SECURITIES
        AND EXCHANGE COMMISSION
 
 WASHINGTON,
        D.C. 20549
 
 FORM
        10-Q/A
 AMENDMENT
        NO.1
  QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE
        ACT OF 1934
 
 For
        the
        quarterly period ended September 30, 2005
  Commission
        file number: 000-24669
 
 HOMETOWN
        AUTO RETAILERS, INC.
 (Exact
        name of Registrant as specified in its charter)
 
 DelawareDelaware
              06-1501703(State
                  or other jurisdictionofof
              (IRS
                  Employerincorporation
                  or organization))
              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 an accelerated filer (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
              
              OutstandingCommon
                  Stock, Class A, par value $.001 per share
              
              3,910,137Common
                  Stock, Class B, par value $.001 per share
              
              2,579,252
  1
  **EXPLANATORY
        NOTE**
 
 Hometown
        Auto Retailers, Inc. (the “Company” or “Hometown”) is filing this Amendment No.
        1 on Form 10-Q/A to amend our previously filed Quarterly Report on Form 10-Q
        for
        the quarterly period ended September 30, 2005 as filed with the Securities
        and
        Exchange Commission (the “SEC”) on November 15, 2005 (the “Original Filing”).
 
 A
        discussion of the restatement is set forth in Note 2 to the Unaudited
        Consolidated Financial Statements and in Item 2. Managements Discussion and
        Analysis of Financial Condition and Results of Operations included in this
        Amendment No. 1 on Form 10-Q/A. Changes have also been made to the following
        items in this Amendment No. 1 on Form 10-Q/A as a result of the
        restatement.
 
 ·
              Item
                  1. Financial Statements and Supplementary Data, including the Notes
                  to the
                  Consolidated Financial Statements.
 ·
              Item
                  2. Managements Discussion and Analysis of Financial Condition and
                  Results
                  of Operations.
 
 The
        changes do not affect total cash flows. The other portions of the Original
        Filing are unaffected by the restatement and have not been amended. All
        information in this amendment is as of the date of the Original Filing and
        does
        not reflect any subsequent information or events occurring after the date
        of the
        Original Filing, except to reflect the changes discussed in the restatement
        note. Accordingly, this amendment should be read in conjunction with the
        Original Filing.
  2
  INDEX
  PART
                  I.
              FINANCIAL
                INFORMATION
              PageITEM
                  1.
              Consolidated
                  Balance Sheets at September 30, 2005 (Unaudited - Restated) and
                  December
                  31, 2004 (Audited - Restated)
              4Unaudited
                  Consolidated Statements of Operations for the three and nine months
                  ended
                  September 30, 2005 (Restated) and 2004 (Restated)
              5Unaudited
                  Consolidated Statements of Stockholders’ Equity for the nine months ended
                  September 30, 2005 (Restated) and 2004 (Restated)
              6Unaudited
                  Consolidated Statements of Cash Flows for the nine months ended
                  September
                  30, 2005 (Restated) and 2004 (Restated)
              7Notes
                  to Unaudited Consolidated Financial Statements
              8ITEM
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              21ITEM
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              37ITEM
                  4.
              Controls
                  and Procedures
              37PART
                  II.
              OTHER
                  INFORMATIONITEM
                  1.
              Legal
                  Proceedings
              38ITEM
                  2.
              Unregistered
                  Sales Of Equity Securities and Use of Proceeds
              38ITEM
                  3.
              Defaults
                  Upon Senior SecuritiesITEM
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              38ITEM
                  5.
              Other
                  Information
              38ITEM
                  6.
              Exhibits
              38SIGNATURES
              
              39CERTIFICATIONS
              
              40
  **FORWARD
        LOOKING STATEMENTS**
 
 *Certain
        statements made in this Quarterly Report on Form 10-Q/A 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.”*
  3
 
 **HOMETOWN
                  AUTO RETAILERS, INC.****CONSOLIDATED
                  BALANCE SHEETS (RESTATED)****(in
                  thousands, except share and per share data)**September
                  30,
              
              December
                  31,ASSETS
              
              2005
              
              2004(Unaudited)Current
                  Assets:Cash
                  and cash equivalents
              
              $
              5,806
              
              $
              6,101Accounts
                  receivable, net
              
              
              4,652
              
              
              5,081Inventories,
                  net
              
              
              27,925
              
              
              43,440Prepaid
                  expenses and other current assets
              
              
              788
              
              
              634Deferred
                  and prepaid income taxes
              
              
              1,412
              
              
              1,412----------Total
                  current assets
              
              
              40,583
              
              
              56,668Property
                  and equipment, net
              
              
              13,074
              
              
              13,854Other
                  assets
              
              
              2,625
              
              
              3,486Total
                  assets
              
              $
              56,282
              
              $
              74,008LIABILITIES
                  AND STOCKHOLDERS’ EQUITYCurrent
                  Liabilities:Floor
                  plan notes payable - trade
              
              $
              5,382
              
              $
              17,382Floor
                  plan notes payable - non-trade
              
              
              20,961
              
              
              25,092Accounts
                  payable and accrued expenses
              
              
              4,366
              
              
              5,106Current
                  maturities of long-term debt and capital lease obligations
              
              
              5,293
              
              
              5,505Deferred
                  revenue
              
              
              318
              
              
              605Total
                  current liabilities
              
              
              36,320
              
              
              53,690Long-term
                  debt and capital lease obligations
              
              
              8,056
              
              
              8,621Long-term
                  deferred income taxes
              
              
              123
              
              
              123Other
                  long-term liabilities and deferred revenue
              
              
              175
              
              
              319Total
                  liabilities
              
              
              44,674
              
              
              62,753Commitments
                  and ContingenciesStockholders'
                  EquityPreferred
                    stock, $.001 par value, 2,000,000 sharesauthorized, no shares
                    issued and outstanding
              
              
              -
              
              
              -Common
                    stock, Class A, $.001 par value, 12,000,000 sharesauthorized,
                    3,910,137 and 3,870,137 shares issued and outstanding,
                    respectively
              
              
              4
              
              
              4Common
                    stock, Class B, $.001 par value, 3,760,000 sharesauthorized,
                    2,579,252 and 3,519,252 shares issued and outstanding,
                    respectively
              
              
              2
              
              
              3Additional
                  paid-in capital
              
              
              29,022
              
              
              30,017Accumulated
                  deficit
              
              
              (17,420
              )
              
              (18,769
              )Total
                  stockholders' equity
              
              
              11,608
              
              
              11,255Total
                  liabilities and stockholders' equity
              
              $
              56,282
              
              $
              74,008The
                  accompanying notes are an integral part of these unaudited consolidated
                  financial statements.
  4
  **HOMETOWN
                  AUTO RETAILERS, INC.****UNAUDITED
                  CONSOLIDATED STATEMENTS OF OPERATIONS (RESTATED)****(in
                  thousands, except share and per share data)**For
                  the Three Months
              
              For
                  the Nine MonthsEnded
                  September 30,
              
              Ended
                  September 30,2005
              
              2004
              
              2005
              
              2004RevenuesNew
                  vehicle sales
              
              $
              38,543
              
              $
              44,291
              
              $
              117,213
              
              $
              130,182Used
                  vehicle sales
              
              
              15,723
              
              
              16,943
              
              
              48,204
              
              
              49,633Parts
                  and service sales
              
              
              5,246
              
              
              5,984
              
              
              17,311
              
              
              18,098Other,
                  net
              
              
              1,881
              
              
              2,116
              
              
              5,834
              
              
              6,223Total
                  revenues
              
              
              61,393
              
              
              69,334
              
              
              188,562
              
              
              204,136Cost
                  of salesNew
                  vehicle
              
              
              35,956
              
              
              41,474
              
              
              109,459
              
              
              121,789Used
                  vehicle
              
              
              14,280
              
              
              15,359
              
              
              43,651
              
              
              44,921Parts
                  and service
              
              
              2,372
              
              
              2,697
              
              
              7,885
              
              
              8,269Total
                  cost of sales
              
              
              52,608
              
              
              59,530
              
              
              160,995
              
              
              174,979Gross
                  profit
              
              
              8,785
              
              
              9,804
              
              
              27,567
              
              
              29,157Selling,
                  general and administrative expenses
              
              
              7,749
              
              
              8,307
              
              
              23,457
              
              
              25,448Income
                  from operations
              
              
              1,036
              
              
              1,497
              
              
              4,110
              
              
              3,709Interest
                  income
              
              
              64
              
              
              53
              
              
              193
              
              
              134Interest
                  (expense)
              
              
              (802
              )
              
              (775
              )
              
              (2,646
              )
              
              (2,406
              )Other
                  income
              
              
              -
              
              
              63
              
              
              591
              
              
              66Other
                  (expense)
              
              
              -
              
              
              (5
              )
              
              -
              
              
              (9
              )Pre-tax
                  income
              
              
              298
              
              
              833
              
              
              2,248
              
              
              1,494Provision
                  for income taxes
              
              
              119
              
              
              225
              
              
              899
              
              
              404Net
                  income
              
              $
              179
              
              $
              608
              
              $
              1,349
              
              $
              1,090Earnings
                  per share, basic
              
              $
              0.03
              
              $
              0.08
              
              $
              0.20
              
              $
              0.15Earnings
                  per share, diluted
              
              $
              0.03
              
              $
              0.08
              
              $
              0.20
              
              $
              0.15Weighted
                  average shares outstanding, basic
              
              
              6,451,128
              
              
              7,389,389
              
              
              6,660,012
              
              
              7,252,529Weighted
                  average shares outstanding, diluted
              
              
              6,646,549
              
              
              7,493,208
              
              
              6,811,927
              
              
              7,429,892The
                  accompanying notes are an integral part of these unaudited consolidated
                  financial statements.
  5
 
 **HOMETOWN
                  AUTO RETAILERS, INC.****UNAUDITED
                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
                  (RESTATED)****(in
                  thousands)**Class
                  A
              
              Class
                  BCommon
                  Stock
              
              Common
                  Stock
              
              Additional
              
              
              
              TotalPaid-in
              
              (Accumulated
              
              Stockholders’Shares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Deficit)
              
              EquityBalance
                  atDecember
                  31, 2003
              
              
              3,656
              
              $
              4
              
              
              3,519
              
              $
              3
              
              $
              29,760
              
              $
              (22,
                  704
              )
              $
              7,063Exercise
                  of Warrants
              
              
              214
              
              
              -
              
              
              -
              
              
              -
              
              
              257
              
              
              -
              
              
              257Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,090
              
              
              1,090Balance
                  atSeptember
                  30, 2004
              
              
              3,870
              
              $
              4
              
              
              3,519
              
              $
              3
              
              $
              30,017
              
              $
              (21,614
              )
              $
              8,410Balance
                  atDecember
                  31, 2004
              
              
              3,870
              
              $
              4
              
              
              3,519
              
              $
              3
              
              $
              30,017
              
              $
              (18,769
              )
              $
              11,255Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,349
              
              
              1,349Exercise
                  of stock options
              
              
              40
              
              
              -
              
              
              -
              
              
              -
              
              
              47
              
              
              -
              
              
              47LitigationSettlement(Note
                  9)
              
              
              -
              
              
              -
              
              
              (940
              )
              
              (1
              )
              
              (1,042
              )
              
              -
              
              
              (1,043
              )Balance
                  atSeptember
                  30, 2005
              
              
              3,910
              
              $
              4
              
              
              2,579
              
              $
              2
              
              $
              29,022
              
              $
              (17,420
              )
              $
              11,608The
                  accompanying notes are an integral part of these unaudited consolidated
                  financial statements.
  6
 
 **HOMETOWN
                  AUTO RETAILERS, INC.****UNAUDITED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)****(in
                  thousands)**For
                  the Nine Months ended
                September
                  30,2005
              
              2004CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              1,349
              
              $
              1,090Adjustments
                    to reconcile net income to net cashprovided by operating
                    activities -Depreciation
                  and amortization
              
              
              965
              
              
              950Loss
                  on sale of property and equipment
              
              
              -
              
              
              8(Gain)
                  on disposal of dealership
              
              
              (587
              )
              
              -Deferred
                  income taxes
              
              
              899
              
              
              404Changes
                  in assets and liabilities:Accounts
                  receivable, net
              
              
              275
              
              
              (1,190
              )Inventories,
                  net
              
              
              9,347
              
              
              (85
              )Prepaid
                  expenses and other current assets
              
              
              (154
              )
              
              (47
              )Prepaid
                  taxes
              
              
              (176
              )
              
              (202
              )Other
                  assets
              
              
              18
              
              
              8Floor
                  plan notes payable - trade
              
              
              (5,336
              )
              
              1,189Accounts
                  payable and accrued expenses
              
              
              (859
              )
              
              (99
              )Deferred
                  revenue - current
              
              
              (287
              )
              
              203Other
                  long-term liabilities and deferred revenue
              
              
              (144
              )
              
              (213
              )Net
                  cash provided by operating activities
              
              
              5,310
              
              
              2,016CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of property and equipment
              
              
              (132
              )
              
              (1,821
              )Net
                  cash (used in) investing activities
              
              
              (132
              )
              
              (1,821
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from floor plan notes payable - non-trade
              
              
              121,793
              
              
              121,356Payment
                  of floor plan notes payable - non-trade
              
              
              (125,924
              )
              
              (121,884
              )Principal
                  payments of long-term debt and capital lease obligations
              
              
              (1,614
              )
              
              (1,707
              )Proceeds
                  from long-term borrowings
              
              
              225
              
              
              1,368Exercise
                  of stock options and warrants
              
              
              47
              
              
              257Net
                  cash (used in) financing activities
              
              
              (5,473
              )
              
              (610
              )Net
                  (decrease) in cash and cash equivalents
              
              
              (295
              )
              
              (415
              )CASH
                  AND CASH EQUIVALENTS, beginning of period
              
              
              6,101
              
              
              5,639CASH
                  AND CASH EQUIVALENTS, end of period
              
              $
              5,806
              
              $
              5,224Cash
                  paid for - Interest
              
              $
              2,717
              
              $
              2,485Cash
                  paid for - Taxes
              
              $
              176
              
              $
              202Purchases
                  financed by capital lease obligations
              
              $
              801
              
              $
              1,013The
                  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
        9 to
        the unaudited financial statements.) 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.
  7
  **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 9 American and Asian automotive brands
        including Chevrolet, Chrysler, Dodge, Ford, Jeep, Lincoln, Mazda, Mercury
        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, within
        this
        Amendment No. 1 to Form 10Q/A, Hometown has restated prior year financial
        statements to reflect this change.
 
 For
        the
        third quarter periods, the effect of this restatement was to increase pre-tax
        income $60,000 and $52,000 for the three months ended September 30, 2005
        and
        2004, respectively. The after tax effects was to increase net income by $36,000
        and $38,000 for the three months ended September 30, 2005 and 2004,
        respectively. The effect of these adjustments was to increase basic and diluted
        earnings per share by $0.01 and $0.00 for the three months ended September
        30,
        2005 and 2004, respectively. For the nine-month periods, the effect of this
        restatement was to increase pre-tax income $173,000 and $254,000 for the
        nine
        months ended September 30, 2005 and 2004, respectively. The after tax effects
        was to increase net income by $104,000 and $185,000 for the nine months ended
        September 30, 2005 and 2004, respectively. The effect of these adjustments
        was
        to increase basic earnings per share by $0.01 and $0.03 for the nine months
        ended September 30, 2005 and 2004, respectively and diluted earnings per
        share
        by $0.02 and $0.03 for the nine months ended September 30, 2005 and 2004,
        respectively.
 
 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, 2005, Hometown had $389,000
        of related deferred revenue remaining. This deferred revenue will be recognized
        over the next three years as follows: 2005 (remaining period) - $72,000,
        2006 -
        $191,000, 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.
  8
  The
        effect of the restatement on the financial statement items affected
        follows:
 
 (in
                  thousands)
              
              September
                  30, 2005
              
              December
                  31, 2004Previously
              
              Restated
              
              Previously
              
              RestatedReported
              
              
              
              Reported**Balance
                  Sheets:**Deferred
                  and prepaid income taxes
              
              $
              1,464
              
              $
              1,412
              
              $
              1,464
              
              $
              1,412Total
                  current assets
              
              $
              40,635
              
              $
              40,583
              
              $
              56,720
              
              $
              56,668Other
                  assets
              
              $
              2,857
              
              $
              2,625
              
              $
              3,649
              
              $
              3,486Total
                  Assets
              
              $
              56,566
              
              $
              56,282
              
              $
              74,223
              
              $
              74,008Deferred
                  revenue
              
              $
              500
              
              $
              318
              
              $
              735
              
              $
              605Total
                  current liabilities
              
              $
              36,502
              
              $
              36,320
              
              $
              53,820
              
              $
              53,690Other
                  long-term liabilities and deferred revenue
              
              $
              703
              
              $
              175
              
              $
              726
              
              $
              319Total
                  liabilities
              
              $
              45,384
              
              $
              44,674
              
              $
              63,290
              
              $
              62,753Accumulated
                  deficit
              
              $
              (17,846
              )
              $
              (17,420
              )
              $
              (19,091
              )
              $
              (18,769
              )Total
                  stockholders’ equity
              
              $
              11,182
              
              $
              11,608
              
              $
              10,933
              
              $
              11,255Total
                  liabilities and stockholders’ equity
              
              $
              56,566
              
              $
              56,282
              
              $
              74,223
              
              $
              74,008Three
                  months ended
              Three
                  months endedSeptember
                  30, 2005
              September
                  30, 2004Previously
              
              
              Restated
              
              
              Previously
              
              
              RestatedReported
              
              
              
              
              
              Reported**Statements
                  of Operations:**Other
                  revenues, net
              
              $
              1,821
              
              $
              1,881
              
              $
              2,064
              
              $
              2,116Total
                  revenues
              
              $
              61,333
              
              $
              61,393
              
              $
              69,282
              
              $
              69,334Gross
                  profit
              
              $
              8,725
              
              $
              8,785
              
              $
              9,752
              
              $
              9,804Income
                  from operations
              
              $
              976
              
              $
              1,036
              
              $
              1,445
              
              $
              1,497Pre-tax
                  income
              
              $
              238
              
              $
              298
              
              $
              781
              
              $
              833Provision
                  for income taxes
              
              $
              95
              
              $
              119
              
              $
              211
              
              $
              225Net
                  income
              
              $
              143
              
              $
              179
              
              $
              570
              
              $
              608Earnings
                  per share, basic
              
              $
              0.02
              
              $
              0.03
              
              $
              0.08
              
              $
              0.08Earnings
                  per share, diluted
              
              $
              0.02
              
              $
              0.03
              
              $
              0.08
              
              $
              0.08
 
 9
 (in
                    thousands)
                
                Nine
                    months ended
                
                Nine
                    months endedSeptember
                    30, 2005
                
                September
                    30, 2004Previously
                
                Restated
                
                Previously
                
                RestatedReported
                
                
                
                Reported**Statements
                    of Operations:**Other
                    revenues, net
                
                $
                5,661
                
                $
                5,834
                
                $
                5,969
                
                $
                6,223Total
                    revenues
                
                $
                188,389
                
                $
                188,562
                
                $
                203,882
                
                $
                204,136Gross
                    profit
                
                $
                27,394
                
                $
                27,567
                
                $
                28,903
                
                $
                29,157Income
                    from operations
                
                $
                3,937
                
                $
                4,110
                
                $
                3,455
                
                $
                3,709Pre-tax
                    income
                
                $
                2,075
                
                $
                2,248
                
                $
                1,240
                
                $
                1,494Provision
                    for income taxes
                
                $
                830
                
                $
                899
                
                $
                335
                
                $
                404Net
                    income
                
                $
                1,245
                
                $
                1,349
                
                $
                905
                
                $
                1,090Earnings
                    per share, basic
                
                $
                0.19
                
                $
                0.20
                
                $
                0.12
                
                $
                0.15Earnings
                    per share, diluted
                
                $
                0.18
                
                $
                0.20
                
                $
                0.12
                
                $
                0.15**Statements
                    of Cash Flows:**Net
                    income
                
                $
                1,245
                
                $
                1,349
                
                $
                905
                
                $
                1,090Deferred
                    income taxes
                
                $
                830
                
                $
                899
                
                $
                335
                
                $
                404Deferred
                    revenue - current
                
                $
                (235
                )
                $
                (287
                )
                $
                209
                
                $
                203Other
                    long-term liabilities and deferred revenue
                
                $
                (23
                )
                $
                (144
                )
                $
                35
                
                $
                (213
                )Net
                    cash provided by operating activities
                
                $
                5,310
                
                $
                5,310
                
                $
                2,016
                
                $
                2,016
 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 is 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 consolidated financial statements.
  **3.**  **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES**
 
 *Basis
        of Presentation*
 
 The
        accompanying consolidated balance sheet as of September 30, 2005, the
        consolidated statements of operations for the three and nine months ended
        September 30, 2005 and 2004, the consolidated statements of stockholders’ equity
        and the consolidated statements of cash flows for the nine months ended
        September 30, 2005 and 2004, are unaudited and restated. (See Note 2) The
        consolidated financial statements include all significant majority-owned
        subsidiaries. All significant intercompany balances and transactions have
        been
        eliminated in consolidation.
 
 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.
  10
 
 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
        years ended December 31, 2004 (restated) and December 31, 2005, which are
        included in Hometown’s filings of its amended annual report on Form 10-K/A
        Amendment No. 1 and Form 10/K, respectively.
 
 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, 2005, Hometown has one stock-based employee compensation plan,
        the
        1998 Stock Option Plan (the “Stock Option Plan”). As allowed by SFAS 148,
        Hometown has elected not to use one of the alternative methods of transition
        available for a voluntary change to the fair value based method of accounting
        for stock-based employee compensation. Hometown accounts for this plan under
        the
        recognition and measurement principles of Accounting Principles Board (“APB”)
        Opinion No. 25, “Accounting for Stock Issued to Employees”, and related
        Interpretations. No stock-based employee compensation cost is reflected in
        net
        income, as all options granted under those plans had an exercise price equal
        to
        or greater than the market value of the underlying common stock on the date
        of
        grant. The following table illustrates the effect on net income and earnings
        per
        share if the company had applied the fair value recognition provisions of
        FASB
        Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based
        employee compensation.
 
 Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  30,
              
              September
                  30,(in
                  thousands, except per share data)
              
              2005
              
              2004
              
              2005
              
              2004Net
                  income, as reported
              
              $
              179
              
              $
              608
              
              $
              1,349
              
              $
              1,090Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards, net of related tax effects
                  (1)
              
              
              (2
              )
              
              (7
              )
              
              (7
              )
              
              (21
              )Pro
                  forma net income
              
              $
              177
              
              $
              601
              
              $
              1,342
              
              $
              1,069Earnings
                  per share:Basic,
                  as reported
              
              $
              0.03
              
              $
              0.08
              
              $
              0.20
              
              $
              0.15Basic,
                  pro forma
              
              $
              0.03
              
              $
              0.08
              
              $
              0.20
              
              $
              0.15Diluted,
                  as reported
              
              $
              0.03
              
              $
              0.08
              
              $
              0.20
              
              $
              0.15Diluted,
                  pro forma
              
              $
              0.03
              
              $
              0.08
              
              $
              0.20
              
              $
              0.14
 
 (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.
  11
  *New
        Accounting Pronouncements*
 
 In
        May
        2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
        Financial Accounting Standards No. 154, “Accounting Changes and Error
        Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
        3”
(“SFAS 154”). This Statement replaces APB Opinion No. 20, “Accounting Changes,”
and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial
        Statements.” SFAS 154 changes the requirements for the accounting for and
        reporting of a change in accounting principle. Previously, most voluntary
        changes in accounting principles required recognition through a cumulative
        adjustment within net income of the period of the change. SFAS 154 requires
        retrospective application to prior periods’ financial statements, unless it is
        impracticable to determine either the period-specific effects or the cumulative
        effect of the change. SFAS 154 is effective for accounting changes made in
        fiscal years beginning after December 15, 2005; however, the Statement does
        not
        change the specific transition provisions of any existing or future accounting
        pronouncements. The adoption of this statement is not expected to have a
        material effect on our financial position or results of operations.
 
 In
        March
        2005, the SEC issued Staff Accounting Bulletin No. 107, “Share-Based Payments”
(“SAB 107”). SAB 107 expresses views of the SEC regarding the interaction
        between SFAS and certain SEC rules and regulations and provides the SEC’s views
        regarding the valuation of share-based compensation for public companies.
        We are
        currently evaluating the adoption of SFAS 123R and the impact that this
        statement will have on our results of operations. We will apply the principles
        of SAB 107 in conjunction with our adoption of SFAS 123R.
 
 In
        March
        2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for
        Conditional Asset Retirement Obligations.” FIN 47 clarifies that the term
“conditional asset retirement obligation” as used in SFAS No. 143, “Accounting
        for Assets Retirements Obligations,” refers to a legal obligation to perform an
        asset retirement activity in which the timing and/or method of settlement
        are
        conditional on a future event that may or may not be within the control of
        the
        entity. Furthermore, the uncertainty about the timing and or method of
        settlement of a conditional asset retirement obligation should be factored
        into
        the measurement of the liability when sufficient information exists. FIN
        47
        clarifies that an entity is required to recognize the liability for the fair
        value of a conditional asset obligation when incurred if the liability’s fair
        value can be reasonably estimated. The
        adoption of this statement is not expected to have a material effect on our
        financial position or results of operations. We intend to implement the
        provisions of this statement in the first quarter of 2006.
 
 In
        December 2004, the FASB issued SFAS 123R, “Share-Based Payment.”**This
        statement is a revision of SFAS 123, “Accounting for Stock-Based Compensation”
and supersedes APB 25, “Accounting for Stock Issued to Employees,” and is
        effective as of the next fiscal year that begins after June 15, 2005. SFAS
        123R
        establishes standards on accounting for transactions in which an entity obtains
        employee services in share-based payment transactions. This statement requires
        measurement of the cost of employee services received in exchange for an
        award
        of equity instruments based on the grant-date fair value of the award. That
        cost
        will be recognized over the period during which an employee is required to
        provide service in exchange for the award, which is usually the vesting period.
        SFAS 123R also addresses transactions in which an entity incurs liabilities
        in
        exchange for goods or services that are based on the fair value of the entity’s
        equity instruments or that may be settled by the issuance of those equity
        instruments. The adoption of this statement is not expected to have a material
        effect on our financial position or results of operations. We intend to
        implement the provisions of this statement in the first quarter of
        2006.
 
 In
        January 2003, the FASB issued Interpretation No. 46 (FIN 46),
        Consolidation of Variable Interest Entities, an Interpretation of Accounting
        Research Bulletin No. 51. The objective of this interpretation is to provide
        guidance on how to identify a variable interest entity (“VIE”) and requires the
        VIE to be consolidated by its primary beneficiary. The primary beneficiary
        is
        the party that absorbs a majority of the VIE's expected losses and/or receives
        a
        majority of the entity's expected residual returns, if they occur. In
        December 2003, the FASB issued FIN 46(R) ("Revised Interpretations")
        delaying the effective date for certain entities created before February
        1, 2003
        and making other amendments to clarify the application of the guidance. In
        adopting FIN 46(R) Hometown has evaluated its variable interests to determine
        whether they are in fact VIE’s and whether Hometown was the primary beneficiary
        of the VIE. This evaluation resulted in determining that Hometown has a VIE
        with
        a related party, whereby Hometown guarantees the mortgage debt of the company.
        The adoption of this interpretation did not have a material effect on Hometown’s
        financial statements.
  12
 
 **4.**  **EARNINGS
        PER SHARE**
 
 “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 498,000 shares of common stock were outstanding as of September
        30, 2005. Options and warrants to purchase approximately 556,000 shares of
        common stock were outstanding as of September 30, 2004. Basic and diluted
        weighted average shares for the three and nine months ended September 30,
        2005
        and 2004 are as follows:
 
 Three
                  Months Ended September 30,
              
              Nine
                  Months Ended September 30,2005
              
              2004
              
              2005
              
              2004Basic,
                  Weighted Average Shares
              
              
              6,451,128
              
              
              7,389,389
              
              
              6,660,012
              
              
              7,252,529Common
                  Stock Equivalents
              
              
              195,421
              
              
              103,819
              
              
              151,915
              
              
              177,363Diluted,
                  Weighted Average Shares
              
              
              6,646,549
              
              
              7,493,208
              
              
              6,811,927
              
              
              7,429,892
 
 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. During the third quarter of 2005, stock options
        to
        purchase 40,000 Class A shares were exercised. Also, the three and nine months
        ended September 30, 2005 includes a gain on the transfer of the Westwood
        dealership of $587,000. See Note 9.
 
 The
        common stock equivalents are options and warrants 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, 2005, options to purchase 99,000
        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. For the three and nine months
        ended September 30, 2004, options and warrants to purchase 286,000 and 133,000
        shares, respectively of Hometown common stock were excluded from the calculation
        of diluted income per share due to the options and warrant 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 months ended September 30, 2005
        and
        2004 is $0.03 and $0.08, respectively. The basic and diluted income per share
        for the nine months ended September 30, 2005 and 2004 is $0.20 and $0.15,
        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)
              
              9/30/05
              
              12/31/04New
                  Vehicles
              
              $
              18,152
              
              $
              33,616Used
                  Vehicles
              
              
              8,035
              
              
              7,761Parts,
                  accessories and other
              
              
              1,738
              
              
              2,063Total
                  Inventories
              
              $
              27,925
              
              $
              43,440
 
 The
        lower
        of cost or market adjustment was $0.5 million and $0.7 million at September
        30,
        2005 and December 31, 2004, respectively. The decrease in the new vehicles
        inventory was primarily due to the transfer of the Westwood dealership ($6.5
        million) along with an improvement (reduction) in inventory levels at our
        dealerships due to better inventory management. The decrease in the lower
        of
        cost or market adjustment was primarily due to the transfer of the Westwood
        dealership. See Note 9.
  13
 
 **6.**  **INTANGIBLE
        ASSETS**
 
 As
        of
        September 30, 2005 and December 31, 2004, Hometown’s intangible assets consisted
        of the following:
 
 (in
                  thousands)
              
              9/30/05
              
              12/31/04Deferred
                  finance charges
              
              $
              272
              
              $
              272Accumulated
                  amortization
              
              
              (136
              )
              
              (121
              )Non-compete
                  agreement
              
              
              381
              
              
              381Accumulated
                  amortization
              
              
              (381
              )
              
              (333
              )Franchise
                  Fee
              
              
              10
              
              
              10Accumulated
                  amortization
              
              
              (5
              )
              
              (3
              )Net
                  intangible assets
              
              $
              141
              
              $
              206
  These
        assets are included in Other Assets in the consolidated financial
        statements.
 
 **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.
 
 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.
  14
 
 **8.**  **LONG-TERM
        DEBT AND CAPITAL LEASE OBLIGATIONS**
 
 Hometown
        is subject to certain financial covenants calculated semi-annually at June
        30 th and
        December 31st, related to its real estate mortgages. Significant financial
        covenants are: (i) a Fixed Cost Coverage Ratio (a defined cash flow ratio)
        calculation and (ii) an Adjusted Net Worth calculation as defined. Hometown
        has
        been in default of its loan agreement for Baystate Lincoln Mercury since
        December 31, 2004 for failure to comply with the Fixed Cost Coverage Ratio
        covenant caused by losses incurred at the dealership. Accordingly, Hometown
        has
        reclassified $4,079,000 of related long-term debt to current at September
        30,
        2005. Total debt for this mortgage at September 30, 2005 is $4,396,000. On
        March
        16, 2005, the lender notified Hometown that it is not declaring an event
        of
        default in connection with the loan, however, reserving all rights to declare
        an
        event of default in the future should the financial covenant default not
        be
        cured. If an event of default was declared and only at the lenders option,
        Hometown could be required to pay all outstanding debt plus a defeasance
        penalty
        and transaction costs totaling approximately $1,300,000. Although Hometown
        does
        not believe the lender will call the loan, in the event it is called, Hometown
        believes it would be able to secure alternate financing.
 
 **9.**  **COMMITMENTS
        AND CONTINGENCIES**
  *Litigation*
 
 During
        the fourth quarter of 2004, Hometown announced that it had resolved in principle
        to settle the litigation matters described in Footnote 9 in the Notes to
        Unaudited Consolidated Financial Statements as contained in Hometown’s Form 10-Q
        as filed with the Securities and Exchange Commission on November 12, 2004.
        On
        March 3, 2005 the execution and delivery of a settlement agreement and
        applicable releases of claims from all parties to the litigation was completed.
        The settlement agreement settled all claims made by Salvatore A. Vergopia
        and
        Edward A. Vergopia, former directors and executive officers of the Corporation,
        and Janet Vergopia, the wife of Salvatore A. Vergopia (the “Vergopias”). The
        settlement also finally resolved the related insurance coverage litigation
        with
        Universal Underwriters Group and The Chubb Group of Insurance Companies.
        The
        gross payment to the Vergopias by all parties was $4 million of which $600,000
        was paid by Hometown in March 2005. The settlement with the Vergopias and
        the
        insurers included an exchange of mutual releases of claims among the parties
        and
        a withdrawal of all claims with prejudice and without costs or attorneys
        fees to
        any party. On May 11, 2005, the parties completed the transfer to the Vergopias
        of certain Westwood Lincoln Mercury Sales, Inc. assets, including its Lincoln
        Mercury franchise and the termination of Hometown’s Westwood, New Jersey lease.
        Hometown received all of the 940,000 shares of Class B Common Stock owned
        by the
        Vergopias in March 2005. The Settlement Agreement does not constitute an
        admission of liability or wrongdoing by any party.
 
 The
        940,000 shares of Hometown stock was recorded at fair market value on March
        3,
        2005, the date of the executed settlement agreement, and is shown as a reduction
        of Stockholders’ Equity of $1,043,000, primarily Additional Paid-in-Capital.
        (See Unaudited Statements of Stockholders Equity) The assets and liabilities
        transferred to the Vergopias was recorded as a reduction of those accounts
        at
        book value on May 11, 2005 resulting in a gain of approximately $600,000
        from
        the transaction. Hometown wrote off the goodwill associated with this franchise
        in 2002 and expensed the aforementioned $600,000 March payment in prior periods.
 
 Hometown
        Auto Retailers, Inc. d/b/a Muller Toyota, Inc. has been named as one of 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 has been brought on behalf of about 111 named plaintiffs
        and, purportedly on behalf of a class of individuals and companies who have
        purchased or leased a motor vehicle from the defendants. Plaintiffs contend
        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. It appears from the complaint that plaintiffs have 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 are no
        allegations that Hometown ever performed any services for any of the plaintiffs.
        The complaint makes certain class action allegations and alleges violations
        of
        the New Jersey Consumer Fraud Act as well as common law fraud. The Court
        has
        dismissed the portions of the complaint alleging violations of the New Jersey
        Consumer Fraud Act, common law fraud and conspiracy to commit common law
        fraud.
        Hometown does not believe that the eventual outcome of this case will have
        a
        material adverse effect upon Hometown’s consolidated financial position or
        results of operations.
  15
 
 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. Further information about the
        Exchange Agreement is set forth below under Note 10 - “Exchange Agreement”.
 
 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 it 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.
 
 As
        of
        September 30, 2005, Hometown has incurred approximately $83,000 in relation
        to
        the complaint, which amount has been expensed and is included in Selling
        General
        and Administrative Expenses on Hometown’s Unaudited Consolidated Statements of
        Operations for the Three and Nine Months Ended September 30, 2005.
  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.
        The
        1999 guaranty was given in substitution for a February 1998 guaranty of that
        debt by the Muller Group, a subsidiary of Hometown. In the event of default
        by
        Rellum Realty Company, Hometown is required to make the mortgage payments,
        but
        does not take ownership of the property. Hometown recorded the lease as a
        capital lease. As of September 30, 2005 the mortgage debt balance is $4.1
        million, which agrees to the capital lease obligation. Hometown makes annual
        lease payments of $864,000 to the landlord. The annual mortgage payments
        made by
        the landlord total approximately $774,000. The mortgage matures March 2013.
        Total undiscounted payments (principal plus interest) that would have to
        be made
        under the guaranty as of September 30, 2005 is $5.8 million.
  16
 
 *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 three
        or
        five year 100,000-mile limited warranty on new and/or used vehicles. The
        cost of
        this warranty is charged to the cost of sale of the vehicle. The warranty
        covers
        certain parts and service for three or five years or until the vehicle reaches
        an odometer reading of 100,000 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. An insurance
        company that is wholly owned by Ford Motor Company reinsures the insurance
        policy. If the insurance company were to fail, Hometown would be responsible
        for
        the costs of the service. Hometown has not recorded any additional reserve
        for
        this warranty program.
 
 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 the customer may receive certain services for free if he
        maintains a certain level of service at the dealership. At September 30,
        2005
        and December 31, 2004, Hometown has a reserve of $298,000 and $208,000,
        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.
 
 Reserve
                  for Policy Work
              
              Balance
                  At Beginning of Year
              
              Additions
                  To Costs and Expenses
              
              Deductions
              
              Balance
                  At End of QuarterNine
                  Months Ended September 30, 2005
              
              $
              208,000
              
              $
              890,000
              
              $
              (800,000
              )
              $
              298,000
 
 Hometown
        also sells extended service contracts as an agent for a third party for which
        it
        receives a commission. The primary obligor is the institution underwriting
        the
        service contract. These revenues are recorded in Revenues, Other in the
        Statement of Operations. Revenues from sales of third party extended service
        contracts, including recognition of deferred revenues discussed below, was
        $1.9
        million and $2.0 million for nine months ended September 30, 2005 and 2004,
        respectively. Prior to July 1, 2003, Connecticut dealerships operated under
        state laws, which made the dealers responsible for providing warranty service
        and insurance in the event of default by the insurance carriers. Accordingly,
        commissions on insurance and service contract sales sold prior to July 1,
        2003
        are required to be recognized over the life of the related insurance product.
        For these dealerships, Hometown recorded the revenue as a liability and
        amortizes the amount into revenue over a five-year period. At September 30,
        2005
        and December 31, 2004, Hometown had $389,000 and $603,000 of related deferred
        revenue, respectively. (See Note 2.) At September 30, 2005 and December 31,
        2004, Hometown also had other deferred revenue of $103,000 and $319,000,
        respectively.
  17
 
 *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 February 18, 2006. 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, including
        the Vergopias as discussed above. 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, 2004 had combined revenues
        of
        $98.1 million and pre-tax income before allocation of corporate costs of
        $2.2
        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.**  **EXCHANGE
        AGREEMENT**
 
 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. Hometown will then transfer to Shaker Auto Group,
        Inc.
        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, Inc. Immediately following
        this transfer, Hometown will transfer all of the outstanding shares of stock
        of
        Shaker Auto Group, Inc. to the Shaker Group in exchange for all of their
        shares
        of stock of Hometown.
 
 Following
        the exchanges, the Shaker Group will be the beneficial owners of all of the
        outstanding shares of stock of Shaker Auto Group, Inc. and the New England
        Subsidiaries, and will cease to own any shares of stock of Hometown. In
        addition, the Muller Group (as defined below) will control a majority of
        the
        voting power of the shares of stock of Hometown, and Hometown will cease
        to own
        any shares of stock of Shaker Auto Group, Inc. or the New England
        Subsidiaries.
 
 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.),·
                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
        consummation of the exchanges is subject to various contingencies, including
        approval of Hometown’s manufacturers to the transfer of the automobile
        franchises to Shaker Auto Group, Inc., and approval of various lenders to
        the
        release of Hometown from certain liabilities and the assumption of certain
        liabilities by Shaker Auto Group, Inc.
 
 In
        connection with the transactions, Hometown anticipates that it will secure
        a
        term loan of up to $6.5 million, with $5 million to be used for the cash
        contribution to be made to Shaker Auto Group (as explained above), $1.1 million
        for financing the split-off costs and associated severance costs, and the
        $0.4
        million balance for working capital for Hometown. As of
        September 30, 2005, Hometown has incurred approximately $474,000 of the
        aforementioned split-off costs, which amount has been expensed and is included
        in Selling General and Administrative Expenses on Hometown’s Unaudited
        Consolidated Statements of Operations for the Three and Nine Months Ended
        September 30, 2005.
 
 Following
        the split-off, Hometown Auto will have a total of 3,884,979 common shares
        (3,108,227 Class A common shares and 776,752 Class B common shares), with
        William C. Muller, Jr. (and his immediate and extended family) holding 367,500
        Class A common shares and 776,752 Class B common shares of Hometown Auto.
        [Note:
        Hometown Auto Class B common shares have 10 for 1 voting rights versus Class
        A
        common shares which are voted on a 1 to 1 basis.]
 
 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 exchange transactions and disclosing the approval of the transactions
        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.
  19
 
 On
        June
        17, 2005, Hometown filed a Preliminary Schedule 14C Information Statement
        (“Information Statement”) with the Securities and Exchange Commission which
        describes the proposed exchange transactions. 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 the
        Company’s Class A Common Stock. In the letter, the Holders also stated their
        belief that the Exchanges will have a material adverse effect on the Company
        and
        the shareholders who are not parties to the Exchanges, and are not in the
        best
        interests of the Company and its shareholders. They further stated their
        belief
        that the Exchanges violate the Board’s statutory and common law fiduciary duties
        and demand that the Company abandon the Exchanges, that the Board appoint
        a new
        Compensation Committee, that the President of the Company resign, that the
        Board
        appoint a Special Committee to explore all options for maximizing shareholder
        value, including conversion of the Company’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 the Company for its costs
        in
        pursuing the Exchanges.
 
 On
        July
        8, 2005 Hometown issued a press release in which it announced (i) 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 (ii) 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.
 
 The
        Press
        Release also announced that the staff of the Securities and Exchange Commission
        had asked the Company to delay sending the information statement describing
        the
        proposed exchanges to its shareholders pending the resolution of certain
        issues
        that had been raised by the staff with respect to the Company’s annual report on
        Form 10-K for the period ended December 31, 2004 and its quarterly report
        on
        Form 10-Q for the period ended March 31, 2005. On September 21, 2005 the
        Company
        filed Amendment No. 1 on Form 10-K/A to the previously filed Annual Report
        on
        Form 10-K for the year ended December 31, 2004 and also filed Amendment No.
        1 on
        Form 10-Q/A to the previously filed Quarterly Report on Form 10-Q for the
        quarterly period ended March 31, 2005. On September 22, 2005 the Securities
        and
        Exchange Commission issued a letter to the Company stating they completed
        their
        review of the filings and that they had no further comments.
  In
        light
        of the potential adverse effects which the commencement of the Delaware
        litigation may have upon the Company and the proposed exchanges, as well
        as a
        variety of other factors, the Company is unable to predict when it will send
        the
        information statement concerning the proposed exchanges to its shareholders
        or
        when the proposed exchanges will be consummated.
  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 amended annual report on Form 10-K/A
        amendment No. 1 for the year ended December 31, 2004 and 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, within
        this
        Amendment No. 1 to Form 10Q/A, Hometown has restated prior year financial
        statements to reflect this change.
 
 For
        the
        third quarter periods, the effect of this restatement was to increase pre-tax
        income $60,000 and $52,000 for the three months ended September 30, 2005
        and
        2004, respectively. The after tax effects was to increase net income by $36,000
        and $38,000 for the three months ended September 30, 2005 and 2004,
        respectively. The effect of these adjustments was to increase basic and diluted
        earnings per share by $0.01 and $0.00 for the three months ended September
        30,
        2005 and 2004, respectively. For the nine-month periods, the effect of this
        restatement was to increase pre-tax income $173,000 and $254,000 for the
        nine
        months ended September 30, 2005 and 2004, respectively. The after tax effects
        was to increase net income by $104,000 and $185,000 for the nine months ended
        September 30, 2005 and 2004, respectively. The effect of these adjustments
        was
        to increase basic earnings per share by $0.01 and $0.03 for the nine months
        ended September 30, 2005 and 2004, respectively and diluted earnings per
        share
        by $0.02 and $0.03 for the nine months ended September 30, 2005 and 2004,
        respectively.
 
 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, 2005, Hometown had $389,000
        of related deferred revenue remaining. This deferred revenue will be recognized
        over the next three years as follows: 2005 (remaining period) - $72,000,
        2006 -
        $191,000, 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.
  21
 
 The
        effect of the restatement on the financial statement items affected
        follows:
 
 (in
                  thousands)
              
              September
                  30, 2005
              
              December
                  31, 2004Previously
              
              Restated
              
              Previously
              
              RestatedReported
              
              
              
              Reported**Balance
                  Sheets:**Deferred
                  and prepaid income taxes
              
              $
              1,464
              
              $
              1,412
              
              $
              1,464
              
              $
              1,412Total
                  current assets
              
              $
              40,635
              
              $
              40,583
              
              $
              56,720
              
              $
              56,668Other
                  assets
              
              $
              2,857
              
              $
              2,625
              
              $
              3,649
              
              $
              3,486Total
                  Assets
              
              $
              56,566
              
              $
              56,282
              
              $
              74,223
              
              $
              74,008Deferred
                  revenue
              
              $
              500
              
              $
              318
              
              $
              735
              
              $
              605Total
                  current liabilities
              
              $
              36,502
              
              $
              36,320
              
              $
              53,820
              
              $
              53,690Other
                  long-term liabilities and deferred revenue
              
              $
              703
              
              $
              175
              
              $
              726
              
              $
              319Total
                  liabilities
              
              $
              45,384
              
              $
              44,674
              
              $
              63,290
              
              $
              62,753Accumulated
                  deficit
              
              $
              (17,846
              )
              $
              (17,420
              )
              $
              (19,091
              )
              $
              (18,769
              )Total
                  stockholders’ equity
              
              $
              11,182
              
              $
              11,608
              
              $
              10,933
              
              $
              11,255Total
                  liabilities and stockholders’ equity
              
              $
              56,566
              
              $
              56,282
              
              $
              74,223
              
              $
              74,008Three
                  months ended
              Three
                  months endedSeptember
                  30, 2005
              September
                  30, 2004Previously
              
              
              Restated
              
              
              Previously
              
              
              RestatedReported
              
              
              
              
              
              Reported**Statements
                  of Operations:**Other
                  revenues, net
              
              $
              1,821
              
              $
              1,881
              
              $
              2,064
              
              $
              2,116Total
                  revenues
              
              $
              61,333
              
              $
              61,393
              
              $
              69,282
              
              $
              69,334Gross
                  profit
              
              $
              8,725
              
              $
              8,785
              
              $
              9,752
              
              $
              9,804Income
                  from operations
              
              $
              976
              
              $
              1,036
              
              $
              1,445
              
              $
              1,497Pre-tax
                  income
              
              $
              238
              
              $
              298
              
              $
              781
              
              $
              833Provision
                  for income taxes
              
              $
              95
              
              $
              119
              
              $
              211
              
              $
              225Net
                  income
              
              $
              143
              
              $
              179
              
              $
              570
              
              $
              608Earnings
                  per share, basic
              
              $
              0.02
              
              $
              0.03
              
              $
              0.08
              
              $
              0.08Earnings
                  per share, diluted
              
              $
              0.02
              
              $
              0.03
              
              $
              0.08
              
              $
              0.08
 
 22
 (in
                    thousands)
                
                Nine
                    months ended
                
                Nine
                    months endedSeptember
                    30, 2005
                
                September
                    30, 2004Previously
                
                Restated
                
                Previously
                
                RestatedReported
                
                
                
                Reported**Statements
                    of Operations:**Other
                    revenues, net
                
                $
                5,661
                
                $
                5,834
                
                $
                5,969
                
                $
                6,223Total
                    revenues
                
                $
                188,389
                
                $
                188,562
                
                $
                203,882
                
                $
                204,136Gross
                    profit
                
                $
                27,394
                
                $
                27,567
                
                $
                28,903
                
                $
                29,157Income
                    from operations
                
                $
                3,937
                
                $
                4,110
                
                $
                3,455
                
                $
                3,709Pre-tax
                    income
                
                $
                2,075
                
                $
                2,248
                
                $
                1,240
                
                $
                1,494Provision
                    for income taxes
                
                $
                830
                
                $
                899
                
                $
                335
                
                $
                404Net
                    income
                
                $
                1,245
                
                $
                1,349
                
                $
                905
                
                $
                1,090Earnings
                    per share, basic
                
                $
                0.19
                
                $
                0.20
                
                $
                0.12
                
                $
                0.15Earnings
                    per share, diluted
                
                $
                0.18
                
                $
                0.20
                
                $
                0.12
                
                $
                0.15**Statements
                    of Cash Flows:**Net
                    income
                
                $
                1,245
                
                $
                1,349
                
                $
                905
                
                $
                1,090Deferred
                    income taxes
                
                $
                830
                
                $
                899
                
                $
                335
                
                $
                404Deferred
                    revenue - current
                
                $
                (235
                )
                $
                (287
                )
                $
                209
                
                $
                203Other
                    long-term liabilities and deferred revenue
                
                $
                (23
                )
                $
                (144
                )
                $
                35
                
                $
                (213
                )Net
                    cash provided by operating activities
                
                $
                5,310
                
                $
                5,310
                
                $
                2,016
                
                $
                2,016
  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 is 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 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 9 American and Asian automotive brands
        including Chevrolet, Chrysler, Dodge, Ford, Jeep, Lincoln, Mazda, Mercury
        and
        Toyota.
  23
 
 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. Hometown’s operating results reflect the closing of a used
        vehicles outlet in August 2004. Also, during the fourth quarter of 2004,
        Hometown announced that it had resolved in principal to resolve certain
        litigation matters (See Note 9 to the unaudited consolidated financial
        statements), which resulted in the transfer of the Westwood Lincoln Mercury
        dealership during the second quarter of 2005. Both contribute to decreases
        in
        sales and gross profit from 2004 to 2005, as well as a decrease in selling,
        general and administrative expenses. We have segregated both operations in
        the
        analysis that follows to allow for a better comparison of the
        results.
 
 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.
 
 The
        past
        few years has shown a decrease in used vehicle sales as manufacturers have
        continued to promote demand for new vehicles through offering various incentive
        programs including cash rebates and low interest financing. It is not expected
        that the manufacturers will stop these promotions.
 
 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 less than $0.1
        million
        in the three months ended September 30, 2005 and 2004, and $0.2 million in
        the
        nine months ended September 30, 2005 and 2004, respectively.
 
 Interest
        expense primarily relates to indebtedness incurred in connection with new
        and
        used vehicle inventories. Other interest expense consists of all other interest
        charges on interest bearing debt including capitalized leases.
  24
 
 ***Three
        months ended September 30, 2005 compared with three months ended September
        30,
        2004.***
 
 ***Revenues***
              
              For
                the Three Months EndedSeptember
                30,
              
              Increase
              
              %(in
                  thousands, except per vehicle data)
              
              2005
              
              2004
              
              (Decrease)
              
              ChangeNew
                  vehicle data:Retail
                  revenues - same store
              
              $
              37,922
              
              $
              36,688
              
              $
              1,234
              
              
              3.4
              %Retail
                  revenues - other stores (1)
              
              
              -
              
              
              7,145
              
              
              (7,145
              )
              
              *Total
                  new retail revenues
              
              
              37,922
              
              
              43,833
              
              
              (5,911
              )
              
              (13.5
              )%Fleet
                  revenues - same store
              
              
              621
              
              
              458
              
              
              163
              
              
              35.6
              %Total
                  new vehicles revenues, as reported
              
              $
              38,543
              
              $
              44,291
              
              $
              (5,748
              )
              
              (13.0
              )%New
                  retail units - same store
              
              
              1,484
              
              
              1,429
              
              
              55
              
              
              3.8
              %New
                  retail units - other stores (1)
              
              
              -
              
              
              204
              
              
              (204
              )
              
              *Fleet
                  units
              
              
              38
              
              
              30
              
              
              8
              
              
              26.7
              %Total
                  new vehicle units
              
              
              1,522
              
              
              1,663
              
              
              (141
              )
              
              (8.5
              )%Used
                  vehicle data:Retail
                  revenues - same store
              
              $
              12,151
              
              $
              12,243
              
              $
              (92
              )
              
              (0.8
              )%Retail
                  revenues - other stores (1)
              
              
              -
              
              
              968
              
              
              (968
              )
              
              *Total
                  used retail revenues
              
              
              12,151
              
              
              13,211
              
              
              (1,060
              )
              
              (8.0
              )%Wholesale
                  revenues - same store
              
              
              3,572
              
              
              3,208
              
              
              364
              
              
              11.3
              %Wholesale
                  revenues - other stores (1)
              
              
              -
              
              
              524
              
              
              (524
              )
              
              *Total
                  wholesale revenues
              
              
              3,572
              
              
              3,732
              
              
              (160
              )
              
              (4.3
              )%Total
                  used vehicle revenue, as reported
              
              $
              15,723
              
              $
              16,943
              
              $
              (1,220
              )
              
              (7.2
              )%Used
                  retail units - same store
              
              
              745
              
              
              805
              
              
              (60
              )
              
              (7.5
              )%Used
                  retail units - other stores (1)
              
              
              -
              
              
              59
              
              
              (59
              )
              
              *Used
                  wholesale units - same store
              
              
              844
              
              
              868
              
              
              (24
              )
              
              (2.8
              )%Used
                  wholesale units - other stores (1)
              
              
              -
              
              
              64
              
              
              (64
              )
              
              *Total
                  used units
              
              
              1,589
              
              
              1,796
              
              
              (207
              )
              
              (11.5
              )%Parts
                  and service:Parts
                  and service revenues - same store
              
              $
              5,246
              
              $
              4,963
              
              $
              283
              
              
              5.7
              %Parts
                  and service revenues - other stores (1)
              
              
              -
              
              
              1,021
              
              
              (1,021
              )
              
              *Total
                  parts and service revenue
              
              $
              5,246
              
              $
              5,984
              
              $
              (738
              )
              
              (12.3
              )%Other
                  revenues, net:Other
                  revenues, net - same store
              
              $
              1,881
              
              $
              1,979
              
              $
              (98
              )
              
              (5.0
              )%Other
                  revenues, net - other stores (1)
              
              
              -
              
              
              137
              
              
              (137
              )
              
              *Total
                  other revenues, net, as reported
              
              $
              1,881
              
              $
              2,116
              
              $
              (235
              )
              
              (11.1
              )%Total
                  revenue:Same
                  store
              
              $
              61,393
              
              $
              59,539
              
              $
              1,854
              
              
              3.1
              %Other
                  stores (1)
              
              
              -
              
              
              9,795
              
              
              (9,795
              )
              
              *Total
                  revenue, as reported
              
              $
              61,393
              
              $
              69,334
              
              $
              (7,941
              )
              
              (11.5
              )%
 
 25
 
 (1)
        Represents the Westwood Lincoln Mercury dealership operations transferred
        on May
        11, 2005 and the used car outlet closed August 2004.
 
 *
        -
        Percentage is 100% or greater.
 
 The
        percentages used in the revenues discussion below are from the above
        table.
 
 Total
        revenue decreased $7.9 million, or 11.5% to $61.4 million for the three months
        ended September 30, 2005 from $69.3 million for the three months ended September
        30, 2004. Same store total revenues increased $1.9 million or 3.1% to $61.4
        million for the three months ended September 30, 2005 from $59.5 million
        for the
        three months ended September 30, 2004. Same store new retail revenues increased
        $1.2 million, or 3.4% to $37.9 million for the three months ended September
        30,
        2005 from $36.7 million for the three months ended September 30, 2004. This
        increase was primarily due to the 3.8% additional units ($1.4 million) sold
        in
        2005 compared to 2004 partially offset by a small decrease (0.5%) in average
        selling price ($0.2 million) in 2005 compared to 2004 reflecting a slight
        change
        in product mix within the brands. The increase in same store new retail revenues
        was primarily due to increases at our Toyota dealerships ($2.0 million),
        partially offset by a decline at our Lincoln Mercury dealerships ($1.0 million).
        The increase ($0.4 million) attributable to the remaining dealerships was
        aided
        by the “Employee Pricing Plan” promotion, which aided unit sales. Hometown’s new
        retail revenues are indicative of sales reported by our manufacturers
        nationally, Toyota continues to be experiencing growth in the United States
        while the domestics remain stagnant or have declined. Same store used vehicle
        retail revenues decreased just under $0.1 million, or 0.8% to $12.2 million
        for
        the three months ended September 30, 2005 from $12.2 million for the three
        months ended September 30, 2004. This decrease was primarily due to a 7.5%
        decrease in units ($0.9 million) sold in 2005 compared to 2004, partially
        offset
        by a 7.2% increase in average selling price ($0.8 million) in 2005 compared
        to
        2004. Contributing to the decrease in units was the aforementioned “Employee
        Pricing Plan”, which pushed potential buyers of used vehicles toward the
        purchase of a new vehicle. The retail used vehicle market continues to be
        challenging, with most dealerships experiencing a decrease in units for the
        third quarter. Certain used vehicles that have high gas mileage saw their
        values
        increase in the third quarter as the price of gasoline soared, contributing
        to
        the increase in average selling price of used vehicles. Same store wholesale
        revenues increased $0.4 million, or 11.3% to $3.6 million for the three months
        ended September 30, 2005 from $3.2 million for the three months ended September
        30, 2004 due to continued strength in the wholesale market. The increase
        in
        average selling price for wholesale units is also a function of the retail
        sales
        unit volume, which is down compared to the prior year. 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.
        Wholesale prices began to weaken toward the latter part of the third quarter
        with the increase in used car inventories. The “Employee Pricing Program” caused
        a surge in new vehicle sales, that brought in more used cars as
        trade-ins.
 
 Parts
        and
        service revenue decreased $0.8 million or 12.3% to $5.2 million for the three
        months ended September 30, 2005 from $6.0 million for the three months ended
        September 30, 2004. On a same store basis, parts and service revenue increased
        $0.2 million or 5.7% to $5.2 million for the three months ended September
        30,
        2005 from $5.0 million for the three months ended September 30, 2004. The
        increase was primarily due to the Toyota dealerships ($0.2 million), and
        is
        attributable to the increase in the dealerships new vehicles revenues. These
        dealerships have been working to have these customers remain with the dealership
        for their vehicles maintenance needs. As part of the new car sales process
        you
        also strive to gain that customer as a service customer as well.
 
 Other
        dealership revenues decreased $0.2 million, or 11.1% to $1.9 million for
        the
        three months ended September 30, 2005 from $2.1 million for the three months
        ended September 30, 2004. On a same store basis, other dealership revenues
        decreased $0.1 million or 5.0% to $1.9 million for the three months ended
        September 30, 2005 from $2.0 million for the three months ended September
        30,
        2004.
  26
 
 ***Gross
                  Profit***
              For
                  the Three Months EndedSeptember
                  30,
              
              Increase
              
              %(in
                  thousands, except per vehicle data)
              2005
              
              2004
              
              (Decrease)
              
              ChangeNew
                  vehicle data:Retail
                  gross profit - same store
              $2,568
              
              $2,453
              
              $115
              
              4.7%Retail
                  gross profit - other stores (1)
              13
              
              360
              
              (347)
              
              (96.4)%Total
                  new retail gross profit
              2,581
              
              2,813
              
              (232)
              
              (8.2)%Fleet
                  gross profit
              6
              
              4
              
              2
              
              50.0%Total
                  new vehicles gross profit, as reported
              $2,587
              
              $2,817
              
              $(230)
              
              (8.2)%Gross
                  profit percentage
              6.7%
              
              6.4%New
                  retail units - same store
              1,484
              
              1,429
              
              55
              
              3.8%New
                  retail units - other stores (1)
              -
              
              204
              
              (204)
              
              *Fleet
                  units
              38
              
              30
              
              8
              
              26.7%Total
                  new vehicle units
              1,522
              
              1,663
              
              (141)
              
              (8.5)%Used
                  vehicle data:Retail
                  gross profit - same store
              $1,452
              
              $1,486
              
              $(34)
              
              (2.3)%Retail
                  gross profit - other stores (1)
              19
              
              76
              
              (57)
              
              (75.0)%Total
                  used retail gross profit
              1,471
              
              1,562
              
              (91)
              
              (5.8)%Wholesale
                  gross profit - same store
              (28)
              
              35
              
              (63)
              
              *Wholesale
                  gross profit - other stores (1)
              -
              
              (13)
              
              13
              
              *Total
                  wholesale gross profit
              (28)
              
              22
              
              (50)
              
              *Total
                  used vehicle gross profit, as reported
              $1,443
              
              $1,584
              
              $(141)
              
              (8.9)%Gross
                  profit percentage
              9.2%
              
              9.3%Used
                  retail units - same store
              745
              
              805
              
              (60)
              
              (7.5)%Used
                  retail units - other stores (1)
              -
              
              59
              
              (59)
              
              *Used
                  wholesale units - same store
              844
              
              868
              
              (24)
              
              (2.8)%Used
                  wholesale units - other stores (1)
              -
              
              64
              
              (64)
              
              *Total
                  used units
              1,589
              
              1,796
              
              (207)
              
              (11.5)%Parts
                  and service:Parts
                  and service gross profit - same store
              $2,874
              
              $2,696
              
              $178
              
              6.6%Parts
                  and service gross profit - other stores (1)
              -
              
              591
              
              (591)
              
              *Total
                  parts and service revenue
              $2,874
              
              $3,287
              
              $(413)
              
              (11.8)%Gross
                  profit percentage
              54.8%
              
              54.9%Other
                  gross profit:Other
                  gross profit - same store
              $1,881
              
              $1,979
              
              $(98)
              
              (5.0)%Other
                  gross profit - other stores (1)
              -
              
              137
              
              (137)
              
              *Total
                  other gross profit, as reported
              $1,881
              
              $2,116
              
              $(235)
              
              (11.1)%Gross
                  profit percentage
              100.0%
              
              100.0%Other
                  gross profit PVR - same store
              $844
              
              $886
              
              $(42)
              
              (4.7)%Other
                  gross profit PVR - other stores (1)
              N/A
              
              521
              
              N/A
              
              N/ATotal
                  other gross profit PVR, as reported
              $844
              
              $847
              
              $(4)
              
              (0.4)%
  27
 ***Gross
                    Profit -(continued)***
                
                For
                  the Three Months EndedSeptember
                    30,
                
                Increase
                
                %(in
                    thousands, except per vehicle data)
                
                2005
                
                2004
                
                (Decrease)
                
                ChangeTotal
                    gross profit:Same
                    store
                
                $
                8,753
                
                $
                8,653
                
                $
                100
                
                
                1.2
                %Other
                    stores (1)
                
                
                32
                
                
                1,151
                
                
                (1,119
                )
                
                (97.2
                )%Total
                    gross profit, as reported
                
                $
                8,785
                
                $
                9,804
                
                $
                (1,019
                )
                
                (10.4
                )%Gross
                    profit percentage
                
                
                14.3
                %
                
                14.1
                %
 (1)
        Represents the Westwood Lincoln Mercury dealership operations transferred
        on May
        11, 2005 and the used car outlet closed August 2004.
 
 *
        -
        Percentage is 100% or greater.
 N/A
        - Not
        applicable due to -0- unit sales.
 
 The
        percentages used in the gross profit discussion below are from the above
        table.
 
 Total
        gross profit decreased $1.0 million, or 10.4%, to $8.8 million for the three
        months ended September 30, 2005, from $9.8 million for the three months ended
        September 30, 2004. Same store total gross profit increased $0.1 million,
        or
        1.2% to $8.8 million for the three months ended September 30, 2005, from
        $8.7
        million for the three months ended September 30, 2004. Same store gross profit
        on new retail vehicle sales increased $0.1 million, or 4.7%, to $2.6 million
        for
        the three months ended September 30, 2005, from $2.5 million for the three
        months ended September 30, 2004. The increase in gross profit is primarily
        attributable to a 3.8% increase in unit sales combined with a 0.8% increase
        in
        new retail gross profit per unit. Similar to revenues, the gain is mostly
        attributable to the Toyota dealerships ($0.2 million), partially offset by
        decreases at certain other dealerships, primarily Lincoln Mercury.
 
 Same
        store gross profit on used vehicle retail sales decreased less than $0.1
        million, or 2.3%, to $1.5 million for the three months ended September 30,
        2005,
        from $1.5 million for the three months ended September 30, 2004. Similar
        to
        revenues, the decrease is primarily attributable to the 7.5% decrease ($0.1
        million) in units sold, partially offset by a 5.6% increase in average gross
        profit per unit (less than $0.1 million). The company strives to maintain
        a
        certain gross profit percentage, so the increase in the average revenue per
        vehicle sold at retail should translate into a higher gross profit per unit.
        The
        wholesale market began to weaken in the third quarter, causing the decrease
        in
        related gross profit. Although the vehicles were of high quality, generating
        a
        relatively high sales price, in many instances the wholesale value decreased
        to
        below our cost.
 
 Same
        store parts and service gross profit increased $0.2 million, or 6.6%, to
        $2.9
        million for the three months ended September 30, 2005, from $2.7 million
        for the
        three months ended September 30, 2004 primarily due the 5.7% increase in
        parts
        and service revenues.
 
 ***Selling,
        General and Administrative Expenses*** **(“S,G&A”)**
 
 S,G&A
        decreased $0.6 million, or 7.2%, to $7.7 million for the three months ended
        September 30, 2005 from $8.3 million for the three months ended September
        30,
        2004. This decrease was primarily attributable to the closing of the used
        car
        outlet in August 2004 and the transfer of the Westwood dealership in May
        2005
        (together totaling $1.1 million). Data processing costs decreased (less than
        $0.1 million) primarily due to the expiration of certain contracts where
        the
        ongoing costs for the similar service have decreased under the terms of the
        new
        contracts. Partially offsetting this are costs associated with the Exchange
        Agreement of $0.5 million and legal costs associated with the related class
        action lawsuit of $0.1 million. See Notes 9 and Note 10 to the unaudited
        consolidated financial statements.
 
 ***Interest
        Expense***
 
 Interest
        expense increased less than $0.1 million, remaining constant at $0.8 million
        for
        the three months ended September 30, 2005 and September 30, 2004. The increase
        is primarily due to an increase of floorplan interest expense resulting from
        higher interest rates partially offset by decreased borrowings resulting
        from
        one less dealership in 2005 compared to 2004 and lower average inventories
        at
        the remaining dealerships.
  28
 
 ***Provision
        for income tax***
 
 The
        effective income tax rate was 40% in the quarter ended September 30, 2005
        and
        27% in the same period of 2004. The rates were based on current forecasts
        of
        income before taxes, and current forecasts of permanent differences between
        tax
        and book income. The 2005 rate reflects the expected effective tax rate for
        the
        year. The 2004 rate reflects the expected full year effective tax rate of
        40%
        adjusted for a reduction in the valuation allowance associated with the 2004
        amortization of goodwill for tax purposes. At December 31, 2004 deferred
        taxes
        were adjusted primarily to reflect a reduction of the valuation allowance
        on the
        deferred tax asset due to the ability to project sufficient income to recover
        the deferred tax asset. Deferred taxes, including the valuation allowance,
        will
        be reviewed throughout fiscal 2005.
 
 ***Net
        Income***
 
 Net
        income decreased $0.4 million to $0.2 million for the three months ended
        September 30, 2005, from $0.6 million for the three months ended September
        30,
        2004. See above for explanation of changes.
 
 ***Earnings
        Per Share, Basic and Diluted and Weighted Average
        Shares***
 
 “Basic
        earnings (loss) per share” is computed by dividing net income (loss) by the
        weighted average common shares outstanding. “Diluted earnings (loss) per share”
is computed by dividing net income (loss) 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 three months ended September 30, 2005
        and
        2004 is $0.03 and $0.08, respectively.
  29
 
 ***Nine
        months ended September 30, 2005 compared with nine months ended September
        30,
        2004.***
 
 ***Revenues***
              
              For
                  the Nine Months EndedSeptember
                  30,
              
              Increase
              
              %(in
                  thousands, except per vehicle data)
              
              2005
              
              2004
              
              (Decrease)
              
              ChangeNew
                  vehicle data:Retail
                  revenues - same store
              
              $
              105,877
              
              $
              103,566
              
              $
              2,311
              
              
              2.2
              %Retail
                  revenues - other stores (1)
              
              
              9,022
              
              
              25,535
              
              
              (16,513
              )
              
              (64.7
              )%Total
                  new retail revenues
              
              
              114,899
              
              
              129,101
              
              
              (14,202
              )
              
              (11.0
              )%Fleet
                  revenues - same store
              
              
              2,314
              
              
              1,081
              
              
              1,233
              
              
              *Total
                  new vehicles revenues, as reported
              
              $
              117,213
              
              $
              130,182
              
              $
              (12,969
              )
              
              (10.0
              )%New
                  retail units - same store
              
              
              4,122
              
              
              4,032
              
              
              90
              
              
              2.2
              %New
                  retail units - other stores (1)
              
              
              245
              
              
              717
              
              
              (472
              )
              
              (65.8
              )%Fleet
                  units
              
              
              132
              
              
              65
              
              
              67
              
              
              *Total
                  new vehicle units
              
              
              4,499
              
              
              4,814
              
              
              (315
              )
              
              (6.5
              )%Used
                  vehicle data:Retail
                  revenues - same store
              
              $
              36,181
              
              $
              35,289
              
              $
              892
              
              
              2.5
              %Retail
                  revenues - other stores (1)
              
              
              789
              
              
              3,384
              
              
              (2,595
              )
              
              (76.7
              )%Total
                  used retail revenues
              
              
              36,970
              
              
              38,673
              
              
              (1,703
              )
              
              (4.4
              )%Wholesale
                  revenues - same store
              
              
              10,815
              
              
              9,942
              
              
              873
              
              
              8.8
              %Wholesale
                  revenues - other stores (1)
              
              
              419
              
              
              1,018
              
              
              (599
              )
              
              (58.8
              )%Total
                  wholesale revenues
              
              
              11,234
              
              
              10,960
              
              
              274
              
              
              2.5
              %Total
                  used vehicle revenue, as reported
              
              $
              48,204
              
              $
              49,633
              
              $
              (1,429
              )
              
              (2.9
              )%Used
                  retail units - same store
              
              
              2,194
              
              
              2,340
              
              
              (146
              )
              
              (6.2
              )%Used
                  retail units - other stores (1)
              
              
              45
              
              
              220
              
              
              (175
              )
              
              (79.5
              )%Used
                  wholesale units - same store
              
              
              2,424
              
              
              2,630
              
              
              (206
              )
              
              (7.8
              )%Used
                  wholesale units - other stores
              
              
              59
              
              
              137
              
              
              (78
              )
              
              (56.9
              )%Total
                  used units
              
              
              4,722
              
              
              5,327
              
              
              (605
              )
              
              (11.4
              )%Parts
                  and service:Parts
                  and service revenues - same store
              
              $
              15,804
              
              $
              15,038
              
              $
              766
              
              
              5.1
              %Parts
                  and service revenues - other stores (1)
              
              
              1,507
              
              
              3,060
              
              
              (1,553
              )
              
              (50.8
              )%Total
                  parts and service revenue
              
              $
              17,311
              
              $
              18,098
              
              $
              (787
              )
              
              (4.3
              )%Other
                  revenues, net:Other
                  revenues, net - same store
              
              $
              5,715
              
              $
              5,757
              
              $
              (42
              )
              
              (0.7
              )%Other
                  revenues, net - other stores (1)
              
              
              119
              
              
              466
              
              
              (347
              )
              
              (74.5
              )%Total
                  other revenues, net, as reported
              
              $
              5,834
              
              $
              6,223
              
              $
              (389
              )
              
              (6.3
              )%Total
                  revenue:Same
                  store
              
              $
              176,706
              
              $
              170,673
              
              $
              6,033
              
              
              3.5
              %Other
                  stores (1)
              
              
              11,856
              
              
              33,463
              
              
              (21,607
              )
              
              (64.6
              )%Total
                  revenue, as reported
              
              $
              188,562
              
              $
              204,136
              
              $
              (15,574
              )
              
              (7.6
              )%
 
 (1)
        Represents the Westwood Lincoln Mercury dealership operations transferred
        on May
        11, 2005 and the used car outlet closed August 2004.
  30
 
 *
        -
        Percentage is 100% or greater.
 
 The
        percentages used in the gross profit discussion below are from the above
        table.
 
 Total
        revenue decreased $15.5 million, or 7.6% to $188.6 million for the nine months
        ended September 30, 2005 from $204.1 million for the nine months ended September
        30, 2004. Same store total revenues increased $6.0 million or 3.5% to $176.7
        million for the nine months ended September 30, 2005 from $170.7 million
        for the
        nine months ended September 30, 2004. Same store new retail revenues increased
        $2.3 million, or 2.2% to $105.9 million for the nine months ended September
        30,
        2005 from $103.6 million for the nine months ended September 30, 2004. This
        increase was directly attributable to the 2.2% increase in additional units
        ($2.3 million) sold in 2005 compared to 2004. The increase in same store
        new
        retail revenues was primarily due to increases at our Toyota dealerships
        ($5.7
        million), partially offset by a decline at our Lincoln Mercury dealerships
        ($3.7
        million). The increase ($0.4 million) attributable to the remaining dealerships
        occurred during the third quarter and was aided by the “Employee Pricing Plant”
promotion, which aided unit sales. Hometown’s new retail revenues are indicative
        of sales reported by our manufacturers nationally, Toyota continues to be
        experiencing growth in the United States while the domestics remain stagnant
        or
        decline. Same store used vehicle retail revenues increased $0.9 million,
        or 2.5%
        to $36.2 million for the nine months ended September 30, 2005 from $35.3
        million
        for the nine months ended September 30, 2004. This increase was primarily
        due to
        a 9.3% increase in average selling price ($3.1 million) in 2005 compared
        to
        2004, partially offset by a 6.2% decrease in units sold ($2.2 million). Although
        the used vehicle market has been challenging, personnel changes in certain
        dealerships enabled Hometown to show an increase over the prior
        year. **** Contributing
        to the decrease in units was the aforementioned “Employee Pricing Plan”, which
        occurred in the third quarter of 2005, which pushed potential buyers of used
        vehicles toward the purchase of a new vehicle. The retail used vehicle market
        continues to be difficult, with most dealerships experiencing a decrease
        in
        units for the third quarter. Certain used vehicles that have high gas mileage
        saw their values increase in the third quarter as the price of gasoline soared,
        contributing to the increase in average selling price of used vehicles. Same
        store wholesale revenues increased $0.9 million, or 8.8% to $10.8 million
        for
        the nine months ended September 30, 2005 from $9.9 million for the nine months
        ended September 30, 2004 due to increased strength in the wholesale market
        compared to the prior year. The increase in average selling price is also
        a
        function of the retail sales unit volume. 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. Wholesale
        prices began to weaken toward the latter part of the third quarter with the
        increase in used car inventories. The “Employee Pricing Program” caused a surge
        in new vehicle sales, that brought in more used cars as trade-ins.
 
 Parts
        and
        service revenue decreased $0.8 million or 4.3% to $17.3 million for the nine
        months ended September 30, 2005 from $18.1 million for the nine months ended
        September 30, 2004. On a same store basis, parts and service revenue increased
        $0.8 million or 5.1% to $15.8 million for the nine months ended September
        30,
        2005 from $15.0 million for the nine months ended September 30, 2004. The
        increase was primarily due to the Toyota dealerships ($0.6 million), and
        is
        attributable to the increase in the dealerships new vehicles revenues. These
        dealerships have been able to attract these customers to remain with the
        dealership for their vehicle maintenance needs. As part of the new car sales
        process you also strive to gain that customer as a service customer as well.
 
 Other
        dealership revenues decreased $0.4 million, or 6.3% to $5.8 million for the
        nine
        months ended September 30, 2005 from $6.2 million for the nine months ended
        September 30, 2004. On a same store basis, other dealership revenues decreased
        less than $0.1 million or 0.7% to $5.7 million for the nine months ended
        September 30, 2005 from $5.8 million for the nine months ended September
        30,
        2004.
  31
 
 ***Gross
                  Profit***
              
              For
                the Nine Months EndedSeptember
                  30,
              
              Increase
              
              %(in
                  thousands, except per vehicle data)
              
              2005
              
              2004
              
              (Decrease)
              
              ChangeNew
                  vehicle data:Retail
                  gross profit - same store
              
              $
              7,256
              
              $
              7,199
              
              $
              57
              
              
              0.8
              %Retail
                  gross profit - other stores (1)
              
              
              477
              
              
              1,186
              
              
              (709
              )
              
              (59.8
              )%Total
                  new retail gross profit
              
              
              7,733
              
              
              8,385
              
              
              (652
              )
              
              (7.8
              )%Fleet
                  gross profit
              
              
              21
              
              
              8
              
              
              13
              
              
              *Total
                  new vehicles gross profit, as reported
              
              $
              7,754
              
              $
              8,393
              
              $
              (639
              )
              
              (7.6
              )%Gross
                  profit percentage
              
              
              6.6
              %
              
              6.4
              %New
                  retail units - same store
              
              
              4,122
              
              
              4,032
              
              
              90
              
              
              2.2
              %New
                  retail units - other stores (1)
              
              
              245
              
              
              717
              
              
              (472
              )
              
              (65.8
              )%Fleet
                  units
              
              
              132
              
              
              65
              
              
              67
              
              
              *Total
                  new vehicle units
              
              
              4,499
              
              
              4,814
              
              
              (315
              )
              
              (6.5
              )%Used
                  vehicle data:Retail
                  gross profit - same store
              
              $
              4,170
              
              $
              4,246
              
              $
              (76
              )
              
              (1.8
              )%Retail
                  gross profit - other stores (1)
              
              
              125
              
              
              297
              
              
              (172
              )
              
              (57.9
              )%Total
                  used retail gross profit
              
              
              4,295
              
              
              4,543
              
              
              (248
              )
              
              (5.5
              )%Wholesale
                  gross profit - same store
              
              
              264
              
              
              162
              
              
              102
              
              
              63.0
              %Wholesale
                  gross profit - other stores (1)
              
              
              (6
              )
              
              7
              
              
              (13
              )
              
              *Total
                  wholesale gross profit
              
              
              258
              
              
              169
              
              
              89
              
              
              52.7
              %Total
                  used vehicle gross profit, as reported
              
              $
              4,553
              
              $
              4,712
              
              $
              (159
              )
              
              (3.4
              )%Gross
                  profit percentage
              
              
              9.4
              %
              
              9.5
              %Used
                  retail units - same store
              
              
              2,194
              
              
              2,340
              
              
              (146
              )
              
              (6.2
              )%Used
                  retail units - other stores (1)
              
              
              45
              
              
              220
              
              
              (175
              )
              
              (79.5
              )%Used
                  wholesale units - same store
              
              
              2,424
              
              
              2,630
              
              
              (206
              )
              
              (7.8
              )%Used
                  wholesale units - other stores
              
              
              59
              
              
              137
              
              
              (78
              )
              
              (56.9
              )%Total
                  used units
              
              
              4,722
              
              
              5,327
              
              
              (605
              )
              
              (11.4
              )%Parts
                  and service:Parts
                  and service gross profit - same store
              
              $
              8,563
              
              $
              8,103
              
              $
              460
              
              
              5.7
              %Parts
                  and service gross profit - other stores (1)
              
              
              863
              
              
              1,726
              
              
              (863
              )
              
              (50.0
              )%Total
                  parts and service revenue
              
              $
              9,426
              
              $
              9,829
              
              $
              (403
              )
              
              (4.1
              )%Gross
                  profit percentage
              
              
              54.5
              %
              
              54.3
              %Other
                  gross profit:Other
                  gross profit - same store
              
              $
              5,715
              
              $
              5,757
              
              $
              (42
              )
              
              (0.7
              )%Other
                  gross profit - other stores (1)
              
              
              119
              
              
              466
              
              
              (347
              )
              
              (74.5
              )%Total
                  other gross profit, as reported
              
              $
              5,834
              
              $
              6,223
              
              $
              (389
              )
              
              (6.3
              )%Gross
                  profit percentage
              
              
              100.0
              %
              
              100.0
              %Other
                  gross profit PVR - same store
              
              $
              905
              
              $
              903
              
              $
              2
              
              
              0.2
              %Other
                  gross profit PVR - other stores (1)
              
              
              410
              
              
              497
              
              
              (87
              )
              
              (17.5
              )%Total
                  other gross profit PVR, as reported
              
              $
              883
              
              $
              851
              
              $
              32
              
              
              3.7
              %
 32
  ***Gross
                    Profit - (continued)***
                
                For
                    the Nine Months EndedSeptember
                    30,
                
                Increase
                
                %(in
                    thousands, except per vehicle data)
                
                2005
                
                2004
                
                (Decrease)
                
                ChangeTotal
                    gross profit:Same
                    store
                
                $
                25,989
                
                $
                25,475
                
                $
                514
                
                
                2.0
                %Other
                    stores (1)
                
                
                1,578
                
                
                3,682
                
                
                (2,104
                )
                
                (57.1
                )%Total
                    gross profit, as reported
                
                $
                27,567
                
                $
                29,157
                
                $
                (1,590
                )
                
                (5.5
                )%Gross
                    profit percentage
                
                
                14.6
                %
                
                14.3
                %
 
 (1)
        Represents the Westwood Lincoln Mercury dealership operations transferred
        on May
        11, 2005 and the used car outlet closed August 2004.
 
 *
        -
        Percentage is 100% or greater.
 
 The
        percentages used in the gross profit discussion below are from the above
        table.
 
 Total
        gross profit decreased $1.6 million, or 5.5%, to $27.6 million for the nine
        months ended September 30, 2005, from $29.2 million for the nine months ended
        September 30, 2004. Same store total gross profit increased $0.5 million,
        or
        2.0% to $26.0 million for the nine months ended September 30, 2005, from
        $25.5
        million for the nine months ended September 30, 2004. Same store gross profit
        on
        new retail vehicle sales increased less than $0.1 million, or 0.8%, to $7.3
        million for the nine months ended September 30, 2005, from $7.2 million for
        the
        nine months ended September 30, 2004. The increase in gross profit is primarily
        attributable to a 2.2% increase in unit sales partially offset by a 1.5%
        decrease in new retail gross profit per unit. It is expected that margins
        on new
        vehicles will continue to be under pressure as the manufacturers continue
        to
        contend with competitive pricing issues. Similar to revenues, the increase
        was
        due mostly to the Toyota dealerships partially offset by a decline at the
        Lincoln Mercury dealerships.
 
 Same
        store gross profit on used vehicle retail sales decreased less than $0.1
        million, or 1.8%, to $4.2 million for the nine months ended September 30,
        2005,
        from $4.2 million for the nine months ended September 30, 2004. The overall
        decrease is attributable to the 6.2% decrease in units sold partially offset
        by
        a 4.7% increase in average gross profit per unit. The company strives to
        maintain a certain gross profit percentage, so the increase in the average
        revenue per vehicle sold at retail should translate into a higher gross profit
        per unit. In addition, strength in the wholesale market, during the first
        half
        of the year, enabled the company to increase its wholesale gross profit compared
        to the prior year.
 
 Same
        store parts and service gross profit increased $0.5 million, or 5.7%, to
        $8.6
        million for the nine months ended September 30, 2005, from $8.1 million for
        the
        nine months ended September 30, 2004 primarily due to the 5.1% increase parts
        and service revenues. Similar to revenues, the increase is primarily
        attributable to the Toyota dealerships.
 
 ***Selling,
        General and Administrative Expenses*** ***(“S,G&A”)***
 
 S,G&A
        decreased $1.9 million, or 7.5%, to $23.5 million for the nine months ended
        September 30, 2005 from $25.4 million for the nine months ended September
        30,
        2004. This decrease was primarily attributable to the closing of the used
        car
        outlet in August 2004 and the transfer of the Westwood dealership in May
        2005
        (together totaling $2.1 million). Additional decreases totaled approximately
        $0.3 million, comprising primarily of decreases in rent and related building
        costs ($0.1 million), legal and professional fees ($0.1 million) and data
        processing costs ($0.1 million). The decrease in rent is primarily due to
        purchasing a building in September 2004, which Hometown had previously rented.
        The decrease in legal and professional fees was due to the settlement of
        certain
        litigation at the end of 2004, partially offset by legal costs incurred during
        the third quarter of 2005 associated with a class action lawsuit ($0.1 million).
        See Note 9 to the unaudited consolidated financial statements. The decrease
        in
        data processing costs is primarily due to the expiration of certain contracts
        where the ongoing costs for the similar service have decreased under the
        terms
        of the new contracts. Partially offsetting these are costs associated with
        the
        Exchange Agreement of $0.5 million. See Note 10 to the unaudited consolidated
        financial statements.
 
 ***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 9 to the unaudited consolidated financial
        statements.
  33
 
 ***Interest
        Expense***
 
 Interest
        expense increased $0.2 million, or 8.3%, to $2.6 million for the nine months
        ended September 30, 2005, from $2.4 million for the nine months ended September
        30, 2004. The increase is primarily due to an increase of floorplan interest
        expense resulting from higher interest rates partially offset by decreased
        borrowings resulting from one less dealership in 2005 compared to 2004 and
        lower
        average inventories at the remaining dealerships.
 
 ***Provision
        for income tax***
 
 The
        effective income tax rate was 40% in the nine months ended September 30,
        2005
        and 27% in the same period of 2004. The rates were based on current forecasts
        of
        income before taxes, and current forecasts of permanent differences between
        tax
        and book income. The 2005 rate reflects the expected effective tax rate for
        the
        year. The 2004 rate reflects the expected full year effective tax rate of
        40%
        adjusted for a reduction in the valuation allowance associated with the 2004
        amortization of goodwill for tax purposes. At December 31, 2004 deferred
        taxes
        were adjusted primarily to reflect a reduction of the valuation allowance
        on the
        deferred tax asset due to the ability to project sufficient income to recover
        the deferred tax asset. Deferred taxes, including the valuation allowance,
        will
        be reviewed throughout fiscal 2005.
 
 ***Net
        Income***
 
 Net
        income increased $0.2 million to $1.3 million for the nine months ended
        September 30, 2005, from $1.1 million for the nine months ended September
        30,
        2004. The increase is primarily due to a gain on transfer of certain assets
        in
        relation to settlement of litigation recorded in Other Income. See above
        for
        explanation of other changes.
 
 ***Earnings
        Per Share, Basic and Diluted and Weighted Average
        Shares***
 
 “Basic
        earnings (loss) per share” is computed by dividing net income (loss) by the
        weighted average common shares outstanding. “Diluted earnings (loss) per share”
is computed by dividing net income (loss) 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, 2005
        and September
        30, 2004 is
        $0.20
        and $0.15, respectively.
 
 ***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.
  34
 
 ***Effects
        of
        Inflation***
 
 Due
        to
        the relatively low levels of inflation experienced in the 2005 and 2004 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 $5.8 million and $6.1 million at September
        30,
        2005 and December 31, 2004, respectively.
 
 *Cash
        Flow from Operations*
 
 The
        following table sets forth the consolidated selected information from the
        unaudited statements of cash flows:
 (in
                  thousands)
              
              Nine
                  months ended
                September
                  30,2005
              
              2004Net
                  cash provided by operating activities
              
              $
              5,310
              
              $
              2,016Net
                  cash (used in) investing activities
              
              
              (132
              )
              
              (1,821
              )Net
                  cash (used in) financing activities
              
              
              (5,473
              )
              
              (610
              )Net
                  (decrease) in cash and cash equivalents
              
              $
              (295
              )
              $
              (415
              )
 
 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).
  35
 
 For
        the
        nine months ended September 30, 2004, net cash provided from operations of
        $2.0
        million primarily consists of: (i) net income of $1.1 million plus non-cash
        items of $1.4 million (totaling $2.5 million) and (ii) an increase in floor
        plan
        liability - trade of $1.2 million less the increase in inventory of $0.1
        million; partially offset by (iii) an increase in accounts receivable of
        $1.2
        million due to the increased level of sales that occurred in September 2004
        compared to December 2003, (iv) prepaid income taxes of $0.2 million and
        (v) a
        decrease in accounts payable and accrued expenses of $0.1 million. Inventory
        and
        related floor plan liability (trade and non-trade) increased due to dealerships
        increasing inventory levels in anticipation of increased sales which did
        not
        materialize. Total floor plan liability increased more than the increase
        in
        inventory due to timing of floor plan payments. Net cash used in investing
        activities of $1.8 million is due to capital
        expenditures, primarily the Brattleboro, Vt. building purchased in September
        2004 for $1.5 million. Net
        cash
        used in financing activities of $0.6 million is due to: (i) principal payments
        of long-term debt and capital lease obligations of $1.7 million, (ii) the
        net
        change (decrease) in non-trade floorplan notes payable of $0.5 million (see
        operating activities); partially offset by (iii) proceeds from long-term
        borrowings of $1.4 million and (iv) exercise of warrants of $0.3 million.
        The
        long-term borrowings were used to acquire the Brattleboro, Vt. building
        discussed above.
 
 *Capital
        Expenditures*
 
 Capital
        expenditures for fiscal 2005 are expected to be $0.3 million, consisting
        primarily of equipment purchases and building and leasehold improvements.
 
 *Receivables*
 
 Hometown
        had $4.7 million in accounts receivable, net at September 30, 2005 compared
        to
        $5.1 million at December 31, 2004. The decrease in receivables is due to
        the
        transfer of the Westwood dealership ($0.5 million). See Note 9 to
        the
        unaudited consolidated financial statements. Partially offsetting this is an increase due to a slight increase in sales
        in
        the month of September 2005 compared to December 2004. The majority of accounts
        receivables, $2.3 million and $2.4 million as of September 30, 2005 and December
        31, 2004, 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. Also
        included are amounts due from manufacturers, which was $1.2 million and $1.7
        million as
        of
        September 30, 2005 and December 31, 2004. These amounts primarily represent
        payments of rebates and other incentives that are paid on a monthly or quarterly
        basis. (Also included in due
        from
        manufacturers in 2005
        is $0.2 million due from Lincoln Mercury related to the Westwood dealership
        transfer.) The
        allowance for doubtful accounts is $0.2 million at September 30, 2005 and
        $0.3
        million December 31, 2004. The decrease in the allowance is primarily due
        to an
        improvement in the accounts receivable ageing.
 
 *Inventories*
 
 Hometown
        had $27.9 million in inventories, net at September 30, 2005 compared to $43.4
        million at December 31, 2004. The majority of inventory, $18.2 million and
        $33.6
        million as of September 30, 2005 and December 31, 2004, respectively, is
        new
        vehicle inventory. The decrease is primarily due one less dealership (Westwood
        Lincoln Mercury - $6.5 million) along with an improvement (reduction) in
        inventory levels at our dealerships due to better inventory management. 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 $0.5 million and $0.7 million at September
        30,
        2005 and December 31, 2004, respectively. The decrease in the lower of cost
        or
        market adjustment was primarily due to the transfer of the Westwood dealership.
        See Note 9 to the unaudited consolidated financial statements.
  36
 
 *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 Quarterly Report on Form 10Q/A, 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.
 
 **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 (trade
        plus non-trade) amounts outstanding at September 30, 2005 of $26.3 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, 2005, Hometown invested $4.7 million of excess cash, of which
        $0.8
        million was invested in money market accounts paying a weighted average interest
        rate of 3.23% at September 30, 2005, and $3.9 million was invested in a Ford
        Motor Credit Company cash management account paying interest of 7.75% at
        September 30, 2005. 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.
  37
 
 At
        September 30, 2005, 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 at the reasonable assurance
        level to accomplish their objectives.
 
 There
        have been no 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.
 
 **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 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 Certification31.2
              Chief
                  Financial Officer Certification32.1
              Chief
                  Executive Officer Certification pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  200232.2
              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
  38
  **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.April
                14,
                2006
              By:
              /s/
                Corey E.
                ShakerDate:
              Corey
                E. ShakerPresident
                and
                Chief Executive Officer
 April
                14,
                2006
              By:
              /s/
                Charles
                F. SchwartzDate:
              Charles
                F. SchwartzChief
                Financial Officer
  39