SECURITIES
        AND EXCHANGE COMMISSION
 
 WASHINGTON,
        D.C. 20549
 
 FORM
        10-Q/A
 AMENDMENT
        NO. 2
 
 QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE
        ACT OF 1934
 
 For
        the
        quarterly period ended March 31, 2005
 
 Commission
        file number: 000-24669
 
 HOMETOWN
        AUTO RETAILERS, INC.
 (Exact
        name of Registrant as specified in its charter)
 
 Delaware
              06-1501703(State
                  or other jurisdictionofof
              (IRS
                  Employerincorporation
                  or organization)
              Identification
                  No.)
  1309
        South Main Street
 Waterbury,
        CT 06706
 (Address
        of principal executive offices) (Zip code)
 
 (203)
        756-1300
 (Registrant's
        telephone number including area code)
 
 774
        Straits Turnpike
 Watertown,
        CT 06795
 (Former
        name, former address and former fiscal year, if changed since last
        report)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes [X] No [ ]
 
 Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act). Yes[ ] No [X]
 
 Indicate
        the number of shares outstanding of each of the registrant's classes of common
        stock, as of the latest practicable date.
 
 Title
              
              OutstandingCommon
                  Stock, Class A, par value $.001 per share
              
              3,870,137Common
                  Stock, Class B, par value $.001 per share
              
              2,579,252
  
 
 **EXPLANATORY
        NOTE**
 
 Hometown
        Auto Retailers, Inc. (the “Company” or “Hometown”) is filing this Amendment No.
        2 on Form 10-Q/A to amend our previously filed Quarterly Report on Form 10-Q/A
        for the quarterly period ended March 31, 2005 as filed with the Securities
        and
        Exchange Commission (the “SEC”) on September 21, 2005 (the “First Amendment”)
        which amended our previously filed Quarterly Report on Form 10-Q for the
        quarterly period ended March 31, 2005 as filed with the SEC on May 16, 2005
        (the
“Original Filing”).
 
 A
        discussion of the restatement is set forth in Note 2 to the Unaudited
        Consolidated Financial Statements and in Item 2. Managements Discussion and
        Analysis of Financial Condition and Results of Operations included in this
        Amendment No. 2 on Form 10-Q/A. Changes have also been made to the following
        items in this Amendment No. 2 on Form 10-Q/A as a result of the
        restatement.
 
 ·
              Item
                  1. Financial Statements and Supplementary Data, including the Notes
                  to the
                  Consolidated Financial Statements.·
              Item
                  2. Managements Discussion and Analysis of Financial Condition and
                  Results
                  of Operations.
 
 The
        changes do not affect total cash flows. The other portions of the Original
        Filing are unaffected by the restatement and have not been amended. All
        information in this amendment is as of the date of the Original Filing and
        does
        not reflect any subsequent information or events occurring after the date
        of the
        Original Filing, except to reflect the changes discussed in the restatement
        note. Accordingly, this amendment should be read in conjunction with the
        Original Filing.
  2
 
 INDEX
  PART I.
              FINANCIAL
                INFORMATION
              PageITEM
                  1.
              Consolidated
                  Balance Sheets at March 31, 2005 (Unaudited - Restated) and December
                  31,
                  2004 (Audited - Restated)
              4Unaudited
                  Consolidated Statements of Operations for the three months ended
                  March 31,
                  2005 (Restated) and 2004 (Restated)
              5Unaudited
                  Consolidated Statements of Stockholders’ Equity for the three months ended
                  March 31, 2005 (Restated) and 2004 (Restated)
              6Unaudited
                  Consolidated Statements of Cash Flows for the three months ended
                  March 31,
                  2005 (Restated) and 2004 (Restated)
              7Notes
                  to Unaudited Consolidated Financial Statements
              8ITEM
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              17ITEM
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              24ITEM
                  4.
              Controls
                  and Procedures
              24PART
                  II.
              OTHER
                  INFORMATIONITEM
                  1.
              Legal
                  Proceedings
              25ITEM
                  2.
              Unregistered
                  Sales Of Equity Securities and Use of Proceeds
              25ITEM
                  3.
              Defaults
                  Upon Senior Securities
              25ITEM
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              25ITEM
                  5.
              Other
                  Information
              25ITEM
                  6.
              Exhibits
              25SIGNATURES
              
              26CERTIFICATIONS
              
              27
 
 **FORWARD
        LOOKING STATEMENTS**
 
 *Certain
        statements made in this Quarterly Report on Form 10-Q/A are "forward-looking
        statements" (within the meaning of the Private Securities Litigation Reform
        Act
        of 1995) regarding the plans and objectives of management for future operations.
        Such statements involve known and unknown risks, uncertainties and other
        factors
        that may cause actual results, performance or achievements of Hometown Auto
        Retailers, Inc. (“Hometown”) to be materially different from any future results,
        performance or achievements expressed or implied by such forward-looking
        statements. The forward-looking statements included herein are based on current
        expectations that involve numerous risks and uncertainties. Assumptions relating
        to the foregoing involve judgments with respect to, among other things, future
        economic, competitive and market conditions and future business decisions,
        all
        of which are difficult or impossible to predict accurately and many of which
        are
        beyond the control of Hometown. Although Hometown believes that its assumptions
        underlying the forward-looking statements are reasonable, any of the assumptions
        could prove inaccurate and, therefore, there can be no assurance that the
        forward-looking statements included in this Report will prove to be accurate.
        In
        light of the significant uncertainties inherent in the forward-looking
        statements, the inclusion of such information should not be regarded as a
        representation by Hometown or any other person that the objectives and plans
        of
        Hometown will be achieved.*  *Factors
        that could cause actual results to differ materially from those expressed
        or
        implied by such forward-looking statements include, but are not limited to,
        the
        factors set forth herein under the heading “Management’s Discussion and Analysis
        of Financial Condition and Results of Operations.”*
  3
 
 **HOMETOWN
                  AUTO RETAILERS, INC.****CONSOLIDATED
                  BALANCE SHEETS (RESTATED)****(in
                  thousands, except share and per share data)**March
                  31,
              
              December
                  31,ASSETS
              
              2005
              
              2004(Unaudited)Current
                  Assets:Cash
                  and cash equivalents
              
              $
              5,336
              
              $
              6,101Accounts
                  receivable, net
              
              
              6,320
              
              
              5,081Inventories,
                  net
              
              
              42,930
              
              
              43,440Prepaid
                  expenses and other current assets
              
              
              745
              
              
              634Deferred
                  and prepaid income taxes
              
              
              1,412
              
              
              1,412Total
                  current assets
              
              
              56,743
              
              
              56,668Property
                  and equipment, net
              
              
              13,663
              
              
              13,854Other
                  assets
              
              
              3,341
              
              
              3,486Total
                  assets
              
              $
              73,747
              
              $
              74,008LIABILITIES
                  AND STOCKHOLDERS’ EQUITYCurrent
                  Liabilities:Floor
                  plan notes payable - trade
              
              $
              15,703
              
              $
              17,382Floor
                  plan notes payable - non-trade
              
              
              26,870
              
              
              25,092Accounts
                  payable and accrued expenses
              
              
              5,750
              
              
              5,106Current
                  maturities of long-term debt and capital lease obligations
              
              
              5,477
              
              
              5,505Deferred
                  revenue
              
              
              523
              
              
              605Total
                  current liabilities
              
              
              54,323
              
              
              53,690Long-term
                  debt and capital lease obligations
              
              
              8,521
              
              
              8,621Long-term
                  deferred income taxes
              
              
              123
              
              
              123Other
                  long-term liabilities and deferred revenue
              
              
              271
              
              
              319Total
                  liabilities
              
              
              63,238
              
              
              62,753Commitments
                  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,
                    3,870,137
                    shares issued and outstanding
              
              
              4
              
              
              4Common
                    stock, Class B, $.001 par value, 3,760,000 shares authorized,
                    3,519,252
                    shares issued
              
              
              3
              
              
              3Additional
                  paid-in capital
              
              
              30,017
              
              
              30,017Accumulated
                  deficit
              
              
              (18,472
              )
              
              (18,769
              )Less:
                  treasury stock, 940,000 Class B shares in 2005
              
              
              (1,043
              )
              
              -Total
                  stockholders' equity
              
              
              10,509
              
              
              11,255Total
                  liabilities and stockholders' equity
              
              $
              73,747
              
              $
              74,008The
                  accompanying notes are an integral part of these unaudited consolidated
                  financial statements.
 4
 **HOMETOWN
                  AUTO RETAILERS, INC.****UNAUDITED
                  CONSOLIDATED STATEMENTS OF OPERATIONS (RESTATED)****(in
                  thousands, except share and per share data)**For
                  the Three MonthsEnded
                  March 31,2005
              
              2004RevenuesNew
                  vehicle sales
              
              $
              38,025
              
              $
              41,115Used
                  vehicle sales
              
              
              15,560
              
              
              16,910Parts
                  and service sales
              
              
              6,156
              
              
              5,959Other,
                  net
              
              
              2,074
              
              
              2,011Total
                  revenues
              
              
              61,815
              
              
              65,995Cost
                  of salesNew
                  vehicle
              
              
              35,592
              
              
              38,355Used
                  vehicle
              
              
              14,003
              
              
              15,244Parts
                  and service
              
              
              2,865
              
              
              2,759Total
                  cost of sales
              
              
              52,460
              
              
              56,358Gross
                  profit
              
              
              9,355
              
              
              9,637Selling,
                  general and administrative expenses
              
              
              8,009
              
              
              8,648Income
                  from operations
              
              
              1,346
              
              
              989Interest
                  income
              
              
              70
              
              
              44Interest
                  (expense)
              
              
              (920
              )
              
              (774
              )Other
                  income
              
              
              2
              
              
              2Other
                  (expense)
              
              
              -
              
              
              (4
              )Pre-tax
                  income
              
              
              498
              
              
              257Provision
                  for income taxes
              
              
              201
              
              
              70Net
                  income
              
              $
              297
              
              $
              187Earnings
                  per share, basic
              
              $
              0.04
              
              $
              0.03Earnings
                  per share, diluted
              
              $
              0.04
              
              $
              0.03Weighted
                  average shares outstanding, basic
              
              
              7,086,500
              
              
              7,175,105Weighted
                  average shares outstanding, diluted
              
              
              7,210,990
              
              
              7,471,259The
                  accompanying notes are an integral part of these unaudited consolidated
                  financial statements.
  5
 
 **HOMETOWN
                  AUTO RETAILERS, INC.****UNAUDITED
                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
                  (RESTATED)****(in
                  thousands)**Class
                  A
              
              Class
                  B
              
              
              
              RetainedCommon
                  Stock
              
              Common
                  Stock
              
              Additional
              
              Earnings
              
              
              
              TotalPaid-in
              
              (Accumulated
              
              Treasury
              
              Stockholders’Shares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Deficit)
              
              Stock
              
              EquityBalance
                  atDecember
                  31, 2003
              
              
              3,656
              
              $
              4
              
              
              3,519
              
              $
              3
              
              $
              29,760
              
              $
              (22,704
              )
              $
              -
              
              $
              7,063Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              187
              
              
              -
              
              
              187Balance
                  atMarch
                  31, 2004
              
              
              3,656
              
              $
              4
              
              
              3,519
              
              $
              3
              
              $
              29,760
              
              $
              (22,517
              )
              $
              -
              
              $
              7,250Balance
                  atDecember
                  31, 2004
              
              
              3,870
              
              $
              4
              
              
              3,519
              
              $
              3
              
              $
              30,017
              
              $
              (18,769
              )
              $
              -
              
              $
              11,255Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              297
              
              
              -
              
              
              297LitigationSettlement(Note
                  9)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,043
              )
              
              (1,043
              )Balance
                  atMarch
                  31, 2005
              
              
              3,870
              
              $
              4
              
              
              3,519
              
              $
              3
              
              $
              30,017
              
              $
              (18,472
              )
              $
              (1,043
              )
              $
              10,509The
                  accompanying notes are an integral part of these unaudited consolidated
                  financial statements.
  6
 
 **HOMETOWN
                  AUTO RETAILERS, INC.****UNAUDITED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)****(in
                  thousands)**For
                  the Three Months ended
                March
                  31,2005
              
              2004CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              297
              
              $
              187Adjustments
                    to reconcile net income to net cash provided by operating activities
                    -Depreciation
                  and amortization
              
              
              335
              
              
              311Loss
                  on sale of fixed assets
              
              
              -
              
              
              4Deferred
                  income taxes
              
              
              201
              
              
              70Changes
                  in assets and liabilities:Accounts
                  receivable, net
              
              
              (1,239
              )
              
              (667
              )Inventories,
                  net
              
              
              562
              
              
              (6,494
              )Prepaid
                  expenses and other current assets
              
              
              (111
              )
              
              (9
              )Prepaid
                  taxes
              
              
              (32
              )
              
              (90
              )Other
                  assets
              
              
              (64
              )
              
              11Floor
                  plan notes payable - trade
              
              
              (1,679
              )
              
              3,758Accounts
                  payable and accrued expenses
              
              
              (399
              )
              
              493Deferred
                  revenue
              
              
              (82
              )
              
              (109
              )Other
                  long-term liabilities and deferred revenue
              
              
              (48
              )
              
              (71
              )Net
                  cash (used in) operating activities
              
              
              (2,259
              )
              
              (2,606
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of property and equipment
              
              
              (57
              )
              
              (94
              )Net
                  cash (used in) investing activities
              
              
              (57
              )
              
              (94
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from floor plan notes payable - non-trade
              
              
              39,637
              
              
              42,159Payment
                  of floor plan notes payable - non-trade
              
              
              (37,859
              )
              
              (38,719
              )Principal
                  payments of long-term debt and capital lease obligations
              
              
              (452
              )
              
              (560
              )Proceeds
                  from long-term borrowings
              
              
              225
              
              
              -Net
                  cash provided by financing activities
              
              
              1,551
              
              
              2,880Net
                  increase (decrease) in cash and cash equivalents
              
              
              (765
              )
              
              180CASH
                  AND CASH EQUIVALENTS, beginning of period
              
              
              6,101
              
              
              5,639CASH
                  AND CASH EQUIVALENTS, end of period
              
              $
              5,336
              
              $
              5,819Cash
                  paid for - Interest
              
              $
              897
              
              $
              770Cash
                  paid for - Taxes
              
              $
              32
              
              $
              90Purchases
                  financed by capital lease obligations
              
              $
              117
              
              $
              327The
                  accompanying notes are an integral part of these unaudited consolidated
                  financial statements.
  7
 
 **HOMETOWN
        AUTO RETAILERS, INC.**
 **NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **1.**
              **BUSINESS
                  AND ORGANIZATION**
  *Business
        of Hometown Auto Retailers, Inc. (“Hometown” or the “Company”)*
 
 Hometown
        sells new and used cars and light trucks, provides maintenance and repair
        services, sells replacement parts and provides related financing, insurance
        and
        service contracts through 8 franchised dealerships and 1 stand-alone service
        facility, located in New Jersey, New York, Connecticut, Massachusetts and
        Vermont. Hometown’s dealerships offer 9 American and Asian automotive brands
        including Chevrolet, Chrysler, Dodge, Ford, Jeep, Lincoln, Mazda, Mercury
        and
        Toyota.
 
 **2.**
              **RESTATEMENT**
  Subsequent
        to fiscal year end December 31, 2005, Hometown concluded that the income
        from
        certain extended warranty and extended warranty reimbursement insurance policies
        generated in Connecticut was no longer required to be recognized over the
        period
        of the contract. Prior to July 1, 2003, Connecticut dealerships were considered
        to be “extended warranty providers” because they did not qualify for any of the
        exclusions applicable to the retail seller of the extended warranty. Effective
        on July 1, 2003, the Connecticut law applicable to extended warranties was
        amended to provide that an “extended warranty provider” means a person who
        issues, makes, provides or offers to provide an extended warranty but that
        person must also be “contractually obligated to provide service under such
        extended warranty”. The administrator of the extended warranties sold by
        Hometown has confirmed that Hometown is not contractually obligated to provide
        service under the extended warranties that they sell. Therefore Hometown
        is no
        longer liable as the “extended warranty provider” under the extended warranties
        that they sell. Hometown has determined that it is no longer necessary to
        recognize the commissions that it receives from the sale of such extended
        warranties over the period of the warranty contract. Accordingly, within
        this
        Amendment No. 2 to Form 10Q/A, Hometown has restated prior year financial
        statements to reflect this change.
 
 The
        effect of this restatement was to increase pre-tax income $49,000 and $117,000
        for the three months ended March 31, 2005 and 2004, respectively. The after
        tax
        effects was to increase net income by $29,000 and $85,000 for the three months
        ended March 31, 2005 and 2004, respectively. The effect of these adjustments
        was
        to increase basic and diluted earnings per share by $0.00 and $0.02 for the
        three months ended March 31, 2005 and 2004, respectively.
 
 Deferred
        revenue recorded as of June 30, 2003, will continue to be taken into income
        over
        the remaining life of the contract. At March 31, 2005, Hometown had $532,000
        of
        related deferred revenue remaining. This deferred revenue will be recognized
        over the next three years as follows: 2005 (remaining period) - $215,000,
        2006 -
        $191,000, 2007 - $100,000 and 2008 - $26,000. These revenues are recorded
        in
        Revenues, Other in the Statement of Operations. The recognition of deferred
        revenues does not generate a cash tax effect as the recording of deferred
        revenues generates a deferred tax asset; therefore the recognition of this
        income causes a reduction of deferred tax assets.
  8
  The
        effect of the restatement on the financial statement items affected
        follows:
 
 (in
                  thousands)
              
              March
                  31, 2005
              
              December
                  31, 2004Previously
              
              Restated
              
              Previously
              
              RestatedReported
              
              
              
              Reported**Balance
                  Sheets:**Deferred
                  and prepaid income taxes
              
              $
              1,464
              
              $
              1,412
              
              $
              1,464
              
              $
              1,412Total
                  current assets
              
              $
              56,795
              
              $
              56,743
              
              $
              56,720
              
              $
              56,668Other
                  assets
              
              $
              3,524
              
              $
              3,341
              
              $
              3,649
              
              $
              3,486Total
                  Assets
              
              $
              73,982
              
              $
              73,747
              
              $
              74,223
              
              $
              74,008Deferred
                  revenue
              
              $
              664
              
              $
              523
              
              $
              735
              
              $
              605Total
                  current liabilities
              
              $
              54,464
              
              $
              54,323
              
              $
              53,820
              
              $
              53,690Other
                  long-term liabilities and deferred revenue
              
              $
              716
              
              $
              271
              
              $
              726
              
              $
              319Total
                  liabilities
              
              $
              63,824
              
              $
              63,238
              
              $
              63,290
              
              $
              62,753Accumulated
                  deficit
              
              $
              (18,823
              )
              $
              (18,472
              )
              $
              (19,091
              )
              $
              (18,769
              )Total
                  stockholders’ equity
              
              $
              10,158
              
              $
              10,509
              
              $
              10,933
              
              $
              11,255Total
                  liabilities and stockholders’ equity
              
              $
              73,982
              
              $
              73,747
              
              $
              74,223
              
              $
              74,008Three
                  months ended
              Three
                  months endedMarch
                  31, 2005
              March
                  31, 2004Previously
              
              
              Restated
              
              
              Previously
              
              
              RestatedReported
              
              
              
              
              
              Reported**Statements
                  of Operations:**Other
                  revenues, net
              
              $
              2,025
              
              $
              2,074
              
              $
              1,894
              
              $
              2,011Total
                  revenues
              
              $
              61,766
              
              $
              61,815
              
              $
              65,878
              
              $
              65,995Gross
                  profit
              
              $
              9,306
              
              $
              9,355
              
              $
              9,520
              
              $
              9,637Income
                  from operations
              
              $
              1,297
              
              $
              1,346
              
              $
              872
              
              $
              989Pre-tax
                  income
              
              $
              449
              
              $
              498
              
              $
              140
              
              $
              257Provision
                  for income taxes
              
              $
              181
              
              $
              201
              
              $
              38
              
              $
              70Net
                  income
              
              $
              268
              
              $
              297
              
              $
              102
              
              $
              187Earnings
                  per share, basic
              
              $
              0.04
              
              $
              0.04
              
              $
              0.01
              
              $
              0.03Earnings
                  per share, diluted
              
              $
              0.04
              
              $
              0.04
              
              $
              0.01
              
              $
              0.03**Statements
                  of Cash Flows:**Net
                  income
              
              $
              268
              
              $
              297
              
              $
              102
              
              $
              187Deferred
                  income taxes
              
              $
              181
              
              $
              201
              
              $
              38
              
              $
              70Deferred
                  revenue - current
              
              $
              (71
              )
              $
              (82
              )
              $
              (142
              )
              $
              (109
              )Other
                  long-term liabilities and deferred revenue
              
              $
              (10
              )
              $
              (48
              )
              $
              79
              
              $
              (71
              )Net
                  cash provided by operating activities
              
              $
              (2,259
              )
              $
              (2,259
              )
              $
              (2,606
              )
              $
              (2,606
              )
  9
 
 In
        addition, Hometown has previously restated its Balance Sheets and Statements
        of
        Cash Flows to comply with guidance under SFAS 95, “Statement of Cash Flows”,
        which states that payments to suppliers should be classified as an operating
        activity. The balance sheets restatement is to breakdown the floor plan notes
        payable into trade and non-trade components, where it had previously been
        shown
        as a single line item, which has been consistent with industry practice.
        The
        Statements of Cash Flows reclassification is to show the non-trade component
        of
        floor plan notes payable as a financing activity, where it had been shown
        as an
        operating activity. The floor plan lender is FMCC, an affiliate of Ford,
        Lincoln
        and Mercury; therefore; floor plan notes payable amounts due from purchases
        of
        inventory from Ford, Lincoln and Mercury are classified as floor plan - trade
        and the related borrowings and payments are to be classified as operating
        activities in the Statements of Cash Flows. Amounts due for inventory purchases
        from all other manufacturers are classified as floor plan notes payable -
        non-trade and the related borrowings and payments are to be classified as
        financing activities in the Statements of Cash Flows. The
        changes do not affect working capital or total cash flows. See
        Note
        7 to the consolidated financial statements.
 
 **3.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING
                  POLICIES**
 
 *Basis
        of Presentation*
 
 The
        accompanying consolidated balance sheet as of March 31, 2005, the consolidated
        statements of operations for the three months ended March 31, 2005 and 2004,
        the
        consolidated statements of stockholders’ equity and the consolidated statements
        of cash flows for the three months ended March 31, 2005 and 2004, are unaudited
        and restated. (See Note 2) The consolidated financial statements include
        all
        significant majority-owned subsidiaries. All significant intercompany balances
        and transactions have been eliminated in consolidation.
 
 In
        the
        opinion of management, all adjustments necessary to present fairly the financial
        position, results of operations and cash flows for the interim periods were
        made. Certain reclassifications have been made to the prior year amounts
        to
        conform to the current year presentation. Due to seasonality and other factors,
        the results of operations for interim periods are not necessarily indicative
        of
        the results that will be realized for the entire year.
 
 Certain
        information and footnote disclosures, normally included in financial statements
        prepared in accordance with generally accepted accounting principles, were
        omitted. Accordingly, these consolidated financial statements should be read
        in
        conjunction with the consolidated financial statements and notes thereto
        for the
        years ended December 31, 2004 (restated) and December 31, 2005, which are
        included in Hometown’s filings of its amended annual report on Form 10-K/A
        Amendment No. 1 and Form 10/K, respectively.
 
 The
        financial statements have been prepared in conformity with generally accepted
        accounting principles and, accordingly, include amounts based on estimates
        and
        judgments of management. Actual results could differ from those
        estimates.
 
 *Stock-based
        Compensation*
 
 At
        March
        31, 2005, Hometown has one stock-based employee compensation plan, the 1998
        Stock Option Plan (the “Stock Option Plan”). As allowed by SFAS 148, Hometown
        has elected not to use one of the alternative methods of transition available
        for a voluntary change to the fair value based method of accounting for
        stock-based employee compensation. Hometown accounts for this plan under
        the
        recognition and measurement principles of Accounting Principles Board (“APB”)
        Opinion No. 25, “Accounting for Stock Issued to Employees”, and related
        Interpretations. No stock-based employee compensation cost is reflected in
        net
        income, as all options granted under those plans had an exercise price equal
        to
        or greater than the market value of the underlying common stock on the date
        of
        grant. The following table illustrates the effect on net income and earnings
        per
        share if the company had applied the fair value recognition provisions of
        FASB
        Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based
        employee compensation.
  10
 
 Three
                  Months EndedMarch
                  31,(in
                  thousands, except per share data)
              
              2005
              
              2004Net
                  income, as reported
              
              $
              297
              
              $
              187Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards, net of related tax effects
                  (1)
              
              
              (2
              )
              
              (7
              )Pro
                  forma net income
              
              $
              295
              
              $
              180Earnings
                  per share:Basic,
                  as reported
              
              $
              0.04
              
              $
              0.03Basic,
                  pro forma
              
              $
              0.04
              
              $
              0.03Diluted,
                  as reported
              
              $
              0.04
              
              $
              0.03Diluted,
                  pro forma
              
              $
              0.04
              
              $
              0.02
 
 (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
        January 2003, the FASB issued Interpretation No. 46 (FIN 46),
        Consolidation of Variable Interest Entities, an Interpretation of Accounting
        Research Bulletin No. 51. The objective of this interpretation is to provide
        guidance on how to identify a variable interest entity (“VIE”) and requires the
        VIE to be consolidated by its primary beneficiary. The primary beneficiary
        is
        the party that absorbs a majority of the VIE's expected losses and/or receives
        a
        majority of the entity's expected residual returns, if they occur. In
        December 2003, the FASB issued FIN 46(R) ("Revised Interpretations")
        delaying the effective date for certain entities created before February
        1, 2003
        and making other amendments to clarify the application of the guidance. In
        adopting FIN 46(R) Hometown has evaluated its variable interests to determine
        whether they are in fact VIE’s and whether Hometown was the primary beneficiary
        of the VIE. This evaluation resulted in determining that Hometown has a VIE
        with
        a related party, whereby Hometown guarantees the mortgage debt of the company.
        The adoption of this interpretation did not have a material effect on Hometown’s
        financial statements.
 
 SFAS
        No.
        123 (Revised 2004), "Share-Based Payment," issued in December 2004, is a
        revision of FASB Statement 123, "Accounting for Stock-Based Compensation"
        and
        supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
        and
        its related implementation guidance. The Statement focuses primarily on
        accounting for transactions in which an entity obtains employee services
        in
        share-based payment transactions. SFAS No. 123 (Revised 2004) requires a
        public
        entity to measure the cost of employee services received in exchange for
        an
        award of equity instruments based on the grant-date fair value of the award
        (with limited exceptions). That cost will be recognized over the period during
        which an employee is required to provide service in exchange for the award.
        This
        statement is effective as of the beginning of the next fiscal year that begins
        after June 15, 2005 and the Company will adopt the standard in the first
        quarter
        of fiscal 2006. The Company has not determined the impact, if any, that this
        statement will have on its consolidated financial position or results of
        operations.
  11
 
 **4.**
              **EARNINGS
                  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 518,000 shares of common stock
        were outstanding during 2005. Options and warrants to purchase approximately
        1,063,000 shares of common stock were outstanding during 2004. Basic and
        diluted
        weighted average shares for the three months ended March 31, 2005 and 2004
        are
        as follows:
 
 Three
                  Months EndedMarch
                  31,2005
              
              2004Basic,
                  Weighted Average Shares
              
              
              7,086,500
              
              
              7,175,105Common
                  Stock Equivalents
              
              
              124,490
              
              
              296,154Diluted,
                  Weighted Average Shares
              
              
              7,210,990
              
              
              7,471,259
 
 Basic
        weighted average shares reflect a reduction of 940,000 Class B shares from
        the
        settlement of the Vergopia litigation on March 3, 2005. This is reflected
        as
        Treasury Stock. See Note 9.
 
 The
        common stock equivalents are options whose exercise price is less than the
        average market price of the common shares during the period. In 2005, options
        to
        purchase 238,000 shares of Hometown common stock were excluded from the
        calculation of diluted income per share due to the option prices being greater
        than the average market price of the common shares during the period. In
        2004,
        options and warrants to purchase 163,000 shares of Hometown common stock
        were
        excluded from the calculation of diluted income per share due to the option
        and
        warrant prices being greater than the average market price of the common
        shares
        during the period.
 
 The
        basic
        and diluted income per share for the three months ended March 31, 2005 and
        2004
        is $0.04 and $0.03, 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)
              
              3/31/05
              
              12/31/04New
                  Vehicles
              
              $
              32,703
              
              $
              33,616Used
                  Vehicles
              
              
              8,208
              
              
              7,761Parts,
                  accessories and other
              
              
              2,019
              
              
              2,063Total
                  Inventories
              
              $
              42,930
              
              $
              43,440
 
 The
        lower
        of cost or market adjustment was $0.7 million at March 31, 2005 and December
        31,
        2004, respectively.
  12
  **6.**
              **INTANGIBLE
                  ASSETS**
 
 As
        of
        March 31, 2005 and December 31, 2004, Hometown’s intangible assets consisted of
        the following:
 
 (in
                  thousands)
              
              3/31/05
              
              12/31/04Deferred
                  finance charges
              
              $
              272
              
              $
              272Accumulated
                  amortization
              
              
              (126
              )
              
              (121
              )Non-compete
                  agreement
              
              
              381
              
              
              381Accumulated
                  amortization
              
              
              (349
              )
              
              (333
              )Franchise
                  Fee
              
              
              10
              
              
              10Accumulated
                  amortization
              
              
              (3
              )
              
              (3
              )Net
                  intangible assets
              
              $
              185
              
              $
              206
  These
        assets are included in Other Assets in the consolidated financial
        statements.
 
 **7.**
              **FLOOR
                  PLAN NOTES PAYABLE**
 
 Hometown
        has a floor plan line of credit at each dealership with Ford Motor Credit
        Corporation (“FMCC”). The FMCC floor plan agreement provides financing for
        vehicle purchases and is secured by and dependent upon new and used vehicle
        inventory levels. Maximum availability under the FMCC agreement is a function
        of
        new and used car sales and is not a pre-determined amount.
 
 Hometown
        is subject to the FMCC standard financing agreement which provides for floor
        plan loans for new and used vehicles that have variable interest rates that
        increase or decrease based on movements in the prime or LIBOR borrowing rates.
        The FMCC agreement has no set maturity date and it is the intention of Hometown
        to continue with this financing on an ongoing basis.
 
 FMCC
        directly pays the manufacturers from which Hometown purchases new vehicle
        inventory. The process is done electronically where an Electronic Funds Transfer
        (EFT) is made whereby the vehicle is purchased with funds from the floor
        plan
        line. Hometown does not have the discretion to receive these funds prior
        to
        disbursement to the manufacturers. Hometown
        finances used vehicles acquired by trade-in at the time a customer is purchasing
        a new vehicle shortly after receipt of the used vehicle from the customer.
        Hometown will also acquire used vehicles at auction, where more likely than
        not,
        arrangements have been made with FMCC for payment to be made by FMCC on our
        behalf using funds available from the floor plan notes payable line of credit.
 
 Hometown
        typically makes monthly interest payments on the amount financed, but is
        not
        generally required to repay the principal prior to sale of the
        vehicle.
 
 Outstanding
        floor plan borrowings financing new vehicles of manufacturers that are
        affiliates of FMCC (Ford, Lincoln and Mercury) are classified as “floor plan
        notes payable - trade”. All other floor plan borrowings are classified as “floor
        plan notes payable - non-trade”.
 
 The
        Statement of Cash Flows reflects changes in “floor plan notes payable - trade”
as a cash operating activity and the changes in “floor plan notes payable -non-
        trade” as a cash financing activity.
  13
 
 **8.**
              **LONG-TERM
                  DEBT AND CAPITAL LEASE
                  OBLIGATIONS**
 
 Hometown
        is subject to certain financial covenants calculated semi-annually at June
        30 th and
        December 31st, related to its real estate mortgages. At December 31, 2004,
        Hometown was in default of its loan agreement for Baystate Lincoln Mercury
        for
        failure to comply with a financial covenant. Accordingly, Hometown has
        reclassified $4,239,000 of related long-term debt to current at March 31,
        2005.
        Total debt for this mortgage at March 31, 2005 is $4,541,000. On March 16,
        2005,
        the lender notified Hometown that it is not declaring an event of default
        in
        connection with the loan, however, reserving all rights to declare an event
        of
        default in the future should the financial covenant default not be cured.
        If an
        event of default was declared and only at the lenders option, Hometown could
        be
        required to pay all outstanding debt plus a defeasance penalty and transaction
        costs totaling approximately $1,400,000. Although Hometown does not believe
        the
        lender will call the loan, in the event it is called, Hometown believes it
        would
        be able to secure alternate financing. Hometown believes the market value
        of the
        property is approximately $6,200,000. Hometown believes it would be able
        to
        borrow up to 100% of the market value of the property. Assuming borrowing
        $6,000,000 at a current variable interest rate of approximately 7.44% for
        a
        15-year mortgage, monthly payments would be approximately $6,800 lower than
        the
        current monthly payments being made on the property.
 
 **9.**
              **COMMITMENTS
                  AND CONTINGENCIES**
  *Litigation*
 
 During
        the fourth quarter of 2004, Hometown announced that it had resolved in principle
        to settle the litigation matters described in Footnote 9 in the Notes to
        Unaudited Consolidated Financial Statements as contained in Hometown’s most
        recent Form 10-Q as filed with the Securities and Exchange Commission on
        November 12, 2004. On March 3, 2005 the execution and delivery of a settlement
        agreement and applicable releases of claims from all parties to the litigation
        was completed. The settlement agreement settles all claims made by Salvatore
        A.
        Vergopia and Edward A. Vergopia, former directors and executive officers
        of the
        Corporation, and Janet Vergopia, the wife of Salvatore A. Vergopia (the
“Vergopias”). The settlement also finally resolved the related insurance
        coverage litigation with Universal Underwriters Group and The Chubb Group
        of
        Insurance Companies. The gross payment to the Vergopias by all parties was
        $4
        million of which $600,000 was paid by Hometown in March 2005. The settlement
        with the Vergopias and the insurers included an exchange of mutual releases
        of
        claims among the parties and a withdrawal of all claims with prejudice and
        without costs or attorneys fees to any party. On May 11, 2005, the parties
        completed the transfer to the Vergopias of certain Westwood Lincoln Mercury
        Sales, Inc. assets, including its Lincoln Mercury franchise and have completed
        the termination of Hometown’s Westwood, New Jersey lease. Hometown received all
        of the 940,000 shares of Class B Common Stock owned by the Vergopias in March
        2005. The Settlement Agreement does not constitute an admission of liability
        or
        wrongdoing by any party.
 
 The
        940,000 shares of Hometown stock was recorded at fair market value on March
        3,
        2005, the date of the executed settlement agreement, and is shown as a reduction
        of Stockholders’ Equity as Treasury Stock of $1,043,000. The assets and
        liabilities being transferred to the Vergopias will be recorded as a reduction
        of those accounts at book value on May 11, 2005. At the time of the Original
        Filing of this Form 10-Q, the final accounting for the transaction has not
        yet
        been completed, but it is estimated that a gain of approximately $600,000
        will
        result from the transaction. Hometown wrote off the goodwill associated with
        this franchise in 2002 and expensed the aforementioned $600,000 March payment
        in
        prior periods. At March 31, 2005, Hometown has recorded a liability of
        $1,043,000 included in Accounts Payable and Accrued Expenses, pending the
        assets
        and liabilities transfer to the Vergopias.
  14
 
 Hometown
        Auto Retailers, Inc. d/b/a Muller Toyota, Inc. has been named as one of 1,667
        defendants in a complaint filed by Maryann Cerbo, et. al. in the Superior
        Court
        of New Jersey in Bergen County and allegedly served upon Hometown on December
        30, 2004. The action has been brought on behalf of about 111 named plaintiffs
        and, purportedly on behalf of a class of individuals and companies who have
        purchased or leased a motor vehicle from the defendants. Plaintiffs contend
        that
        the defendants (a) overcharged for registration and/or title fees; (b) failed
        to
        properly itemize documentary costs and governmental costs; (c) charged grossly
        excessive documentary fees not reasonably related to costs; and (d) failed
        to
        disclose that the defendants are not required to perform certain documentary
        services. It appears from the complaint that plaintiffs have attempted to
        name
        as defendants all franchised automobile dealers in the State of New Jersey,
        as
        well as a large assortment of other persons and entities. There are no
        allegations that Hometown ever performed any services for any of the plaintiffs.
        The complaint makes certain class action allegations and alleges violations
        of
        the New Jersey Consumer Fraud Act as well as common law fraud. 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.
 
 Hometown
        from time to time may be a defendant in lawsuits arising from normal business
        activities. Management reviews pending litigation with legal counsel and
        believes that the ultimate liability, if any, resulting from such actions
        will
        not have a material adverse effect on Hometown's consolidated financial position
        or results of operations.
 
 *Guarantees*
 
 Hometown
        may guaranty or partially guaranty loans advanced by financial institutions
        to
        certain customers. It is Hometown’s policy to provide reserves for potential
        future default losses based on available historical information.
 
 In
        connection with the acquisition in 1999 of real estate used by Baystate Lincoln
        Mercury, Hometown guaranteed the mortgage debt of Rellum Realty Company.
        The
        1999 guaranty was given in substitution for a February 1998 guaranty of that
        debt by the Muller Group, a subsidiary of Hometown. In the event of default
        by
        Rellum Realty Company, Hometown is required to make the mortgage payments,
        but
        does not take ownership of the property. Hometown recorded the lease as a
        capital lease. As of March 31, 2005 the mortgage debt balance is $4.2 million,
        which agrees to the capital lease obligation. Hometown makes annual lease
        payments of $864,000 to the landlord. The annual mortgage payments made by
        the
        landlord total approximately $774,000. The mortgage matures March 2013.
 
 *Warranties*
 
 Hometown’s
        new vehicle sales and certain used vehicle sales have manufacturer warranties
        that specify coverage and period. In these instances, Hometown is reimbursed
        by
        the manufacturer for the cost of parts and service on the vehicle covered
        by
        these warranties, as specified by the manufacturer. Hometown also provides
        a
        limited warranty on used vehicles sold at retail. The warranty period is
        as
        agreed upon by the customer and may be subject to a minimum period as mandated
        by the state. The typical warranty period ranges up to three months. Hometown
        also sells parts and service. Manufacturer parts are covered by limited
        warranties, as specified by the manufacturer. Service also has a limited
        warranty; whereby the part and certain labor costs are covered under the
        limited
        manufacturer warranty. Also, certain Hometown dealerships provide a three
        or
        five year 100,000-mile limited warranty on new and/or used vehicles. The
        cost of
        this warranty is charged to the cost of sale of the vehicle. The warranty
        covers
        certain parts and service for three or five years or until the vehicle reaches
        an odometer reading of 100,000 miles, whichever comes sooner. The warranty
        is
        insured, making the cost of the warranty fixed for Hometown. The insurance
        company pays costs associated with the warranty work to Hometown. An insurance
        company that is wholly owned by Ford Motor Company reinsures the insurance
        policy. If the insurance company were to fail, Hometown would be responsible
        for
        the costs of the service. Hometown has not recorded any additional reserve
        for
        this warranty program.
  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.
        At March 31, 2005 and December 31, 2004, Hometown has a reserve of $212,000
        and
        $208,000, respectively. The reserve is based on the last three months of
        used
        vehicle units sold and the average cost of repairs over the last twelve months.
        While Hometown believes its estimated liability for product warranties is
        adequate and that the judgment applied is appropriate, the estimated liability
        for product warranties could differ materially from future actual warranty
        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, 2005
              
              $
              208,000
              
              $
              204,000
              
              $
              (200,000
              )
              $
              212,000
 
 Hometown
        also sells extended service contracts as an agent for a third party for which
        it
        receives a commission. The primary obligor is the institution underwriting
        the
        service contract. These revenues are recorded in Revenues, Other in the
        Statement of Operations. Revenues from sales of third party extended service
        contracts, including recognition of deferred revenues discussed below, was
        $0.8
        million and $0.6 million for three months ended March 31, 2005 and 2004,
        respectively. Prior to July 1, 2003, Connecticut dealerships operated under
        state laws, which made the dealers responsible for providing warranty service
        and insurance in the event of default by the insurance carriers. Accordingly,
        commissions on insurance and service contract sales sold prior to July 1,
        2003
        are required to be recognized over the life of the related insurance product.
        For these dealerships, Hometown recorded the revenue as a liability and
        amortizes the amount into revenue over a five-year period. At March 31, 2005
        and
        December 31, 2004 Hometown had $532,000 and $603,000 of related deferred
        revenue, respectively. (See Note 2.) At March 31, 2005 and December 31, 2004,
        Hometown also had other deferred revenue of $261,000 and $319,000,
        respectively.
 
 *Franchise
        Agreements*
 
 Toyota
        Motor Sales, U.S.A., Inc. has extended Hometown’s current Toyota Dealer
        Agreement through May 18, 2005. 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 Vergopia’s as
        discussed above. Hometown developed and implemented plans to correct the
        operational deficiencies that would bring Hometown into compliance. Hometown
        has
        obtained written confirmations from Ford Motor Credit in response to Toyota’s
        requests for information relating to financing arrangements. In addition,
        Hometown has improved net working capital through the sale of a Chrysler/Jeep
        sales and service franchise in the second quarter of 2003 and advances on
        warranty income from Hometown’s Extended Service Plan vendor. Hometown has been
        in regular contact with Toyota to review the efforts of Hometown to resolve
        the
        deficiencies alleged by Toyota. The two Toyota dealerships for the fiscal
        year
        ended December 31, 2004 had combined revenues of $98.1 million and pre-tax
        income before allocation of corporate costs of $2.2 million. Hometown believes
        that it has corrected the alleged net working capital deficiency for the
        Toyota
        dealerships, that it has alleviated the concerns expressed by Toyota and
        that
        Hometown will enter into a new dealer agreement with Toyota Motor Sales,
        U.S.A.;
        however, 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.
  16
  **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
 
 Management's
        discussion and analysis of financial condition and results of operations
        is
        based on the historical financial statements of Hometown Auto Retailers,
        Inc.
        and contains forward-looking statements that involve risks and uncertainties.
        Hometown's actual results may differ materially from those discussed in the
        forward-looking statements as a result of various factors, as described under
        "Risk Factors" as detailed on Hometown’s amended annual report on Form 10-K/A
        amendment No. 1 for the year ended December 31, 2004 and Form 10-K for the
        year
        ended December 31, 2005.
 
 ***Overview***
 
 Hometown
        sells new and used cars and light trucks, provides maintenance and repair
        services, sells replacement parts and provides related financing, insurance
        and
        service contracts through 8 franchised dealerships and 1 stand-alone service
        facility located in New Jersey, New York, Connecticut, Massachusetts and
        Vermont. Hometown’s dealerships offer 9 American and Asian automotive brands
        including Chevrolet, Chrysler, Dodge, Ford, Jeep, Lincoln, Mazda, Mercury
        and
        Toyota.
 
 ***Restatement***
  Subsequent
        to fiscal year end December 31, 2005, Hometown concluded that the income
        from
        certain extended warranty and extended warranty reimbursement insurance policies
        generated in Connecticut was no longer required to be recognized over the
        period
        of the contract. Prior to July 1, 2003, Connecticut dealerships were considered
        to be “extended warranty providers” because they did not qualify for any of the
        exclusions applicable to the retail seller of the extended warranty. Effective
        on July 1, 2003, the Connecticut law applicable to extended warranties was
        amended to provide that an “extended warranty provider” means a person who
        issues, makes, provides or offers to provide an extended warranty but that
        person must also be “contractually obligated to provide service under such
        extended warranty”. The administrator of the extended warranties sold by
        Hometown has confirmed that Hometown is not contractually obligated to provide
        service under the extended warranties that they sell. Therefore Hometown
        is no
        longer liable as the “extended warranty provider” under the extended warranties
        that they sell. Hometown has determined that it is no longer necessary to
        recognize the commissions that it receives from the sale of such extended
        warranties over the period of the warranty contract. Accordingly, within
        this
        Amendment No. 2 to Form 10Q/A, Hometown has restated prior year financial
        statements to reflect this change.
 
 The
        effect of this restatement was to increase pre-tax income $49,000 and $117,000
        for the three months ended March 31, 2005 and 2004, respectively. The after
        tax
        effects was to increase net income by $29,000 and $85,000 for the three months
        ended March 31, 2005 and 2004, respectively. The effect of these adjustments
        was
        to increase basic and diluted earnings per share by $0.00 and $0.02 for the
        three months ended March 31, 2005 and 2004, respectively.
 
 Deferred
        revenue recorded as of June 30, 2003, will continue to be taken into income
        over
        the remaining life of the contract. At March 31, 2005, Hometown had $532,000
        of
        related deferred revenue remaining. This deferred revenue will be recognized
        over the next three years as follows: 2005 (remaining period) - $215,000,
        2006 -
        $191,000, 2007 - $100,000 and 2008 - $26,000. These revenues are recorded
        in
        Revenues, Other in the Statement of Operations. The recognition of deferred
        revenues does not generate a cash tax effect as the recording of deferred
        revenues generates a deferred tax asset; therefore the recognition of this
        income causes a reduction of deferred tax assets.
  17
  
 The
        effect of the restatement on the financial statement items affected
        follows:
 
 (in
                  thousands)
              
              March
                  31, 2005
              
              December
                  31, 2004Previously
              
              Restated
              
              Previously
              
              RestatedReported
              
              
              
              Reported**Balance
                  Sheets:**Deferred
                  and prepaid income taxes
              
              $
              1,464
              
              $
              1,412
              
              $
              1,464
              
              $
              1,412Total
                  current assets
              
              $
              56,795
              
              $
              56,743
              
              $
              56,720
              
              $
              56,668Other
                  assets
              
              $
              3,524
              
              $
              3,341
              
              $
              3,649
              
              $
              3,486Total
                  Assets
              
              $
              73,982
              
              $
              73,747
              
              $
              74,223
              
              $
              74,008Deferred
                  revenue
              
              $
              664
              
              $
              523
              
              $
              735
              
              $
              605Total
                  current liabilities
              
              $
              54,464
              
              $
              54,323
              
              $
              53,820
              
              $
              53,690Other
                  long-term liabilities and deferred revenue
              
              $
              716
              
              $
              271
              
              $
              726
              
              $
              319Total
                  liabilities
              
              $
              63,824
              
              $
              63,238
              
              $
              63,290
              
              $
              62,753Accumulated
                  deficit
              
              $
              (18,823
              )
              $
              (18,472
              )
              $
              (19,091
              )
              $
              (18,769
              )Total
                  stockholders’ equity
              
              $
              10,158
              
              $
              10,509
              
              $
              10,933
              
              $
              11,255Total
                  liabilities and stockholders’ equity
              
              $
              73,982
              
              $
              73,747
              
              $
              74,223
              
              $
              74,008Three
                  months ended
              Three
                  months endedMarch
                  31, 2005
              March
                  31, 2004Previously
              
              
              Restated
              
              
              Previously
              
              
              RestatedReported
              
              
              
              
              
              Reported**Statements
                  of Operations:**Other
                  revenues, net
              
              $
              2,025
              
              $
              2,074
              
              $
              1,894
              
              $
              2,011Total
                  revenues
              
              $
              61,766
              
              $
              61,815
              
              $
              65,878
              
              $
              65,995Gross
                  profit
              
              $
              9,306
              
              $
              9,355
              
              $
              9,520
              
              $
              9,637Income
                  from operations
              
              $
              1,297
              
              $
              1,346
              
              $
              872
              
              $
              989Pre-tax
                  income
              
              $
              449
              
              $
              498
              
              $
              140
              
              $
              257Provision
                  for income taxes
              
              $
              181
              
              $
              201
              
              $
              38
              
              $
              70Net
                  income
              
              $
              268
              
              $
              297
              
              $
              102
              
              $
              187Earnings
                  per share, basic
              
              $
              0.04
              
              $
              0.04
              
              $
              0.01
              
              $
              0.03Earnings
                  per share, diluted
              
              $
              0.04
              
              $
              0.04
              
              $
              0.01
              
              $
              0.03**Statements
                  of Cash Flows:**Net
                  income
              
              $
              268
              
              $
              297
              
              $
              102
              
              $
              187Deferred
                  income taxes
              
              $
              181
              
              $
              201
              
              $
              38
              
              $
              70Deferred
                  revenue - current
              
              $
              (71
              )
              $
              (82
              )
              $
              (142
              )
              $
              (109
              )Other
                  long-term liabilities and deferred revenue
              
              $
              (10
              )
              $
              (48
              )
              $
              79
              
              $
              (71
              )Net
                  cash provided by operating activities
              
              $
              (2,259
              )
              $
              (2,259
              )
              $
              (2,606
              )
              $
              (2,606
              )
  18
 
 In
        addition, Hometown has previously restated its Balance Sheets and Statements
        of
        Cash Flows to comply with guidance under SFAS 95, “Statement of Cash Flows”,
        which states that payments to suppliers should be classified as an operating
        activity. The balance sheets restatement is to breakdown the floor plan notes
        payable into trade and non-trade components, where it had previously been
        shown
        as a single line item, which has been consistent with industry practice.
        The
        Statements of Cash Flows reclassification is to show the non-trade component
        of
        floor plan notes payable as a financing activity, where it had been shown
        as an
        operating activity. The floor plan lender is FMCC, an affiliate of Ford,
        Lincoln
        and Mercury; therefore; floor plan notes payable amounts due from purchases
        of
        inventory from Ford, Lincoln and Mercury are classified as floor plan - trade
        and the related borrowings and payments are to be classified as operating
        activities in the Statements of Cash Flows. Amounts due for inventory purchases
        from all other manufacturers are classified as floor plan notes payable -
        non-trade and the related borrowings and payments are to be classified as
        financing activities in the Statements of Cash Flows. The
        changes do not affect working capital or total cash flows. See
        Note
        7 to the consolidated financial statements.
 
 ***Revenue***
 
 Total
        revenue decreased $4.2 million, or 6.4% to $61.8 million for three months
        ended
        March 31, 2005 from $66.0 million for three months ended March 31, 2004.
        This
        decrease was primarily due to decreased new vehicle sales ($3.1 million)
        and
        decreased sales of used vehicles ($1.3 million) partially offset by an increase
        in parts and service revenues ($0.2 million).
 
 Revenue
        from the sale of new vehicles decreased $3.1 million, or 7.5% to $38.0 million
        for the three months ended March 31, 2005 from $41.1 million for three months
        ended March 31, 2004. The
        decrease is attributable to a reduction of 59 units sold in 2005 compared
        to
        2004 ($1.6 million) combined with a 3.7% decrease in average selling price
        ($1.5
        million). The decrease was primarily due to the Lincoln Mercury ($4.1 million),
        Chevrolet ($0.8 million) and Ford ($0.5 million) dealerships, partially offset
        by an increase at the Toyota ($1.6 million) and Chrysler/Jeep ($0.7 million)
        dealerships. The decrease at the Lincoln Mercury dealerships was primarily
        due
        to a decrease of 107 units sold in 2005 compared to 2004 ($3.8 million) combined
        with a 3.4% decrease in the average selling price ($0.3 million). The Lincoln
        Mercury increase includes a decrease in sales of 55 livery units ($1.9 million).
        The decrease at the Chevrolet dealership was primarily due to a decrease
        of 33
        units sold in 2005 compared to 2004. The decrease at the Ford dealership
        was
        primarily due to a decrease of 27 units sold in 2005 compared to 2004 ($0.7
        million), partially offset by a 4.4% increase in the average selling price
        ($0.2
        million). The increase at the Toyota dealerships was primarily due to an
        increase of 80 units sold in 2005 compared to 2004 ($1.9 million), partially
        offset by a 1.9% decrease in the average selling price ($0.3 million). Included
        in this was an increase in fleet sales of $0.4 million due to an increase
        of 30
        units sold. The Chrysler/Jeep increase was primarily due to an additional
        28
        units sold in 2005 compared to 2004.
 
 Revenue
        from the sale of used vehicles decreased $1.3 million, or 7.7% to $15.6 million
        for the three months ended March 31, 2005 from $16.9 million for three months
        ended March 31, 2004. This was due to decreased used vehicle revenues at
        retail
        ($1.2 million), primarily due to a decrease of 178 units ($2.6 million),
        partially offset by a 12.8% increase in average selling price ($1.4 million);
        plus a decrease in used vehicle sales at wholesale ($0.1 million), due to
        a
        decrease of 210 units ($0.8 million) partially offset by a 25.8% increase
        in
        average selling price ($0.7 million). The increase in wholesale average selling
        price is a function of the decrease in retail sales. High quality vehicles
        that
        were taken as trade-ins at the time of new vehicle purchases, were not being
        sold at retail, necessitating being sold at wholesale. The decreased revenues
        at
        retail were primarily due to decreases at the Toyota ($0.8 million), Chevrolet
        ($0.4 million) and Lincoln Mercury dealerships ($0.4 million) along with
        the
        closing of a used car outlet ($0.4 million). The decrease at Toyota was
        primarily due to the reduction of 66 units ($1.0 million) partially offset
        by a
        6.9% increase in average selling price ($0.2 million). The decrease at Chevrolet
        was primarily due to the reduction of 43 units ($0.6 million) partially offset
        by a 9.2% increase in average selling price ($0.2 million). The decrease
        at
        Lincoln Mercury was primarily due to the reduction of 41 units ($0.7 million)
        partially offset by a 7.8% increase in average selling price ($0.3 million).
        Ford ($0.4 million), Mazda ($0.2 million) and Chrysler/Jeep ($0.2 million)
        had
        increases in revenues at retail in 2005 compared to 2004. The increase at
        Ford
        was primarily due to a 30.5% increase in average selling price. The increase
        at
        Mazda was primarily due to an additional 16 units ($0.3 million) sold in
        2005
        compared to 2004 partially offset by a 12.2% decrease in average selling
        price
        ($0.1 million). Lincoln Mercury ($0.5 million), Ford (less than $0.1 million)
        and Mazda (less than $0.1 million) experienced decreases in wholesale, while
        there were increases at Toyota ($0.2 million), Chevrolet ($0.1 million) and
        Chrysler/Jeep ($0.1 million).
  19
 
 Parts
        and
        service revenue increased $0.2 million, or 3.3%, to $6.2 million for the
        three
        months ended March 31, 2005, from $6.0 million for the three months ended
        March
        31, 2004. The Toyota dealerships accounted for $0.1 million with the remaining
        $0.1 million spread across the other dealerships.
 
 Other
        dealership revenues increased less than $0.1 million, or 5.0% to $2.1 million
        for the three months ended March 31, 2005 from $2.0 million for the three
        months
        ended March 31, 2004. The increase is primarily attributable to increased
        extended service plan income.
 
 ***Gross
        Profit***
 
 Total
        gross profit decreased $0.2 million, or 2.1%, to $9.4 million for the three
        months ended March 31, 2005, from $9.6 million for the three months ended
        March
        31, 2004. This decrease was primarily attributable to decreased gross profit
        on
        new vehicle sales ($0.4 million) and used vehicle sales ($0.1 million) partially
        offset by increases gross profit on parts and service sales ($0.1 million)
        other
        dealership revenues ($0.1 million). Gross profit percentage for Hometown
        was
        15.1% in 2005 and 14.6% in 2004. Adjusting both periods for fleet sales,
        which
        generate low gross profit margins, gross profit percentage was 15.4% in 2005
        and
        14.5% in 2004.
 
 Gross
        profit on the sale of new vehicles decreased $0.4 million, or 14.3%, to $2.4
        million for the three months ended March 31, 2005, from $2.8 million for
        the
        three months ended March 31, 2004. The decrease in gross profit is primarily
        attributable to an 8.2% decrease in average gross profit per vehicle ($0.3
        million) combined with a reduction of 59 units ($0.1 million) sold in 2005
        compared to 2004. The unit increase is net of a 39-unit increase attributable
        to
        fleet sales, which had a minimal effect on the increase in gross profit.
        All
        brands, except for Mazda, experienced a decrease in gross profit on the sale
        of
        new vehicles in the 2005 period compared to 2004. Lincoln Mercury accounted
        for
        $0.2 million while all of the other dealerships accounted for the remainder.
        Mazda had a minimal increase. Gross profit percentage for 2005 was 6.4% compared
        to 6.7% for 2004. Adjusting both periods for fleet sales, which generate
        low
        margins, gross profit percentage for new vehicles was 6.5% in 2005 compared
        to
        6.7% in 2004.
 
 Gross
        profit on the sale of used vehicles decreased $0.1 million, or 5.9%, to $1.6
        million for the three months ended March 31, 2005, from $1.7 million for
        the
        three months ended March 31, 2004. This decrease is primarily due to a 178-unit
        decrease at retail ($0.3 million), partially offset by a 7.7% increase in
        average gross profit per retail unit ($0.1 million). Decreases at retail
        for
        Toyota and Lincoln Mercury (together totaling $0.1 million) and Chevrolet
        ($0.1
        million) dealerships were partially offset by increases at the Ford, Mazda
        and
        Chrysler/Jeep (together totaling $0.1 million) dealerships. The closing of
        a
        used car outlet in 2004 accounted for an additional $0.1 million. The decrease
        at Toyota was primarily due to a decrease of 66 units ($0.1 million), partially
        offset by a 16.0% increase in average gross profit per unit (less than $0.1
        million). The decrease at Lincoln Mercury and Chevrolet was primarily due
        to a
        decrease of 41 units and 45 units, respectively. The increase at Ford and
        Chrysler/Jeep was primarily due to an increase in average gross profit per
        vehicle of 34.9% and 1.4%, respectively. The increase at Mazda was primarily
        due
        to an increase of 16-units sold in 2005 compared to 2004. Gross profit on
        the
        sale of used vehicles at wholesale increased $0.1 million to $0.2 million
        for
        the three months ended March 31, 2005, from $0.1 million for the three months
        ended March 31, 2004. The increase in wholesale gross profit is a function
        of
        the decrease in retail sales. High quality vehicles that were taken as trade-ins
        at the time of new vehicle purchases, were not being sold at retail,
        necessitating being sold at wholesale. Gross profit percentage on the sale
        of
        used vehicles was 10.0% in 2005 compared to 9.9% in 2004.
 
 Parts
        and
        service gross profit increased $0.1 million, or 3.1%, to $3.3 million for
        the
        three months ended March 31, 2005, from $3.2 million for the three months
        ended
        March 31, 2004. The increase is due to the increased revenue described above.
        Gross profit percentage was 53.5% in 2005 compared to 53.7% in 2004.
  20
 
 ***Selling,
        General and Administrative Expenses***
 
 Selling,
        general and administrative expenses decreased $0.6 million, or 7.0%, to $8.0
        million for the three months ended March 31, 2005 from $8.6 million for the
        three months ended March 31, 2004. The decrease was primarily due to decreases
        in salaries and employee benefits ($0.3 million), legal and other professional
        fees ($0.1 million), rent ($0.1 million) and various other costs ($0.1 million).
        Included in these selling, general and administrative expense reductions
        was
        approximately $0.1 million associated with the closing of the used car
        lot.
 
 ***Interest
        Expense***
 
 Interest
        expense increased $0.1 million, or 12.5% to $0.9 for the three months ended
        March 31, 2005 from $0.8 million for the three months ended March 31, 2004.
        The
        increase is primarily attributable to an increase in floor plan interest
        expense
        resulting from an increase in interest rates.
 
 ***Provision
        for income tax***
 
 The
        effective income tax rate was 40.4% in the quarter ended March 31, 2005 and
        27.2% in the same period of 2004. The rates were based on current forecasts
        of
        income before taxes, and current forecasts of permanent differences between
        tax
        and book income. The 2005 rate reflects the expected effective tax rate for
        the
        year. The 2004 rate reflects the expected full year effective tax rate of
        40%
        adjusted for a reduction in the valuation allowance associated with the 2004
        amortization of goodwill for tax purposes. At December 31, 2004 deferred
        taxes
        were adjusted primarily to reflect a reduction of the valuation allowance
        on the
        deferred tax asset due to the ability to project sufficient income to recover
        the deferred tax asset. Deferred taxes, including the valuation allowance,
        will
        be reviewed throughout fiscal 2005.
 
 ***Net
        Income***
 
 Net
        income increased $0.1 million to $0.3 million for the three months ended
        March
        31, 2005 from $0.2 million for the three months ended March 31, 2004. See
        above
        for explanation of the improvement.
 
 ***Earnings
        Per Share, Basic and Diluted and Weighted Average
        Shares***
 
 “Basic
        earnings (loss) per share” is computed by dividing net income (loss) by the
        weighted average common shares outstanding. “Diluted earnings (loss) per share”
is computed by dividing net income (loss) by the weighted average common
        shares
        outstanding adjusted for the incremental dilution of potentially dilutive
        securities. See Note 3 to the unaudited consolidated financial statements.
 
 The
        basic
        and diluted income per share for the three months ended March 31, 2005 and
        2004
        is $0.04 and $0.03, 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.
  21
 
 ***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 2005 and 2004 periods,
        inflation did not have a significant effect on the results of Hometown during
        those periods.
 
 ***Liquidity
        and Capital Resources***
 
 The
        principal sources of liquidity are cash on hand, cash from operations and
        floor
        plan financing.
 
 *Cash
        and Cash Equivalents*
 
 Total
        cash and cash equivalents was $5.3 million and $6.1 million at March 31,
        2005
        and December 31, 2004, respectively.
 
 *Cash
        Flow from Operations*
 
 The
        following table sets forth the consolidated selected information from the
        unaudited statements of cash flows:
  Three
                  months ended March 31,(in
                  thousands)
              
              2005
              
              2004Net
                  cash (used in) operating activities
              
              $
              (2,259
              )
              $
              (2,606
              )Net
                  cash (used in) investing activities
              
              
              (57
              )
              
              (94
              )Net
                  cash provided by financing activities
              
              
              1,551
              
              
              2,880Net
                  increase (decrease) in cash and cash equivalents
              
              $
              (765
              )
              $
              180
 
 For
        the
        three months ended March 31, 2005, net cash used in operations 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, (iii) a decrease in accounts payable,
        accrued expenses and deferred revenues of $0.5 million (see Note 2 to the
        unaudited consolidated financial statements) and (iv) an increase in prepaid
        expenses and other assets of $0.2 million; partially offset by net income
        of
        $0.3 million plus non-cash items of $0.5 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;
        partially offset by principal payments of long-term debt and capital lease
        obligations of $0.4 million.
  22
 
 For
        the
        three months ended March 31, 2004, net cash used in operations of $2.6 million
        primarily consists of: (i) the increase in inventory of $6.5 million less
        the
        increase in floor plan notes payable - trade of $3.8 million, (ii) the increase
        in accounts receivable of $0.7 million and (iii) the decrease in deferred
        revenue of $0.2 million (see Note 2 to the unaudited consolidated financial
        statements); partially offset by (iii) net income plus non-cash items of
        $0.6
        million and (iv) an increase in accounts payable and accrued expenses of
        $0.5
        million. Inventory (an increase of $6.5 million) and related floor plan
        liability (trade and non-trade increase of $7.2 million) increased due to
        inventory that was purchased with the expectation of higher sales in 2004,
        which
        did not materialize. The increase in floor plan liability in excess of inventory
        is due to timing of payments. Net cash used in investing activities of $0.1
        million is due to capital
        expenditures. Net
        cash
        provided by financing activities of $2.9 million is due to the net change
        (increase) in non-trade floor plan notes payable of $3.4 million (see operating
        activities) partially offset by principal payments of long-term debt and
        capital
        lease obligations.
 
 *Capital
        Expenditures*
 
 Capital
        expenditures for fiscal 2005 are expected to be $0.3 million, consisting
        primarily of equipment purchases and building and leasehold improvements.
 
 *Receivables*
 
 Hometown
        had $6.3 million in accounts receivable at March 31, 2005 compared to $5.1
        million at December 31, 2004. The increase in receivables is due to the increase
        in sales that takes place in March compared to December. The majority of
        those
        receivables, $3.0 million and $2.4 million as of March 31, 2005 and December
        31,
        2004, respectively, are due from finance companies that provide or secure
        financing for customer purchases, and primarily represent
        contracts-in-transit. These
        amounts are typically received within seven days of the transaction. The
        allowance for doubtful accounts is $0.3 million at March 31, 2005 and December
        31, 2004.
 
 *Inventories*
 
 Hometown
        had $42.9 million in inventories, net at March 31, 2005 compared to $43.4
        million at December 31, 2004. The majority of inventory, $32.7 million and
        $33.6
        million as of March 31, 2005 and December 31, 2004, 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 $0.7 million at March 31, 2005
        and
        December 31, 2004.
 
 *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.
  23
  ***Forward
        Looking Statement***
 
 When
        used
        in the amended Quarterly Report on Form 10Q/A Amendment No. 2, 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, 2005 of $42.6 million, a 1%
        change in the prime rate would result in a $0.4 million change to annual
        floor
        plan interest expense.
 
 At
        March
        31, 2005, Hometown invested $2.6 million of excess cash, of which $0.1 million
        was invested in money market accounts paying a weighted average interest
        rate of
        1.23% at March 31, 2005, and $2.5 million was invested in a Ford Motor Credit
        Company cash management account paying interest of 6.50% at March 31, 2005.
        The
        cash management account interest rate is tied to the rate charged on Hometown’s
        floor plan financing arrangement.
 **ITEM
          4.  CONTROLS
          AND PROCEDURES**
  We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in our reports under the Securities
        Exchange Act of 1934, as amended, are recorded, processed, summarized and
        reported within the time periods specified in the SEC's rules and forms,
        and
        that such information is accumulated and communicated to our management,
        including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
        as appropriate, to allow timely decisions regarding required disclosure.
        In
        designing and evaluating the disclosure controls and procedures, management
        recognizes that any disclosure controls and procedures, no matter how well
        designed and operated, can provide only reasonable assurance of achieving
        the
        desired control objectives, and management necessarily is required to use
        its
        judgment in evaluating the cost to benefit relationship of possible controls
        and
        procedures.
 
 At
        March
        31, 2005, management, with the participation of the CEO and CFO, evaluated
        the
        effectiveness of the design and operation of our disclosure controls and
        procedures. Based upon that evaluation and subject to the foregoing, our
        management, including the CEO and CFO, concluded that our disclosure controls
        and procedures were effective 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.
  24
  **PART
        II. OTHER INFORMATION**
 
 
 **ITEM
                  1.**
              **LEGAL
                  PROCEEDINGS**
 
 See
        Note
        9 - Commitments and Contingencies - Litigation, to the notes to the unaudited
        consolidated financial statements.
 
 **ITEM
                  2.**
              **UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF
                  PROCEEDS**
 
 NONE
 
 **ITEM
                  3.**
              **DEFAULTS
                  UPON SENIOR SECURITIES**
 
 NONE
 
 **ITEM
                  4.**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS**
 
 NONE
 
 **ITEM
                  5.**
              **OTHER
                  INFORMATION**
 
 NONE
 
 **ITEM
                  6.**
              **EXHIBITS**
 
 31.1
              Chief
                  Executive Officer Certification31.2
              Chief
                  Financial Officer Certification32.1
              Chief
                  Executive Officer Certification pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  200232.2
              Chief
                  Financial Officer Certification pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002
  25
  **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned, thereunto
        duly authorized.
  Hometown
                  Auto Retailers, Inc.April
                  14, 2006
              By:
              /s/
                Corey E. ShakerDate
              Corey
                E. ShakerPresident
                and Chief Executive Officer
  April
                  14,
                  2006
              By:
              /s/
                Charles F. SchwartzDate
              Charles
                F. SchwartzChief
                Financial Officer
  26