credit Support Document to which the
Defaulting Party is a party or by reason of the early termination of any Transaction, including, but not limited to,
costs of collection.

12.          Notices

(a)           Effectiveness. Any notice or other communication in respect of this Agreement may be given in any manner
described below (except that a notice or other communication under Section 5 or 6 may not be given by electronic
messaging system or e-mail) to the address or number or in accordance with the electronic messaging system or
e-mail details provided (see the Schedule) and will be deemed effective as indicated:—

(i)      if in writing and delivered in person or by courier, on the date it is delivered;

(ii)     if sent by telex, on the date the recipient’s answerback is received;

(iii)    if sent by facsimile transmission, on the date it is received by a responsible employee of the
recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not
be met by a transmission report generated by the sender’s facsimile machine);

(iv)    if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt
requested), on the date it is delivered or its delivery is attempted;

(v)     if sent by electronic messaging system, on the date it is received, or

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(vi)    if sent by e-mail, on the date it is delivered,

unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or
that communication is delivered (or attempted) or received, as applicable, after the close of business on a Local
Business Day, in which case that communication will be deemed given and effective on the first following day that is
a Local Business Day.

(b)           Change of Details. Either party may by notice to the other change the address, telex or facsimile number or
electronic messaging system or e-mail details at which notices or other communications are to be given to it.

13.          Governing Law and Jurisdiction

(a)           Governing Law. This Agreement will be governed by and construed in accordance with the law
specified in the Schedule.

(b)           Jurisdiction. With respect to any suit, action or proceedings relating to any dispute arising out of or in
connection with this Agreement (“Proceedings”), each party irrevocably:—

(i)      submits:—

(1)         if this Agreement is expressed to be governed by English law, to (A) the non-exclusive
jurisdiction of the English courts if the Proceedings do not involve a Convention Court and (B) the
exclusive jurisdiction of the English courts if the Proceedings do involve a Convention Court; or

(2)         if this Agreement is expressed to be governed by the laws of the State of New York, to the
non-exclusive jurisdiction of the courts of the State of New York and the United States District
Court located in the Borough of Manhattan in New York City.

(ii)     waives any objection which it may have at any time to the laying of venue of any Proceedings
brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient
forum and further waives the right to object, with respect to such Proceedings, that such court does not have
any jurisdiction over such party; and

(iii)    agrees, to the extent permitted by applicable law, that the bringing of Proceedings in any one or
more jurisdictions will not preclude the bringing of Proceedings in any other jurisdiction.

(c)           Service of Process. Each party irrevocably appoints the Process Agent (if any) specified opposite its name
in the Schedule to receive, for it and on its behalf, service of process in any Proceedings. If for any reason any
party’s Process Agent is unable to act as such, such party will promptly notify the other party and within 30 days
appoint a substitute process agent acceptable to the other party. The parties irrevocably consent to service of process
given in the manner provided for notices in Section 12(a)(i), 12(a)(iii) or 12(a)(iv). Nothing in this Agreement will
affect the right of either party to serve process in any other manner permitted by applicable law.

(d)           Waiver of Immunities. Each party irrevocably waives, to the extent permitted by applicable law, with
respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of
sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any court, (iii) relief by way of injunction, or
order for specific performance or recovery of property, (iv) attachment of its assets (whether before or after
judgment) and (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be
entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by
applicable law, that it will not claim any such immunity in any Proceedings.

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14.          Definitions

As used in this Agreement:—

“Additional Representation” has the meaning specified in Section 3.

“Additional Termination Event” has the meaning specified in Section 5(b).

“Affected Party” has the meaning specified in Section 5(b).

“Affected Transactions” means (a) with respect to any Termination Event consisting of an Illegality, Force Majeure
Event, Tax Event or Tax Event Upon Merger, all Transactions affected by the occurrence of such Termination Event
(which, in the case of an Illegality under Section 5(b)(i)(2) or a Force Majeure Event under Section 5(b)(ii)(2), means
all Transactions unless the relevant Credit Support Document references only certain Transactions, in which case
those Transactions and, if the relevant Credit Support Document constitutes a Confirmation for a Transaction, that
Transaction) and (b) with respect to any other Termination Event, all Transactions.

“Affiliate” means, subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by
the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common
control with the person. For this purpose, “control” of any entity or person means ownership of a majority of the
voting power of the entity or person.

“Agreement” has the meaning specified in Section 1(c).

“Applicable Close-out Rate” means:—

(a)     in respect of the determination of an Unpaid Amount:—

(i)          in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii))
by a Defaulting Party, the Default Rate;

(ii)         in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii))
by a Non-defaulting Party, the Non-default Rate;

(iii)        in respect of obligations deferred pursuant to Section 5(d), if there is no Defaulting Party and for so
long as the deferral period continues, the Applicable Deferral Rate; and

(iv)        in all other cases following the occurrence of a Termination Event (except where interest accrues
pursuant to clause (iii) above), the Applicable Deferral Rate; and

(b)     in respect of an Early Termination Amount:—

(i)          for the period from (and including) the relevant Early Termination Date to (but excluding) the date
(determined in accordance with Section 6(d)(ii)) on which that amount is payable:—

(1)           if the Early Termination Amount is payable by a Defaulting Party, the Default Rate;

(2)           if the Early Termination Amount is payable by a Non-defaulting Party, the Non-default
Rate; and

(3)           in all other cases, the Applicable Deferral Rate; and

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(ii)         for the period from (and including) the date (determined in accordance with Section 6(d)(ii)) on
which that amount is payable to (but excluding) the date of actual payment:—

(1)           if a party fails to pay the Early Termination Amount due to the occurrence of an event or
circumstance which would, if it occurred with respect to a payment or delivery under a Transaction,
constitute or give rise to an Illegality or a Force Majeure Event, and for so long as the Early
Termination Amount remains unpaid due to the continuing existence of such event or circumstance,
the Applicable Deferral Rate;

(2)           if the Early Termination Amount is payable by a Defaulting Party (but excluding any
period in respect of which clause (1) above applies), the Default Rate;

(3)           if the Early Termination Amount is payable by a Non-defaulting Party (but excluding any
period in respect of which clause (1) above applies), the Non-default Rate; and

(4)           in all other cases, the Termination Rate.

“Applicable Deferral Rate” means:—

(a)           for the purpose of Section 9(h)(i)(3)(A), the rate certified by the relevant payer to be a rate offered to the
payer by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such bank to
be selected in good faith by the payer for the purpose of obtaining a representative rate that will reasonably reflect
conditions prevailing at the time in that relevant market;

(b)           for purposes of Section 9(h)(i)(3)(B) and clause (a)(iii) of the definition of Applicable Close-out Rate, the
rate certified by the relevant payer to be a rate offered to prime banks by a major bank in a relevant interbank market
for overnight deposits in the applicable currency, such bank to be selected in good faith by the payer after
consultation with the other party, if practicable, for the purpose of obtaining a representative rate that will reasonably
reflect conditions prevailing at the time in that relevant market; and

(c)           for purposes of Section 9(h)(i)(3)(C) and clauses (a)(iv), (b)(i)(3) and (b)(i)(3) and (b)(ii)(1) of the definition of
Applicable Close-out Rate, a rate equal to the arithmetic mean of the rate determined pursuant to clause (a) above and a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount.

“Automatic Early Termination” has the meaning specified in Section 6(a).

“Burdened Party” has the meaning specified in Section 5(b)(iv).

“Change in Tax Law” means the enactment, promulgation, execution or ratification of, or any change in or
amendment to, any law (or in the application or official interpretation of any law) that occurs on or after the parties enter
into the relevant Transaction.

“Close-out Amount” means, with respect to each Terminated Transaction or each group of Terminated Transactions
and a Determining Party, the amount of the losses or costs of the Determining Party that are or would be incurred
under then prevailing circumstances (expressed as a positive number) or gains of the Determining Party that are or
would be realised under then prevailing circumstances (expressed as a negative number) in replacing, or in providing
for the Determining Party the economic equivalent of, (a) the material terms of that Terminated Transaction or group
of Terminated Transactions, including the payments and deliveries by the parties under Section 2(a)(i) in respect of
that Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant
Early Termination Date, have been required after that date (assuming satisfaction of the conditions precedent in

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Section 2(a)(iii) and (b) the option rights of the parties in respect of that Terminated Transaction or group of
Terminated Transactions.

Any Close-out Amount will be determined by the Determining Party (or its agent), which will act in good faith and
use commercially reasonable procedures in order to produce a commercially reasonable result. The Determining
Party may determine a Close-out Amount for any group of Terminated Transactions or any individual Terminated
Transaction but, in the aggregate, for not less than all Terminated Transactions. Each Close-out Amount will be
determined as of the Early Termination Date or, if that would not be commercially reasonable, as of the date or dates
following the Early Termination Date as would be commercially reasonable.

Unpaid Amounts in respect of a Terminated Transaction or group of Terminated Transactions and legal fees and out-
of-pocket expenses referred to in Section 11 are to be excluded in all determinations of Close-out Amounts.

In determining a Close-out Amount, the Determining Party may consider any relevant information, including, without
limitation, one or more of the following types of information:—

(i)            quotations (either firm or indicative) for replacement transactions supplied by one or more third parties that
may take into account the creditworthiness of the Determining Party at the time the quotation is provided and the
terms of any relevant documentation, including credit support documentation, between the Determining Party and the
third party providing the quotation;

(ii)           information consisting of relevant market data in the relevant market supplied by one or more third parties
including, without limitation, relevant rates, prices, yields, yield curves, volatilities, spreads, correlations or other
relevant market data in the relevant market; or

(iii)          information of the types described in clause (i) or (ii) above from internal sources (including any of the
Determining Party’s Affiliates) if that information is of the same type used by the Determining Party in the regular
course of its business for the valuation of similar transactions.

The Determining Party will consider, taking into account the standards and procedures described in this definition,
quotations pursuant to clause (i) above or relevant market data pursuant to clause (ii) above unless the Determining
Party reasonably believes in good faith that such quotations or relevant market data are not readily available or would
produce a result that would not satisfy those standards. When considering information described in clause (i), (ii) or
(iii) above, the Determining Party may include costs of funding, to the extent costs of funding are not and would not
be a component of the other information being utilised. Third parties supplying quotations pursuant to clause (i)
above or market data pursuant to clause (ii) above may include, without limitation, dealers in the relevant markets,
end-users of the relevant product, information vendors, brokers and other sources of market information.

Without duplication of amounts calculated based on information described in clause (i), (ii) or (iii) above, or other
relevant information, and when it is commercially reasonable to do so, the Determining Party may in addition
consider in calculating a Close-out Amount any loss or cost incurred in connection with its terminating, liquidating or
re-establishing any hedge related to a Terminated Transaction or group of Terminated Transactions (or any gain
resulting from any of them).

Commercially reasonable procedures used in determining a Close-out Amount may include the following:—

(1)           application to relevant market data from third parties pursuant to clause (ii) above or information from
internal sources pursuant to clause (iii) above of pricing or other valuation models that are, at the time of the
determination of the Close-out Amount, used by the Determining Party in the regular course of its business in pricing
or valuing transactions between the Determining Party and unrelated third parties that are similar to the Terminated
Transaction or group of Terminated Transactions; and

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(2)           application of different valuation methods to Terminated Transactions or groups of Terminated Transactions
depending on the type, complexity, size or number of the Terminated Transactions or group of Terminated
Transactions.

“Confirmation” has the meaning specified in the preamble.

“consent” includes a consent, approval, action, authorisation, exemption, notice, filing, registration or exchange
control consent.

“Contractual Currency” has the meaning specified in Section 8(a).

“Convention Court” means any court which is bound to apply to the Proceedings either Article 17 of the 1968
Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters or
Article 17 of the 1988 Lugano Convention on Jurisdiction and the Enforcement of Judgments in Civil and
Commercial Matters.

“Credit Event Upon Merger” has the meaning specified in Section 5(b).

“Credit Support Document” means any agreement or instrument that is specified as such in this Agreement.

“Credit Support Provider” has the meaning specified in the Schedule.

“Cross-Default” means the event specified in Section 5(a)(vi).

“Default Rate” means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the
relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1% per annum.

“Defaulting Party” has the meaning specified in Section 6(a).

“Designated Event” has the meaning specified in Section 5(b)(v).

“Determining Party” means the party determining a Close-out Amount.

“Early Termination Amount” has the meaning specified in Section 6(e).

“Early Termination Date” means the date determined in accordance with Section 6(a) or 6(b)(iv).

“electronic messages” does not include e-mails but does include documents expressed in markup languages, and
“electronic messaging system” will be construed accordingly.

“English Law” means the law of England and Wales, and “English” will be construed accordingly.

“Event of Default” has the meaning specified in Section 5(a) and, if applicable, in the Schedule.

“Force Majeure Event” has the meaning specified in Section 5(b).

“General Business Day” means a day on which commercial banks are open for general business (including dealings
in foreign exchange and foreign currency deposits).

“Illegality” has the meaning specified in Section 5(b).

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“Indemnifiable Tax” means any Tax other than a Tax that would not be imposed in respect of a payment under this
Agreement but for a present or former connection between the jurisdiction of the government or taxation authority
imposing such Tax and the recipient of such payment or a person related to such recipient (including, without
limitation, a connection arising from such recipient or related person being or having been a citizen or resident of
such jurisdiction, or being or having been organised, present or engaged in a trade or business in such jurisdiction, or
having or having had a permanent establishment or fixed place of business in such jurisdiction, but excluding a
connection arising solely from such recipient or related person having executed, delivered, performed its obligations
or received a payment under, or enforced, this Agreement or a Credit Support Document).

“law” includes any treaty, law, rule or regulation (as modified, in the case of tax matters, by the practice of any
relevant governmental revenue authority) and “unlawful” will be construed accordingly.

“Local Business Day” means, (a) in relation to any obligation under Section 2(a)(i), a General Business Day in the
place or places specified in the relevant Confirmation and a day on which a relevant settlement system is open or
operating as specified in the relevant Confirmation or, if a place or a settlement system is not so specified, as
otherwise agreed by the parties in writing or determined pursuant to provisions contained, or incorporated by
reference, in this Agreement, (b) for the purpose of determining when a Waiting Period expires, a General Business
Day in the place where the event or circumstance that constitutes or gives rise to the Illegality or Force Majeure
Event, as the case may be, occurs, (c) in relation to any other payment, a General Business Day in the place where the
relevant account is located and, if different, in the principal financial centre, if any, of the currency of such payment,
and, if that currency does not have a single recognised principal financial centre, a day on which the settlement
system necessary to accomplish such payment is open, (d) in relation to any notice or other communication, including
notice contemplated under Section 5(a)(i), a General Business Day (or a day that would have been a General
Business Day but for the occurrence of an event or circumstance which would, if it occurred with respect to payment,
delivery or compliance related to a Transaction, constitute or give rise to an Illegality or a Force Majeure Event) in
the place specified in the address for notice provided by the recipient and, in the case of a notice contemplated by
Section 2(b), in the place where the relevant new account is to be located and (e) in relation to Section 5(a)(v)(2), a
General Business Day in the relevant locations for performance with respect to such Specified Transaction.

“Local Delivery Day” means, for purposes of Sections 5(a)(i) and 5(d), a day on which settlement systems necessary
to accomplish the relevant delivery are generally open for business so that the delivery is capable of being
accomplished in accordance with customary market price, in the place specified in the relevant Confirmation or, if
not so specified, in a location as determined in accordance with customary market practice for the relevant delivery.

“Master Agreement” has the meaning specified in the preamble.

“Merger Without Assumption” means the event specified in Section 5(a)(viii).

“Multiple Transaction Payment Netting” has the meaning specified in Section 2(c).

“Non-affected Party” means, so long as there is one Affected Party, the other party.

“Non-default Rate” means the rate certified by the Non-defaulting Party to be a rate offered to the Non-defaulting
Party by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such bank to
be selected in good faith by the Non-defaulting Party for the purpose of obtaining a representative rate that will
reasonably reflect conditions prevailing at the time in that relevant market.

“Non-defaulting Party” has the meaning specified in Section 6(a).

“Office” means a branch or office of a party, which may be such party’s head or home office.

“Other Amounts” has the meaning specified in Section 6(f).

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“Payee” has the meaning specified in Section 6(f).

“Payer” has the meaning specified in Section 6(f).

“Potential Event of Default” means any event which, with the giving of notice or the lapse of time or both, would
constitute an Event of Default.

“Proceedings” has the meaning specified in Section 13(b).

“Process Agent” has the meaning specified in the Schedule.

“rate of exchange” includes, without limitation, any premiums and costs of exchange payable in connection with the
purchase of or conversion into the Contractual Currency.

“Relevant Jurisdiction” means, with respect to a party, the jurisdictions (a) in which the party is incorporated,
organised, managed and controlled or considered to have its seat, (b) where an Office through which the party is
acting for purposes of this Agreement is located, (c) in which the party executes this Agreement and (d) in relation to
any payment, from or through which such payment is made.

“Schedule” has the meaning specified in the preamble.

“Scheduled Settlement Date” means a date on which a payment or delivery is to be made under Section 2(a)(i) with
respect to a Transaction.

“Specified Entity” has the meaning specified in the Schedule.

“Specified Indebtedness” means, subject to the Schedule, any obligation (whether present or future, contingent or
otherwise, as principal or surety or otherwise) in respect of borrowed money.

“Specified Transaction” means, subject to the Schedule, (a) any transaction (including an agreement with respect to
any such transaction) now existing or hereafter entered into between one party to this Agreement (or any CreditSupport Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement(or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is
not a Transaction under this Agreement but (i) which is a rate swap transaction, swap option, basis swap, forward ratetransaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bondoption, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction,currency swap transaction, cross-currency rate swap transaction, currency option, credit protection transaction, credit
swap, credit default swap, credit default option, total return swap, credit spread transaction, repurchase transaction,
reverse repurchase transaction, buy/sell-back transaction, securities lending transaction, weather index transaction or
forward purchase or sale of a security, commodity or other financial instrument or interest (including any option with
respect to any of these transactions) or (ii) which is a type of transaction that is similar to any transaction referred to
in clause (i) above that is currently, or in the future becomes, recurrently entered into in the financial markets
(including terms and conditions incorporated by reference in such agreement) and which is a forward, swap, future,
option or other derivative on one or more rates, currencies, commodities, equity securities or other equity
instruments, debt securities or other debt instruments, economic indices or measures of economic risk or value, or
other benchmarks against which payments or deliveries are to be made, (b) any combination of these transactions and
(c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation.

“Stamp Tax” means any stamp, registration, documentation or similar tax.

“Stamp Tax Jurisdiction” has the meaning specified in Section 4(e).

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“Tax” means any present or future tax, levy, impost, duty, charge, assessment or fee of any nature (including interest,
penalties and additions thereto) that is imposed by any government or other taxing authority in respect of any
payment under this Agreement other than a stamp, registration, documentation or similar tax.

“Tax Event” has the meaning specified in Section 5(b).

“Tax Event Upon Merger” has the meaning specified in Section 5(b).

“Terminated Transactions” means with respect to any Early Termination Date (a) if resulting from an Illegality or
a Force Majeure Event, all Affected Transactions specified in the notice given pursuant to Section 6(b)(iv), (b) if
resulting from any other Termination Event, all Affected Transactions and (c) if resulting from an Event of Default,
all Transactions in effect either immediately before the effectiveness of the notice designating that Early Termination
Date or, if Automatic Early Termination applies, immediately before that Early Termination Date.

“Termination Currency” means (a) if a Termination Currency is specified in the Schedule and that currency is freely
available, that currency, and (b) otherwise, euro if this Agreement is expressed to be governed by English law or
United States Dollars if this Agreement is expressed to be governed by the laws of the State of New York.

“Termination Currency Equivalent” means, in respect of any amount denominated in the Termination Currency,
such Termination Currency amount and, in respect of any amount denominated in a currency other than the
Termination Currency (the “Other Currency”), the amount in the Termination Currency determined by the party
making the relevant determination as being required to purchase such amount of such Other Currency as at the
relevant Early Termination Date, or, if the relevant Close-out Amount is determined as of a later date, that later date,
with the Termination Currency at the rate equal to the spot exchange rate of the foreign exchange agent (selected as
provided below) for the purchase of such Other Currency with the Termination Currency at or about 11:00 a.m. (in
the city in which such foreign exchange agent is located) on such date as would be customary for the determination of
such a rate for the purchase of such Other Currency for value on the relevant Early Termination Date or that later
date. The foreign exchange agent will, if only one party is obliged to make a determination under Section 6(e), be
selected in good faith by that party and otherwise will be agreed by the parties.

“Termination Event” means an Illegality, a Force Majeure Event, a Tax Event, a Tax Event Upon Merger or, if
specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event.

“Termination Rate” means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence of
any actual cost) to each party (as certified by such party) if it were to fund or of funding such
amounts.

“Threshold Amount” means the amount, if any, specified as such in the Schedule.

“Transaction” has the meaning specified in the preamble.

“Unpaid Amounts” owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in
respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for
Section 2(a)(iii) or due but for Section 5(d)) to such party under Section 2(a)(i) or 2(d)(i)(4) on or prior to such Early
Termination Date and which remain unpaid as at such Early Termination Date, and (b) in respect of each Terminated
Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii) or
5(d)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not
been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or
would have been) required to be delivered and (c) if the Early Termination Date results from an Event of Default, a
Credit Event Upon Merger or an Additional Termination Event in respect of which all outstanding Transactions are
Affected Transactions, any Early Termination Amount due prior to such Early Termination Date and which remains
unpaid as of such Early Termination Date, in each case together with any amount of interest accrued or other

27

compensation in respect of that obligation or deferred obligation, as the case may be, pursuant to Section 9(h)(ii)(1)
or (2), as appropriate.  The fair market value of any obligation referred to in clause (b) above will be determined as of
the originally scheduled date for delivery, in good faith and using commercially reasonable procedures, by the party
obliged to make the determination under section 6(e) or, if each party is so obliged, it will be the average of the
Termination Currency Equivalents of the fair market values so determined by both parties.

“Waiting Period” means:—

(a)           in respect of an event or circumstance under Section 5(b)(i), other than in the case of Section 5(b)(i)(2)
where the relevant payment, delivery or compliance is actually required on the relevant day (in which case no
Waiting Period will apply), a period of three Local Business Days (or days that would have been Local Business
Days but for the occurrence of that event or circumstance) following the occurrence of that event or circumstance; and

(b)           in respect of an event or circumstance under Section 5(b)(ii), other than in the case of Section 5(b)(ii)(2)
where the relevant payment, delivery or compliance is actually required on the relevant day (in which case no
Waiting Period will apply), a period of three Local Business Days (or days that would have been Local Business
Days but for the occurrence of that event or circumstance) following the occurrence of that event or circumstance.

IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below
with effect from the date specified on the first page of this document.

JPMORGAN CHASE BANK, NATIONAL ASSOCIATION			LKQ CORPORATION
By:	/s/ Eric W. Bonatz		By:	/s/ Frank P. Erlain
	Name:	Eric W. Bonatz		Name:	Frank P. Erlain
	Title:	Vice President		Title:	V. P. — Finance & Controller

28

SCHEDULE

to the

2002 MASTER AGREEMENT

dated as of March 20, 2008

between

JPMORGAN CHASE BANK, NATIONAL ASSOCIATION (“Party A”) and LKQ CORPORATION (“Party B”)

PART 1

Termination Provisions

(1)“Specified Entity” means, in relation to Party A, for the purpose of:

Section 5(a)(v), any Affiliate of Party A;

Section 5(a)(vi), none;

Section 5(a)(vii), none; and

Section 5(b)(v), none;

and, in relation to Party B, for the purpose of:

Section 5(a)(v), any Credit Support Provider of Party B;

Section 5(a)(vi), none;

Section 5(a)(vii), none; and

Section 5(b)(v), none.

(2)“Specified Transaction” will have the meaning specified in Section 14 of this Agreement.

(3)The “Cross-Default” provisions of Section 5(a)(vi) will apply to Party A and Party B, and for such purpose:

(a)“Specified Indebtedness” will have the meaning specified in Section 14 of this Agreement, except that such term shall not include obligations in respect of deposits received in the ordinary course of party’s banking business.

(b)“Threshold Amount” means, with respect to Party A, an amount equal to three percent of the shareholder’s equity of Party A (in the case of Party A, of JPMorgan Chase & Co.); and with respect to Party B USD 15,000,000 or the equivalent thereof in any currency or currencies.  For purpose of this definition, any Specified Indebtedness denominated in a currency other than the currency in which the Threshold Amount is expressed shall be converted into the currency in which the Threshold Amount is expressed of the exchange rate therefor as of the time of any determination reasonably chosen by the other party.

(4)The “Credit Event Upon Merger” provisions of Section 5(b)(v) will apply to Party A and Party B; provided, however, that if the applicable party has long term, unsecured and unsubordinated indebtedness or deposits which is or are publicly rated (such rating, a “Credit Rating”) by Moody’s Investor Services, Inc. (“Moody’s”),  Standard and Poors Ratings Group (“S&P”) or any other internationally recognized rating agency (a “Rating Agency”), then the words “materially weaker” in line 6 of Section 5(b)(v) shall mean that the Credit Rating of such party (or, if applicable, the Credit Support Provider of such party) shall be rated lower than Baa3 by Moody’s, or lower than BBB- by S&P or, in the event that there is no Credit Rating by either Moody’s or S&P applicable to such party (or, if applicable, the Credit Support Provider of such party) but such party’s long-term indebtedness or deposits is or are rated by a Rating Agency, lower than a rating equivalent to the foregoing by such Rating Agency.

(5)The “Automatic Early Termination” provision of Section 6(a) will not apply to Party A or Party B.

(6)“Termination Currency” will have the meaning set forth in Section 14 of this Agreement.

(7)Additional Termination EventIt shall be an Additional Termination Event hereunder with respect to Party B as the Affected Party if at any time:  (i) a default (however described) occurs under the Loan Agreement (hereinafter defined); or (ii) the Loan Agreement shall be paid or prepaid in full, expire, terminate or otherwise cease to be in full force and effect.

(8)Additional Condition Precedent.  For the purposes of Section 2(a)(iii) it shall be a condition precedent that no Additional Termination Event with respect to such party shall have occurred and be continuing.

PART 2

Tax Representations

For the purpose of Section 3(f) of this Agreement:

(i)Party A and Party B each represent, respectively, that it is a United States Person for U.S. federal income tax purposes and either (a) is a financial institution or (b) is not acting as an agent for a person that is not a United States Person for U.S. federal income tax purposes.

PART 3

Agreement to Deliver Documents

For the purpose of Sections 4(a)(i) and 4(a)(ii) of this Agreement, each party agrees to deliver the following documents:

                (a)           Tax forms, documents or certificates to be delivered are:

Party B agrees to deliver a complete and accurate United States Internal Revenue Service Form W-9 (or any applicable successor form), in a manner reasonably satisfactory to Party

2

A, (i) upon execution of this Agreement; (ii) promptly upon reasonable demand of Party A, and (iii) promptly upon learning that any such form previously provided by Party B has become obsolete or incorrect (and each such form is hereby identified for purposes of Section 3(d) of this Agreement.

(b)Other documents to be delivered are:

Party required to deliver document	Form/Document/ Certificate	Date by which to be delivered	Covered by Section 3(d) Representation
Party B	Most recently completed Annual Report of Party B and of its Credit Support Provider (as applicable) containing consolidated financial statements certified by independent certified public accountants and prepared in accordance with accounting principles that are generally accepted in the country or countries in which Party B and its Credit Support Provider (as applicable) is organized	Upon request	Yes
Party B	Most recently completed, unaudited consolidated financial statements of Party B and of its Credit Support Provider (as applicable) for a fiscal quarter prepared in accordance with accounting principles that are generally accepted in the country or countries in which Party B and its Credit Support Provider (as applicable) is organized	Upon request	Yes
Party B	Certified copies of all corporate authorizations and any other documents with respect to the execution, delivery and performance of this Agreement	Upon execution and delivery of this Agreement	Yes
Party A and Party B	Certificate of authority and specimen signatures of individuals executing this Agreement, Confirmations and each Credit Support Document (as applicable)	Upon execution and delivery of this Agreement and thereafter upon request of the other party	Yes

3

PART 4

Miscellaneous

(1)Addresses for Notices.  For the purpose of Section 12(a) of this Agreement:

Address for notice or communications to Party A:

Any notice relating to a particular Transaction shall be delivered to the address or facsimile number specified in the Confirmation of such Transaction.  Any notice delivered for purposes of Sections 5 and 6 of this Agreement shall be delivered to the following address:

JPMorgan Chase Bank, National Association

Attention:  Legal Department- Derivatives Practice Group

270 Park Avenue, 41^st Floor

New York, New York 10017-2070

Facsimile No.:  (212) 270-3625

Address for notice or communications to Party B:

LKQ Corporation

120 N. LaSalle Street

Suite 3300

Chicago, Illinois 60602

Attention: Mark Spears

Telephone No.:  (312) 621-2730

Facsimile No.:   (312) 621-1969

Email Address:   MTSpears@LKQCORP.com

(2)Process Agent.  For the purpose of Section 13(c) of this Agreement:

Party A appoints as its Process Agent:  Not applicable.

Party B appoints as its Process Agent:  Not applicable.

(3)Offices.  The provisions of Section 10(a) will apply to this Agreement.

(4)Multibranch Party.  For the purpose of Section 10 of this Agreement:

Party A is a Multibranch Party and may act through any Office specified in a Confirmation.

Party B is not a Multibranch Party.

(5)Credit Support Document.  With respect to Party A does not apply, and with respect to Party B, means the Loan Documents as defined in the Loan Agreement, and any other document which by its terms secures, guarantees or otherwise supports the full and timely performance of Party B’s obligations under this Agreement from time to time.

Party B represents to Party A at all times hereunder that its obligations under this Agreement remain secured under the Credit Support Document(s), to the extent provided in such documents.

4

(6)Credit Support Provider. With respect to Party A does not apply, and with respect to Party B means each party to any Credit Support Document of Party B other than (i) Party A or Party B, (ii) any Affiliate of Party A, or (iii) any other secured party under any such Credit Support Document.

(7)Governing Law.  This Agreement will be governed by and construed in accordance with the laws of the State of New York (without reference to choice of law doctrine).

(8)Netting of Payments. “Multiple Transaction Payment Netting” will apply for the purpose of Section 2(c) of this Agreement to all Transactions starting from the date of this Agreement.

(9)           Absence of Litigation.  For the purpose of Section 3(c) of this Agreement:

“Specified Entity” means, in relation to Party A, any Affiliate of Party A.

“Specified Entity” means, in relation to Party B, any Affiliate of Party B.

(10)No Agency.  The provisions of Section 3(g) of this Agreement will apply to this Agreement.

(11)Additional Representation will apply.  For the purpose of Section 3 of this Agreement, the following will each constitute an Additional Representation:

(h)           Relationship Between Parties.  Each party will be deemed to represent to the other party on the date on which it enters into a Transaction that (absent a written agreement between the parties that expressly imposes affirmative obligations to the contrary for that Transaction):

                (i)            Non-Reliance.  It is acting for its own account, and it has made its own independent decisions to enter into that Transaction and as to whether that Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisers as it has deemed necessary.  It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into that Transaction, it being understood that information and explanations related to the terms and conditions of a Transaction will not be considered investment advice or a recommendation to enter into that Transaction.  No communication (written or oral) received from the other party will be deemed to be an assurance or guarantee as to the expected results of that Transaction.

                (ii)           Assessment and Understanding.  It is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions and risks of that Transaction.  It is also capable of assuming, and assumes, the risks of that Transaction.

                (iii)          Status of Parties.  The other party is not acting as a fiduciary for or an adviser to it in respect of that Transaction.

5

                (iv)          Other Transactions.  It understands and acknowledges that the other party may, either in connection with entering into a Transaction or from time to time thereafter, engage in open market transactions that are designed to hedge or reduce the risks incurred by it in connection with such Transaction and that the effect of such open market transactions may be to affect or reduce the value of such Transaction.

(12)Eligible Contract Participant. Each party represents to the other party (which representation will be deemed to be repeated by each party on each date on which a Transaction is entered into) that it is an “eligible contract participant”, as defined in the Commodity Futures Modernization Act of 2000.

(13)Recording of Conversations.  Each party (i) consents to the recording of telephone conversations between the trading, marketing and other relevant personnel of the parties and their Affiliates in connection with this Agreement or any potential Transaction, (ii) agrees to obtain any necessary consent of, and give any necessary notice of such recording to, its relevant personnel and (iii) agrees, to the extent permitted by applicable law, that recordings may be submitted in evidence in any Proceedings.

PART 5

Other Provisions

(1)Waiver of Jury Trial.  Each party waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any suit, action or proceeding relating to this Agreement or any Credit Support Document.  Each party (i) certifies that no representative, agent or attorney of the other party or any Credit Support Provider has represented, expressly or otherwise, that such other party would not, in the event of such a suit, action or proceeding, seek to enforce the foregoing waiver and (ii) acknowledges that it and the other party have been induced to enter into this Agreement and provide for any Credit Support Document, as applicable, by, among other things, the mutual waivers and certifications in this Section.

(2)ISDA Definitions.  Reference is hereby made to the 2000 ISDA Definitions (the “2000 Definitions”) and the 1998 FX and Currency Option Definitions (the “FX Definitions”) (collectively the “ISDA Definitions”) each as published by the International Swaps and Derivatives Association, Inc., which are hereby incorporated by reference herein.  Any terms used and not otherwise defined herein which are contained in the ISDA Definitions shall have the meaning set forth therein.

(3)Scope of Agreement.  Notwithstanding anything contained in this Agreement to the contrary, any transaction (other than a repurchase transaction, reverse repurchase transaction, buy/sell-back transaction or securities lending transaction) which may otherwise constitute a “Specified Transaction” (without regard to the phrase “which is not a Transaction under this Agreement but” in the definition of “Specified Transaction”) for purposes of this Agreement which has been or will be entered into between the parties shall constitute a “Transaction” which is subject to, governed by, and construed in accordance with the terms of this Agreement, unless any Confirmation with

6

respect to a Transaction entered into after the execution of this Agreement expressly provides otherwise.

(4)Inconsistency.  In the event of any inconsistency between any of the following documents, the relevant document first listed below shall govern:  (i) a Confirmation; (ii) the Schedule and Paragraph 13 of an ISDA Credit Support Annex (as applicable); (iii) the ISDA Definitions; and (iv) the printed form of ISDA Master Agreement and ISDA Credit Support Annex (as applicable).  In the event of any inconsistency between provisions contained in the 2000 Definitions and the FX Definitions, the FX Definitions shall prevail.

(5)Loan Agreement.Until all of Party B’s obligations (whether absolute or contingent) under this Agreement have been satisfied in full, Party B will at all times perform, comply with and observe all covenants and agreements of the Loan Agreement applicable to it, which covenants and agreements, together with related definitions and ancillary provisions, are hereby incorporated by reference (mutatis mutandis) and, for the avoidance of doubt, shall be construed to apply hereunder for the benefit of Party A as though (i) all references therein to the party or parties making loans, extensions of credit or financial accommodations thereunder or commitments therefor (“Financings”) were to Party A and (ii) to the extent that such covenants and agreements are conditioned on or relate to the existence of such Financings or Party B having any obligations arising out of or in connection therewith, all references to such Financings or obligations were to Party B’s obligations under this Agreement.

“Loan Agreement” means that certain Credit Agreement dated as of October 12, 2007 by and among Party B, LKQ Delaware LLP, several banks and financial institutions party thereto, as the Lenders, Lehman Brothers Inc. and Deutsche Bank Securities Inc., as joint Lead Arrangers and Joint Bookrunners, Deutsche Bank Securities Inc, as Syndication Agent, Lehman Commercial Paper Inc., as Administrative Agent, Deutsche Bank AG New York Branch, as US Dual Currency  RCF Agent and Deutsche Bank AG Canada Branch, as Canadian Agent and together with the Administration Agent and the US Dual Currency RCF Agent, the Facility Agents, as the same may be amended, modified, and supplemented from time to time, including by waiver or consent thereunder or pursuant thereto, but without regard to any termination or cancellation thereof, whether by reason of payment of all indebtedness incurred thereunder or otherwise.

Please confirm your agreement to the terms of the foregoing Schedule by signing below.

JPMORGAN CHASE BANK, NATIONAL ASSOCIATION			LKQ CORPORATION
By:	/s/ Eric W. Bonatz		By:	/s/ Frank P. Erlain
	Name:	Eric W. Bonatz		Name:	Frank P. Erlain
	Title:	Vice President		Title:	V. P. — Finance & Controller

7

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Joseph M. Holsten, certify that:

1.         I have reviewed this report on Form 10-Q of LKQ Corporation (the “Company”);

2.         Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.         Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.         The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a)         designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)         designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance

regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)         evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)         disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report)  that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.         The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):

a)         all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b)         any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

May 8, 2008

/s/ JOSEPH M. HOLSTEN

Joseph M. Holsten

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Mark T. Spears, certify that:

1.         I have reviewed this report on Form 10-Q of LKQ Corporation (the “Company”);

2.         Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.         Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.         The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a)         designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)         designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)        evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)         disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report)  that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.         The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):

a)         all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b)         any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

May 8, 2008

/s/MARK T. SPEARS

Mark T. Spears

Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of LKQ Corporation (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, as President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

(1)        the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)        the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 8, 2008
	/s/ JOSEPH M. HOLSTEN
	Joseph M. Holsten
	President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of LKQ Corporation (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, as Executive Vice President and Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

(1)        the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)        the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 8, 2008
	/s/ MARK T. SPEARS
	Mark T. Spears
	Executive Vice President and Chief Financial Officer