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 March 31, 2006








Commission
      file number: 000-24669








HOMETOWN
      AUTO RETAILERS, INC.


(Exact
      name of Registrant as specified in its charter)





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





1309
      South Main Street


Waterbury,
      CT 06706


(Address
      of principal executive offices) (Zip code)





(203)
      756-1300


(Registrant's
      telephone number including area code)








Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes [X] No [ ]





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





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





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





Title
            
            Outstanding
              As
                of May 10, 2006Common
                Stock, Class A, par value $.001 per share
            
            3,910,137Common
                Stock, Class B, par value $.001 per share
            
            2,579,252





INDEX


PART I.
              FINANCIAL
                  INFORMATION
              PageITEM 1.
              Consolidated
                  Balance Sheets at March 31, 2006 (Unaudited) and December 31, 2005
                  (Audited)
              
              3Unaudited
                  Consolidated Statements of Operations for the three months ended
                  March 31,
                  2006 and 2005 (Restated)
              
              4Unaudited
                  Consolidated Statements of Stockholders’ Equity for the three months ended
                  March 31, 2006 and 2005 (Restated)
              
              5Unaudited
                  Consolidated Statements of Cash Flows for the three months ended
                  March 31,
                  2006 and 2005 (Restated)
              
              6Notes
                  to Unaudited Consolidated Financial Statements
              
              7ITEM 2.
              Management’s
                  Discussion and Analysis of Financial Conditionand Results of
                  Operations
              
              19ITEM 3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              29ITEM 4.
              Controls
                  and Procedures
              
              29PART II.
              OTHER
                  INFORMATIONITEM 1.
              Legal
                  Proceedings
              
              30ITEM 1A.
              Risk
                  Factors
              
              30ITEM 2.
              Unregistered
                  Sales Of Equity Securities and Use of Proceeds
              
              30ITEM 3.
              Defaults
                  Upon Senior Securities
              
              30ITEM 4.
              Submission
                  of Matters to a Vote of Security Holders
              
              30ITEM 5.
              Other
                  Information
              
              30ITEM 6.
              Exhibits
              
              30SIGNATURES
              
              31CERTIFICATIONS
              
              32


**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)**




March
                31,
            
            
            December
                31,ASSETS
            
            
            2006
            
            
            2005(Unaudited)
            
            
            (Audited)Current
                Assets:Cash
                and cash equivalents
            
            $
            5,111
            
            $
            6,453Accounts
                receivable, net
            
            
            5,515
            
            
            4,330Inventories,
                net
            
            
            34,845
            
            
            33,542Prepaid
                expenses and other current assets
            
            
            751
            
            
            568Deferred
                and prepaid income taxes
            
            
            1,039
            
            
            1,039Total
                current assets
            
            
            47,261
            
            
            45,932Property
                and equipment, net
            
            
            12,923
            
            
            13,035Other
                assets
            
            
            4,855
            
            
            2,919Total
                assets
            
            $
            65,039
            
            $
            61,886LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                Liabilities:Floor
                plan notes payable - trade
            
            $
            5,291
            
            $
            6,697Floor
                plan notes payable - non-trade
            
            
            28,085
            
            
            26,265Accounts
                payable and accrued expenses
            
            
            4,304
            
            
            3,909Current
                maturities of long-term debt and capital lease obligations
            
            
            1,326
            
            
            5,245Deferred
                revenue
            
            
            243
            
            
            207Total
                current liabilities
            
            
            39,249
            
            
            42,323Long-term
                debt and capital lease obligations
            
            
            14,788
            
            
            7,884Other
                long-term liabilities and deferred revenue
            
            
            102
            
            
            128Total
                liabilities
            
            
            54,139
            
            
            50,335Commitments
                and ContingenciesStockholders'
                EquityPreferred
                          stock, $.001 par value, 2,000,000 shares authorized, no
                          shares issued and
                          outstanding
            
            
            -
            
            
            -Common
                          stock, Class A, $.001 par value, 12,000,000 shares authorized,
                          3,910,137
                          shares issued and
                          outstanding
            
            
            4
            
            
            4Common
                          stock, Class B, $.001 par value, 3,760,000 shares authorized,
                          2,579,252
                          shares issued and
                          outstanding
            
            
            2
            
            
            2Additional
                paid-in capital
            
            
            29,025
            
            
            29,022Accumulated
                deficit
            
            
            (18,131
            )
            
            (17,477
            )Total
                stockholders' equity
            
            
            10,900
            
            
            11,551Total
                liabilities and stockholders' equity
            
            $
            65,039
            
            $
            61,886The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.




3


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











For
                the Three Months Ended
                March 31,2006
            
            
            2005(Restated)RevenuesNew
                vehicle sales
            
            $
            26,556
            
            $
            38,025Used
                vehicle sales
            
            
            15,261
            
            
            15,560Parts
                and service sales
            
            
            5,233
            
            
            6,156Other,
                net
            
            
            1,967
            
            
            2,074Total
                revenues
            
            
            49,017
            
            
            61,815Cost
                of salesNew
                vehicle
            
            
            24,761
            
            
            35,592Used
                vehicle
            
            
            13,697
            
            
            14,003Parts
                and service
            
            
            2,500
            
            
            2,865Total
                cost of sales
            
            
            40,958
            
            
            52,460Gross
                profit
            
            
            8,059
            
            
            9,355Selling,
                general and administrative expenses
            
            
            7,237
            
            
            8,009Income
                from operations
            
            
            822
            
            
            1,346Interest
                income
            
            
            99
            
            
            70Interest
                (expense)
            
            
            (1,999
            )
            
            (920
            )Other
                income
            
            
            3
            
            
            2Other
                (expense)
            
            
            (20
            )
            
            -Pre-tax
                income (loss)
            
            
            (1,095
            )
            
            498Income
                tax provision (benefit)
            
            
            (441
            )
            
            201Net
                income (loss)
            
            $
            (654
            )
            $
            297Earnings
                (loss) per share, basic
            
            $
            (0.10
            )
            $
            0.04Earnings
                (loss) per share, diluted
            
            $
            (0.10
            )
            $
            0.04Weighted
                average shares outstanding, basic
            
            
            6,489,389
            
            
            7,086,500Weighted
                average shares outstanding, diluted
            
            
            6,489,389
            
            
            7,210,990The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.


4





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






Class
                A
            Class
                BCommon
                Stock
            Common
                Stock
            
            Additional
            
            
            
            
            
            
            
            
            TotalPaid-in
            
            
            (Accumulated
            
            
            Treasury
            
            
            Stockholders’Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Deficit)
            
            
            Stock
            
            
            EquityBalance
                atDecember
                31, 2004 (Restated)
            
            
            3,870
            
            $
            4
            
            
            3,519
            
            $
            3
            
            $
            30,017
            
            $
            (18,769
            )
            $
            -
            
            $
            11,255Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            297
            
            
            -
            
            
            297LitigationSettlement
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,043
            )
            
            (1,043
            )Balance
                atMarch
                31, 2005 (Restated)
            
            
            3,870
            
            $
            4
            
            
            3,519
            
            $
            3
            
            $
            30,017
            
            $
            (18,472
            )
            $
            (1,043
            )
            $
            10,509Balance
                atDecember
                31, 2005
            
            
            3,910
            
            $
            4
            
            
            2,579
            
            $
            2
            
            $
            29,022
            
            $
            (17,477
            )
            $
            -
            
            $
            11,551Net
                (loss)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (654
            )
            
            -
            
            
            (654
            )Stock
                option expense
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3
            
            
            -
            
            
            -
            
            
            3Balance
                at
              March
                31, 2006
            
            
            3,910
            
            $
            4
            
            
            2,579
            
            $
            2
            
            $
            29,025
            
            $
            (18,131
            )
            $
            -
            
            $
            10,900The
                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 Three Months endedMarch
                31,2006
            
            
            2005(Restated)CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income (loss)
            
            $
            (654
            )
            $
            297Adjustments
                  to reconcile net income (loss) to net cash provided by operating
                  activities -Depreciation
                and amortization
            
            
            398
            
            
            335Loss
                on sale of fixed assets
            
            
            19
            
            
            -Deferred
                income taxes
            
            
            (441
            )
            
            201Stock
                option expense
            
            
            3
            
            
            -Changes
                in assets and liabilities:Accounts
                receivable, net
            
            
            (1,185
            )
            
            (1,239
            )Inventories,
                net
            
            
            (534
            )
            
            562Prepaid
                expenses and other current assets
            
            
            (183
            )
            
            (111
            )Prepaid
                taxes
            
            
            (73
            )
            
            (32
            )Other
                assets
            
            
            106
            
            
            (64
            )Floor
                plan notes payable - trade
            
            
            (1,406
            )
            
            (1,679
            )Accounts
                payable and accrued expenses
            
            
            395
            
            
            (399
            )Deferred
                revenue - current
            
            
            36
            
            
            (82
            )Other
                long-term liabilities and deferred revenue
            
            
            (26
            )
            
            (48
            )Net
                cash (used in) operating activities
            
            
            (3,545
            )
            
            (2,259
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of property and equipment
            
            
            (146
            )
            
            (57
            )Proceeds
                from sale of property and equipment
            
            
            1
            
            
            -Acquisition
                of Nissan franchise
            
            
            (2,000
            )
            
            -Net
                cash (used in) investing activities
            
            
            (2,145
            )
            
            (57
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from floor plan notes payable - non-trade
            
            
            36,919
            
            
            39,637Payment
                of floor plan notes payable - non-trade
            
            
            (35,099
            )
            
            (37,859
            )Principal
                payments of long-term debt and capital lease obligations
            
            
            (5,102
            )
            
            (452
            )Proceeds
                from long-term borrowings
            
            
            7,630
            
            
            225Net
                cash provided by financing activities
            
            
            4,348
            
            
            1,551Net
                (decrease) in cash and cash equivalents
            
            
            (1,342
            )
            
            (765
            )CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            6,453
            
            
            6,101CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            5,111
            
            $
            5,336Cash
                paid for - Interest
            
            $
            2,015
            
            $
            897Cash
                paid for - Taxes
            
            $
            73
            
            $
            32Purchases
                financed by capital lease obligations
            
            $
            810
            
            $
            117The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.


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 $49,000 for the three
      months ended March 31, 2005. The after tax effects was to increase net income
      by
      $29,000 for the three months ended March 31, 2005. These adjustments did not
      affect basic and diluted earnings per share for the three months ended March
      31,
      2005.





Deferred
      revenue recorded as of June 30, 2003, will continue to be taken into income
      over
      the remaining life of the contract. At March 31, 2006, Hometown had $268,000
      of
      related deferred revenue remaining. This deferred revenue will be recognized
      over the next three years as follows: 2006 (remaining period) - $142,000, 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 March 31, 2006 Hometown has other deferred
      revenues of $75,000.




7




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




Three
                months ended March
                31, 2005Previously
Reported
            
            
            Restated**Statements
                of Operations:**Other
                revenues, net
            
            $
            2,025
            
            $
            2,074Total
                revenues
            
            $
            61,766
            
            $
            61,815Gross
                profit
            
            $
            9,306
            
            $
            9,355Income
                from operations
            
            $
            1,297
            
            $
            1,346Pre-tax
                income
            
            $
            449
            
            $
            498Provision
                for income taxes
            
            $
            181
            
            $
            201Net
                income
            
            $
            268
            
            $
            297Earnings
                per share, basic
            
            $
            0.04
            
            $
            0.04Earnings
                per share, diluted
            
            $
            0.04
            
            $
            0.04**Statements
                of Cash Flows:**Net
                income
            
            $
            268
            
            $
            297Deferred
                income taxes
            
            $
            181
            
            $
            201Deferred
                revenue - current
            
            $
            (71
            )
            $
            (82
            )Other
                long-term liabilities and deferred revenue
            
            $
            (10
            )
            $
            (48
            )Net
                cash provided by operating activities
            
            $
            (2,259
            )
            $
            (2,259
            )





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 March 31, 2006, the consolidated
      statements of operations for the three months ended March 31, 2006 and 2005
      (restated), the consolidated statements of stockholders’ equity and the
      consolidated statements of cash flows for the three months ended March 31,
      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
      March
      31, 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 months ended March 31, 2006, Hometown recognized approximately $3,000
      pre-tax ($1,800 after-tax) 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. No options were granted, exercised or forfeited in 2006.
      Hometown used the Black-Scholes valuation model and straight-line amortization
      of compensation expense over the requisite service period of the grant. As
      of
      March 31, 2006 there were 23,332 unvested stock options, with related
      unrecognized compensation cost of $26,000, 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.





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.




9





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




(in
                thousands, except per share data)
            
            
            Three
                Months Ended March
                31, 2005Net
                income, as reported
            
            $
            297Deduct:
                Total stock-based employee compensation expense determined under
fair
                value based method for all awards, net of related tax effects
                (1)
            
            
            (2
            )Pro
                forma net income
            
            $
            295Earnings
                per share:Basic,
                as reported
            
            $
            0.04Basic,
                pro forma
            
            $
            0.04Diluted,
                as reported
            
            $
            0.04Diluted,
                pro forma
            
            $
            0.04





(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.




**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 (loss) by the weighted average common shares
      outstanding adjusted for the incremental dilution of potentially dilutive
      securities. Options to purchase approximately 498,000 and 518,000 shares of
      common stock were outstanding during 2006 and 2005, respectively.




10




Basic
      and
      diluted weighted average shares for the three months ended March 31, 2006 and
      2005 are as follows:





Three
                Months Ended March
                31,2006
            
            
            2005Basic,
                Weighted Average Shares
            
            
            6,489,389
            
            
            7,086,500Common
                Stock Equivalents
            
            
            -
            
            
            124,490Diluted,
                Weighted Average Shares
            
            
            6,489,389
            
            
            7,210,990





Basic
      weighted average shares reflect a reduction of 940,000 Class B shares from
      the
      settlement of the Vergopia litigation on March 3, 2005.





The
      common stock equivalents are options whose exercise price is less than the
      average market price of the common shares during the period. Options to purchase
      498,000 shares of Hometown common stock in 2006 were excluded from the
      calculation of diluted earnings (loss) per share due being anti-dilutive.
      Options to purchase 238,000 shares of Hometown common stock in 2005 were
      excluded from the calculation of diluted earnings (loss) per share due to the
      option prices being greater than the average market price of the common shares.





The
      basic
      and diluted income (loss) per share for the three months ended March 31, 2006
      and 2005 is $(0.10) and $0.04, 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)
            
            
            3/31/06
            
            
            12/31/05New
                Vehicles
            
            $
            25,366
            
            $
            24,474Used
                Vehicles
            
            
            7,464
            
            
            7,284Parts,
                accessories and other
            
            
            2,015
            
            
            1,784Total
                Inventories
            
            $
            34,845
            
            $
            33,542





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





**6.**  **INTANGIBLE
      ASSETS**





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





(in
                thousands)
            
            
            3/31/06
            
            
            12/31/05Manufacturer
                franchise rights
            
            $
            2,000
            
            $
            -Deferred
                finance charges
            
            
            62
            
            
            272Accumulated
                amortization
            
            
            (50
            )
            
            (142
            )Franchise
                fee
            
            
            10
            
            
            10Accumulated
                amortization
            
            
            (5
            )
            
            (5
            )Net
                intangible assets
            
            $
            2,017
            
            $
            135





11




These
      assets are included in Other Assets in the consolidated financial statements.
      During the three months ended March 31, 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.





In
      connection with the acquisition of a Nissan franchise (see Note 8), Hometown
      recorded $2.0 million as manufacturer franchise rights during the quarter ended
      March 31, 2006. Hometown has determined these 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 at least an annual basis. Franchise value
      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. At the date of acquisition the fair value
      of
      the franchise exceeded the cost of the franchise.





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




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





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





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





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





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





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




**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
      customer lists, 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 franchise rights and 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 has not yet been completed. The appraisal will determine an estimate
      of
      the fair market value of the assets acquired. Upon completion of the appraisal,
      the purchase price will be allocated to the assets acquired based on the results
      of the appraisal and amortized accordingly. The effect of not having an
      appraisal completed at this time will not have a material effect on the results
      of operations. Hometown incurred approximately $0.1 million of costs in relation
      to the acquisition, which was expensed and is included in Selling, General
      and
      Administrative expenses in the accompanying Unaudited Consolidated Statement
      of
      Operations at March 31, 2006. At March 31, 2006 Hometown has a $40,000 accounts
      payable to the Shaker Auto Group, a related party, in relation to this
      transaction. This represents the initial deposit on this
      transaction.




12





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 to Interest Expense in Hometown’s Consolidated Statement of Operations
      for the period ended March 31, 2006.





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.




13





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.





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


****


*Litigation*





Hometown
      Auto Retailers, Inc. d/b/a Muller Toyota, Inc. has been named as one of 1,667
      defendants in a complaint filed by Maryann Cerbo, et. al. in the Superior Court
      of New Jersey in Bergen County and allegedly served upon Hometown on December
      30, 2004. The action has been brought on behalf of about 111 named plaintiffs
      and, purportedly on behalf of a class of individuals and companies who have
      purchased or leased a motor vehicle from the defendants. Plaintiffs contend
      that
      the defendants (a) overcharged for registration and/or title fees; (b) failed
      to
      properly itemize documentary costs and governmental costs; (c) charged grossly
      excessive documentary fees not reasonably related to costs; and (d) failed
      to
      disclose that the defendants are not required to perform certain documentary
      services. It appears from the complaint that plaintiffs have attempted to name
      as defendants all franchised automobile dealers in the State of New Jersey,
      as
      well as a large assortment of other persons and entities. There are no
      allegations that Hometown ever performed any services for any of the named
      plaintiffs. The complaint makes certain class action allegations and alleges
      violations of the New Jersey Consumer Fraud Act as well as common law fraud.
      The
      Court has dismissed the portions of the complaint alleging violations of the
      New
      Jersey Consumer Fraud Act, common law fraud and conspiracy to commit common
      law
      fraud. Hometown does not believe that the eventual outcome of this case will
      have a material adverse effect upon Hometown’s consolidated financial position
      or results of operations.





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.




14





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.




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.




15





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 March 31, 2006 and December
      31,
      2005, Hometown has a reserve of $226,000 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.





Reserve
                for Policy Work
            Balance
                At Beginning of Year
            Additions
                To Costs and Expenses
            Deductions
            Balance
                At End of QuarterThree
                Months Ended March 31, 2006
            $202,000
            $206,000
            $(182,000)
            $226,000





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 May 18, 2006. Previously on March 13,
      2003,
      Hometown was notified by Toyota Motor Sales, U.S.A., that Hometown must correct
      certain operational deficiencies or make substantial progress toward rectifying
      such deficiencies. Toyota had previously expressed concerns that the financial
      resources of the Toyota dealerships were being used to finance the cash flow
      deficits of other Hometown dealerships and that because of this the financial
      health of the Toyota dealerships were detrimentally affected by a net working
      capital deficiency. Toyota requested and Hometown provided a written action
      plan
      and consolidated financial forecast. Toyota also expressed concerns about the
      impact of Ford Motor Credit’s financing terms upon the Toyota dealerships and
      the existing litigation, which has now been settled, including the Vergopias
      as
      discussed above. Hometown developed and implemented plans to correct the
      operational deficiencies that would bring Hometown into compliance. Hometown
      has
      obtained written confirmations from Ford Motor Credit in response to Toyota’s
      requests for information relating to financing arrangements. In addition,
      Hometown has improved net working capital through the sale of a Chrysler/Jeep
      sales and service franchise in the second quarter of 2003 and advances on
      warranty income from Hometown’s Extended Service Plan vendor. Hometown has been
      in regular contact with Toyota to review the efforts of Hometown to resolve
      the
      deficiencies alleged by Toyota. The two Toyota dealerships for the fiscal year
      ended December 31, 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.**
            **EXCHANGE
              AGREEMENT**





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




16





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





Following
      the exchanges, the Shaker Group will be the beneficial owners of all of the
      outstanding shares of stock of Shaker Auto Group, Inc. and the New England
      Subsidiaries, and will cease to own any shares of stock of Hometown. In
      addition, the Muller Group (as defined below) will control a majority of the
      voting power of the shares of stock of Hometown, and Hometown will cease to
      own
      any shares of stock of Shaker Auto Group, Inc. or the New England
      Subsidiaries.





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





The
      automobile franchises operated by the New England subsidiaries
      include:


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


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


·
            Family
                Ford (Waterbury, Conn.),


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


·
            Wellesley
                Mazda (Wellesley, Mass.),


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





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


·
            Baystate
                Realty (Framingham, Mass.), and


·
            Brattleboro
                Realty (Brattleboro, Vt.).





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


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


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


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





The
      consummation of the exchanges is subject to various contingencies, including
      approval of Hometown’s manufacturers to the transfer of the automobile
      franchises to Shaker Auto Group, Inc., and approval of various lenders to the
      release of Hometown from certain liabilities and the assumption of certain
      liabilities by Shaker Auto Group, Inc.





In
      connection with the transactions, Hometown anticipates that it will secure
      a
      term loan of up to $6.5 million, with $5 million to be used for the cash
      contribution to be made to Shaker Auto Group (as explained above), $1.1 million
      for financing the split-off costs and associated severance costs, and the $0.4
      million balance for working capital for Hometown. As of March 31, 2006, Hometown
      has incurred approximately $0.5 million of the aforementioned split-off costs,
      which amount has been expensed and is included in Selling General and
      Administrative Expenses on Hometown’s Consolidated Statements of Operations for
      the Year Ended December 31, 2005. Approximately $12,000 of these costs were
      incurred and expensed in the quarter ending March 31, 2006.





Following
      the split-off, Hometown Auto will have a total of 3,884,979 common shares
      (3,108,227 Class A common shares and 776,752 Class B common shares), with
      William C. Muller, Jr. (and his immediate and extended family) holding 367,500
      Class A common shares and 776,752 Class B common shares of Hometown Auto. [Note:
      Hometown Auto Class B common shares have 10 for 1 voting rights versus Class
      A
      common shares which are voted on a 1 to 1 basis.]




17





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





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





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





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





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





The
      Press
      Release also announced that the staff of the Securities and Exchange Commission
      had asked the Company to delay sending the information statement describing
      the
      proposed exchanges to its shareholders pending the resolution of certain issues
      that had been raised by the staff with respect to the Company’s annual report on
      Form 10-K for the period ended December 31, 2004 and its quarterly report on
      Form 10-Q for the period ended March 31, 2005. On September 21, 2005 the Company
      filed Amendment No. 1 on Form 10-K/A to the previously filed Annual Report
      on
      Form 10-K for the year ended December 31, 2004 and also filed Amendment No.
      1 on
      Form 10-Q/A to the previously filed Quarterly Report on Form 10-Q for the
      quarterly period ended March 31, 2005. On September 22, 2005 the Securities
      and
      Exchange Commission issued a letter to the Company stating they completed their
      review of the filings and that they had no further comments.




In
      light
      of the potential adverse effects which the commencement of the Delaware
      litigation may have upon the Company and the proposed exchanges, as well as
      a
      variety of other factors, the Company is unable to predict when, or if, it
      will
      send the information statement concerning the proposed exchanges to its
      shareholders or when the proposed exchanges will be
      consummated.


18


**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 $49,000 for the three
      months ended March 31, 2005. The after tax effects was to increase net income
      by
      $29,000 for the three months ended March 31, 2005. These adjustments did not
      effect basic and diluted earnings per share for the three months ended March
      31,
      2005.





Deferred
      revenue recorded as of June 30, 2003, will continue to be taken into income
      over
      the remaining life of the contract. At March 31, 2006, Hometown had $268,000
      of
      related deferred revenue remaining. This deferred revenue will be recognized
      over the next three years as follows: 2006 (remaining period) - $142,000, 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 March 31, 2006 Hometown has other deferred
      revenues of $75,000.




19







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




Three
                months ended March
                31, 2005PreviouslyReported
            
            
            Restated**Statements
                of Operations:**Other
                revenues, net
            
            $
            2,025
            
            $
            2,074Total
                revenues
            
            $
            61,766
            
            $
            61,815Gross
                profit
            
            $
            9,306
            
            $
            9,355Income
                from operations
            
            $
            1,297
            
            $
            1,346Pre-tax
                income
            
            $
            449
            
            $
            498Provision
                for income taxes
            
            $
            181
            
            $
            201Net
                income
            
            $
            268
            
            $
            297Earnings
                per share, basic
            
            $
            0.04
            
            $
            0.04Earnings
                per share, diluted
            
            $
            0.04
            
            $
            0.04**Statements
                of Cash Flows:**Net
                income
            
            $
            268
            
            $
            297Deferred
                income taxes
            
            $
            181
            
            $
            201Deferred
                revenue - current
            
            $
            (71
            )
            $
            (82
            )Other
                long-term liabilities and deferred revenue
            
            $
            (10
            )
            $
            (48
            )Net
                cash provided by operating activities
            
            $
            (2,259
            )
            $
            (2,259
            )





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.




20





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. Although first quarter 2006 revenues for this dealership were down
      compared to 2005, Hometown believes this change over will translate into
      increases in all revenues at this dealership. The results for this dealership
      are included in same store results for both periods that are
      compared.





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 less than $0.1 million
      in the three months ended March 31, 2006 and 2005.





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 capitalized
      leases.




21





***Three
      months ended March 31, 2006 compared with three months ended March 31,
      2005.***





***Revenues***
            
            For
                the Three Months EndedMarch
                31,
            
            Increase(in
                thousands, except per vehicle data)
            
            
            2006
            
            
            2005
            
            
            (Decrease)
            
            
            %
                ChangeNew
                vehicle data:Retail
                revenues - same store
            
            $
            25,925
            
            $
            32,249
            
            $
            (6,324
            )
            
            (19.6
            )%Retail
                revenues - other stores (1)
            
            
            -
            
            
            5,096
            
            
            (5,096
            )
            
            *Total
                new retail revenues
            
            
            25,925
            
            
            37,345
            
            
            (11,420
            )
            
            (30.6
            )%Fleet
                revenues - same store
            
            
            631
            
            
            680
            
            
            (49
            )
            
            (7.2
            )%Total
                new vehicles revenues, as reported
            
            $
            26,556
            
            $
            38,025
            
            $
            (11,469
            )
            
            (30.2
            )%New
                retail units - same store
            
            
            1,014
            
            
            1,254
            
            
            (240
            )
            
            (19.1
            )%New
                retail units - other stores (1)
            
            
            -
            
            
            142
            
            
            (142
            )
            
            *Fleet
                units
            
            
            35
            
            
            41
            
            
            (6
            )
            
            (14.6
            )%Total
                new vehicle units
            
            
            1,049
            
            
            1,437
            
            
            (388
            )
            
            (27.0
            )%Used
                vehicle data:Retail
                revenues - same store
            
            $
            12,126
            
            $
            11,647
            
            $
            479
            
            
            4.1
            %Retail
                revenues - other stores (1)
            
            
            -
            
            
            685
            
            
            (685
            )
            
            *Total
                used retail revenues
            
            
            12,126
            
            
            12,332
            
            
            (206
            )
            
            (1.7
            )%Wholesale
                revenues - same store
            
            
            3,135
            
            
            3,086
            
            
            49
            
            
            1.6
            %Wholesale
                revenues - other stores (1)
            
            
            -
            
            
            142
            
            
            (142
            )
            
            *Total
                wholesale revenues
            
            
            3,135
            
            
            3,228
            
            
            (93
            )
            
            (2.9
            )%Total
                used vehicle revenue, as reported
            
            $
            15,261
            
            $
            15,560
            
            $
            (299
            )
            
            (1.9
            )%Used
                retail units - same store
            
            
            723
            
            
            698
            
            
            25
            
            
            3.6
            %Used
                retail units - other stores (1)
            
            
            -
            
            
            39
            
            
            (39
            )
            
            *Used
                wholesale units - same store
            
            
            594
            
            
            669
            
            
            (75
            )
            
            (11.2
            )%Used
                wholesale units - other stores (1)
            
            
            -
            
            
            24
            
            
            (24
            )
            
            *Total
                used units
            
            
            1,317
            
            
            1,430
            
            
            (113
            )
            
            (7.9
            )%Parts
                and service:Parts
                and service revenues - same store
            
            $
            5,233
            
            $
            5,139
            
            $
            94
            
            
            1.8
            %Parts
                and service revenues - other stores (1)
            
            
            -
            
            
            1,017
            
            
            (1,017
            )
            
            *Total
                parts and service revenue
            
            $
            5,233
            
            $
            6,156
            
            $
            (923
            )
            
            (15.0
            )%Other
                revenues, net:Other
                revenues, net - same store
            
            $
            1,967
            
            $
            1,977
            
            $
            (10
            )
            
            (0.5
            )%Other
                revenues, net - other stores (1)
            
            
            -
            
            
            97
            
            
            (97
            )
            
            *Total
                other revenues, net, as reported
            
            $
            1,967
            
            $
            2,074
            
            $
            (107
            )
            
            (5.2
            )%Total
                revenue:Same
                store
            
            $
            49,017
            
            $
            54,778
            
            $
            (5,761
            )
            
            (10.5
            )%Other
                stores (1)
            
            
            -
            
            
            7,037
            
            
            (7,037
            )
            
            *Total
                revenue, as reported
            
            $
            49,017
            
            $
            61,815
            
            $
            (12,798
            )
            
            (20.7
            )%





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




22





*
      -
      Percentage is 100% or greater.





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





Total
      revenue decreased $12.8 million, or 20.7% to $49.0 million for three months
      ended March 31, 2006 from $61.8 million for three months ended March 31, 2005.
      Same store revenues decreased $5.8 million, or 10.5% to $49.0 million for three
      months ended March 31, 2006 from $54.8 million for three months ended March
      31,
      2005.





Same
      store new retail revenues decreased $6.3 million, or 19.6% to $25.9 million
      for
      the three months ended March 31, 2006 from $32.2 million for the three months
      ended March 31, 2005. This decrease was directly attributable to the 19.1%
      decrease in units ($6.2 million) sold in 2006 compared to 2005. All of
      Hometown’s 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. Ford, Lincoln Mercury, Chevrolet and
      Chrysler unit sales were down from 21% - 41% 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. Toyota unit sales were
      down 11%, which contrasted with a small increase at non-Hometown dealerships
      in
      Hometown’s area. Hometown’s Toyota dealerships had relied heavily on truck and
      sport utility vehicle sales, which were hurt as fuel costs have risen. That
      trend may continue as fuel costs continue to rise. Also one Toyota facility
      has
      been adversely affected by not having the Scion vehicle available for sale.
      Fleet revenues decreased slightly from 2005 levels.





Same
      store used vehicle retail revenues increased $0.5 million, or 4.1% to $12.1
      million for the three months ended March 31, 2006 from $11.6 million for the
      three months ended March 31, 2005. This increase was primarily attributable
      to a
      3.6% increase in units sold ($0.4 million). The increase in units was primarily
      due to Hometown’s Chevrolet dealership. This increase is attributable to a
      change in the dealerships used vehicle management team. Same store wholesale
      revenues remained constant at $3.1 million for the three months ended March
      31,
      2006 and 2005. A decrease in units was offset by an increase in average selling
      price as the wholesale market showed strength in the first quarter of
      2006.





Same
      store parts and service revenues increased $0.1 million or 1.8% to $5.2 million
      for the three months ended March 31, 2006 from $5.1 million for the three months
      ended March 31, 2005. The increase was primarily due to the Toyota, Mazda and
      Nissan dealerships (together totaling $0.2 million) partially offset by
      decreases at the Lincoln Mercury, Ford, Chevrolet and Chrysler dealerships
      (together totaling $0.1 million). These are attributable to the dealerships
      new
      vehicles revenues over the last few years. Toyota new vehicle sales have been
      growing for the past few years, which translates into an increase in parts
      and
      service revenue, whereas the domestic brands (Lincoln Mercury, Ford, Chevrolet
      and Chrysler) have had decreasing new car sales, which has been causing a
      decrease in their service customer base. The Nissan dealership has already
      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.





Same
      store other dealership revenues remained constant at $2.0 million for the three
      months ended March 31, 2006 and March 31, 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
      miscellaneous other revenues.




23




***Gross
        Profit***


For
                  the Three Months EndedMarch 31,Increase(in
                thousands, except per vehicle data)
            
            2006
            
            
            2005
            
            
            (Decrease)
            
            
            
            %
                ChangeNew
                vehicle data:Retail
                gross profit - same store
            $
            1,790
            
            $
            2,162
            
            $
            (372
            )
            
            
            (17.2
            )%Retail
                gross profit - other stores (1)
            
            -
            
            
            265
            
            
            (265
            )
            
            
            *Total
                new retail gross profit
            
            1,790
            
            
            2,427
            
            
            (637
            )
            
            
            (26.2
            )%Fleet
                gross profit
            
            5
            
            
            6
            
            
            (1
            )
            
            
            (16.7
            )%Total
                new vehicles gross profit, as reported
            $
            1,795
            
            $
            2,433
            
            $
            (638
            )
            
            
            (26.2
            )%Gross
                profit percentage
            
            6.8
            %
            
            6.4
            %New
                retail units - same store
            
            1,014
            
            
            1,254
            
            
            (240
            )
            
            
            (19.1
            )%New
                retail units - other stores (1)
            
            -
            
            
            142
            
            
            (142
            )
            
            
            *Fleet
                units
            
            35
            
            
            41
            
            
            (6
            )
            
            
            (14.6
            )%Total
                new vehicle units
            
            1,049
            
            
            1,437
            
            
            (388
            )
            
            
            (27.0
            )%Used
                vehicle data:Retail
                gross profit - same store
            $
            1,484
            
            $
            1,334
            
            $
            150
            
            
            
            11.2
            %Retail
                gross profit - other stores (1)
            
            -
            
            
            52
            
            
            (52
            )
            
            
            *Total
                used retail gross profit
            
            1,484
            
            
            1,386
            
            
            98
            
            
            
            7.1
            %Wholesale
                gross profit - same store
            
            80
            
            
            157
            
            
            (77
            )
            
            
            (49.0
            )%Wholesale
                gross profit - other stores (1)
            
            -
            
            
            14
            
            
            (14
            )
            
            
            *Total
                wholesale gross profit
            
            80
            
            
            171
            
            
            (91
            )
            
            
            (53.2
            )%Total
                used vehicle gross profit, as reported
            $
            1,564
            
            $
            1,557
            
            $
            7
            
            
            
            0.4
            %Gross
                profit percentage
            
            10.2
            %
            
            10.0
            %Used
                retail units - same store
            
            723
            
            
            698
            
            
            25
            
            
            
            3.6
            %Used
                retail units - other stores (1)
            
            -
            
            
            39
            
            
            (39
            )
            
            
            *Used
                wholesale units - same store
            
            594
            
            
            669
            
            
            (75
            )
            
            
            (11.2
            )%Used
                wholesale units - other stores (1)
            
            -
            
            
            24
            
            
            (24
            )
            
            
            *Total
                used units
            
            1,317
            
            
            1,430
            
            
            (113
            )
            
            
            (7.9
            )%Parts
                and service:Parts
                and service gross profit - same store
            $
            2,733
            
            $
            2,703
            
            $
            30
            
            
            
            1.1
            %Parts
                and service gross profit - other stores (1)
            
            -
            
            
            588
            
            
            (588
            )
            
            
            *Total
                parts and service revenue
            $
            2,733
            
            $
            3,291
            
            $
            (558
            )
            
            
            (17.0
            )%Gross
                profit percentage
            
            52.2
            %
            
            53.5
            %Other
                gross profit:Other
                gross profit - same store
            $
            1,967
            
            $
            1,977
            
            $
            (10
            )
            
            
            (0.5
            )%Other
                gross profit - other stores (1)
            
            -
            
            
            97
            
            
            (97
            )
            
            
            *Total
                other gross profit, as reported
            $
            1,967
            
            $
            2,074
            
            $
            (107
            )
            
            
            (5.2
            )%Gross
                profit percentage
            
            100.0
            %
            
            100.0
            %Other
                gross profit PVR - same store
            $
            1,132
            
            $
            1,013
            
            $
            120
            
            
            
            11.8
            %Other
                gross profit PVR - other stores (1)
            
            -
            
            
            536
            
            
            (536
            )
            
            
            *Total
                other gross profit PVR, as reported
            $
            1,132
            
            $
            972
            
            $
            160
            
            
            
            16.5
            %Total
                gross profit:Same
                store
            $
            8,059
            
            $
            8,339
            
            $
            (280
            )
            
            
            (3.4
            )%Other
                stores (1)
            
            -
            
            
            1,016
            
            
            (1,016
            )
            
            
            *Total
                gross profit, as reported
            $
            8,059
            
            $
            9,355
            
            $
            (1,296
            )
            
            
            (13.9
            )%Gross
                profit percentage
            
            16.4
            %
            
            15.1
            %





24




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





*
      -
      Percentage is 100% or greater.





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





Total
      gross profit decreased $1.3 million, or 13.9%, to $8.1 million for the three
      months ended March 31, 2006, from $9.4 million for the three months ended March
      31, 2005. Same store total gross profit decreased $0.2 million, or 3.4% to
      $8.1
      million for the three months ended March 31, 2006, from $8.3 million for the
      three months ended March 31, 2005. Same store gross profit on new retail vehicle
      sales decreased $0.4 million, or 17.2%, to $1.8 million for the three months
      ended March 31, 2006, from $2.2 million for the three months ended March 31,
      2005. The decrease in gross profit is directly attributable to a 19.1% decrease
      in unit sales. Similar to revenues, a ll
      of
      Hometown’s dealerships experienced a decrease in gross
      profit on new retail vehicle sales from
      2005
      to 2006; with the domestic brands having the largest percentage declines over
      the prior year.





Same
      store gross profit on used vehicle retail sales increased $0.2 million, or
      11.2%, to $1.5 million for the three months ended March 31, 2006, from $1.3
      million for the three months ended March 31, 2005. The overall increase is
      attributable to a 3.6% increase in units sold (less than $0.1 million) combined
      with a 7.4% increase in average gross profit per unit ($0.1 million). The
      company has been striving to increase the gross profit percentage on used
      vehicle retail sales, and was able to do so at most Hometown dealerships during
      the first quarter of 2006 compared to 2005.





Same
      store parts and service gross profit remained constant at $2.7 million for
      the
      three months ended March 31, 2006 and 2005. Similar to revenues, increases
      at
      the Toyota, Mazda and Nissan dealerships (together totaling $0.1 million) were
      partially offset by decreases at the Lincoln Mercury, Ford, and Chrysler
      dealerships (together totaling $0.1 million). Chevrolet also experienced a
      small
      increase in gross profit. The decrease in revenues at the Chevrolet dealership
      was offset by an increase in gross profit percentage.





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





S,G&A
      decreased $0.8 million, or 10.0%, to $7.2 million for the three months ended
      March 31, 2006 from $8.0 million for the three months ended March 31, 2005.
      This
      decrease was primarily attributable to the transfer of the Westwood dealership
      ($0.9 million) in May 2005. On a same store basis, S,G&A increased $0.1
      million, or 1.4%, to $7.2 million for the three months ended March 31, 2006
      from
      $7.1 million for the three months ended March 31, 2005. Reductions in payroll
      and related costs of $0.1 million (due to decreased gross profit on a same
      store
      basis) was offset by the write-off of deferred finance fees of $0.1 million
      (due
      to the refinancing of debt, see Note 8), and (i) costs associated with the
      Nissan franchise acquisition (see Note 8), (ii) Exchange Agreement and related
      litigation costs (see Notes 9 and 10) and (iii) higher reserves (together
      totaling $0.1 million).




25




***Interest
      Expense***





Interest
      expense increased $1.1 million to $2.0 million for the three months ended March
      31, 2006 from $0.9 million for the three months ended March 31, 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) and an increase
      in floorplan interest expense (less than $0.1 million) resulting from higher
      interest rates partially offset by decreased borrowings resulting from one
      less
      dealership in 2006 compared to 2005 and lower average inventories at the
      remaining dealerships.





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





The
      effective income tax rate was 40.3% in the quarter ended March 31, 2006 and
      40.4% 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 2005.





***Net
      Income (Loss)***





Net
      income decreased $1.0 million to a loss of $0.7 million for the three months
      ended March 31, 2006, from income of $0.3 million for the three months ended
      March 31, 2005 primarily due to the $1.0 million prepayment penalty discussed
      in
      interest expense above. 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 three months ended March 31, 2006
      and 2005 is $(0.10) and $0.04, 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.





***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.




26




***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 $5.1 million and $6.5 million at March 31, 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:




Three
                months ended March 31,(in
                thousands)
            
            
            2006
            
            
            2005Net
                cash (used in) operating activities
            
            $
            (3,545
            )
            $
            (2,259
            )Net
                cash (used in) investing activities
            
            
            (2,145
            )
            
            (57
            )Net
                cash provided by financing activities
            
            
            4,348
            
            
            1,551Net
                (decrease) in cash and cash equivalents
            
            $
            (1,342
            )
            $
            (765
            )





For
      the
      three months ended March 31, 2006, net cash used in operating activities of
      $3.5
      million primarily consists of: (i) net loss of $0.65 million plus non-cash
      items
      of $.02 million (totaling $0.7 million), (ii) an increase in inventory of $0.5
      million combined with the decrease in floor plan liability - trade of $1.4
      million, (iii) an increase in accounts receivable of $1.2 million, primarily
      due
      to an increase in revenues in March 2006 compared to December 2005 and (iv)
      an
      increase in prepaids and other current assets of $0.2 million, primarily due
      to
      prepayments of insurance and advertising; partially offset by (v) an increase
      in
      accounts payable and accrued expenses of $0.4 million, primarily due to a
      general increase associated with increased sales activity in March 2006 compared
      to December 2005. Inventory and related floor plan liability (trade and
      non-trade) increased $0.5 million and $0.4 million, respectively, due to an
      anticipated increase in sales expected in the second quarter of 2006 compared
      to
      the first quarter of 2006. The difference between the two increases is due
      to
      the timing of floorplan payoffs. Net cash used in investing activities of $2.1
      million is primarily due to the acquisition of the Nissan franchise ($2.0
      million, see Note 8 to the unaudited consolidated financial statements) and
      $0.1
      million of miscellaneous capital expenditures, primarily dealership equipment
      and leasehold improvements. Net cash provided by financing activities of $4.3
      million is due to (i) proceeds from long-term borrowings of $7.6 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 $1.8 million (see operating activities discussion
      above), partially offset by principal payments of long-term debt and capital
      lease obligations of $5.1 million ($4.3 million of which was to pay off the
      Baystate loan discussed above which was refinanced with a different bank).





For
      the
      three months ended March 31, 2005, net cash used in operating activites of
      $2.3
      million primarily consists of: (i) the decrease in floor plan notes payable
      -
      trade of $1.7 million less the decrease in inventory of $0.6 million, (ii)
      the
      increase in accounts receivable of $1.2 million, primarily
      due to an increase in revenues in March 2005 compared to December
      2004, (iii) a
      decrease in accounts payable and accrued expenses of $0.4 million, primarily
      due
      to the payment of certain litigation costs, (iv) a decrease in deferred revenues
      of $0.1 million (see Note 2 to the unaudited consolidated financial statements)
      and (iv) an increase in prepaid expenses and other assets of $0.2 million,
      primarily due to prepayments of insurance and deposits made concerning the
      Exchange Agreement that were expensed in subsequent periods; partially offset
      by
      net income of $0.3 million plus non-cash items of $0.5 million (together
      totaling $0.8 million). The decrease in inventory of $0.6 million would be
      expected to generate a similar decrease in floor plan notes payable (trade
      and
      non-trade); however, due to the timing of floor plan payoffs, floor plan notes
      payable (trade and non-trade) actually increased $0.1 million. Net cash used
      in
      investing activities of $0.1 million is due to capital
      expenditures. Net
      cash
      used in financing activities of $1.6 million is due to (i) the net change
      (increase) in non-trade floor plan notes payable of $1.8 million (see operating
      activities) and (ii) proceeds from long-term borrowings of $0.2 million (used
      to
      pay for improvements to the corporate office); partially offset by principal
      payments of long-term debt and capital lease obligations of $0.4 million.




27





*Capital
      Expenditures*





Capital
      expenditures for fiscal 2006 are expected to be $0.3 million, consisting
      primarily of equipment purchases and building and leasehold improvements.





*Receivables*





Hometown
      had $5.5 million in accounts receivable, net at March 31, 2006 compared to
      $4.3
      million at December 31, 2005. A substantial portion of those receivables, $2.4
      million and $1.7 million as of March 31, 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, $1.3 million and $0.9 million as of March 31, 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 36% increase in dealerships
      revenue in the first 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, increased
      slightly to $1.3 million at March 31, 2006 from $1.2 million at December 31,
      2005, and parts and service receivables were $0.4 million as of both March
      31,
      2006 and December 31, 2005.





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





*Inventories*





Hometown
      had $34.8 million in inventories, net at March 31, 2006 compared to $33.5
      million at December 31, 2005. The majority of inventory, $25.4 million and
      $24.5
      million as of March 31, 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 March 31, 2006
      and December 31, 2005.





*Floor
      Plan Financing*




See
      Note
      7 to the unaudited consolidated financial statements.





*Long-Term
      Debt and Capital Lease Obligations*





See
      Note
      8 to the unaudited consolidated financial statements.





*Commitments
      and Contingencies*





See
      Note
      9 to the unaudited consolidated financial statements.




28




***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 March 31, 2006 of $33.4 million, a 1%
      change in the prime rate would result in a $0.3 million change to annual floor
      plan interest expense.





At
      March
      31, 2006, Hometown invested $4.3 million of excess cash, of which $0.9 million
      was invested in money market accounts paying a weighted average interest rate
      of
      4.19% at March 31, 2006, and $3.4 million was invested in a Ford Motor Credit
      Company cash management account paying interest of 8.50% at March 31, 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
      March
      31, 2006, management, with the participation of the CEO and CFO, evaluated
      the
      effectiveness of the design and operation of our disclosure controls and
      procedures. Based upon that evaluation and subject to the foregoing, our
      management, including the CEO and CFO, concluded that our disclosure controls
      and procedures were effective to accomplish their objectives.





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


29


**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
              Certification31.2
            Chief
              Financial Officer Certification32.1
            Chief
              Executive Officer Certification pursuant to 18 U.S.C. Section 1350,
              as
              adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
              200232.2
            Chief
              Financial Officer Certification pursuant to 18 U.S.C. Section 1350,
              as
              adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
              2002




30


**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.May
              12, 2006
            By:
            /s/
              Corey E.
              ShakerDate
            Corey E. ShakerPresident
              and
              Chief Executive Officer


May
              12, 2006
            By:
            /s/
              Charles F.
              SchwartzDate
            Charles F. SchwartzChief
              Financial Officer








31