LITHIA MOTORS INC
EXHIBIT 10.6.1
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<TYPE>EX-10.6.1
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<FILENAME>v79395ex10-6_1.txt
<DESCRIPTION>EXHIBIT 10.6.1
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                                                                  EXHIBIT 10.6.1

                        INCENTIVE STOCK OPTION AGREEMENT

        This Incentive Stock Option Agreement is made and entered into as of the
Date of Grant indicated below pursuant to the terms of the Lithia Motors, Inc.
(the "Company") 2001 Stock Option Plan (the "Plan") by and between the Company
and the person named below as the Optionee. Unless otherwise defined herein,
capitalized terms defined in this Incentive Stock Option Agreement shall have
the meanings as defined in the Plan.

THE "OPTIONEE"
                                                   ---------------------------
"DATE OF GRANT"                                                         ,
                                                   --------------------- -----

NUMBER OF SHARES OF THE
COMPANY'S CLASS A COMMON STOCK                     ---------------------------

"EXERCISE PRICE" PER SHARE                         $
                                                   ---------------------------
"EXPIRATION DATE"                                                       ,
                                                   --------------------- -----

"VESTING RATE"                                          % ON
                                                   -----    ------------------
1.      TERMS OF THE OPTION.

        1.1 Grant of Option. The Company hereby grants to the Optionee and the
Optionee hereby accepts, as of the Date of Grant, the right, privilege, and
option (the "Option") to purchase up to the number of shares of Common Stock
indicated above (the "Option Shares") at the Exercise Price indicated above,
subject to adjustment in accordance with the terms and conditions of the Plan.
The Option may only be exercised as to a whole number of shares of Common Stock.

        1.2 Status of this Option as an Incentive Stock Option. The Company
intends that this Option will qualify as an incentive stock option within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
However, if this Option fails in whole or in part to qualify as an incentive
stock option for any reason, this Option shall continue to be valid, shall be an
incentive stock option to the fullest extent permitted and otherwise shall be
treated as a nonqualified stock option. The Company shall not have any liability
to the Optionee for any failure of this Option to qualify, in whole or in part,
as an incentive stock option.

        1.3 Nontransferability of Option. This Option and the rights of the
Optionee under this Incentive Stock Option Agreement may not be transferred in
any manner except by will or by the laws of descent and distribution upon the
death of the Optionee.


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        1.4 Reservation of Shares. At all times, the Company shall have reserved
for issuance upon exercise of this Option such number of shares of its Common
Stock as is required for such issuance.

2.      TIME OF EXERCISE OF OPTION.

        2.1 When the Option Becomes Exercisable. This Option may only be
exercised on or after the Grant Date to the extent vested. This Option shall
vest on the date or dates indicated in the Vesting Rate as to that number of
shares that equals (rounded to the nearest whole share) the total number of
Option Shares multiplied by the Vesting Rate as indicated above. Notwithstanding
the foregoing, to the extent that this Incentive Stock Option Agreement
(together with other incentive stock options within the meaning of Section 422
of the Internal Revenue Code held by the Optionee with an equal or lower
exercise price per share) purports to become exercisable for the first time
during any calendar year as to shares of Class A Common Stock with a Fair Market
Value (determined at the time of grant) in excess of $100,000, such excess
shares shall be considered to be covered by a nonqualified stock option and not
an incentive stock option within the meaning of Section 422 of the Internal
Revenue Code. Under certain circumstances, the number of shares indicated in the
foregoing vesting schedule may be adjusted and the vesting dates may be
accelerated in accordance with terms and conditions of the Plan.

        2.2 Effect of Unpaid Leaves of Absence. If at any time during the term
of this Option, the Optionee is on unpaid leave from the Company or any
Subsidiary, the Option may not be exercised during such unpaid leave and the
dates contained in the Vesting Rate shall be extended by the length of such
unpaid leave.

        2.3 Expiration and Termination of Option. This Option will expire at
5:00pm Pacific Time on the Expiration Date and may terminate earlier upon
certain events as set forth in Section 4 of this Incentive Stock Option
Agreement. To the extent that this Option has not been exercised prior to the
Expiration Date or any earlier termination, all further rights to purchase
shares pursuant to this Option will cease and terminate at such time.

3.      OPTION EXERCISE PROCEDURES.

        3.1 Who May Exercise the Option. Only the Optionee (or, in the case of
exercise after death of the Optionee, by the executor, administrator, heir, or
legatee of the Optionee, as the case may be) may exercise this Option.

        3.2 Notice of Exercise. A "Notice of Exercise" must be signed and
delivered to the Company's corporate Secretary or such other person as the
Company may designate at the Company's principal business office of the Company.
A copy of the Company's current form of Notice of Exercise is attached hereto.
The Company, however, reserves the right to revise its form of Notice of
Exercise from time-to-time as it determines to be appropriate. If, at the time
of the exercise of this Option, the Company does not have an effective
registration statement on file with the Securities and Exchange Commission that
covers the issuance of shares upon the exercise of


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this Option, the Notice of Exercise will also contain certain representations
from the Optionee as required under applicable state and federal securities
laws. A copy of the then-current form of Notice of Exercise may be obtained at
any time from the Company. A notice will only be effective if submitted on the
form in effect at the time of such exercise.

        3.3 Payment of Exercise Price. The Notice of Exercise must indicate the
manner of payment of the Exercise Price for the number of shares so purchased.
Payment shall be made by cash or by the surrender to the Company for
cancellation of shares of Common Stock or other securities of the Company
(provided that the surrendered shares of Common Stock or other securities of the
Company shall have been held by the Optionee for not less than six months) or
any combination of the foregoing.

        3.4 Payment of Tax Withholding. The Optionee shall pay or make adequate
provision for payment, of any Tax Withholding that may be required upon exercise
of this Option. The notice of exercise shall indicate the method of payment of
Tax Withholding, which may be accomplished by payment in cash, the Company
withholding other amounts payable by the Company to the Optionee, by the
application of shares to be received upon exercise of this Option, the surrender
of shares of Common Stock or other securities of the Company (provided that the
surrendered shares of Common Stock or other securities of the Company shall have
been held by the Optionee for not less than six months) or any combination of
the foregoing.

        3.5 Delivery of Shares Following Exercise. The Company will make
delivery of the Option Shares purchased within a reasonable time after it
receives the Notice of Exercise and payment in full of the Exercise Price of the
Option Shares being purchased. However, if any law or regulation requires the
Company to take any action with respect to the issuance of the Option Shares,
including, without limitation, actions that may be required for compliance with
federal and state securities laws or the listing requirements of any stock
exchange upon which the Company's Common Stock is then listed, then the date of
delivery of such shares may be extended for the period necessary to take such
action. The Optionee shall only become the holder of such shares upon the actual
issuance of the stock certificate representing such shares.

4.      TERMINATION OF THE OPTION

        4.1 Effect of the Death of the Optionee. If the Optionee dies while an
employee of the Company or any Subsidiary, this Option will terminate 12 months
following the date of the Optionee's death or, if sooner, upon the Expiration
Date. In such event, this Option may be exercised only to the extent the
Optionee was entitled to exercise this Option on the date of the Optionee's
death and only by the person or persons to whom the Optionee's rights under this
Option may pass by the Optionee's will or by the laws of descent and
distribution of the state or country of the Optionee's domicile at the time of
death.

        4.2 Effect of the Disability of the Optionee. If the Optionee's
employment by the Company terminates as a result of the Optionee becoming
Disabled (as defined in the Plan) while an employee of the Company or any
Subsidiary, this Option will terminate 12 months following the date of the
Optionee becoming Disabled or, if sooner, upon the Expiration Date. In such
event,


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this Option may be exercised only to the extent the Optionee was entitled to
exercise this Option on the date of such termination.

        4.3 Effect of Termination of the Employment of the Optionee for Cause.
If the Optionee's employment with the Company or any Subsidiary is terminated
for "cause", as defined in the Plan, this Option will terminate on the effective
date of the termination of Optionee's employment and shall no longer be
exercisable as to any of the remaining Option Shares.

        4.4 Effect of Retirement of the Optionee. If the Optionee's employment
with the Company or any Subsidiary is terminated as a result of the Optionee's
retirement in accordance with the Company's then current retirement policy, this
Option will terminate three months after the date of the termination of
Optionee's employment by retirement and shall no longer be exercisable as to any
of the remaining Option Shares. In such event, this Option may be exercised only
to the extent the Optionee was entitled to exercise this Option on the date of
the Optionee's retirement.

        4.5 Effect of any other Termination of the Employment of the Optionee.
If the Optionee's employment with the Company or any Subsidiary terminates for
any reason other than the reasons set forth in Sections 4.1, 4.2, 4.3 or 4.4 of
this Option, this Option will terminate thirty days after the date of such
termination of employment or, if sooner, upon the Expiration Date. In such
event, this Option may be exercised only to the extent the Optionee was entitled
to exercise this Option on the date of such termination. For purposes of this
Option, the Optionee's employment with the Company or any Subsidiary shall be
considered to have terminated if the Optionee for any reason becomes a
"part-time" employee as such term is defined in the Company's then existing
employment rules or guidelines.

5.      REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE OPTIONEE.

        5.1. No Effect on Employment. The Optionee understands and agrees that
nothing contained in this Incentive Stock Option Agreement will be construed to
limit or restrict the rights of the Company to terminate the employment of the
Optionee at any time, with or without cause, to change the duties of the
Optionee or to increase or decrease the Optionee's compensation. Without
limiting the foregoing, the Optionee understands and agrees that the vesting of
shares under this Option is subject to and is conditioned upon the continued
employment of the Optionee by the Company or a Subsidiary and that such
employment can be terminated at any time by the Company or its Subsidiary.

        5.2. Rights Prior to Exercise of This Option. The Optionee understands
and agrees that the Optionee will have no rights as a shareholder in the Option
Shares, including without limitation the right to vote or receive dividends,
until the issuance of the shares is reflected in the Company's stock transfer
records.

        5.3. Tax Implications. The Optionee understands that, under federal
income tax laws as they currently exist, the exercise of this Option may result
in alternative minimum taxes and that the sale of shares acquired by exercise of
this Option either within two (2) years of the Grant Date


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or within one (1) year of the date on which this Option is exercised (a
"Disqualifying Disposition") will result in ordinary income to the Optionee in
an amount equal to the difference between the Exercise Price and the lesser of
the fair market value of the shares acquired on the date of such exercise or the
amount realized in the Disqualifying Disposition. If the Optionee makes a
Disqualifying Disposition, the Optionee will immediately notify the Company that
such has occurred and will pay to the Company the amount of any federal, state,
or local income taxes that the Company may be required to withhold under
applicable law.

        5.4 Underwriter's Lock-up. The Optionee by accepting this Option agrees
that whenever the Company undertakes a firm underwritten public offering of its
securities and if requested by the managing underwriter in such offering, the
Optionee will enter into an agreement not to sell or dispose of any securities
of the Company owned or controlled by the Optionee provided that such
restriction will not extend beyond twelve (12) months from the effective date of
the registration statement filed in connection with such offering.

        5.5 Disclosures. The Optionee acknowledges receipt of a copy of the Plan
and certain related information and represents that Optionee has fully reviewed
the terms and conditions of the Plan and this Option and has had opportunity to
obtain the advice of counsel prior to executing this Incentive Stock Option
Agreement. The Optionee represents and warrants that the Optionee is not relying
upon any representations, agreements or understandings of or with the Company
except for those set forth in this Incentive Stock Option Agreement.

6.      MISCELLANEOUS PROVISIONS

        6.1. Binding Effect. This Incentive Stock Option Agreement will be
binding upon and inure to the benefit of the parties hereto and their heirs,
executors, administrators, successors, and assigns.

        6.2. Notices. All notices to the Optionee or other persons then entitled
to exercise this Option will be delivered at the address contained in the
records of the Company or such other address as may be specified in writing by
the Optionee or such other person. All notices to the Company will be delivered
at its principal offices.

        6.3. Governing Law and Interpretation. This Incentive Stock Option
Agreement and the Option granted hereunder will be governed by the laws of the
State of Oregon as to all matters, including but not limited to matters of
validity, construction, effect, and performance, without giving effect to rules
of choice of law. This Incentive Stock Option Agreement hereby incorporates by
reference all of the provisions of the Plan and will in all respects be
interpreted and construed in such manner as to effectuate the intent of the
Plan. In the event of a conflict between the terms of this Incentive Stock
Option Agreement and the Plan, the terms of the Plan will prevail. All matters
of interpretation of the Plan and this Incentive Stock Option Agreement,
including the applicable terms and conditions and the definitions of the words,
will be determined in the sole and final discretion of the Committee or the
Company's Board of Directors.


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        6.4. Attorney Fees. If any suit or action is instituted in connection
with any controversy arising out of this Incentive Stock Option Agreement or the
enforcement of any right hereunder, the prevailing party will be entitled to
recover, in addition to costs, such sums as the court may adjudge reasonable as
attorney fees, including fees on any appeal.

                               LITHIA MOTORS, INC.

                               By:
                                  ---------------------------------------
                               Name:
                                    -------------------------------------
                               Title
                                    -------------------------------------

                               OPTIONEE:

                               ------------------------------------------
                               Name:
                                    -------------------------------------

                               ------------------------------------------
                               Street Address

                               ------------------------------------------
                               City, State and Zip Code

                               ------------------------------------------
                               Social Security Number


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