SECURITIES
      AND EXCHANGE COMMISSION





WASHINGTON,
      D.C. 20549





FORM
      10-Q





QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
      ACT OF 1934





For
      the
      quarterly period ended September 30, 2006





Commission
      file number: 000-24669





HOMETOWN
      AUTO RETAILERS, INC.


(Exact
      name of Registrant as specified in its charter)





Delaware
            06-1501703(State
                or other jurisdiction of incorporation
                or organization)
            (IRS Employer Identification
                No.)




1309
      South Main Street


Waterbury,
      CT 06706


(Address
      of principal executive offices) (Zip code)





(203)
      756-1300


(Registrant's
      telephone number including area code)





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 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 [ ] Accelerated filer [ ] Non-accelerated filer
      [X]





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





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





Title
            
            Outstanding
              As
                of November 7, 2006Common
                Stock, Class A, par value $.001 per share
            
            3,910,137Common
                Stock, Class B, par value $.001 per share
            
            2,579,252





INDEX




PagePART I.
              FINANCIAL INFORMATIONITEM 1.
              Consolidated Balance Sheets at September
                30,
                2006 (Unaudited)and December 31, 2005
                (Audited)
              3Unaudited Consolidated Statements
                of
                Operations for the three and nine months ended September 30, 2006
                and 2005
                (Restated)
              4Unaudited Consolidated Statements
                of
                Stockholders’ Equity for the nine months ended September 30, 2006 and 2005
                (Restated)
              5Unaudited Consolidated Statements
                of Cash
                Flows for the nine months ended September 30, 2006 and 2005
                (Restated)
              6Notes to Unaudited Consolidated Financial
                Statements
              7ITEM 2.
              Management’s Discussion and Analysis of
                Financial Condition and Results of Operations
              21ITEM 3.
              Quantitative and Qualitative Disclosures
                About Market Risk
              36ITEM 4.
              Controls and Procedures
              36PART II.
              OTHER
                INFORMATIONITEM 1.
              Legal Proceedings
              37ITEM 1A.
              Risk Factors
              37ITEM 2
              Unregistered Sales Of Equity Securities
                and
                Use of Proceeds
              37ITEM 3.
              Defaults Upon Senior
                Securities
              37ITEM 4.
              Submission of Matters to a Vote of
                Security
                Holders
              37ITEM 5.
              Other Information
              37ITEM 6.
              ExhibitsSIGNATURES
              38CERTIFICATIONS
              39




**FORWARD
      LOOKING STATEMENTS**





*Certain
      statements made in this Quarterly Report on Form 10-Q are "forward-looking
      statements" (within the meaning of the Private Securities Litigation Reform
      Act
      of 1995) regarding the plans and objectives of management for future operations.
      Such statements involve known and unknown risks, uncertainties and other factors
      that may cause actual results, performance or achievements of Hometown Auto
      Retailers, Inc. (“Hometown”) to be materially different from any future results,
      performance or achievements expressed or implied by such forward-looking
      statements. The forward-looking statements included herein are based on current
      expectations that involve numerous risks and uncertainties. Assumptions relating
      to the foregoing involve judgments with respect to, among other things, future
      economic, competitive and market conditions and future business decisions,
      all
      of which are difficult or impossible to predict accurately and many of which
      are
      beyond the control of Hometown. Although Hometown believes that its assumptions
      underlying the forward-looking statements are reasonable, any of the assumptions
      could prove inaccurate and, therefore, there can be no assurance that the
      forward-looking statements included in this Report will prove to be accurate.
      In
      light of the significant uncertainties inherent in the forward-looking
      statements, the inclusion of such information should not be regarded as a
      representation by Hometown or any other person that the objectives and plans
      of
      Hometown will be achieved.*  *Factors
      that could cause actual results to differ materially from those expressed or
      implied by such forward-looking statements include, but are not limited to,
      the
      factors set forth herein under the heading “Management’s Discussion and Analysis
      of Financial Condition and Results of Operations.”*


2








**HOMETOWN
                AUTO RETAILERS, INC.****CONSOLIDATED
                BALANCE SHEETS****(in
                thousands, except share and per share
                data)**




ASSETS
            
            
            September
                      30, 2006 (Unaudited)
            
            
            December
                      31, 2005(Audited)Current
                Assets:Cash
                and cash equivalents
            
            $
            6,352
            
            $
            6,453Accounts
                receivable, net
            
            
            4,857
            
            
            4,330Inventories,
                net
            
            
            31,064
            
            
            33,542Prepaid
                expenses and other current assets
            
            
            760
            
            
            568Deferred
                and prepaid income taxes
            
            
            1,039
            
            
            1,039Total
                current assets
            
            
            44,072
            
            
            45,932Property
                and equipment, net
            
            
            12,616
            
            
            13,035Other
                assets
            
            
            4,691
            
            
            2,919Total
                assets
            
            $
            61,379
            
            $
            61,886LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                Liabilities:Floor
                plan notes payable - trade
            
            $
            5,040
            
            $
            6,697Floor
                plan notes payable - non-trade
            
            
            24,913
            
            
            26,265Accounts
                payable and accrued expenses
            
            
            4,090
            
            
            3,909Current
                maturities of long-term debt and capital lease obligations
            
            
            1,316
            
            
            5,245Deferred
                revenue
            
            
            148
            
            
            207Total
                current liabilities
            
            
            35,507
            
            
            42,323Long-term
                debt and capital lease obligations
            
            
            14,206
            
            
            7,884Other
                long-term liabilities and deferred revenue
            
            
            61
            
            
            128Total
                liabilities
            
            
            49,774
            
            
            50,335Commitments
                and ContingenciesStockholders'
                EquityPreferred
                    stock, $.001 par value, 2,000,000 shares authorized, no shares
                    issued and
                    outstanding
            
            
            -
            
            
            -Common
              stock, Class A, $.001 par value,
              12,000,000 shares authorized, 3,910,137 shares issued and outstanding
              for
              both periods
            
            
            4
            
            
            4Common
                    stock, Class B, $.001 par value, 3,760,000 shares authorized,
                    2,579,252
                    shares issued and outstanding for both periods
            
            
            2
            
            
            2Additional
                paid-in capital
            
            
            29,032
            
            
            29,022Accumulated
                deficit
            
            
            (17,433
            )
            
            (17,477
            )Total
                stockholders' equity
            
            
            11,605
            
            
            11,551Total
                liabilities and stockholders' equity
            
            $
            61,379
            
            $
            61,886The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.




3


**HOMETOWN
                AUTO RETAILERS, INC.****UNAUDITED
                CONSOLIDATED STATEMENTS OF OPERATIONS****(in
                thousands, except share and per share
                data)**






For
                the Three Months Ended
                September 30,
            
            
            For
                the Nine MonthsEnded
                September 30,2006
            
            
            2005
            
            
            2006
            
            
            2005(Restated)
            
            
            
            
            
            (Restated)RevenuesNew
                vehicle sales
            
            $
            35,122
            
            $
            38,543
            
            $
            95,819
            
            $
            117,213Used
                vehicle sales
            
            
            15,576
            
            
            15,723
            
            
            46,435
            
            
            48,204Parts
                and service sales
            
            
            5,469
            
            
            5,246
            
            
            16,017
            
            
            17,311Other,
                net
            
            
            1,960
            
            
            1,881
            
            
            5,873
            
            
            5,834Total
                revenues
            
            
            58,127
            
            
            61,393
            
            
            164,144
            
            
            188,562Cost
                of salesNew
                vehicle
            
            
            32,611
            
            
            35,956
            
            
            89,138
            
            
            109,459Used
                vehicle
            
            
            14,070
            
            
            14,280
            
            
            41,834
            
            
            43,651Parts
                and service
            
            
            2,541
            
            
            2,372
            
            
            7,467
            
            
            7,885Total
                cost of sales
            
            
            49,222
            
            
            52,608
            
            
            138,439
            
            
            160,995Gross
                profit
            
            
            8,905
            
            
            8,785
            
            
            25,705
            
            
            27,567Selling,
                general and administrative expenses
            
            
            7,289
            
            
            7,749
            
            
            21,798
            
            
            23,457Income
                from operations
            
            
            1,616
            
            
            1,036
            
            
            3,907
            
            
            4,110Interest
                income
            
            
            105
            
            
            64
            
            
            298
            
            
            193Interest
                (expense)
            
            
            (1,053
            )
            
            (802
            )
            
            (4,122
            )
            
            (2,646
            )Other
                income
            
            
            4
            
            
            -
            
            
            12
            
            
            591Other
                (expense)
            
            
            -
            
            
            -
            
            
            (20
            )
            
            -Pre-tax
                income
            
            
            672
            
            
            298
            
            
            75
            
            
            2,248Income
                tax provision
            
            
            272
            
            
            119
            
            
            31
            
            
            899Net
                income
            
            $
            400
            
            $
            179
            
            $
            44
            
            $
            1,349Earnings
                per share, basic
            
            $
            0.06
            
            $
            0.03
            
            $
            0.01
            
            $
            0.20Earnings
                per share, diluted
            
            $
            0.06
            
            $
            0.03
            
            $
            0.01
            
            $
            0.20Weighted
                average shares outstanding, basic
            
            
            6,489,389
            
            
            6,451,128
            
            
            6,489,389
            
            
            6,660,012Weighted
                average shares outstanding, diluted
            
            
            6,657,479
            
            
            6,646,549
            
            
            6,645,245
            
            
            6,811,927The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.


4





**HOMETOWN
                AUTO RETAILERS, INC.****UNAUDITED
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY****(in
                thousands)**





Class
                ACommon Stock
            
            
            Class
                B Common Stock
            
            
            AdditionalPaid-in
            
            
            (Accumulated
            
            
            Total Stockholders’Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Deficit)
            
            
            EquityBalance
                atDecember
                31, 2004 (Restated)
            
            
            3,870
            
            $
            4
            
            
            3,519
            
            $
            3
            
            $
            30,017
            
            $
            (18,769
            )
            $
            11,255Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,349
            
            
            1,349Exercise
                of stock options
            
            
            40
            
            
            -
            
            
            -
            
            
            -
            
            
            47
            
            
            -
            
            
            47Litigation
              Settlement
            
            
            -
            
            
            -
            
            
            (940
            )
            
            (1
            )
            
            (1,042
            )
            
            -
            
            
            (1,043
            )Balance
                atSeptember
                30, 2005 (Restated)
            
            
            3,910
            
            $
            4
            
            
            2,579
            
            $
            2
            
            $
            29,022
            
            $
            (17,420
            )
            $
            11,608Balance
                atDecember
                31, 2005
            
            
            3,910
            
            $
            4
            
            
            2,579
            
            $
            2
            
            $
            29,022
            
            $
            (17,477
            )
            $
            11,551Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            44
            
            
            44Stock
                option expense
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            10
            
            
            -
            
            
            10Balance
                at
              September
                30, 2006
            
            
            3,910
            
            $
            4
            
            
            2,579
            
            $
            2
            
            $
            29,032
            
            $
            (17,433
            )
            $
            11,605The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.


5





**HOMETOWN
                AUTO RETAILERS, INC.****UNAUDITED
                CONSOLIDATED STATEMENTS OF CASH FLOWS****(in
                thousands)**






For
                the Nine Months ended September
                30,2006
            
            
            2005(Restated)CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            44
            
            $
            1,349Adjustments
                to reconcile net income to net cashprovided
                by operating activities -Depreciation
                and amortization
            
            
            955
            
            
            965Loss
                on sale of fixed assets
            
            
            19
            
            
            -(Gain)
                on disposal of dealership
            
            
            -
            
            
            (587
            )Deferred
                income taxes
            
            
            31
            
            
            899Stock
                option expense
            
            
            10
            
            
            -Changes
                in assets and liabilities:Accounts
                receivable, net
            
            
            (527
            )
            
            275Inventories,
                net
            
            
            3,912
            
            
            9,347Prepaid
                expenses and other current assets
            
            
            (192
            )
            
            (154
            )Prepaid
                taxes
            
            
            (282
            )
            
            (176
            )Other
                assets
            
            
            103
            
            
            18Floor
                plan notes payable - trade
            
            
            (1,657
            )
            
            (5,336
            )Accounts
                payable and accrued expenses
            
            
            181
            
            
            (859
            )Deferred
                revenue - current
            
            
            (59
            )
            
            (287
            )Other
                long-term liabilities and deferred revenue
            
            
            (67
            )
            
            (144
            )Net
                cash provided by operating activities
            
            
            2,471
            
            
            5,310CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of property and equipment
            
            
            (303
            )
            
            (132
            )Proceeds
                from sale of property and equipment
            
            
            1
            
            
            -Acquisition
                of Nissan franchise
            
            
            (2,101
            )
            
            -Net
                cash (used in) investing activities
            
            
            (2,403
            )
            
            (132
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from floor plan notes payable - non-trade
            
            
            131,292
            
            
            121,793Payment
                of floor plan notes payable - non-trade
            
            
            (132,644
            )
            
            (125,924
            )Principal
                payments of long-term debt and capital lease obligations
            
            
            (6,478
            )
            
            (1,614
            )Proceeds
                from long-term borrowings
            
            
            7,661
            
            
            225Exercise
                of stock options and warrants
            
            
            -
            
            
            47Net
                cash (used in) financing activities
            
            
            (169
            )
            
            (5,473
            )Net
                (decrease) in cash and cash equivalents
            
            
            (101
            )
            
            (295
            )CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            6,453
            
            
            6,101CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            6,352
            
            $
            5,806Cash
                paid for - Interest
            
            $
            4,159
            
            $
            2,717Cash
                paid for - Taxes
            
            $
            282
            
            $
            176Purchases
                financed by capital lease obligations
            
            $
            1,563
            
            $
            801The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.





Supplemental
      Cash flow Information:


On
      May
      11, 2005 Hometown transferred certain assets and liabilities to the Vergopia’s
      resulting in a gain of approximately $587,000 on the transaction. (See Note
      15 -
      Commitments and Contingencies - Litigation to December 31, 2005 Form 10-K.)
      Hometown received 940,000 shares of Hometown Common Stock valued at $1,043,000
      in exchange for Accounts Receivable of $154,000, New Vehicle and Parts Inventory
      of $6,786,000, Net Property and Equipment of $195,000, Floor Plan Notes Payable
      - Trade of $6,664,000 and Other Debt of $134,000. Costs of $119,000 are included
      in the computation of the gain.




6





**HOMETOWN
      AUTO RETAILERS, INC.**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**




**1.**  **BUSINESS
      AND ORGANIZATION**




*Business
      of Hometown Auto Retailers, Inc. (“Hometown” or the “Company”)*





Hometown
      sells new and used cars and light trucks, provides maintenance and repair
      services, sells replacement parts and provides related financing, insurance
      and
      service contracts through 8 franchised dealerships and 1 stand-alone service
      facility, located in New Jersey, New York, Connecticut, Massachusetts and
      Vermont. Hometown’s dealerships offer 10 American and Asian automotive brands
      including Chevrolet, Chrysler, Dodge, Ford, Jeep, Lincoln, Mazda, Mercury,
      Nissan and Toyota.




**2.
        **RESTATEMENT****




Subsequent
      to fiscal year end December 31, 2005, Hometown concluded that the income from
      certain extended warranty and extended warranty reimbursement insurance policies
      generated in Connecticut was no longer required to be recognized over the period
      of the contract. Prior to July 1, 2003, Connecticut dealerships were considered
      to be “extended warranty providers” because they did not qualify for any of the
      exclusions applicable to the retail seller of the extended warranty. Effective
      on July 1, 2003, the Connecticut law applicable to extended warranties was
      amended to provide that an “extended warranty provider” means a person who
      issues, makes, provides or offers to provide an extended warranty but that
      person must also be “contractually obligated to provide service under such
      extended warranty”. The administrator of the extended warranties sold by
      Hometown has confirmed that Hometown is not contractually obligated to provide
      service under the extended warranties that they sell. Therefore Hometown is
      no
      longer liable as the “extended warranty provider” under the extended warranties
      that they sell. Hometown has determined that it is no longer necessary to
      recognize the commissions that it receives from the sale of such extended
      warranties over the period of the warranty contract. Accordingly, financial
      statements for periods prior to December 31, 2005 were restated and are
      reflected as such within this Form 10Q.





The
      effect of this restatement was to increase pre-tax income $60,000 and $173,000
      for the three and nine months ended September 30, 2005, respectively. The after
      tax effects was to increase net income by $36,000 and $104,000 for the three
      and
      nine months ended September 30, 2005, respectively. The effect of these
      adjustments for the three months ended September 30, 2005 was to increase basic
      and diluted earnings per share by $0.01. The effect of these adjustments was
      to
      increase basic and diluted earnings per share by $0.01 and $0.02, respectively
      for the nine months ended September 30, 2005.





Deferred
      revenue recorded as of June 30, 2003, will continue to be taken into income
      over
      the remaining life of the contract. At September 30, 2006, Hometown had $173,000
      of related deferred revenue remaining. This deferred revenue will be recognized
      over the next three years as follows: 2006 (remaining period) - $47,000, 2007
      -
      $100,000 and 2008 - $26,000. These revenues are recorded in Revenues, Other
      in
      the Statement of Operations. The recognition of deferred revenues does not
      generate a cash tax effect as the recording of deferred revenues generates
      a
      deferred tax asset; therefore the recognition of this income causes a reduction
      of deferred tax assets. As of September 30, 2006 Hometown has other deferred
      revenues of $25,000.




7




The
      effect of the restatement on the financial statement items affected
      follows:







Three
                months ended September
                30, 2005
            
            
            Nine
                months ended
              September
                30, 2005Previously
            
            
            Restated
            
            
            Previously
            
            
            RestatedReported
            
            
            
            
            
            Reported**Statements
                of Operations:**Other
                revenues, net
            
            $
            1,821
            
            $
            1,881
            
            $
            5,661
            
            $
            5,834Total
                revenues
            
            $
            61,333
            
            $
            61,393
            
            $
            188,389
            
            $
            188,562Gross
                profit
            
            $
            8,725
            
            $
            8,785
            
            $
            27,394
            
            $
            27,567Income
                from operations
            
            $
            976
            
            $
            1,036
            
            $
            3,937
            
            $
            4,110Pre-tax
                income
            
            $
            238
            
            $
            298
            
            $
            2,075
            
            $
            2,248Provision
                for income taxes
            
            $
            95
            
            $
            119
            
            $
            830
            
            $
            899Net
                income
            
            $
            143
            
            $
            179
            
            $
            1,245
            
            $
            1,349Earnings
                per share, basic
            
            $
            0.02
            
            $
            0.03
            
            $
            0.19
            
            $
            0.20Earnings
                per share, diluted
            
            $
            0.02
            
            $
            0.03
            
            $
            0.18
            
            $
            0.20**Statements
                of Cash Flows:**Net
                income
            
            
            
            
            
            
            
            $
            1,245
            
            $
            1,349Deferred
                income taxes
            
            
            
            
            
            
            
            $
            830
            
            $
            899Deferred
                revenue - current
            
            
            
            
            
            
            
            $
            (235
            )
            $
            (287
            )Other
                long-term liabilities and deferred revenue
            
            
            
            
            
            
            
            $
            (23
            )
            $
            (144
            )Net
                cash provided by operating activities
            
            
            
            
            
            
            
            $
            5,310
            
            $
            5,310





In
      addition, Hometown has previously restated its Balance Sheets and Statements
      of
      Cash Flows to comply with guidance under SFAS 95, “Statement of Cash Flows”,
      which states that payments to suppliers should be classified as an operating
      activity. The balance sheets restatement is to breakdown the floor plan notes
      payable into trade and non-trade components, where it had previously been shown
      as a single line item, which has been consistent with industry practice. The
      Statements of Cash Flows reclassification was to show the non-trade component of
      floor plan notes payable as a financing activity, where it had been shown as
      an
      operating activity. The floor plan lender is FMCC, an affiliate of Ford, Lincoln
      and Mercury; therefore; floor plan notes payable amounts due from purchases
      of
      inventory from Ford, Lincoln and Mercury are classified as floor plan - trade
      and the related borrowings and payments are to be classified as operating
      activities in the Statements of Cash Flows. Amounts due for inventory purchases
      from all other manufacturers are classified as floor plan notes payable -
      non-trade and the related borrowings and payments are to be classified as
      financing activities in the Statements of Cash Flows. The
      changes do not affect working capital or total cash flows. See
      Note
      7 to the unaudited consolidated financial statements.





**3.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





*Basis
      of Presentation*





The
      accompanying consolidated balance sheet as of September 30, 2006, the
      consolidated statements of operations for the three and nine months ended
      September 30, 2006 and 2005 (restated), the consolidated statements of
      stockholders’ equity and the consolidated statements of cash flows for the nine
      months ended September 30, 2006 and 2005 (restated), are unaudited. (See Note
      2)
      The consolidated financial statements include all significant majority-owned
      subsidiaries. All significant intercompany balances and transactions have been
      eliminated in consolidation.




8





In
      the
      opinion of management, all adjustments necessary to present fairly the financial
      position, results of operations and cash flows for the interim periods were
      made. Certain reclassifications have been made to the prior year amounts to
      conform to the current year presentation. Due to seasonality and other factors,
      the results of operations for interim periods are not necessarily indicative
      of
      the results that will be realized for the entire year.





Certain
      information and footnote disclosures, normally included in financial statements
      prepared in accordance with generally accepted accounting principles, were
      omitted. Accordingly, these consolidated financial statements should be read
      in
      conjunction with the consolidated financial statements and notes thereto for
      the
      year ended December 31, 2005, which are included in Hometown’s filings of its
      amended annual report on Form 10-K.





The
      financial statements have been prepared in conformity with generally accepted
      accounting principles and, accordingly, include amounts based on estimates
      and
      judgments of management. Actual results could differ from those
      estimates.





*Stock-based
      Compensation*





At
      September 30, 2006, Hometown has one stock-based employee compensation plan,
      the
      1998 Stock Option Plan (the “Stock Option Plan”). In December 2004, the
      FASB issued SFAS 123R, “Share-Based Payment,” a revision of SFAS 123. In
      March 2005, the SEC issued Staff Bulletin No. 107 regarding its
      interpretation of SFAS 123R. The standard requires companies to expense the
      grant-date fair value of stock options and other equity-based compensation
      issued to employees and was effective for annual periods beginning after
      June 15, 2005. As of January 1, 2006, Hometown adopted SFAS 123R using
      the modified prospective transition method. Accordingly, Hometown’s unaudited
      consolidated financial statements for prior periods have not been restated
      to
      reflect the adoption of SFAS 123R.





For
      the
      three and nine months ended September 30, 2006, Hometown recognized
      approximately $3,000 and $10,000 pre-tax, respectively ($1,800 and $6,000
      after-tax, respectively) of non-cash compensation expense (included in Selling,
      General and Administrative expense in the 2006 Unaudited Consolidated Statement
      of Operations) attributable to stock options that vested subsequent to
      December 31, 2005. Hometown used the Black-Scholes valuation model and
      straight-line amortization of compensation expense over the requisite service
      period of the grant. As of September 30, 2006 there was $17,000 of total
      unrecognized compensation cost related to non-vested stock options, which will
      be recognized over a three-year period.





The
      risk-free interest rate used was from 3.00% - 3.82% and is based on the U.S.
      Treasury yield curve at the time of the grant. The expected dividend yield
      used
      was 0%. The expected term of stock options granted is 5-10 years and is derived
      from historical data and represents the period of time that stock options are
      expected to be outstanding. The expected volatility used is 75% and is based
      on
      historical volatility and other factors impacting the Company.




9




A
      summary
      of stock option transactions is as follows for the nine months ended September
      30, 2006.





Number
                of Shares
            Weighted
                Average Exercise Price per Share
            Weighted
                Average Remaining Contract Term
            Aggregate
                Intrinsic ValueOptions
                outstanding at December 31, 2005
            497,500
            $1.03
            2.50Options
                granted
            -
            -Exercised
            -
            -Canceled
            (220,000)
            $1.63Options
                outstanding at September 30, 2006
            277,500
            $0.56
            3.27
            $106,894Options
                exercisable at September 30, 2006
            264,167
            $0.53
            3.01
            $
                93,609





A
      summary
      of non-vested stock option transactions is as follows for the nine months ended
      September 30, 2006.





Number
                of Shares
            Weighted
                Average Grant-Date Fair Value per ShareNon-vested
                stock options at December 31, 2005
            39,999
            $0.67Options
                granted
            -
            -Vested
            (25,833)
            $0.50Canceled
            (833)
            $0.67Non-vested
                stock options at September 30, 2006
            13,333
            $1.01





Prior
      to
      January 1, 2006, the Company applied Accounting Principles Board Opinion
      No. 25, “Accounting for Stock Issued to Employees” in accounting for
      stock-based employee compensation arrangements whereby compensation cost related
      to stock options was generally not recognized in determining net income and
      the
      pro forma impact of compensation cost related to stock options was disclosed.





The
      Company’s pro forma net income and pro forma earnings per share were as
      follows:




(in
                thousands, except per share data)
            
            
            Three
                Months Ended September 30, 2005
            
            
            Nine
                Months Ended September 30, 2005Net
                income, as reported
            
            $
            179
            
            $
            1,349Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax effects
                (1)
            
            
            (2
            )
            
            (7
            )Pro
                forma net income
            
            $
            177
            
            $
            1,342Earnings
                per share:Basic,
                as reported
            
            $
            0.03
            
            $
            0.20Basic,
                pro forma
            
            $
            0.03
            
            $
            0.20[Missing
                Graphic Reference]Diluted,
                as reported
            
            $
            0.03
            
            $
            0.20Diluted,
                pro forma
            
            $
            0.03
            
            $
            0.20





(1)
            All
                awards refer to awards granted, modified, or settled in fiscal periods
                since plan inception in 1998; that is, awards for which the fair
                value was
                required to be measured under Statement 123





*New
      Accounting Pronouncements*





In
      February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments - an amendment of FASB Statements No. 133 and 140," which
      simplifies accounting for certain hybrid financial instruments by permitting
      fair value remeasurement for any hybrid instrument that contains an embedded
      derivative that otherwise would require bifurcation and eliminates a restriction
      on the passive derivative instruments that a qualifying special-purpose entity
      may hold. SFAS No. 155 is effective for all financial instruments acquired,
      issued or subject to a remeasurement (new basis) event occurring after the
      beginning of an entity's first fiscal year that begins after September 15,
      2006.
      The adoption of SFAS No. 155 will have no impact on our results of operations
      or
      our financial position.




10





In
      March
      2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
      Assets - an amendment of FASB Statement No. 140," which establishes, among
      other
      things, the accounting for all separately recognized servicing assets and
      servicing liabilities by requiring that all separately recognized servicing
      assets and servicing liabilities be initially measured at fair value, if
      practicable. SFAS No. 156 is effective as of the beginning of an entity's first
      fiscal year that begins after September 15, 2006. The adoption of SFAS No.
      156
      will have no impact on our results of operations or our financial
      position.





In
      June
      2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for
      Uncertainty in Income Taxes”, an Interpretation of FASB Statement No. 109. The
      objective of this interpretation prescribes a recognition threshold and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. FIN 48 is
      effective for the fiscal years beginning after December 15, 2006. The adoption
      of this statement is not expected to have a material effect on our financial
      position or results of operations.





In
      September 2006, the Financial Accounting Standards Board (FASB) issued
      SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
      Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and
      132(R),” which requires recognition of a net liability or asset to report the
      funded status of defined benefit pension and other postretirement plans on
      the
      balance sheet and recognition (as a component of other comprehensive income)
      of
      changes in the funded status in the year in which the changes occur.
      Additionally, SFAS No. 158 requires measurement of a plan’s assets and
      obligations as of the balance sheet date and additional annual disclosures
      in
      the notes to the financial statements. The recognition and disclosure provisions
      of SFAS No. 158 are effective for fiscal years ending after
      December 15, 2006, while the requirement to measure a plan’s assets and
      obligations as of the balance sheet date is effective for fiscal years ending
      after December 15, 2008. The adoption of this statement is not expected to
      have a material effect on our financial position or results of
      operations.





In
      September 2006, FASB issued SFAS No. 157, “Fair Value Measurements,”
which provides enhanced guidance for using fair value to measure assets and
      liabilities. SFAS No. 157 establishes a common definition of fair value,
      provides a framework for measuring fair value under U.S. GAAP and expands
      disclosures requirements about fair value measurements. SFAS No. 157 is
      effective for financial statements issued in fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The
      adoption of this statement is not expected to have a material effect on our
      financial position or results of operations.





**4.**  **EARNINGS
      PER SHARE / STOCKHOLDERS EQUITY**





“Basic
      earnings per share” is computed by dividing net income by the weighted average
      common shares outstanding. “Diluted earnings per share” is computed by dividing
      net income by the weighted average common shares outstanding adjusted for the
      incremental dilution of potentially dilutive securities. Options to purchase
      approximately 278,000 and 498,000 shares of common stock were outstanding as
      of
      September 30, 2006 and 2005, respectively.




11





Basic
      and
      diluted weighted average shares for the three and nine months ended September
      30, 2006 and 2005 are as follows:





Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,2006
            
            2005
            
            2006
            
            2005Basic,
                Weighted Average Shares
            6,489,389
            
            6,451,128
            
            6,489,389
            
            6,660,012Common
                Stock Equivalents
            168,090
            
            195,421
            
            155,856
            
            151,915Diluted,
                Weighted Average Shares
            6,657,479
            
            6,646,549
            
            6,645,245
            
            6,811,927





Basic
      weighted average shares reflect a reduction of 940,000 Class B shares from
      the
      settlement of the Vergopia litigation on March 3, 2005. These shares have been
      cancelled as of May 13, 2005. Also, the nine months ended September 30, 2005
      includes a gain on the transfer of the Westwood dealership of $587,000.





The
      common stock equivalents are options whose exercise price is less than the
      average market price of the common shares during the period. For the three
      and
      nine months ended September 30, 2006, no options were excluded from the
      calculation of diluted earnings per share. For the three and nine months ended
      September 30, 2005, options to purchase 217,000 shares of Hometown common stock
      were excluded from the calculation of diluted income per share due to the option
      prices being greater than the average market price of the common shares during
      the period.





The
      basic
      and diluted income per share for the three and nine months ended September
      30,
      2006 is $0.06 and $0.01, respectively. The basic and diluted income per share
      for the three and nine months ended September 30, 2005 is $0.03 and $0.20
      respectively.





**5.**  **INVENTORIES**





New,
      used
      and demonstrator vehicles are stated at the lower of cost or market, determined
      on a specific unit basis. Parts and accessories are stated at the lower of
      cost
      (determined on a first-in, first-out basis) or market. Inventories, net consist
      of the following:





(in
                thousands)
            
            
            9/30/06
            
            
            12/31/05New
                Vehicles
            
            $
            21,564
            
            $
            24,474Used
                Vehicles
            
            
            7,658
            
            
            7,284Parts,
                accessories and other
            
            
            1,842
            
            
            1,784Total
                Inventories
            
            $
            31,064
            
            $
            33,542





The
      lower
      of cost or market adjustment was $0.4 million at September 30, 2006 and December
      31, 2005.




12




**6.**  **GOODWILL
      AND OTHER INTANGIBLE ASSETS**





As
      of
      September 30, 2006 and December 31, 2005, Hometown’s intangible assets consisted
      of the following:





(in
                thousands)
            
            
            9/30/06
            
            
            12/31/05Goodwill
            
            $
            1,539
            
            $
            -Manufacturer
                franchise rights
            
            
            562
            
            
            -Deferred
                finance charges
            
            
            62
            
            
            272Accumulated
                amortization
            
            
            (54
            )
            
            (142
            )Franchise
                fee
            
            
            10
            
            
            10Accumulated
                amortization
            
            
            (6
            )
            
            (5
            )Net
                intangible assets
            
            $
            2,113
            
            $
            135




These
      assets are included in Other Assets in the consolidated financial statements.
      During the first quarter of 2006, $0.1 million of deferred financing charges
      was
      expensed (resulting from a debt refinancing in February 2006, see Note 8) and
      is
      included in Selling, General and Administrative expenses in the accompanying
      Unaudited Consolidated Statements of Operations for the nine months ended
      September 30, 2006.





In
      connection with the acquisition of a Nissan franchise (see Note 8), a formal
      appraisal of the assets acquired was completed. Based on this appraisal,
      Hometown recorded $1.5 million as goodwill and $0.6 million as manufacturer
      franchise rights. Goodwill represents the excess cost of the business acquired
      over the fair market value of the identifiable net assets.





Hometown
      has determined the manufacturer franchise rights have an indefinite life as
      there are no legal, contractual, economic or other factors that limit its useful
      life and it is expected to generate cash flows indefinitely due to the
      historically long lives of manufacturers brand names. In accordance with SFAS
      No. 142, “Goodwill and Other Intangible Assets,” Hometown does not amortize
      intangible assets that are deemed to have indefinite lives.





Intangible
      assets are reviewed for impairment on an annual basis or more often if
      circumstances indicate that impairment may have occurred. According to the
      criteria under SFAS 142, it has been determined that Hometown is a single
      reporting unit. Goodwill impairment is assessed through comparison of an
      estimate of its fair value with its carrying value. Fair value is determined
      by
      using a discounted cash flow approach.





Franchise
      rights impairment is assessed through a comparison of an estimate of its fair
      value with its carrying value. Its fair value is determined by discounting
      the
      projected cash flows attributable to the franchise. An indicator of impairment
      exists if the carrying value of a franchise exceeds its estimated fair value
      and
      an impairment loss is recognized.





**7.**  **FLOOR
      PLAN NOTES PAYABLE**





Hometown
      has a floor plan line of credit at each dealership with Ford Motor Credit
      Corporation (“FMCC”). The FMCC floor plan agreement provides financing for
      vehicle purchases and is secured by and dependent upon new and used vehicle
      inventory levels. Maximum availability under the FMCC agreement is a function
      of
      new and used car sales and is not a pre-determined amount.





Hometown
      is subject to the FMCC standard financing agreement which provides for floor
      plan loans for new and used vehicles that have variable interest rates that
      increase or decrease based on movements in the prime or LIBOR borrowing rates.
      The FMCC agreement has no set maturity date and it is the intention of Hometown
      to continue with this financing on an ongoing basis.




13





FMCC
      directly pays the manufacturers from which Hometown purchases new vehicle
      inventory. The process is done electronically where an Electronic Funds Transfer
      (EFT) is made whereby the vehicle is purchased with funds from the floor plan
      line. Hometown does not have the discretion to receive these funds prior to
      disbursement to the manufacturers. Hometown
      finances used vehicles acquired by trade-in at the time a customer is purchasing
      a new vehicle shortly after receipt of the used vehicle from the customer.
      Hometown will also acquire used vehicles at auction, where more likely than
      not,
      arrangements have been made with FMCC for payment to be made by FMCC on our
      behalf using funds available from the floor plan notes payable line of credit.





Hometown
      typically makes monthly interest payments on the amount financed, but is not
      generally required to repay the principal prior to sale of the
      vehicle.





Outstanding
      floor plan borrowings financing new vehicles of manufacturers that are
      affiliates of FMCC (Ford, Lincoln and Mercury) are classified as “floor plan
      notes payable - trade”. All other floor plan borrowings are classified as “floor
      plan notes payable - non-trade”.





The
      Statement of Cash Flows reflects changes in “floor plan notes payable - trade”
as a cash operating activity and the changes in “floor plan notes payable -non-
      trade” as a cash financing activity.





**8.**  **NISSAN
      FRANCHISE ACQUISITION / LONG-TERM DEBT**





On
      February 9, 2006 Hometown completed the acquisition of a Nissan franchise.
      Pursuant to the terms of the Asset and Franchise Purchase Agreement, Hometown
      purchased a Nissan sales and service franchise and certain assets including
      certain new parts and accessories, special tools and new vehicle inventory.
      Hometown did not assume any liabilities. Hometown has accounted for the
      acquisition using the purchase method. The purchase price including acquisition
      costs was $2.1 million (recorded as goodwill of $1.5 million and franchise
      rights of $0.6 million and is included in Other Assets, Note 6) plus
      approximately $0.1 million for certain special tools and parts and accessories.
      In addition, Hometown received a credit for holdbacks, floor plan assistance
      and
      advertising credits of less than $0.1 million and assumed the new vehicle
      inventory on hand which was financed under Hometown’s existing floor plan
      financing with Ford Motor Credit Corporation. A formal appraisal of the assets
      acquired was completed which determined the allocation of the purchase price
      to
      the assets acquired.





With
      regard to the pending Exchange Agreement (see Note 10) with the New England
      Subsidiaries of Hometown and the stockholders of Hometown in the Shaker Group,
      the assets acquired under the Asset and Franchise Purchase Agreement were
      acquired by Hometown Auto Framingham, Inc., one of the New England Subsidiaries
      and all of the indebtedness relating to the acquisition is in favor of and
      secured only by the assets of the New England Subsidiaries. Accordingly, in
      the
      event that the exchanges are ultimately consummated, it is anticipated that
      the
      assets and the indebtedness related thereto will become the sole obligation
      of
      the New England Subsidiaries and Hometown will have no interest in the assets
      and no obligation with respect to the indebtedness incurred in connection with
      the acquisition of such assets.





The
      acquisition described above was funded through the completion of several
      simultaneous financing transactions on February 9, 2006 including: (i) the
      pay-off (prepayment) of a real estate mortgage note payable of $4.3 million
      (plus a $1.0 million prepayment yield maintenance fee described below); (ii)
      a
      $6.0 million real estate mortgage note payable from Ford Motor Credit Company
      (the “Mortgage Loan”); and (iii) a $1.5 million capital loan from Ford Motor
      Credit Company (the “Capital Loan”).





The
      prepayment of the real estate mortgage note payable required payment of a “yield
      maintenance” fee defined generally as the “excess, if any, of the value of all
      remaining payments, discounted to the prepayment date, over the outstanding
      loan
      amount.” The yield maintenance fee was calculated to equal $1.0 million and was
      expensed in the first quarter of 2006 to Interest Expense in Hometown’s
      Consolidated Statement of Operations.




14





The
      Mortgage Loan bears interest at a rate, variable monthly, equal to 2.75% per
      annum above the LIBOR Rate (effective rate of 8.09% at September 30, 2006),
      and
      is payable in 59 unequal, consecutive monthly installments of principal
      commencing on the first day of the second month following the closing, together
      with accrued interest, based upon a 240 month amortization, with a final balloon
      payment due upon maturity five (5) years from the first payment date.





The
      Mortgage Loan is unconditionally guaranteed by the following corporate
      subsidiaries of Hometown (collectively, the “Corporate Guarantors”): Hometown
      Auto Framingham, Inc., Family Ford, Inc., Shakers, Inc., Hometown Brattleboro,
      Inc., Shaker Auto Group, Inc., and by certain shareholders (the “Individual
      Guarantors”). Hometown has agreed to indemnify the Individual Guarantors in the
      event that the Exchange Agreement is not consummated. The Mortgage Loan is
      secured by a first mortgage on real estate and improvements owned by the
      Borrower at 571 Worcester Road, Framingham, Massachusetts (the “Property”), a
      first security interest in the Borrower’s and each Corporate Guarantor’s
      personal property, a collateral assignment of a lease by and between the
      Borrower and Hometown Auto Framingham, Inc., and a collateral assignment of
      all
      leases of real or personal property used in connection with the Property.
      Furthermore, the Mortgage Loan is “cross-defaulted” and “cross-collateralized”
with: (i) the Capital Loan from Lender to Hometown Auto Framingham, Inc. recited
      below; (ii) a Wholesale Line of Credit made by Lender to Hometown Auto
      Framingham, Inc. dated March 2, 2001; (iii) a Wholesale Line of Credit made
      by
      Lender to Family Ford, Inc. dated February 28, 2001; (iv) a Wholesale Line
      of
      Credit made by Lender to Shakers Inc. dated February 28, 2001; (v) a Wholesale
      Line of Credit made by Lender to Hometown Brattleboro, Inc. dated March 2,
      2001;
      (vi) any and all other loans now or hereafter outstanding made by Lender to
      Borrower and/or the Guarantors; and (vii) any and all extensions, increases,
      amendments, renewals and modifications of the foregoing
      obligations.





The
      Capital Loan bears interest at a variable rate, equal to 2.50% per annum above
      the Prime Rate (effective rate of 10.75% at September 30, 2006), and is payable
      in 59 consecutive monthly installments of principal in the amount of $12,500
      each commencing on the fifteenth day of the first month following the closing,
      together with accrued interest, with a final balloon payment due upon maturity
      five (5) years from the closing date. The Capital Loan was made to Hometown
      Auto
      Framingham, Inc. (the “Borrower”) by the Lender and is unconditionally
      guaranteed by the following corporate subsidiaries of Hometown (collectively,
      the “Corporate Guarantors”): Bay State Realty Holdings, Inc., Family Ford, Inc.,
      Shakers, Inc., Hometown Brattleboro, Inc., Shaker Auto Group, Inc., and by
      certain shareholders. The Capital Loan is secured by a first security interest
      in the Borrower’s and each Corporate Guarantor’s personal property, and is also
“cross-defaulted” and “cross-collateralized” with: (i) the Mortgage Loan from
      Lender to Bay State Realty Holdings, Inc. recited above; (ii) a Wholesale Line
      of Credit made by Lender to Hometown Auto Framingham, Inc. dated March 2, 2001;
      (iii) a Wholesale Line of Credit made by Lender to Family Ford, Inc. dated
      February 28, 2001; (iv) a Wholesale Line of Credit made by Lender to Shakers
      Inc. dated February 28, 2001; (v) a Wholesale Line of Credit made by Lender
      to
      Hometown Brattleboro, Inc. dated March 2, 2001; (vi) any and all other loans
      now
      or hereafter outstanding made by Lender to Borrower and/or the Guarantors;
      and
      (vii) any and all extensions, increases, amendments, renewals and modifications
      of the foregoing obligations.




Both
      the
      Mortgage Loan and the Capital Loan were made with Lender’s understanding that
      the Borrowers and the Guarantors would not be prohibited from completing the
      pending Exchange Agreement. The Borrowers and Corporate Guarantors under the
      Mortgage Loan and the Capital Loan comprise the New England Subsidiaries (as
      described in the Exchange Agreement), and Hometown is neither a Borrower nor
      a
      Guarantor under either Loan. Accordingly, in the event that the exchanges under
      the Exchange Agreement are ultimately consummated, it is anticipated that the
      indebtedness under the Mortgage Loan and the Capital Loan will remain the sole
      obligation of the New England Subsidiaries and Hometown will have no obligation
      with respect to the indebtedness under the Mortgage Loan and the Capital
      Loan.




15




**9.**  **COMMITMENTS
      AND CONTINGENCIES**




*Litigation*





Hometown
      Auto Retailers, Inc. d/b/a Muller Toyota, Inc. was named as one of about 1,667
      defendants in a complaint filed by Maryann Cerbo, et. al. in the Superior Court
      of New Jersey in Bergen County and allegedly served upon Hometown on December
      30, 2004.  The action was brought on behalf of about 111 named plaintiffs
      and purportedly on behalf of a class of individuals and companies who purchased
      or leased a motor vehicle from the defendants. Plaintiffs contended that the
      defendants (a) "overcharged" for registration and/or title fees; (b) failed
      to
      properly itemize documentary costs and governmental costs; (c) charged grossly
      excessive documentary fees not reasonably related to costs; and (d) failed
      to
      disclose that the defendants are not required to perform certain documentary
      services.  Plaintiffs attempted to name as defendants all franchised
      automobile dealers in the State of New Jersey, as well as a large assortment
      of
      other persons and entities.  There were no allegations that Hometown ever
      performed any services for any of the named plaintiffs.  Hometown accepted
      a settlement offer by the class which provided for a payment of legal fees
      to
      plaintiffs' counsel, administrative fees of the Settlement Administrator and
      the
      refunding to any consumers that file a valid claim with the Settlement
      Administrator that they were "overcharged."  The settlement was
      approved at a "fairness hearing" by the Court on November 2, 2006. Hometown
      presently anticipates that the additional net expense after applicable insurance
      will be approximately $40,000. Hometown does not believe that the payments
      made
      or to be made as part of the settlement of this case will have a material
      adverse effect upon Hometown’s consolidated financial position or results of
      operations.





On
      July
      8, 2005 Hometown issued a press release in which it announced its receipt of
      notice of the commencement of a lawsuit against Hometown and an indefinite
      delay
      in the mailing to Hometown’s stockholders of the Information Statement prepared
      in connection with the Exchange Agreement announced by Hometown on June 2,
      2005.
      The press release was filed with the Securities and Exchange Commission as
      part
      of Hometown’s Form 8-K filed on July 8, 2005. See Note 10 to the unaudited
      consolidated financial statements.





The
      complaint was filed on June 30, 2005 in the Court of Chancery of the State
      of
      Delaware by Steven N. Bronson, Louis J. Meade and Leonard Hagan against Hometown
      Auto Retailers, Inc. and its directors, Corey E. Shaker, William C. Muller,
      Jr.,
      Joseph Shaker, Bernard J. Dzinski, Jr., Steven A. Fournier, H. Dennis Lauzon
      and
      Timothy C. Moynihan. Plaintiffs purport to bring the action individually,
      derivatively and as a class action on behalf of the public stockholders of
      Hometown’s Class A shares. The plaintiffs allege in their complaint that the
      directors and controlling stockholders have breached their fiduciary duties
      to
      Hometown and the Class A stockholders, have failed to seek a transaction that
      would maximize value for Hometown and all its stockholders, and have initiated
      a
      transaction that is not fair to Hometown and its public stockholders. The
      plaintiffs seek equitable and monetary relief, including, rescission of the
      Exchange Agreement, a preliminary and permanent injunction against the Exchange
      Agreement transactions, a declaration that the defendants have breached their
      fiduciary duties, a constructive trust on any assets transferred pursuant to
      the
      Exchange Agreement transactions, damages for the injury suffered by plaintiffs
      and the Class as a result of defendants’ breach of fiduciary duties,
      certification of the action as a class action, and an order requiring defendants
      to pay attorneys’ fees and expenses to plaintiffs.





On
      July
      19, 2005, a copy of the complaint as filed in the Court of Chancery of the
      State
      of Delaware was filed with the Securities and Exchange Commission by Steven
      N.
      Bronson as an Exhibit to Amendment No. 4 to Mr. Bronson’s Schedule 13D
      filing.





Following
      the filing of the lawsuit, the parties engaged in negotiations to resolve the
      matter. In order to avoid the expense and uncertainty of litigation, the parties
      negotiated a settlement. Under the terms of a Stipulation and Agreement of
      Compromise, Settlement and Release dated June 7, 2006 (the “Settlement
      Agreement”), Hometown agreed, among other things, to enter into a merger (the
“Merger”) pursuant to which: (a) a newly-formed corporation called Hometown
      Acquisition Corporation (“Newco”) will be merged with and into Hometown; (b) the
      stockholders of Hometown other than the members of the Shaker Group and the
      Muller Group (as defined in Note 10 below) (the “Public Stockholders”) will
      receive $2.40 in cash (reduced by certain legal fees) for each share of
      Hometown’s Class A Common Stock which they own; and (c) the Public Stockholders
      will receive a per share cash payment equal to the excess, if any, of $2.40
      (reduced by certain legal fees) over the exercise price per share of any options
      to acquire shares of Class A Common Stock which they own. The Settlement
      Agreement is subject to certain conditions as described in the Form 8-K filed
      with the Securities and Exchange Commission on June 7, 2006, and in the press
      release attached to the Form 8-K filed with the Securities and Exchange
      Commission on June 8, 2006.




16





The
      Court
      of Chancery approved the Settlement Agreement on July 27, 2006. The Court also
      awarded plaintiffs’ counsel attorneys’ fees and expenses in the amount of
      $300,000. Accordingly, if the Merger is consummated, the Public Stockholders
      will receive approximately $2.30 per share.




Hometown
      from time to time may be a defendant in lawsuits arising from normal business
      activities. Management reviews pending litigation with legal counsel and
      believes that the ultimate liability, if any, resulting from such actions will
      not have a material adverse effect on Hometown's consolidated financial position
      or results of operations.





*Guarantees*





Hometown
      may guaranty or partially guaranty loans advanced by financial institutions
      to
      certain customers. It is Hometown’s policy to provide reserves for potential
      future default losses based on available historical information.





In
      connection with the acquisition in 1999 of real estate used by Baystate Lincoln
      Mercury, Hometown guaranteed the mortgage debt of Rellum Realty Company. On
      February 28, 2006, Rellum Realty Company refinanced their mortgage. As part
      of
      that refinancing, Hometown was released from its guaranty of the mortgage debt.





*Warranties*





Hometown’s
      new vehicle sales and certain used vehicle sales have manufacturer warranties
      that specify coverage and period. In these instances, Hometown is reimbursed
      by
      the manufacturer for the cost of parts and service on the vehicle covered by
      these warranties, as specified by the manufacturer. Hometown also provides
      a
      limited warranty on used vehicles sold at retail. The warranty period is as
      agreed upon by the customer and may be subject to a minimum period as mandated
      by the state. The typical warranty period ranges up to three months. Hometown
      also sells parts and service. Manufacturer parts are covered by limited
      warranties, as specified by the manufacturer. Service also has a limited
      warranty; whereby the part and certain labor costs are covered under the limited
      manufacturer warranty. Also, certain Hometown dealerships provide a ten-year
      250,000-mile limited engine warranty on new vehicles. The cost of this warranty
      is charged to the cost of sale of the vehicle. The warranty covers certain
      parts
      and labor for ten-years or until the vehicle reaches an odometer reading of
      250,000 miles, whichever comes sooner. The warranty is insured, making the
      cost
      of the warranty fixed for Hometown. The insurance company pays costs associated
      with the warranty work to Hometown.





Hometown
      records a reserve referred to as “policy” for used vehicle warranties and the
      labor portion of service warranties based on available historical information.
      Also included in this reserve are (i) the costs associated with free products
      or
      services that may be offered to a retail customer for purposes of maintaining
      goodwill with that particular service customer or new or used vehicle customer,
      or (ii) the free products or service may be part of a service maintenance
      program whereby customers may receive certain services for free if they maintain
      a certain level of service at the dealership. At September 30, 2006 and December
      31, 2005, Hometown has a reserve of $238,000 and $202,000, respectively. The
      reserve is based on the last three months of used vehicle units sold and the
      average cost of repairs, including free parts and service, over the last twelve
      months. While Hometown believes its estimated liability for product warranties
      and free parts and service is adequate and that the judgment applied is
      appropriate, the estimated liability for product warranties and free parts
      and
      service could differ materially from future actual costs.




17











Reserve
                for Policy Work
            Balance
                At Beginning of Year
            Additions
                To Costs and Expenses
            Deductions
            Balance
                At End of QuarterNine
                Months Ended September 30, 2006
            $202,000
            $672,000
            $(636,000)
            $238,000





Other
      revenues generated by sales of extended service plans, finance, insurance and
      other do not have any Hometown warranties attached to the sale, except for
      certain sales prior to July 1, 2003 in Connecticut dealerships discussed in
      Note
      2.





*Franchise
      Agreements*





Toyota
      Motor Sales, U.S.A., Inc. has extended Hometown’s current Toyota Dealer
      Agreement on a periodic basis since March of 2003. The most recent extension
      was
      for a period of three months through January 10, 2007. Previously on March
      13,
      2003, Hometown was notified by Toyota Motor Sales, U.S.A., that Hometown must
      correct certain operational deficiencies or make substantial progress toward
      rectifying such deficiencies. Toyota had previously expressed concerns that
      the
      financial resources of the Toyota dealerships were being used to finance the
      cash flow deficits of other Hometown dealerships and that because of this the
      financial health of the Toyota dealerships were detrimentally affected by a
      net
      working capital deficiency. Toyota requested and Hometown provided a written
      action plan and consolidated financial forecast. Toyota also expressed concerns
      about the impact of Ford Motor Credit’s financing terms upon the Toyota
      dealerships and the existing litigation, which has now been settled. Hometown
      developed and implemented plans to correct the operational deficiencies that
      would bring Hometown into compliance. Hometown has obtained written
      confirmations from Ford Motor Credit in response to Toyota’s requests for
      information relating to financing arrangements. In addition, Hometown has
      improved net working capital through the sale of a Chrysler/Jeep sales and
      service franchise in the second quarter of 2003 and advances on warranty income
      from Hometown’s Extended Service Plan vendor. Hometown has been in regular
      contact with Toyota to review the efforts of Hometown to resolve the
      deficiencies alleged by Toyota. The two Toyota dealerships for the fiscal year
      ended December 31, 2005 had combined revenues of $104.0 million and pre-tax
      income before allocation of corporate costs of $2.4 million. Hometown believes
      that it has corrected the alleged net working capital deficiency for the Toyota
      dealerships and that it has undertaken reasonable steps to alleviate the
      concerns expressed by Toyota. However, there can be no assurance that Toyota
      will enter into a new dealer agreement with Hometown and Toyota has reserved
      the
      right to terminate the Toyota Dealership Agreements if sufficient progress
      is
      not made to correct the alleged deficiencies. Should Hometown be notified by
      Toyota that they intend to terminate the Toyota Dealership Agreements, Hometown
      believes it would have a reasonable amount of time to cure the defaults.





**10.**
            **MERGER
                AND****EXCHANGE**





On
      June
      2, 2005 Hometown entered
      into an Exchange Agreement with the New England Subsidiaries of Hometown (as
      described below) and the stockholders of Hometown in the Shaker Group (as
      described below). The Exchange Agreement was also approved by the written
      consent of stockholders owning a majority of the voting power of the shares
      of
      stock of Hometown.





Pursuant
      to the Exchange Agreement, Hometown will organize a new corporation to be called
      Shaker Auto Group, Inc. (“Shaker
      Auto Group”). Hometown
      will then transfer to Shaker Auto Group all of the shares of stock of the New
      England Subsidiaries, plus $5 million in cash (subject to adjustment for
      fluctuations in the value of certain assets and liabilities of the New England
      Subsidiaries) in exchange for all of the outstanding shares of stock of Shaker
      Auto Group .
      Immediately following this transfer, Hometown will transfer all of the
      outstanding shares of stock of Shaker Auto Group to the
      Shaker Group in exchange for all of their shares of stock of
      Hometown. These
      transactions are referred to as the “Exchanges”.





The
      New
      England Subsidiaries consist of the business operations and real estate holdings
      of Hometown located in the States of Connecticut, Massachusetts and Vermont.
      They include ERR Enterprises, Inc., Family Ford, Inc., Shaker’s, Inc., Shaker’s
      Lincoln/Mercury Auto Care, Inc., Hometown Brattleboro, Inc., Hometown Auto
      Framingham, Inc., Bay State Realty Holdings, Inc. and Brattleboro Realty
      Holdings, Inc.




18





The automobile
      franchises operated by the New England subsidiaries include:


·
            Bay
                State Lincoln Mercury (Framingham, Mass.),


·
            Hometown
                Nissan (Framingham, Mass.),


·
            Brattleboro
                Chrysler Jeep Dodge(Brattleboro, Vt.),


·
            Family
                Ford (Waterbury, Conn.),


·
            Shaker’s
                Lincoln Mercury (Watertown, Conn.),


·
            Wellesley
                Mazda (Wellesley, Mass.),


·
            Shaker’s
                Auto Care (Naugatuck**,**Conn.).





The
      New
      England subsidiaries also include the following real estate holding
      companies:


·
            Baystate
                Realty (Framingham, Mass.), and


·
            Brattleboro
                Realty (Brattleboro, Vt.).





Following
      the split-off of the above-described assets and liabilities to Shaker Auto
      Group, Hometown Auto will operate the following automobile
      franchises:


·
            Muller
                Chevrolet (Stewartsville, N.J.);


·
            Muller
                Toyota (Clinton, N.J.), and


·
            Toyota
                of Newburgh, (New Windsor, N.Y.).





The
      Shaker Group consists of the following individuals and trusts: Corey Shaker
      (individually and as custodian for Lindsay Shaker, Kristen Shaker and Edward
      Shaker), Edward Shaker Family Trust, Joseph Shaker, Shaker Irrevocable Trust,
      Richard Shaker Family Trust, Steven Shaker, Janet Shaker, Paul Shaker, Edward
      D.
      Shaker, Edward Shaker, Lillian Shaker, Richard Shaker and Rose Shaker.





The
      Muller Group consists of the following individuals and trust: William C. Muller,
      Jr., Douglas D. Muller, Angela P. Muller, Rose Muller Trust, Robert Scott Doyle,
      Andrea L. Pantuso and Michelle Muller.





On
      June
      2 ,
      2005,
      Hometown issued a press release describing the general terms of the proposed Exchanges and
      disclosing the approval of the Exchanges by the
      Board of Directors and by a majority of the voting power to the Company’s Common
      Stock. The press release and the Exchange Agreement were filed with the
      Securities and Exchange Commission, as part of the Company’s Form 8-K filed on
      June 2, 2005.





On
      June
      17, 2005, Hometown filed a Preliminary Schedule 14C Information Statement
      (“Information Statement”) with the Securities and Exchange Commission which
      describes the proposed Exchanges .
      The
      Preliminary Schedule 14C Information Statement included the disclosure that
      the
      members of the Board of Directors of the Company were sent a letter dated June
      14, 2005 signed by Steven Bronson, Louis J. Meade and Leonard Hagan, which
      letter was included in an amendment to a Schedule 13D filed by Steven Bronson
      with the Securities and Exchange Commission on June 15, 2005. In the letter,
      Messrs. Bronson, Meade and Hagan (the “Holders”) stated that they own an
      aggregate of 16.31% of Hometown ’s
      Class
      A Common Stock. In the letter, the Holders also stated their belief that the
      Exchanges will have a material adverse effect on Hometown and the
      shareholders who are not parties to the Exchanges, and are not in the best
      interests of Hometown and its
      shareholders. They further stated their belief that the Exchanges violate the
      Board’s statutory and common law fiduciary duties and demand that Hometown abandon
      the Exchanges, that the Board appoint a new Compensation Committee, that the
      President of Hometown resign,
      that the Board appoint a Special Committee to explore all options for maximizing
      shareholder value, including conversion of Hometown ’s
      Class
      B Common Stock into Class A Common Stock, that provision be made for minority
      shareholder representation on the Board, and that the Shaker Group reimburse Hometown for its
      costs in pursuing the Exchanges.





On
      July
      8, 2005 Hometown issued a press release in which it announced ( a )
      its
      receipt of notice of the lawsuit which is described above, see Note 9 -
“Litigation”, in which the plaintiffs seek equitable and monetary relief,
      including rescission of the Exchange Agreement, and ( b )
      an
      indefinite delay in the mailing of the Information Statement to Hometown’s
      stockholders. The press release was also filed with the Securities and Exchange
      Commission, as part of Hometown’s Form 8-K filed on July 8, 2005.




19





Following
      the filing of the lawsuit, the parties engaged in negotiations to resolve the
      lawsuit and entered into the Settlement Agreement on June 7, 2006. Under the
      terms of the Settlement Agreement, Hometown agreed, among other things, to
      enter
      into a merger between Hometown and Newco, a newly organized corporation, (the
      “Merger”) pursuant to which the Public Stockholders will receive $2.40 in cash
      (reduced by certain legal fees) for each share of Hometown’s Class A Common
      Stock, which they own. The Court of Chancery approved the Settlement Agreement
      on July 27, 2006. The Court also awarded plaintiffs’ counsel attorneys’ fees and
      expenses in the amount of $300,000. Accordingly, if the Merger is consummated,
      the Public Stockholders will receive approximately $2.30 per share. See Note
      9 -
“Litigation”.





The
      consummation of the Merger and the Exchanges is subject to various conditions
      and contingencies, including that holders of not more than seven percent (7%)
      of
      Hometown’s Class A Common Stock exercise their dissenters’ rights in connection
      with the Merger, that Hometown’s manufacturers approve the transfer of the
      automobile franchises to Shaker Auto Group, and that Hometown’s various lenders
      approve the release of Hometown from certain liabilities and approve the
      assumption of certain liabilities by Shaker Auto Group.





Immediately
      following the consummation of the Merger and the Exchanges, the Shaker Group
      will be the owners of Shaker Auto Group and the New England Subsidiaries and
      will no longer have any interest in Hometown, and Hometown will no longer have
      any interest in Shaker Auto Group or any of the New England Subsidiaries. In
      addition, the Muller Group will hold 367,500 shares of Class A Common Stock
      and
      776,752 shares of Class B Common Stock, representing 100% of the issued and
      outstanding shares of common stock of Hometown. [Note: Hometown Class B Common
      Stock has 10 for 1 voting rights versus Class A Common Stock, which are voted
      on
      a 1 to 1 basis.]





In
      order
      to consummate the Merger and the Exchanges, the Company anticipates that it
      will
      raise approximately $9.5 million by borrowing or by other capital raising events
      such as a sale of assets or by a combination thereof. The capital raised will
      be
      applied to (a) the $7.0 million cost to purchase the outstanding shares of
      Class
      A Common Stock and the options to acquire shares of Class A Common Stock from
      the Public Stockholders in connection with the Merger; and (b) the $5.0 million
      cash contribution to Shaker Auto Group in connection with the Exchanges. The
      additional $2.5 million required to complete the foregoing transactions and
      expected additional split-off costs and associated severance costs of $0.5
      million will be paid out of existing Hometown cash on hand.





As
      of
      September 30, 2006, Hometown has incurred approximately $0.8 million in costs
      related to the Exchanges and related lawsuit (see Note 9 - Litigation), which
      amount has been expensed and is included in Selling General and Administrative
      Expenses on Hometown’s Consolidated Statements of Operations. Approximately $0.1
      million of these costs were incurred and expensed in the nine months ended
      September 30, 2006, with the remainder in the year ended December 31,
      2005.


20


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





Management's
      discussion and analysis of financial condition and results of operations is
      based on the historical financial statements of Hometown Auto Retailers, Inc.
      and contains forward-looking statements that involve risks and uncertainties.
      Hometown's actual results may differ materially from those discussed in the
      forward-looking statements as a result of various factors, as described under
      "Risk Factors" as detailed on Hometown’s annual report on Form 10-K for the year
      ended December 31, 2005.





***Restatement***




Subsequent
      to fiscal year end December 31, 2005, Hometown concluded that the income from
      certain extended warranty and extended warranty reimbursement insurance policies
      generated in Connecticut was no longer required to be recognized over the period
      of the contract. Prior to July 1, 2003, Connecticut dealerships were considered
      to be “extended warranty providers” because they did not qualify for any of the
      exclusions applicable to the retail seller of the extended warranty. Effective
      on July 1, 2003, the Connecticut law applicable to extended warranties was
      amended to provide that an “extended warranty provider” means a person who
      issues, makes, provides or offers to provide an extended warranty but that
      person must also be “contractually obligated to provide service under such
      extended warranty”. The administrator of the extended warranties sold by
      Hometown has confirmed that Hometown is not contractually obligated to provide
      service under the extended warranties that they sell. Therefore Hometown is
      no
      longer liable as the “extended warranty provider” under the extended warranties
      that they sell. Hometown has determined that it is no longer necessary to
      recognize the commissions that it receives from the sale of such extended
      warranties over the period of the warranty contract. Accordingly, financial
      statements for periods prior to December 31, 2005 were restated and are
      reflected as such within this Form 10Q.





The
      effect of this restatement was to increase pre-tax income $60,000 and $173,000
      for the three and nine months ended September 30, 2005, respectively. The after
      tax effects was to increase net income by $36,000 and $104,000 for the three
      and
      nine months ended September 30, 2005, respectively. The effect of these
      adjustments for the three months ended September 30, 2005 was to increase basic
      and diluted earnings per share by $0.01. The effect of these adjustments was
      to
      increase basic and diluted earnings per share by $0.01 and $0.02, respectively
      for the nine months ended September 30, 2005.





Deferred
      revenue recorded as of June 30, 2003, will continue to be taken into income
      over
      the remaining life of the contract. At September 30, 2006, Hometown had $173,000
      of related deferred revenue remaining. This deferred revenue will be recognized
      over the next three years as follows: 2006 (remaining period) - $47,000, 2007
      -
      $100,000 and 2008 - $26,000. These revenues are recorded in Revenues, Other
      in
      the Statement of Operations. The recognition of deferred revenues does not
      generate a cash tax effect as the recording of deferred revenues generates
      a
      deferred tax asset; therefore the recognition of this income causes a reduction
      of deferred tax assets. As of September 30, 2006 Hometown has other deferred
      revenues of $25,000.




21




The
      effect of the restatement on the financial statement items affected
      follows:





Three
                months ended September
                30, 2005
            
            
            Nine
                months ended
              September
                30, 2005Previously
            
            
            Restated
            
            
            Previously
            
            
            RestatedReported
            
            
            
            
            
            Reported**Statements
                of Operations:**Other
                revenues, net
            
            $
            1,821
            
            $
            1,881
            
            $
            5,661
            
            $
            5,834Total
                revenues
            
            $
            61,333
            
            $
            61,393
            
            $
            188,389
            
            $
            188,562Gross
                profit
            
            $
            8,725
            
            $
            8,785
            
            $
            27,394
            
            $
            27,567Income
                from operations
            
            $
            976
            
            $
            1,036
            
            $
            3,937
            
            $
            4,110Pre-tax
                income
            
            $
            238
            
            $
            298
            
            $
            2,075
            
            $
            2,248Provision
                for income taxes
            
            $
            95
            
            $
            119
            
            $
            830
            
            $
            899Net
                income
            
            $
            143
            
            $
            179
            
            $
            1,245
            
            $
            1,349Earnings
                per share, basic
            
            $
            0.02
            
            $
            0.03
            
            $
            0.19
            
            $
            0.20Earnings
                per share, diluted
            
            $
            0.02
            
            $
            0.03
            
            $
            0.18
            
            $
            0.20**Statements
                of Cash Flows:**Net
                income
            
            
            
            
            
            
            
            $
            1,245
            
            $
            1,349Deferred
                income taxes
            
            
            
            
            
            
            
            $
            830
            
            $
            899Deferred
                revenue - current
            
            
            
            
            
            
            
            $
            (235
            )
            $
            (287
            )Other
                long-term liabilities and deferred revenue
            
            
            
            
            
            
            
            $
            (23
            )
            $
            (144
            )Net
                cash provided by operating activities
            
            
            
            
            
            
            
            $
            5,310
            
            $
            5,310





In
      addition, Hometown has previously restated its Balance Sheets and Statements
      of
      Cash Flows to comply with guidance under SFAS 95, “Statement of Cash Flows”,
      which states that payments to suppliers should be classified as an operating
      activity. The balance sheets restatement is to breakdown the floor plan notes
      payable into trade and non-trade components, where it had previously been shown
      as a single line item, which has been consistent with industry practice. The
      Statements of Cash Flows reclassification was to show the non-trade component
      of
      floor plan notes payable as a financing activity, where it had been shown as
      an
      operating activity. The floor plan lender is FMCC, an affiliate of Ford, Lincoln
      and Mercury; therefore; floor plan notes payable amounts due from purchases
      of
      inventory from Ford, Lincoln and Mercury are classified as floor plan - trade
      and the related borrowings and payments are to be classified as operating
      activities in the Statements of Cash Flows. Amounts due for inventory purchases
      from all other manufacturers are classified as floor plan notes payable -
      non-trade and the related borrowings and payments are to be classified as
      financing activities in the Statements of Cash Flows. The
      changes do not affect working capital or total cash flows. See
      Note
      7 to the unaudited consolidated financial statements.





***Overview***





Hometown
      sells new and used cars and light trucks, provides maintenance and repair
      services, sells replacement parts and provides related financing, insurance
      and
      service contracts through 8 franchised dealerships and 1 stand-alone service
      facility located in New Jersey, New York, Connecticut, Massachusetts and
      Vermont. Hometown’s dealerships offer 10 American and Asian automotive brands
      including Chevrolet, Chrysler, Dodge, Ford, Jeep, Lincoln, Mazda, Mercury,
      Nissan and Toyota.




22





Hometown's
      operations are subject to seasonal variations, with the second and third
      quarters generally contributing more revenues and operating profit than the
      first and fourth quarters. This seasonality is driven primarily by: (i)
      manufacturer related factors, primarily the historical timing of major
      manufacturer incentive programs and model changeovers, (ii) weather-related
      factors, which primarily affect parts and service and (iii) consumer buying
      patterns. Sales also fluctuate due to other items such as availability of
      credit, consumer confidence in the economy, industry competition, international
      conflicts and fuel prices among others.





We
      assess
      the growth of our revenues and gross profit by comparing the year-to-year
      results of our dealerships that have operated continuously during the periods
      being compared. During the fourth quarter of 2004, Hometown announced that
      it
      had resolved in principal to resolve certain litigation matters, which resulted
      in the transfer of the Westwood Lincoln Mercury dealership during the second
      quarter of 2005. This contributes to decreases in sales and gross profit from
      2005 to 2006, as well as a decrease in selling, general and administrative
      expenses. We have segregated this operation in the analysis that follows to
      allow for a better comparison of the results. Also, during the first quarter
      of
      2006, Hometown replaced a Lincoln Mercury franchise at its Baystate, MA
      dealership with a Nissan franchise that was acquired in February
      2006. **** New
      and
      used vehicle retail sales at this dealership were hampered due to the change
      over from being a Lincoln Mercury dealership to a Nissan dealership in February
      2006. Sales were negatively affected for approximately a two-month period;
      however, it is expected that this change will be beneficial to this dealership
      due to the strength of the Nissan brand versus the Lincoln Mercury brand. Nissan
      ranks much higher nationally than Lincoln Mercury with respect to vehicle sales
      per dealership. Also demographic information indicates the area where the
      dealership is located is considered more of an import market than a domestic
      market. Hometown believes this change will translate into increases in all
      revenues at this dealership along with increased profits. The results for this
      dealership are included in same store results for both periods that are
      compared. Nissan results for the store will be compared to the Lincoln Mercury
      results for the period being discussed.





Revenues
      are generated from: (i) the sale of new vehicles to (a) retail customers and
      (b)
      commercial customers, referred to as fleet; (ii) the sale of used vehicles
      to
      (a) retail customers and (b) other dealers at auctions, referred to as
      wholesale; (iii) parts and service sales; and (iv) other revenues, including
      the
      sale of third-party extended warranty products and the arrangement of
      third-party financing and insurance for which the company receives a fee among
      other items. We assess revenue results by a year-to-year comparison as follows:
      new and used vehicle revenues on unit volumes, parts and service revenues on
      aggregate revenues and other on per retail vehicle.





New
      vehicle cost of sales primarily includes the cost of the vehicle, net of any
      manufacturer incentives including floor plan assistance. Used vehicle cost
      of
      sales primarily includes the cost of the vehicle, including the labor and parts
      associated with preparing a used vehicle for sale. Parts and service cost of
      sales primarily includes the cost of the part and cost of labor incurred on
      the
      service.





Our
      gross
      profit percentage varies with product mix and varies across product lines.
      Parts
      and service revenues generate the highest gross profit percentages, followed
      generally by used vehicle sales and new vehicle sales. Other revenues are
      recorded net. We assess gross profit results by a year-to-year comparison as
      follows: new and used vehicle gross profit per retail vehicle, parts and service
      on aggregate gross profit and other on gross profit per retail
      vehicle.





Selling,
      general and administrative expenses (“SG&A”) consist of: compensation and
      related taxes and benefits, advertising, building costs (rent, utilities, real
      estate taxes, depreciation), data processing and other operating expenses.
      A
      large amount of compensation is variable in that it is commission based and
      certain significant expenses, such as advertising, are controllable. Hometown
      also includes certain distribution costs in SG&A, which other similar
      companies may include in cost of sales. These costs total $0.1 million in the
      three months ended September 30, 2006 and 2005, and $0.3 million and $0.2
      million in the nine months ended September 30, 2006 and 2005,
      respectively.





Interest
      expense primarily relates to indebtedness incurred in connection with new and
      used vehicle inventories. The 2006 period also includes a $1.0 million
      prepayment penalty associated with a refinancing. See Note 8 to the unaudited
      consolidated financial statements. Other interest expense consists of all other
      interest charges on interest bearing debt including mortgage obligations and
      capitalized leases.




23




***Three
      months ended September 30, 2006 compared with three months ended September
      30,
      2005.***




***Revenues***
            
            
            For
                the Three Months Ended September 30,
            
            
            Increase
            
            
            %(in
                thousands, except per vehicle data)
            
            
            2006
            
            
            2005
            
            
            (Decrease)
            
            
            ChangeNew
                vehicle data:Retail
                revenues
            
            $
            34,580
            
            $
            37,922
            
            $
            (3,342
            )
            
            (8.8
            )%Fleet
                revenues
            
            
            542
            
            
            621
            
            
            (79
            )
            
            (12.7
            )%Total
                new vehicles revenues, as reported
            
            $
            35,122
            
            $
            38,543
            
            $
            (3,421
            )
            
            (8.9
            )%New
                retail units
            
            
            1,375
            
            
            1,484
            
            
            (109
            )
            
            (7.3
            )%Fleet
                units
            
            
            33
            
            
            38
            
            
            (5
            )
            
            (13.2
            )%Total
                new vehicle units
            
            
            1,408
            
            
            1,522
            
            
            (114
            )
            
            (7.5
            )%Used
                vehicle data:Retail
                revenues
            
            $
            12,194
            
            $
            12,151
            
            $
            43
            
            
            0.4
            %Wholesale
                revenues
            
            
            3,382
            
            
            3,572
            
            
            (190
            )
            
            (5.3
            )%Total
                used vehicle revenue, as reported
            
            $
            15,576
            
            $
            15,723
            
            $
            (147
            )
            
            (0.9
            )%Used
                retail
            
            
            760
            
            
            745
            
            
            15
            
            
            2.0
            %Used
                wholesale units
            
            
            776
            
            
            844
            
            
            (68
            )
            
            (8.1
            )%Total
                used units
            
            
            1,536
            
            
            1,589
            
            
            (53
            )
            
            (3.3
            )%Total
                parts and service revenue
            
            $
            5,469
            
            $
            5,246
            
            $
            223
            
            
            4.3
            %Total
                other revenues, net
            
            $
            1,960
            
            $
            1,881
            
            $
            79
            
            
            4.2
            %Total
                revenue
            
            $
            58,127
            
            $
            61,393
            
            $
            (3,266
            )
            
            (5.3
            )%





The
      percentages used in the revenues discussion below are from the above
      table.





The
      operations of Westwood Lincoln Mercury ceased during the second quarter of
      2005.
      The dealerships in operation were the same during the three months ended
      September 30, 2006 compared to the three months ended September 30, 2005;
      therefore there is no separate comparison of same store revenues.





Total
      revenue decreased $3.3 million, or 5.3% to $58.1 million for three months ended
      September 30, 2006 from $61.4 million for three months ended September 30,
      2005.





New
      retail revenues decreased $3.3 million, or 8.8% to $34.6 million for the three
      months ended September 30, 2006 from $37.9 million for the three months ended
      September 30, 2005. This decrease was primarily attributable to the 7.3%
      decrease in units ($2.8 million) sold in 2006 compared to 2005. A 1.6% decrease
      in average revenue per unit sold in 2006 compared to 2005 contributed $0.5
      million to the decrease. The unit decrease is due to a drop off in truck sales
      during the 2006 period, which in turn contributed to the decrease in the average
      revenue per unit. This is consistent with national trends. Buyers have been
      opting for higher gas mileage vehicles and have been buying fewer trucks, which
      include more expensive sport utility vehicles. Many of Hometown’s domestic
      dealerships experienced a decrease in unit sales and new retail revenues from
      2005 to 2006. Chrysler, Ford, Lincoln Mercury and Chevrolet unit sales were
      down
      from 12% - 38% from 2005 to 2006. The decreases at the other domestic
      dealerships were in line with decreases at non-Hometown dealerships in
      Hometown’s area, some of which were larger or smaller than Hometown’s declines.
      Ford was benefited in 2005 with the Family Plan, which caused an increase in
      unit sales during the 2005 period. Toyota unit sales were down 3%, which
      compares to an approximate 13% increase for non-Hometown dealerships in
      Hometown’s region. The Hometown dealerships relied heavily on truck and SUV
      sales and were carrying inventory accordingly. Car sales for Toyota began to
      increase but the dealerships were not carrying the appropriate vehicle
      inventory, which caused a reduction in the amount of potential sales. The
      inventory situation was corrected by the end of the third quarter. Also one
      Toyota facility has been adversely affected by not having the Scion vehicle
      available for sale. The Nissan dealership sold 35% more in unit sales compared
      to its predecessor Lincoln Mercury dealership. Also, the Mazda dealership sold
      23% more units in 2006 than 2005 primarily due to a change in management at
      the
      dealership. Fleet revenues decreased from 2005 levels, but does not contribute
      significantly to profits.




24





Used
      vehicle retail revenues increased less than $0.1 million, or 0.4% remaining
      constant at $12.2 million for the three months ended September 30, 2006 and
      2005. A 2.0% increase in units sold ($0.2 million) was substantially offset
      by a
      1.6% decrease in average revenue per unit. Increases at Chevrolet, Chrysler
      and
      Mazda were partially offset by decreases at Hometowns other dealerships. The
      increase at the Chevrolet dealership is due to an increased focus on used
      vehicle sales vs. new vehicle sales that began earlier in the year. Chrysler
      has
      also increased its focus on used vehicles. The increase at Mazda was due the
      same management change referred to in the new vehicle section discussion above.
      Partially offsetting this was a decrease at the remaining Lincoln Mercury
      dealership, which experienced a large drop off in traffic in the store that
      began in the second quarter and continued through the third quarter. Also,
      the
      Nissan dealership has not sold as many used vehicle units as the predecessor
      Lincoln Mercury dealership. Wholesale revenues decreased $0.2 million, or 5.3%
      to $3.4 million for the three months ended September 30, 2006 from $3.6 million
      for the three months ended September 30, 2005. A decrease in units ($0.3
      million) was partially offset by a 3.0% increase in average selling price.
      High
      quality vehicles that were taken as trade-ins at the time of new vehicle
      purchases, were not all sold at retail, necessitating being sold at wholesale,
      generating higher prices.





Parts
      and
      service revenues increased $0.3 million or 4.3% to $5.5 million for the three
      months ended September 30, 2006 from $5.2 million for the three months ended
      September 30, 2005. The increase was primarily due to the new Nissan dealership
      (more than $0.2 million). The Nissan dealership has experienced an increase
      in
      parts and service revenue since changing from a Lincoln Mercury dealership
      due
      to a higher amount of Nissan customers in their area.





Other
      dealership revenues increased $0.1 million, or 4.2% to $2.0 million for the
      three months ended September 30, 2006 from $1.9 million for the three months
      ended September 30, 2005. An increase in extended warranty revenues and
      miscellaneous other revenues were partially offset by a decrease in new vehicle
      finance revenue (due to a decrease in vehicles sold combined with decreased
      revenue earned on each financing transaction).





***Gross
                Profit***
            
            For
                the Three Months Ended September 30,
            
            
            Increase
            
            
            %(in
                thousands, except per vehicle data)
            
            2006
            
            
            2005
            
            
            (Decrease)
            
            
            ChangeNew
                vehicle data:Retail
                gross profit - same store
            $
            2,505
            
            $
            2,568
            
            $
            (63
            )
            
            (2.5
            )%Retail
                gross profit - other stores (1)
            
            -
            
            
            13
            
            
            (13
            )
            
            *Total
                new retail gross profit
            
            2,505
            
            
            2,581
            
            
            (76
            )
            
            (2.9
            )%Fleet
                gross profit
            
            6
            
            
            6
            
            
            -
            
            
            -Total
                new vehicles gross profit, as reported
            $
            2,511
            
            $
            2,587
            
            $
            (76
            )
            
            (2.9
            )%Gross
                profit percentage
            
            7.1
            %
            
            6.7
            %New
                retail units - same store
            
            1,375
            
            
            1,484
            
            
            (109
            )
            
            (7.3
            )%New
                retail units - other stores (1)
            
            -
            
            
            -
            
            
            -
            
            
            -Fleet
                units
            
            33
            
            
            38
            
            
            (5
            )
            
            (13.2
            )%Total
                new vehicle units
            
            1,408
            
            
            1,522
            
            
            (114
            )
            
            (7.5
            )%




25




***Gross
                Profit -(continued)***
            
            For
                the Three Months Ended September 30,
            
            
            Increase
            
            
            %(in
                thousands, except per vehicle data)
            
            2006
            
            
            2005
            
            
            (Decrease)
            
            
            ChangeUsed
                vehicle data:Retail
                gross profit - same store
            $
            1,556
            
            $
            1,452
            
            $
            104
            
            
            7.2
            %Retail
                gross profit - other stores (1)
            
            -
            
            
            19
            
            
            (19
            )
            
            *Total
                used retail gross profit
            
            1,556
            
            
            1,471
            
            
            85
            
            
            5.8
            %Wholesale
                gross profit - same store
            
            (50
            )
            
            (28
            )
            
            (22
            )
            
            (78.6
            )%Wholesale
                gross profit - other stores (1)
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                wholesale gross profit
            
            (50
            )
            
            (28
            )
            
            (22
            )
            
            (78.6
            )%Total
                used vehicle gross profit, as reported
            $
            1,506
            
            $
            1,443
            
            $
            63
            
            
            4.4
            %Gross
                profit percentage
            
            9.7
            %
            
            9.2
            %Used
                retail units - same store
            
            760
            
            
            745
            
            
            15
            
            
            2.0
            %Used
                retail units - other stores (1)
            
            -
            
            
            -
            
            
            -
            
            
            -Used
                wholesale units - same store
            
            776
            
            
            844
            
            
            (68
            )
            
            (8.1
            )%Used
                wholesale units - other stores (1)
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                used units
            
            1,536
            
            
            1,589
            
            
            (53
            )
            
            (3.3
            )%Parts
                and service:Parts
                and service gross profit - same store
            $
            2,928
            
            $
            2,874
            
            $
            54
            
            
            1.9
            %Parts
                and service gross profit - other stores (1)
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                parts and service revenue
            $
            2,928
            
            $
            2,874
            
            $
            54
            
            
            1.9
            %Gross
                profit percentage
            
            53.5
            %
            
            54.8
            %Other
                gross profit:Other
                gross profit - same store
            $
            1,960
            
            $
            1,881
            
            $
            79
            
            
            4.2
            %Other
                gross profit - other stores (1)
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                other gross profit, as reported
            $
            1,960
            
            $
            1,881
            
            $
            79
            
            
            4.2
            %Gross
                profit percentage
            
            100.0
            %
            
            100.0
            %Other
                gross profit PVR - same store
            $
            918
            
            $
            844
            
            $
            74
            
            
            8.8
            %Other
                gross profit PVR - other stores (1)
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                other gross profit PVR, as reported
            $
            918
            
            $
            844
            
            $
            74
            
            
            8.8
            %Total
                gross profit:Same
                store
            $
            8,905
            
            $
            8,753
            
            $
            152
            
            
            1.7
            %Other
                stores (1)
            
            -
            
            
            32
            
            
            (32
            )
            
            *Total
                gross profit, as reported
            $
            8,905
            
            $
            8,785
            
            $
            120
            
            
            1.4
            %Gross
                profit percentage
            
            15.3
            %
            
            14.3
            %





(1)
      Represents the Westwood Lincoln Mercury dealership operations transferred on
      May
      11, 2005.





*
      -
      Percentage is 100% or greater.





The
      percentages used in the gross profit discussion below are from the above
      table.





The
      operations of Westwood Lincoln Mercury ceased during the second quarter of
      2005.
      The dealerships in operation were the same during the three months ended
      September 30, 2006 compared to the three months ended September 30, 2005. Gross
      profit reported for Westwood during the 2005 third quarter was minimal.




26





Total
      gross profit decreased $0.1 million, or 1.4%, to $8.9 million for the three
      months ended September 30, 2006, from $8.8 million for the three months ended
      September 30, 2005. Same store gross profit on new retail vehicle sales
      decreased $0.1 million, or 2.5%, to $2.5 million for the three months ended
      September 30, 2006, from $2.6 million for the three months ended September
      30,
      2005. Similar to revenues, the decrease in gross profit is primarily
      attributable to the 7.3% decrease in unit sales. This was partially offset
      by a
      5.3% increase in average gross profit per unit due to improved vehicle mix.
      Although Nissan revenues were up compared to its predecessor Lincoln Mercury
      dealership, gross profit was down. Nissan vehicles typically generate a lower
      gross profit per vehicle than Lincoln Mercury vehicles.





Same
      store gross profit on used vehicle retail sales increased $0.1 million, or
      7.2%,
      to $1.6 million for the three months ended September 30, 2006, from $1.5 million
      for the three months ended September 30, 2005. The increase is attributable
      to a
      2.0% increase in units sold combined with a 5.1% increase in average gross
      profit per unit. The dealerships have continued to focus on generating a higher
      gross profit per vehicle sold. Gross profit on wholesale sales decreased
      slightly from the prior year period.





Same
      store parts and service gross profit increased less than $0.1 million or 1.9%
      remaining at $2.9 million for the three months ended September 30, 2006 and
      September 30, 2005. The increase is primarily due to the increase in revenues
      discussed above.





***Selling,
      General and Administrative Expenses*** **(“S,G&A”)**





S,G&A
      decreased $0.4 million, or 5.2%, to $7.3 million for the three months ended
      September 30, 2006 from $7.7 million for the three months ended September 30,
      2005. R eported
      S,G&A is the same as same store S,G&A due to the operations of Westwood
      Lincoln Mercury ceasing during the second quarter of 2005. The 2005
      period included $0.5 million in costs associated with the Exchange Agreement
      (see Notes 9 and 10 to the
      unaudited consolidated financial statements) in
      excess of the comparable 2006 period. Partially offsetting this was increased
      advertising costs of $0.1 million in 2006 compared to 2005 (needed to maintain
      sales levels).





***Interest
      Expense***





Interest
      expense increased $0.3 million to $1.1 million for the three months ended
      September 30, 2006 from $0.8 million for the three months ended September 30,
      2005. The increase is primarily due to an increase in floorplan interest expense
      resulting from higher interest rates combined with increased borrowings
      resulting from higher average inventories in 2006 compared to 2005.





***Income
      tax provision***





The
      effective income tax rate was 40.5% in the quarter ended September 30, 2006
      and
      40.0% in the same period of 2005. The rates were based on current forecasts
      of
      income before taxes, and current forecasts of permanent differences between
      tax
      and book income. The rates reflect the expected effective tax rate for the
      year.
      Deferred taxes, including the valuation allowance, will be reviewed throughout
      fiscal 2006.





***Net
      Income***





Net
      income increased $0.2 million to $0.4 million for the three months ended
      September 30, 2006, from $0.2 million for the three months ended September
      30,
      2005 for the various reasons discussed above.





***Earnings
      Per Share, Basic and Diluted and Weighted Average
      Shares***





“Basic
      earnings per share” is computed by dividing net income by the weighted average
      common shares outstanding. “Diluted earnings per share” is computed by dividing
      net income by the weighted average common shares outstanding adjusted for the
      incremental dilution of potentially dilutive securities. See Note 4 to the
      unaudited consolidated financial statements.




27





The
      basic
      and diluted income per share for the three months ended September 30, 2006
      and
      2005 is $0.06 and $0.03, respectively.





***Nine
      months ended September 30, 2006 compared with nine months ended September 30,
      2005.***





***Revenues***
            
            
            For
                the Nine Months
              Ended September 30,
            
            
            Increase
            
            
            
            %(in
                thousands, except per vehicle data)
            
            
            2006
            
            
            2005
            
            
            (Decrease)
            
            
            
            ChangeNew
                vehicle data:Retail
                revenues - same store
            
            $
            93,009
            
            $
            105,877
            
            $
            (12,868
            )
            
            
            (12.2
            )%Retail
                revenues - other stores (1)
            
            
            -
            
            
            9,022
            
            
            (9,022
            )
            
            
            *Total
                new retail revenues
            
            
            93,009
            
            
            114,899
            
            
            (21,890
            )
            
            
            (19.1
            )%Fleet
                revenues - same store
            
            
            2,810
            
            
            2,314
            
            
            496
            
            
            
            21.4
            %Total
                new vehicles revenues, as reported
            
            $
            95,819
            
            $
            117,213
            
            $
            (21,394
            )
            
            
            (18.3
            )%New
                retail units - same store
            
            
            3,705
            
            
            4,122
            
            
            (417
            )
            
            
            (10.1
            )%New
                retail units - other stores (1)
            
            
            -
            
            
            245
            
            
            (245
            )
            
            
            *Fleet
                units
            
            
            139
            
            
            132
            
            
            7
            
            
            
            5.3
            %Total
                new vehicle units
            
            
            3,844
            
            
            4,499
            
            
            (655
            )
            
            
            (14.6
            )%Used
                vehicle data:Retail
                revenues - same store
            
            $
            35,805
            
            $
            36,181
            
            $
            (376
            )
            
            
            (1.0
            )%Retail
                revenues - other stores (1)
            
            
            -
            
            
            789
            
            
            (789
            )
            
            
            *Total
                used retail revenues
            
            
            35,805
            
            
            36,970
            
            $
            (1,165
            )
            
            
            (3.2
            )%Wholesale
                revenues - same store
            
            
            10,630
            
            
            10,815
            
            
            (185
            )
            
            
            (1.7
            )%Wholesale
                revenues - other stores (1)
            
            
            -
            
            
            419
            
            
            (419
            )
            
            
            *Total
                wholesale revenues
            
            
            10,630
            
            
            11,234
            
            
            (604
            )
            
            
            (5.4
            )%Total
                used vehicle revenue, as reported
            
            $
            46,435
            
            $
            48,204
            
            $
            (1,769
            )
            
            
            (3.7
            )%Used
                retail units - same store
            
            
            2,193
            
            
            2,194
            
            
            (1
            )
            
            
            (0.0
            )%Used
                retail units - other stores (1)
            
            
            -
            
            
            45
            
            
            (45
            )
            
            
            *Used
                wholesale units - same store
            
            
            2,135
            
            
            2,424
            
            
            (289
            )
            
            
            (11.9
            )%Used
                wholesale units - other stores (1)
            
            
            -
            
            
            59
            
            
            (59
            )
            
            
            *Total
                used units
            
            
            4,328
            
            
            4,722
            
            
            (394
            )
            
            
            (8.3
            )%Parts
                and service:Parts
                and service revenues - same store
            
            $
            16,017
            
            $
            15,804
            
            $
            213
            
            
            
            1.3
            %Parts
                and service revenues - other stores (1)
            
            
            -
            
            
            1,507
            
            
            (1,507
            )
            
            
            *Total
                parts and service revenue
            
            $
            16,017
            
            $
            17,311
            
            $
            (1,294
            )
            
            
            (7.5
            )%Other
                revenues, net:Other
                revenues, net - same store
            
            $
            5,873
            
            $
            5,715
            
            $
            158
            
            
            
            2.8
            %Other
                revenues, net - other stores (1)
            
            
            -
            
            
            119
            
            
            (119
            )
            
            
            *Total
                other revenues, net, as reported
            
            $
            5,873
            
            $
            5,834
            
            $
            39
            
            
            
            0.7
            %Total
                revenue:Same
                store
            
            $
            164,144
            
            $
            176,706
            
            $
            (12,562
            )
            
            
            (7.1
            )%Other
                stores (1)
            
            
            -
            
            
            11,856
            
            
            (11,856
            )
            
            
            *Total
                revenue, as reported
            
            $
            164,144
            
            $
            188,562
            
            $
            (24,418
            )
            
            
            (12.9
            )%





(1)
      Represents the Westwood Lincoln Mercury dealership operations transferred on
      May
      11, 2005.




28





*
      -
      Percentage is 100% or greater.





The
      percentages used in the revenues discussion below are from the above
      table.





Total
      revenue decreased $24.5 million, or 12.9% to $164.1 million for nine months
      ended September 30, 2006 from $188.6 million for nine months ended September
      30,
      2005. Same store revenues decreased $12.6 million, or 7.1% to $164.1 million
      for
      nine months ended September 30, 2006 from $176.7 million for nine months ended
      September 30, 2005.





Same
      store new retail revenues decreased $12.9 million, or 12.2% to $93.0 million
      for
      the nine months ended September 30, 2006 from $105.9 million for the nine months
      ended September 30, 2005. This decrease was primarily attributable to the 10.1%
      decrease in units ($10.7 million) sold in 2006 compared to 2005 combined with
      a
      2.3% decrease in average revenue per unit sold ($2.2 million) in 2006 compared
      to 2005. The Nissan dealership has sold more units compared to its predecessor
      Lincoln Mercury brand and the Mazda dealership was within three units of the
      2005 level. All other Hometown dealerships experienced a decrease in unit sales
      and new retail revenues from 2005 to 2006, with the domestic brands having
      the
      largest percentage declines over the prior year. The year to date unit decrease
      is from both cars and trucks, but the drop off in truck sales continued during
      the third quarter whereas car sales were consistent with the prior year. The
      decrease in truck sales contributed to the decrease in the average revenue
      per
      unit. This is consistent with national trends. Buyers have been opting for
      higher gas mileage vehicles and have been buying fewer trucks, including more
      expensive sport utility vehicles. Lincoln Mercury, Ford, Chrysler and Chevrolet
      unit sales were down from 16% - 34% from 2005 to 2006. These decreases were
      in
      line with decreases at non-Hometown dealerships in Hometown’s area, some of
      which were larger or smaller than Hometown’s declines. Ford was benefited in
      2005 with the Family Plan, which caused an increase in unit sales during the
      2005 period. Chevrolet was benefited in 2005 with an employee-pricing program,
      which caused an increase in unit sales during the 2005 period. Chevrolet did
      not
      offer this program during the 2006 period. Toyota unit sales were down nearly
      4%, which compares to an approximate 11% increase for non-Hometown dealerships
      in Hometown’s region. The Hometown dealerships relied heavily on truck and SUV
      sales and were carrying inventory accordingly. Car sales for Toyota began to
      increase but the dealerships were not carrying the appropriate vehicle
      inventory, which caused a reduction in the amount of potential sales. The
      inventory situation was corrected by the end of the third quarter. Also one
      Toyota facility has been adversely affected by not having the Scion vehicle
      available for sale. Fleet revenues increased from 2005 levels, but do not
      contribute significantly to profits.





Same
      store used vehicle retail revenues decreased $0.4 million, or 1.0% to $35.8
      million for the nine months ended September 30, 2006 from $36.2 million for
      the
      nine months ended September 30, 2005. This decrease was due to a 1.0% decrease
      in average revenue per unit and was primarily due to a decrease at the remaining
      Lincoln Mercury dealership which experienced a large drop off in traffic in
      the
      store that began in the second quarter and continued through the third quarter.
      Also, the Nissan dealership has not sold as many used vehicle units as the
      predecessor Lincoln Mercury dealership. This was partially offset by an increase
      at the Chevrolet dealership due to an increased focus on used vehicle sales
      vs.
      new vehicle sales. Also, the Mazda dealership had increased vehicle sales
      primarily due to a change in management at the dealership that occurred during
      the third quarter. Same store wholesale revenues decreased $0.2 million, or
      1.7%
      to $10.6 million for the nine months ended September 30, 2006 from $10.8 million
      for the nine months ended September 30, 2005. A decrease in units was partially
      offset by an increase in average selling price. High quality vehicles that
      were
      taken as trade-ins at the time of new vehicle purchases, were not all sold
      at
      retail, necessitating being sold at wholesale, generating higher
      prices. ****




29





Same
      store parts and service revenues increased $0.2 million or 1.3% to $16.0 million
      for the nine months ended September 30, 2006 from $15.8 million for the nine
      months ended September 30, 2005. Increases at the Nissan ($0.5 million) and
      Mazda ($0.1 million) dealerships were partially offset by decreases at the
      Chevrolet ($0.1 million) and the remaining Lincoln Mercury ($0.2 million)
      dealerships. The Nissan dealership has experienced an increase in parts and
      service revenue since changing from a Lincoln Mercury dealership due to a higher
      amount of Nissan customers in their area. Mazda also experienced an increase
      primarily due to continuing to build on its service customer base, as the brand
      has only been sold by Hometown since 1999. The domestic brands have had
      decreasing new car sales, which has been causing a decrease in their service
      customer base making it difficult to increase parts and service revenues.





Same
      store other dealership revenues increased $0.2 million or 2.8% to $5.9 million
      for the nine months ended September 30, 2006 from $5.7 million for the nine
      months ended September 30, 2005. An increase in extended warranty revenues
      and
      miscellaneous other revenues were partially offset by a decrease in new vehicle
      finance revenue (due to a decrease in vehicles sold combined with decreased
      revenue earned on each financing transaction).





***Gross
                Profit***
            
            For
                the Nine Months
              Ended September 30,
            
            
            Increase
            
            
            
            %(in
                thousands, except per vehicle data)
            
            2006
            
            
            2005
            
            
            (Decrease)
            
            
            
            ChangeNew
                vehicle data:Retail
                gross profit - same store
            $
            6,658
            
            $
            7,256
            
            $
            (598
            )
            
            
            (8.2
            )%Retail
                gross profit - other stores (1)
            
            -
            
            
            477
            
            
            (477
            )
            
            
            *Total
                new retail gross profit
            
            6,658
            
            
            7,733
            
            
            (1,075
            )
            
            
            (13.9
            )%Fleet
                gross profit
            
            23
            
            
            21
            
            
            2
            
            
            
            9.5
            %Total
                new vehicles gross profit, as reported
            $
            6,681
            
            $
            7,754
            
            $
            (1,073
            )
            
            
            (13.8
            )%Gross
                profit percentage
            
            7.0
            %
            
            6.6
            %New
                retail units - same store
            
            3,705
            
            
            4,122
            
            
            (417
            )
            
            
            (10.1
            )%New
                retail units - other stores (1)
            
            -
            
            
            245
            
            
            (245
            )
            
            
            *Fleet
                units
            
            139
            
            
            132
            
            
            7
            
            
            
            5.3
            %Total
                new vehicle units
            
            3,844
            
            
            4,499
            
            
            (655
            )
            
            
            (14.6
            )%Used
                vehicle data:Retail
                gross profit - same store
            $
            4,518
            
            $
            4,170
            
            $
            348
            
            
            
            8.3
            %Retail
                gross profit - other stores (1)
            
            -
            
            
            125
            
            
            (125
            )
            
            
            *Total
                used retail gross profit
            
            4,518
            
            
            4,295
            
            
            223
            
            
            
            5.2
            %Wholesale
                gross profit - same store
            
            83
            
            
            264
            
            
            (181
            )
            
            
            (68.6
            )%Wholesale
                gross profit - other stores (1)
            
            -
            
            
            (6
            )
            
            6
            
            
            
            *Total
                wholesale gross profit
            
            83
            
            
            258
            
            
            (175
            )
            
            
            (67.8
            )%Total
                used vehicle gross profit, as reported
            $
            4,601
            
            $
            4,553
            
            $
            48
            
            
            
            1.1
            %Gross
                profit percentage
            
            9.9
            %
            
            9.4
            %Used
                retail units - same store
            
            2,193
            
            
            2,194
            
            
            (1
            )
            
            
            0.0
            %Used
                retail units - other stores (1)
            
            -
            
            
            45
            
            
            (45
            )
            
            
            *Used
                wholesale units - same store
            
            2,135
            
            
            2,424
            
            
            (289
            )
            
            
            (11.9
            )%Used
                wholesale units - other stores (1)
            
            -
            
            
            59
            
            
            (59
            )
            
            
            *Total
                used units
            
            4,328
            
            
            4,722
            
            
            (394
            )
            
            
            (8.3
            )%Parts
                and service:Parts
                and service gross profit - same store
            $
            8,550
            
            $
            8,563
            
            $
            (13
            )
            
            
            (0.2
            )%Parts
                and service gross profit - other stores (1)
            
            -
            
            
            863
            
            
            (863
            )
            
            
            *Total
                parts and service revenue
            $
            8,550
            
            $
            9,426
            
            $
            (876
            )
            
            
            (9.3
            )%Gross
                profit percentage
            
            53.4
            %
            
            54.5
            %




30









***Gross
                Profit -(continued)***
            
            For
                the Nine Months
              Ended September 30,
            
            
            Increase(in
                thousands, except per vehicle data)
            
            2006
            
            
            2005
            
            
            (Decrease)
            
            
            
            ChangeOther
                gross profit:Other
                gross profit - same store
            $
            5,873
            
            $
            5,715
            
            $
            158
            
            
            
            2.8
            %Other
                gross profit - other stores (1)
            
            -
            
            
            119
            
            
            (119
            )
            
            
            *Total
                other gross profit, as reported
            $
            5,873
            
            $
            5,834
            
            $
            39
            
            
            
            0.7
            %Gross
                profit percentage
            
            100.0
            %
            
            100.0
            %Other
                gross profit PVR - same store
            $
            996
            
            $
            905
            
            $
            91
            
            
            
            10.0
            %Other
                gross profit PVR - other stores (1)
            
            -
            
            
            410
            
            
            (410
            )
            
            
            *Total
                other gross profit PVR, as reported
            $
            996
            
            $
            883
            
            $
            113
            
            
            
            12.8
            %Total
                gross profit:Same
                store
            $
            25,705
            
            $
            25,989
            
            $
            (284
            )
            
            
            (1.1
            )%Other
                stores (1)
            
            -
            
            
            1,578
            
            
            (1,578
            )
            
            
            *Total
                gross profit, as reported
            $
            25,705
            
            $
            27,567
            
            $
            (1,862
            )
            
            
            (6.8
            )%Gross
                profit percentage
            
            15.7
            %
            
            14.6
            %





(1)
      Represents the Westwood Lincoln Mercury dealership operations transferred on
      May
      11, 2005.





*
      -
      Percentage is 100% or greater.





The
      percentages used in the gross profit discussion below are from the above
      table.





Total
      gross profit decreased $1.9 million, or 6.8%, to $25.7 million for the nine
      months ended September 30, 2006, from $27.6 million for the nine months ended
      September 30, 2005. Same store total gross profit decreased $0.3 million, or
      1.1% to $25.7 million for the nine months ended September 30, 2006, from $26.0
      million for the nine months ended September 30, 2005. Same store gross profit
      on
      new retail vehicle sales decreased $0.6 million, or 8.2%, to $6.7 million for
      the nine months ended September 30, 2006, from $7.3 million for the nine months
      ended September 30, 2005. Similar to the decrease in revenues, the decrease
      in
      gross profit is primarily attributable to the 10.1% decrease in unit sales
      discussed in revenues. All dealerships, except Mazda and Toyota, experienced
      a
      decrease in new vehicle gross profit in 2006 compared to 2005. Both Mazda and
      Toyota were able to generate an increase in average gross profit per unit
      causing the favorable comparison to 2005. Although Nissan revenues were up
      compared to its predecessor Lincoln Mercury dealership, gross profit was down.
      Nissan vehicles typically generate a lower gross profit per vehicle than Lincoln
      Mercury vehicles.





Same
      store gross profit on used vehicle retail sales increased $0.3 million, or
      8.3%,
      to $4.5 million for the nine months ended September 30, 2006, from $4.2 million
      for the nine months ended September 30, 2005. The overall increase is
      attributable to an 8.4% increase in average gross profit per unit. The
      improvement is similar to the change in revenues discussed above. The majority
      of the increase was due to the Chevrolet dealership and is primarily due to
      a
      change in the incentive pay plan of the used vehicle sales manager whereby
      his
      focus is more on used vehicle gross profit. Gross profit on wholesale sales
      decreased $0.2 million from the prior year period primarily due to a decrease
      in
      the wholesale price of trucks and sport utility vehicles.





Same
      store parts and service gross profit decreased less than $0.1 million or 0.2%
      remaining at $8.6 million for the nine months ended September 30, 2006 and
      September 30, 2005. An increase in gross profit due to increases in revenues
      (discussed above) was offset by a decrease in the gross profit percentage.




31




***Selling,
      General and Administrative Expenses*** **(“S,G&A”)**





S,G&A
      decreased $1.7 million, or 7.2%, to $21.8 million for the nine months ended
      September 30, 2006 from $23.5 million for the nine months ended September 30,
      2005. This decrease was primarily attributable to the transfer of the Westwood
      dealership ($1.3 million) in May 2005. On a same store basis, S,G&A
      decreased $0.4 million, or 1.8%, to $21.8 million for the nine months ended
      September 30, 2006 from $22.2 million for the nine months ended September 30,
      2005. The 2005 period included $0.4 million in costs associated with the
      Exchange Agreement (see Notes 9 and 10 to the
      unaudited consolidated financial statements) in
      excess of the comparable 2006 period. ** Reductions
      in payroll and related costs of $0.1 million (due to decreased gross profit
      on a
      same store basis) and reductions in policy costs of $0.1 million due to a
      decrease in vehicles sold and cost per vehicle (see Note 9 -
      warranties to the
      unaudited consolidated financial statements) was
      partially offset by (i) increased advertising costs of $0.2 million (needed
      to
      maintain sales levels).





***Interest
      Expense***





Interest
      expense increased $1.5 million to $4.1 million for the nine months ended
      September 30, 2006 from $2.6 million for the nine months ended September 30,
      2005. The increase is primarily due to a $1.0 million prepayment penalty
      associated with a debt refinancing as part of the Nissan acquisition (see Note
      8 to the
      unaudited consolidated financial statements ),
      and an
      increase in floorplan interest expense ($0.4 million) resulting from higher
      interest rates partially offset by decreased borrowings primarily resulting
      from
      one less dealership in 2006 compared to 2005.





***Other
      Income***





In
      May
      2005, Hometown completed the transfer of certain assets in relation to the
      settlement of litigation matters resulting in a gain of approximately $587,000
      recorded in Other Income. See Note 15 - Commitments and Contingencies -
      Litigation to December 31, 2005 Form 10-K.





***Income
      tax provision***





The
      effective income tax rate was 41.3% in the nine months ended September 30,
      2006
      and 40.0% in the same period of 2005. The rates were based on current forecasts
      of income before taxes, and current forecasts of permanent differences between
      tax and book income. The rates reflect the expected effective tax rate for
      the
      year. Deferred taxes, including the valuation allowance, will be reviewed
      throughout fiscal 2006.





***Net
      Income***





Net
      income decreased $1.3 million to less than $0.1 million for the nine months
      ended September 30, 2006, from income of $1.3 million for the nine months ended
      September 30, 2005 primarily due to the $1.0 million prepayment penalty in
      2006
      discussed above in Interest Expense above combined with the $0.6 million gain
      in
      2005 discussed above in Other Income. See above for explanation of other
      changes.





***Earnings
      Per Share, Basic and Diluted and Weighted Average
      Shares***





“Basic
      earnings per share” is computed by dividing net income by the weighted average
      common shares outstanding. “Diluted earnings per share” is computed by dividing
      net income by the weighted average common shares outstanding adjusted for the
      incremental dilution of potentially dilutive securities. See Note 4 to the
      unaudited consolidated financial statements.





The
      basic
      and diluted income per share for the nine months ended September 30, 2006 and
      2005 is $0.01 and $0.20, respectively.




32




***Cyclicality***





Hometown’s
      operations, like the automotive retailing industry in general, are affected
      by a
      number of factors relating to general economic conditions, including consumer
      business cycles, consumer confidence, economic conditions, availability of
      consumer credit and interest rates. Although the above factors, among others,
      may affect Hometown’s business, Hometown believes that the impact on Hometown’s
      operations of future negative trends in such factors will be somewhat mitigated
      by its (i) strong parts, service and collision repair services, (ii) variable
      cost salary structure, (iii) geographic regional focus, and (iv) product
      diversity.





***Seasonality***





Hometown’s
      operations are subject to seasonal variations, with the second and third
      quarters generally contributing more revenues and operating profit than the
      first and fourth quarters. This seasonality is driven primarily by: (i)
      Manufacturer related factors, primarily the historical timing of major
      Manufacturer incentive programs and model changeovers, (ii) weather-related
      factors and (iii) consumer buying patterns.





***Effects
      of Inflation***





Due
      to
      the relatively low levels of inflation experienced in the 2006 and 2005 periods,
      inflation did not have a significant effect on the results of Hometown during
      those periods.





***Liquidity
      and Capital Resources***





The
      principal sources of liquidity are cash on hand, cash from operations and floor
      plan financing.





*Cash
      and Cash Equivalents*





Total
      cash and cash equivalents was $6.4 million and $6.5 million at September 30,
      2006 and December 31, 2005, respectively.





*Cash
      Flow from Operations*





The
      following table sets forth the consolidated selected information from the
      unaudited statements of cash flows:







Nine
                months ended September
                30,(in
                thousands)
            
            
            2006
            
            
            
            2005Net
                cash provided by operating activities
            
            $
            2,471
            
            
            $
            5,310Net
                cash (used in) investing activities
            
            
            (2,403
            )
            
            
            (132
            )Net
                cash (used in) financing activities
            
            
            (169
            )
            
            
            (5,473
            )Net
                (decrease) in cash and cash equivalents
            
            $
            (101
            )
            
            $
            (295
            )





For
      the
      nine months ended September 30, 2006, net cash provided by operating activities
      of $2.5 million primarily consists of: (i) net income of less than $0.1 million
      plus non-cash items of $1.0 million (totaling $1.1 million), (ii) a decrease
      in
      inventory of $3.9 million less the decrease in floor plan liability - trade
      of
      $1.7 million, and (iii) an increase in accounts payable and accrued expenses
      of
      $0.2 million primarily caused by an increase in sales and use tax payments
      due
      to an increase in revenues in September 2006 compared to December 2005;
      partially offset by (i) an increase in accounts receivable of $0.5 million,
      primarily due to an increase in revenues in September 2006 compared to December
      2005 and (ii) an increase in prepaid taxes, expenses and other current assets
      of
      $0.5 million, primarily due to prepayments of income taxes, insurance and
      advertising. Inventory and related floor plan liability (trade and non-trade)
      decreased $3.9 million and $3.0 million, respectively, due to increased sales
      that take place in the summer months compared to the winter months. The
      difference between the two decreases is due to the timing of floorplan payoffs.
      Net cash used in investing activities of $2.4 million is primarily due to the
      acquisition of the Nissan franchise ($2.1 million, see Note 8 to the unaudited
      consolidated financial statements) and $0.3 million of miscellaneous capital
      expenditures, primarily dealership equipment, signage and leasehold
      improvements. Net cash used in financing activities of $0.2 million is due
      to
      proceeds from long-term borrowings of $7.7 million (primarily used as follows:
      $2.1 million was used to purchase the Nissan Franchise discussed above, $4.3
      million to refinance the Baystate mortgage loan and $1.0 million to pay the
      prepayment penalty. See Note 8 to the unaudited consolidated financial
      statements), offset by (i) the net change (decrease) in non-trade floorplan
      notes payable of $1.4 million (see operating activities discussion above) and
      (ii) principal payments of long-term debt and capital lease obligations of
      $6.5
      million ($4.3 million of which was to pay off the Baystate loan discussed above
      which was refinanced with a different bank).




33





For
      the
      nine months ended September 30, 2005, net cash provided from operations of
      $5.3
      million primarily consists of: (i) net income of $1.3 million plus non-cash
      items of $1.3 million (totaling $2.6 million), (ii) a decrease in inventory
      of
      $9.3 million less the decrease in floor plan liability - trade of $5.3 million,
      (iii) a decrease in accounts receivable of $0.3 million, primarily due to owning
      one less dealership; partially offset by (iv) a decrease in accounts payable
      and
      accrued expenses of $0.9 million, primarily due to payment of litigation
      settlements and owning one less dealership, (v) an increase in prepaid expenses
      and other current assets of $0.1 million, (vi) prepaid income taxes of $0.2
      million, and (vii) amortization of deferred revenue of $0.5 million. (See Note
      2
      to the unaudited consolidated financial statements.) Inventory and related
      floor
      plan liability (trade and non-trade) decreased due to improved new vehicle
      inventory management. Net cash used in investing activities of $0.1 million
      is
      due to miscellaneous capital expenditures. Net
      cash
      used in financing activities of $5.5 million is due to: (i) the net change
      in
      non-trade floorplan notes payable of $4.1 million (which decreased due to a
      similar change in related inventory, see operating activities) and (ii)
      principal payments of long-term debt and capital lease obligations of $1.6
      million; partially offset by proceeds from long-term borrowings of $0.2 million
      (used to fund the build-out of the corporate office which was built in December
      2004) and exercise of stock options (less than $0.1 million).





*Capital
      Expenditures*





Capital
      expenditures for fiscal 2006 are expected to be $0.4 million, consisting
      primarily of equipment purchases, signage and building and leasehold
      improvements.





*Receivables*





Hometown
      had $4.9 million in accounts receivable, net at September 30, 2006 compared
      to
      $4.3 million at December 31, 2005. A substantial portion of those receivables,
      $2.3 million and $1.8 million as of September 30, 2006 and December 31, 2005,
      respectively, are due from finance companies that provide or secure financing
      for customer purchases, and primarily represent contracts-in-transit. These
      amounts are typically received within seven days of the transaction. Of the
      remaining amount, $1.5 million and $0.9 million as of September 30, 2006 and
      December 31, 2005, respectively, represents amounts due from manufactures for
      such items as warranty claims and incentive reimbursements. These categories
      increased from December 31, 2005 primarily due to a 31% increase in dealerships
      revenue in the third quarter of 2006 compared to the fourth quarter of 2005.
      Also, certain receivables due from manufacturers are due on a quarterly basis.
      Other receivables, net of the allowance for doubtful accounts, decreased to
      $0.7
      million at September 30, 2006 from $1.2 million at December 31, 2005, primarily
      due to a decrease of fleet sales receivables at September 30, 2006. Parts and
      service receivables were $0.4 million as of September 30, 2006 and December
      31,
      2005.





In
      assessing our allowance for doubtful accounts, we consider historical losses
      as
      well as current performance with respect to past due accounts. The allowance
      for
      doubtful accounts is $0.2 million at both September 30, 2006 and December 31,
      2005.




34




*Inventories*





Hometown
      had $31.1 million in inventories, net at September 30, 2006 compared to $33.5
      million at December 31, 2005. The majority of inventory, $21.6 million and
      $24.5
      million as of September 30, 2006 and December 31, 2005, respectively, is new
      vehicle inventory. New, used and demonstrator vehicle values are stated at
      the
      lower of cost or market, determined on a specific unit basis. Parts and
      accessories are stated at the lower of cost (determined on a first-in, first-out
      basis) or market. Hometown assesses the lower of cost or market reserve
      requirement for vehicles, on an individual unit basis, taking into consideration
      historical loss rates, the age and composition of the inventory and current
      market conditions. The lower of cost or market adjustment was $0.4 million
      at
      both September 30, 2006 and December 31, 2005.





*Floor
      Plan Financing*




See
      Note
      7 to the unaudited consolidated financial statements.





*Long-Term
      Debt and Capital Lease Obligations*





See
      Note
      8 to the unaudited consolidated financial statements.





*Commitments
      and Contingencies*





See
      Note
      9 to the unaudited consolidated financial statements.








***Forward
      Looking Statement***





When
      used
      in the amended Quarterly Report on Form 10Q, the words “may”, “will”, “should”,
“expect”, “believe”, “anticipate”, “continue”, “estimate”, “project”, “intend”
and similar expressions are intended to identify forward-looking statements
      within the meaning of Section 27A of the Securities Act and Section 21E of
      the
      Exchange Act regarding events, conditions and financial trends that may affect
      Hometown’s future plans of operations, business strategy, results of operations
      and financial condition. Hometown wishes to ensure that such statements are
      accompanied by meaningful cautionary statements pursuant to the safe harbor
      established in the Private Securities Litigation Reform Act of 1995. Prospective
      investors are cautioned that any forward-looking statements are not guarantees
      of future performance and are subject to risks and uncertainties and that actual
      results may differ materially from those included within the forward-looking
      statements as a result of various factors including the ability of Hometown
      to
      consummate, and the terms of, acquisitions. Such forward-looking statements
      should, therefore, be considered in light of various important factors,
      including those set forth herein and others set forth from time to time in
      Hometown’s reports and registration statements filed with the Securities and
      Exchange Commission (the “Commission”). Hometown disclaims any intent or
      obligation to update such forward-looking statements.




35




**ITEM
      3.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





We
      are
      exposed to market risk from changes in interest rates on our amounts outstanding
      under our floor plan financing arrangement, which bears interest at variable
      rates based on the prime or LIBOR borrowing rates. Based on floor plan amounts
      (trade and non-trade) outstanding at September 30, 2006 of $30.0 million, a
      1%
      change in the prime rate would result in a $0.3 million change to annual floor
      plan interest expense.





At
      September 30, 2006, Hometown invested $4.5 million of excess cash, of which
      $0.8
      million was invested in money market accounts paying a weighted average interest
      rate of 4.87% at September 30, 2006, and $3.7 million was invested in a Ford
      Motor Credit Company cash management account paying interest of 9.25% at
      September 30, 2006. The cash management account interest rate is tied to the
      rate charged on Hometown’s floor plan financing arrangement.





**ITEM
      4.**  **CONTROLS
      AND PROCEDURES**





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports under the Securities
      Exchange Act of 1934, as amended, are recorded, processed, summarized and
      reported within the time periods specified in the SEC's rules and forms, and
      that such information is accumulated and communicated to our management,
      including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
      as appropriate, to allow timely decisions regarding required disclosure. In
      designing and evaluating the disclosure controls and procedures, management
      recognizes that any disclosure controls and procedures, no matter how well
      designed and operated, can provide only reasonable assurance of achieving the
      desired control objectives, and management necessarily is required to use its
      judgment in evaluating the cost to benefit relationship of possible controls
      and
      procedures.





At
      September 30, 2006, management, with the participation of the CEO and CFO,
      evaluated the effectiveness of the design and operation of our disclosure
      controls and procedures. Based upon that evaluation and subject to the
      foregoing, our management, including the CEO and CFO, concluded that our
      disclosure controls and procedures were effective to accomplish their
      objectives.





There
      have been no significant changes in our internal controls over financial
      reporting during the most recently completed fiscal quarter that materially
      affected, or are reasonably likely to materially affect, our internal controls
      over financial reporting.




36




**PART
      II. OTHER INFORMATION**





**ITEM
      1.**  **LEGAL
      PROCEEDINGS**





See
      Note
      9 - Commitments and Contingencies - Litigation, to the notes to the unaudited
      consolidated financial statements.





**ITEM
      1A.**  **RISK
      FACTORS**





See
      Hometown’s annual report on Form 10-K for the year ended December 31, 2005 for a
      description of Risk Factors. There has been no material change in risk factors
      since that filing.





**ITEM
      2.**  **UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**





NONE





**ITEM
      3.**  **DEFAULTS
      UPON SENIOR SECURITIES**





NONE





**ITEM
      4.**  **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**





NONE





**ITEM
      5.**  **OTHER
      INFORMATION**





NONE





**ITEM
      6.**  **EXHIBITS**





31.1  Chief
      Executive Officer Certification





31.2
            Chief
                Financial Officer Certification





32.1
            Chief
                Executive Officer Certification pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002





32.2
            Chief
                Financial Officer Certification pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002




37


**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.










Hometown Auto Retailers,
              Inc.November 10, 2006
            
            By: /s/ Corey E.
              ShakerDate
            
            Corey E. ShakerPresident and Chief Executive
              OfficerNovember 10,
              2006
            
            By: /s/ Charles F.
              SchwartzDate
            
            Charles F. SchwartzChief Financial Officer








38