10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended February 28, 2006

OR

¨ 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: 1-31420

CARMAX, INC.

(Exact name of registrant as specified in its charter)

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

12800 TUCKAHOE CREEK PARKWAY, RICHMOND, VIRGINIA	23238
(Address of principal executive offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, par value $0.50	New York Stock Exchange
Rights to Purchase Series A Preferred Stock, par value $20.00	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes   ¨    No  x

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  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

                Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

On August 31, 2005, there were 104,645,141 outstanding shares of CarMax, Inc. common stock, par value $0.50 per share. The aggregate market value of the registrant’s common stock held by non-affiliates as of August 31, 2005, computed by reference to the closing price of the registrant’s common stock on the New York Stock Exchange on that date, was $3.3 billion.

On March 31, 2006, there were 105,051,639 outstanding shares of CarMax, Inc. common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the company’s Annual Report to Shareholders for the fiscal year ended February 28, 2006, and the Proxy Statement for the 2006 Annual Meeting of Shareholders are incorporated by reference in Parts II and III of this Annual Report on Form 10-K.

CARMAX, INC.

FORM 10-K

FOR FISCAL YEAR ENDED FEBRUARY 28, 2006

TABLE OF CONTENTS

		Page No.
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	11
Item 2.	Properties	11
Item 3.	Legal Proceedings	12
Item 4.	Submission of Matters to a Vote of Security Holders	12
PART II
Item 5.	Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	13
Item 6.	Selected Financial Data	13
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	13
Item 8.	Consolidated Financial Statements and Supplementary Data	13
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	13
Item 9A.	Controls and Procedures	13
Item 9B.	Other Information	14
PART III
Item 10.	Directors and Executive Officers of the Company	14
Item 11.	Executive Compensation	15
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	15
Item 13.	Certain Relationships and Related Transactions	15
Item 14.	Principal Accounting Fees and Services	15
PART IV
Item 15.	Exhibits, Financial Statement Schedules	16
	Signatures	17

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PART I

In this document, “the company” and “CarMax” refer to CarMax, Inc. and its wholly owned subsidiaries, unless the context requires otherwise.

Forward-Looking and Cautionary Statements

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Among other things, these statements relate to CarMax’s financial condition, results of operations and future business plans, operations, opportunities, or prospects, including without limitation any statements or factors regarding expected sales, margins, or earnings. In addition, CarMax and its representatives may from time to time make written or oral forward-looking statements, including statements contained in other filings with the Securities and Exchange Commission and in the company’s reports to shareholders. These forward-looking statements are generally identified by the use of words such as “expect,” “believe,” “anticipate,” “could,” “should,” “may,” “plan,” “will,” “predict,” estimate,” and similar expressions or words of similar import. These forward-looking statements are based upon the company’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause CarMax’s actual results, performance, or achievements to be materially different from any anticipated results, performance, or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include (i) changes in the general U.S. or regional U.S. economy; (ii) intense competition within the company’s industry; (iii) significant changes in retail prices for used and new vehicles; (iv) a reduction in the availability or the company’s access to sources of inventory; (v) the significant loss of key employees from the company’s store, regional, and corporate management teams; (vi) the efficient operation of the company’s information systems; (vii) changes in the availability or cost of capital and working capital financing; (viii) the company’s ability to acquire suitable real estate; (ix) the occurrence of adverse weather events; (x) seasonal fluctuations in the company’s business; (xi) the geographic concentration of the company’s superstores; (xii) the regulatory environment in which the company operates; (xiii) the effect of various litigation matters; (xiv) the effect of new accounting requirements or changes to generally accepted accounting principles; and (xv) the occurrence of certain other material events. For more information on risks and uncertainties that may affect the company’s business, see Item 1A., “Risk Factors” on page 9 of this report. The company cautions investors not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made. CarMax undertakes no obligation to update any forward-looking statements made in this report.

Item 1. Business.

Business Overview

CarMax, Inc. was incorporated under the laws of the Commonwealth of Virginia in 1996. Its corporate offices are located at 12800 Tuckahoe Creek Parkway, Richmond, Va. CarMax, Inc. is a holding company and its operations are conducted through its subsidiaries.

Under the ownership of Circuit City Stores, Inc. (“Circuit City”), CarMax began operations in 1993 when it opened its first superstore in Richmond, Va. In fiscal 1997, Circuit City created two common stock series, Circuit City Stores, Inc.–Circuit City Group common stock and Circuit City Stores, Inc.–CarMax Group (“CarMax Group”) common stock. On February 7, 1997, Circuit City completed an initial public offering of CarMax Group common stock, which was intended to track separately the performance of the CarMax operations. On October 1, 2002, the CarMax business was separated from Circuit City through a tax-free transaction in which each share of CarMax Group common stock was exchanged for one share of CarMax, Inc. common stock. In addition, each holder of Circuit City Group common stock received a distribution of a 0.313879 share of CarMax, Inc. common stock for each Circuit City Group share owned. As a result of the separation, all of the businesses, assets, and liabilities of the former CarMax Group are held in CarMax, Inc., an independent, separately traded public company.

CarMax is the nation’s largest retailer of used cars. CarMax was the first used vehicle retailer to offer a large selection of high quality used vehicles at competitively low, fixed prices using a customer-friendly sales process in an attractive, modern sales facility. The CarMax consumer offer provides consumers the opportunity to shop for vehicles the same way they shop for items at other “big-box” retailers. CarMax has designed a strategy to better serve the auto retailing market by addressing the major sources of dissatisfaction with traditional auto retailers and to maximize operating efficiencies with standardized operating procedures and store formats enhanced by sophisticated, proprietary management information systems.

The company purchases, reconditions, and sells used vehicles. In general, the used vehicles retailed by CarMax are one to six years old with fewer than 60,000 miles. All used vehicles are thoroughly reconditioned to meet high mechanical, electrical, safety, and cosmetic standards and must pass a comprehensive inspection before being offered for sale. Each superstore also offers a selection of used vehicles that are more than six years old or have more than 60,000 miles, but which meet similar quality standards.

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The company also sells new vehicles under franchise agreements with four new car manufacturers. In fiscal 2006, new vehicles comprised 7% of the company’s total retail vehicle unit sales. As planned, CarMax’s new car sales have become a smaller part of its business mix over the past five fiscal years as it has divested 14 new car franchises while aggressively growing its used car business. CarMax expects to maintain long-term relationships with the automotive manufacturers that it currently represents.

CarMax provides its customers with a full range of related products and services, including the financing of vehicle purchases through CarMax Auto Finance (“CAF”), the company’s own finance operation, and third-party lenders; the sale of extended service plans and accessories; the appraisal and purchase of vehicles directly from consumers; and vehicle repair service.

The CarMax consumer offer enables customers to evaluate separately each component of the sales process and to make informed decisions based on comprehensive information about the options, terms, and associated prices of each component. The customer can accept or decline any individual element of the offer without affecting the price or terms of any other component of the offer. CarMax’s “no-haggle” pricing and its commission structure, which is based on a fixed dollars-per-unit standard, allow its sales consultants to focus solely on meeting customer needs.

The company has separated the practice of trading in a used vehicle in conjunction with the purchase of another vehicle into two distinct and independent transactions. CarMax will appraise a consumer’s vehicle and make a cash offer to purchase that vehicle regardless of whether the owner is purchasing a vehicle from CarMax. CarMax acquires the majority of its retail used vehicle inventory through this unique in-store appraisal process. The company also acquires a significant portion of its used vehicles through wholesale auctions and, to a lesser extent, directly from other sources, including wholesalers, dealers, and fleet owners. Vehicles purchased through the company’s in-store appraisal process that do not meet CarMax’s retail standards are sold at on-site wholesale auctions.

CarMax’s inventory management and control system tracks each vehicle throughout the sales process. Using the information provided by this system and applying sophisticated statistical modeling techniques enable CarMax to optimize its inventory mix and display by store, anticipate future inventory needs at each store, evaluate sales consultant performance, and refine its vehicle pricing strategy. Because of the pricing discipline afforded by the inventory management and pricing system, more than 99% of the entire inventory offered at retail is sold at retail.

Since opening its first superstore in 1993, CarMax has expanded its store base to 67 superstores in 31 U.S. markets as of the end of fiscal 2006. The company opened a total of 33 used car superstores through fiscal 2000 before suspending new store development to focus on improving sales and profits. CarMax resumed opening new stores at the end of fiscal 2002 and is currently opening used car superstores at an annual rate of approximately 15% to 20% of the company’s superstore base.

Industry and Competition. With calendar year 2005 sales of approximately $370 billion, used vehicles comprise nearly half of the U.S. auto retail market, the largest retail segment of the economy. In calendar 2005, there were an estimated 44 million used vehicles sold in the U.S. compared with approximately 17 million new vehicles. CarMax’s primary focus, late-model vehicles that are 1 to 6 years old, is estimated at approximately $280 billion in annual sales and 21 million units per year.

The U.S. used car marketplace is highly fragmented and competitive and includes approximately 21,600 franchised new car dealers and 44,700 independent dealers, as well as millions of private individuals. The company’s primary competitors are the franchised new car dealers, who sell the majority of late-model used vehicles. Independent dealers predominantly sell older, higher mileage cars than does CarMax. In both the used and new vehicle markets, CarMax seeks to distinguish itself from traditional dealerships through its consumer offer, sales approach, and other innovative operating strategies.

The company believes that its principal competitive factors in used vehicle retailing are its ability to provide a high degree of customer satisfaction with the car-buying experience; competitively low prices; breadth of selection of most popular makes and models available on site at each CarMax superstore and on its website, carmax.com; quality of vehicles; proprietary information systems; and location of retail sites. Upon request by the customer, CarMax will transfer virtually any used vehicle in the company’s nationwide inventory to a local superstore. Transfers are free within a market; longer distance transfers include a charge to cover transportation costs. CarMax’s Certified Quality Inspection assures that every vehicle offered for sale at CarMax meets stringent mechanical, electrical, and safety standards. CarMax backs every vehicle with a 5-day, money-back guarantee, and at least a 30-day limited warranty. Other competitive factors include the ability to offer or arrange customer financing on competitive terms and the comprehensiveness and cost of extended service plans. CarMax believes that it is competitive in all of these areas and that it enjoys advantages over competitors that employ traditional high-pressure, negotiation-oriented sales techniques.

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CarMax’s sales consultants play a significant role in ensuring a customer-friendly sales process. A sales consultant is paid a commission based on a fixed dollars-per-unit standard, thereby earning the same dollar sales commission regardless of the price or gross margin on the vehicle being sold. This ensures that the sales consultant’s primary objective is helping customers find the right cars for their needs at prices they can afford. In contrast, sales and finance personnel at traditional dealerships often receive higher commissions for negotiating higher prices and for steering customers toward vehicles with higher gross margins.

In the new vehicle market, CarMax competes with other franchised dealers offering vehicles produced by the same or other manufacturers. Historically, the new vehicle market has been served primarily by dealerships employing traditional automotive selling methods. The company believes its customer-friendly, low-pressure sales methods are points of competitive differentiation.

Marketing and Advertising. CarMax’s marketing strategies are focused on developing awareness of the advantages of shopping at its stores and on attracting customers who are already considering buying or selling a vehicle. The company uses market awareness and customer satisfaction surveys to help tailor its marketing efforts to the purchasing habits and preferences of customers in each market area. CarMax’s marketing strategies are implemented primarily through television and radio broadcasts, carmax.com, the Internet, and newspaper advertising. Television and radio broadcast advertisements are designed to build consumer awareness of the CarMax name, carmax.com, and key components of the CarMax offer. Newspaper advertisements promote CarMax’s broad selection of vehicles and price competitiveness, targeting consumers with immediate purchase intentions. Broadcast, Internet, and newspaper advertisements are designed to drive customers to CarMax stores and to carmax.com.

The media landscape is changing rapidly and CarMax is changing its marketing programs in response. The company is customizing its marketing program based on awareness levels in each market. In selected markets, CarMax is expanding its use of Internet-based advertising while de-emphasizing its use of newspaper advertising. The company is building awareness and driving traffic to its stores and carmax.com by listing every retail vehicle on both AutoTrader.com and cars.com. Through their syndication networks, AutoTrader.com and cars.com vehicle listings appear on sites that are visited by more than 80% of all late-model used vehicle buyers who use the Internet in their shopping process. The company’s advertising on the Internet also includes banner and key-word advertisements on search engines, such as Google and Yahoo!

The company’s website, carmax.com, is a marketing tool for communicating the CarMax consumer offer in detail, a sophisticated search engine for finding the right vehicle, and a sales channel for customers who prefer to complete a part of the shopping and sales process online. The CarMax website offers complete inventory and pricing search capabilities. Information on the more than 22,000 cars available in the company’s nationwide inventory is updated daily. Carmax.com includes detailed information, such as vehicle photos, prices, features, specifications, and store locations, as well as sorting and comparison features that allow consumers to easily compare vehicles. The site also includes features such as detailed vehicle reviews, payment calculators, and an option to estimate trade-in values via a link with Kelley Blue Book. Customers can contact sales consultants online via carmax.com, by telephone, or by fax. Customers can work with these sales consultants from the comfort of home, including applying for financing, and need to visit the store only to sign the paperwork and pick up their vehicle.

Suppliers for Used Vehicles. CarMax acquires its used vehicle inventory directly from consumers through its unique in-store appraisal process and through other sources, including local and regional auctions, wholesalers, franchised and independent dealers, and fleet owners, such as leasing companies and rental companies. In calendar 2005, more than 23 million used vehicles were remarketed in the U.S., of which approximately 9.6 million were sold at wholesale auction.

The CarMax in-store appraisal offer process gives the company access to individual consumers as its largest source for used vehicle inventory. The most popular makes and models are more readily available directly from consumers than from other sources. In stores open for more than a year, CarMax acquires the majority of its used vehicle inventory directly from consumers. This buying strategy also helps provide an inventory of makes and models that reflects the tastes of each market. In May 2006, CarMax began testing a stand-alone car-buying center in the Atlanta market in a major automotive retail center not currently served by CarMax. Staffed by CarMax buyers, this store is intended to increase appraisal traffic and the number of vehicles sourced from individual consumers. The company does not sell cars at this store.

CarMax has replaced the traditional “trade-in” transaction with a process in which a CarMax-trained buyer appraises the vehicle and provides the vehicle’s owner with a written, guaranteed cash offer that is good for 7 days or 300 miles, whichever comes first. An appraisal is available to every customer free of charge, whether or not the individual purchases a vehicle from CarMax. Based on their age, mileage, or condition, fewer than half of the vehicles acquired through this in-store appraisal process meet the company’s high quality retail standards. Those vehicles that do not meet CarMax’s retail standards are sold at the company’s on-site wholesale auctions.

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The inventory purchasing function is primarily performed at the store level and is the responsibility of the buyers, who handle both on-site appraisals and off-site auction purchases. CarMax buyers evaluate all used vehicles on the basis of their estimated wholesale value and reconditioning costs, and, for off-site purchases, cost of delivery to the store where they will be reconditioned. To decide which inventory to purchase at off-site auctions, CarMax’s buyers, in collaboration with its home office staff, rely on the extensive inventory and sales trend data available through the CarMax information system. The company’s inventory and pricing models help the buyers tailor inventories to the buying preferences at each superstore, recommend pricing adjustments, and optimize inventory turnover to help maintain gross margin dollars per unit.

Based on consumer acceptance of the in-store appraisal process at existing CarMax stores, the company’s experience and success to date in acquiring vehicles from auctions and other sources, and the large size of the U.S. auction market relative to the company’s needs, CarMax believes that its sources of used vehicles will continue to be sufficient to meet current needs and to support planned expansion.

Suppliers for New Vehicles. CarMax operates seven new car franchises under separate agreements with manufacturers. New car operations are governed by the terms of the sales and service agreements with DaimlerChrysler, General Motors, Nissan, and Toyota. These agreements generally impose operating requirements and restrictions, including inventory levels, working capital, monthly financial reporting, signage, and cooperation with marketing strategies. A manufacturer may terminate a dealer agreement under certain circumstances, including a change in ownership without prior manufacturer approval, failure to maintain adequate customer satisfaction ratings, or a material breach of other provisions of the agreement. CarMax also has entered into framework agreements with several of the manufacturers noted above. These agreements generally contain provisions relating to the acquisition, ownership structure, advertising, and management of a dealership franchised by those manufacturers.

Seasonality. CarMax’s business is seasonal. Most CarMax superstores experience their strongest traffic and sales in the spring and summer fiscal quarters. Sales and gross margins are typically lowest in the fall quarter, which coincides with the new vehicle model-year-changeover period. In the fall quarter, the new model year introductions and discounts on model year closeouts generally can cause rapid depreciation in used car pricing, particularly for late-model used cars. Seasonal patterns for car buying and selling may vary in different parts of the country and, as CarMax expands geographically, these differences could have an effect on the overall seasonal pattern of the company’s results.

Products and Services

Merchandising. CarMax offers its customers a broad selection of makes and models of used vehicles, including both domestic and imported vehicles, at competitive prices. CarMax’s used car selection covers popular brands from manufacturers such as DaimlerChrysler, Ford, General Motors, Honda, Mitsubishi, Nissan, and Toyota and luxury brands such as Acura, BMW, Infiniti, Lexus, and Mercedes. The company’s primary focus is vehicles that are 1 to 6 years old, have fewer than 60,000 miles, and generally range in price from $11,000 to $31,000. Each vehicle must pass a comprehensive quality inspection that covers all major and minor mechanical systems and all safety functions as well as cosmetic criteria. For the more cost-conscious consumer, the company also offers used cars that are more than 6 years old or have 60,000 miles or more and that generally range in price from $8,000 to $21,000. These older vehicles must pass a quality inspection covering the major mechanical systems and all safety functions.

CarMax has implemented an everyday low-price strategy under which it sets no-haggle prices on both its used and new vehicles. The company believes that its pricing is competitive with the best negotiated prices in the market. Prices on all vehicles are clearly displayed on each vehicle’s information sticker; on carmax.com, AutoTrader.com, and cars.com; and in CarMax’s newspaper advertising. CarMax extends its no-haggle philosophy to every component of the vehicle transaction, including vehicle appraisal offers, financing rates, accessories, extended service plan pricing, and vehicle documentation fees. In addition to selling new vehicles using the low, no-haggle price strategy, the franchise and dealer agreements generally allow CarMax to perform warranty work on these vehicles and sell related parts and services within a specified market area. Designation of specified market areas generally does not guarantee exclusivity within a specified territory.

Reconditioning and Service. An integral part of CarMax’s used car consumer offer is the reconditioning process. This process includes a comprehensive, certified quality inspection of the engine and all major systems, including cooling, fuel, drivetrain, transmission, electronics, suspension, brakes, steering, air conditioning, and other equipment, as well as the interior and exterior of the vehicle. Based on this quality inspection, CarMax determines the reconditioning necessary to bring the vehicle up to CarMax’s high quality standards. Vehicle inspections are completed by CarMax’s service technicians. CarMax performs most routine mechanical and minor body repairs in-house; however, for some reconditioning services, CarMax engages third parties specializing in those services. Over the past several years, CarMax has performed an increasing percentage of reconditioning services in-house, and, based on the cost savings realized, this trend is expected to continue. Satellite superstores depend upon nearby mega or standard superstores for reconditioning, which increases efficiency and reduces overhead.

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All CarMax used car locations provide vehicle repair service, including used car extended service plan repairs. Factory-authorized service is also provided at all new car franchises. CarMax has developed systems and procedures that are intended to ensure that its retail repair service is conducted in the same customer-friendly and efficient manner as its other operations.

CarMax believes that the efficiency of its reconditioning and service operations is enhanced by its modern facilities, a technician mentoring process, and its compensation programs. The mentoring process and compensation programs are designed to increase the productivity of service technicians and result in reduced costs and higher-quality repairs. CarMax is able to track the productivity of each technician through the company’s information system. The experienced technicians in each store perform the more complicated repairs with assistance from apprentices, who also perform less complex functions on their own. At the majority of the company’s stores, compensation is based on an industry “flat rate” system, in which the individual technician’s hourly pay rate is applied to a standard, defined time unit for each repair or service performed.

Wholesale Auctions. Vehicles purchased through CarMax’s in-store appraisal process that do not meet the company’s retail standards are sold at on-site wholesale auctions. At February 28, 2006, wholesale auctions were conducted at 42 of the company’s 67 superstores. Auctions are generally not held at satellite superstores. Auctions are held on a weekly, bi-weekly, or monthly basis. Auction frequency at a given superstore is determined by the number of vehicles to be auctioned, which depends on the number of CarMax stores and the market awareness of the company and its in-store appraisal offer in that market. The typical wholesale vehicle is approximately 10 years old and has more than 100,000 miles. Participation in the company’s wholesale auctions is restricted to licensed automobile dealers, the majority of whom are independent dealers. To participate in a CarMax auction, dealers must register with the Company’s centralized auction support group, at which time the company determines the purchase limit available to each dealer. CarMax makes conditional announcements on each vehicle, including those for vehicles with major mechanical issues, possible frame or flood damage, branded titles and salvage history, and unknown true mileage. The auctions are conducted by professional, licensed auctioneers. These policies result in an auction sales rate that is generally between 95% and 100%. Dealers pay a fee to the company based on the sales price of the vehicles they purchase.

Customer Credit. CarMax provides prime-rated financing to qualified customers through CAF and Bank of America. Offering customers a third-party alternative for prime financing enhances the CarMax consumer offer and helps ensure that CAF remains competitive. In addition, DaimlerChrysler Services, General Motors Acceptance, Nissan Motors Acceptance, and Toyota Financial Services offer prime financing to qualified customers purchasing new vehicles at applicable CarMax locations. Nonprime financing is offered by AmeriCredit Financial Services, Capital One Auto Finance, CitiFinancial Auto, Triad Financial, and Wells Fargo Auto Finance. In selected states, subprime financing is offered by Drive Financial Services (“Drive”). CarMax has tested and will continue to test other third-party finance companies in order to expand the choices for its customers and increase discrete approvals.

Customers applying for financing provide credit information that is electronically submitted by sales consultants through CarMax’s proprietary information system, first to CAF and Bank of America, and then, as necessary, to its nonprime and subprime lenders. Responses from the lenders are received quickly, generally in less than five minutes from prime lenders. The vehicle financings, or loans, are retail installment contracts secured by the vehicles financed. CarMax has no recourse liability on retail installment contracts arranged with third-party finance companies. Customers are permitted to refinance or pay off their loans within three business days of a purchase without incurring any finance or related charges. CarMax’s arrangements with its third-party finance companies, excluding Drive, provide for payment of a fee to CarMax at the time of financing, provided the loan is not paid in full within 90 days. As is customary in the subprime finance industry, Drive purchases the loans at a discount.

Extended Service Plan Sales. At the time CarMax sells a vehicle, it offers the customer an extended service plan. Currently, in all the states in which CarMax operates, it sells these plans on behalf of unrelated third parties that are the primary obligors. Under these third-party service plan programs, CarMax has no contractual liability to the customer. The extended service plans have terms of coverage from 12 to 72 months, depending on the vehicle age and make. CarMax offers these extended service plans at low, fixed prices, which are based primarily on the repair record of the vehicle and the length of coverage selected. All extended service plans sold by CarMax (other than manufacturers’ warranties) have been designed to CarMax specifications and are administered by the third parties through private-label arrangements under which CarMax receives a commission from the administrator at the time the extended service plan is sold.

CarMax’s extended service plan customers have access to the company’s vehicle repair service at each store and to the third-party administrators’ nationwide network of approximately 14,000 independent service providers. CarMax believes that the quality of the services provided by this provider network, as well as the broad scope of its extended service plans, helps promote customer satisfaction and loyalty, and thus increases the likelihood of repeat and referral business.

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Systems

CarMax’s stores are supported by an advanced information system that improves the customer experience while providing tightly integrated automation of all operating functions. Using in-store information kiosks, customers can search each store’s vehicle inventory and print a detailed listing for any vehicle, which includes the vehicle’s features and specifications, and a map showing its specific location on the display lot. CarMax’s inventory management system tracks every vehicle through its CarMax life from purchase through reconditioning and test drives to ultimate sale. Bar codes are placed on each vehicle and on each parking space on the display lot, and all vehicle bar codes are scanned daily as a loss prevention measure. Test drive information is captured on every vehicle using radio frequency identification devices, linking the specific vehicle and the sales consultant. The company also captures data on vehicles it wholesales, which helps track market pricing. An online finance application process and computer-assisted document preparation ensure rapid completion of the sales transaction. Behind the scenes, CarMax’s proprietary store technology provides its management with real-time information about every aspect of store operations, such as inventory management, pricing, vehicle transfers, wholesale auctions, and sales consultant productivity.

The company’s advanced inventory management systems provide CarMax with the ability to anticipate future inventory needs and manage pricing. Through its centralized systems, CarMax is able to immediately integrate new stores into its store network, allowing the new stores to rapidly achieve operating efficiency. CarMax continues to enhance and refine its information systems, which it believes to be a core competitive advantage. In addition to inventory management, the company’s Electronic Repair Order system (“ERO”) is used by the service department to sequence reconditioning procedures. ERO has reduced cycle time, and it provides information that will help increase quality and reduce costs, which further enhance CarMax’s customer service and profitability.

Associates

On March 31, 2006, CarMax had 9,181 hourly and salaried associates and 2,880 sales associates who worked on a commission basis. Additional CarMax associates are employed during peak selling seasons. At March 31, 2006, CarMax’s 70 location general managers averaged more than 7 years of CarMax experience and more than 11 years of prior management experience. Management believes that the company maintains good employee relations. No CarMax employee is subject to a collective bargaining agreement.

Training. CarMax places special emphasis on attracting, developing, and retaining qualified associates and believes that its favorable working conditions and compensation programs allow it to attract and retain highly qualified individuals in each market that the company enters. The company accomplishes this partly through its commitment to provide exceptional training to its associates. Store associates receive structured, self-paced training programs that introduce them to company policies and their specific job responsibilities through KMX University – the company’s proprietary intranet-based testing and tracking system. KMX University is comprised of customized applications hosted within a learning management system that allows the company to author, deliver, and track training events, and to measure associate competency before and after training. Most new store associates are also assigned mentors who provide on-the-job guidance and support.

The company also provides comprehensive, facilitated classroom training courses to sales consultants, buyers, automotive technicians, and managers. All sales consultants receive extensive customer service training both initially and on an ongoing basis. Buyers-in-training undergo a 6– to 18–month apprenticeship under the direction of experienced buyers, and buyers-in-training appraise more than one thousand cars before making their first independent purchase. The company utilizes a mix of internal and external technical training programs in an effort to provide a stable future supply of qualified technicians. Reconditioning and mechanical technicians attend in-house training and vendor-sponsored training programs designed to develop their skills in performing repairs on the diverse makes and models of vehicles CarMax sells. Technicians at the company’s new car franchises also attend manufacturer-sponsored training programs to stay abreast of current diagnostic, repair, and maintenance techniques for those manufacturers’ vehicles. The management training program includes rotations through each functional area. To the greatest extent possible, CarMax opens new stores with an experienced management team drawn from existing stores.

Laws and Regulations

Vehicle Dealer and Other Laws and Regulations. CarMax operates in a highly regulated industry. In every state in which CarMax operates, the company must obtain various licenses and permits in order to conduct business, including dealer, service, sales, and finance licenses issued by state and certain local regulatory authorities. A wide range of federal, state, and local laws and regulations govern the manner in which the company conducts business, including its advertising, sales, financing, and employment practices. These laws include consumer protection laws, privacy laws, anti-money laundering laws, and state franchise laws, as well as other laws and regulations applicable to new and used motor vehicle dealers. These laws also include federal and state wage-hour, anti-discrimination, and other employment practices laws. CarMax’s financing activities with customers are subject to federal truth-in-lending, consumer leasing, and equal credit opportunity laws and regulations, as well as state and local motor vehicle finance laws, installment finance laws, and usury laws.

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Claims arising out of actual or alleged violations of law may be asserted against the company by individuals or governmental authorities and may expose CarMax to significant damages or other penalties, including revocation or suspension of licenses necessary to conduct business and fines.

Environmental, Health, and Safety Laws and Regulations. CarMax’s business involves the use, handling, and disposal of hazardous or toxic substances, including motor oil, gasoline, transmission fluid, solvents, lubricants, and other materials. CarMax is subject to compliance with governmental and environmental regulations concerning the past and current operation and/or removal of aboveground and underground storage tanks containing these and other substances. As a result, CarMax is subject to a variety of federal, state, and local laws and requirements that regulate the environment and public health and safety.

Availability of Reports and Other Information

The company’s website address is www.carmax.com. The company makes available free of charge through its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A, and any amendments to those reports as soon as reasonably practicable after filing or furnishing the material to the Securities and Exchange Commission. The contents of the company’s website are not, however, part of this report.

In addition, the company’s Corporate Governance Guidelines and Code of Conduct, as well as the charters of the Audit Committee, Nominating and Governance Committee, and Compensation and Personnel Committee, are available to shareholders and the public through the “Corporate Governance” link of the company’s investor information home page at http://investor.carmax.com. Printed copies of these documents are available to any shareholder upon written request to the company’s corporate secretary at the address set forth on the cover page to this report. Any changes to these documents or waivers of the Code of Conduct are promptly disclosed on the company’s website.

Item 1A. Risk Factors.

CarMax is subject to various risks, including the risks described below. CarMax’s business, operating results, and financial condition could be materially and adversely affected by any of these risks. Additional risks not presently known to the company or that CarMax currently deems immaterial may also impair the business and its operations.

Economic Conditions. In the normal course of business, CarMax is subject to changes in general or regional U.S. economic conditions, including, but not limited to, consumer credit availability, consumer credit delinquency and default rates, interest rates, gasoline prices, inflation, personal discretionary spending levels, and consumer sentiment about the economy in general. Any significant changes in economic conditions could adversely affect consumer demand and/or increase costs resulting in lower profitability for the company.

Competition. Automotive retailing is a highly competitive business. CarMax’s competition includes publicly and privately owned franchised new car dealers and independent dealers, as well as millions of private individuals. The company’s competitors may sell the same or similar makes of vehicles that CarMax offers in the same or similar markets at competitive prices. Further, new entrants to the market could result in increased wholesale costs for used vehicles and lower-than-expected vehicle sales and margins. CAF is subject to competition from various financial institutions. Additionally, competition on vehicle sales and related financing is increasing as these products are now being marketed and sold over the Internet. Customers are using the Internet to compare pricing for cars and related financing, which may further reduce the company’s profitability.

Retail Prices. Any significant changes in retail prices for used and new vehicles could result in lower sales and margins for the company. If any of CarMax’s competitors seek to gain or retain market share by reducing prices for used or new vehicles, the company would likely reduce its prices in order to remain competitive, which may result in a decrease in its sales and profitability and require a change in its operating strategies.

Inventory. A reduction in the availability or access to sources of inventory would adversely affect the company’s business. A failure to adjust appraisal offers to stay in line with the broader market trade-in offer trends, or a failure to recognize those trends, could negatively impact CarMax’s ability to acquire inventory. Should excess inventory develop, the inability to liquidate excess inventory at prices that allow the company to meet its margin targets or to recover its costs would adversely affect the company’s profitability.

Management and Workforce. CarMax’s success depends upon the continued contributions of its store, region, and corporate management teams. Consequently, the loss of the services of key employees could have a material adverse effect on the

9

company’s results of operations. In addition, as CarMax opens new stores, the company will need to hire additional personnel. The market for qualified employees in the industry and in the regions in which CarMax operates is highly competitive and may subject the company to increased labor costs during periods of low unemployment.

Information Systems. The company’s business is dependent upon the efficient operation of its information systems. In particular, CarMax relies on its information systems to effectively manage its sales, inventory, consumer financing, and customer information. The failure of the company’s information systems to perform as designed or the failure to maintain and continually enhance or protect the integrity of these systems could disrupt the company’s business, impact sales and profitability, or expose the company to customer or third-party claims.

Capital. Changes in the availability or cost of capital and working capital financing, including the availability of long-term financing to support development of the company and the availability of securitization financing, could adversely affect the company’s growth and operating strategies. Further, CarMax’s current credit facility and certain securitization and sale-leaseback agreements contain covenants and/or performance triggers. Any failure by the company to comply with these covenants and/or performance triggers could have a material adverse effect on the company’s business.

Real Estate. The inability to acquire suitable real estate at favorable terms could limit the expansion of the company’s store base and could have a material adverse affect on the company’s future operating results.

Weather. The occurrence of weather events, such as rain, snow, wind, storms, hurricanes, or other natural disasters, adversely affecting consumer traffic at CarMax’s auto superstores could negatively impact the company’s operating results.

Seasonal Fluctuations. CarMax’s business is subject to seasonal fluctuations. In the company’s experience, demand for vehicles is generally lower during the third and fourth fiscal quarters. Therefore, CarMax generally realizes a higher proportion of its revenue and operating profit during the first and second fiscal quarters. If conditions arise that impair vehicle sales during the first or second fiscal quarters, the adverse effect on company’s revenues and operating profit for the year could be disproportionately large.

Geographic Concentration. The company’s performance is subject to local economic, competitive, and other conditions prevailing in geographic areas where CarMax operates. Because a large number of the company’s superstores are located in the Southeast U.S. and in the company’s Chicago, Los Angeles, Houston, Dallas, and Washington, D.C./Baltimore markets, the company’s current results of operations depend substantially on general economic conditions and consumer spending habits in these markets. In the event that any of these geographic areas experience a downturn in economic conditions, it may adversely affect CarMax’s business.

Regulatory Environment. CarMax’s business is subject to a wide range of federal, state, and local laws and regulations, such as local licensing requirements and laws regarding advertising, vehicle sales, financing, and employment practices. The company’s facilities and operations are also subject to federal, state, and local laws and regulations relating to environmental protection and human health and safety. The violation of these laws and regulations could result in administrative, civil, or criminal penalties against the company, or in a cease and desist order against CarMax’s operations. As a result, the company has incurred, and will continue to incur, capital and operating expenditures, and other costs in complying with these laws and regulations. Further, over the past several years, private plaintiffs and federal, state, and local regulatory and law enforcement authorities have increased their scrutiny of advertising, sales, and finance and insurance activities in the sale and leasing of motor vehicles.

Litigation. CarMax is subject to various litigation matters, which, if the outcomes in any significant matters are adverse, could negatively affect the company’s business. Claims arising out of actual or alleged violations of law may be asserted against the company by individuals, either individually or through class actions, or by governmental entities in civil or criminal investigations and proceedings. Such actions may expose CarMax to adverse publicity and to substantial monetary damages and legal defense costs, injunctive relief, and criminal and civil fines and penalties, including suspension or revocation of its licenses to conduct operations.

Accounting Changes. The implementation of new accounting requirements or changes to generally accepted accounting principles could adversely affect the company’s reported financial position or results of operations. Such potential changes currently under consideration by the Financial Accounting Standards Board include, but are not limited to, proposed rule changes relating to the accounting for securitization transactions and the accounting for defined benefit pension and other postemployment benefit plans.

Other Material Events. The occurrence of certain material events including natural disasters, acts of terrorism, the outbreak of war, or other significant national or international events could adversely affect the company’s operating results.

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Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

CarMax conducts its used vehicle operations in three basic retail formats – mega, standard, and satellite superstores. The company’s current growth plan primarily includes the construction of standard superstores and satellite superstores. Standard superstores are approximately 40,000 to 60,000 square feet on 10 to 25 acres. Satellite superstores are approximately 10,000 to 20,000 square feet on 4 to 10 acres. Mega superstores are approximately 70,000 to 95,000 square feet on 20 to 35 acres.

Stores as of March 31, 2006

	Used Car Superstores			Co-Located New Car Stores (1)	Total
	Mega	Standard	Satellite
Alabama	—	1	—	—	1
California	1	3	2	1	7
Florida	3	4	3	1	11
Georgia	1	2	1	—	4
Illinois	3	1	2	—	6
Indiana	—	1	1	—	2
Kansas	—	2	—	—	2
Kentucky	—	1	—	—	1
Maryland	1	1	1	1	4
Missouri	—	—	1	—	1
Nevada	—	1	1	—	2
New Mexico	—	1	—	—	1
North Carolina	—	3	3	—	6
South Carolina	—	2	—	—	2
Tennessee	—	3	1	—	4
Texas	4	4	2	—	10
Utah	—	1	—	—	1
Virginia	—	3	1	—	4
Wisconsin	—	—	1	1	2
Total	13	34	20	4	71

⁽¹⁾ The company currently operates seven new car franchises. Two franchises are integrated within used car superstores, and they do not operate as separate stores. The remaining five franchises are operated from four new car stores that are co-located with used car superstores.

CarMax has financed the majority of its stores through sale-leaseback transactions. As of March 31, 2006, the company leased 61 of its 71 retail stores and owned the remaining 10 stores. CarMax also owns its home office building in Richmond, Va., which opened during the third quarter of fiscal 2006. The company also owns land associated with fiscal 2007 and future year store openings.

CarMax operates 23 of its retail locations pursuant to various leases under which its former parent Circuit City was the original tenant and primary obligor. Circuit City had originally entered into these leases so that CarMax could take advantage of the favorable economic terms available at that time to Circuit City as a large retailer. Circuit City has assigned each of these leases to CarMax. Despite the assignment and pursuant to the terms of the leases, Circuit City remains contingently liable under the leases. In recognition of this ongoing contingent liability, CarMax made a one-time special dividend payment of $28.4 million to Circuit City on the October 1, 2002, separation date.

Expansion

CarMax believes that it is well positioned to succeed in the highly competitive automotive retail industry. The company has built a strong foundation for future growth based upon its unique knowledge of the used car market, its established presence in key locations, and its ability to execute its business plan in a market subject to continuous change. CarMax continues to refine its operating strategies and has grown to be the nation’s largest retailer of used cars. Specifically, CarMax has enhanced its ability to identify profitable markets, determine the appropriate store formats to fit those markets, and effectively manage pricing and inventory mix.

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During the next three fiscal years, the company plans to open superstores at an annual rate of approximately 15% to 20% of its used car superstore base. CarMax funds its store expansion program with sources of funding that provide the most attractive economics and greatest flexibility. In fiscal 2007, the company’s expansion plans are largely focused on opening standard superstores in new mid-sized markets and satellite superstores in existing markets. Mid-sized markets are defined as those with television viewing populations ranging from 0.6 million to 2.5 million. These markets are the most efficient to enter from a real estate and advertising perspective and are where CarMax has generally experienced the fastest store sales ramp-up and profitability. After fiscal 2007, CarMax expects to resume store growth in new large markets.

In fiscal 2007, CarMax plans to open approximately 11 superstores, including six standard-sized superstores and five satellite superstores. One of the satellite openings will be in Charlottesville, Va., which is a test of a smaller-format superstore that will help the company understand the longer-term opportunities in small markets. Five of the 11 planned new stores are currently scheduled to open in the fourth quarter. Accordingly, CarMax expects little, if any, contribution to sales and profits from these five stores in fiscal 2007. In addition, normal construction, permitting, or other scheduling delays could shift the opening dates of any of these five stores into fiscal 2008.

Fiscal 2007 Planned Store Openings

		Standard Superstores	Satellite Superstores	Total Superstores
Hartford / New Haven, Conn.	New mid-sized market	1	1	2
Columbus, Ohio	New mid-sized market	1	1	2
Oklahoma City, Okla.	New mid-sized market	1	—	1
Los Angeles, Calif.	Existing large market	—	1	1
Charlottesville, Va.	New small market	—	1	1
Fredericksburg, Va. (1)	Existing large market	1	—	1
Austin, Tex.	Existing mid-sized market	—	1	1
Charlotte, N.C.	Existing mid-sized market	1	—	1
Fresno, Calif.	New mid-sized market	1	—	1
Total planned openings		6	5	11

⁽¹⁾ Part of the Washington, D.C. television market.

Item 3. Legal Proceedings.

In the normal course of business, CarMax is involved in various legal proceedings. Based upon the company’s evaluation of information currently available, it believes that the ultimate resolution of any such proceedings will not have a material adverse effect, either individually or in the aggregate, on CarMax’s financial position, liquidity, or results of operations.

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

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended February 28, 2006.

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PART II

With the exception of the information incorporated by reference to the 2006 Annual Report to Shareholders in Items 5, 6, 7, 7A, 8, and 9A of Part II of this Form 10-K, the company’s 2006 Annual Report to Shareholders is not to be deemed filed as a part of this report.

Item 5. Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The information required by this Item is incorporated by reference to the sections titled “Stock Information,” “Quarterly Stock Price Range,” and “Dividend Policy” on page 61 of the company’s 2006 Annual Report to Shareholders.

The company did not repurchase any equity securities during the fourth quarter of its 2006 fiscal year.

Item 6. Selected Financial Data.

The information required by this Item is incorporated by reference to the section titled “Selected Financial Data” on page 17 of the company’s 2006 Annual Report to Shareholders.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The information required by this Item is incorporated by reference to the section titled “Management’s Discussion and Analysis” on pages 18 through 35 of the company’s 2006 Annual Report to Shareholders.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

The information required by this Item is incorporated by reference to the sub-section titled “Market Risk” on pages 34 and 35 of the company’s 2006 Annual Report to Shareholders.

Item 8. Consolidated Financial Statements and Supplementary Data.

The information required by this Item is incorporated by reference to the sections titled “Consolidated Statements of Earnings,” “Consolidated Balance Sheets,” “Consolidated Statements of Cash Flows,” “Consolidated Statements of Shareholders’ Equity,” “Notes to Consolidated Financial Statements,” “Management’s Annual Report on Internal Control Over Financial Reporting,” and “Report of Independent Registered Public Accounting Firm” on pages 36 through 58 of the company’s 2006 Annual Report to Shareholders.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The company maintains disclosure controls and procedures (“disclosure controls”) that are designed to ensure that information required to be disclosed in its reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to management, including the chief executive officer (“CEO”) and the chief financial officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, the company evaluated the effectiveness of the design and operation of its disclosure controls. This evaluation was performed under the supervision and with the participation of management, including the CEO and CFO. Based upon that evaluation, the CEO and CFO concluded that the company’s disclosure controls were effective as of the end of such period.

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Management’s Report on Internal Control over Financial Reporting

Management’s annual report on internal control over financial reporting and the report of the independent registered public accounting firm are incorporated by reference to pages 56 and 58 of the company’s 2006 Annual Report to Shareholders.

Changes in Internal Controls

There was no change in the company’s internal control over financial reporting that occurred during the quarter ended February 28, 2006, that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

Item 9B. Other Information.

None.

PART III

With the exception of the information incorporated by reference from the company’s Proxy Statement for the 2006 Annual Meeting of Shareholders in Items 10, 11, 12, 13, and 14 of Part III of this Form 10-K, the company’s Proxy Statement for the 2006 Annual Meeting of Shareholders is not to be deemed filed as a part of this report.

Item 10. Directors and Executive Officers of the Company.

The following table identifies the executive officers of the company as of March 31, 2006. The company is not aware of any family relationships among any executive officers of the company or between any executive officer and any director of the company. All executive officers are elected annually and serve for one year or until their successors are elected and qualify. The next election of officers will occur in June 2006.

Name	Age	Office
Austin Ligon	55	President, Chief Executive Officer, and Director
Keith D. Browning	53	Executive Vice President, Chief Financial Officer, Corporate Secretary, and Director
Thomas J. Folliard	41	Executive Vice President, Store Operations
Michael K. Dolan	56	Senior Vice President, Chief Information Officer
Joseph S. Kunkel	43	Senior Vice President, Marketing and Strategy

Mr. Ligon is a co-founder of CarMax and has been integrally involved in the leadership of the business since its inception. He has been president of CarMax since 1995 and chief executive officer since the separation of the company from its former parent Circuit City on October 1, 2002. He was appointed senior vice president of corporate planning at Circuit City in 1991 and became senior vice president-automotive of Circuit City and president of CarMax in 1995. Mr. Ligon has served as a director of CarMax since January 1997. On October 6, 2005, Mr. Ligon announced his intent to retire in fiscal 2007 following the appointment and election of a successor.

Mr. Browning joined CarMax in 1996 as vice president and chief financial officer after spending 14 years at Circuit City, his last position being corporate controller and vice president. He has been involved in the development of accounting procedures, systems, and internal controls for CarMax since its inception. Mr. Browning was promoted to executive vice president and chief financial officer in 2001. He has served as a director of CarMax since January 1997 and as the company’s corporate secretary since July 2005.

Mr. Folliard joined CarMax in 1993 as senior buyer and became director of purchasing in 1994. Mr. Folliard was promoted to vice president of merchandising in 1996, senior vice president of store operations in July 2000, and executive vice president of store operations in April 2001. He is responsible for the design and development of the unique CarMax purchasing process, the buyer-in-training program, and the in-store wholesale auction system.

Mr. Dolan joined CarMax in 1997 as vice president and chief information officer. Mr. Dolan was named senior vice president in April 2001. Mr. Dolan had prior executive experience in information systems with H.E. Butt Grocery Company, a privately held grocery retailer, where he was vice president and chief information officer.

14

Mr. Kunkel joined CarMax in 1998 as vice president, marketing and strategy. Mr. Kunkel was named senior vice president in April 2001. Prior to joining CarMax, Mr. Kunkel was president of Wholesome Kidfoods, Inc., and a senior manager with McKinsey and Company.

The information concerning the company’s directors required by this Item is incorporated by reference to the section titled “Proposal One - Election of Directors” appearing on pages 7 through 9 of the company’s Proxy Statement for the 2006 Annual Meeting of Shareholders.

The information concerning the audit committee of the company’s board of directors and the audit committee financial expert required by this Item is incorporated by reference to the information included in the sub-section titled “Committees of the Board –Audit Committee” appearing on page 12 of the company’s Proxy Statement for the 2006 Annual Meeting of Shareholders.

The information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 required by this Item is incorporated by reference to the sub-section titled “Section 16(a) Beneficial Ownership Reporting Compliance” appearing on page 18 of the company’s Proxy Statement for the 2006 Annual Meeting of Shareholders.

The information concerning the company’s code of ethics (“Code of Conduct”) for senior management required by this Item is incorporated by reference to the section in Part I hereof titled “Availability of Reports and Other Information” appearing on page 9 of this Form 10-K.

Item 11. Executive Compensation.

The information required by this Item is incorporated by reference to the section titled “Executive Compensation” (excluding the information under the heading “Ten-Year History of Options” and “Performance Graph”) appearing on pages 22 through 29 of the company’s Proxy Statement for the 2006 Annual Meeting of Shareholders. Additional information required by this Item is incorporated by reference to the sub-section titled “Compensation for Non-Employee Directors for Fiscal 2006” on page 13 and 14 of the company’s Proxy Statement for the 2006 Annual Meeting of Shareholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this Item is incorporated by reference to the section titled “CarMax Share Ownership” on pages 16 through 18 and the sub-section titled “Equity Compensation Plan Information” on page 24 of the company’s Proxy Statement for the 2006 Annual Meeting of Shareholders.

Item 13. Certain Relationships and Related Transactions.

The information required by this Item is incorporated by reference to the section titled “Certain Relationships and Related Transactions” appearing on page 29 of the company’s Proxy Statement for the 2006 Annual Meeting of Shareholders.

Item 14. Principal Accounting Fees and Services.

The information required by this Item is incorporated by reference to the sub-section titled “Auditor Information” appearing on

page 31 of the company’s Proxy Statement for the 2006 Annual Meeting of Shareholders.

15

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) The following documents are filed as part of this Report:

1. Financial Statements. The following Consolidated Financial Statements of CarMax, Inc. and subsidiaries and the related Notes to Consolidated Financial Statements and the Reports of Independent Registered Public Accounting Firm are incorporated by reference to Item 8 of this report:

(a) Consolidated Statements of Earnings for the fiscal years ended February 28 or 29, 2006, 2005, and 2004;

(b) Consolidated Balance Sheets at February 28, 2006 and 2005;

(c) Consolidated Statements of Cash Flows for the fiscal years ended February 28 or 29, 2006, 2005, and 2004;

(d) Consolidated Statements of Shareholders’ Equity for the fiscal years ended February 28 or 29, 2006, 2005, and 2004;

(e) Notes to Consolidated Financial Statements;

(f) Management’s Annual Report on Internal Control Over Financial Reporting; and

(g) Reports of Independent Registered Public Accounting Firm.

2. Financial Statement Schedules. “Schedule II – Valuation and Qualifying Accounts and Reserves” and the accompanying Report of Independent Registered Public Accounting Firm on CarMax, Inc. Financial Statement Schedule for the fiscal years ended February 28 or 29, 2006, 2005, and 2004, are filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of CarMax, Inc. and Notes thereto.

Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements and Notes thereto.

3. Exhibits. The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedule are filed as part of, or incorporated by reference into, this report.

(b) Exhibits

See Item 15(a)(3) above.

(c) Financial Statement Schedules

See Item 15(a)(2) above.

16

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CARMAX, INC.
By:	/s/    AUSTIN LIGON	By:	/s/    KEITH D. BROWNING
	Austin Ligon President and Chief Executive Officer May 12, 2006		Keith D. Browning Executive Vice President and Chief Financial Officer May 12, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

/s/    AUSTIN LIGON	/s/    HUGH G. ROBINSON*
Austin Ligon President, Chief Executive Officer, and Director May 12, 2006	Hugh G. Robinson Director May 12, 2006
/s/    KEITH D. BROWNING	/s/    RICHARD L. SHARP *
Keith D. Browning Executive Vice President, Chief Financial Officer, Chief Accounting Officer, and Director May 12, 2006	Richard L. Sharp Director May 12, 2006
/s/    JAMES F. CLINGMAN, JR.*	/s/    THOMAS G. STEMBERG *
James F. Clingman, Jr. Director May 12, 2006	Thomas G. Stemberg Director May 12, 2006
/s/    JEFFREY E. GARTEN *	/s/    VIVIAN M. STEPHENSON*
Jeffrey E. Garten Director May 12, 2006	Vivian M. Stephenson Director May 12, 2006
/s/    W. ROBERT GRAFTON *	/s/    BETH A. STEWART*
W. Robert Grafton Director May 12, 2006	Beth A. Stewart Director May 12, 2006
/s/    WILLIAM S. KELLOGG *	/s/    WILLIAM R. TIEFEL*
William S. Kellogg Director May 12, 2006	William R. Tiefel Director May 12, 2006

*By:	/s/    AUSTIN LIGON
	Austin Ligon Attorney-In-Fact

The original powers of attorney authorizing Austin Ligon and Keith D. Browning, or either of them, to sign this annual report on behalf of certain directors and officers of the company are included as Exhibit 24.1.

17

Schedule II

CARMAX, INC. AND SUBSIDIARIES

Valuation and Qualifying Accounts and Reserves

(In thousands)

Description	Balance at Beginning of Year		Charged To Income		Charge-offs Less Recoveries			Balance at End of Year
Year ended February 29, 2004:
Allowance for doubtful accounts	$	2,090	$	2,803	$	(2,744	)	$	2,149
Year ended February 28, 2005:
Allowance for doubtful accounts	$	2,149	$	3,903	$	(2,472	)	$	3,580
Year ended February 28, 2006:
Allowance for doubtful accounts	$	3,580	$	5,854	$	(3,802	)	$	5,632

18

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

CarMax, Inc.:

Under the date May 12, 2006, we reported on the consolidated balance sheets of CarMax, Inc. and subsidiaries (the Company) as of February 28, 2006 and February 28, 2005, and the related consolidated statements of earnings, shareholders’ equity and cash flows for each of the fiscal years in the three-year period ended February 28, 2006, incorporated by reference herein. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related CarMax, Inc. financial statement schedule (Schedule II) as listed in Item 15(a) 2 of this Form 10-K. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

Richmond, Virginia

May 12, 2006

19

INDEX TO EXHIBITS

2.1	Separation Agreement, dated May 21, 2002, between Circuit City Stores, Inc. and CarMax, Inc., filed as Exhibit 2.1 to CarMax’s Registration Statement on Form S-4/A, filed June 6, 2002 (File No. 333-85240), is incorporated by this reference.
3.1	CarMax, Inc. Amended and Restated Articles of Incorporation, effective June 6, 2002, filed as Exhibit 3.1 to CarMax’s Current Report on Form 8-K, filed October 3, 2002 (File No. 1-31420), is incorporated by this reference.
3.2	CarMax, Inc. Articles of Amendment to the Amended and Restated Articles of Incorporation, effective June 6, 2002, filed as Exhibit 3.2 to CarMax’s Current Report on Form 8-K, filed October 3, 2002 (File No. 1-31420), is incorporated by this reference.
3.3	CarMax, Inc. Bylaws, as amended and restated April 24, 2006, filed as Exhibit 3.1 to CarMax’s Current Report on Form 8-K, filed April 28, 2006 (File No. 1-31420), is incorporated by this reference.
4.1	Rights Agreement, dated as of May 21, 2002, between CarMax, Inc. and Wells Fargo Bank Minnesota, N.A., as Rights Agent, filed as Exhibit 4.1 to CarMax’s Registration Statement on Form S-4/A, filed June 6, 2002 (File No. 333-85240), is incorporated by this reference.
10.1	Form of Employment Agreement between CarMax, Inc. and certain executive officers, including Austin Ligon, Thomas J. Folliard, Keith D. Browning, Michael K. Dolan, and Joseph S. Kunkel, filed as Exhibit 10.1 to CarMax’s Quarterly Report on Form 10-Q, filed October 12, 2004 (File No. 1-31420), is incorporated by this reference. *
10.2	CarMax, Inc. Benefit Restoration Plan, as amended and restated October 19, 2004, filed as Exhibit 10.2 to CarMax’s Annual Report on Form 10-K, filed May 13, 2005 (File No. 1-31420), is incorporated by this reference. *
10.3	CarMax, Inc. 2002 Non-Employee Directors Stock Incentive Plan, as amended and restated April 24, 2006, filed as Exhibit 10.4 to CarMax’s Current Report on Form 8-K, filed April 28, 2006 (File No. 1-31420), is incorporated by this reference. *
10.4	CarMax, Inc. 2002 Stock Incentive Plan, as amended and restated April 24, 2006, filed as Exhibit 10.2 to CarMax’s Current Report on Form 8-K, filed April 28, 2006 (File No. 1-31420), is incorporated by this reference. *
10.5	CarMax, Inc. Annual Performance-Based Bonus Plan, as amended and restated April 24, 2006, filed as Exhibit 10.1 to CarMax’s Current Report on Form 8-K, filed April 28, 2006 (File No. 1-31420), is incorporated by this reference. *
10.6	CarMax, Inc. 2002 Employee Stock Purchase Plan, as amended and restated November 1, 2004, filed as Exhibit 10.2 to CarMax’s Quarterly Report on Form 10-Q, filed January 7, 2005 (File No. 1-31420), is incorporated by this reference.
10.7	Credit Agreement, dated August 24, 2005, among CarMax Auto Superstores, Inc., CarMax, Inc., various subsidiaries of CarMax, various Lenders named therein and Bank of America N.A., as Administrative Agent, filed as Exhibit 10.1 to CarMax’s Quarterly Report on Form 10-Q, filed October 7, 2005 (File No. 1-31420), is incorporated by this reference. Certain non-material schedules and exhibits have been omitted from the Credit Agreement as filed. CarMax agrees to furnish supplementally to the Commission upon request a copy of such schedules and exhibits.
10.8	Security Agreement, dated August 24, 2005, among CarMax, Inc., CarMax Auto Superstores, Inc., various subsidiaries of CarMax named therein, and Bank of America N.A., as Administrative Agent, filed as Exhibit 10.2 to CarMax’s Quarterly Report on Form 10-Q, filed October 7, 2005 (File No. 1-31420), is incorporated by this reference.
10.9	Company Guaranty Agreement, dated August 24, 2005, between CarMax, Inc. and Bank of America N.A., as Administrative Agent, filed as Exhibit 10.3 to CarMax’s Quarterly Report on Form 10-Q, filed October 7, 2005 (File No. 1-31420), is incorporated by this reference.
10.10	Amended and Restated Tax Allocation Agreement between Circuit City Stores, Inc. and CarMax, Inc., dated October 1, 2002, filed as Exhibit 99.2 to CarMax’s Current Report on Form 8-K, filed October 3, 2002 (File No. 1-31420), is incorporated by this reference.

20

10.11	Transition Services Agreement between Circuit City Stores, Inc. and CarMax, Inc., dated October 1, 2002, filed as Exhibit 99.3 to CarMax’s Current Report on Form 8-K, filed October 3, 2002 (File No. 1-31420), is incorporated by this reference.
10.12	Employee Benefits Agreement between Circuit City Stores, Inc. and CarMax, Inc., dated October 1, 2002, filed as Exhibit 99.4 to CarMax’s Current Report on Form 8-K, filed October 3, 2002 (File No. 1-31420), is incorporated by this reference.
10.13	Confidentiality Agreement between Circuit City Stores, Inc. and CarMax, Inc., dated October 1, 2002, filed as Exhibit 99.5 to CarMax’s Current Report on Form 8-K, filed October 3, 2002 (File No. 1-31420), is incorporated by this reference.
10.14	Amendment No. 1 to Transition Services Agreement dated as of August 21, 2003, between Circuit City Stores, Inc. and CarMax, Inc., filed as Exhibit 10 to CarMax’s Quarterly Report on 10-Q, filed October 15, 2003 (File No. 1-31420), is incorporated by this reference.
10.15	Form of Incentive Award Agreement between CarMax, Inc. and Austin Ligon, filed as Exhibit 10.1 to CarMax’s Current Report on Form 8-K, filed December 28, 2005 (File No. 1-31420), is incorporated by this reference. *
10.16	Form of Notice of Stock Option Grant between CarMax, Inc. and certain named and other executive officers, filed as Exhibit 10.3 to CarMax’s Current Report on Form 8-K, filed April 28, 2006 (File No. 1-31420), is incorporated by this reference. *
10.17	Form of Directors Stock Option Grant Agreement between CarMax, Inc. and certain non-employee directors of the CarMax, Inc. board of directors, filed as Exhibit 10.5 to CarMax’s Current Report on Form 8-K, filed April 28, 2006 (File No. 1-31420), is incorporated by this reference. *
10.18	Form of Stock Grant Notice Letter from CarMax, Inc. to certain non-employee directors of the CarMax, Inc. board of directors, filed as Exhibit 10.20 to CarMax’s Annual Report on Form 10-K, filed May 13, 2005 (File No. 1-31420), is incorporated by this reference. *
13.1	CarMax’s Annual Report to Shareholders for the fiscal year ended February 28, 2006, pages 17-58 and page 61, filed herewith.
21.1	CarMax, Inc. Subsidiaries, filed herewith.
23.1	Consent of KPMG LLP, filed herewith.
24.1	Powers of Attorney, filed herewith.
31.1	Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed herewith.
31.2	Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed herewith.
32.1	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, filed herewith.
32.2	Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed herewith.

* Indicates management contracts, compensatory plans, or arrangements of the company required to be filed as an exhibit.

21

EX-13.1

SELECTED FINANCIAL DATA

(Dollars in millions except per share data)	FY06		FY05			FY04		FY03		FY02		FY01		FY00			FY99			FY98			FY97
Net sales and operating revenues	$	6,260.0	$	5,260.3		$	4,597.7	$	3,969.9	$	3,533.8	$	2,758.5	$	2,201.2		$	1,607.3		$	950.7		$	566.7
Net earnings (loss)	$	148.1	$	112.9		$	116.5	$	94.8	$	90.8	$	45.6	$	1.1		$	(23.5	)	$	(34.2	)	$	(9.3	)
Net earnings (loss) per share:
Basic	$	1.41	$	1.09		$	1.13	$	0.92	$	0.89	$	0.45	$	0.01		$	(0.24	)	$	(0.35	)	$	(0.10	)
Diluted	$	1.39	$	1.07		$	1.10	$	0.91	$	0.87	$	0.44	$	0.01		$	(0.24	)	$	(0.35	)	$	(0.10	)
Total assets	$	1,489.2	$	1,293.0		$	1,047.9	$	917.6	$	720.2	$	711.0	$	675.5		$	571.2		$	448.3		$	427.2
Long-term debt, excluding current portion	$	134.8	$	128.4		$	100.0	$	100.0	$	—	$	83.1	$	121.3		$	139.7		$	27.4		$	—
Used vehicle units sold		289,888		253,168			224,099		190,135		164,062		132,868		111,247			96,915			56,594			31,701
New vehicle units sold		20,901		20,636			21,641		22,360		24,164		20,157		17,775			6,152			4,265			2,799
Wholesale vehicle units sold		179,548		155,393			127,168		104,593		90,937		73,323		58,452			46,784			24,475			15,252
Percent changes in:
Comparable store used vehicle unit sales		4		1			6		8		24		13		(8	)		(5	)		6			7
Total used vehicle unit sales		15		13			18		16		23		19		15			71			79			62
Total net sales and operating revenues		19		14			16		12		28		25		37			69			68			73
Diluted net earnings (loss) per share		30		(3	)		21		5		98		4,300		104			31			(250	)		nm
Used car superstores at year-end		67		58			49		40		35		33		33			29			18			7
Retail stores at year-end		71		61			52		44		40		40		40			31			18			7
Associates at year-end		11,712		10,815			9,355		8,263		7,196		6,065		5,676			4,789			3,605			1,614

nm = not meaningful. The initial public offering of CarMax stock occurred in 1997.

CARMAX 2006 17

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the financial performance of CarMax, Inc. MD&A is presented in eight sections: Business Overview; Critical Accounting Policies; Results of Operations; Operations Outlook; Recent Accounting Pronouncements; Financial Condition; Market Risk; and Cautionary Information About Forward-Looking Statements. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes contained elsewhere in this annual report.

In MD&A, “we,” “our,” “us,” “CarMax,” “CarMax, Inc.,” and “the company” refer to CarMax, Inc. and its wholly owned subsidiaries, unless the context requires otherwise. Amounts and percentages in tables may not total due to rounding.

BUSINESS OVERVIEW

General

CarMax is the nation’s largest retailer of used vehicles. We pioneered the used car superstore concept, opening our first store in 1993. Over the next six years, we opened an additional 32 used car superstores before suspending new store development to focus on improving sales and profits. After a period of concept refinement and execution improvement, we resumed opening new stores at the end of fiscal 2002. At February 28, 2006, we had 67 used car superstores in 31 markets, including 23 mid-sized markets and 8 large markets. We initially defined mid-sized markets as those with television viewing populations generally between 1 million and 2.5 million people. As we have refined our operations and market data, we now believe a more appropriate definition of a mid-sized market is one with a television viewing population generally between 600,000 and 2.5 million people. During fiscal 2006, we also operated seven new car franchises, all of which were integrated or co-located with our used car superstores. In fiscal 2006, we sold 289,888 used cars, representing 93% of the total 310,789 vehicles the company sold at retail.

We believe the CarMax consumer offer is unique in the automobile retailing marketplace. Our offer gives consumers a way to shop for cars in the same manner that they shop for items at other “big box” retailers. Our consumer offer is structured around four core equities: low, no-haggle prices; a broad selection; high quality; and customer-friendly service. Our website, carmax.com, is a valuable tool for communicating the CarMax consumer offer, a sophisticated search engine, and an efficient sales channel for customers who prefer to complete part of the shopping and sales process online. We generate revenues, income, and cash flows primarily by retailing used vehicles and associated items including vehicle financing, extended service plans, and vehicle repair service. A majority of the used vehicles we sell at retail are purchased directly from consumers. Vehicles purchased through our appraisal process that do not meet our retail standards are sold at on-site wholesale auctions.

Wholesale auctions are conducted at the majority of our superstores and are held on a weekly, bi-weekly, or monthly basis. On average, the vehicles we wholesale are approximately 10 years old and have more than 100,000 miles. Participation in our wholesale auctions is restricted to licensed automobile dealers, the majority of whom are independent dealers.

CarMax provides prime-rated financing to qualified customers through CarMax Auto Finance (“CAF”), the company’s finance operation, and Bank of America. Nonprime financing is provided through several third-party lenders, and subprime financing is provided through a third-party lender under a program rolled out near the end of the second quarter of fiscal 2005. We periodically test additional third-party lenders. CarMax has no recourse liability for loans provided by third-party lenders. Having our own finance operation allows us to limit the risk of relying on third-party finance sources, while also allowing us to capture additional profit and cash flows. The majority of CAF’s profit contribution is generated by the spread between the interest rates charged to customers and our cost of funds. We collect fixed, prenegotiated fees from the third parties that finance prime- and nonprime-rated customers. As is customary in the subprime finance industry, the subprime lender purchases the loans at a discount.

CARMAX 2006 18

We sell extended service plans on behalf of unrelated third parties who are the primary obligors. We have no contractual liability to the customer under these third-party service plans. Extended service plan revenue represents commissions from the unrelated third parties.

We are still at a relatively early stage in the national rollout of our retail concept. We believe the primary driver for future earnings growth will be vehicle unit sales growth from comparable store sales increases and from geographic expansion. We target a similar dollar amount of gross profit per used unit, regardless of retail price. Used unit sales growth is our primary focus. We plan to open used car superstores at a rate of approximately 15% to 20% of our used car superstore base each year. In fiscal 2007, we plan to focus our store growth primarily on adding standard superstores in new mid-sized markets and satellite fill-in superstores in established markets. After fiscal 2007, we expect to resume store growth in new large markets. For the foreseeable future, we expect used unit comparable store sales increases to average in the range of 4% to 8%, reflecting the multi-year ramp in sales at newly opened stores as they mature and continued market share gains at stores that have reached basic maturity sales levels, which generally occurs in a store’s fifth year of operation.

The principal challenges we face in expanding our store base include our ability to build our management bench strength to support the store growth and our ability to procure suitable real estate at reasonable costs.

We staff each newly opened store with an experienced management team, generally including a location general manager, operations manager, purchasing manager, and business office manager, as well as a number of experienced sales managers and buyers. We must therefore continually recruit, train, and develop managers and associates to fill the pipeline necessary to support future store openings. If at any time we believed that the rate of store growth was causing our performance to falter, we would consider slowing the growth rate.

Fiscal 2006 Highlights

• Net sales and operating revenues increased 19% to $6.26 billion from $5.26 billion in fiscal 2005, and net earnings increased 31% to $148.1 million, or $1.39 per share, from $112.9 million, or $1.07 per share.

• Total used vehicle unit sales increased 15%, reflecting the combination of the growth in our store base and a 4% increase in comparable store used unit sales.

• We opened nine used car superstores in fiscal 2006, including four standard superstores in new markets and one standard and four satellite superstores in existing markets. Two of the superstore openings were in Los Angeles, bringing our presence in this large market to five superstores and giving us the critical mass to commence television advertising in this market.

• Our total gross profit per unit increased to $2,544 from $2,375 in fiscal 2005. Compared with the prior year, used vehicle gross profit per unit was similar, and wholesale vehicle gross profit per unit increased substantially. The wholesale gross profit benefited from the exceptionally strong wholesale pricing environment, particularly in the second half of the fiscal year, and the success of our in-store appraisal strategy.

• CAF income increased 26% to $104.3 million from $82.7 million in fiscal 2005, reflecting the growth in retail vehicle sales and managed receivables. CAF income included a benefit of $0.09 per share for favorable items, primarily valuation adjustments to the retained interest, in fiscal 2006, compared with a benefit of $0.02 per share in fiscal 2005.

• Selling, general, and administrative expenses as a percent of net sales and operating revenues (the “SG&A ratio”) was 10.4% in both fiscal 2006 and fiscal 2005. The moderate rate of increase in comparable store used unit sales was not sufficient to provide SG&A leverage. The increase in the percentage of our store base that is comprised of stores not yet at basic maturity, the launch of market-wide television advertising in Los Angeles, and the lower-than-normal corporate bonus expense in fiscal 2005 were also factors precluding SG&A leverage. Stores generally have higher SG&A ratios during their first four years of operation.

• Net cash provided by operations increased to $122.3 million from $45.7 million in fiscal 2005, reflecting the improved net earnings and changes in working capital.

CARMAX 2006 19

CRITICAL ACCOUNTING POLICIES

Our results of operations and financial condition as reflected in the company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of financial statements requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues, and expenses, and the disclosures of contingent assets and liabilities. We use our historical experience and other relevant factors when developing our estimates and assumptions. We continually evaluate these estimates and assumptions. Note 2 to the company’s consolidated financial statements includes a discussion of significant accounting policies. The accounting policies discussed below are the ones we consider critical to an understanding of the company’s consolidated financial statements because their application places the most significant demands on our judgment. Our financial results might have been different if different assumptions had been used or other conditions had prevailed.

Securitization Transactions

We use a securitization program to fund substantially all of the automobile loan receivables originated by CAF. The securitization transactions are accounted for as sales in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” A gain, recorded at the time of the securitization transaction, results from recording a receivable approximately equal to the present value of the expected residual cash flows generated by the securitized receivables. The fair value of our retained interest includes the present value of the expected residual cash flows generated by the securitized receivables, various reserve accounts, and an undivided ownership interest in securitized receivables.

The present value of the expected residual cash flows generated by the securitized receivables is determined by estimating the future cash flows using management’s assumptions of key factors, such as finance charge income, default rates, prepayment rates, and discount rates appropriate for the type of asset and risk. These assumptions are derived from historical experience and projected economic trends. Adjustments to one or more of these assumptions may have a material impact on the fair value of the retained interest. The fair value of the retained interest may also be affected by external factors, such as changes in the behavior patterns of customers, changes in the economy, and developments in the interest rate markets. Note 2(C) to the company’s consolidated financial statements includes a discussion of accounting policies related to securitizations. Note 4 to the company’s consolidated financial statements includes a discussion of securitizations and provides a sensitivity analysis showing the hypothetical effect on the retained interest if there were variations from the assumptions used. In addition, see the “CarMax Auto Finance Income” section of this MD&A for a discussion of the impact of changing our assumptions.

Revenue Recognition

We recognize revenue when the earnings process is complete, generally either at the time of sale to a customer or upon delivery to a customer. The majority of our revenue is generated from the sale of used vehicles. We recognize vehicle revenue when a sales contract has been executed and the vehicle has been delivered, net of a reserve for returns under our 5-day, money-back guarantee. A reserve for vehicle returns is recorded based on historical experience and trends.

We also sell extended service plans on behalf of unrelated third parties to customers who purchase a vehicle. Because these third parties are the primary obligors under these programs, we recognize commission revenue on the extended service plans at the time of the sale, net of a reserve for estimated service plan returns. The estimated reserve for returns is based on historical experience and trends.

The estimated reserves for returns could be affected if future vehicle or service plan return occurrences differ from historical averages.

Income Taxes

Estimates and judgments are used in the calculation of certain tax liabilities and in the determination of the recoverability of certain of the deferred tax assets. In the ordinary course of business, transactions occur for which the ultimate tax outcome is uncertain at the time of the transactions. We adjust our income tax provision in the period in which we determine that it is probable that our actual results will differ from our estimates. Tax law and rate changes are reflected in the income tax provision in the period in which such changes are enacted.

CARMAX 2006 20

We evaluate the need to record valuation allowances that would reduce deferred tax assets to the amount that will more likely than not be realized. When assessing the need for valuation allowances, we consider future reversals of existing temporary differences and future taxable income. We believe that all of our recorded deferred tax assets as of February 28, 2006, will more likely than not be realized. However, if a change in circumstances results in a change in our ability to realize our deferred tax assets, our tax provision would increase in the period when the change in circumstances occurs.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize potential liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If payments of these amounts ultimately prove to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result in the period of determination.

Information regarding income taxes is presented in Note 7 to the company’s consolidated financial statements.

Defined Benefit Retirement Plan

The plan obligations and related assets of our defined benefit retirement plan are presented in Note 8 to the company’s consolidated financial statements. Plan assets, which consist primarily of marketable equity and debt instruments, are valued using current market quotations. Plan obligations and the annual pension expense are determined by independent actuaries using a number of assumptions provided by the company. Key assumptions used to measure the plan obligations include the discount rate, the estimated rate of salary increases, and the estimated future return on plan assets. In determining the discount rate, we use the current yield on high-quality, fixed-income investments that have maturities corresponding to the anticipated timing of the benefit payments. Salary increase assumptions are based upon historical experience and anticipated future board and management actions. Asset returns are estimated based upon the anticipated average yield on the plan assets. We do not believe that any significant changes in assumptions used to measure the plan obligations are likely to occur that would have a material impact on the company’s financial position or results of operations.

RESULTS OF OPERATIONS

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

NET SALES AND OPERATING REVENUES

	Years Ended February 28 or 29
(In millions)	2006		%	2005		%	2004		%
Used vehicle sales	$	4,771.3	76.2	$	3,997.2	76.0	$	3,470.6	75.5
New vehicle sales		502.8	8.0		492.1	9.4		515.4	11.2
Wholesale vehicle sales		778.3	12.4		589.7	11.2		440.6	9.6
Other sales and revenues:
Extended service plan revenues		97.9	1.6		84.6	1.6		77.1	1.7
Service department sales		93.4	1.5		82.3	1.6		69.1	1.5
Third-party finance fees, net		16.3	0.3		14.4	0.3		19.6	0.4
Appraisal purchase processing fees		—	—		—	—		5.3	0.1
Total other sales and revenues		207.6	3.3		181.3	3.4		171.1	3.7
Total net sales and operating revenues	$	6,260.0	100.0	$	5,260.3	100.0	$	4,597.7	100.0

CARMAX 2006 21

RETAIL VEHICLE SALES CHANGES

	Years Ended February 28 or 29
	2006		2005		2004
Vehicle units:
Used vehicles	15	%	13	%	18	%
New vehicles	1	%	(5	)%	(3	)%
Total	14	%	11	%	16	%
Vehicle dollars:
Used vehicles	19	%	15	%	19	%
New vehicles	2	%	(5	)%	(1	)%
Total	17	%	13	%	16	%

Comparable store used unit sales growth is one of the key drivers of our profitability. A CarMax store is included in comparable store sales beginning in the store’s fourteenth full month of operation.

COMPARABLE STORE RETAIL VEHICLE SALES CHANGES

	Years Ended February 28 or 29
	2006		2005		2004
Vehicle units:
Used vehicles	4	%	1	%	6	%
New vehicles	1	%	8	%	(1	)%
Total	4	%	1	%	5	%
Vehicle dollars:
Used vehicles	8	%	3	%	7	%
New vehicles	1	%	8	%	1	%
Total	8	%	3	%	6	%

CHANGE IN USED CAR SUPERSTORE BASE

	Years Ended February 28 or 29
	2006		2005		2004
Used car superstores, beginning of year	58		49		40
Superstore openings:
Standard superstores	5		5		5
Satellite superstores	4		4		4
Total superstore openings	9		9		9
Used car superstores, end of year	67		58		49
Openings as a percent of the beginning-of-year store base	16	%	18	%	23	%

CARMAX 2006 22

Used Vehicle Sales

Fiscal 2006 Versus Fiscal 2005. The 19% increase in used vehicle dollar sales in fiscal 2006 reflected a 15% increase in unit sales and a 4% increase in average retail selling price. The unit sales growth reflected sales from newer superstores not yet in the comparable store base, together with a 4% increase in comparable store used units. The comparable store used unit sales growth was driven by an increase in store traffic, combined with continuing strong execution by our store teams. Store traffic and comparable store sales increases were particularly strong during the period from June through September 2005, which coincided with the domestic new car manufacturers’ employee pricing programs. Under these programs, the manufacturers established specific “employee” prices, available to all consumers, for each make and model. These programs created greater clarity on new car pricing and increased traffic in the marketplace, both of which we believe benefited CarMax. Our no-haggle consumer offer makes price comparing easy, and we believe it gives us a unique advantage as consumers cross-shop.

Our subprime finance lender, which was added to our third-party lender group near the end of the second quarter of fiscal 2005, did not contribute to the 4% comparable store used unit growth in fiscal 2006. In the fourth quarter of fiscal 2006, the subprime finance lender implemented program changes in certain states, narrowing the selection of vehicles it would finance, making this business less economically attractive to us. We chose to curtail our subprime business in these states to preserve margins and profits.

Fiscal 2005 Versus Fiscal 2004. The 15% increase in used vehicle dollars sales in fiscal 2005 reflected a 13% increase in unit sales and a 2% increase in average retail selling price. The unit sales growth reflected sales from newer superstores not yet in the comparable store base, together with a 1% increase in comparable store used units. During the first half of fiscal 2005, we experienced widespread volatility and softness in our used car business during what is normally the peak spring and summer selling season. We believe the soft market environment was the result of economic and other factors such as high gas prices; the intense competition and unpredictable incentive behavior among new car manufacturers; higher wholesale vehicle prices resulting, in part, from fewer off-lease vehicles; and severe weather in the southeastern United States, primarily affecting our Florida markets. In the second half of fiscal 2005, used vehicle sales improved as many of the factors that appeared to cause the first half weakness abated.

Following a nine-month test in selected stores, near the end of the second quarter of fiscal 2005 we added a provider of subprime financing to our group of third-party lenders. Subprime-financed sales added approximately 3% to our total used unit sales in fiscal 2005. We believe the vast majority of these were incremental sales that we previously could not finance.

New Vehicle Sales

Fiscal 2006 Versus Fiscal 2005. The 2% increase in new vehicle dollar sales in fiscal 2006 was due to a 1% increase in unit sales and a 1% increase in average retail selling price. New vehicle unit sales were strong during the domestic new car manufacturers’ employee pricing programs in June through September 2005; however, these increases were substantially offset by the effects of softer industry new car sales in the months following the end of these programs. New vehicle sales were generally in line with industry performance for the core brands we represent—Chevrolet, DaimlerChrysler, Nissan, and Toyota. Our disposition of five new car franchises in the second half of fiscal 2005 also affected the change in our new car unit sales.

Fiscal 2005 Versus Fiscal 2004. The 5% decline in new vehicle dollar sales in fiscal 2005 reflected the combination of a 5% decline in unit sales and a stable average retail selling price. The decline in new car unit sales reflected the dispositions of five new car franchises in fiscal 2005 and four in fiscal 2004. New vehicle sales at the remaining franchises were generally in line with industry performance for the core brands we represent.

Wholesale Vehicle Sales

Our operating strategy is to build customer satisfaction by offering high-quality vehicles. Fewer than half of the vehicles acquired from consumers through the appraisal purchase process meet our standards for reconditioning and subsequent retail sale. Those vehicles that do not meet our standards are sold at our on-site wholesale auctions.

CARMAX 2006 23

Fiscal 2006 Versus Fiscal 2005. The 32% increase in wholesale vehicle dollar sales in fiscal 2006 reflected a 16% increase in wholesale unit sales and a 14% increase in average wholesale selling price. Our wholesale unit sales growth benefited from a strong increase in appraisal traffic combined with the expansion of our store base. Appraisal traffic was up throughout fiscal 2006, but it was particularly strong in the second quarter. We believe this increase was due, in part, to the domestic new car manufacturers’ employee pricing programs. In these programs, franchised dealers lost some ability to negotiate on trade-ins due to their inability to negotiate on the published employee discount price on new cars. In addition, the employee pricing program coincided with a period of rapid decline in wholesale values for SUVs and large trucks, making some dealers reluctant to accept these vehicles in trade. These factors created an influx of appraisal traffic at CarMax as we continued to make appraisal purchase offers on all vehicles presented for appraisal. Appraisal traffic also benefited from our focused “We Buy Cars” advertising during fiscal 2006.

Our on-site wholesale auctions exhibited unusual aggregate price strength in fiscal 2006, reflecting trends in the general wholesale market. We believe some of the factors that may have contributed to the unusually strong wholesale market pricing environment during various portions of the year included reduced supplies of off-lease and off-rental cars; the strong demand for smaller, fuel-efficient cars in the face of rising gasoline prices; and hurricanes Katrina, Rita, and Wilma, which destroyed an estimated 400,000 to 600,000 vehicles and created a short-term demand/supply imbalance. Wholesale price increases were especially strong in older, higher mileage cars that make up the majority of the vehicles we sell at wholesale. Our wholesale prices also benefited from a record level of dealer attendance at our auctions and a record dealer-to-car ratio in fiscal 2006. We believe the high dealer attendance at our auctions reflected the shortage of older vehicles as well as our continuing efforts to attract dealers to our auctions.

Fiscal 2005 Versus Fiscal 2004. The 34% increase in wholesale vehicle dollar sales in fiscal 2005 reflected a 22% increase in wholesale unit sales and a 10% increase in average wholesale selling price. The increase in wholesale vehicle unit sales reflected the expansion of our retail store base as well as, we believe, enhancements to the processes that our sales consultants use to deliver appraisals to customers and our systems support for buyers. We believe that these enhancements contributed to the increase in our rate of appraisal purchases completed per appraisal offers made. We believe reduced supply of off-lease vehicles contributed to the pricing strength in the wholesale market.

Other Sales and Revenues

Other sales and revenues include commissions on the sale of extended service plans, service department sales, third-party finance fees, and, through the second quarter of fiscal 2004, appraisal purchase processing fees collected from customers on the purchase of their vehicles.

Fiscal 2006 Versus Fiscal 2005. Other sales and revenues increased 14% in fiscal 2006, as all components benefited from the increase in retail vehicle sales and the expansion of our superstore base.

Fiscal 2005 Versus Fiscal 2004. Other sales and revenues increased 6% in fiscal 2005, which was significantly slower than the growth in retail vehicle sales. Growth in extended service plan and service department revenues was partially offset by the decline in third-party finance fees related to the rollout of the subprime finance lender and by the elimination of appraisal purchase processing fees. The subprime finance lender purchases the automobile loans at a discount, which is reflected as an offset to third-party finance fees. During the second quarter of fiscal 2004, the appraisal purchase processing fees were replaced with an alternative method for recovering the costs of our appraisal and wholesale operations. Under the revised appraisal offer strategy, instead of charging the customer the appraisal purchase processing fee, we adjust the price of our purchase offer to allow for full recovery of our costs, thereby reducing the in-store acquisition costs of used and wholesale vehicles.

CARMAX 2006 24

Impact of Inflation

Inflation has not been a significant contributor to results. Profitability is based on achieving targeted unit sales and gross profit dollars per vehicle rather than on average retail prices.

Seasonality

Most of our superstores experience their strongest traffic and sales in the spring and summer fiscal quarters. Sales are typically lowest in the fall quarter, which coincides with the new vehicle model-year-changeover period. In the fall quarter, the new model year introductions and discounts on model year closeouts generally can cause rapid depreciation in used car pricing, particularly for late-model used cars. Seasonal patterns for car buying and selling may vary in different parts of the country and, as CarMax expands geographically, these differences could have an effect on the overall seasonal pattern of the company’s results.

Supplemental Sales Information

UNIT SALES

	Years Ended February 28 or 29
	2006			2005			2004
Used vehicles		289,888			253,168			224,099
New vehicles		20,901			20,636			21,641
Wholesale vehicles		179,548			155,393			127,168
AVERAGE SELLING PRICES
	Years Ended February 28 or 29
	2006			2005			2004
Used vehicles	$	16,298		$	15,663		$	15,379
New vehicles	$	23,887		$	23,671		$	23,650
Wholesale vehicles	$	4,233		$	3,712		$	3,383
RETAIL VEHICLE SALES MIX
	Years Ended February 28 or 29
	2006			2005			2004
Vehicle units:
Used vehicles		93	%		92	%		91	%
New vehicles		7			8			9
Total		100	%		100	%		100	%
Vehicle dollars:
Used vehicles		90	%		89	%		87	%
New vehicles		10			11			13
Total		100	%		100	%		100	%

CARMAX 2006 25

RETAIL STORES

	As of February 28 or 29
	2006	2005	2004
Mega superstores(1)	13	13	13
Standard superstores(2)	34	29	24
Satellite superstores(3)	20	16	12
Total used superstores	67	58	49
Co-located new car stores	4	3	3
Total	71	61	52

⁽¹⁾ Generally 70,000 to 95,000 square feet on 20 to 35 acres.

⁽²⁾ Generally 40,000 to 60,000 square feet on 10 to 25 acres.

⁽³⁾ Generally 10,000 to 20,000 square feet on 4 to 10 acres.

We have a total of seven new car franchises, and we expect to maintain long-term relationships with the automotive manufacturers that we currently represent. Two franchises are integrated within used car superstores, and the remaining five franchises are operated from four facilities that are co-located with select used car superstores.

GROSS PROFIT

	Years Ended February 28 or 29
	2006			2005			2004
	$ per unit (1)		%(2)	$ per unit (1)		%(2)	$ per unit (1)		%(2)
Used vehicle gross profit	$	1,808	11.0	$	1,817	11.5	$	1,742	11.3
New vehicle gross profit	$	934	3.9	$	860	3.6	$	872	3.7
Wholesale vehicle gross profit	$	700	16.1	$	464	12.2	$	359	10.4
Other gross profit	$	391	58.5	$	366	55.3	$	472	67.7
Total gross profit	$	2,544	12.6	$	2,375	12.4	$	2,323	12.4

⁽¹⁾ Calculated as category gross profit divided by its respective units sold, except the other and total categories, which are divided by total retail units sold.

⁽²⁾ Calculated as a percentage of its respective sales or revenue.

Used Vehicle Gross Profit

We target a similar dollar amount of gross profit per used unit, regardless of retail price. Our ability to quickly adjust appraisal offers to stay in line with the broader market trade-in trends and our rapid inventory turns, which reduce our exposure to declining prices, contribute to the general stability in our gross profit dollars per unit.

Fiscal 2006 Versus Fiscal 2005. While our used vehicle gross profit dollars per unit was similar to that achieved in fiscal 2005, our used vehicle gross profits remained under some pressure throughout fiscal 2006. The profit pressure was primarily the result of the combination of the strong wholesale market pricing environment and our desire to price our retail cars at levels that made them attractive to consumers as they compared options in the new and used car marketplace. A strong wholesale market pricing environment increases our cost of acquiring vehicles both in our in-store purchases and at auction. We were able to offset some of the resulting profit pressure through successful refinements in our in-store appraisal strategy. During portions of the year, we did not increase our appraisal offers at the same rate as the steep increase in the major public wholesale auction market prices, as we did not believe the price trends at the major public wholesale auctions were reflective of the broader market trade-in offer trends. This belief was reinforced by the fact that we continued to experience strong increases in appraisal traffic while maintaining our ratio of appraisal buys to appraisal offers. This strategy allowed us to keep our retail prices more in line with underlying retail demand, while maintaining gross profit dollars per unit.

CARMAX 2006 26

Fiscal 2005 Versus Fiscal 2004. The increase in used vehicle gross profit dollars per unit in fiscal 2005 was primarily the result of changing and refining our in-store appraisal strategy. Under the revised strategy, the acquisition cost of used vehicles sourced through our appraisal purchases decreased, resulting in higher used vehicle gross profit.

New Vehicle Gross Profit

Fiscal 2006 Versus Fiscal 2005. The increase in the new vehicle gross profit dollars per unit in fiscal 2006 was primarily attributable to the higher profits realized during the domestic new car manufacturers’ employee pricing programs. We were able to modestly increase our new car prices during these programs, as our pricing had generally been below the manufacturers’ specified employee discount prices.

Fiscal 2005 Versus Fiscal 2004. The decline in the new vehicle gross profit dollars per unit in fiscal 2005 reflected the heightened competitive market with strong manufacturers’ incentives, which required more aggressive pricing in order to drive unit sales volume.

Wholesale Vehicle Gross Profit

Fiscal 2006 Versus Fiscal 2005. The wholesale vehicle gross profit dollars per unit increased substantially in fiscal 2006, primarily as a result of the stronger-than-normal wholesale market pricing environment. The refinements in our in-store appraisal strategy benefited our wholesale operations, while allowing us to maintain used vehicle gross profit dollars per unit levels in the face of rising vehicle acquisition costs. While we did not increase our appraisal offers at the same rate as the steep increase in the major public wholesale auction market prices, our own wholesale auctions generally reflected the pricing trends of the public wholesale auctions.

Our wholesale gross profit growth was particularly strong in the second half of fiscal 2006. Wholesale pricing typically declines during the fall due to pressure from model year closeout sales and from reduced demand at auction as dealers pare back inventories heading into the slower-volume winter months. As a result, our third quarter is typically when we experience our lowest wholesale prices and margins. In this quarter, we adjusted our appraisal offers to incorporate the anticipated drop in wholesale pricing. We were particularly aggressive in our appraisals of SUVs, where prices had fallen dramatically through the summer. Pricing in the overall wholesale marketplace did not decline as anticipated, however, giving us unusually high third quarter wholesale gross profits. In the fourth quarter, which coincides with the time of the year when dealers are building inventories for the higher-volume spring and summer months, we typically experience our strongest wholesale prices and margins. The combination of continuing strong industry demand and the normal seasonal trends lifted wholesale pricing to further inflated levels in the fourth quarter, again benefiting our wholesale gross profits.

Fiscal 2005 Versus Fiscal 2004. The increase in wholesale gross profit dollars per unit in fiscal 2005 reflected the implementation of and refinement to our in-store appraisal strategy. Under the revised strategy, the acquisition cost of wholesale vehicles decreased resulting in higher wholesale gross profit.

Other Gross Profit

Fiscal 2006 Versus Fiscal 2005. Other gross profit dollars per unit increased modestly in fiscal 2006. The improvement was primarily the result of improved penetration in sales of extended service plans, which have no associated cost of sales, and the growth in service profits. The service department, which is the only category within other sales and revenues that has an associated cost of sales, reported higher profits reflecting the greater overhead expense absorption provided by the higher vehicle sales and reconditioning volumes.

Fiscal 2005 Versus Fiscal 2004. The decline in other gross profit dollars per unit in fiscal 2005 resulted from a combination of factors, including a decrease in service profits, the rollout of the subprime lender, and the elimination of appraisal purchase processing fees as part of the new in-store appraisal strategy. Service profits declined in fiscal 2005, reflecting, in part, the slower used vehicle sales pace and the associated deleveraging of service and reconditioning overhead costs. Third-party finance fees also declined in fiscal 2005, reflecting the discount at which our subprime lender purchases automobile loans, which more than offset the growth in fees received from our other third-party lenders.

CARMAX 2006 27

CarMax Auto Finance Income

CAF provides prime automobile financing for our used and new car sales. Because the purchase of an automobile is traditionally reliant on the consumer’s ability to obtain on-the-spot financing, it is important to our business that such financing be available to creditworthy customers. While financing can also be obtained from third-party sources, we believe that total reliance on third parties can create an unacceptable volatility and business risk. Furthermore, we believe that our processes and systems, the transparency of our pricing, and our vehicle quality provide a unique and ideal environment in which to procure high-quality automobile loan receivables, both for CAF and for third-party lenders. CAF provides us the opportunity to capture additional profits and cash flows from automobile loan receivables while managing our reliance on third-party finance sources.

	Years Ended February 28 or 29
(In millions)	2006		%	2005		%	2004		%
Total gain income (1)	$	77.1	4.1	$	58.3	3.8	$	65.1	4.7
Other CAF income (2):
Servicing fee income		27.6	1.0		24.7	1.0		21.8	1.0
Interest income		21.4	0.8		19.0	0.8		16.0	0.8
Total other CAF income		49.0	1.8		43.7	1.8		37.8	1.8
Direct CAF expenses (2):
CAF payroll and fringe benefit expense		10.3	0.4		9.0	0.4		8.2	0.4
Other direct CAF expenses		11.5	0.4		10.3	0.4		9.7	0.5
Total direct CAF expenses		21.8	0.8		19.3	0.8		17.9	0.9
CarMax Auto Finance income (3)	$	104.3	1.7	$	82.7	1.6	$	85.0	1.8
Total loans sold	$	1,887.5		$	1,534.8		$	1,390.2
Average managed receivables	$	2,657.7		$	2,383.6		$	2,099.4
Ending managed receivables	$	2,772.5		$	2,494.9		$	2,248.6
Total net sales and operating revenues	$	6,260.0		$	5,260.3		$	4,597.7

Percent columns indicate:

⁽¹⁾ Percent of loans sold.

⁽²⁾ Percent of average managed receivables.

⁽³⁾ Percent of total net sales and operating revenues.

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

CAF originates automobile loans to qualified customers at competitive market rates of interest. The majority of the profit contribution from CAF is generated by the spread between the interest rates charged to customers and the related cost of funds. Substantially all of the loans originated by CAF are sold in securitization transactions. A gain, recorded at the time of securitization, results from recording a receivable approximately equal to the present value of the expected residual cash flows generated by the securitized receivables. In a normalized environment, we expect the gains on loans originated and sold as a percent of loans originated and sold (the “gain spread”) to be in the range of 3.5% to 4.5%.

The reported gains on sales of loans in fiscal 2006 and fiscal 2005 also included the effects of valuation adjustments, new public securitizations, and the repurchase and resale of receivables in existing public securitizations. The following table provides information on the aggregate effect of these items on gain income, loans sold, and gain spread.

CARMAX 2006 28

GAIN INCOME AND LOANS SOLD

	Years Ended February 28 or 29
(In millions)	2006			2005			2004
Gains on sales of loans originated and sold	$	61.9		$	54.9		$	66.4
Other gain income (loss)		15.2			3.3			(1.3	)
Total gain income	$	77.1		$	58.3		$	65.1
Loans originated and sold	$	1,792.6		$	1,483.8		$	1,390.2
Receivables repurchased from public securitizations and resold		94.8			51.0			—
Total loans sold	$	1,887.5		$	1,534.8		$	1,390.2
Gain percentage on loans originated and sold		3.5	%		3.7	%		4.8	%
Total gain income as a percentage of total loans sold		4.1	%		3.8	%		4.7	%

Fiscal 2006 Versus Fiscal 2005. CAF income rose 26% to $104.3 million in fiscal 2006. The fiscal 2006 total gain income benefited from the growth in retail vehicle sales, $0.06 per share of favorable valuation adjustments, $0.02 per share of favorable effects from new public securitizations completed during the year, and $0.01 per share from the repurchase and resale of receivables in existing public securitizations. In fiscal 2005, CAF’s gains on sales of loans included a benefit of $0.01 per share resulting from a favorable valuation adjustment and $0.01 per share from the repurchase and resale of receivables in existing public securitizations. The increases in other CAF income and direct CAF expenses in fiscal 2006 were proportionate to the growth in managed receivables during the year.

The $0.06 per share of favorable valuation adjustments in fiscal 2006 and $0.01 per share of favorable valuation adjustments in fiscal 2005 resulted primarily from lowering the loss rate assumptions on pools of previously securitized receivables. These pools of receivables experienced loss rates lower than our initial expectations, reflecting the implementation of a new credit scorecard in fiscal 2003, operating efficiencies resulting from system enhancements, and a favorable economic environment. The $0.02 per share favorable effect of new public securitizations in fiscal 2006 resulted from the refinancing of receivables from the warehouse facility into three new public securitizations.

The company’s public securitizations typically contain an option to repurchase the securitized receivables when the outstanding balance in a pool of automobile loan receivables falls below 10% of the original pool balance. The company exercised this option twice in fiscal 2006 and once in fiscal 2005. All eligible receivables were subsequently resold into the warehouse facility. In each year, the remaining receivables carried relatively high interest rates that, combined with the relatively low short-term funding costs, resulted in an earnings benefit of approximately $0.01 per share.

In future years, the effect of refinancing, repurchase, and resale activity could be favorable or unfavorable depending on the securitization structure and market conditions at the transaction date.

Fiscal 2005 Versus Fiscal 2004. CAF income declined 3% to $82.7 million in fiscal 2005, primarily reflecting the decline in the gain spread to 3.7% in fiscal 2005 from 4.8% in fiscal 2004. As anticipated, this decrease in CAF income resulted primarily from a return to more normal gain spread levels, as CAF’s cost of funds increased more rapidly than consumer loan rates during fiscal 2005. During the first half of fiscal 2004, we benefited from higher-than-normal gain spreads resulting from consumer loan rates falling more slowly than our cost of funds. In fiscal 2005, the increases in other CAF income and direct CAF expenses were proportionate to the increase in managed receivables during the year.

CARMAX 2006 29

PAST DUE ACCOUNT INFORMATION

	As of February 28 or 29
(In millions)	2006			2005			2004
Loans securitized	$	2,710.4		$	2,427.2		$	2,200.4
Loans held for sale or investment		62.0			67.7			48.2
Ending managed receivables	$	2,772.5		$	2,494.9		$	2,248.6
Accounts 31+ days past due	$	37.4		$	31.1		$	31.4
Past due accounts as a percentage of ending managed receivables		1.35	%		1.24	%		1.40	%

CREDIT LOSS INFORMATION

	Years Ended February 28 or 29
(In millions)	2006			2005			2004
Net credit losses on managed receivables	$	18.4		$	19.5		$	21.1
Average managed receivables	$	2,657.7		$	2,383.6		$	2,099.4
Net credit losses as a percentage of average managed receivables		0.69	%		0.82	%		1.01	%
Recovery rate		51	%		46	%		42	%

We are at risk for the performance of the managed securitized receivables to the extent of our retained interest in the receivables. If the managed receivables do not perform in accordance with the assumptions used in determining the fair value of the retained interest, our earnings could be impacted. We believe the decreases in net credit losses as a percentage of average managed receivables in fiscal 2006 and fiscal 2005 were due to a combination of factors, including improved general economic conditions, the implementation of a new credit scorecard in fiscal 2003, operational efficiencies resulting from system enhancements, and improved recovery rates. This improved net credit loss performance was reflected in the favorable adjustments to our loss rate assumptions recorded in fiscal 2006 and fiscal 2005. The recovery rate represents the average percentage of the outstanding principal balance CarMax receives when a vehicle is repossessed or surrendered by the customer and sold at wholesale auction. We believe the improvements in the recovery rate reflect the effects of the strengthening wholesale market pricing environment through fiscal 2005 and fiscal 2006.

Selling, General, and Administrative Expenses

Fiscal 2006 Versus Fiscal 2005. The SG&A ratio was 10.4% in both fiscal 2006 and fiscal 2005. The moderate rate of increase in comparable store used unit sales in fiscal 2006 was not sufficient to provide SG&A leverage. The increase in the percentage of our store base that is comprised of newer stores not yet at basic maturity, which generally occurs in the fifth year of operation, also was a contributing factor. Newer stores typically experience higher SG&A ratios during their first four years of operation. On average, 45% of our stores were less than four years old in fiscal 2006 compared with 37% in fiscal 2005. Costs associated with the launch of market-wide television advertising in Los Angeles in fiscal 2006 and the lower-than-normal corporate bonus expense in fiscal 2005 also precluded SG&A leverage.

Fiscal 2005 Versus Fiscal 2004. The SG&A ratio increased to 10.4% in fiscal 2005 from 10.2% in fiscal 2004. The fiscal 2005 SG&A ratio was adversely affected by the deleveraging impact of lower comparable store unit sales experienced in the first half of the fiscal year, the increase in the percentage of our store base comprised of stores not yet at basic maturity, and modestly higher operating expenses associated with being a standalone company following the fiscal 2003 separation from Circuit City Stores, Inc. On average, 37% of our stores were less than four years old in fiscal 2005 compared with 30% in fiscal 2004. We estimate standalone costs were approximately $3 million to $4 million higher in fiscal 2005 than in fiscal 2004 because of the termination of certain transition services previously provided by Circuit City Stores, Inc.

CARMAX 2006 30

Income Taxes

The effective income tax rate was 38.3% in fiscal 2006, 38.8% in fiscal 2005, and 38.5% in fiscal 2004. The fiscal 2006 decrease resulted primarily from a legal entity reorganization in the fourth quarter of fiscal 2005. The company created a centralized corporate management entity in an effort to obtain operational, legal, and other benefits that also resulted in state tax efficiencies. The fiscal 2005 increase resulted from geographic expansion into states with higher income tax rates, including having a larger percentage of stores located in unitary tax states.

OPERATIONS OUTLOOK

Store Openings and Capital Expenditures

During the fiscal year ending February 28, 2007, we plan to expand our used car superstore base by approximately 16%, opening approximately 11 used car superstores, consisting of an approximately equal mix of standard and satellite superstores.

FISCAL 2007 PLANNED SUPERSTORE OPENINGS

		Standard Superstores	Satellite Superstores	Total Superstores
Hartford/New Haven, Conn	New mid-sized market	1	1	2
Columbus, Ohio	New mid-sized market	1	1	2
Oklahoma City, Okla.	New mid-sized market	1	—	1
Los Angeles, Calif	Existing large market	—	1	1
Charlottesville, Va	New small market	—	1	1
Fredericksburg, Va.(1)	Existing large market	1	—	1
Austin, Tex.	Existing mid-sized market	—	1	1
Charlotte, N.C.	Existing mid-sized market	1	—	1
Fresno, Calif.	New mid-sized market	1	—	1
Total planned openings		6	5	11

⁽¹⁾ Part of the Washington, D.C. television market.

We expect to open approximately four stores in the first quarter of fiscal 2007, two stores late in the third quarter, and five stores in the fourth quarter. Given their timing, we expect little, if any, contribution to fiscal 2007 sales and profits from the stores scheduled to open in the fourth quarter. In addition, normal construction, permitting, or other scheduling delays could shift the opening dates of any of these stores into fiscal 2008.

With an estimated television viewing population of approximately 185,000, Charlottesville, Va., represents our first entry into a small market. We will be adjusting our store footprint, inventory, and our staffing model in this store, as a result of the smaller overall sales opportunities provided by this market. This store’s performance over the next few years will help us better understand our longer-term opportunities in small markets.

In May 2006, we opened our first “CarMax Car Buying Center,” which is in the Atlanta market in a major automotive retail center not currently served by CarMax. The store is staffed with CarMax buyers, who conduct appraisals and purchase vehicles on site using the same processes and systems utilized in our used car superstores. We do not sell cars at this store. This test store is part of our long-term program to increase both appraisal traffic and retail vehicle sourcing self-sufficiency.

We estimate gross capital expenditures will total approximately $300 million in fiscal 2007. Planned expenditures primarily relate to new store construction and land purchases associated with future year store openings. Compared with fiscal 2006, the increase in estimated fiscal 2007 capital spending primarily reflects a higher level of real estate purchases for store development in future years, as well as the timing of construction activities.

CARMAX 2006 31

Fiscal 2007 Expectations

The fiscal 2007 expectations discussed below are based on historical and current trends in our business and should be read in conjunction with the “Cautionary Information About Forward-Looking Statements” section of this MD&A.

Fiscal 2007 Sales. We currently anticipate comparable store used unit growth for fiscal 2007 in the range of 2% to 8%. The width of the range reflects the uncertainty of the current market environment. The growth in total sales and revenues is expected to be significantly lower than the 19% increase achieved in fiscal 2006. This decrease reflects the difference in store opening patterns. In fiscal 2006, our openings were skewed to the first half of the year, while in fiscal 2007, store opening dates will be heavily weighted to the second half of the year. In addition, we do not expect our wholesale sales to repeat the exceptional performance achieved in fiscal 2006.

Accounting for Stock-Based Compensation. Effective March 1, 2006, we adopted SFAS No. 123 (Revised 2004), “Share-Based Payment,” which modifies SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) requires that all stock-based compensation, including employee stock options, be accounted for using a fair-value-based method. The effect of the adoption of this accounting change on our fiscal 2007 diluted earnings per share is expected to be a reduction of approximately $0.18 to $0.20. As required by SFAS No. 123(R), this estimate includes expensing all outstanding unvested options held by our retiring chief executive officer, as well as accelerated recognition of stock-based compensation expense of new options for associates who will reach retirement eligibility earlier than the end of the stated vesting period. The estimate does not include any expense that may result from an additional equity grant, if any, issued to a new chief executive officer. SFAS No. 123(R) will be adopted on a modified retrospective basis and results for prior periods will be restated, enhancing comparability. Prior period restatements will reflect compensation costs in the amounts previously reported in the pro forma footnote disclosures under the provisions of SFAS No. 123. The effect of the restatement on fiscal 2006 results is estimated to be a $0.12 reduction from $1.39 to $1.27 in diluted earnings per share.

Fiscal 2007 Earnings Per Share. Excluding the estimated effect of expensing stock-based compensation, we expect fiscal 2007 earnings per share in the range of $1.45 to $1.65, representing EPS growth in the range of 4% to 19%. Including the estimated expense for stock-based compensation, but excluding any expense from an additional equity grant, if any, for a new chief executive officer, we expect fiscal 2007 earnings per share in the range of $1.25 to $1.47, reflecting EPS performance in the range of (2)% to 16%. This expectation recognizes estimated stock-based compensation expense of $0.12 for fiscal 2006 and approximately $0.18 to $0.20 for fiscal 2007. Excluding the $0.09 of favorable CAF items in fiscal 2006 and including the estimated expense for stock-based compensation, earnings per share growth would be in the range of 6% to 25%.

We expect modest improvement in used vehicle gross profit dollars per unit as wholesale pricing moderates. During the first half of fiscal 2007, we expect wholesale gross profit dollars per unit to increase and wholesale sales to grow at approximately the same rate as our retail sales. During the third quarter, we expect wholesale sales to continue to grow, but gross margins to moderate in comparison to the unusual circumstances in the third quarter of fiscal 2006. In the fourth quarter, we expect both wholesale sales growth and margins to moderate. Overall, we expect wholesale sales and gross profit to increase in line with used retail sales growth.

We expect a slight decline in CAF income due to the $0.09 per share of favorable CAF items reported in fiscal 2006. CAF gain spreads are expected to be at the low end of our normalized 3.5% to 4.5% range in the first half of fiscal 2007. The gain spread could improve modestly in the second half of the year, depending on interest rate trends and other economic factors.

If we perform at or above the mid-point of our range of expected comparable store used unit sales, we expect a modest amount of SG&A leverage in fiscal 2007, including an expected increase in costs of approximately $5 million associated with moving our data center, and excluding expenses related to stock-based compensation. We expect our effective tax rate for fiscal 2007 will be similar to the fiscal 2006 rate.

RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting pronouncements applicable to the company, see Note 15 to the company’s consolidated financial statements.

CARMAX 2006 32

FINANCIAL CONDITION

Operating Activities

We generated net cash from operating activities of $122.3 million in fiscal 2006, $45.7 million in fiscal 2005, and $147.0 million in fiscal 2004. The $76.6 million improvement in cash generated from operating activities in fiscal 2006 compared with fiscal 2005 primarily reflected the $35.2 million increase in net earnings and a $39.9 million reduction in the year-over-year growth in current assets other than cash. The increase in inventories in both years reflected the growth in total vehicle inventories resulting from the expansion of our store base. The $101.2 million decline in cash generated from operating activities in fiscal 2005 compared with fiscal 2004 primarily reflected a $110.9 million increase in the year-over-year growth in inventories. Inventory levels were similar at the beginning and the end of fiscal 2004, reflecting a higher-than-normal inventory balance at the beginning of the year and the disposal of four new car franchises, which together offset the growth in inventory associated with store openings.

The aggregate principal amount of automobile loan receivables funded through securitizations, which are discussed in Notes 3 and 4 to the company’s consolidated financial statements, totaled $2.71 billion at February 28, 2006, $2.43 billion at February 28, 2005, and $2.20 billion at February 29, 2004. During fiscal 2006, we completed three public automobile securitizations totaling $1.59 billion. At February 28, 2006, the warehouse facility limit was $825.0 million and unused warehouse capacity totaled $241.0 million. The warehouse facility matures in July 2006. Note 4 to the company’s consolidated financial statements includes a discussion of the warehouse facility. We anticipate that we will be able to renew, expand, or enter into new securitization arrangements to meet the future needs of the automobile finance operation.

Investing Activities

Net cash used in investing activities was $116.1 million in fiscal 2006, $141.1 million in fiscal 2005, and $73.8 million in fiscal 2004. Capital expenditures were $194.4 million in fiscal 2006, $230.1 million in fiscal 2005, and $181.3 million in fiscal 2004. In addition to store construction costs, capital expenditures for all three years included the cost of land acquired for future year store openings and costs associated with our new home office, which was completed in October 2005. Compared with fiscal 2005, the decline in capital spending in fiscal 2006 primarily reflects fewer real estate purchases for store development in future years. Several of the store sites added in fiscal 2006 were acquired pursuant to long-term leases, as opposed to purchases.

Capital expenditures are funded through internally generated funds, short- and long-term debt, and sale-leaseback transactions. Net proceeds from the sales of assets totaled $78.3 million in fiscal 2006, $89.0 million in fiscal 2005, and $107.5 million in fiscal 2004. The majority of the sale proceeds relate to sale-leaseback transactions. In fiscal 2006, we entered into sale-leaseback transactions involving five superstores valued at $72.7 million. In fiscal 2005, we entered into sale-leaseback transactions involving seven superstores valued at approximately $84.0 million. In fiscal 2004, we entered into sale-leaseback transactions involving nine superstores valued at approximately $107.0 million. These transactions were structured with initial lease terms of either 15 or 20 years with four, five-year renewal options. At February 28, 2006, we owned ten superstores currently in operation, as well as the company’s home office in Richmond, Virginia. In addition, six store facilities were accounted for as capital leases.

Financing Activities

Net cash used in financing activities was $1.6 million in fiscal 2006, while net cash provided by financing activities was $63.8 million in fiscal 2005. In fiscal 2004, net cash used in financing activities was $47.6 million. In fiscal 2006, we used cash generated from operations to reduce total debt by $6.8 million. In fiscal 2005, we increased total debt by $60.2 million primarily to fund increased inventory. In fiscal 2004, we used cash generated from operations to reduce total outstanding debt by $51.6 million.

In August 2005, we entered into a new, four-year $450 million revolving credit facility secured by vehicle inventory. Concurrently, we terminated our existing $300 million credit agreement. Borrowings under the new credit facility are available for working capital and general corporate purposes, and represent senior secured indebtedness of the company. All outstanding principal amounts borrowed under the credit facility will be due and payable in August 2009. The aggregate borrowing limit includes a $25 million limit on new vehicle swing line loans, a $25 million limit on other swing line loans, and a $30 million limit on standby letters of credit. Borrowings on each of the swing lines are due on demand and must be repaid monthly or refinanced through other committed borrowings under the credit agreement.

CARMAX 2006 33

As of February 28, 2006, $159.3 million was outstanding under the credit facility, with the remainder fully available to the company. The outstanding balance included $0.5 million of swing line loans classified as short-term debt, $58.8 million classified as current portion of long-term debt, and $100.0 million classified as long-term debt. The determination of the amount classified as long-term debt was based on management’s intent as to that portion expected to remain outstanding for more than one year from the balance sheet date.

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

CONTRACTUAL OBLIGATIONS

	As of February 28, 2006
(In millions)	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years
Revolving credit agreement	$	159.3	$	59.3	$	—	$	100.0	$	—
Capital leases (1)		71.5		4.5		8.9		9.4		48.7
Operating leases (1)		982.2		68.6		138.6		141.1		633.9
Purchase obligations (2)		76.7		47.7		15.9		12.0		1.1
Total	$	1,289.7	$	180.1	$	163.4	$	262.5	$	683.7

⁽¹⁾ See Note 12 to the company’s consolidated financial statements.

⁽²⁾ Purchase obligations include certain enforceable and legally binding obligations related to the purchase of real property, third-party outsourcing services, and certain automotive reconditioning products.

Off-Balance Sheet Arrangements

CAF provides prime automobile financing for our used and new car sales. We use a securitization program to fund substantially all of the automobile loan receivables originated by CAF. We sell the automobile loan receivables to a wholly owned, bankruptcy-remote, special purpose entity that transfers an undivided interest in the receivables to a group of third-party investors. This program is referred to as the warehouse facility.

We routinely use public securitizations to refinance the receivables previously securitized through the warehouse facility. In a public securitization, a pool of automobile loan receivables is sold to a bankruptcy-remote, special purpose entity that in turn transfers the receivables to a special purpose securitization trust.

Additional information regarding the nature, business purposes, and importance of our off-balance sheet arrangement to our liquidity and capital resources can be found in the CarMax Auto Finance Income, Financial Condition, and Market Risk sections of this MD&A, as well as in Notes 3 and 4 to the company’s consolidated financial statements.

MARKET RISK

Automobile Installment Loan Receivables

At February 28, 2006, and February 28, 2005, all loans in the portfolio of automobile loan receivables were fixed-rate installment loans. Financing for these automobile loan receivables is achieved through asset securitization programs that, in turn, issue both fixed- and floating-rate securities. Interest rate exposure relating to floating-rate securitizations is managed through the use of interest rate swaps. Receivables held for investment or sale are financed with working capital. Generally, changes in interest rates associated with underlying swaps will not have a material impact on earnings. However, changes in interest rates associated with underlying swaps may have a material impact on cash and cash flows.

Credit risk is the exposure to nonperformance of another party to an agreement. Credit risk is mitigated by dealing with highly rated bank counterparties. The market and credit risks associated with financial derivatives are similar to those relating to other types of financial instruments. Refer to Note 5 to the company’s consolidated financial statements for a description of these items.

CARMAX 2006 34

COMPOSITION OF AUTOMOBILE LOAN RECEIVABLES

	As of February 28
(In millions)	2006		2005
Principal amount of:
Fixed-rate securitizations	$	2,126.4	$	1,764.7
Floating-rate securitizations synthetically altered to fixed		584.0		662.1
Floating-rate securitizations		—		0.4
Held for investment (1)		57.9		45.5
Held for sale (2)		4.1		22.2
Total	$	2,772.5	$	2,494.9

⁽¹⁾ The majority is held by a bankruptcy-remote special purpose entity.

⁽²⁾ Held by a bankruptcy-remote special purpose entity.

Interest Rate Exposure

We also have interest rate risk from changing interest rates related to our outstanding debt. Substantially all of the debt is floating-rate debt based on LIBOR. A 100-basis point increase in market interest rates would have decreased our fiscal 2006 net earnings per share by less than $0.01.

CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS

The company cautions readers that the statements contained herein regarding the company’s future business plans, operations, opportunities, or prospects, including without limitation any statements or factors regarding management’s expectations for fiscal 2007 and beyond, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from anticipated results. Among the factors that could cause actual results and outcomes to differ materially from those contained in the forward-looking statements are the following: changes in the general U.S. or regional U.S. economy; intense competition within the company’s industry; significant changes in retail prices for used and new vehicles; a reduction in the availability or the company’s access to sources of inventory; the significant loss of key employees from the company’s store, regional, and corporate management teams; the efficient operation of the company’s information systems; changes in the availability or cost of capital and working capital financing; the company’s ability to acquire suitable real estate; the occurrence of adverse weather events; seasonal fluctuations in the company’s business; the geographic concentration of the company’s superstores; the regulatory environment in which the company operates; the effect of various litigation matters; the effect of new accounting requirements or changes to generally accepted accounting principles; and the occurrence of certain other material events. For more details on factors that could affect expectations, see the company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2006, and its quarterly or current reports as filed with or furnished to the Securities and Exchange Commission.

CARMAX 2006 35

CONSOLIDATED STATEMENTS OF EARNINGS

	Years Ended February 28 or 29
(In thousands except per share data)	2006		%(1)	2005		%(1)	2004		%(1)
SALES AND OPERATING REVENUES:
Used vehicle sales	$	4,771,325	76.2	$	3,997,218	76.0	$	3,470,615	75.5
New vehicle sales		502,805	8.0		492,054	9.4		515,383	11.2
Wholesale vehicle sales		778,268	12.4		589,704	11.2		440,571	9.6
Other sales and revenues		207,569	3.3		181,286	3.4		171,122	3.7
NET SALES AND OPERATING REVENUES		6,259,967	100.0		5,260,262	100.0		4,597,691	100.0
Cost of sales		5,469,253	87.4		4,610,066	87.6		4,026,803	87.6
GROSS PROFIT		790,714	12.6		650,196	12.4		570,888	12.4
CARMAX AUTO FINANCE INCOME		104,327	1.7		82,656	1.6		84,963	1.8
Selling, general, and administrative expenses		651,988	10.4		546,577	10.4		468,374	10.2
Gain on franchise dispositions, net		—	—		633	—		2,327	0.1
Interest expense		4,093	0.1		2,806	0.1		1,137	—
Interest income		1,023	—		421	—		683	—
Earnings before income taxes		239,983	3.8		184,523	3.5		189,350	4.1
Provision for income taxes		91,928	1.5		71,595	1.4		72,900	1.6
NET EARNINGS	$	148,055	2.4	$	112,928	2.1	$	116,450	2.5
Weighted average common shares:
Basic		104,635			104,036			103,503
Diluted		106,344			105,779			105,628
NET EARNINGS PER SHARE:
Basic	$	1.41		$	1.09		$	1.13
Diluted	$	1.39		$	1.07		$	1.10

⁽¹⁾ Percents are calculated as a percentage of net sales and operating revenues and may not equal totals due to rounding.

See accompanying notes to consolidated financial statements.

CARMAX 2006 36

CONSOLIDATED BALANCE SHEETS

	At February 28
(In thousands except share data)	2006		2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	21,759	$	17,124
Accounts receivable, net		76,621		76,167
Automobile loan receivables held for sale		4,139		22,152
Retained interest in securitized receivables		158,308		147,963
Inventory		669,700		576,567
Prepaid expenses and other current assets		11,211		13,008
TOTAL CURRENT ASSETS		941,738		852,981
Property and equipment, net		499,298		406,301
Deferred income taxes		4,211		—
Other assets		44,000		33,731
TOTAL ASSETS	$	1,489,247	$	1,293,013
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	188,614	$	170,646
Accrued expenses and other current liabilities		85,316		65,664
Accrued income taxes		5,598		1,179
Deferred income taxes		23,562		26,315
Short-term debt		463		65,197
Current portion of long-term debt		59,762		330
TOTAL CURRENT LIABILITIES		363,315		329,331
Long-term debt, excluding current portion		134,787		128,419
Deferred revenue and other liabilities		31,407		29,260
Deferred income taxes		—		5,027
TOTAL LIABILITIES		529,509		492,037
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY:
Common stock, $0.50 par value; 350,000,000 shares authorized; 104,954,983 and 104,303,375 shares issued and outstanding at February 28, 2006 and 2005, respectively		52,477		52,152
Capital in excess of par value		499,546		489,164
Retained earnings		407,715		259,660
TOTAL SHAREHOLDERS’ EQUITY		959,738		800,976
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,489,247	$	1,293,013

See accompanying notes to consolidated financial statements.

CARMAX 2006 37

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended February 28 or 29
(In thousands)	2006			2005			2004
OPERATING ACTIVITIES:
Net earnings	$	148,055		$	112,928		$	116,450
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		26,692			20,145			16,181
Amortization of restricted stock awards		54			108			122
Gain on disposition of assets		(764	)		(1,486	)		(1,462	)
Provision for deferred income taxes		(11,991	)		(1,184	)		(1,298	)
Changes in operating assets and liabilities:
Increase in accounts receivable, net		(454	)		(3,809	)		(15,909	)
Decrease (increase) in automobile loan receivables held for sale, net		18,013			(3,371	)		(15,202	)
Increase in retained interest in securitized receivables		(10,345	)		(1,975	)		(10,972	)
(Increase) decrease in inventory		(93,133	)		(110,506	)		389
Decrease (increase) in prepaid expenses and other current assets		1,797			(4,358	)		3,986
(Increase) decrease in other assets		(5,975	)		1,042			3,147
Increase in accounts payable, accrued expenses and other current liabilities, and accrued income taxes		47,461			35,876			48,570
Increase in deferred revenue and other liabilities		2,885			2,326			2,962
NET CASH PROVIDED BY OPERATING ACTIVITIES		122,295			45,736			146,964
INVESTING ACTIVITIES:
Capital expenditures		(194,433	)		(230,080	)		(181,338	)
Proceeds from sales of assets		78,340			88,999			107,493
NET CASH USED IN INVESTING ACTIVITIES		(116,093	)		(141,081	)		(73,845	)
FINANCING ACTIVITIES:
(Decrease) increase in short-term debt, net		(64,734	)		60,751			(51,605	)
Issuance of long-term debt		174,929			—			—
Payments on long-term debt		(116,993	)		(509	)		—
Issuances of equity through stock incentive plans		6,035			4,306			4,613
Purchases of shares for employee stock purchase plan		(804	)		(747	)		(599	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(1,567	)		63,801			(47,591	)
Increase (decrease) in cash and cash equivalents		4,635			(31,544	)		25,528
Cash and cash equivalents at beginning of year		17,124			48,668			23,140
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	21,759		$	17,124		$	48,668
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest	$	7,928		$	5,726		$	4,695
Income taxes	$	94,112		$	72,022		$	59,987
Noncash investing and financing activities:
Asset acquisitions from capitalization of leases	$	7,864		$	29,258		$	—
Long-term debt obligations from capitalization of leases	$	7,864		$	29,258		$	—

See accompanying notes to consolidated financial statements.

CARMAX 2006 38

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)	Common Shares Outstanding		Common Stock			Capital in Excess of Par Value			Retained Earnings		Total
BALANCE AT FEBRUARY 28, 2003	103,083		$	51,542		$	472,745		$	30,282	$	554,569
Net earnings	—			—			—			116,450		116,450
Exercise of common stock options	693			346			4,176			—		4,522
Shares purchased for employee stock purchase plan	—			—			(599	)		—		(599	)
Shares issued under stock incentive plans	3			2			95			—		97
Shares cancelled upon reacquisition by the company	(1	)		(1	)		(13	)		—		(14	)
Tax benefit from stock issued	—			—			5,598			—		5,598
Unearned compensation–restricted stock	—			—			130			—		130
BALANCE AT FEBRUARY 29, 2004	103,778			51,889			482,132			146,732		680,753
Net earnings	—			—			—			112,928		112,928
Exercise of common stock options	522			262			3,955			—		4,217
Shares purchased for employee stock purchase plan	—			—			(747	)		—		(747	)
Shares issued under stock incentive plans	4			2			88			—		90
Shares cancelled upon reacquisition by the company	(1	)		(1	)		(16	)		—		(17	)
Tax benefit from stock issued	—			—			3,628			—		3,628
Unearned compensation–restricted stock	—			—			124			—		124
BALANCE AT FEBRUARY 28, 2005	104,303			52,152			489,164			259,660		800,976
Net earnings	—			—			—			148,055		148,055
Exercise of common stock options	651			325			5,620			—		5,945
Shares purchased for employee stock purchase plan	—			—			(804	)		—		(804	)
Shares issued under stock incentive plans	3			1			88			—		89
Shares cancelled upon reacquisition by the company	(2	)		(1	)		(12	)		—		(13	)
Tax benefit from stock issued	—			—			5,422			—		5,422
Unearned compensation–restricted stock	—			—			68			—		68
BALANCE AT FEBRUARY 28, 2006	104,955		$	52,477		$	499,546		$	407,715	$	959,738

See accompanying notes to consolidated financial statements.

CARMAX 2006 39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 BUSINESS AND BACKGROUND

CarMax, Inc. (“CarMax” and “the company”), including its wholly owned subsidiaries, is the largest retailer of used vehicles in the United States. CarMax was the first used vehicle retailer to offer a large selection of quality used vehicles at low, “no-haggle” prices using a customer-friendly sales process in an attractive, modern sales facility. CarMax also sells new vehicles under various franchise agreements. CarMax provides its customers with a full range of related services, including the financing of vehicle purchases through its own finance operation, CarMax Auto Finance (“CAF”), and third-party lenders; the sale of extended service plans; the appraisal and purchase of vehicles directly from consumers; and vehicle repair service. Vehicles purchased through the appraisal process that do not meet CarMax’s retail standards are sold at on-site wholesale auctions.

CarMax was formerly a subsidiary of Circuit City Stores, Inc. (“Circuit City”). On October 1, 2002, the CarMax business was separated from Circuit City through a tax-free transaction. As a result of the separation, all of the businesses, assets, and liabilities of the CarMax business are held in CarMax, Inc., an independent, separately traded public company.

At the separation date, Circuit City and CarMax executed a transition services agreement and a tax allocation agreement. At the end of fiscal 2006, the only significant service provided by Circuit City to CarMax under the transition services agreement pertained to the operation of the company’s data center. The tax allocation agreement provided that the preseparation taxes attributable to the business of each party would be borne solely by that party.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) Basis of Presentation and Use of Estimates

The consolidated financial statements include the accounts of CarMax and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

(B) Cash and Cash Equivalents

Cash equivalents of $6.0 million at February 28, 2006, and February 28, 2005, consisted of highly liquid investments with original maturities of three months or less.

(C) Securitizations

The transfers of receivables associated with the company’s automobile loan securitization program are accounted for as sales in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The company retains an interest in the automobile loan receivables that it securitizes. The retained interest presented on the company’s consolidated balance sheets includes the present value of the expected residual cash flows generated by the securitized receivables, various reserve accounts, and an undivided ownership interest in securitized receivables. The retained interest is carried at fair value, and changes in fair value are included in earnings. See Notes 3 and 4 for additional discussion of securitizations.

(D) Fair Value of Financial Instruments

Due to the short-term nature and/or variable rates associated with these financial instruments, the carrying value of the company’s cash and cash equivalents, receivables including automobile loan receivables, accounts payable, short-term debt, and long-term debt approximates fair value. The company’s retained interest in securitized receivables and derivative financial instruments are recorded on the consolidated balance sheets at fair value.

(E) Trade Accounts Receivable

Trade accounts receivable, net of an allowance for doubtful accounts, include certain amounts due from finance companies and customers, as well as from manufacturers for incentives and warranty reimbursements, and for other miscellaneous receivables. The estimate for doubtful accounts is based on historical experience and trends.

CARMAX 2006 40

(F) Inventory

Inventory is comprised primarily of vehicles held for sale or undergoing reconditioning and is stated at the lower of cost or market. Vehicle inventory cost is determined by specific identification. Parts and labor used to recondition vehicles, as well as transportation and other incremental expenses associated with acquiring and reconditioning vehicles, are included in inventory. Certain manufacturer incentives and rebates for new car inventory, including holdbacks, are recognized as a reduction to new car inventory when CarMax purchases the vehicles. Volume-based incentives are recognized as a reduction to cost of sales when achievement of qualifying sales volumes is determined to be probable.

(G) Property and Equipment

Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the shorter of the asset’s estimated useful life or the lease term, if applicable. Property held under capital lease is stated at the lower of the present value of the future minimum lease payments at the inception of the lease or fair value. Amortization of capital lease assets is computed on a straight-line basis over the shorter of the initial lease term or the estimated useful life of the asset and is included in depreciation expense. Costs incurred during new store construction are capitalized as construction in progress and reclassified to the appropriate fixed asset category when the store opens.

ESTIMATED USEFUL LIVES

	Life
Buildings	25–40 years
Capital leases	10–20 years
Leasehold improvements	8–15 years
Furniture, fixtures, and equipment	5–15 years

The company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. Impairment is recognized when the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value.

(H) Other Assets

Computer Software Costs

External direct costs of materials and services used in the development of internal-use software and payroll and payroll-related costs for employees directly involved in the development of internal-use software are capitalized. Amounts capitalized are amortized on a straight-line basis over five years.

Goodwill and Intangible Assets

The company reviews goodwill and intangible assets for impairment annually or when circumstances indicate the carrying amount may not be recoverable. No impairment of goodwill or intangible assets resulted from the annual impairment tests in fiscal 2006 or fiscal 2005.

Restricted Cash Deposits

Included in other assets at February 28, 2006, and February 28, 2005, were restricted cash deposits of $17.7 million and $12.0 million, respectively, which were associated with certain insurance deductibles. Restricted cash deposits were previously reported in Cash and Cash Equivalents.

(I) Defined Benefit Plan Obligations

Defined benefit retirement plan obligations are included in accrued expenses and other current liabilities on the company’s consolidated balance sheets. The defined benefit retirement plan obligations are determined by independent actuaries using a number of assumptions provided by the company. Key assumptions used in measuring the plan obligations include the discount rate, the estimated rate of salary increases, and the estimated future return on plan assets.

(J) Insurance Liabilities

Insurance liabilities are included in accrued expenses and other current liabilities on the company’s consolidated balance sheets. The company uses a combination of insurance and self-insurance for a number of risks including workers’ compensation, general liability, and employee-related health care benefits, a portion of which is paid by associates. Estimated insurance liabilities are determined by considering historical claims experience, demographic factors, and other actuarial assumptions.

CARMAX 2006 41

(K) Store Opening Expenses

Costs related to store openings, including preopening costs, are expensed as incurred.

(L) Income Taxes

The company files a consolidated federal income tax return for a majority of its subsidiaries. Certain subsidiaries are required to file separate partnership or corporate federal income tax returns. Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes, measured by applying currently enacted tax laws. A deferred tax asset is recognized if it is more likely than not that a benefit will be realized. Changes in tax laws and tax rates are reflected in the income tax provision in the period in which the changes are enacted.

(M) Revenue Recognition

The company recognizes revenue when the earnings process is complete, generally either at the time of sale to a customer or upon delivery to a customer. As part of its customer service strategy, the company guarantees the vehicles it sells with a 5-day, money-back guarantee. If a customer returns the vehicle purchased within the parameters of the guarantee, the company will refund the customer’s money. A reserve for returns is recorded based on historical experience and trends.

The company sells extended service plans on behalf of unrelated third parties. These service plans have terms of coverage from 12 to 72 months. Because the third parties are the primary obligors under these service plans, commission revenue is recognized at the time of sale, net of a reserve for estimated customer returns of the service plans. The reserve for returns is based on historical experience and trends.

(N) Advertising Expenses

All advertising costs are expensed as incurred. Advertising expenses are included in selling, general, and administrative expenses in the company’s consolidated statements of earnings.

(O) Net Earnings Per Share

Basic net earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding. Diluted net earnings per share is computed by dividing net earnings by the sum of the weighted average number of shares of common stock outstanding and dilutive potential common stock.

(P) Stock-Based Compensation

The company accounts for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under this opinion and related interpretations, compensation expense is recorded on the date of grant and amortized over the vesting period only if the market value of the underlying stock on the grant date exceeds the exercise price. Compensation expense for employee stock options is not reflected in the company’s net earnings, as options granted under its plans had exercise prices equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and net earnings per share as if the fair-value-based method of accounting prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” had been applied to all outstanding stock awards in each reported period.

PROFORMA NET EARNINGS AND NET EARNINGS PER SHARE

	Years Ended February 28 or 29
(In thousands except per share data)	2006			2005			2004
Net earnings, as reported	$	148,055		$	112,928		$	116,450
Stock-based compensation expense included in net earnings, net of related tax effects		33			66			75
Total additional stock-based compensation expense determined under the fair-value-based method for all awards, net of related tax effects		(13,808	)		(11,567	)		(6,834	)
Pro forma net earnings	$	134,280		$	101,427		$	109,691
Net earnings per share:
Basic, as reported	$	1.41		$	1.09		$	1.13
Basic, pro forma	$	1.28		$	0.97		$	1.06
Diluted, as reported	$	1.39		$	1.07		$	1.10
Diluted, pro forma	$	1.27		$	0.97		$	1.04

CARMAX 2006 42

The pro forma effect on fiscal 2006 and prior fiscal years may not be representative of the effect on net earnings and net earnings per share for future years.

For the purpose of computing the pro forma amounts indicated above, the fair value of each option on the date of grant was estimated using the Black-Scholes option-pricing model.

WEIGHTED AVERAGE ASSUMPTIONS USED TO ESTIMATE OPTION VALUES

	Years Ended February 28 or 29
	2006		2005		2004
Expected dividend yield	—		—		—
Expected stock volatility	52	%	73	%	78	%
Risk-free interest rates	4	%	3	%	3	%
Expected lives (in years)	5		5		5

Using these assumptions in the Black-Scholes model, the weighted average fair value of options granted was $12.68 per share in fiscal 2006, $17.50 per share in fiscal 2005, and $9.14 per share in fiscal 2004.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised 2004), “Share-Based Payment,” which will require the company to expense costs related to share-based awards in fiscal 2007. See Note 15, “Recent Accounting Pronouncements,” for further discussions.

(Q) Derivative Financial Instruments

In connection with certain securitization activities, the company enters into interest rate swap agreements to manage exposure to interest rates and to more closely match funding costs to the use of funding. The company recognizes the interest rate swaps as either assets or liabilities on the consolidated balance sheets at fair value with changes in fair value included in earnings as a component of CarMax Auto Finance income.

(R) Risks and Uncertainties

CarMax sells used and new vehicles. The diversity of the company’s customers and suppliers reduces the risk that a severe impact will occur in the near term as a result of changes in its customer base, competition, or sources of supply. However, management cannot assure that unanticipated events will not have a negative impact on the company.

(S) Reclassifications

Certain prior year amounts have been reclassified to conform to the current year’s presentation. The consolidated balance sheets and consolidated statements of cash flows reflect the reclassifications of restricted cash deposits of $12.0 million at February 28, 2005, and $13.0 million at February 29, 2004, as discussed in Note 2(H).

3 CARMAX AUTO FINANCE INCOME

The company’s finance operation, CAF, originates prime-rated financing for qualified customers at competitive market rates of interest. Throughout each month, the company sells substantially all of the loans originated by CAF in securitization transactions as discussed in Note 4. The majority of CAF income is generated by the spread between the interest rates charged to customers and the related cost of funds. A gain, recorded at the time of securitization, results from recording a receivable approximately equal to the present value of the expected residual cash flows generated by the securitized receivables. The cash flows are calculated taking into account expected prepayments and defaults.

	Years Ended February 28 or 29
(In millions)	2006		2005		2004
Total gain income	$	77.1	$	58.3	$	65.1
Other CAF income:
Servicing fee income		27.6		24.7		21.8
Interest income		21.4		19.0		16.0
Total other CAF income		49.0		43.7		37.8
Direct CAF expenses:
CAF payroll and fringe benefit expense		10.3		9.0		8.2
Other direct CAF expenses		11.5		10.3		9.7
Total direct CAF expenses		21.8		19.3		17.9
CarMax Auto Finance income	$	104.3	$	82.7	$	85.0

CARMAX 2006 43

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

4 SECURITIZATIONS

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

The company routinely uses public securitizations to refinance the receivables previously securitized through the warehouse facility. In a public securitization, a pool of automobile loan receivables is sold to a bankruptcy-remote, special purpose entity that in turn transfers the receivables to a special purpose securitization trust. The securitization trust issues asset-backed securities, secured or otherwise supported by the transferred receivables, and the proceeds from the sale of the securities are used to pay for the securitized receivables. Depending on securitization structures and market conditions, refinancing receivables in a public securitization may or may not have a significant impact on the company’s results. The company recognized a gain of $0.02 per share in fiscal 2006 related to three such refinancings. In future years, the impact of refinancing activity will depend upon the particular securitization structures and market conditions at the refinancing date.

All transfers of receivables are accounted for as sales in accordance with SFAS No. 140. When the receivables are securitized, the company recognizes a gain or loss on the sale of the receivables as described in Note 3.

	Years Ended February 28 or 29
(In millions)	2006			2005			2004
Net loans originated	$	1,774.6		$	1,490.3		$	1,407.6
Total loans sold	$	1,887.5		$	1,534.8		$	1,390.2
Total gain income(1)	$	77.1		$	58.3		$	65.1
Total gain income as a percentage of total loans sold(1)		4.1	%		3.8	%		4.7	%

⁽¹⁾ Includes the effects of valuation adjustments, new public securitizations, and the repurchase and resale of receivables in existing public securitizations.

Retained Interest

The company retains an interest in the automobile loan receivables that it securitizes. The retained interest, presented as a current asset on the company’s consolidated balance sheets, serves as a credit enhancement for the benefit of the investors in the securitized receivables. The retained interest includes the present value of the expected residual cash flows generated by the securitized receivables, or “interest-only strip receivables,” various reserve accounts, and an undivided ownership interest in the securitized receivables, or “required excess receivables,” as described below. On a combined basis, the reserve accounts and required excess receivables are generally 2% to 4% of managed receivables. The special purpose entities and the investors have no recourse to the company’s assets.

The fair value of the retained interest was $158.3 million as of February 28, 2006, and $148.0 million as of February 28, 2005. The retained interest had a weighted average life of 1.5 years as of February 28, 2006, and February 28, 2005. As defined in SFAS No. 140, the weighted average life in periods (for example, months or years) of prepayable assets is calculated by multiplying the principal collections expected in each future period by the number of periods until that future period, summing those products, and dividing the sum by the initial principal balance.

Interest-Only Strip Receivables. Interest-only strip receivables represent the present value of residual cash flows the company expects to receive over the life of the securitized receivables. The value of these receivables is determined by estimating the future cash flows using management’s assumptions of key factors, such as finance charge income, default rates, prepayment rates, and discount rates appropriate for the type of asset and risk. The value of interest-only strip receivables may be affected by external factors, such as changes in the behavior patterns of customers, changes in the strength of the economy, and developments in the interest rate markets; therefore, actual performance may differ from these assumptions. Management evaluates the performance of the receivables relative to these assumptions on a regular basis. Any financial impact resulting from a change in assumptions is recognized in earnings in the period in which it occurs.

CARMAX 2006 44

Reserve Accounts. The company is required to fund various reserve accounts established for the benefit of the securitization investors. In the event that the cash generated by the securitized receivables in a given period was insufficient to pay the interest, principal, and other required payments, the balances on deposit in the reserve accounts would be used to pay those amounts. In general, each of the company’s securitizations requires that an amount equal to a specified percentage of the original balance of the securitized receivables be deposited in a reserve account on the closing date and that any excess cash generated by the receivables be used to fund the reserve account to the extent necessary to maintain the required amount. If the amount on deposit in the reserve account exceeds the required amount, the excess is released through the special purpose entity to the company. In the public securitizations, the amount required to be on deposit in the reserve account must equal or exceed a specified floor amount. The reserve account remains funded until the investors are paid in full, at which time the remaining balance is released through the special purpose entity to the company. The amount required to be maintained in the public securitization reserve accounts may increase depending upon the performance of the securitized receivables. The amount on deposit in reserve accounts was $29.0 million as of February 28, 2006, and $33.5 million as of February 28, 2005.

Required Excess Receivables. A majority of the securitizations require that the total value of the securitized receivables exceed, by a specified amount, the principal amount owed to the investors. The required excess receivables balance represents this specified amount. Any cash flows generated by the required excess receivables are used, if needed, to make payments to the investors. Any remaining cash flows from the required excess receivables are released through the special purpose entity to the company. The unpaid principal balance related to the required excess receivables was $52.2 million as of February 28, 2006, and $44.3 million as of February 28, 2005.

Key Assumptions Used in Measuring the Retained Interest and Sensitivity Analysis

The following table shows the key economic assumptions used in measuring the fair value of the retained interest at February 28, 2006, and a sensitivity analysis showing the hypothetical effect on the retained interest if there were unfavorable variations from the assumptions used. These sensitivity analyses are hypothetical and should be used with caution. In this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in actual circumstances, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

(In millions)	Assumptions Used	Impact onFair Value of 10% Adverse Change		Impact on Fair Value of 20% Adverse Change
Prepayment rate	1.43%–1.50%	$	5.5	$	10.8
Cumulative default rate	1.40%–2.15%	$	4.7	$	9.4
Annual discount rate	12.0%	$	2.3	$	4.5

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

Cumulative Default Rate. The cumulative default rate, or “static pool” net losses, is calculated by dividing the total projected credit losses of a pool of receivables by the original pool balance. Projected credit losses are estimated using the losses experienced to date, the credit quality of the receivables, economic factors, and the performance history of similar receivables.

Continuing Involvement with Securitized Receivables

The company continues to manage the automobile finance receivables that it securitizes. The company receives servicing fees of approximately 1% of the outstanding principal balance of the securitized receivables. The servicing fees specified in the securitization agreements adequately compensate the company for servicing the securitized receivables. No servicing asset or liability has been recorded. The company is at risk for the retained interest in the securitized receivables, and if the securitized receivables do not perform as originally projected, the value of the retained interest would be impacted.

CARMAX 2006 45

PAST DUE ACCOUNT INFORMATION

	As of February 28 or 29
(In millions)	2006			2005			2004
Accounts 31+ days past due	$	37.4		$	31.1		$	31.4
Ending managed receivables	$	2,772.5		$	2,494.9		$	2,248.6
Past due accounts as a percentage of ending managed receivables		1.35	%		1.24	%		1.40	%
CREDIT LOSS INFORMATION
	Years Ended February 28 or 29
(In millions)	2006			2005			2004
Net credit losses on managed receivables	$	18.4		$	19.5		$	21.1
Average managed receivables	$	2,657.7		$	2,383.6		$	2,099.4
Net credit losses as a percentage of average managed receivables		0.69	%		0.82	%		1.01	%
Recovery rate		51	%		46	%		42	%

SELECTED CASH FLOWS FROM SECURITIZED RECEIVABLES

	Years Ended February 28 or 29
(In millions)	2006		2005		2004
Proceeds from new securitizations	$	1,513.5	$	1,260.0	$	1,185.5
Proceeds from collections reinvested in revolving period securitizations	$	757.5	$	590.8	$	514.9
Servicing fees received	$	27.3	$	24.5	$	21.5
Other cash flows received from the retained interest:
Interest-only strip receivables	$	82.1	$	79.8	$	74.1
Reserve account releases	$	19.7	$	14.1	$	16.6

Proceeds from New Securitizations. Proceeds from new securitizations include proceeds from receivables that are newly securitized in or refinanced through the warehouse facility during the indicated period. Balances previously outstanding in public securitizations that were refinanced through the warehouse facility totaled $94.8 million in fiscal 2006 and $51.0 million in fiscal 2005. Proceeds received when the company refinances receivables in public securitizations are excluded from this table as they are not considered to be new securitizations.

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

Servicing Fees. Servicing fees received represent cash fees paid to the company to service the securitized receivables.

Other Cash Flows Received from the Retained Interest. Other cash flows received from the retained interest represent cash received by the company from securitized receivables other than servicing fees. It includes cash collected on interest-only strip receivables and amounts released to the company from reserve accounts.

Financial Covenants and Performance Triggers

Certain of the securitization agreements include various financial covenants and performance triggers. These agreements require the company to meet financial covenants related to maintaining minimum tangible net worth, maximum total liabilities to tangible net worth ratio, minimum tangible net worth to managed assets ratio, minimum current ratio, minimum cash balance or borrowing capacity, and minimum fixed charge coverage ratio. Performance triggers require certain pools of securitized receivables to achieve specified thresholds related to portfolio yields, default rates, and delinquency rates. If these financial covenants and/or thresholds are not met, in addition to other consequences, the company may be unable to continue to securitize receivables through the warehouse facility or it may be terminated as servicer under the securitizations. At February 28, 2006, the company was in compliance with the financial covenants, and the securitized receivables were in compliance with the performance triggers.

CARMAX 2006 46

5 FINANCIAL DERIVATIVES

The company enters into amortizing fixed-pay interest rate swaps relating to its automobile loan receivable securitizations. Swaps are used to better match funding costs to the fixed-rate receivables being securitized by converting variable-rate financing costs in the warehouse facility to fixed-rate obligations. The company entered into two 17-month and twenty-five 40-month amortizing interest rate swaps with initial notional amounts totaling approximately $1.57 billion in fiscal 2006, and one 18-month and twenty-six 40-month amortizing interest rate swaps with initial notional amounts totaling approximately $1.36 billion in fiscal 2005. The amortized notional amount of all outstanding swaps related to the automobile loan receivable securitizations was approximately $584.0 million at February 28, 2006, and $662.1 million at February 28, 2005. The fair value of swaps included in prepaid expenses and other current assets totaled a net asset of $1.6 million at February 28, 2006, and $5.4 million at February 28, 2005.

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

6 PROPERTY AND EQUIPMENT

	As of February 28
(In thousands)	2006		2005
Land	$	85,814	$	37,650
Land held for sale		1,515		2,664
Land held for development		6,084		6,084
Buildings		146,738		49,047
Capital leases		37,122		29,258
Leasehold improvements		47,513		45,346
Furniture, fixtures, and equipment		154,378		125,734
Construction in progress		124,381		198,682
Total property and equipment		603,545		494,465
Less accumulated depreciation and amortization		104,247		88,164
Property and equipment, net	$	499,298	$	406,301

Land held for development represents land owned for future sites that are scheduled to open more than one year beyond the fiscal year reported. Leased property meeting capital lease criteria is capitalized and the present value of the related lease payments is recorded as long-term debt.

7 INCOME TAXES

PROVISION FOR INCOME TAXES

	Years Ended February 28 or 29
(In thousands)	2006			2005			2004
Current:
Federal	$	92,488		$	62,662		$	65,212
State		11,431			10,117			8,986
Total		103,919			72,779			74,198
Deferred:
Federal		(10,955	)		(1,068	)		(1,180	)
State		(1,036	)		(116	)		(118	)
Total		(11,991	)		(1,184	)		(1,298	)
Provision for income taxes	$	91,928		$	71,595		$	72,900

CARMAX 2006 47

EFFECTIVE INCOME TAX RATE RECONCILIATION

	Years Ended February 28 or 29
	2006		2005		2004
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal benefit	3.0	%	3.5	%	3.1	%
Nondeductible items	0.3	%	0.3	%	0.4	%
Effective income tax rate	38.3	%	38.8	%	38.5	%

DEFERRED TAX ASSETS AND LIABILITIES

	As of February 28
(In thousands)	2006		2005
Deferred tax assets:
Accrued expenses	$	16,887	$	12,381
Partnership basis		6,229		—
Other		—		100
Total gross deferred tax assets		23,116		12,481
Deferred tax liabilities:
Securitized receivables		19,699		23,301
Prepaid expenses		10,757		157
Inventory		7,476		8,515
Depreciation and amortization		4,508		7,744
Other		27		—
Partnership basis		—		4,106
Total gross deferred tax liabilities		42,467		43,823
Net deferred tax liability	$	19,351	$	31,342

Based on the company’s historical and current pretax earnings, management believes the amount of gross deferred tax assets will more likely than not be realized through future taxable income and future reversals of existing temporary differences; therefore, no valuation allowance is necessary.

8 BENEFIT PLANS

(A) Retirement Plans

The company has a noncontributory defined benefit pension plan (the “pension plan”) covering the majority of full-time employees. The company also has an unfunded nonqualified plan (the “restoration plan”) that restores retirement benefits for certain senior executives who are affected by Internal Revenue Code limitations on benefits provided under the pension plan. The company uses a fiscal year end measurement date for both the pension plan and the restoration plan.

Assets. Assets used in calculating the funded status are measured at current market values. The restoration plan is excluded since it is unfunded.

CHANGES IN PENSION PLAN ASSETS

	Years Ended February 28
(In thousands)	2006			2005
Fair value of plan assets at beginning of year	$	25,316		$	16,404
Actual return on plan assets		2,357			1,849
Employer contributions		4,500			7,381
Benefits paid		(213	)		(318	)
Fair value of plan assets at end of year	$	31,960		$	25,316

CARMAX 2006 48

PENSION PLAN ASSET ALLOCATION

	As of February 28
	2006				2005
	Target Allocation		Actual Allocation		Target Allocation		Actual Allocation
Equity securities	75	%	78	%	80	%	76	%
Fixed income securities	25		22		20		24
Total	100	%	100	%	100	%	100	%

The company’s pension plan assets are held in trust. The company sets investment policies and strategies for the pension plan. Long-term strategic investment objectives include preserving the assets of the trust and balancing risk and return. The company oversees the investment allocation process, which includes selecting investment managers, setting long-term strategic targets, and monitoring asset allocations. Target allocations are guidelines, not limitations, and occasionally plan fiduciaries will approve allocations above or below the targets.

Benefit Obligations. The projected benefit obligations are the present value of future benefits to employees, including assumed salary increases. The accumulated benefit obligations are based on employee service as of the date reported, excluding assumed future service and salary increases.

BENEFIT OBLIGATIONS AND PLAN ASSETS

	As of February 28
	Pension Plan				Restoration Plan				Total
(In thousands)	2006		2005		2006		2005		2006		2005
Projected benefit obligation	$	71,352	$	48,674	$	6,864	$	4,508	$	78,216	$	53,182
Accumulated benefit obligation	$	45,151	$	30,646	$	3,805	$	2,419	$	48,956	$	33,065
Fair value of plan assets	$	31,960	$	25,316		—		—	$	31,960	$	25,316

CHANGES IN THE PROJECTED BENEFIT OBLIGATIONS

	Years Ended February 28
	Pension Plan						Restoration Plan				Total
(In thousands)	2006			2005			2006		2005		2006			2005
Projected benefit obligation at beginning of year	$	48,674		$	35,918		$	4,508	$	3,596	$	53,182		$	39,514
Service cost		8,780			6,557			480		343		9,260			6,900
Interest cost		2,794			2,152			259		232		3,053			2,384
Plan amendments		—			—			—		267		—			267
Actuarial loss		11,317			4,365			1,617		70		12,934			4,435
Benefits paid		(213	)		(318	)		—		—		(213	)		(318	)
Projected benefit obligation at end of year	$	71,352		$	48,674		$	6,864	$	4,508	$	78,216		$	53,182

WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE THE BENEFIT OBLIGATIONS

	As of February 28
	Pension Plan				Restoration Plan
	2006		2005		2006		2005
Discount rate	5.75	%	5.75	%	5.75	%	5.75	%
Rate of compensation increase	5.00	%	5.00	%	7.00	%	7.00	%

ESTIMATED FUTURE BENEFIT PAYMENTS

(In thousands)	Pension Plan		Restoration Plan
Fiscal 2007	$	233	$	72
Fiscal 2008	$	327	$	134
Fiscal 2009	$	476	$	228
Fiscal 2010	$	678	$	286
Fiscal 2011	$	954	$	322
Fiscal 2012 through 2016	$	10,999	$	1,988

CARMAX 2006 49

Funding Policy. For the defined benefit pension plan, the company contributes amounts sufficient to meet minimum funding requirements as set forth in the employee benefit and tax laws plus any additional amounts as the company may determine to be appropriate. The company expects to contribute at least $11.0 million to the pension plan in fiscal 2007.

Funded Status. The funded status represents the difference between the projected benefit obligations and the market value of the assets.

FUNDED STATUS RECONCILIATION

	As of February 28
	Pension Plan						Restoration Plan						Total
(In thousands)	2006			2005			2006			2005			2006			2005
Funded status	$	(39,392	)	$	(23,358	)	$	(6,864	)	$	(4,508	)	$	(46,256	)	$	(27,866	)
Unrecognized actuarial loss		23,947			13,877			3,427			1,945			27,374			15,822
Unrecognized prior service cost		220			257			217			242			437			499
Net amount recognized	$	(15,225	)	$	(9,224	)	$	(3,220	)	$	(2,321	)	$	(18,445	)	$	(11,545	)

COMPONENTS OF NET PENSION EXPENSE

	Years Ended February 28 or 29
	Pension Plan									Restoration Plan						Total
(In thousands)	2006			2005			2004			2006		2005		2004		2006			2005			2004
Service cost	$	8,780		$	6,557		$	5,529		$	480	$	343	$	231	$	9,260		$	6,900		$	5,760
Interest cost		2,794			2,152			1,679			259		232		126		3,053			2,384			1,805
Expected return on plan assets		(2,071	)		(1,523	)		(892	)		—		—		—		(2,071	)		(1,523	)		(892	)
Amortization of prior service cost		37			37			37			24		24		—		61			61			37
Recognized actuarial loss		961			736			647			136		149		53		1,097			885			700
Net pension expense	$	10,501		$	7,959		$	7,000		$	899	$	748	$	410	$	11,400		$	8,707		$	7,410

WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE NET PENSION EXPENSE

	Years Ended February 28 or 29
	Pension Plan						Restoration Plan
	2006		2005		2004		2006		2005		2004
Discount rate	5.75	%	6.00	%	6.50	%	5.75	%	6.00	%	6.50	%
Expected rate of return on plan assets	8.00	%	8.00	%	9.00	%	—		—		—
Rate of compensation increase	5.00	%	5.00	%	6.00	%	7.00	%	7.00	%	6.00	%

Assumptions Used to Determine Plan Information. Underlying both the calculation of the projected benefit obligation and the net periodic plan expense are actuarial calculations of each plan’s liability. These calculations use participant-specific information such as salary, age, and years of service, as well as certain assumptions, the most significant being the discount rate, expected rate of return on plan assets, rate of compensation increase, and mortality rate. The company evaluates these assumptions, at a minimum, annually, and makes changes as necessary.

The discount rate assumption used for the retirement benefit plan accounting reflects the yields available on high-quality, fixed income debt instruments. For the company’s plans, we review high-quality corporate bond indices in addition to a hypothetical portfolio of corporate bonds constructed with maturities that approximate the expected timing of the anticipated benefit payments.

CARMAX 2006 50

To determine the expected long-term rate of return on pension plan assets, the company considers the current and expected asset allocations, as well as historical and expected returns on various categories of pension plan assets. The company applies the expected rate of return to a market-related value of assets, which reduces the underlying variability in assets to which the expected return is applied. The use of expected long-term rates of return on pension plan assets may result in recognized pension income that is greater or less than the actual returns of those pension plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and therefore result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by the employees. Differences between actual and expected returns, a component of unrecognized actuarial gains/losses, are recognized over the average future expected service of the active employees in the pension plan.

The rate of compensation increases is determined by the company, based upon its long-term plans for such increases. Mortality rate assumptions are based on the life expectancy of the population, and this assumption was updated as of February 28, 2006, to account for recent improvements in mortality.

(B) 401(k) Plan

CarMax sponsors a 401(k) plan for all associates meeting certain eligibility criteria. Under the plan, eligible associates can contribute up to 40% of their salaries, and the company matches a portion of those contributions. The total cost for matching contributions was $2.0 million in fiscal 2006, $1.5 million in fiscal 2005, and $1.2 million in fiscal 2004.

9 DEBT

	As of February 28
(In thousands)	2006		2005
Revolving credit agreement	$	159,263	$	65,197
Obligations under capital leases [Note 12]		35,749		28,749
Term loan		—		100,000
Total debt		195,012		193,946
Less current portion:
Revolving credit agreement		59,263		65,197
Obligations under capital leases		962		330
Total long-term debt, excluding current portion	$	134,787	$	128,419

In August 2005, CarMax entered into a $450 million, four-year revolving credit facility (the “credit agreement”) with Bank of America, N.A. and various other financial institutions and terminated its existing $300 million revolving credit and term loan facility. The credit agreement is secured by vehicle inventory and contains customary representations and warranties, conditions, and covenants. Borrowings accrue interest at variable rates based on LIBOR, the federal funds rate, or the prime rate, depending on the type of borrowing. The company pays a commitment fee on the used and unused portions of the available funds. All outstanding principal amounts will be due and payable in August 2009, and there are no penalties for prepayment.

The aggregate borrowing limit includes a $25 million limit on new vehicle swing line loans, a $25 million limit on other swing line loans, and a $30 million limit on standby letters of credit. Borrowings on each of the swing lines are due on demand and must be repaid monthly or refinanced through other committed borrowings under the credit agreement.

As of February 28, 2006, $159.3 million was outstanding under the credit agreement, with the remainder fully available to the company. The outstanding balance included $0.5 million of swing line loans classified as short-term debt, $58.8 million classified as current portion of long-term debt, and $100.0 million classified as long-term debt. The determination of the amount classified as long-term debt was based on management’s intent as to that portion expected to remain outstanding for more than one year from the balance sheet date.

The company has recorded six capital leases for store facilities. The related capital lease assets are included in property and equipment. These leases were structured at varying interest rates with initial lease terms ranging from 10 to 20 years with payments made monthly. The present value of future minimum lease payments totaled $35.7 million at February 28, 2006.

The weighted average interest rate on outstanding short-term debt was 5.5% during fiscal 2006, 4.3% during fiscal 2005, and 3.5% during fiscal 2004.

The company capitalizes interest in connection with the construction of certain facilities. Capitalized interest totaled $6.0 million in fiscal 2006, $3.5 million in fiscal 2005, and $2.5 million in fiscal 2004.

CARMAX 2006 51

10 STOCK AND STOCK-BASED INCENTIVE PLANS

(A) Shareholder Rights Plan and Undesignated Preferred Stock

In conjunction with the company’s shareholder rights plan, shareholders received preferred stock purchase rights as a dividend at the rate of one right for each share of CarMax, Inc. common stock owned. The rights are exercisable only upon the attainment of, or the commencement of a tender offer to attain, a 15% or greater ownership interest in the company by a person or group. When exercisable, each right would entitle the holder to buy one one-thousandth of a share of Cumulative Participating Preferred Stock, Series A, $20 par value, at an exercise price of $140 per share, subject to adjustment. A total of 120,000 shares of such preferred stock, which has preferential dividend and liquidation rights, have been authorized and designated. No such shares are outstanding. In the event that an acquiring person or group acquires the specified ownership percentage of CarMax, Inc. common stock (except pursuant to a cash tender offer for all outstanding shares determined to be fair by the board of directors) or engages in certain transactions with the company after the rights become exercisable, each right will be converted into a right to purchase, for half the current market price at that time, shares of CarMax, Inc. common stock valued at two times the exercise price. The company also has an additional 19,880,000 authorized shares of undesignated preferred stock of which no shares are outstanding.

(B) Stock Incentive Plans

The company maintains long-term incentive plans for management, key employees, and the non-employee members of the board of directors. The plans allow for the grant of equity-based compensation awards, including nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, stock grants, or a combination of awards. As of February 28, 2006, a total of 17,000,000 shares of CarMax common stock have been authorized to be issued under the long-term incentive plans. The number of unissued common shares reserved for future grants under the long-term incentive plans was 6,286,198 at February 28, 2006.

Stock Options. Substantially all of the grants have been made as nonqualified stock options that vest annually in equal amounts over periods of 3 years to 4 years. These options generally expire no later than ten years after the date of grant.

STOCK OPTION ACTIVITY

	Years Ended February 28 or 29
	2006				2005				2004
(Shares in thousands)	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of year	7,092		$	17.45	5,676		$	12.24	4,345		$	10.25
Granted	2,640		$	26.53	2,126		$	29.47	2,154		$	14.59
Exercised	(651	)	$	9.13	(522	)	$	8.40	(693	)	$	6.53
Cancelled	(312	)	$	24.37	(188	)	$	21.50	(130	)	$	14.88
Outstanding at end of year	8,769		$	20.55	7,092		$	17.45	5,676		$	12.24
Exercisable at end of year	3,627		$	13.99	2,693		$	9.93	1,839		$	8.02

OUTSTANDING STOCK OPTIONS

As of February 28, 2006	Options Outstanding				Options Exercisable
(Shares in thousands) Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$1.63 to $ 3.31	501	1.0	$	1.79	501	$	1.79
$ 4.89	937	2.0	$	4.89	937	$	4.89
$ 6.06	245	0.3	$	6.06	245	$	6.06
$13.25 to $ 18.60	1,711	7.0	$	14.32	792	$	14.34
$20.00 to $ 26.83	3,241	7.6	$	26.43	640	$	26.67
$28.26 to $ 43.44	2,134	8.0	$	29.56	512	$	29.97
Total	8,769	6.4	$	20.55	3,627	$	13.99

CARMAX 2006 52

Restricted Stock Awards. Restricted stock awards are issued in the name of the employee, who has all the rights of a shareholder, subject to certain restrictions or forfeitures. The restrictions generally expire either three or four years after the date of grant. No restricted stock awards were granted in fiscal 2006 or fiscal 2005.

At the date of grant, the market value of restricted shares is recorded as unearned compensation and is a component of equity. Unearned compensation is expensed over the restriction period. The total expense for restricted stock was $53,700 in fiscal 2006; $108,000 in fiscal 2005; and $121,500 in fiscal 2004. There were no outstanding restricted shares at February 28, 2006. At February 28, 2005, there were 23,918 restricted shares outstanding.

(C) Employee Stock Purchase Plan

The company has an employee stock purchase plan for all employees meeting certain eligibility criteria. Employee contributions are limited to 10% of eligible compensation, up to a maximum of $7,500 per year. For each $1.00 contributed by employees to the plan, the company matches $0.15. CarMax has authorized up to 1,000,000 shares of common stock for the employee stock purchase plan. The source of the shares available for purchase by employees may, at the company’s option, be open market purchases or newly issued shares.

At February 28, 2006, a total of 302,227 shares remained available under the plan. Shares purchased on the open market on behalf of employees were 213,659 during fiscal 2006; 225,961 during fiscal 2005; and 161,662 during fiscal 2004. The average price per share purchased under the plan was $28.83 in fiscal 2006, $25.96 in fiscal 2005, and $29.97 in fiscal 2004. The total cost for matching contributions was $803,600 in fiscal 2006; $746,700 in fiscal 2005; and $598,600 in fiscal 2004.

11 NET EARNINGS PER SHARE

BASIC AND DILUTIVE NET EARNINGS PER SHARE RECONCILIATIONS

	Years Ended February 28 or 29
(In thousands except per share data)	2006		2005		2004
Net earnings available to common shareholders	$	148,055	$	112,928	$	116,450
Weighted average common shares outstanding		104,635		104,036		103,503
Dilutive potential common shares:
Stock options		1,698		1,728		2,113
Restricted stock		11		15		12
Weighted average common shares and dilutive potential common shares		106,344		105,779		105,628
Basic net earnings per share	$	1.41	$	1.09	$	1.13
Diluted net earnings per share	$	1.39	$	1.07	$	1.10

Certain options were outstanding and not included in the calculation of diluted net earnings per share because the options’ exercise prices were greater than the average market price of the common shares. As of February 28, 2006, options to purchase 1,890,921 shares of common stock with exercise prices ranging from $29.61 to $43.44 per share were outstanding and not included in the calculation. As of February 28, 2005, options to purchase 26,580 shares with exercise prices ranging from $30.34 to $43.44 per share were outstanding and not included in the calculation. As of February 29, 2004, options to purchase 18,364 shares with exercise prices ranging from $35.23 to $43.44 per share were outstanding and not included in the calculation.

12 LEASE COMMITMENTS

The company conducts a majority of its business in leased premises. The company’s lease obligations are based upon contractual minimum rates. Most leases provide that the company pays taxes, maintenance, insurance, and operating expenses applicable to the premises. The initial term of most real property leases will expire within the next 20 years; however, most of the leases have options providing for renewal periods of 5 to 20 years at terms similar to the initial terms. For operating leases, rent is recognized on a straight-line basis over the lease term, including scheduled rent increases and rent holidays. Rent expense for all operating leases was $72.6 million in fiscal 2006, $61.5 million in fiscal 2005, and $54.2 million in fiscal 2004.

CARMAX 2006 53

FUTURE MINIMUM FIXED LEASE OBLIGATIONS

	As of February 28, 2006
(In thousands)	Capital Leases (1)			Operating Leases (1)
Fiscal 2007	$	4,453		$	68,597
Fiscal 2008		4,453			68,976
Fiscal 2009		4,462			69,665
Fiscal 2010		4,627			70,371
Fiscal 2011		4,777			70,687
Fiscal 2012 and thereafter		48,690			633,944
Total minimum lease payments		71,462		$	982,240
Less amounts representing interest		(35,713	)
Present value of net minimum capital lease payments [Note 9]	$	35,749

⁽¹⁾ Future minimum fixed lease obligations exclude taxes, insurance, and other costs payable directly by the company.

The company entered into sale-leaseback transactions involving five superstores valued at approximately $72.7 million in fiscal 2006, and sale-leaseback transactions for seven superstores valued at approximately $84.0 million in fiscal 2005. All sale-leaseback transactions are structured at competitive rates. Gains or losses on sale-leaseback transactions are recorded as deferred rent and amortized over the lease term. The company does not have continuing involvement under the sale-leaseback transactions. In conjunction with certain sale-leaseback transactions, the company must meet financial covenants relating to minimum tangible net worth and minimum coverage of rent expense. The company was in compliance with all such covenants at February 28, 2006.

13 SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

(A) Goodwill and Other Intangibles

Other assets on the consolidated balance sheets included goodwill and other intangibles with a carrying value of $15.0 million as of February 28, 2006, and February 28, 2005.

(B) Accrued Compensation and Benefits

Accrued expenses and other current liabilities on the consolidated balance sheets included accrued compensation and benefits of $75.8 million as of February 28, 2006, and $53.8 million as of February 28, 2005.

(C) Advertising Expense

Selling, general, and administrative expenses on the consolidated statements of earnings included advertising expense of $86.7 million in fiscal 2006, $73.6 million in fiscal 2005, and $62.4 million in fiscal 2004. Advertising expenses were 1.4% of net sales and operating revenues for fiscal 2006, fiscal 2005, and fiscal 2004.

14 CONTINGENT LIABILITIES

(A) Litigation

In the normal course of business, the company is involved in various legal proceedings. Based upon the company’s evaluation of the information presently available, management believes that the ultimate resolution of any such proceedings will not have a material adverse effect on the company’s financial position, liquidity, or results of operations.

(B) Other Matters

In accordance with the terms of real estate lease agreements, the company generally agrees to indemnify the lessor from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities and repairs to leased property upon termination of the lease. Additionally, in accordance with the terms of agreements entered into for the sale of properties, the company generally agrees to indemnify the buyer from certain liabilities and costs arising subsequent to the date of the sale, including environmental liabilities and liabilities resulting from the breach of representations or warranties made in accordance with the agreements. The company does not have any known material environmental commitments, contingencies, or other indemnification issues arising from these arrangements.

CARMAX 2006 54

As part of its customer service strategy, the company guarantees the used vehicles it retails with a 30-day limited warranty. A vehicle in need of repair within 30 days of the customer’s purchase will be repaired free of charge. As a result, each vehicle sold has an implied liability associated with it. Accordingly, the company records a provision for estimated repairs during the guarantee period for each vehicle sold based on historical trends. The liability for this guarantee was $1.9 million at February 28, 2006 and February 28, 2005, and is included in accrued expenses and other current liabilities in the consolidated balance sheets.

15 RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment,” that will require the company to expense costs related to stock-based compensation, including employee stock options. With limited exceptions, SFAS No. 123(R) requires that the fair value of share-based payments to employees be expensed over the period service is received. Pro forma disclosure is no longer an alternative. Effective March 1, 2006, the company adopted SFAS No. 123(R), applying the modified retrospective method whereby prior period financial statements will be restated based on the amounts previously reported in the pro forma footnote disclosures required by SFAS No. 123.

SFAS No. 123(R) allows the use of either closed form (e.g., Black-Scholes) models or open form (e.g., lattice or binomial) models to measure the fair value of the share-based payment as long as that model is capable of incorporating all of the substantive characteristics unique to stock-based awards. In accordance with the transition provisions of SFAS No. 123(R), the expense attributable to a stock-based award will be measured in accordance with the company’s measurement model at that award’s date of grant. The company intends to use a lattice model to value stock-based awards granted during fiscal 2007.

The company believes the pro forma disclosures in Note 2(P), “Stock-Based Compensation,” have provided an appropriate short-term indicator of the level of expense that will be recognized in accordance with SFAS No. 123(R). However, the total expense recorded in future periods will depend on several variables, including the type of stock-based awards granted, the number of stock-based awards that vest, the fair value of those vested awards, the retirement eligibility date of associates receiving awards, and the model used to measure the fair value.

16 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

	First Quarter				Second Quarter					Third Quarter				Fourth Quarter					Fiscal Year
(In thousands except per share data)	2006		2005		2006		2005			2006		2005		2006		2005			2006		2005
Net sales and operating revenues	$	1,578,360	$	1,324,990	$	1,633,853	$	1,323,507		$	1,423,980	$	1,215,711	$	1,623,774	$	1,396,054		$	6,259,967	$	5,260,262
Gross profit	$	197,759	$	167,230	$	208,584	$	163,200		$	177,173	$	145,446	$	207,198	$	174,320		$	790,714	$	650,196
CarMax Auto Finance income	$	27,071	$	21,816	$	23,824	$	20,744		$	27,971	$	20,439	$	25,461	$	19,657		$	104,327	$	82,656
Selling, general, and administrative expenses	$	159,235	$	130,688	$	165,274	$	134,726		$	161,727	$	137,170	$	165,752	$	143,993		$	651,988	$	546,577
(Loss) gain on franchise dispositions	$	—	$	—	$	—	$	(11	)	$	—	$	692	$	—	$	(48	)	$	—	$	633
Net earnings	$	39,818	$	35,330	$	41,422	$	29,859		$	26,412	$	18,045	$	40,403	$	29,694		$	148,055	$	112,928
Net earnings per share:
Basic	$	0.38	$	0.34	$	0.40	$	0.29		$	0.25	$	0.17	$	0.39	$	0.28		$	1.41	$	1.09
Diluted	$	0.37	$	0.33	$	0.39	$	0.28		$	0.25	$	0.17	$	0.38	$	0.28		$	1.39	$	1.07

CARMAX 2006 55

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control–Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of February 28, 2006.

KPMG LLP, the company’s independent registered public accounting firm, has issued a report on our management’s assessment of our internal control over financial reporting. Their report is included herein.

AUSTIN LIGON

PRESIDENT AND CHIEF EXECUTIVE OFFICER

KEITH D. BROWNING

EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

CARMAX 2006 56

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

CarMax, Inc.:

We have audited the accompanying consolidated balance sheets of CarMax, Inc. and subsidiaries (the “Company”) as of February 28, 2006 and 2005, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended February 28, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CarMax, Inc. and subsidiaries as of February 28, 2006 and February 28, 2005, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended February 28, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of February 28, 2006, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 12, 2006, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

RICHMOND, VIRGINIA

MAY 12, 2006

CARMAX 2006 57

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

CarMax, Inc.:

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting that CarMax, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of February 28, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of February 28, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 28, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CarMax, Inc. and subsidiaries as of February 28, 2006 and February 28, 2005, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended February 28, 2006, and our report dated May 12, 2006 expressed an unqualified opinion on those consolidated financial statements.

RICHMOND, VIRGINIA

MAY 12, 2006

CARMAX 2006 58

CORPORATE AND SHAREHOLDER INFORMATION

HOME OFFICE

CarMax, Inc.

12800 Tuckahoe Creek Parkway

Richmond, Virginia 23238

Telephone: (804) 747-0422

WEBSITE

www.carmax.com

ANNUAL SHAREHOLDERS’ MEETING

Tuesday, June 20, 2006, at 10:00 a.m.

The Richmond Marriott West Hotel

4240 Dominion Boulevard

Glen Allen, Virginia 23060

STOCK INFORMATION

CarMax, Inc. common stock is traded on the New York Stock Exchange under the ticker symbol KMX.

At February 28, 2006, there were approximately 4,200 CarMax shareholders of record.

QUARTERLY STOCK PRICE RANGE

The following table sets forth by fiscal quarter the high and low reported prices of the company’s common stock for the last two fiscal years:

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Fiscal 2006
High	$	34.00	$	34.25	$	32.00	$	31.85
Low	$	24.88	$	24.64	$	26.01	$	26.40
Fiscal 2005
High	$	36.20	$	23.79	$	30.25	$	34.80
Low	$	20.60	$	18.05	$	19.23	$	26.05

DIVIDEND POLICY

To date, CarMax has not paid a cash dividend on its common stock. The company presently intends to retain its net earnings for use in its operations and for geographic expansion and, therefore, does not anticipate paying any cash dividends in the foreseeable future.

TRANSFER AGENT AND REGISTRAR

Contact our transfer agent for questions regarding your stock certificates, including changes of address, name, or ownership; lost certificates; or to consolidate multiple accounts.

Wells Fargo Bank, N.A.

P.O. Box 64854

South St. Paul, Minnesota 55164-0854

Toll free: (800) 468-9716

Hearing impaired: (651) 450-4144

www.wellsfargo.com/shareownerservices

INDEPENDENT AUDITORS

KPMG LLP

1021 East Cary Street, Suite 2000

Richmond, Virginia 23219-4023

FINANCIAL INFORMATION

For quarterly sales and earnings information, financial reports, filings with the Securities and Exchange Commission (including Form 10-K), news releases, and other investor information, please visit our investor website at http://investor.carmax.com. Information may also be obtained from the Investor Relations Department at: E-mail: investor_relations@carmax.com Telephone: (804) 747-0422,

ext. 4489

CEO AND CFO CERTIFICATIONS

CarMax’s chief executive officer and chief financial officer have filed with the SEC the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 regarding the quality of the company’s public disclosure. These certifications are included as exhibits to the Annual Report on Form 10-K for fiscal 2006. In addition, CarMax’s chief executive officer annually certifies to the NYSE that he is not aware of any violation by CarMax of the NYSE’s corporate governance listing standards. This certification was submitted, without qualification, as required after the 2005 annual meeting of CarMax’s shareholders.

CORPORATE GOVERNANCE INFORMATION

Copies of the CarMax Corporate Governance Guidelines, the Code of Conduct, and the charters for each of the Audit Committee, Nominating and Governance Committee, and Compensation and Personnel Committee are available from our investor website, at http://investor.carmax.com, under the corporate governance tab. Alternatively, shareholders may obtain, without charge, copies of these documents by writing to Investor Relations at the CarMax home office.

INVESTOR RELATIONS

Security analysts are invited to contact:

Dandy Barrett, Assistant Vice President, Investor Relations

Telephone: (804) 935-4591

GENERAL INFORMATION

Members of the media and others seeking general information about CarMax should contact:

Lisa Van Riper, Assistant Vice President, Public Affairs

Telephone: (804) 935-4594

CARMAX, CARMAX THE AUTO SUPERSTORE, THE CARMAX ADVANTAGE, 5 DAY MONEY BACK GUARANTEE (and design), VALUMAX, and CARMAX.COM are all registered trademarks or service marks of CarMax. Other company, product, and service names may be trademarks or service marks of their respective owners.

CARMAX 2006 61

EX-21.1

Exhibit 21.1

CARMAX, INC.

Subsidiaries of the Company

Subsidiary	Jurisdiction of Incorporation or Organization
CarMax Auto Superstores, Inc.	Virginia
CarMax Auto Superstores West Coast, Inc.	California
CarMax Auto Superstores California, LLC	California
CarMax Auto Superstores Services, Inc.	Virginia
CarMax Business Services, LLC	Delaware
Glen Allen Insurance, LTD	Bermuda

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors

CarMax, Inc.:

We consent to the incorporation by reference in the registration statements (No. 333-127486 and No. 333-100311) on Form S-8 of CarMax, Inc. (the Company) of our report dated May 12, 2006, with respect to the consolidated balance sheets of the Company as of February 28, 2006 and 2005, and the related consolidated statements of earnings, shareholders’ equity and cash flows for each of the fiscal years in the three-year period ended February 28, 2006, the related financial statement schedule, management’s assessment of the effectiveness of internal control over financial reporting as of February 28, 2006 and the effectiveness of internal control over financial reporting as of February 28, 2006, which reports are included or incorporated by reference from the annual report to shareholders in the February 28, 2006, annual report on Form 10-K of the Company.

/s/ KPMG LLP

Richmond, Virginia

May 12, 2006

EX-24.1

EXHIBIT 24.1

POWER OF ATTORNEY

I hereby appoint Austin Ligon or Keith D. Browning my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of CarMax, Inc. for its fiscal year ended February 28, 2006, and any amendment which such attorney-in-fact may deem appropriate or necessary.

Signature:	/s/ James F. Clingman, Jr.
Print Name:	James F. Clingman, Jr.
Title:	Director
Signature:	/s/ Jeffrey E. Garten
Print Name:	Jeffrey E. Garten
Title:	Director
Signature:	/s/ W. Robert Grafton
Print Name:	W. Robert Grafton
Title:	Director
Signature:	/s/ William S. Kellogg
Print Name:	William S. Kellogg
Title:	Director
Signature:	/s/ Hugh G. Robinson
Print Name:	Hugh G. Robinson
Title:	Director
Signature:	/s/ Richard L. Sharp
Print Name:	Richard L. Sharp
Title:	Director
Signature:	/s/ Thomas G. Stemberg
Print Name:	Thomas G. Stemberg
Title:	Director
Signature:	/s/ Vivian M. Stephenson
Print Name:	Vivian M. Stephenson
Title:	Director
Signature:	/s/ Beth A. Stewart
Print Name:	Beth A. Stewart
Title:	Director
Signature:	/s/ William R. Tiefel
Print Name:	William R. Tiefel
Title:	Director

EX-31.1

EXHIBIT 31.1

Certification of the Chief Executive Officer

Pursuant to Rule 13a-14(a)

I, Austin Ligon, certify that:

1. I have reviewed this annual report on Form 10-K of CarMax, Inc.;

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 registrant as of, and for, the periods presented in this report;

4. The registrant’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 registrant 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 registrant, 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 registrant’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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

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 registrant’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 registrant’s internal control over financial reporting.

Date: May 12, 2006
	/s/ Austin Ligon
	Austin Ligon
	President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification of the Chief Financial Officer

Pursuant to Rule 13a-14(a)

I, Keith D. Browning, certify that:

1. I have reviewed this annual report on Form 10-K of CarMax, Inc.;

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 registrant as of, and for, the periods presented in this report;

4. The registrant’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 registrant 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 registrant, 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 registrant’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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

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 registrant’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 registrant’s internal control over financial reporting.

Date: May 12, 2006
	/s/ Keith D. Browning
	Keith D. Browning
	Executive Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the CarMax, Inc. (the “company”) Annual Report on Form 10-K for the year ended February 28, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Austin Ligon, President and Chief Executive Officer of the company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1. The Report fully complies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company as of, and for, the periods presented in the Report.

Date: May 12, 2006	By:	/s/ Austin Ligon
		Austin Ligon
		President and Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the CarMax, Inc. (the “company”) Annual Report on Form 10-K for the year ended February 28, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Keith D. Browning, Executive Vice President and Chief Financial Officer of the company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1. The Report fully complies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company as of, and for, the periods presented in the Report.

Date: May 12, 2006	By:	/s/ Keith D. Browning
		Keith D. Browning
		Executive Vice President and Chief Financial Officer