SECURITIES
      AND EXCHANGE COMMISSION





WASHINGTON,
      D.C. 20549





FORM
      10-Q





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


EXCHANGE
      ACT OF 1934





For
      the
      quarterly period ended June 30, 2006








Commission
      file number: 000-24669








HOMETOWN
      AUTO RETAILERS, INC.


(Exact
      name of Registrant as specified in its charter)





Delaware
            06-1501703(State
                or other jurisdiction of
            (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 o





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





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





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





Title
            
            Outstanding
              As
                of August 8, 2006Common
                Stock, Class A, par value $.001 per share
            
            3,910,137Common
                Stock, Class B, par value $.001 per share
            
            2,579,252





INDEX






PagePART
                I.
            FINANCIAL
                INFORMATIONITEM
                1.
            Consolidated
                Balance Sheets at June 30, 2006 (Unaudited)and
                December 31, 2005 (Audited)
            3Unaudited
                Consolidated Statements of Operations for the threeand
                six months ended June 30, 2006 and 2005 (Restated)
            4Unaudited
                Consolidated Statements of Stockholders’ Equityfor
                the three and six months ended June 30, 2006 and 2005
                (Restated)
            5Unaudited
                Consolidated Statements of Cash Flows for the six monthsended
                June 30, 2006 and 2005 (Restated)
            6Notes
                to Unaudited Consolidated Financial Statements
            7ITEM
                2.
            Management’s
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            20ITEM
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            35ITEM
                4.
            Controls
                and Procedures
            35PART
                II.
            OTHER
                INFORMATIONITEM
                1.
            Legal
                Proceedings
            36ITEM
                1A.
            Risk
                Factors
            36ITEM
                2.
            Unregistered
                Sales Of Equity Securities and Use of Proceeds
            36ITEM
                3.
            Defaults
                Upon Senior Securities
            36ITEM
                4.
            Submission
                of Matters to a Vote of Security Holders
            36ITEM
                5.
            Other
                Information
            36ITEM
                6.
            Exhibits
            36SIGNATURES
            
            37CERTIFICATIONS
            
            38





**FORWARD
      LOOKING STATEMENTS**





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


2





**HOMETOWN
                AUTO RETAILERS, INC.****CONSOLIDATED
                BALANCE SHEETS****(in
                thousands, except share and per share data)**June
                30,
            
            December
                31,ASSETS
            
            2006
            
            2005(Unaudited)
            
            (Audited)Current
                Assets:Cash
                and cash equivalents
            
            $
            5,469
            
            $
            6,453Accounts
                receivable, net
            
            
            4,498
            
            
            4,330Inventories,
                net
            
            
            35,845
            
            
            33,542Prepaid
                expenses and other current assets
            
            
            692
            
            
            568Deferred
                and prepaid income taxes
            
            
            1,039
            
            
            1,039Total
                current assets
            
            
            47,543
            
            
            45,932Property
                and equipment, net
            
            
            12,808
            
            
            13,035Other
                assets
            
            
            4,843
            
            
            2,919Total
                assets
            
            $
            65,194
            
            $
            61,886LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                Liabilities:Floor
                plan notes payable - trade
            
            $
            5,215
            
            $
            6,697Floor
                plan notes payable - non-trade
            
            
            28,612
            
            
            26,265Accounts
                payable and accrued expenses
            
            
            3,928
            
            
            3,909Current
                maturities of long-term debt and capital lease obligations
            
            
            1,327
            
            
            5,245Deferred
                revenue
            
            
            195
            
            
            207Total
                current liabilities
            
            
            39,277
            
            
            42,323Long-term
                debt and capital lease obligations
            
            
            14,639
            
            
            7,884Other
                long-term liabilities and deferred revenue
            
            
            77
            
            
            128Total
                liabilities
            
            
            53,993
            
            
            50,335Commitments
                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 shares issued and outstanding
            
            
            4
            
            
            4Common
                stock, Class B, $.001 par value, 3,760,000 sharesauthorized,
                2,579,252 shares issued and outstanding
            
            
            2
            
            
            2Additional
                paid-in capital
            
            
            29,028
            
            
            29,022Accumulated
                deficit
            
            
            (17,833
            )
            
            (17,477
            )Total
                stockholders' equity
            
            
            11,201
            
            
            11,551Total
                liabilities and stockholders' equity
            
            $
            65,194
            
            $
            61,886




The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.





3


**HOMETOWN
                AUTO RETAILERS, INC.****UNAUDITED
                CONSOLIDATED STATEMENTS OF OPERATIONS****(in
                thousands, except share and per share data)**For
                the Three Months
            
            For
                the Six MonthsEnded
                June 30,
            
            Ended
                June 30,2006
            
            2005
            
            2006
            
            2005(Restated)
            
            
            
            (Restated)RevenuesNew
                vehicle sales
            
            $
            34,141
            
            $
            40,645
            
            $
            60,697
            
            $
            78,670Used
                vehicle sales
            
            
            15,598
            
            
            16,921
            
            
            30,859
            
            
            32,481Parts
                and service sales
            
            
            5,315
            
            
            5,909
            
            
            10,548
            
            
            12,065Other,
                net
            
            
            1,946
            
            
            1,879
            
            
            3,913
            
            
            3,953Total
                revenues
            
            
            57,000
            
            
            65,354
            
            
            106,017
            
            
            127,169Cost
                of salesNew
                vehicle
            
            
            31,766
            
            
            37,911
            
            
            56,527
            
            
            73,503Used
                vehicle
            
            
            14,067
            
            
            15,368
            
            
            27,764
            
            
            29,371Parts
                and service
            
            
            2,426
            
            
            2,648
            
            
            4,926
            
            
            5,513Total
                cost of sales
            
            
            48,259
            
            
            55,927
            
            
            89,217
            
            
            108,387Gross
                profit
            
            
            8,741
            
            
            9,427
            
            
            16,800
            
            
            18,782Selling,
                general and administrative expenses
            
            
            7,272
            
            
            7,699
            
            
            14,509
            
            
            15,708Income
                from operations
            
            
            1,469
            
            
            1,728
            
            
            2,291
            
            
            3,074Interest
                income
            
            
            94
            
            
            59
            
            
            193
            
            
            129Interest
                (expense)
            
            
            (1,070
            )
            
            (924
            )
            
            (3,069
            )
            
            (1,844
            )Other
                income
            
            
            5
            
            
            589
            
            
            8
            
            
            591Other
                (expense)
            
            
            -
            
            
            -
            
            
            (20
            )
            
            -Pre-tax
                income (loss)
            
            
            498
            
            
            1,452
            
            
            (597
            )
            
            1,950Income
                tax provision (benefit)
            
            
            200
            
            
            579
            
            
            (241
            )
            
            780Net
                income (loss)
            
            $
            298
            
            $
            873
            
            $
            (356
            )
            $
            1,170Earnings
                (loss) per share, basic
            
            $
            0.05
            
            $
            0.14
            
            $
            (0.05
            )
            $
            0.17Earnings
                (loss) per share, diluted
            
            $
            0.04
            
            $
            0.13
            
            $
            (0.05
            )
            $
            0.17Weighted
                average shares outstanding, basic
            
            
            6,489,389
            
            
            6,449,389
            
            
            6,489,389
            
            
            6,766,185Weighted
                average shares outstanding, diluted
            
            
            6,646,534
            
            
            6,584,446
            
            
            6,489,389
            
            
            6,895,987The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.


4





**HOMETOWN
                AUTO RETAILERS, INC.****UNAUDITED
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY****(in
                thousands)**Class
                A
            
            Class
                BCommon
                Stock
            
            Common
                Stock
            
            Additional
            
            
            
            TotalPaid-in
            
            (Accumulated
            
            Stockholders’Shares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Deficit)
            
            EquityBalance
                atDecember
                31, 2004 (Restated)
            
            
            3,870
            
            $
            4
            
            
            3,519
            
            $
            3
            
            $
            30,017
            
            $
            (18,769
            )
            $
            11,255Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,170
            
            
            1,170LitigationSettlement
            
            
            -
            
            
            -
            
            
            (940
            )
            
            (1
            )
            
            (1,042
            )
            
            -
            
            
            (1,043
            )Balance
                atJune
                30, 2005 (Restated)
            
            
            3,870
            
            $
            4
            
            
            2,579
            
            $
            2
            
            $
            28,975
            
            $
            (17,599
            )
            $
            11,382Balance
                atDecember
                31, 2005
            
            
            3,910
            
            $
            4
            
            
            2,579
            
            $
            2
            
            $
            29,022
            
            $
            (17,477
            )
            $
            11,551Net
                (loss)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (356
            )
            
            (356
            )Stock
                option expense
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            6
            
            
            -
            
            
            6Balance
                atJune
                30, 2006
            
            
            3,910
            
            $
            4
            
            
            2,579
            
            $
            2
            
            $
            29,028
            
            $
            (17,833
            )
            $
            11,201





The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.


5





**HOMETOWN
                AUTO RETAILERS, INC.****UNAUDITED
                CONSOLIDATED STATEMENTS OF CASH FLOWS****(in
                thousands)**For
                the Six Months ended June 30,2006
            
            2005(Restated)CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income (loss)
            
            $
            (356
            )
            $
            1,170Adjustments
                to reconcile net income (loss) to net cashprovided
                by operating activities -Depreciation
                and amortization
            
            
            675
            
            
            657Loss
                on sale of fixed assets
            
            
            20
            
            
            -(Gain)
                on disposal of dealership
            
            
            -
            
            
            (587
            )Deferred
                income taxes
            
            
            (241
            )
            
            780Stock
                option expense
            
            
            6
            
            
            -Changes
                in assets and liabilities:Accounts
                receivable, net
            
            
            (168
            )
            
            (540
            )Inventories,
                net
            
            
            (1,206
            )
            
            4,977Prepaid
                expenses and other current assets
            
            
            (124
            )
            
            (377
            )Prepaid
                taxes
            
            
            (261
            )
            
            (156
            )Other
                assets
            
            
            104
            
            
            36Floor
                plan notes payable - trade
            
            
            (1,482
            )
            
            (2,278
            )Accounts
                payable and accrued expenses
            
            
            19
            
            
            (441
            )Deferred
                revenue - current
            
            
            (12
            )
            
            (201
            )Other
                long-term liabilities and deferred revenue
            
            
            (51
            )
            
            (97
            )Net
                cash provided by (used in) operating activities
            
            
            (3,077
            )
            
            2,943CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of property and equipment
            
            
            (265
            )
            
            (91
            )Proceeds
                from sale of property and equipment
            
            
            1
            
            
            -Acquisition
                of Nissan franchise
            
            
            (2,000
            )
            
            -Net
                cash (used in) investing activities
            
            
            (2,264
            )
            
            (91
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from floor plan notes payable - non-trade
            
            
            83,747
            
            
            78,932Payment
                of floor plan notes payable - non-trade
            
            
            (81,400
            )
            
            (82,117
            )Principal
                payments of long-term debt and capital lease obligations
            
            
            (5,651
            )
            
            (943
            )Proceeds
                from long-term borrowings
            
            
            7,661
            
            
            225Net
                cash provided by (used in) financing activities
            
            
            4,357
            
            
            (3,903
            )Net
                (decrease) in cash and cash equivalents
            
            
            (984
            )
            
            (1,051
            )CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            6,453
            
            
            6,101CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            5,469
            
            $
            5,050Cash
                paid for - Interest
            
            $
            3,071
            
            $
            1,891Cash
                paid for - Taxes
            
            $
            261
            
            $
            156Purchases
                financed by capital lease obligations
            
            $
            1,180
            
            $
            464The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.





Supplemental
      Cash flow Information:


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


6








**HOMETOWN
      AUTO RETAILERS, INC.**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**








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




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





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





**2.** **RESTATEMENT**




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





The
      effect of this restatement was to increase pre-tax income $64,000 and $113,000
      for the three and six months ended June 30, 2005, respectively. The after tax
      effects was to increase net income by $39,000 and $68,000 for the three and
      six
      months ended June 30, 2005, respectively. The effect of these adjustments for
      the three months ended June 30, 2005 was to increase basic and diluted earnings
      per share by $0.01 and $0.00, respectively. The effect of these adjustments
      was
      to increase basic and diluted earnings per share by $0.01 for the six months
      ended June 30, 2005.





Deferred
      revenue recorded as of June 30, 2003, will continue to be taken into income
      over
      the remaining life of the contract. At June 30, 2006, Hometown had $221,000
      of
      related deferred revenue remaining. This deferred revenue will be recognized
      over the next three years as follows: 2006 (remaining period) - $95,000, 2007
      -
      $100,000 and 2008 - $26,000. These revenues are recorded in Revenues, Other
      in
      the Statement of Operations. The recognition of deferred revenues does not
      generate a cash tax effect as the recording of deferred revenues generates
      a
      deferred tax asset; therefore the recognition of this income causes a reduction
      of deferred tax assets. As of June 30, 2006 Hometown has other deferred revenues
      of $50,000.


7








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





Three
                months ended
            
            Six
                months endedJune
                30, 2005
            
            June
                30, 2005Previously
            
            Restated
            
            Previously
            
            RestatedReported
            
            
            
            Reported**Statements
                of Operations:**Other
                revenues, net
            
            $
            1,815
            
            $
            1,879
            
            $
            3,840
            
            $
            3,953Total
                revenues
            
            $
            65,290
            
            $
            65,354
            
            $
            127,056
            
            $
            127,169Gross
                profit
            
            $
            9,363
            
            $
            9,427
            
            $
            18,669
            
            $
            18,782Income
                from operations
            
            $
            1,664
            
            $
            1,728
            
            $
            2,961
            
            $
            3,074Pre-tax
                income
            
            $
            1,388
            
            $
            1,452
            
            $
            1,837
            
            $
            1,950Provision
                for income taxes
            
            $
            554
            
            $
            579
            
            $
            735
            
            $
            780Net
                income
            
            $
            834
            
            $
            873
            
            $
            1,102
            
            $
            1,170Earnings
                per share, basic
            
            $
            0.13
            
            $
            0.14
            
            $
            0.16
            
            $
            0.17Earnings
                per share, diluted
            
            $
            0.13
            
            $
            0.13
            
            $
            0.16
            
            $
            0.17**Statements
                of Cash Flows:**Net
                income
            
            
            
            
            
            
            
            $
            1,102
            
            $
            1,170Deferred
                income taxes
            
            
            
            
            
            
            
            $
            735
            
            $
            780Deferred
                revenue - current
            
            
            
            
            
            
            
            $
            (173
            )
            $
            (201
            )Other
                long-term liabilities and deferred revenue
            
            
            
            
            
            
            
            $
            (12
            )
            $
            (97
            )Net
                cash provided by operating activities
            
            
            
            
            
            
            
            $
            2,943
            
            $
            2,943





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





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





*Basis
      of Presentation*





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


8








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





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





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





*Stock-based
      Compensation*





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





For
      the
      three and six months ended June 30, 2006, Hometown recognized approximately
      $3,000 and $6,000 pre-tax, respectively ($1,800 and $3,000 after-tax,
      respectively) of non-cash compensation expense (included in Selling, General
      and
      Administrative expense in the 2006 Unaudited Consolidated Statement of
      Operations) attributable to stock options that vested subsequent to
      December 31, 2005. Hometown used the Black-Scholes valuation model and
      straight-line amortization of compensation expense over the requisite service
      period of the grant. As of June 30, 2006 there was $20,000 of total unrecognized
      compensation cost related to non-vested stock options, which will be recognized
      over a three-year period.





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





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





Number
                of Shares
            
            Weighted
                Average Exercise Price per Share
            
            Weighted
                Average Remaining Contract Term
            
            Aggregate
                Intrinsic ValueOptions
                outstanding at December 31, 2005
            
            
            497,500
            
            $
            1.03
            
            
            2.50Options
                granted
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Canceled
            
            
            (220,000
            )
            $
            1.63Options
                outstanding at June 30, 2006
            
            
            277,500
            
            $
            0.56
            
            
            3.52
            
            $
            106,894Options
                exercisable at June 30, 2006
            
            
            264,167
            
            $
            0.53
            
            
            3.25
            
            $
            93,609





9





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





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





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





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


Three
                Months
            
            Six
                MonthsEnded
                June 30,
            
            Ended
                June 30,(in
                thousands, except per share data)
            
            2005
            
            2005Net
                income, as reported
            
            $
            873
            
            $
            1,170Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax effects
                (1)
            
            
            (2
            )
            
            (5
            )Pro
                forma net income
            
            $
            871
            
            $
            1,165Earnings
                per share:Basic,
                as reported
            
            $
            0.14
            
            $
            0.17Basic,
                pro forma
            
            $
            0.14
            
            $
            0.17Diluted,
                as reported
            
            $
            0.13
            
            $
            0.17Diluted,
                pro forma
            
            $
            0.13
            
            $
            0.17





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





*New
      Accounting Pronouncements*





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





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




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


10








**4.**  **EARNINGS
      (LOSS) PER SHARE / STOCKHOLDERS EQUITY**





“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 by the weighted average common shares
      outstanding adjusted for the incremental dilution of potentially dilutive
      securities. Options to purchase approximately 278,000 and 538,000 shares of
      common stock were outstanding as of June 30 2006 and 2005,
      respectively.





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





Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2006
            
            2005
            
            2006
            
            2005Basic,
                Weighted Average Shares
            
            
            6,489,389
            
            
            6,449,389
            
            
            6,489,389
            
            
            6,766,185Common
                Stock Equivalents
            
            
            157,145
            
            
            135,057
            
            
            -
            
            
            129,802Diluted,
                Weighted Average Shares
            
            
            6,646,534
            
            
            6,584,446
            
            
            6,489,389
            
            
            6,895,987





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





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





The
      basic
      and diluted income per share for the three months ended June 30, 2006 is $0.05
      and $0.04, respectively. The basic and diluted income per share for the three
      months ended June 30, 2005 is $0.14 and $0.13 respectively. The basic and
      diluted income (loss) per share for the six months ended June 30, 2006 and
      2005
      is $(0.05) and $0.17, 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)
            
            6/30/06
            
            12/31/05New
                Vehicles
            
            $
            25,613
            
            $
            24,474Used
                Vehicles
            
            
            8,160
            
            
            7,284Parts,
                accessories and other
            
            
            2,072
            
            
            1,784Total
                Inventories
            
            $
            35,845
            
            $
            33,542





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


11





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





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





(in
                thousands)
            
            6/30/06
            
            12/31/05Goodwill
            
            $
            1,438
            
            $
            -Manufacturer
                franchise rights
            
            
            562
            
            
            -Deferred
                finance charges
            
            
            62
            
            
            272Accumulated
                amortization
            
            
            (52
            )
            
            (142
            )Franchise
                fee
            
            
            10
            
            
            10Accumulated
                amortization
            
            
            (6
            )
            
            (5
            )Net
                intangible assets
            
            $
            2,014
            
            $
            135







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





In
      connection with the acquisition of a Nissan franchise (see Note 8), a formal
      appraisal of the assets acquired was completed. Based on this appraisal,
      Hometown recorded $1.4 million as goodwill and $0.6 million as manufacturer
      franchise rights. Goodwill represents the excess cost of the business acquired
      over the fair market value of the identifiable net assets.





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





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





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





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





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





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


12





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





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





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





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





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





On
      February 9, 2006 Hometown completed the acquisition of a Nissan franchise.
      Pursuant to the terms of the Asset and Franchise Purchase Agreement, Hometown
      purchased a Nissan sales and service franchise and certain assets including
      certain new parts and accessories, special tools and new vehicle inventory.
      Hometown did not assume any liabilities. Hometown has accounted for the
      acquisition using the purchase method. The purchase price was $2.0 million
      (recorded as goodwill of $1,437,500 and franchise rights of $562,500 and is
      included in Other Assets, Note 6) plus approximately $0.1 million for certain
      special tools and parts and accessories. In addition, Hometown received a credit
      for holdbacks, floor plan assistance and advertising credits of less than $0.1
      million and assumed the new vehicle inventory on hand which was financed under
      Hometown’s existing floor plan financing with Ford Motor Credit Corporation. A
      formal appraisal of the assets acquired was completed which determined the
      allocation of the purchase price to the assets acquired.





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





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





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


13








The
      Mortgage Loan bears interest at a rate, variable monthly, equal to 2.75% per
      annum above the LIBOR Rate (which as of the closing on the Mortgage Loan
      resulted in an effective rate of 7.24%), and is payable in 59 unequal,
      consecutive monthly installments of principal commencing on the first day of
      the
      second month following the closing, together with accrued interest, based upon
      a
      240 month amortization, with a final balloon payment due upon maturity five
      (5)
      years from the first payment date.





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





The
      Capital Loan bears interest at a variable rate, equal to 2.50% per annum above
      the Prime Rate (which as of the closing on the Capital Loan resulted in an
      effective rate of 10.0%), and is payable in 59 consecutive monthly installments
      of principal in the amount of $12,500 each commencing on the fifteenth day
      of
      the first month following the closing, together with accrued interest, with
      a
      final balloon payment due upon maturity five (5) years from the closing date.
      The Capital Loan was made to Hometown Auto Framingham, Inc. (the “Borrower”) by
      the Lender and is unconditionally guaranteed by the following corporate
      subsidiaries of Hometown (collectively, the “Corporate Guarantors”): Bay State
      Realty Holdings, Inc., Family Ford, Inc., Shakers, Inc., Hometown Brattleboro,
      Inc., Shaker Auto Group, Inc., and by certain shareholders. The Capital Loan
      is
      secured by a first security interest in the Borrower’s and each Corporate
      Guarantor’s personal property, and is also “cross-defaulted” and
“cross-collateralized” with: (i) the Mortgage Loan from Lender to Bay State
      Realty Holdings, Inc. recited above; (ii) a Wholesale Line of Credit made by
      Lender to Hometown Auto Framingham, Inc. dated March 2, 2001; (iii) a Wholesale
      Line of Credit made by Lender to Family Ford, Inc. dated February 28, 2001;
      (iv)
      a Wholesale Line of Credit made by Lender to Shakers Inc. dated February 28,
      2001; (v) a Wholesale Line of Credit made by Lender to Hometown Brattleboro,
      Inc. dated March 2, 2001; (vi) any and all other loans now or hereafter
      outstanding made by Lender to Borrower and/or the Guarantors; and (vii) any
      and
      all extensions, increases, amendments, renewals and modifications of the
      foregoing obligations.




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





14





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




*Litigation*





Hometown
      Auto Retailers, Inc. d/b/a Muller Toyota, Inc. was named as one of about 1,667
      defendants in a complaint filed by Maryann Cerbo, et. al. in the Superior Court
      of New Jersey in Bergen County and allegedly served upon Hometown on December
      30, 2004.  The action was brought on behalf of about 111 named plaintiffs
      and purportedly on behalf of a class of individuals and companies who purchased
      or leased a motor vehicle from the defendants. Plaintiffs contended that the
      defendants (a) "overcharged" for registration and/or title fees; (b) failed
      to
      properly itemize documentary costs and governmental costs; (c) charged grossly
      excessive documentary fees not reasonably related to costs; and (d) failed
      to
      disclose that the defendants are not required to perform certain documentary
      services.  Plaintiffs attempted to name as defendants all franchised
      automobile dealers in the State of New Jersey, as well as a large assortment
      of
      other persons and entities.  There were no allegations that Hometown ever
      performed any services for any of the named plaintiffs.  Hometown has
      accepted a settlement offer by the class which provides for a payment of legal
      fees to plaintiffs' counsel (presently anticipated to be $18,000 as per the
      settlement offer) and the refunding to any consumers that file a valid claim
      with the Settlement Administrator that they were "overcharged."  The
      settlement has not yet been approved and the "fairness hearing" by the Court
      is
      scheduled for August 11, 2006.  Hometown does not believe that the payments
      to be made as part of the settlement of this case, if approved by the Court,
      will have a material adverse effect upon Hometown’s consolidated financial
      position or results of operations.





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





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





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





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


15








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




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





*Guarantees*





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





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





*Warranties*





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





Hometown
      records a reserve referred to as “policy” for used vehicle warranties and the
      labor portion of service warranties based on available historical information.
      Also included in this reserve are (i) the costs associated with free products
      or
      services that may be offered to a retail customer for purposes of maintaining
      goodwill with that particular service customer or new or used vehicle customer,
      or (ii) the free products or service may be part of a service maintenance
      program whereby customers may receive certain services for free if they maintain
      a certain level of service at the dealership. At June 30, 2006 and December
      31,
      2005, Hometown has a reserve of $233,000 and $202,000, respectively. The reserve
      is based on the last three months of used vehicle units sold and the average
      cost of repairs, including free parts and service, over the last twelve months.
      While Hometown believes its estimated liability for product warranties and
      free
      parts and service is adequate and that the judgment applied is appropriate,
      the
      estimated liability for product warranties and free parts and service could
      differ materially from future actual costs.





16








Reserve
                for Policy Work
            Balance
                At Beginning of Year
            Additions
                To Costs and Expenses
            Deductions
            Balance
                At End of QuarterThree
                Months Ended June 30, 2006
            $202,000
            $428,000
            $(397,000)
            $233,000





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





*Franchise
      Agreements*





Toyota
      Motor Sales, U.S.A., Inc. has extended Hometown’s current Toyota Dealer
      Agreement on a periodic basis since March of 2003. The most recent extension
      was
      for a period of three months through November 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. Hometown
      developed and implemented plans to correct the operational deficiencies that
      would bring Hometown into compliance. Hometown has obtained written
      confirmations from Ford Motor Credit in response to Toyota’s requests for
      information relating to financing arrangements. In addition, Hometown has
      improved net working capital through the sale of a Chrysler/Jeep sales and
      service franchise in the second quarter of 2003 and advances on warranty income
      from Hometown’s Extended Service Plan vendor. Hometown has been in regular
      contact with Toyota to review the efforts of Hometown to resolve the
      deficiencies alleged by Toyota. The two Toyota dealerships for the fiscal year
      ended December 31, 2005 had combined revenues of $104.0 million and pre-tax
      income before allocation of corporate costs of $2.4 million. Hometown believes
      that it has corrected the alleged net working capital deficiency for the Toyota
      dealerships and that it has undertaken reasonable steps to alleviate the
      concerns expressed by Toyota. However, there can be no assurance that Toyota
      will enter into a new dealer agreement with Hometown and Toyota has reserved
      the
      right to terminate the Toyota Dealership Agreements if sufficient progress
      is
      not made to correct the alleged deficiencies. Should Hometown be notified by
      Toyota that they intend to terminate the Toyota Dealership Agreements, Hometown
      believes it would have a reasonable amount of time to cure the defaults.





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





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





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





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


17








The automobile
      franchises operated by the New England subsidiaries include:


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


·
            Hometown
                Nissan (Framingham, Mass.),


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


·
            Family
                Ford (Waterbury, Conn.),


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


·
            Wellesley
                Mazda (Wellesley, Mass.),


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





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


·
            Baystate
                Realty (Framingham, Mass.), and


·
            Brattleboro
                Realty (Brattleboro, Vt.).





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


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


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


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





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





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





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





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





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


18








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





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





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





In
      order
      to consummate the Merger and the Exchanges, the Company anticipates that it
      will
      borrow up to $9.5 million from a lender. Of the proceeds of the loan, it is
      anticipated that: (a) $7.0 million will be used to purchase the outstanding
      shares of Class A Common Stock and the options to acquire shares of Class A
      Common Stock from the Public Stockholders in connection with the Merger; and
      (b)
      $2.5 million will be used toward the required $5.0 million cash contribution
      to
      Shaker Auto Group in connection with the Exchanges. The
      additional $2.5 million required cash contribution to Shaker Auto Group and
      expected additional split-off costs and associated severance costs of $0.5
      million will be paid out of existing Hometown cash on hand.





As
      of
      June 30, 2006, Hometown has incurred approximately $0.7 million in costs related
      to the Exchanges and related lawsuit (see Note 9 - Litigation), which amount
      has
      been expensed and is included in Selling General and Administrative Expenses
      on
      Hometown’s Consolidated Statements of Operations. Approximately $75,000 of these
      costs were incurred and expensed in the six months ending June 30, 2006, with
      the remainder in the year ending December 31, 2005.


19


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





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





***Restatement***




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





The
      effect of this restatement was to increase pre-tax income $64,000 and $113,000
      for the three and six months ended June 30, 2005, respectively. The after tax
      effects was to increase net income by $39,000 and $68,000 for the three and
      six
      months ended June 30, 2005, respectively. The effect of these adjustments for
      the three months ended June 30, 2005 was to increase basic and diluted earnings
      per share by $0.01 and $0.00, respectively. The effect of these adjustments
      was
      to increase basic and diluted earnings per share by $0.01 for the six months
      ended June 30, 2005.





Deferred
      revenue recorded as of June 30, 2003, will continue to be taken into income
      over
      the remaining life of the contract. At June 30, 2006, Hometown had $221,000
      of
      related deferred revenue remaining. This deferred revenue will be recognized
      over the next three years as follows: 2006 (remaining period) - $95,000, 2007
      -
      $100,000 and 2008 - $26,000. These revenues are recorded in Revenues, Other
      in
      the Statement of Operations. The recognition of deferred revenues does not
      generate a cash tax effect as the recording of deferred revenues generates
      a
      deferred tax asset; therefore the recognition of this income causes a reduction
      of deferred tax assets. As of June 30, 2006 Hometown has other deferred revenues
      of $50,000.




20





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





Three
                months ended
            
            Six
                months endedJune
                30, 2005
            
            June
                30, 2005Previously
            
            Restated
            
            Previously
            
            RestatedReported
            
            
            
            Reported**Statements
                of Operations:**Other
                revenues, net
            
            $
            1,815
            
            $
            1,879
            
            $
            3,840
            
            $
            3,953Total
                revenues
            
            $
            65,290
            
            $
            65,354
            
            $
            127,056
            
            $
            127,169Gross
                profit
            
            $
            9,363
            
            $
            9,427
            
            $
            18,669
            
            $
            18,782Income
                from operations
            
            $
            1,664
            
            $
            1,728
            
            $
            2,961
            
            $
            3,074Pre-tax
                income
            
            $
            1,388
            
            $
            1,452
            
            $
            1,837
            
            $
            1,950Provision
                for income taxes
            
            $
            554
            
            $
            579
            
            $
            735
            
            $
            780Net
                income
            
            $
            834
            
            $
            873
            
            $
            1,102
            
            $
            1,170Earnings
                per share, basic
            
            $
            0.13
            
            $
            0.14
            
            $
            0.16
            
            $
            0.17Earnings
                per share, diluted
            
            $
            0.13
            
            $
            0.13
            
            $
            0.16
            
            $
            0.17**Statements
                of Cash Flows:**Net
                income
            
            
            
            
            
            
            
            $
            1,102
            
            $
            1,170Deferred
                income taxes
            
            
            
            
            
            
            
            $
            735
            
            $
            780Deferred
                revenue - current
            
            
            
            
            
            
            
            $
            (173
            )
            $
            (201
            )Other
                long-term liabilities and deferred revenue
            
            
            
            
            
            
            
            $
            (12
            )
            $
            (97
            )Net
                cash provided by operating activities
            
            
            
            
            
            
            
            $
            2,943
            
            $
            2,943





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





***Overview***





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


21





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





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





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





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





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





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





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




22





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





***Revenues***
            
            For
                the Three Months EndedJune
                30,
            
            
            
            Increase%(in
                thousands, except per vehicle data)
            
            2006
            
            2005
            
            (Decrease)
            
            ChangeNew
                vehicle data:Retail
                revenues - same store
            
            $
            32,504
            
            $
            35,706
            
            $
            (3,202
            )
            
            (9.0
            )%Retail
                revenues - other stores (1)
            
            
            -
            
            
            3,926
            
            
            (3,926
            )
            
            *Total
                new retail revenues
            
            
            32,504
            
            
            39,632
            
            
            (7,128
            )
            
            (18.0
            )%Fleet
                revenues - same store
            
            
            1,637
            
            
            1,013
            
            
            624
            
            
            61.6
            %Total
                new vehicles revenues, as reported
            
            $
            34,141
            
            $
            40,645
            
            $
            (6,504
            )
            
            (16.0
            )%New
                retail units - same store
            
            
            1,316
            
            
            1,384
            
            
            (68
            )
            
            (4.9
            )%New
                retail units - other stores (1)
            
            
            -
            
            
            103
            
            
            (103
            )
            
            *Fleet
                units
            
            
            71
            
            
            53
            
            
            18
            
            
            34.0
            %Total
                new vehicle units
            
            
            1,387
            
            
            1,540
            
            
            (153
            )
            
            (9.9
            )%Used
                vehicle data:Retail
                revenues - same store
            
            $
            11,485
            
            $
            12,383
            
            $
            (898
            )
            
            (7.3
            )%Retail
                revenues - other stores (1)
            
            
            -
            
            
            104
            
            
            (104
            )
            
            *Total
                used retail revenues
            
            
            11,485
            
            
            12,487
            
            
            (1,002
            )
            
            (8.0
            )%Wholesale
                revenues - same store
            
            
            4,113
            
            
            4,157
            
            
            (44
            )
            
            (1.1
            )%Wholesale
                revenues - other stores (1)
            
            
            -
            
            
            277
            
            
            (277
            )
            
            *Total
                wholesale revenues
            
            
            4,113
            
            
            4,434
            
            
            (321
            )
            
            (7.2
            )%Total
                used vehicle revenue, as reported
            
            $
            15,598
            
            $
            16,921
            
            $
            (1,323
            )
            
            (7.8
            )%Used
                retail units - same store
            
            
            710
            
            
            751
            
            
            (41
            )
            
            (5.5
            )%Used
                retail units - other stores (1)
            
            
            -
            
            
            6
            
            
            (6
            )
            
            *Used
                wholesale units - same store
            
            
            765
            
            
            911
            
            
            (146
            )
            
            (16.0
            )%Used
                wholesale units - other stores (1)
            
            
            -
            
            
            35
            
            
            (35
            )
            
            *Total
                used units
            
            
            1,475
            
            
            1,703
            
            
            (228
            )
            
            (13.4
            )%Parts
                and service:Parts
                and service revenues - same store
            
            $
            5,315
            
            $
            5,420
            
            $
            (105
            )
            
            (1.9
            )%Parts
                and service revenues - other stores (1)
            
            
            -
            
            
            489
            
            
            (489
            )
            
            *Total
                parts and service revenue
            
            $
            5,315
            
            $
            5,909
            
            $
            (594
            )
            
            (10.1
            )%Other
                revenues, net:Other
                revenues, net - same store
            
            $
            1,946
            
            $
            1,858
            
            $
            88
            
            
            4.7
            %Other
                revenues, net - other stores (1)
            
            
            -
            
            
            21
            
            
            (21
            )
            
            *Total
                other revenues, net, as reported
            
            $
            1,946
            
            $
            1,879
            
            $
            67
            
            
            3.6
            %Total
                revenue:Same
                store
            
            $
            57,000
            
            $
            60,537
            
            $
            (3,537
            )
            
            (5.8
            )%Other
                stores (1)
            
            
            -
            
            
            4,817
            
            
            (4,817
            )
            
            *Total
                revenue, as reported
            
            $
            57,000
            
            $
            65,354
            
            $
            (8,354
            )
            
            (12.8
            )%





23





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





*
      -
      Percentage is 100% or greater.





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





Total
      revenue decreased $8.4 million, or 12.8% to $57.0 million for three months
      ended
      June 30, 2006 from $65.4 million for three months ended June 30, 2005. Same
      store revenues decreased $3.5 million, or 5.8% to $57.0 million for three months
      ended June 30, 2006 from $60.5 million for three months ended June 30, 2005.





Same
      store new retail revenues decreased $3.2 million, or 9.0% to $32.5 million
      for
      the three months ended June 30, 2006 from $35.7 million for the three months
      ended June 30, 2005. This decrease was attributable to both the 4.9% decrease
      in
      units ($1.8 million) sold in 2006 compared to 2005 combined with a 4.3% decrease
      in average revenue per unit sold ($1.4 million) in 2006 compared to 2005. The
      unit decrease is due to a drop off in truck sales during the 2006 period, which
      in turn contributed to the decrease in the average revenue per unit. This is
      consistent with national trends. Buyers have been opting for higher gas mileage
      vehicles and have been buying fewer trucks, which include more expensive sport
      utility vehicles. Many of Hometown’s domestic dealerships experienced a decrease
      in unit sales and new retail revenues from 2005 to 2006. Ford, Chrysler and
      Chevrolet unit sales were down from 8% - 39% from 2005 to 2006. These decreases
      were in line with decreases at non-Hometown dealerships in Hometown’s area, some
      of which were larger or smaller than Hometown’s declines. Chevrolet was
      benefited in 2005 with an employee-pricing program, which caused in increase
      in
      unit sales during the 2005 period. Chevrolet did not offer this program during
      the 2006 period. The Nissan dealership experienced a doubling of unit sales
      compared to its predecessor Lincoln Mercury dealership. Toyota unit sales were
      up nearly 3%, which is similar to non-Hometown dealerships in Hometown’s area.
      Also one Toyota facility has been adversely affected by not having the Scion
      vehicle available for sale. Fleet revenues increased from 2005 levels, but
      does
      not contribute significantly to profits.





Same
      store used vehicle retail revenues decreased $0.9 million, or 7.3% to $11.5
      million for the three months ended June 30, 2006 from $12.4 million for the
      three months ended June 30, 2005. This decrease was primarily attributable
      to a
      5.5% decrease in units sold ($0.7 million) and was primarily due to decreases
      at
      the remaining Lincoln Mercury dealership which experienced a large drop off
      in
      traffic in the store. Same store wholesale revenues decreased less than $0.1
      million, or 1.1% to $4.1 million for the three months ended June 30, 2006 from
      $4.2 million for the three months ended June 30, 2005. A decrease in units
      was
      offset by an increase in average selling price. The increase in average selling
      price for wholesale units is also a function of the retail sales unit volume,
      which is down over the prior year and is even lower than historical levels.
      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.





Same
      store parts and service revenues decreased $0.1 million or 1.9% to $5.3 million
      for the three months ended June 30, 2006 from $5.4 million for the three months
      ended June 30, 2005. The decrease was primarily due to the Toyota ($0.1
      million), Lincoln Mercury ($0.1 million), Chevrolet, Ford and Chrysler (together
      totaling $0.1 million) partially offset by an increase at the Nissan and Mazda
      dealerships (together totaling $0.2 million). The decrease at the Toyota dealers
      is partially attributable to certain large service sales in 2005 that did not
      occur again in 2006.  The
      domestic brands (Lincoln Mercury, Chevrolet, Ford and Chrysler) have had
      decreasing new car sales, which has been causing a decrease in their service
      customer base. The Nissan dealership has experienced an increase in parts and
      service revenue since changing from a Lincoln Mercury dealership due to a higher
      amount of Nissan customers in their area. Mazda also experienced an increase
      primarily due to continuing to build on its service customer base, as the brand
      has only been sold by Hometown since 1999.


24








Same
      store other dealership revenues increased slightly (less than $0.1 million)
      remaining at $1.9 million for the three months ended June 30, 2006 and June
      30,
      2005. A decrease in new vehicle finance revenue (due to a decrease in vehicles
      sold combined with decreased revenue earned on each financing transaction)
      was
      offset by an increase in extended warranty revenues and miscellaneous other
      revenues.





***Gross
                Profit***
            
            For
                the Three Months EndedJune
                30,
            
            Increase%(in
                thousands, except per vehicle data)
            
            2006
            
            2005
            
            (Decrease)
            
            ChangeNew
                vehicle data:Retail
                gross profit - same store
            
            $
            2,363
            
            $
            2,526
            
            $
            (163
            )
            
            (6.5
            )%Retail
                gross profit - other stores (1)
            
            
            -
            
            
            199
            
            
            (199
            )
            
            *Total
                new retail gross profit
            
            
            2,363
            
            
            2,725
            
            
            (362
            )
            
            (13.3
            )%Fleet
                gross profit
            
            
            12
            
            
            9
            
            
            3
            
            
            33.3
            %Total
                new vehicles gross profit, as reported
            
            $
            2,375
            
            $
            2,734
            
            $
            (359
            )
            
            (13.1
            )%Gross
                profit percentage
            
            
            7.0
            %
            
            6.7
            %New
                retail units - same store
            
            
            1,316
            
            
            1,384
            
            
            (68
            )
            
            (4.9
            )%New
                retail units - other stores (1)
            
            
            -
            
            
            103
            
            
            (103
            )
            
            *Fleet
                units
            
            
            71
            
            
            53
            
            
            18
            
            
            34.0
            %Total
                new vehicle units
            
            
            1,387
            
            
            1,540
            
            
            (153
            )
            
            (9.9
            )%Used
                vehicle data:Retail
                gross profit - same store
            
            $
            1,478
            
            $
            1,384
            
            $
            94
            
            
            6.8
            %Retail
                gross profit - other stores (1)
            
            
            -
            
            
            54
            
            
            (54
            )
            
            *Total
                used retail gross profit
            
            
            1,478
            
            
            1,438
            
            
            40
            
            
            2.8
            %Wholesale
                gross profit - same store
            
            
            53
            
            
            135
            
            
            (82
            )
            
            (60.7
            )%Wholesale
                gross profit - other stores (1)
            
            
            -
            
            
            (20
            )
            
            20
            
            
            *Total
                wholesale gross profit
            
            
            53
            
            
            115
            
            
            (62
            )
            
            (53.9
            )%Total
                used vehicle gross profit, as reported
            
            $
            1,531
            
            $
            1,553
            
            $
            (22
            )
            
            (1.4
            )%Gross
                profit percentage
            
            
            9.8
            %
            
            9.2
            %Used
                retail units - same store
            
            
            710
            
            
            751
            
            
            (41
            )
            
            (5.5
            )%Used
                retail units - other stores (1)
            
            
            -
            
            
            6
            
            
            (6
            )
            
            *Used
                wholesale units - same store
            
            
            765
            
            
            911
            
            
            (146
            )
            
            (16.0
            )%Used
                wholesale units - other stores (1)
            
            
            -
            
            
            35
            
            
            (35
            )
            
            *Total
                used units
            
            
            1,475
            
            
            1,703
            
            
            (228
            )
            
            (13.4
            )%Parts
                and service:Parts
                and service gross profit - same store
            
            $
            2,889
            
            $
            2,987
            
            $
            (98
            )
            
            (3.3
            )%Parts
                and service gross profit - other stores (1)
            
            
            -
            
            
            274
            
            
            (274
            )
            
            *Total
                parts and service revenue
            
            $
            2,889
            
            $
            3,261
            
            $
            (372
            )
            
            (11.4
            )%Gross
                profit percentage
            
            
            54.4
            %
            
            55.2
            %Other
                gross profit:Other
                gross profit - same store
            
            $
            1,946
            
            $
            1,858
            
            $
            88
            
            
            4.7
            %Other
                gross profit - other stores (1)
            
            
            -
            
            
            21
            
            
            (21
            )
            
            *Total
                other gross profit, as reported
            
            $
            1,946
            
            $
            1,879
            
            $
            67
            
            
            3.6
            %Gross
                profit percentage
            
            
            100.0
            %
            
            100.0
            %





25





***Gross
                Profit -(continued)***
            
            For
                the Three Months EndedJune
                30,
            
            Increase%(in
                thousands, except per vehicle data)
            
            2006
            
            2005
            
            (Decrease)
            
            ChangeOther
                gross profit PVR - same store
            
            $
            961
            
            $
            870
            
            $
            90
            
            
            10.4
            %Other
                gross profit PVR - other stores (1)
            
            
            -
            
            
            193
            
            
            (193
            )
            
            *Total
                other gross profit PVR, as reported
            
            $
            961
            
            $
            837
            
            $
            123
            
            
            14.7
            %Total
                gross profit:Same
                store
            
            $
            8,741
            
            $
            8,899
            
            $
            (158
            )
            
            (1.8
            )%Other
                stores (1)
            
            
            -
            
            
            528
            
            
            (528
            )
            
            *Total
                gross profit, as reported
            
            $
            8,741
            
            $
            9,427
            
            $
            (686
            )
            
            (7.3
            )%Gross
                profit percentage
            
            
            15.3
            %
            
            14.4
            %





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





*
      -
      Percentage is 100% or greater.





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





Total
      gross profit decreased $0.7 million, or 7.3%, to $8.7 million for the three
      months ended June 30, 2006, from $9.4 million for the three months ended June
      30, 2005. Same store total gross profit decreased $0.2 million, or 1.8% to
      $8.7
      million for the three months ended June 30, 2006, from $8.9 million for the
      three months ended June 30, 2005. Same store gross profit on new retail vehicle
      sales decreased $0.1 million, or 6.5%, to $2.4 million for the three months
      ended June 30, 2006, from $2.5 million for the three months ended June 30,
      2005.
      The decrease in gross profit is primarily attributable to the 4.9% decrease
      in
      unit sales. Similar to revenues, all dealerships, except Toyota, experienced
      a
      decrease in gross profit in 2006 compared to 2005. Although Nissan revenues
      were
      up compared to its predecessor Lincoln Mercury dealership, gross profit was
      down. Nissan vehicles typically generate a lower gross profit per vehicle than
      Lincoln Mercury vehicles.





Same
      store gross profit on used vehicle retail sales increased $0.1 million, or
      6.8%,
      to $1.5 million for the three months ended June 30, 2006, from $1.4 million
      for
      the three months ended June 30, 2005. The overall increase is attributable
      to a
      12.9% increase in average gross profit per unit, primarily attributable to
      increases at the Chevrolet and Ford dealerships. The increase at the Chevrolet
      dealership is primarily due to a change in the incentive pay plan of the used
      vehicle sales manager whereby his focus is more on used vehicle gross profit.
      The increase at the Ford dealership is primarily due to a change in sales
      management at the location. Gross profit on wholesale sales decreased
      approximately $0.1 million from the prior year period primarily due to a
      decrease in the wholesale price of trucks and sport utility
      vehicles.





Same
      store parts and service gross profit decreased $0.1 million or 3.3% to $2.9
      million for the three months ended June 30, 2006 from $3.0 million for the
      three
      months ended June 30, 2005. The decrease is primarily due to the decrease in
      revenues combined with a decrease of less than 1% in gross profit percentage.





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





S,G&A
      decreased $0.4 million, or 5.1%, to $7.3 million for the three months ended
      June
      30, 2006 from $7.7 million for the three months ended June 30, 2005. This
      decrease was primarily attributable to the transfer of the Westwood dealership
      ($0.4 million) in May 2005. On a same store basis, S,G&A remained constant
      at $7.3 million for the three months ended June 30, 2006 and 2005. Reductions
      in
      policy costs of $0.1 million due to a reduction in vehicles sold and a decrease
      in cost per unit (see Note 9 - warranties to the
      unaudited consolidated financial statements )
      and
      payroll and related costs of less than $0.1 million (primarily due to decreased
      gross profit) was offset by increased advertising costs of $0.1 million (needed
      to maintain sales levels) and increased litigation costs of less than $0.1
      million (see Notes 9 and 10 to the
      unaudited consolidated financial statements ).


26








***Interest
      Expense***





Interest
      expense increased $0.2 million to $1.1 million for the three months ended June
      30, 2006 from $0.9 million for the three months ended June 30, 2005. The
      increase is primarily due to an increase in floorplan interest expense resulting
      from higher interest rates partially offset by decreased borrowings resulting
      from one less dealership in 2006 compared to 2005.





***Other
      Income***





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





***Income
      tax provision***





The
      effective income tax rate was 40.2% in the quarter ended June 30, 2006 and
      39.9%
      in the same period of 2005. The rates were based on current forecasts of income
      before taxes, and current forecasts of permanent differences between tax and
      book income. The rates reflect the expected effective tax rate for the year.
      Deferred taxes, including the valuation allowance, will be reviewed throughout
      fiscal 2006.





***Net
      Income***





Net
      income decreased $0.6 million to $0.3 million for the three months ended June
      30, 2006, from $0.9 million for the three months ended June 30, 2005 primarily
      due to the $0.6 million gain discussed in Other Income above. See above for
      explanation of other changes.





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





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





The
      basic
      and diluted income per share for the three months ended June 30, 2006 is $0.05
      and $0.04, respectively. The basic and diluted income per share for the three
      months ended June 30, 2005 is $0.14 and $0.13, respectively.




27





***Six
      months ended June 30, 2006 compared with six months ended June 30,
      2005.***





***Revenues***
            
            For
                the Six Months EndedJune
                30,
            
            Increase%(in
                thousands, except per vehicle data)
            
            2006
            
            2005
            
            (Decrease)
            
            ChangeNew
                vehicle data:Retail
                revenues - same store
            
            $
            58,429
            
            $
            67,955
            
            $
            (9,526
            )
            
            (14.0
            )%Retail
                revenues - other stores (1)
            
            
            -
            
            
            9,022
            
            
            (9,022
            )
            
            *Total
                new retail revenues
            
            
            58,429
            
            
            76,977
            
            
            (18,548
            )
            
            (24.1
            )%Fleet
                revenues - same store
            
            
            2,268
            
            
            1,693
            
            
            575
            
            
            34.0
            %Total
                new vehicles revenues, as reported
            
            $
            60,697
            
            $
            78,670
            
            $
            (17,973
            )
            
            (22.8
            )%New
                retail units - same store
            
            
            2,330
            
            
            2,638
            
            
            (308
            )
            
            (11.7
            )%New
                retail units - other stores (1)
            
            
            -
            
            
            245
            
            
            (245
            )
            
            *Fleet
                units
            
            
            106
            
            
            94
            
            
            12
            
            
            12.8
            %Total
                new vehicle units
            
            
            2,436
            
            
            2,977
            
            
            (541
            )
            
            (18.2
            )%Used
                vehicle data:Retail
                revenues - same store
            
            $
            23,611
            
            $
            24,030
            
            $
            (419
            )
            
            (1.7
            )%Retail
                revenues - other stores (1)
            
            
            -
            
            
            789
            
            
            (789
            )
            
            *Total
                used retail revenues
            
            
            23,611
            
            $
            24,819
            
            $
            (1,208
            )
            
            (4.9
            )%Wholesale
                revenues - same store
            
            
            7,248
            
            
            7,243
            
            
            5
            
            
            0.1
            %Wholesale
                revenues - other stores (1)
            
            
            -
            
            
            419
            
            
            (419
            )
            
            *Total
                wholesale revenues
            
            
            7,248
            
            
            7,662
            
            
            (414
            )
            
            (5.4
            )%Total
                used vehicle revenue, as reported
            
            $
            30,859
            
            $
            32,481
            
            $
            (1,622
            )
            
            (5.0
            )%Used
                retail units - same store
            
            
            1,433
            
            
            1,449
            
            
            (16
            )
            
            (1.1
            )%Used
                retail units - other stores (1)
            
            
            -
            
            
            45
            
            
            (45
            )
            
            *Used
                wholesale units - same store
            
            
            1,359
            
            
            1,580
            
            
            (221
            )
            
            (14.0
            )%Used
                wholesale units - other stores (1)
            
            
            -
            
            
            59
            
            
            (59
            )
            
            *Total
                used units
            
            
            2,792
            
            
            3,133
            
            
            (341
            )
            
            (10.9
            )%Parts
                and service:Parts
                and service revenues - same store
            
            $
            10,548
            
            $
            10,559
            
            $
            (11
            )
            
            (0.1
            )%Parts
                and service revenues - other stores (1)
            
            
            -
            
            
            1,506
            
            
            (1,506
            )
            
            *Total
                parts and service revenue
            
            $
            10,548
            
            $
            12,065
            
            $
            (1,517
            )
            
            (12.6
            )%Other
                revenues, net:Other
                revenues, net - same store
            
            $
            3,913
            
            $
            3,835
            
            $
            78
            
            
            2.0
            %Other
                revenues, net - other stores (1)
            
            
            -
            
            
            118
            
            
            (118
            )
            
            *Total
                other revenues, net, as reported
            
            $
            3,913
            
            $
            3,953
            
            $
            (40
            )
            
            (1.0
            )%Total
                revenue:Same
                store
            
            $
            106,017
            
            $
            115,315
            
            $
            (9,298
            )
            
            (8.1
            )%Other
                stores (1)
            
            
            -
            
            
            11,854
            
            
            (11,854
            )
            
            *Total
                revenue, as reported
            
            $
            106,017
            
            $
            127,169
            
            $
            (21,152
            )
            
            (16.6
            )%





28





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





*
      -
      Percentage is 100% or greater.





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





Total
      revenue decreased $21.2 million, or 16.6% to $106.0 million for six months
      ended
      June 30, 2006 from $127.2 million for six months ended June 30, 2005. Same
      store
      revenues decreased $9.3 million, or 8.1% to $106.0 million for six months ended
      June 30, 2006 from $115.3 million for six months ended June 30, 2005.





Same
      store new retail revenues decreased $9.6 million, or 14.0% to $58.4 million
      for
      the six months ended June 30, 2006 from $68.0 million for the six months ended
      June 30, 2005. This decrease was attributable to the 11.7% decrease in units
      ($8.0 million) sold in 2006 compared to 2005 combined with a 2.7% decrease
      in
      average revenue per unit sold ($1.6 million) in 2006 compared to 2005. The
      Nissan dealership has sold more units compared to its predecessor Lincoln
      Mercury brand. All other Hometown dealerships experienced a decrease in unit
      sales and new retail revenues from 2005 to 2006, with the domestic brands having
      the largest percentage declines over the prior year. The year to date unit
      decrease is from both cars and trucks, but the drop off in truck sales continued
      during the second quarter whereas car sales were consistent with the prior
      year.
      The decrease in truck sales contributed to the decrease in the average revenue
      per unit. This is consistent with national trends. Buyers have been opting
      for
      higher gas mileage vehicles and have been buying fewer trucks, including more
      expensive sport utility vehicles. Ford, Chevrolet and Chrysler unit sales were
      down from 23% - 39% from 2005 to 2006. These decreases were in line with
      decreases at non-Hometown dealerships in Hometown’s area, some of which were
      larger or smaller than Hometown’s declines. Chevrolet was benefited in 2005 with
      an employee-pricing program, which caused in increase in unit sale during the
      2005 period. Chevrolet did not offer this program during the 2006 period. Toyota
      unit sales were down nearly 4%, which is similar to non-Hometown dealerships
      in
      Hometown’s area. Also one Toyota facility has been adversely affected by not
      having the Scion vehicle available for sale. Fleet revenues increased from
      2005
      levels, but do not contribute significantly to profits.





Same
      store used vehicle retail revenues decreased $0.4 million, or 1.7% to $23.6
      million for the six months ended June 30, 2006 from $24.0 million for the six
      months ended June 30, 2005. This decrease was primarily attributable to a 1.1%
      decrease in units sold ($0.3 million) and was primarily due to decreases at
      the
      remaining Lincoln Mercury dealership which experienced a large drop off in
      traffic in the store during the second quarter. Same store wholesale revenues
      remained constant at $7.2 million for the six months ended June 30, 2006 and
      2005. A decrease in units was offset by an increase in average selling price.
      The increase in average selling price for wholesale units is also a function
      of
      the retail sales unit volume, which is down over the prior year and is even
      lower than historical levels. 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.





Same
      store parts and service revenues decreased less than $0.1 million or 0.1% to
      $10.5 million for the six months ended June 30, 2006 from $10.6 million for
      the
      six months ended June 30, 2005. Increases at Nissan ($0.2 million), Mazda and
      Toyota (together totaling $0.1 million) were offset by decreases at Lincoln
      Mercury ($0.1 million), Chevrolet ($0.1 million), and Ford ($0.1 million).
      The
      Nissan dealership has experienced an increase in parts and service revenue
      since
      changing from a Lincoln Mercury dealership due to a higher amount of Nissan
      customers in their area. The domestic brands have had decreasing new car sales,
      which has been causing a decrease in their service customer base.





Same
      store other dealership revenues increased $0.1 million or 2.0% to $3.9 million
      for the six months ended June 30, 2006 from $3.8 million for the six months
      ended June 30, 2005. A decrease in new vehicle finance revenue (due to a
      decrease in vehicles sold combined with decreased revenue earned on each
      financing transaction) was offset by an increase in extended warranty revenues
      and miscellaneous other revenues.


29





***Gross
                Profit***
            
            For
                the Six Months EndedJune
                30,
            
            Increase%(in
                thousands, except per vehicle data)
            
            2006
            
            2005
            
            (Decrease)
            
            ChangeNew
                vehicle data:Retail
                gross profit - same store
            
            $
            4,153
            
            $
            4,688
            
            $
            (535
            )
            
            (11.4
            )%Retail
                gross profit - other stores (1)
            
            
            -
            
            
            464
            
            
            (464
            )
            
            *Total
                new retail gross profit
            
            
            4,153
            
            
            5,152
            
            
            (999
            )
            
            (19.4
            )%Fleet
                gross profit
            
            
            17
            
            
            15
            
            
            2
            
            
            13.3
            %Total
                new vehicles gross profit, as reported
            
            $
            4,170
            
            $
            5,167
            
            $
            (997
            )
            
            (19.3
            )%Gross
                profit percentage
            
            
            6.9
            %
            
            6.6
            %New
                retail units - same store
            
            
            2,330
            
            
            2,638
            
            
            (308
            )
            
            (11.7
            )%New
                retail units - other stores (1)
            
            
            -
            
            
            245
            
            
            (245
            )
            
            *Fleet
                units
            
            
            106
            
            
            94
            
            
            12
            
            
            12.8
            %Total
                new vehicle units
            
            
            2,436
            
            
            2,977
            
            
            (541
            )
            
            (18.2
            )%Used
                vehicle data:Retail
                gross profit - same store
            
            $
            2,962
            
            $
            2,718
            
            $
            244
            
            
            9.0
            %Retail
                gross profit - other stores (1)
            
            
            -
            
            
            106
            
            
            (106
            )
            
            *Total
                used retail gross profit
            
            
            2,962
            
            
            2,824
            
            
            138
            
            
            4.9
            %Wholesale
                gross profit - same store
            
            
            133
            
            
            292
            
            
            (159
            )
            
            (54.5
            )%Wholesale
                gross profit - other stores (1)
            
            
            -
            
            
            (6
            )
            
            6
            
            
            *Total
                wholesale gross profit
            
            
            133
            
            
            286
            
            
            (153
            )
            
            (53.5
            )%Total
                used vehicle gross profit, as reported
            
            $
            3,095
            
            $
            3,110
            
            $
            (15
            )
            
            (0.5
            )%Gross
                profit percentage
            
            
            10.0
            %
            
            9.6
            %Used
                retail units - same store
            
            
            1,433
            
            
            1,449
            
            
            (16
            )
            
            1.1
            %Used
                retail units - other stores (1)
            
            
            -
            
            
            45
            
            
            (45
            )
            
            *Used
                wholesale units - same store
            
            
            1,359
            
            
            1,580
            
            
            (221
            )
            
            (14.0
            )%Used
                wholesale units - other stores (1)
            
            
            -
            
            
            59
            
            
            (59
            )
            
            *Total
                used units
            
            
            2,792
            
            
            3,133
            
            
            (341
            )
            
            (10.9
            )%Parts
                and service:Parts
                and service gross profit - same store
            
            $
            5,622
            
            $
            5,690
            
            $
            (68
            )
            
            (1.2
            )%Parts
                and service gross profit - other stores (1)
            
            
            -
            
            
            862
            
            
            (862
            )
            
            *Total
                parts and service revenue
            
            $
            5,622
            
            $
            6,552
            
            $
            (930
            )
            
            (14.2
            )%Gross
                profit percentage
            
            
            53.3
            %
            
            54.3
            %Other
                gross profit:Other
                gross profit - same store
            
            $
            3,913
            
            $
            3,835
            
            $
            78
            
            
            2.0
            %Other
                gross profit - other stores (1)
            
            
            -
            
            
            118
            
            
            (118
            )
            
            *Total
                other gross profit, as reported
            
            $
            3,919
            
            $
            3,953
            
            $
            (40
            )
            
            (1.0
            )%Gross
                profit percentage
            
            
            100.0
            %
            
            100.0
            %Other
                gross profit PVR - same store
            
            $
            1,040
            
            $
            938
            
            $
            102
            
            
            10.8
            %Other
                gross profit PVR - other stores (1)
            
            
            -
            
            
            407
            
            
            (407
            )
            
            *Total
                other gross profit PVR, as reported
            
            $
            1,040
            
            $
            903
            
            $
            137
            
            
            15.1
            %





30





***Gross
                Profit -(continued)***
            
            For
                the Six Months EndedJune
                30,
            
            
            
            Increase%(in
                thousands, except per vehicle data)
            
            2006
            
            2005
            
            (Decrease)
            
            ChangeTotal
                gross profit:Same
                store
            
            $
            16,800
            
            $
            17,238
            
            $
            (438
            )
            
            (2.5
            )%Other
                stores (1)
            
            
            -
            
            
            1,544
            
            
            (1,544
            )
            
            *Total
                gross profit, as reported
            
            $
            16,800
            
            $
            18,782
            
            $
            (1,982
            )
            
            (10.6
            )%Gross
                profit percentage
            
            
            15.8
            %
            
            14.8
            %





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





*
      -
      Percentage is 100% or greater.





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





Total
      gross profit decreased $2.0 million, or 10.6%, to $16.8 million for the six
      months ended June 30, 2006, from $18.8 million for the six months ended June
      30,
      2005. Same store total gross profit decreased $0.4 million, or 2.5% to $16.8
      million for the six months ended June 30, 2006, from $17.2 million for the
      six
      months ended June 30, 2005. Same store gross profit on new retail vehicle sales
      decreased $0.5 million, or 11.4%, to $4.2 million for the six months ended
      June
      30, 2006, from $4.7 million for the six months ended June 30, 2005. The decrease
      in gross profit is directly attributable to the 11.7% decrease in unit sales
      discussed in revenues. All dealerships, except Toyota, experienced a decrease
      in
      new vehicle gross profit in 2006 compared to 2005.





Same
      store gross profit on used vehicle retail sales increased $0.3 million, or
      9.0%,
      to $3.0 million for the six months ended June 30, 2006, from $2.7 million for
      the six months ended June 30, 2005. The overall increase is attributable to
      a
      10.2% increase in average gross profit per unit, primarily attributable to
      increases at the Chevrolet and Ford dealerships. The increase at the Chevrolet
      dealership is primarily due to a change in the incentive pay plan of the used
      vehicle sales manager whereby his focus is more on used vehicle gross profit.
      The increase at the Ford dealership is primarily due to a change in sales
      management at the location. Gross profit on wholesale sales decreased less
      than
      $0.2 million from the prior year period primarily due to a decrease in the
      wholesale price of trucks and sport utility vehicles.





Same
      store parts and service gross profit decreased $0.1 million or 1.2% to $5.6
      million for the six months ended June 30, 2006 from $5.7 million for the six
      months ended June 30, 2005. Increases at Nissan and Mazda (together totaling
      $0.1 million) were offset by decreases at Lincoln Mercury, Ford, Chrysler and
      Chevrolet (together totaling $0.2 million). The Nissan dealership has
      experienced an increase in parts and service revenue since changing from a
      Lincoln Mercury dealership due to a higher amount of Nissan customers in their
      area. The overall decrease of $0.1 million is primarily due to a decrease of
      less than 1% in gross profit percentage.





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





S,G&A
      decreased $1.2 million, or 7.6%, to $14.5 million for the six months ended
      June
      30, 2006 from $15.7 million for the six months ended June 30, 2005. This
      decrease was primarily attributable to the transfer of the Westwood dealership
      ($1.3 million) in May 2005. On a same store basis, S,G&A increased $0.1
      million, or 0.1%, to $14.5 million for the six months ended June 30, 2006 from
      $14.4 million for the six months ended June 30, 2005. Reductions in payroll
      and
      related costs of $0.1 million (due to decreased gross profit on a same store
      basis) and reductions in policy costs of $0.1 million due to a decrease in
      vehicles sold and cost per vehicle (see Note 9 - warranties to the
      unaudited consolidated financial statements) was
      offset by (i) increased advertising costs of $0.1 million (needed to maintain
      sales levels), (ii) the write-off of deferred finance fees of $0.1 million
      (due
      to the refinancing of debt, see Note 8 to the
      unaudited consolidated financial statements ),
      and
      (iii) various other costs of $0.1
      million.


31








***Other
      Income***





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





***Interest
      Expense***





Interest
      expense increased $1.3 million to $3.1 million for the six months ended June
      30,
      2006 from $1.8 million for the six months ended June 30, 2005. The increase
      is
      primarily due to a $1.0 million prepayment penalty associated with a debt
      refinancing as part of the Nissan acquisition (see Note 8 to the
      unaudited consolidated financial statements. )
      and an
      increase in floorplan interest expense ($0.2 million) resulting from higher
      interest rates partially offset by decreased borrowings primarily resulting
      from
      one less dealership in 2006 compared to 2005.





***Income
      tax provision (benefit)***





The
      effective income tax rate was 40.4% in the six months ended June 30, 2006 and
      40.0% in the same period of 2005. The rates were based on current forecasts
      of
      income before taxes, and current forecasts of permanent differences between
      tax
      and book income. The rates reflect the expected effective tax rate for the
      year.
      Deferred taxes, including the valuation allowance, will be reviewed throughout
      fiscal 2006.





***Net
      Income (Loss)***





Net
      income decreased $1.6 million to a loss of $0.4 million for the six months
      ended
      June 30, 2006, from income of $1.2 million for the six months ended June 30,
      2005 primarily due to the $1.0 million prepayment penalty in 2006 discussed
      above in Interest Expense above combined with the $0.6 million gain in 2005
      discussed above in Other Income. See above for explanation of other
      changes.





***Earnings
      (Loss) 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 (loss) per share for the six months ended June 30, 2006
      and
      2005 is $(0.05) and $0.17, 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.


32





***Effects
      of Inflation***





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





***Liquidity
      and Capital Resources***





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





*Cash
      and Cash Equivalents*





Total
      cash and cash equivalents was $5.5 million and $6.5 million at June 30, 2006
      and
      December 31, 2005, respectively.





*Cash
      Flow from Operations*





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





Six
                months ended June 30,(in
                thousands)
            
            2006
            
            2005Net
                cash provided by (used in) operating activities
            
            $
            (3,077
            )
            $
            2,943Net
                cash (used in) investing activities
            
            
            (2,264
            )
            
            (91
            )Net
                cash provided by (used in) financing activities
            
            
            4,357
            
            
            (3,903
            )Net
                (decrease) in cash and cash equivalents
            
            $
            (984
            )
            $
            (1,051
            )





For
      the
      six months ended June 30, 2006, net cash used in operating activities of $3.1
      million primarily consists of: (i) net loss of $0.4 million less non-cash items
      of $.5 million (totaling $0.1 million), (ii) an increase in inventory of $1.2
      million combined with the decrease in floor plan liability - trade of $1.5
      million, (iii) an increase in accounts receivable of $0.2 million, primarily
      due
      to an increase in revenues in June 2006 compared to December 2005 and (iv)
      an
      increase in prepaid taxes, expenses and other current assets of $0.4 million,
      primarily due to prepayments of income taxes, insurance and advertising.
      Inventory and related floor plan liability (trade and non-trade) increased
      $1.2
      million and $0.9 million, respectively, due to an anticipated increase in sales
      expected in the summer months. The difference between the two increases is
      due
      to the timing of floorplan payoffs. Net cash used in investing activities of
      $2.3 million is primarily due to the acquisition of the Nissan franchise ($2.0
      million, see Note 8 to the unaudited consolidated financial statements) and
      $0.3
      million of miscellaneous capital expenditures, primarily dealership equipment,
      signage and leasehold improvements. Net cash provided by financing activities
      of
      $4.4 million is due to (i) proceeds from long-term borrowings of $7.7 million
      (primarily used as follows: $2.0 million was used to purchase the Nissan
      Franchise discussed above, $4.3 million to refinance the Baystate mortgage
      loan
      and $1.0 million to pay the prepayment penalty. See Note 8 to the unaudited
      consolidated financial statements), (ii) the net change (increase) in non-trade
      floorplan notes payable of $2.3 million (see operating activities discussion
      above), partially offset by principal payments of long-term debt and capital
      lease obligations of $5.7 million ($4.3 million of which was to pay off the
      Baystate loan discussed above which was refinanced with a different bank).


33





For
      the
      six months ended June 30, 2005, net cash provided from operations of $2.9
      million primarily consists of: (i) net income of $1.2 million plus non-cash
      items of $0.8 million (totaling $2.0 million), (ii) a decrease in inventory
      of
      $5.0 million less the decrease in floor plan liability - trade of $2.3 million;
      partially offset by (iii) a decrease in accounts payable and accrued expenses
      of
      $0.4 million, primarily due to payment of litigation settlements, (iv) an
      increase in accounts receivable of $0.5 million, primarily due to the funds
      to
      be received from Lincoln Mercury related to the transfer of the Westwood
      dealership, (v) an increase in prepaid expenses and other current assets of
      $0.4
      million, primarily due to payment of costs associated with the pending exchange
      agreement, (vi) prepaid income taxes of $0.2 million, and (vii) amortization
      of
      deferred revenue of $0.3 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. Total
      floor plan liability decreased more than the decrease in inventory due to an
      increase in used vehicle inventory in excess of the used floor plan limit.
      This
      was primarily due to a planned used vehicle special event sale that took place
      in July 2005. Net cash used in investing activities of $0.1 million is due
      to miscellaneous capital expenditures. Net
      cash
      used in financing activities of $3.9 million is due to: (i) the net change
      in
      non-trade floorplan notes payable of $3.2 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 $0.9
      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).





*Capital
      Expenditures*





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





*Receivables*





Hometown
      had $4.5 million in accounts receivable, net at June 30, 2006 compared to $4.3
      million at December 31, 2005. A substantial portion of those receivables, $2.1
      million and $1.8 million as of June 30, 2006 and December 31, 2005,
      respectively, are due from finance companies that provide or secure financing
      for customer purchases, and primarily represent contracts-in-transit. These
      amounts are typically received within seven days of the transaction. Of the
      remaining amount, $1.5 million and $0.9 million as of June 30, 2006 and December
      31, 2005, respectively, represents amounts due from manufactures for such items
      as warranty claims and incentive reimbursements. These categories increased
      from
      December 31, 2005 primarily due to a 28% increase in dealerships revenue in
      the
      second quarter of 2006 compared to the fourth quarter of 2005. Also, certain
      receivables due from manufacturers are due on a quarterly basis. Other
      receivables, net of the allowance for doubtful accounts, decreased to $0.6
      million at June 30, 2006 from $1.2 million at December 31, 2005, primarily
      due
      to a decrease of fleet sales receivables at June 30, 2006. Parts and service
      receivables were $0.3 million and $0.4 million as of June 30, 2006 and December
      31, 2005, respectively.





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





*Inventories*





Hometown
      had $35.8 million in inventories, net at June 30, 2006 compared to $33.5 million
      at December 31, 2005. The majority of inventory, $25.6 million and $24.5 million
      as of June 30, 2006 and December 31, 2005, respectively, is new vehicle
      inventory. New, used and demonstrator vehicle values are stated at the lower
      of
      cost or market, determined on a specific unit basis. Parts and accessories
      are
      stated at the lower of cost (determined on a first-in, first-out basis) or
      market. Hometown assesses the lower of cost or market reserve requirement for
      vehicles, on an individual unit basis, taking into consideration historical
      loss
      rates, the age and composition of the inventory and current market conditions.
      The lower of cost or market adjustment was $0.4 million at both June 30, 2006
      and December 31, 2005.





*Floor
      Plan Financing*




See
      Note
      7 to the unaudited consolidated financial statements.


34








*Long-Term
      Debt and Capital Lease Obligations*





See
      Note
      8 to the unaudited consolidated financial statements.





*Commitments
      and Contingencies*





See
      Note
      9 to the unaudited consolidated financial statements.








***Forward
      Looking Statement***





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





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





We
      are
      exposed to market risk from changes in interest rates on our amounts outstanding
      under our floor plan financing arrangement, which bears interest at variable
      rates based on the prime or LIBOR borrowing rates. Based on floor plan amounts
      (trade and non-trade) outstanding at June 30, 2006 of $33.8 million, a 1% change
      in the prime rate would result in a $0.3 million change to annual floor plan
      interest expense.





At
      June
      30, 2006, Hometown invested $4.5 million of excess cash, of which $1.8 million
      was invested in money market accounts paying a weighted average interest rate
      of
      4.09% at June 30, 2006, and $2.7 million was invested in a Ford Motor Credit
      Company cash management account paying interest of 9.00% at June 30, 2006.
      The
      cash management account interest rate is tied to the rate charged on Hometown’s
      floor plan financing arrangement.





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





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





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


35








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








**PART
      II. OTHER INFORMATION**








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





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





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





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





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





NONE





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





NONE





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





NONE





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





NONE





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





31.1
            Chief
                Executive Officer Certification





31.2
            Chief
                Financial Officer Certification





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





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











36


**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.August
                10, 2006
            By:
                /s/ Corey E. ShakerDate
            Corey
                E. ShakerPresident
                and Chief Executive OfficerAugust
                10, 2006
            By:
                /s/ Charles F. SchwartzDate
            Charles
                F. SchwartzChief
                Financial Officer








37