UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-K





FOR
      ANNUAL AND TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15 (d) OF
      THE


SECURITIES
      AND EXCHANGE ACT OF 1934





(Mark
      One)


x ANNUAL
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE


ACT
      OF
      1934





For
      the
      fiscal year ended December 31, 2005





OR





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


EXCHANGE
      ACT OF 1934





For
      the
      transition period from _____ to _____





Commission
      file number: 000-24669





HOMETOWN
      AUTO RETAILERS, INC.


(Exact
      Name of Registrant as Specified in Its Charter)





Delaware
            06-1501703(State
                or Other Jurisdiction of Incorporation or Organization)
            (IRS
                Employer Identification No.)1309
                South Main Street
              Waterbury,
                CT 06706
              (Address
                of Principal Executive Offices)





Registrant's
      telephone number, including area code:  (203)
      756-1300





Securities
      registered pursuant to Section 12(b) of the Act: None





Securities
      registered pursuant to Section 12(g) of the Act:  Class
      A
      Common Stock, par value $.001 per share


(Title
      of
      class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405  of
      the
      Securities Act. Yes o
      No x


Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes o No
x




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





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. o





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


Large
      accelerated filer o Accelerated
      filer o Non-accelerated filer x





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





The
      aggregate market value of the voting stock held by non-affiliates of the
      registrant as of June 30, 2005 was approximately $3,106,000. Non-affiliates
      are
      defined as holders of Class A Common Stock that do not also hold Class B Common
      Stock. Hometown used closing selling price in the calculation.





The
      number of shares outstanding of the registrant's Class A and Class B Common
      Stock, $.001 par value, as of March 24, 2006 was 6,489,389 shares.




DOCUMENTS
      INCORPORATED BY REFERENCE: NONE







**HOMETOWN
      AUTO RETAILERS, INC.**


**Form
      10-K Annual Report**


**TABLE
                OF CONTENTS****PART
                I**
            
            PageItem
                1.
            Business
            3Item
                1A.
            Risk
                Factors
            17Item
                1B.
            Unresolved
                Staff Comments
            21Item
                2.
            Properties
            21Item
                3.
            Legal
                Proceedings.
            23Item
                4.
            Submission
                of Matters to a Vote of Security Holders.
            25**PART
                II**Item
                5.
            Market
                for Registrant’s Common Equity and Related Stockholder
                Matters
            25Item
                6.
            Selected
                Financial Data
            26Item
                7.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            27Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            47Item
                8.
            Financial
                Statements and Supplementary Data
            47Item
                9.
            Change
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure
            47Item
                9A.
            Controls
                and Procedures
            47Item
                9B.
            Other
                Information
            48**PART
                III**Item
                10.
            Directors
                and Executive Officers of the Registrant
            49Item
                11.
            Executive
                Compensation
            52Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management
            57Item
                13.
            Certain
                Relationships and Related Transactions
            60Item
                14.
            Principal
                Accountant Fees and Services
            61**PART
                IV**Item
                15.
            Exhibits
                and Financial Statement Schedules
            63





**FORWARD
      LOOKING STATEMENT INFORMATION**





*Certain
      statements made in this Annual Report on Form 10-K 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. Hometown’s plans and
      objectives are based, in part, on assumptions* ****** *involving
      the continued expansion of business. 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 headings “Business,” “Certain Factors That
      May Affect Future Growth” and “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations.”*


2


**PART
      I**





**ITEM
      1. BUSINESS**




Hometown
      was founded by merger, on June 27, 1997, between Dealer-Co., Inc., a New York
      Corporation, organized on March 10, 1997 and Hometown Auto Retailers, Inc.,
      a
      Delaware corporation, organized on June 6, 1997. Until the closing of its
      initial public offering on July 31, 1998, Hometown conducted no operations
      under
      its own name and all revenues were generated by its predecessor companies.
      On
      July 31, 1998, Hometown acquired three dealerships, and the predecessor
      companies, which operate six dealerships, a collision repair center and a
      factory authorized freestanding service center. In 1999, Hometown also acquired
      freestanding Lincoln Mercury and Toyota dealerships and added both a Mazda
      and a
      Jeep dealership to existing locations. In 2000, Hometown acquired a high-end
      used car operation, which was added to its Massachusetts location. In 2001,
      Hometown sold its Morristown, NJ dealership, Lincoln Mercury franchise back
      to
      Lincoln Mercury. In 2002, the high-end used car operation was significantly
      scaled down. In 2003, Hometown sold the Chrysler/Jeep Sales and Service
      Franchise for its Waterbury CT store. In 2005, as described in Item 3 - Legal
      Proceedings, Hometown settled certain litigation matters, which includes among
      other things the transfer of certain Westwood Lincoln Mercury Sales, Inc.
      assets, the transfer to the Vergopia’s of the Westwood Lincoln Mercury
      franchise, the termination of Hometown’s Westwood, New Jersey lease, and the
      receipt by Hometown of all of Hometown’s shares owned by the Vergopia’s.





**General**





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 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.





Hometown’s
      "Lincoln Mercury Autocare" center located in Connecticut was the pilot facility
      for Ford's authorized free-standing neighborhood service center concept for
      the
      maintenance and light repair of cars and trucks. Free-standing neighborhood
      service centers are an innovative attempt by the automobile retail industry
      to
      recapture repair and maintenance business which has been lost in recent decades
      to chain and independent service businesses. These service centers are designed
      to enhance customer convenience by operating during extended hours, servicing
      vehicles without prior appointment and offering quick turnaround. ****





**Operating
      Strategy**





Hometown
      will seek to consolidate operations and increase the profitability of its
      existing dealerships by using a strategy that combines its "best in class"
      operating practices with the advantages of its established customer base, local
      presence and name recognition. Each of Hometown’s dealerships will use a core
      operating strategy specifically designed to produce a high "shop absorption
      rate," a high rate of service retention and a high ratio of retail used to
      new
      car sales, all in order to maximize profitability and provide insulation from
      the cyclical nature of new car sales. “Shop absorption rate” is the percentage
      of a dealership’s fixed expenses that are covered or absorbed by the gross
      profit of the parts and service departments.





Hometown
      believes that the following factors, coupled with its established organizational
      structure, will help it achieve its operating strategy:





·
            *Strong
                Regional Focus.*Hometown’s eight franchised dealerships are located in New Jersey, New
                York, Connecticut, Massachusetts and Vermont. Hometown believes that
                proximity of its dealerships to one another will contribute to ease
                of
                management, more effective control of dealership operations, increased
                sales from coordinated marketing of new cars, used cars and livery
                vehicles and cost savings from coordinated auction purchasing, car
                transport and other activities.


3








·
            *Established
                Customer Base.*Hometown believes that its existing dealerships have good local
                reputations and have strong local name recognition. Through
                "owner-loyalty" and similar programs, Hometown believes it has established
                a customer base that looks to its existing "hometown" dealership
                as its
                first choice in buying replacement vehicles. See “Dealership Operations -
                Parts and Service” for a description of “owner-loyalty
                program”.





·
            *Experienced
                Management.*Hometown's management is comprised of second and third generation
                members
                of dealer families who have been leaders in the automotive retailing
                industry. The executive officers and key managers of Hometown have
                over
                200 years of combined experience in the automotive retailing industry
                and
                are members of families who have owned dealerships since 1947. They
                are
                recognized leaders in the automotive retailing industry and have
                served at
                various times in leadership positions in state and national industry
                organizations. Hometown has also received numerous awards based on
                high
                customer satisfaction index ("CSI") ratings and other performance
                measures
                regularly compiled and monitored by the automobile Manufacturers.
                See
                "Item 10. Directors and Executive Officers of the Registrant" for
                additional information as to the numerous Manufacturer awards and
                citations earned by Hometown's senior management and dealerships
                in recent
                years.





·
            *Focus
                on Higher Margin Operations*





·
            *Parts
                and Service.*Hometown's dealerships emphasize sales of parts and service, which
                typically have a higher profit margin than vehicle sales. As part
                of their
                emphasis Hometown operates "Lincoln Mercury Autocare" a freestanding
                neighborhood service center for the maintenance and light repair
                of cars
                and trucks, which operates during extended hours, provides comfortable
                customer waiting areas and quickly services vehicles without prior
                appointment.





·
            *Used
                Car Sales.*The sale of used vehicles is emphasized at each of Hometown’s dealerships.
                Typically, used vehicle sales generate higher gross margins than
                new
                vehicle sales. Hometown seeks to attract customers and enhance buyer
                satisfaction by offering multiple financing options and extended
                warranties on used vehicles.





·
            *Ability
                To Source High Quality Used Vehicles.*An
                important component in selling used vehicles and maintaining high
                margins
                on such sales is the ability to obtain high quality used vehicles
                at
                reasonable prices. Hometown obtains its used vehicles through trade-ins
                and off-lease programs as well as regular auction buying. Key executives
                at each dealership have developed the skills necessary for making
                effective purchases at regularly scheduled auctions. Hometown believes
                that auction buying activities is enhanced by its ability to use
                common
                buyers to fill the needs of several dealerships, handle its own
                transportation of vehicles from the auction to the dealership and
                obtain
                discounted prices.





·
            *Brand
                Diversity.*Hometown's dealerships offer 9 American and Asian automotive brands
                including Chevrolet, Chrysler, Dodge, Ford, Jeep, Lincoln, Mazda,
                Mercury,
                and Toyota. Hometown believes that brand diversity helps to insulate
                it
                from changes in consumer preferences, short supplies of particular
                automotive models and negative publicity concerning a particular
                Manufacturer or vehicle model.





·
            *Quality
                Personnel.*Hometown employs professional management practices in all aspects
                of its
                operations, including information technology, advanced employee sales
                training, profit-based compensation and cash management. Each dealership
                is managed as a profit center by a trained and experienced general
                manager
                who has primary responsibility for decisions relating to inventory,
                pricing and personnel. Hometown compensates its general managers
                and
                department managers pursuant to various formulas based upon dealership
                or
                department profitability, rather than on sales volume. Senior management
                uses computer-based management information systems to monitor each
                dealership's sales, profitability and inventory on a daily basis
                and to
                identify areas requiring improvement and provide additional training
                where
                necessary.


4




**Dealership
      Operations**





Hometown’s
      established operating practices and procedures, including the management and
      pricing of inventories of new and used vehicles, are regularly reviewed and
      updated by the Chief Executive Officer and members of Hometown’s operating
      management. Each of Hometown’s dealerships use a management structure that
      promotes and rewards the achievement of benchmarks set by senior management.
      Each local general manager of a Hometown dealership is ultimately responsible
      for the operation, personnel and financial performance of that dealership.
      Each
      general manager is complemented with a management team generally consisting
      of a
      new vehicle sales manager, a used vehicle sales manager, service and parts
      managers and finance and insurance (“F&I”) managers. The general manager and
      the other members of each dealership management team, as long-time members
      of
      their local communities, are typically best able to judge how to conduct
      day-to-day operations based on the team's experience in and familiarity with
      its
      local market. Certain members of Hometown’s senior management also serve as
      general managers of particular dealerships. Each dealership engages in a number
      of inter-related businesses: new vehicle sales; used vehicle sales; service
      and
      parts operations; and F&I.





*New
      Vehicle Sales.* Hometown's dealerships represent 9 American and Asian brands of lower, mid
      and
      higher priced sport and family cars and light trucks, including sport utility
      vehicles. Hometown believes that offering numerous new vehicle brands appeals
      to
      a variety of customers, minimizes dependence on any one Manufacturer and reduces
      its exposure to supply problems and product cycles.





The
      following table sets forth for 2005 and 2004, certain information relating
      to
      the brands of new vehicles sold at retail by Hometown:





**For
                the Years Ended December 31,****2005**
            
            **2004****BRANDS**
            
            **Number**
            
            **Percentage**
            
            **Number**
            
            **Percentage**TOYOTA
            
            
            2,902
            
            
            53.0
            %
            
            2,851
            
            
            45.9
            %CHEVROLET
            
            
            686
            
            
            12.5
            %
            
            759
            
            
            12.2
            %LINCOLN/MERCURY
            
            
            630
            
            
            11.5
            %
            
            1,373
            
            
            22.1
            %FORD
            
            
            558
            
            
            10.2
            %
            
            601
            
            
            9.7
            %MAZDA
            
            
            368
            
            
            6.7
            %
            
            351
            
            
            5.6
            %DODGE
            
            
            138
            
            
            2.5
            %
            
            105
            
            
            1.7
            %CHRYSLER
            
            
            111
            
            
            2.0
            %
            
            71
            
            
            1.1
            %JEEP
            
            
            85
            
            
            1.6
            %
            
            97
            
            
            1.6
            %OTHER
            
            
            0
            
            
            0.0
            %
            
            7
            
            
            0.1
            %Total
            
            
            5,478
            
            
            100.0
            %
            
            6,215
            
            
            100.0
            %





Hometown
      seeks to provide customer-oriented service designed to meet the needs of its
      customers and establish lasting relationships that will result in repeat and
      referral business. This is accomplished by: (i) engaging in extensive
      follow-up after a sale in order to develop long-term relationships with its
      customers; (ii) training its sales staff to be able to meet customer needs;
      (iii) employing more efficient, non-confrontational selling systems; and
      (iv) using computer technology that decreases the time necessary to
      purchase a vehicle. Hometown believes that its ability to share "best practices"
      among its dealerships gives it an advantage over smaller dealerships.


5




Hometown
      acquires substantially all of its new vehicle inventory from Manufacturers
      of
      the vehicle brands it sells. The Manufacturers allocate a limited inventory
      among their franchised dealers based primarily on sales volume and input from
      dealers. Hometown finances its inventory purchases through revolving credit
      arrangements known in the industry as "floor plan" financing.




*Used
      Vehicle Sales.* Hometown
      sells used vehicles at each of its franchised dealerships. Used vehicles
      typically generate higher gross margins than new vehicles because of their
      limited comparability and the somewhat subjective nature of their valuation.





The
      following table shows actual vehicle sales by Hometown from 2001 through 2005.





**Number
                of Used and New Vehicles Sold****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001**Used
                Vehicles - Retail
            
            
            2,848
            
            
            3,329
            
            
            3,683
            
            
            4,128
            
            
            4,874Used
                Vehicles - Wholesale
            
            
            3,077
            
            
            3,576
            
            
            3,144
            
            
            2,857
            
            
            3,105New
                Vehicles
            
            
            5,478
            
            
            6,215
            
            
            6,910
            
            
            6,432
            
            
            6,230Total
                Sales
            
            
            11,403
            
            
            13,120
            
            
            13,737
            
            
            13,417
            
            
            14,209




Sales
      of
      used vehicles are dependent on the ability of the dealerships to obtain a supply
      of high quality used vehicles and effectively manage that inventory. New vehicle
      operations provide a supply of such vehicles through trade-ins and off-lease
      vehicles. Hometown supplements its used vehicle inventory with used vehicles
      purchased at auctions where Manufacturers re-market lease return, rental buy
      back and Manufacturer demonstration cars. To maintain a broad selection of
      high
      quality used vehicles and to meet local preferences, Hometown acquires used
      vehicles from trade-ins and a variety of sources throughout the Northeast,
      including direct purchases and Manufacturers' and independent auctions.





Hometown
      follows an inventory management strategy pursuant to which used vehicles are
      offered at progressively lower gross profit margins the longer they stay in
      inventory and if not sold at retail by the end of approximately 12 weeks are
      sold to another dealer or sold at auction. Unsold, excess or unsuitable vehicles
      received as trade-ins are sold at auctions or sold directly to other dealers
      and
      wholesalers. Trade-ins may be transferred among Hometown dealerships to provide
      balanced inventories of used vehicles at each location.





Hometown
      has taken steps to build customer confidence in its used vehicle inventory,
      including participation in the Manufacturers' certification processes to make
      used vehicles eligible for new vehicle benefits such as new vehicle finance
      rates and extended Manufacturer warranties.





Hometown
      believes that franchised dealership strengths in offering used vehicles include:
      (i) access on new vehicle purchase to trade-ins which are typically lower
      mileage and higher quality relative to trade-ins on used car purchases,
      (ii) access to late-model, low mileage off-lease vehicles, rental returns
      and Manufacturer demos, and (iii) the availability of Manufacturer
      certification and extended Manufacturer warranties for higher quality used
      vehicles. Hometown believes that a well-managed used vehicle operation at each
      location affords it an opportunity to: (i) generate additional customer
      traffic from a wide variety of prospective buyers, (ii) increase new and
      used vehicle sales by aggressively pursuing customer trade-ins,
      (iii) generate incremental revenues from customers financially unable or
      unwilling to purchase a new vehicle, and (iv) increase ancillary product
      sales, particularly F&I, to improve overall profitability. Hometown also
      maintains a “virtual” used car lot through its website “htauto.com”. Customers
      can see digital images of most of Hometown’s pre-owned inventory, updated
      weekly, at all their locations. In addition, sales people and managers can
      search other Hometown locations to fulfill customer needs for used cars or
      trucks not at the specific location that a customer may be in. This potentially
      eliminates many customers from leaving one Hometown location without seeing
      what
      they need.


6




*Parts
      and Service.* Hometown
      regards service and repair activities as an integral part of its overall
      approach to customer service, providing an opportunity to foster ongoing
      relationships with its customers and deepen customer loyalty. Hometown provides
      parts and service at each of its franchised dealerships for the vehicle brands
      sold by these dealerships. Maintenance and repair services are provided at
      8
      dealership locations and one factory authorized neighborhood service center.





Hometown
      implemented an "owner loyalty program" to encourage customers to return to
      the
      dealership for all maintenance and light repair work. The program provides
      customers with information as to recommended intervals of service and details
      all charges for a wide range of maintenance activities and expected replacements
      at such intervals. Customers who maintain their vehicles in accordance with
      the
      owner loyalty program recommendations receive various items of maintenance,
      such
      as oil changes, loaner vehicles, certain scheduled maintenance, wiper blades,
      spark plugs and towing without charge and also receive specified rebates against
      new or used vehicle purchases for money spent in Hometown's service departments.
      The owner loyalty program is designed to combat the quantity of repair and
      maintenance work to be performed at service stations and other independent
      repair shops, chains of specialized repair, maintenance and part replacement
      shops, such as muffler shops, brake shops, and tire shops. Manufacturers'
      policies that require warranty work to be performed at franchised dealerships
      support Hometown's strategy of retaining maintenance and light repair work.





The
      parts
      and service business is less cyclical than new vehicle sales and provides an
      important recurring revenue stream to Hometown's dealerships. Hometown uses
      systems that track its customers' maintenance records and notify owners of
      vehicles purchased at the dealerships when their vehicles are due for periodic
      services. Hometown believes that this practice encourages preventive maintenance
      rather than post-breakdown repairs.





Each
      dealership sells factory-approved parts for vehicle brands and models sold
      by
      that dealership. These parts are either used in repairs made by the dealership
      or sold at retail to its customers or at wholesale to independent repair shops.
      Each dealership employs its own parts manager and independently controls its
      parts inventory and sales. Hometown dealerships which sell the same new vehicle
      brands will have access to each other's computerized inventories. Further,
      certain Manufacturers offer discounts on volume purchases of certain parts
      and
      components.





*Finance,
      Insurance and Other Revenue.* Hometown
      dealerships arrange financing for their customers' vehicle purchases, sell
      vehicle service contracts and arrange selected types of credit insurance in
      connection with the financing of vehicle sales. The dealerships place heavy
      emphasis on F&I and offer advanced F&I training to their F&I
      managers. During 2005, Hometown arranged financing for approximately 75% of
      new
      and used vehicles sold at retail to its customers. Typically, the dealerships
      forward proposed financing contracts to finance companies owned and operated
      by
      the Manufacturers or to selected commercial banks or other financing parties.
      The dealerships receive a finance fee from the lender for arranging the
      financing and may be assessed a charge-back against a portion of the finance
      fee
      if the contract is terminated prior to its scheduled maturity for any reason,
      including early repayment or default. The time period whereby Hometown is
      subject to charge-backs is generally from 90 days to 180 days. For certain
      other
      contracts Hometown is subject to charge-backs for the life of the loan. Hometown
      pays for this in the form of a reduction of the finance fee.





At
      the
      time of a new vehicle sale, Hometown offers extended service contracts to
      supplement the Manufacturer's warranty. Additionally, Hometown sells primary
      service contracts for used vehicles, as well as service contracts of third
      party
      vendors.





Hometown
      also offers three types of insurance to customers: (i) credit life insurance
      pays off the remaining balance of the vehicle loan upon the death of the
      insured, (ii) disability insurance makes the monthly loan payments on behalf
      of
      the insured during a period of disability and (iii) gap insurance ensures that
      the loan is paid in full if the vehicle becomes totally inoperable due to an
      accident. Hometown’s dealerships typically receive one-half of the premiums as a
      commission for selling these products. Insurance revenues for the year ended
      December 31, 2005 were less than 1% of total Finance, Insurance and Other
      Revenues.


7




***Company
      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 December 31, 2005 the mortgage debt balance is $4.0
      million, which equals the capital lease obligation. On February 28, 2006, Rellum
      Realty Company refinanced their mortgage. As part of that refinancing, Hometown
      was released from its guaranty of the mortgage debt. See Notes 8, 9 and 10
      to
      the consolidated financial statements.





***Company
      Warranties***





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





Hometown
      records a reserve referred to as “policy” for used vehicle warranties and the
      labor portion of service warranties based on available historical information.
      Also included in this reserve are (i) the costs associated with free products
      or
      services that may be offered to a retail customer for purposes of maintaining
      goodwill with that particular service customer or new or used vehicle customer,
      or (ii) the free products or service may be part of a service maintenance
      program whereby customers may receive certain services for free if they maintain
      a certain level of service at the dealership. At December 31, 2005 and 2004,
      Hometown has a reserve of $202,000 and $208,000, respectively. The reserve
      is
      based on the last three months of used vehicle units sold and the average cost
      of repairs, including free parts and service, over the last twelve months.
      While
      Hometown believes its estimated liability for product warranties and free parts
      and service is adequate and that the judgment applied is appropriate, the
      estimated liability for product warranties and free parts and service could
      differ materially from future actual costs.





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


8




**Seasonality**





See
      “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.”





**Franchise
      Agreements**





Each
      Hometown dealership operates pursuant to a franchise agreement between the
      applicable Manufacturer and the dealership. The typical automotive franchise
      agreement specifies the locations at which the dealer has the right and the
      obligation to sell motor vehicles and related parts and products and to perform
      certain approved services in order to serve a specified market area. The
      designation of such areas and the allocation of new vehicles among dealerships
      are subject to the discretion of the manufacturer which generally does not
      guarantee exclusivity within a specified territory. However, most states have
      laws protecting dealership territories. In addition, a franchise agreement
      may
      impose requirements on the dealer concerning such matters as showrooms,
      facilities and equipment for servicing vehicles, maintenance of inventories
      of
      vehicles and parts, maintenance of minimum net working capital and training
      of
      personnel. Compliance with each of these requirements is closely monitored
      by
      the Manufacturer. In addition, Manufacturers require each dealership to submit
      a
      financial statement of operations on a monthly and annual basis. The franchise
      agreement also grants the dealer the non-exclusive right to use and display
      the
      Manufacturer's trademarks, service marks and design in the form and manner
      approved by the Manufacturer.





Each
      franchise agreement sets forth the name of the person approved by the
      Manufacturer to exercise full managerial authority over the dealership's
      operations and the names and ownership percentages of the approved owners of
      the
      dealership and contains provisions requiring the Manufacturer's prior approval
      of changes in management or transfers of ownership of the dealership. A number
      of Manufacturers prohibit the acquisition of a substantial ownership interest
      in
      the franchised dealer or transactions that may affect management control of
      the
      franchised dealer, in each case without the approval of the Manufacturer.





Certain
      franchise agreements are perpetual, while others expire within one to five
      years. Hometown expects to renew any expiring agreements in the ordinary course
      of business. The typical franchise agreement provides for early termination
      or
      non-renewal by the Manufacturer under certain circumstances such as change
      of
      management or ownership without Manufacturer approval, insolvency or bankruptcy
      of the dealership, death or incapacity of the dealer manager, conviction of
      a
      dealer manager or owner of certain crimes, misrepresentation of certain
      information by the dealership or dealer manager or owner to the Manufacturer,
      failure to adequately operate the dealership, failure to maintain any license,
      permit or authorization required for the conduct of business or material breach
      of other provisions of the franchise agreement. The dealership is typically
      entitled to terminate the franchise agreement for any cause.





Various
      federal and state laws established to protect dealerships from the generally
      unequal bargaining power between the parties also govern the automobile
      franchise relationship. The state statutes generally provide that it is a
      violation for a manufacturer to terminate, or to fail to renew, a franchise
      without good cause. Most statutes also provide that the manufacturer is
      prohibited from unreasonably withholding approval for a proposed change in
      ownership of the dealership. Generally, in order to withhold approval, the
      manufacturer must have material reasons relating to the character, financial
      ability or business experience of the proposed transferee. Moreover, certain
      states including Connecticut, New Jersey, Massachusetts and Vermont have laws
      which grant to pre-existing dealers a right to contest, in court or before
      an
      administrative agency, if a manufacturer establishes a new dealership, or
      authorizes the relocation of an existing dealership, to a location within a
      defined market area of a pre-existing dealership holding a franchise to sell
      the
      same brand. Accordingly, the relationship between the Manufacturer and the
      dealer, particularly as it relates to a manufacturer's rights to terminate,
      or
      to fail to renew, the franchise, is the subject of a substantial body of case
      law based upon specific facts in each instance. The above discussion of state
      court and administrative holdings and various state laws is based on
      management's beliefs and may not be an accurate description of the state court
      and administrative holdings and various state laws.


9




Toyota
      Motor Sales, U.S.A., Inc. has extended Hometown’s current Toyota Dealer
      Agreement on a periodic basis since March of 2003. The most recent extension
      was
      for a period of three months through May 18, 2006. Previously on March 13,
      2003,
      Hometown was notified by Toyota Motor Sales, U.S.A., that Hometown must correct
      certain operational deficiencies or make substantial progress toward rectifying
      such deficiencies. Toyota had previously expressed concerns that the financial
      resources of the Toyota dealerships were being used to finance the cash flow
      deficits of other Hometown dealerships and that because of this the financial
      health of the Toyota dealerships were detrimentally affected by a net working
      capital deficiency. Toyota requested and Hometown provided a written action
      plan
      and consolidated financial forecast. Toyota also expressed concerns about the
      impact of Ford Motor Credit’s financing terms upon the Toyota dealerships and
      the existing litigation, which has now been settled, including the Vergopias as
      discussed in Item
      3. -
      Legal Proceedings and in Note 15 to the consolidated financial statements.
      Hometown developed and implemented plans to correct the operational deficiencies
      that would bring Hometown into compliance. Hometown has obtained written
      confirmations from Ford Motor Credit in response to Toyota’s requests for
      information relating to financing arrangements. In addition, Hometown has
      improved net working capital through the sale of a Chrysler/Jeep sales and
      service franchise in the second quarter of 2003 and advances on warranty income
      from Hometown’s Extended Service Plan vendor. Hometown has been in regular
      contact with Toyota to review the efforts of Hometown to resolve the
      deficiencies alleged by Toyota. The two Toyota dealerships for the fiscal year
      ended December 31, 2005 had combined revenues of $104.0 million and pre-tax
      income before allocation of corporate costs of $2.4 million. Hometown believes
      that it has corrected the alleged net working capital deficiency for the Toyota
      dealerships and that it has undertaken reasonable steps to alleviate the
      concerns expressed by Toyota. However, there can be no assurance that Toyota
      will enter into a new dealer agreement with Hometown and Toyota has reserved
      the
      right to terminate the Toyota Dealership Agreements if sufficient progress
      is
      not made to correct the alleged deficiencies. Should Hometown be notified by
      Toyota that they intend to terminate the Toyota Dealership Agreements, Hometown
      believes it would have a reasonable amount of time to cure the
      defaults.





**Exchange
      Agreement**





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





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





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





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


10







The
      automobile franchises operated by the New England subsidiaries
      include:


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


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


·
            Family
                Ford (Waterbury, Conn.),


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


·
            Wellesley
                Mazda (Wellesley, Mass.),


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





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


·
            Baystate
                Realty (Framingham, Mass.), and


·
            Brattleboro
                Realty (Brattleboro, Vt.).





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


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


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


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





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





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





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





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





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





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


11




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





On
      July
      8, 2005 Hometown issued a press release in which it announced (i) its receipt
      of
      notice of the lawsuit which is described above, see Note 15 - “Litigation” to
      the consolidated financial statements, in which the plaintiffs seek equitable
      and monetary relief, including rescission of the Exchange Agreement, and (ii)
      an
      indefinite delay in the mailing of the Information Statement to Hometown’s
      stockholders. The press release was also filed with the Securities and Exchange
      Commission, as part of Hometown’s Form 8-K filed on July 8, 2005.





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




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





**Subsequent
      Events**





On
      February 9, 2006 Hometown completed the acquisition of a Nissan franchise.
      Pursuant to the terms of the Asset and Franchise Purchase Agreement, Hometown
      purchased a Nissan sales and service franchise and certain assets including
      customer lists, certain new parts and accessories, special tools and new vehicle
      inventory. Hometown did not assume any liabilities. The purchase price was
      $2.0
      million plus approximately $0.1 million for certain special tools and parts
      and
      accessories. In addition, Hometown received a credit for holdbacks, floor plan
      assistance and advertising credits of less than $0.1 million and assumed the
      new
      vehicle inventory on hand which was financed under Registrant’s existing floor
      plan financing with Ford Motor Credit Corporation.


12




With
      regard to the pending Exchange Agreement (see Note 19 to the consolidated
      financial statements) with the New England Subsidiaries of Hometown and the
      stockholders of Hometown in the Shaker Group, the assets acquired under the
      Asset and Franchise Purchase Agreement were acquired by Hometown Auto
      Framingham, Inc., one of the New England Subsidiaries and all of the
      indebtedness relating to the acquisition is in favor of and secured only by
      the
      assets of the New England Subsidiaries. Accordingly, in the event that the
      exchanges are ultimately consummated, it is anticipated that the assets and
      the
      indebtedness related thereto will become the sole obligation of the New England
      Subsidiaries and Hometown will have no interest in the assets and no obligation
      with respect to the indebtedness incurred in connection with the acquisition
      of
      such assets.





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





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





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





The
      Mortgage Loan is unconditionally guaranteed by the following corporate
      subsidiaries of the Registrant (collectively, the “Corporate Guarantors”):
      Hometown Auto Framingham, Inc., Family Ford, Inc., Shakers, Inc., Hometown
      Brattleboro, Inc., Shaker Auto Group, Inc., and by certain shareholders (the
      “Individual Guarantors”). Hometown has agreed to indemnify the Individual
      Guarantors in the event that the Exchange Agreement is not consummated. The
      Mortgage Loan is secured by a first mortgage on real estate and improvements
      owned by the Borrower at 571 Worcester Road, Framingham, Massachusetts (the
      “Property”), a first security interest in the Borrower’s and each Corporate
      Guarantor’s personal property, a collateral assignment of a lease by and between
      the Borrower and Hometown Auto Framingham, Inc., and a collateral assignment
      of
      all leases of real or personal property used in connection with the Property.
      Furthermore, the Mortgage Loan is “cross-defaulted” and “cross-collateralized”
with: (i) the Capital Loan from Lender to Hometown Auto Framingham, Inc. recited
      below; (ii) a Wholesale Line of Credit made by Lender to Hometown Auto
      Framingham, Inc. dated March 2, 2001; (iii) a Wholesale Line of Credit made
      by
      Lender to Family Ford, Inc. dated February 28, 2001; (iv) a Wholesale Line
      of
      Credit made by Lender to Shakers Inc. dated February 28, 2001; (v) a Wholesale
      Line of Credit made by Lender to Hometown Brattleboro, Inc. dated March 2,
      1001;
      (vi) any and all other loans now or hereafter outstanding made by Lender to
      Borrower and/or the Guarantors; and (vii) any and all extensions, increases,
      amendments, renewals and modifications of the foregoing
      obligations.





The
      Capital Loan bears interest at a variable rate, equal to 2.50% per annum above
      the Prime Rate (which as of the closing on the Capital Loan resulted in an
      effective rate of 10.0%), and is payable in 59 consecutive monthly installments
      of principal in the amount of $12,500 each commencing on the fifteenth day
      of
      the first month following the closing, together with accrued interest, with
      a
      final balloon payment due upon maturity five (5) years from the closing date.
      The Capital Loan was made to Hometown Auto Framingham, Inc. (the “Borrower”) by
      the Lender and is unconditionally guaranteed by the following corporate
      subsidiaries of the Registrant (collectively, the “Corporate Guarantors”): Bay
      State Realty Holdings, Inc., Family Ford, Inc., Shakers, Inc., Hometown
      Brattleboro, Inc., Shaker Auto Group, Inc., and by certain shareholders. The
      Capital Loan is secured by a first security interest in the Borrower’s and each
      Corporate Guarantor’s personal property, and is also “cross-defaulted” and
“cross-collateralized” with: (i) the Mortgage Loan from Lender to Bay State
      Realty Holdings, Inc. recited above; (ii) a Wholesale Line of Credit made by
      Lender to Hometown Auto Framingham, Inc. dated March 2, 2001; (iii) a Wholesale
      Line of Credit made by Lender to Family Ford, Inc. dated February 28, 2001;
      (iv)
      a Wholesale Line of Credit made by Lender to Shakers Inc. dated February 28,
      2001; (v) a Wholesale Line of Credit made by Lender to Hometown Brattleboro,
      Inc. dated March 2, 1001; (vi) any and all other loans now or hereafter
      outstanding made by Lender to Borrower and/or the Guarantors; and (vii) any
      and
      all extensions, increases, amendments, renewals and modifications of the
      foregoing obligations.


13




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





**Competition**





The
      automotive retailing industry is extremely competitive and consumers generally
      have a number of choices in deciding where to purchase or service a new or
      used
      vehicle. Hometown competes for new vehicle sales with other franchised dealers
      in each of its marketing areas. Hometown does not have any cost advantage in
      purchasing new vehicles from the Manufacturers and typically relies on sales
      expertise, reputation and customer goodwill, the quality of its service and
      location of its dealerships to sell new vehicles. In recent years, automobile
      dealers have also faced increased competition in the sale or lease of new
      vehicles from independent leasing companies, on-line purchasing services and
      warehouse clubs. Hometown believes that the principal competitive factors in
      new
      vehicle sales are the marketing campaigns conducted by Manufacturers, the
      ability of dealerships to offer a wide selection of the most popular vehicles,
      the location of dealerships and the quality of customer service. Other
      competitive factors include customer preference for particular brands of
      automobiles, pricing (including Manufacturer rebates and other special offers)
      and warranties. Hometown believes that its dealerships are competitive in all
      of
      these areas.





In
      used
      vehicles, Hometown competes with other franchised dealers, independent used
      car
      dealers, automobile rental agencies and private parties for supply and resale
      of
      used vehicles. Hometown believes that the principal competitive factors in
      used
      vehicle sales are the quality and condition of its used cars, price and the
      quality of customer service.





Hometown
      competes against other franchised dealers to perform warranty repairs and
      against other automobile dealers, franchised and independent service center
      chains and independent garages for non-warranty repair and routine maintenance
      business. Hometown competes with other automobile dealers, service stores and
      automotive parts retailers in its parts operations. Hometown believes that
      the
      principal competitive factors in parts and service sales are price, the use
      of
      factory approved replacement parts, a dealership's expertise with a
      Manufacturer's brands and models, the quality of customer service and
      convenience for the customer.





In
      addition to competition for the sale of vehicles, Hometown competes with
      publicly and privately owned dealership groups for the acquisition of other
      dealerships. It currently faces only limited competition in this region from
      other purchasers of dealerships. Publicly owned dealerships with significantly
      greater capital resources have acquired a limited number of dealerships in
      Hometown's current and targeted market areas.


14




**Governmental
      Regulations**





A
      number
      of regulations affect Hometown's business of marketing, selling, financing
      and
      servicing automobiles. Hometown is also subject to laws and regulations relating
      to business corporations generally.





Under
      New
      Jersey, New York, Connecticut, Massachusetts and Vermont law, Hometown must
      obtain a license in order to establish, operate or relocate a dealership or
      provide certain automotive repair services. These laws also regulate Hometown's
      conduct of business, including its advertising and sales practices.





Hometown's
      financing activities are subject to federal and state laws and regulations
      regarding truth-in-lending, deceptive and unfair trade practices, consumer
      leasing and equal credit opportunity regulations, as well as state and local
      motor vehicle finance laws, installment finance laws, insurance laws, usury
      laws
      and other installment sales laws. We are also subject to certain so-called
      Lemon
      Laws, which may require repair or replacement of vehicles in certain situations.
      Laws have recently been enacted to strengthen the privacy of consumers not
      only
      with respect to the sharing of information, but more recently, with regard
      to
      restrictions on access to that information by employees of the dealership.
      Hometown is complying with these laws, which include the development of secure
      documentation areas and the restriction on access to sensitive computer
      information. Some states regulate finance fees that may be paid as a result
      of
      vehicle sales. Penalties for violation of any of these laws or regulations
      may
      include revocation of certain licenses, assessment of criminal and civil fines
      and penalties and, in certain instances, may create a private cause of action
      for individuals. Automobile dealerships, and parts and service operations in
      particular, involve the use, handling and recycling and disposal of hazardous
      substances or wastes, including motor oil, oil filters, transmission fluid,
      antifreeze, freon, batteries, lubricants, degreasing agents and gasoline and
      diesel fuels. As a result, we are subject to federal, state and local
      environmental laws concerning health, environmental quality, and remediation
      of
      contamination to facilities under our control or to which we send hazardous
      wastes. Hometown believes that its dealerships substantially comply with all
      laws and regulations affecting their businesses and do not have any material
      liabilities under such laws and regulations, and that compliance with all such
      laws and regulations does not and will not, individually or in the aggregate,
      have a material adverse effect on Hometown's capital expenditures, earnings,
      or
      competitive position.





**Environmental
      Matters**





Hometown
      is subject to a wide range of federal, state and local environmental laws and
      regulations, including those governing discharges to the air and water, storage
      of petroleum substances and chemicals, handling and disposal of wastes, and
      remediation of contamination arising from spills and releases. As with
      automobile dealerships generally, and service and parts and collision repair
      center operations in particular, Hometown's business involves the generation,
      use, handling and disposal of hazardous or toxic substances or wastes.
      Operations involving the management of hazardous and non- hazardous wastes
      are
      subject to requirements of the Federal Resource Conservation and Recovery Act
      and comparable state statutes. Pursuant to these laws, federal and state
      environmental agencies have established approved methods for storage, treatment,
      and disposal of regulated wastes with which Hometown must comply.





Hometown's
      business also involves the use of aboveground and underground storage tanks.
      Under applicable laws and regulations, Hometown is responsible for the proper
      use, maintenance and abandonment of regulated storage tanks owned or operated
      by
      it and for remediation of subsurface soils and groundwater impacted by releases
      from such existing or abandoned aboveground or underground storage tanks. In
      addition to these regulated tanks, Hometown owns and operates other underground
      and aboveground devices or containers (e.g. automotive lifts and service pits)
      that may not be classified as regulated tanks, but which are capable of
      releasing stored materials into the environment, thereby potentially obligating
      Hometown to remediate any contamination of soils or groundwater resulting from
      such releases.


15




Hometown
      is also subject to laws and regulations governing remediation of contamination
      at facilities it operates or to which it sends hazardous or toxic substances
      or
      wastes for treatment, recycling or disposal. The Comprehensive Environmental
      Response, Compensation and Liability Act ("CERCLA"), also known as the
      "Superfund" law, imposes liability, without regard to fault or the legality
      of
      the original conduct, on certain classes of persons that are considered to
      have
      contributed to the release of a "hazardous substance" into the environment.
      These persons include the owner or operator of the disposal site or sites where
      the release occurred and companies that disposed or arranged for the disposal
      of
      the hazardous substances released at such sites. Under CERCLA, these
      "responsible parties" may be subject to joint and several liability for the
      costs of cleaning up the hazardous substances that have been released into
      the
      environment, for damages to natural resources and for the costs of certain
      health studies, and it is not uncommon for neighboring landowners and other
      third parties to file claims for personal injury and property damage allegedly
      caused by the release of hazardous substances.





Further,
      the Federal Water Pollution Control Act, also known as the Clean Water Act,
      and
      comparable state statutes prohibit discharges of pollutants into regulated
      waters without authorized National Pollution Discharge Elimination System
      (NPDES) and similar state permits, require containment of potential discharges
      of oil or hazardous substances, and require preparation of spill contingency
      plans. Hometown expects to implement programs that address wastewater discharge
      requirements as well as containment of potential discharges and spill
      contingency planning.





Environmental
      laws and regulations have become very complex, making it very difficult for
      businesses that routinely handle hazardous and non-hazardous wastes to achieve
      and maintain full compliance with all applicable environmental laws. Like
      virtually any network of automobile dealerships and vehicle service facilities,
      Hometown, from time to time, can be expected to experience incidents and
      encounter conditions that will not be in compliance with environmental laws
      and
      regulations. However, none of Hometown's dealerships have been subject to any
      material environmental liabilities in the past and Hometown does not anticipate
      that any material environmental liabilities will be incurred in the future.
      Hometown believes that the trend towards broader and stricter environmental
      legislation and regulations is likely to continue. Hence, there can be no
      assurance that compliance with environmental laws or regulations or the future
      discovery of unknown environmental conditions will not require additional
      expenditures by Hometown or that such expenditures would not be material.





**Employees**





As
      of
      December 31, 2005, Hometown employed 297  people,
      of whom approximately 50 were employed in managerial positions, 66 were employed
      in non-managerial sales positions, 131 were employed in non-managerial parts
      and
      service positions and 50 were employed in administrative support positions.





Hometown
      believes that its relationships with its employees are favorable. None of the
      employees is represented by a labor union. Because of its dependence on the
      Manufacturers, Hometown may, however, be affected by labor strikes, work
      slowdowns and walkouts at the manufacturing facilities of their Manufacturers
      or
      of suppliers to, or shippers for, their Manufacturers.





16


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





**CERTAIN
      FACTORS THAT MAY AFFECT GROWTH AND PROFITS**





*The
      following factors may affect the growth or profits of Hometown and should be
      considered by any prospective purchaser of Hometown’s
      securities:*





**The
      Split-Up of Hometown Could Have an Adverse Impact on the Future Business of
      Hometown**





On
      June
      1, 2005 the Board of Directors of Hometown approved the organization of Shaker
      Auto Group, Inc. as a wholly-owned subsidiary of the Company. Following the
      organization of Shaker Auto Group, Inc., the Board of Directors authorized
      Hometown to contribute to Shaker Auto Group, Inc. all of the issued and
      outstanding shares of stock of each of its New England subsidiaries, and to
      receive in exchange therefore all of the issued and outstanding shares of stock
      of Shaker Auto Group, Inc. The New England subsidiaries include ERR Enterprises,
      Inc., Family Ford, Inc., Shaker’s, Inc., Shaker’s Lincoln/Mercury Auto Care,
      Inc., Hometown Brattleboro, Inc., Hometown Auto Framingham, Inc., Bay State
      Realty Holdings, Inc. and Brattleboro Realty Holdings, Inc. This transaction
      is
      called the “First Exchange”. As part of the First Exchange, Hometown will also
      make a cash payment to Shaker Auto Group, Inc. in order to provide Shaker Auto
      Group, Inc. with necessary working capital. The amount of cash that Hometown
      will contribute to Shaker Auto Group, Inc. will equal $5 million (adjusted
      for
      fluctuations in the value of the used cars, parts and accessories, accounts
      receivable, accounts payable, and accrued expenses of the New England
      subsidiaries). Hometown anticipates that it will borrow up to $6.5 million
      in
      order to make this cash contribution to Shaker Auto Group, Inc., to finance
      the
      costs associated with the exchange, and to obtain working capital.





In
      addition, on June 1, 2005 the Board of Directors of Hometown authorized that,
      immediately following the consummation of the First Exchange, all of the
      outstanding shares of stock of Shaker Auto Group, Inc. will be exchanged for
      all
      of the outstanding shares of Class A Common Stock and Class B Common Stock
      of
      Hometown that are owned by the members of the Shaker Group. The Shaker Group
      includes Corey Shaker (individually and as custodian for Lindsay Shaker, Kristen
      Shaker and Edward Shaker), Edward Shaker Family Trust, Joseph Shaker, Shaker
      Irrevocable Trust, Richard Shaker Family Trust, Steven Shaker, Janet Shaker,
      Paul Shaker, Edward D. Shaker, Edward Shaker, Lillian Shaker, Richard Shaker
      and
      Rose Shaker. This transaction is referred to as the “Second
      Exchange”.





If
      the
      First Exchange and the Second Exchange are consummated and the split-up of
      Hometown occurs, then:





·
            The
                stockholders of Hometown will no longer have any interest in the
                New
                England subsidiaries, and so will not be able to share in any future
                growth in the business of the New England
                subsidiaries.


·
            The
                business of Hometown will be less geographically dispersed, thereby
                making
                it more susceptible to regional fluctuations in business
                activity.


·
            The
                business of Hometown will no longer have the benefit of the revenue
                generated by the New England subsidiaries. Hometown would have had
                revenues of approximately $131.7 million and $129.4 million in 2005
                and
                2004, respectively, without the New England subsidiaries. Hometown
                also
                would have had gross profit of approximately $18.8 million and $18.7
                million in 2005 and 2004, respectively, without the New England
                subsidiaries.


·
            The
                ratio of Hometown’s outstanding debt to its total stockholders’ equity
                will increase significantly due to the borrowing, which Hometown
                will
                undertake to consummate the
                exchanges.


17


·
            Hometown
                will be selling vehicles produced by a smaller number of manufacturers,
                and therefore will be more dependent on the public’s willingness to
                purchase the vehicles of a smaller number of
                manufacturers.





**A
      Decrease In Consumer Demand For Our New Vehicle Lines Or The Failure Of Its
      Manufacturer Could Adversely Affect The Results Of Our
      Operations.**





Our
      business is significantly dependent upon the sale of new vehicles from Toyota
      Motors, Ford Motors and Chevrolet. For the year ended December 31, 2005, Toyota
      Motor, Ford Motor and Chevrolet accounted for 53.0%, 21.7% and 12.5% of our
      new
      vehicle sales, respectively. New vehicle sales generate the majority of our
      gross revenue and lead to sales of higher-margin products and services such
      as
      used vehicle sales, finance and insurance products and repair and maintenance
      services. In addition, the success of each of our franchises is also dependent
      to a great extent on the success of the respective manufacturer, including
      its
      financial condition, marketing, vehicle demand, production capabilities and
      management. If one or more of these manufacturers were to suffer from labor
      strikes, negative publicity, including safety recalls of a particular vehicle
      model, or a decrease in consumer demand for its products, our results of
      operations could be materially and adversely affected.





**The
      Failure To Meet Manufacturers’ Customer Satisfaction Requirements Could Limit
      Our Ability To Acquire Additional Dealerships And Participate In Manufacturers’
Incentive Programs.**





Many
      manufacturers attempt to measure customers' satisfaction with automobile
      dealerships through a CSI, or customer satisfaction index, rating system. These
      manufacturers may use a dealership's CSI scores as a factor in evaluating
      applications for additional dealership acquisitions and participation by a
      dealership in incentive programs. Additionally, from time to time, the
      components of the various manufacturer CSI scores have been modified and there
      is no assurance that such components will not be further modified or replaced
      by
      different systems in the future, which will make it more difficult for our
      key
      dealerships to meet such standards. If our dealerships fail to meet or exceed
      their manufacturers' CSI standards, those manufacturers may prohibit us from
      acquiring additional dealerships and/or participating in incentive programs,
      which could have a material adverse effect on our business.





**Manufacturers'
      Control over Dealerships**





The
      dealerships operated by Hometown sell cars and light trucks pursuant to
      franchise or dealership agreements with Ford Motor, GM, Toyota Motor, Chrysler
      and Mazda. Through the terms and conditions of these agreements, such
      Manufacturers exert considerable influence over the operations of Hometown’s
      dealerships. Each of these agreements includes provisions for the termination
      or
      non-renewal of the manufacturer-dealer relationship for a variety of causes
      including any unapproved change of ownership or management and other material
      breaches of the franchise agreement.





Toyota
      Motor Sales, U.S.A., Inc. has extended Hometown’s current Toyota Dealer
      Agreement on a periodic basis since March of 2003. The most recent extension
      was
      for a period of three months through May 18, 2006. Previously on March 13,
      2003,
      Hometown was notified by Toyota Motor Sales, U.S.A., that Hometown must correct
      certain operational deficiencies or make substantial progress toward rectifying
      such deficiencies. Toyota had previously expressed concerns that the financial
      resources of the Toyota dealerships were being used to finance the cash flow
      deficits of other Hometown dealerships and that because of this the financial
      health of the Toyota dealerships were detrimentally affected by a net working
      capital deficiency. Toyota requested and Hometown provided a written action
      plan
      and consolidated financial forecast. Toyota also expressed concerns about the
      impact of Ford Motor Credit’s financing terms upon the Toyota dealerships and
      the existing litigation, which has now been settled, including the Vergopias as
      discussed in Item
      3. -
      Legal Proceedings and in Note 15 to the consolidated financial statements.
      Hometown developed and implemented plans to correct the operational deficiencies
      that would bring Hometown into compliance. Hometown has obtained written
      confirmations from Ford Motor Credit in response to Toyota’s requests for
      information relating to financing arrangements. In addition, Hometown has
      improved net working capital through the sale of a Chrysler/Jeep sales and
      service franchise in the second quarter of 2003 and advances on warranty income
      from Hometown’s Extended Service Plan vendor. Hometown has been in regular
      contact with Toyota to review the efforts of Hometown to resolve the
      deficiencies alleged by Toyota. The two Toyota dealerships for the fiscal year
      ended December 31, 2005 had combined revenues of $104.0 million and pre-tax
      income before allocation of corporate costs of $2.4 million. Hometown believes
      that it has corrected the alleged net working capital deficiency for the Toyota
      dealerships and that it has undertaken reasonable steps to alleviate the
      concerns expressed by Toyota. However, there can be no assurance that Toyota
      will enter into a new dealer agreement with Hometown and Toyota has reserved
      the
      right to terminate the Toyota Dealership Agreements if sufficient progress
      is
      not made to correct the alleged deficiencies. Should Hometown be notified by
      Toyota that they intend to terminate the Toyota Dealership Agreements, Hometown
      believes it would have a reasonable amount of time to cure the
      defaults.


18




To
      its
      knowledge, Hometown has, to date, complied with its other dealership agreements.
      There can be no assurance, however, that Hometown will not from time to time
      fail to comply with particular provisions of some or all of these agreements.
      Although such agreements generally afford Hometown a reasonable opportunity
      to
      cure violations, if a Manufacturer were to terminate or decline to renew one
      or
      more of Hometown’s significant agreements, such action could have a material
      adverse effect on Hometown and its business.





**If
      Automobile Manufacturers Discontinue Incentive Programs, Our Sales Volume or
      Profit Margin Could Be Materially and Adversely Affected.**




We
      depend
      on manufacturers for certain sales incentives, warranties and other programs
      that are intended to promote and support new vehicle sales. Manufacturers often
      make many changes to their incentive programs during each year. Some key
      incentive programs include:


·
            customer
                rebates on new vehicles;


·
            dealer
                incentives on new vehicles;


·
            special
                financing or leasing terms;


·
            warranties
                on new and used vehicles; and


·
            sponsorship
                of used vehicle sales by authorized new vehicle
                dealers.





A
      reduction or discontinuation of our key manufacturers' incentive programs may
      materially and adversely affect our revenues or profitability.





**We
      May Not Be Able To Retain Key Existing Employees Or Attract And Retain Qualified
      Employees.**





Our
      success depends to a large extent upon the abilities and continued efforts
      of
      its senior executive officers and key managers including Corey Shaker, William
      C. Muller Jr., Joseph Shaker, Steven Shaker and Charles F. Schwartz and on
      our
      ability to attract and retain qualified employees to operate our dealerships.
      If
      any of these persons becomes unavailable to continue in such capacity, or if
      Hometown were unable to attract and retain other qualified employees, its
      business or prospects could be adversely affected.




**Future
      Losses May Threaten The Viability Of Our Business.**





Hometown
      had net income of $1.3 million for the year ended December 31, 2005 compared
      to
      net income of $3.9 million and $2.5 million for the years ended December 31,
      2004 (restated) and 2003 (restated), respectively. The 2005 period includes
      a
      pre-tax gain of $0.6 million (see Note 15 to the consolidated financial
      statements) as well as costs associated with the Exchange Agreement of $0.5
      million and related litigation costs of $0.2 million (see Note 19 and 15,
      respectively). The 2004 period includes a $2.5 million tax benefit associated
      with a reduction of a tax valuation allowance. See Note 12 to the consolidated
      financial statements. The 2003 period included $0.9 million associated with
      the
      gain on sale of a Chrysler/Jeep Sales and Service Franchise and $0.6 million
      associated with a tax
      benefit recorded primarily due to the reduction of a tax valuation
      allowance .
      Although Hometown is currently profitable, if Hometown sustains significant
      losses in the future, our business could be materially and adversely affected
      and the value of our common stock might decline.





19


**Our
      Limited Cash And Working Capital Could Have An Adverse Affect On Our
      Business.**





At
      December 31, 2005, our total cash and cash equivalents was approximately $6.5
      million and our working capital was approximately $3.6 million. If we were
      to
      incur net losses in 2006 or subsequent years, then we may have insufficient
      working capital to maintain our current level of operations or provide for
      unexpected contingencies. In such event, we will need to seek additional capital
      from public or private equity or debt funding sources and we may not be able
      to
      raise needed cash on terms acceptable to us or at all. Financings may be on
      terms that are dilutive or potentially dilutive to our stockholders. If sources
      of financing are required, but are insufficient or unavailable, we will be
      required to modify our growth and operating plans to the extent of available
      funding, which could have an adverse affect on our business.





**The
      Cyclical Nature of Automobile Sales May Adversely Affect Our
      Profitability.**





Sales
      of
      motor vehicles, particularly new vehicles, historically have been subject to
      substantial cyclical variation characterized by oversupply and weak demand.
      We
      believe that the industry is affected by many factors, including general
      economic conditions, consumer confidence, the level of personal discretionary
      spending, interest rates and credit availability. There can be no assurance
      that
      the industry will not experience sustained periods of decline in vehicle sales,
      particularly new vehicle sales, in the future. Any such decline could have
      a
      material adverse affect on our business.





**Governmental
      Restrictions On Imported Products Could Impair Our Ability To Sell Foreign
      Vehicles Profitably.**





A
      portion
      of our new vehicle business involves the sale of vehicles, parts or vehicles
      composed of parts that are manufactured outside the United States. As a result,
      our operations will be subject to customary risks of importing merchandise,
      including fluctuations in the value of currencies, import duties, exchange
      controls, trade restrictions, work stoppages and general political and economic
      conditions in foreign countries. The United States or the countries from which
      our products are imported may, from time to time, impose new quotas, duties,
      tariffs or other restrictions, or adjust presently prevailing quotas, duties
      or
      tariffs, which could affect our operations and our ability to purchase imported
      vehicles and/or parts.





**The
      Concentration of Voting Power Could Prevent Our Class A Common Stockholders
      From
      Having Any Voice In Our Corporate Affairs.**





The
      holders of our Class B common stock are entitled to ten votes for each share
      held, while holders of our Class A common stock, are entitled to one vote per
      share held. Consequently, as of March 24, 2006, the holders of the Class B
      common stock, who also own approximately 58% of our outstanding common stock
      of
      all classes, will control approximately 91% of the aggregate number of votes
      eligible to be cast by stockholders for the election of directors and certain
      other stockholder actions, and will be in a position to control our policies
      and
      operations. Also as of March 24, 2006, our executive officers and directors
      control approximately 55% of the aggregate number of votes eligible to be cast
      by stockholders for the election of directors and certain other stockholder
      actions, and will be in a position to control our policies and operations.
      Accordingly, absent a significant increase in the number of shares of Class
      A
      common stock outstanding or conversion of Class B common stock into Class A
      common stock, the holders of shares of Class B common stock will be entitled,
      for the foreseeable future, to elect all members of the Board of Directors
      and
      control all matters subject to stockholder approval.





20


**Regulations
      Affecting Low Price Securities Could Impair The Liquidity Of Our Class A Common
      Stock** .





The
      Securities and Exchange Commission has adopted regulations which generally
      define "penny stock" to be an equity security that has a market price, as
      defined, of less than $5.00 per share or an exercise price of less than $5.00
      per share, subject to certain exceptions, including an exception of an equity
      security that is quoted on the Nasdaq Stock Market. Equity securities trading
      on
      the NASD "OTC Bulletin Board" are subject to rules that impose additional sales
      practice requirements on broker-dealers who sell our securities. For
      transactions covered by these rules, the broker-dealer must make a special
      suitability determination for the purchaser of such securities and have received
      the purchaser's written consent to the transactions prior to the purchase.
      Additionally, unless exempt, the rules require the delivery, prior to the
      transaction, of a disclosure schedule prepared by the Securities and Exchange
      Commission relating to the penny stock market. The broker-dealer also must
      disclose the commissions payable to both the broker-dealer and the registered
      underwriter, current quotations for the securities and, if the broker-dealer
      is
      the sole market-maker, the broker-dealer must disclose this fact and the
      broker-dealer's presumed control over the market. Finally among other
      requirements, monthly statements must be sent disclosing recent price
      information for the penny stock held in the account and information on the
      limited market in penny stocks. Since February 2001 our Class A common stock
      has
      been trading on the NASD OTC Bulletin Board, as a penny stock, and therefore
      is
      subject to these additional rules. As such, these penny stock rules may restrict
      the ability of stockholders to sell our Class A common stock. Consequently,
      the
      liquidity of our Class A common stock could be impaired, not only in the number
      of securities which could be bought and sold, but also through delays in the
      timing of transactions, reduction in security analysts and new media coverage
      of
      Hometown, and lower prices for our securities than might otherwise be
      obtained.








**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None








**ITEM
      2. PROPERTIES**





Set
      forth
      in the table below is certain information relating to the properties that
      Hometown uses in its business. Hometown accounts for operating leases on a
      straight line basis.





**Occupant/Trade
                Name**
            
            **Location**
            
            **Use**
            
            **Lease/Own**Shaker's
                Lincoln Mercury
            
            831
                Straits Turnpike
              Watertown,
                CT
              06795
            
            New
                and used car sales; service; F & I
            
            Lease
                expires in 2013; $274,000 per year with CPI increase in
                2009.Lincoln
                Mercury Autocare
            
            1189
                New Haven Rd.
              Naugatuck,
                CT
              06770
            
            Service
            
            Owned
                facility.Family
                Ford
            
            1200
                Wolcott Street
              Waterbury,
                CT
              06705
            
            New
                and used car sales; service; F & I
            
            Lease
                expires in 2013; $274,000 per year with CPI increase in
                2009.Hometown
                Auto Retailers, Inc.
            
            1309
                South Main St.
              Waterbury,
                CT
              06706
            
            Administrative
                and Corporate offices
            
            Lease
                expires in 2013; $82,000 per year with CPI increase in
                2009.


21




Muller
                  Toyota
              
              Route
                  31 and Van Syckles Rd.Clinton, NJ
                08809
              
              New
                  and used car sales; service; F & I
              
              Lease
                  expires in 2013; $411,000 per year with CPI increase in 2009. The
                  lease is
                  treated as a capital lease. See Note 8, 9 and 10.Muller
                  Chevrolet
              
              Route
                  173 and Voorhees Rd.
                Stewartsville,
                  NJ
                08886
              
              New
                  and used car sales; service; F & I
              
              Lease
                  expires in 2013; $452,000 per year with CPI increase in 2009. The
                  lease is
                  treated as a capital lease. See Note 8, 9 and 10.Wellesley
                  Mazda
              
              965
                  Worcester Road
                Wellesley,
                  MA
                02181
              
              New
                  and Used car sales; service; F&I
              
              Lease
                  expires 12/22/08 at $216,000 per year, one five year renewal option
                  at the
                  same rent; and option to purchase at the end of term or end of
                  extension
                  term at the then fair market value.Bay
                  State Lincoln Mercury
              
              571
                  Worcester Road
                Framingham,
                  MA
                01701
              
              New
                  and used car sales; service; F & I
              
              Owned
                  facility. Mortgage balance of $4,319,000 at 12/31/05. Refinanced
                  February
                  2006. See Note 8, 10 and 20.Brattleboro
                  Chrysler Dodge Sales
              
              Route
                  5, Putney Rd.
                N.
                  Brattleboro, VT
                05304
              
              New
                  and used car sales; service; F & I
              
              Owned
                  facility. Mortgage balance of $979,000 at 12/31/05. Matures May
                  2019.
                  Annual payments of $113,000. Second mortgage balance of $145,000
                  at
                  12/31/05. Matures April 2007. Annual payments of $117,000. See
                  Note
                  8.Autos
                  ofNewburgh,
                  Inc. d/b/a Toyota of Newburgh
              
              2934
                  Rte 9 W
                New
                  Windsor, NY
                12553
              
              New
                  and used car sales; service; F & I
              
              Owned
                  facility. Mortgage balance of $2,655,000 at 12/31/05. Matures 5/1/2014.
                  Annual payments of $462,000. See Note 8.Autos
                  ofNewburgh,
                  Inc. d/b/a Toyota of Newburgh
              
              2915
                  Route 9W
                New
                  Windsor, NY
                12553
              
              Vehicle
                  storage lot
              
              Lease
                  expires 9/30/08 at $12,000 per
                  year.





**Leases**





Hometown
      has leased from various affiliates the premises occupied by certain of its
      dealerships. Each of the governing leases became effective as of the closing
      of
      the initial public offering, has a term expiring in 2013, is on a triple net
      basis and provides for a consumer price index ("CPI") increase to the base
      rent
      on January 1, 2009. Hometown believes that each lease was at their fair
      market value at inception.




*Shaker
      Group.* Hometown
      leases, for an annual base rental of approximately $274,000, the premises
      occupied by its Lincoln Mercury dealership in Watertown, Connecticut, from
      Shaker Enterprises, a Connecticut general partnership whose seven partners
      include Joseph Shaker, Corey Shaker, Steven Shaker, Janet Shaker, Edward D.
      Shaker, Edward Shaker and Richard Shaker. Hometown leases, for an annual base
      rental of approximately $274,000 and $82,000 respectively, the premises occupied
      by the Family Ford and Shaker Auto Outlet dealerships in Waterbury, CT from
      Joseph Shaker Realty, a Connecticut general partnership whose three partners
      are
      Richard Shaker, Edward Shaker and Rose Shaker. Richard Shaker is the father
      of
      Steven Shaker, Edward D. Shaker and Joseph Shaker. Edward Shaker is the father
      of Corey Shaker and Janet Shaker and Rose Shaker is the aunt of Steven Shaker,
      Joseph Shaker, Edward D. Shaker, Corey Shaker and Janet Shaker. Corey Shaker
      is
      the CEO, Director and a principal stockholder of Hometown. Steven Shaker is
      the
      Regional Vice President - North Division and a principal stockholder of
      Hometown. Joseph Shaker is the Regional Vice President - East Division, Director
      and a principal stockholder of Hometown. Edward D. Shaker and Janet Shaker
      are
      principal stockholders of Hometown.


22




*Muller
      Group.*  Hometown
      leases, for an annual base rental of approximately $411,000 and $452,000
      respectively the premises occupied by its Toyota (“Toyota”) dealership in
      Clinton, New Jersey and its Chevrolet (“Chevy”) dealership in Stewartsville, New
      Jersey from Rellum Realty Company, a New Jersey general partnership, one of
      whose two partners is William C. Muller Jr. Mr. Muller is Regional Vice
      President - South Division, director and a principal stockholder of Hometown.
      The Toyota and Chevy leases are treated as capital leases. 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. Hometown recorded the lease as
      a
      capital lease. As of December 31, 2005 the mortgage debt balance is $4.0
      million, which agrees with the capital lease obligation. On February 28, 2006,
      Rellum Realty Company refinanced their mortgage. As part of that refinancing,
      Hometown was released from its guaranty of the mortgage debt.







**ITEM
      3. LEGAL PROCEEDINGS**





During
      the fourth quarter of 2004, Hometown announced that it had resolved in principle
      to settle the litigation matters described in Footnote 9 in the Notes to
      Unaudited Consolidated Financial Statements as contained in Hometown’s Form 10-Q
      as filed with the Securities and Exchange Commission on November 12, 2004.
      On
      March 3, 2005 the execution and delivery of a settlement agreement and
      applicable releases of claims from all parties to the litigation was completed.
      The settlement agreement settled all claims made by Salvatore A. Vergopia and
      Edward A. Vergopia, former directors and executive officers of the Corporation,
      and Janet Vergopia, the wife of Salvatore A. Vergopia (the “Vergopias”). The
      settlement also finally resolved the related insurance coverage litigation
      with
      Universal Underwriters Group and The Chubb Group of Insurance Companies. The
      gross payment to the Vergopias by all parties was $4 million of which $0.6
      million was paid by Hometown in March 2005. The settlement with the Vergopias
      and the insurers included an exchange of mutual releases of claims among the
      parties and a withdrawal of all claims with prejudice and without costs or
      attorneys fees to any party. On May 11, 2005, the parties completed the transfer
      to the Vergopias of certain Westwood Lincoln Mercury Sales, Inc. assets,
      including its Lincoln Mercury franchise and the termination of Hometown’s
      Westwood, New Jersey lease. Hometown received all of the 940,000 shares of
      Class
      B Common Stock owned by the Vergopias in March 2005. The Settlement Agreement
      does not constitute an admission of liability or wrongdoing by any party.





The
      940,000 shares of Hometown stock was recorded at fair market value on March
      3,
      2005, the date of the executed settlement agreement, and is shown as a reduction
      of Stockholders’ Equity of $1.0 million, primarily Additional Paid-in-Capital.
      (See Statements of Stockholders Equity.) The assets and liabilities transferred
      to the Vergopias was recorded as a reduction of those accounts at book value
      on
      May 11, 2005 resulting in a gain of approximately $0.6 million from the
      transaction. Hometown wrote off the goodwill associated with this franchise
      in
      2002 and expensed the aforementioned $0.6 million March payment in prior
      periods.


23





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





On
      July
      8, 2005 Hometown issued a press release in which it announced its receipt of
      notice of the commencement of a lawsuit against Hometown and an indefinite
      delay
      in the mailing to Hometown’s stockholders of the Information Statement prepared
      in connection with the Exchange Agreement announced by Hometown on June 2,
      2005.
      The press release was filed with the Securities and Exchange Commission as
      part
      of Hometown’s Form 8-K filed on July 8, 2005. See Note 19 to the consolidated
      financial statements.





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





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





As
      of
      December 31, 2005, Hometown has incurred approximately $0.2 million in relation
      to the complaint, which amount has been expensed and is included in Selling
      General and Administrative Expenses on Hometown’s Consolidated Statements of
      Operations for the Year Ended December 31, 2005.




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.





24





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





None








**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**





**(a)**  **Market
      Information**





Hometown's
      Class A Common Stock trades over the counter as a Bulletin Board stock under
      the
      symbol "HCAR.OB"





The
      following table sets forth the high and low bid prices as quoted by the NASD
      OTC
      Bulletin Board. Such quotations reflect inter-dealer prices, without retail
      mark-up, markdown or commission and may not necessarily represent actual
      transactions.





**Price
                Range of Common Stock**
            
            **Bid****Prices****High**
            
            **Low****Year
                Ended 2004**First
                Quarter
            
            $
            2.00
            
            $
            1.05Second
                Quarter
            
            $
            1.40
            
            $
            0.95Third
                Quarter
            
            $
            1.25
            
            $
            0.71Fourth
                Quarter
            
            $
            0.87
            
            $
            0.68**Year
                Ended 2005**First
                Quarter
            
            $
            1.30
            
            $
            0.76Second
                Quarter
            
            $
            1.41
            
            $
            1.05Third
                Quarter
            
            $
            1.97
            
            $
            1.17Fourth
                Quarter
            
            $
            1.75
            
            $
            1.15





**(b)**  **Holders**





As
      of
      March 24, 2006, the number of record holders of the Class A Common Stock of
      Hometown was 50. Hometown believes it has more than 700 beneficial
      holders.





**(c)**  **Dividends**





The
      holders of Common Stock are entitled to receive such dividends as may be
      declared by Hometown’s Board of Directors. Hometown has not paid and does not
      expect to declare or pay any dividends in the foreseeable future.





**(d)**  **Equity
      Compensation Plan Information**




There
      are
      no new compensation plans in 2005.




25





**ITEM
      6. SELECTED FINANCIAL DATA**





The
      following selected financial data as of December 31, 2005, 2004, 2003, 2002
      and
      2001 have been derived from the audited consolidated financial statements of
      Hometown.





For
                the Years Ended December 31,(in
                thousands, except share and per share data)2005
            
            2004
            
            2003
            
            2002
            
            2001(Restated)
            
            (Restated)**Statement
                of Operations Data:**Revenues
            
            $
            233,080
            
            $
            265,594
            
            $
            280,001
            
            $
            269,739
            
            $
            275,760Gross
                profit
            
            
            34,738
            
            
            38,287
            
            
            39,971
            
            
            38,667
            
            
            39,815Amortization
                of goodwill
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            704Selling,
                general and administrative expenses
            
            
            29,735
            
            
            33,371
            
            
            34,840
            
            
            34,152
            
            
            35,114Income
                from operations
            
            
            5,003
            
            
            4,916
            
            
            5,131
            
            
            4,515
            
            
            3,997Interest
                expense
            
            
            (3,550
            )
            
            (3,281
            )
            
            (3,037
            )
            
            (3,205
            )
            
            (4,225
            )Net
                income (loss) before cumulative effect of accounting
                change
            
            
            1,292
            
            
            3,935
            
            
            2,513
            
            
            776
            
            
            (2,136
            )Cumulative
                effect of accounting change
            
            
            —
            
            
            —
            
            
            —
            
            
            (23,708
            )
            
            —Net
                income (loss)
            
            $
            1,292
            
            $
            3,935
            
            $
            2,513
            
            $
            (22,932
            )
            $
            (2,136
            )Earnings
                (loss) per share, basicBefore
                cumulative effect of accounting change
            
            $
            0.20
            
            $
            0.54
            
            $
            0.35
            
            $
            0.10
            
            $
            (.32
            )Cumulative
                effect of accounting change
            
            
            —
            
            
            —
            
            
            —
            
            
            (3.30
            )
            
            —Earnings
                (loss) per share, basic
            
            $
            0.20
            
            $
            0.54
            
            $
            0.35
            
            $
            (3.20
            )
            $
            (.32
            )Earnings
                (loss) per share, dilutedBefore
                cumulative effect of accounting change
            
            $
            0.19
            
            $
            0.53
            
            $
            0.35
            
            $
            0.10
            
            $
            (.32
            )Cumulative
                effect of accounting change
            
            
            —
            
            
            —
            
            
            —
            
            
            (3.30
            )
            
            —Earnings
                (loss) per share, diluted
            
            $
            0.19
            
            $
            0.53
            
            $
            0.35
            
            $
            (3.20
            )
            $
            (.32
            )Weighted
                average shares,
              Basic
              Diluted
            
            
            6,617,005
              6,770,278
            
            
            7,286,931
              7,439,024
            
            
            7,175,105
              7,215,492
            
            
            7,175,105
              7,175,105
            
            
            6,592,436
              6,592,4362005
            
            
            2004
            
            
            2003
            
            
            2002
            
            
            2001(Restated)
            
            
            (Restated)**Balance
                Sheet Data:**Working
                capital
            
            $
            3,609
            
            $
            2,978
            
            $
            6,098
            
            $
            4,085
            
            $
            4,029Inventories
            
            
            33,542
            
            
            43,440
            
            
            37,774
            
            
            39,169
            
            
            31,887Total
                assets
            
            
            61,886
            
            
            74,008
            
            
            65,175
            
            
            63,816
            
            
            81,842Total
                debt, including short-term debt
            
            
            46,091
            
            
            56,600
            
            
            51,075
            
            
            52,745
            
            
            46,234Stockholders'
                equity
            
            $
            11,551
            
            $
            11,255
            
            $
            7,063
            
            $
            4,550
            
            $
            27,452





26





**ITEM
      7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS**





**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
      Form 10K, Hometown has restated prior year financial statements to reflect
      this
      change.





The
      effect of this restatement was to increase pre-tax income $313,000 and $224,000
      for the years ended December 31, 2004 and 2003, respectively. The after tax
      effects was to increase net income by $187,000 and $135,000 for the years ended
      December 31, 2004 and 2003, respectively. The effect of these adjustments was
      to
      increase basic and diluted earnings per share by $0.03 and $0.02 for the years
      ended December 31, 2004 and 2003, respectively.





Deferred
      revenue recorded as of June 30, 2003, will continue to be taken into income
      over
      the remaining life of the contract. At December 31, 2005, Hometown had $317,000
      of related deferred revenue remaining. This deferred revenue will be recognized
      over the next three years as follows: 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.





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





Year
                ended
            
            Year
                ended(in
                thousands)
            
            December
                31, 2004
            
            December
                31, 2003Previously
            
            Restated
            
            Previously
            
            RestatedReported
            
            
            
            Reported**Balance
                Sheets:**Deferred
                and prepaid income taxes
            
            $
            1,464
            
            $
            1,412
            
            
            —
            
            
            —Total
                current assets
            
            $
            56,720
            
            $
            56,668
            
            
            —
            
            
            —Other
                assets
            
            $
            3,649
            
            $
            3,486
            
            
            —
            
            
            —Total
                Assets
            
            $
            74,223
            
            $
            74,008
            
            
            —
            
            
            —Deferred
                revenue
            
            $
            735
            
            $
            605
            
            
            —
            
            
            —Total
                current liabilities
            
            $
            53,820
            
            $
            53,690
            
            
            —
            
            
            —Other
                long-term liabilities and deferred revenue
            
            $
            726
            
            $
            319
            
            
            —
            
            
            —Total
                liabilities
            
            $
            63,290
            
            $
            62,753
            
            
            —
            
            
            —


27





***(continued)***
            
            Year
                ended
            
            Year
                endedDecember
                31, 2004
            
            December
                31, 2003Previously
            
            Restated
            
            Previously
            
            RestatedReported
            
            
            
            ReportedAccumulated
                deficit
            
            $
            (19,091
            )
            $
            (18,769
            )
            
            —
            
            
            —Total
                stockholders’ equity
            
            $
            10,933
            
            $
            11,255
            
            
            —
            
            
            —Total
                liabilities and stockholders’ equity
            
            $
            74,223
            
            $
            74,008
            
            
            —
            
            
            —**Statements
                of Operations:**Other
                revenues, net
            
            $
            7,804
            
            $
            8,117
            
            $
            7,998
            
            $
            8,222Total
                revenues
            
            $
            265,281
            
            $
            265,594
            
            $
            279,777
            
            $
            280,001Gross
                profit
            
            $
            37,974
            
            $
            38,287
            
            $
            39,747
            
            $
            39,971Income
                from operations
            
            $
            4,603
            
            $
            4,916
            
            $
            4,907
            
            $
            5,131Pre-tax
                income
            
            $
            1,652
            
            $
            1,965
            
            $
            2,905
            
            $
            3,129Provision
                (benefit) for income taxes
            
            $
            (2,096
            )
            $
            (1,970
            )
            $
            527
            
            $
            616Net
                income
            
            $
            3,748
            
            $
            3,935
            
            $
            2,378
            
            $
            2,513Earnings
                per share, basic
            
            $
            0.51
            
            $
            0.54
            
            $
            0.33
            
            $
            0.35Earnings
                per share, diluted
            
            $
            0.50
            
            $
            0.53
            
            $
            0.33
            
            $
            0.35**Statements
                of Cash Flows:**Net
                income
            
            $
            3,748
            
            $
            3,935
            
            $
            2,378
            
            $
            2,513Deferred
                income taxes
            
            $
            (2,288
            )
            $
            (2,162
            )
            $
            120
            
            $
            209Deferred
                revenue - current
            
            $
            126
            
            $
            95
            
            $
            21
            
            $
            (78
            )Other
                long-term liabilities and deferred revenue
            
            $
            (3
            )
            $
            (285
            )
            $
            (14
            )
            $
            (139
            )Net
                cash provided by operating activities
            
            $
            571
            
            $
            571
            
            $
            5,826
            
            $
            5,826





In
      addition, Hometown previously restated its Balance Sheets and Statements of
      Cash
      Flows on Form 10-K/A for the year ended December 31, 2004 to comply with
      guidance under SFAS 95, “Statement of Cash Flows”, which states that payments to
      suppliers should be classified as an operating activity. The balance sheets
      restatement is to breakdown the floor plan notes payable into trade and
      non-trade components, where it had previously been shown as a single line item,
      which has been consistent with industry practice. The Statements of Cash Flows
      reclassification was to show the non-trade component of floor plan notes payable
      as a financing activity, where it had been shown as an operating activity.
      The
      floor plan lender is FMCC, an affiliate of Ford, Lincoln and Mercury; therefore;
      floor plan notes payable amounts due from purchases of inventory from Ford,
      Lincoln and Mercury are classified as floor plan - trade and the related
      borrowings and payments are to be classified as operating activities in the
      Statements of Cash Flows. Amounts due for inventory purchases from all other
      manufacturers are classified as floor plan notes payable - non-trade and the
      related borrowings and payments are to be classified as financing activities
      in
      the Statements of Cash Flows. The
      changes do not affect working capital or total cash flows. See
      Note
      7 to the consolidated financial statements.





**The
      Split-Up of Hometown Could Have an Adverse Impact on the Future Business of
      Hometown**





On
      June
      1, 2005 the Board of Directors of Hometown approved the organization of Shaker
      Auto Group, Inc. as a wholly-owned subsidiary of the Company. Following the
      organization of Shaker Auto Group, Inc., the Board of Directors authorized
      Hometown to contribute to Shaker Auto Group, Inc. all of the issued and
      outstanding shares of stock of each of its New England subsidiaries, and to
      receive in exchange therefore all of the issued and outstanding shares of stock
      of Shaker Auto Group, Inc. The New England subsidiaries include ERR Enterprises,
      Inc., Family Ford, Inc., Shaker’s, Inc., Shaker’s Lincoln/Mercury Auto Care,
      Inc., Hometown Brattleboro, Inc., Hometown Auto Framingham, Inc., Bay State
      Realty Holdings, Inc. and Brattleboro Realty Holdings, Inc. This transaction
      is
      called the “First Exchange”. As part of the First Exchange, Hometown will also
      make a cash payment to Shaker Auto Group, Inc. in order to provide Shaker Auto
      Group, Inc. with necessary working capital. The amount of cash that Hometown
      will contribute to Shaker Auto Group, Inc. will equal $5 million (adjusted
      for
      fluctuations in the value of the used cars, parts and accessories, accounts
      receivable, accounts payable, and accrued expenses of the New England
      subsidiaries). Hometown anticipates that it will borrow up to $6.5 million
      in
      order to make this cash contribution to Shaker Auto Group, Inc., to finance
      the
      costs associated with the exchange, and to obtain working
      capital.


28




In
      addition, on June 1, 2005 the Board of Directors of Hometown authorized that,
      immediately following the consummation of the First Exchange, all of the
      outstanding shares of stock of Shaker Auto Group, Inc. will be exchanged for
      all
      of the outstanding shares of Class A Common Stock and Class B Common Stock
      of
      Hometown that are owned by the members of the Shaker Group. The Shaker Group
      includes Corey Shaker (individually and as custodian for Lindsay Shaker, Kristen
      Shaker and Edward Shaker), Edward Shaker Family Trust, Joseph Shaker, Shaker
      Irrevocable Trust, Richard Shaker Family Trust, Steven Shaker, Janet Shaker,
      Paul Shaker, Edward D. Shaker, Edward Shaker, Lillian Shaker, Richard Shaker
      and
      Rose Shaker. This transaction is referred to as the “Second
      Exchange”.





If
      the
      First Exchange and the Second Exchange are consummated and the split-up of
      Hometown occurs, then:





·
            The
                stockholders of Hometown will no longer have any interest in the
                New
                England subsidiaries, and so will not be able to share in any future
                growth in the business of the New England
                subsidiaries.


·
            The
                business of Hometown will be less geographically dispersed, thereby
                making
                it more susceptible to regional fluctuations in business
                activity.


·
            The
                business of Hometown will no longer have the benefit of the revenue
                generated by the New England subsidiaries. Hometown would have had
                revenues of approximately $131.7 million and $129.4 million in 2005
                and
                2004, respectively, without the New England subsidiaries. Hometown
                also
                would have had gross profit of approximately $18.8 million and $18.7
                million in 2005 and 2004, respectively, without the New England
                subsidiaries.


·
            The
                ratio of Hometown’s outstanding debt to its total stockholders’ equity
                will increase significantly due to the borrowing, which Hometown
                will
                undertake to consummate the
                exchanges.


·
            Hometown
                will be selling vehicles produced by a smaller number of manufacturers,
                and therefore will be more dependent on the public’s willingness to
                purchase the vehicles of a smaller number of
                manufacturers.





**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. Hometown added Nissan in February 2006. See Note 20 to the consolidated
      financial statements.





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


29




We
      assess
      the growth of our revenues and gross profit by comparing the year-to-year
      results of our dealerships that have operated continuously during the periods
      being compared. Hometown’s operating results reflect the closing of a used
      vehicles outlet in August 2004. Also, during the fourth quarter of 2004,
      Hometown announced that it had resolved in principal to resolve certain
      litigation matters (See Item 3 and Note 15 to the consolidated financial
      statements), which resulted in the transfer of the Westwood Lincoln Mercury
      dealership during the second quarter of 2005. Both contribute to decreases
      in
      sales and gross profit from 2004 to 2005, as well as a decrease in selling,
      general and administrative expenses. We have segregated both operations in
      the
      analysis that follows to allow for a better comparison of the
      results.





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





The
      past
      few years has shown a decrease in used vehicle sales as manufacturers have
      continued to promote demand for new vehicles through offering various incentive
      programs including cash rebates and low interest financing. It is not expected
      that the manufacturers will stop these promotions.





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





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





Selling,
      general and administrative expenses (“SG&A”) consist of: compensation and
      related taxes and benefits, advertising, building costs (rent, utilities, real
      estate taxes, depreciation), data processing and other operating expenses.
      A
      large amount of compensation is variable in that it is commission based and
      certain significant expenses, such as advertising, are controllable. Hometown
      also includes certain distribution costs in SG&A, which other similar
      companies may include in cost of sales. These costs total $0.3 million in both
      of the years ended December 31, 2005 and 2004, respectively.





Interest
      expense primarily relates to indebtedness incurred in connection with new and
      used vehicle inventories. Other interest expense consists of all other interest
      charges on interest bearing debt including capitalized leases.




30





**Year
      Ended December 31, 2005 Compared to Year Ended December 31, 2004
      (Restated)**


***Revenues***
                  
                  For
                      the Year EndedDecember
                      31,2005
                  
                  2004
                  
                  Increase
                  
                  %(in
                      thousands, except per vehicle data)
                  
                  
                  
                  Restated
                  
                  (Decrease)
                  
                  ChangeNew
                      vehicle data:Retail
                      revenues - same store
                  
                  $
                  128,984
                  
                  $
                  134,313
                  
                  $
                  (5,329
                  )
                  
                  (4.0
                  )%Retail
                      revenues - other stores (1)
                  
                  
                  9,022
                  
                  
                  31,440
                  
                  
                  (22,418
                  )
                  
                  (71.3
                  )%Total
                      new retail revenues
                  
                  
                  138,006
                  
                  
                  165,753
                  
                  
                  (27,747
                  )
                  
                  (16.7
                  )%Fleet
                      revenues - same store
                  
                  
                  3,932
                  
                  
                  2,179
                  
                  
                  1,753
                  
                  
                  80.4
                  %Total
                      new vehicles revenues, as reported
                  
                  $
                  141,938
                  
                  $
                  167,932
                  
                  $
                  (25,994
                  )
                  
                  (15.5
                  )%New
                      retail units - same store
                  
                  
                  5,009
                  
                  
                  5,209
                  
                  
                  (200
                  )
                  
                  (3.8
                  )%New
                      retail units - other stores (1)
                  
                  
                  245
                  
                  
                  871
                  
                  
                  (626
                  )
                  
                  (71.9
                  )%Fleet
                      units
                  
                  
                  224
                  
                  
                  135
                  
                  
                  89
                  
                  
                  65.9
                  %Total
                      new vehicle units
                  
                  
                  5,478
                  
                  
                  6,215
                  
                  
                  (737
                  )
                  
                  (11.9
                  )%Used
                      vehicle data:Retail
                      revenues - same store
                  
                  $
                  46,376
                  
                  $
                  46,821
                  
                  $
                  (445
                  )
                  
                  (1.0
                  )%Retail
                      revenues - other stores (1)
                  
                  
                  789
                  
                  
                  4,188
                  
                  
                  (3,399
                  )
                  
                  (81.2
                  )%Total
                      used retail revenues
                  
                  
                  47,165
                  
                  
                  51,009
                  
                  
                  (3,844
                  )
                  
                  (7.5
                  )%Wholesale
                      revenues - same store
                  
                  
                  13,575
                  
                  
                  12,906
                  
                  
                  669
                  
                  
                  5.2
                  %Wholesale
                      revenues - other stores (1)
                  
                  
                  419
                  
                  
                  1,411
                  
                  
                  (992
                  )
                  
                  (70.3
                  )%Total
                      wholesale revenues
                  
                  
                  13,994
                  
                  
                  14,317
                  
                  
                  (323
                  )
                  
                  (2.3
                  )%Total
                      used vehicle revenue, as reported
                  
                  $
                  61,159
                  
                  $
                  65,326
                  
                  $
                  (4,167
                  )
                  
                  (6.4
                  )%Used
                      retail units - same store
                  
                  
                  2,803
                  
                  
                  3,071
                  
                  
                  (268
                  )
                  
                  (8.7
                  )%Used
                      retail units - other stores (1)
                  
                  
                  45
                  
                  
                  258
                  
                  
                  (213
                  )
                  
                  (82.6
                  )%Used
                      wholesale units - same store
                  
                  
                  3,018
                  
                  
                  3,399
                  
                  
                  (381
                  )
                  
                  (11.2
                  )%Used
                      wholesale units - other stores (1)
                  
                  
                  59
                  
                  
                  177
                  
                  
                  (118
                  )
                  
                  (66.7
                  )%Total
                      used units
                  
                  
                  5,925
                  
                  
                  6,905
                  
                  
                  (980
                  )
                  
                  (14.2
                  )%Parts
                      and service:Parts
                      and service revenues - same store
                  
                  $
                  21,180
                  
                  $
                  20,161
                  
                  $
                  1,019
                  
                  
                  5.1
                  %Parts
                      and service revenues - other stores (1)
                  
                  
                  1,507
                  
                  
                  4,058
                  
                  
                  (2,551
                  )
                  
                  (62.9
                  )%Total
                      parts and service revenue
                  
                  $
                  22,687
                  
                  $
                  24,219
                  
                  $
                  (1,532
                  )
                  
                  (6.3
                  )%Other
                      revenues, net:Other
                      revenues, net - same store
                  
                  $
                  7,184
                  
                  $
                  7,545
                  
                  $
                  (361
                  )
                  
                  (4.8
                  )%Other
                      revenues, net - other stores (1)
                  
                  
                  112
                  
                  
                  572
                  
                  
                  (460
                  )
                  
                  (80.4
                  )%Total
                      other revenues, net, as reported
                  
                  $
                  7,296
                  
                  $
                  8,117
                  
                  $
                  (821
                  )
                  
                  (10.1
                  )%Total
                      revenue:Same
                      store
                  
                  $
                  221,231
                  
                  $
                  223,925
                  
                  $
                  (2,694
                  )
                  
                  (1.2
                  )%Other
                      stores (1)
                  
                  
                  11,849
                  
                  
                  41,669
                  
                  
                  (29,820
                  )
                  
                  (71.6
                  )%Total
                      revenue, as reported
                  
                  $
                  233,080
                  
                  $
                  265,594
                  
                  $
                  (32,514
                  )
                  
                  (12.2
                  )%
   31





(1)
      Represents the Westwood Lincoln Mercury dealership operations transferred on
      May
      11, 2005 and the used car outlet closed August 2004.




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





Total
      revenue decreased $32.5 million, or 12.2% to $233.1 million for the year ended
      December 31, 2005 from $265.6 million for the year ended December 31, 2004.
      Same
      store total revenues decreased $2.7 million or 1.2% to $221.2 million for the
      year ended December 31, 2005 from $223.9 million for the year ended December
      31,
      2004.





Same
      store new retail revenues decreased $5.3 million, or 4.0% to $129.0 million
      for
      the year ended December 31, 2005 from $134.3 million for the year ended December
      31, 2004. This decrease was directly attributable to the 3.8% decrease in units
      ($5.2 million) sold in 2005 compared to 2004. The decrease in same store new
      retail revenues was primarily attributable to a 290-unit decrease in fourth
      quarter unit sales resulting in a $7.6 million decrease in the fourth quarter
      2005 compared to 2004. The third quarter of 2005 was aided by the “Employee
      Pricing Plan” promotion of certain domestic brand manufacturers, which aided
      unit sales. This caused a spike in third quarter sales by pulling sales into
      the
      third quarter that more likely than not would have occurred during the fourth
      quarter. For the year, decreases at Hometown’s Lincoln Mercury ($5.2 million),
      Chevrolet ($3.1 million) and Ford dealerships ($1.1 million) were partially
      offset by increases at the Toyota ($3.9 million) and Chrysler/Jeep dealerships
      ($0.2 million). The Mazda dealership 2005 new vehicle revenue remained constant
      compared to 2004. Hometown’s new retail revenues are indicative of sales
      reported by our manufacturers nationally, Toyota continues to be experiencing
      growth in the United States while the domestics remain stagnant or decline.
      Fleet revenues increased $1.8 million from 2004 levels but do not contribute
      significantly to gross profit ($20,000 increase in related gross profit).





Same
      store used vehicle retail revenues decreased $0.4 million, or 1.0% to $46.4
      million for the year ended December 31, 2005 from $46.8 million for the year
      ended December 31, 2004. This decrease was primarily due to an 8.7% decrease
      in
      units sold ($4.1 million), partially offset by an 8.5% increase in average
      selling price ($3.7 million) in 2005 compared to 2004. Contributing to the
      decrease in units was the aforementioned “Employee Pricing Plan”, which occurred
      in the third quarter of 2005, which pushed potential buyers of used vehicles
      toward the purchase of a new vehicle. The retail used vehicle market continues
      to be difficult, with most dealerships experiencing a decrease in units for
      the
      fourth quarter. Certain used vehicles that have high gas mileage saw their
      values increase as the price of gasoline increased, contributing to the increase
      in average selling price of used vehicles. Same store wholesale revenues
      increased $0.7 million, or 5.2% to $13.6 million for the year ended December
      31,
      2005 from $12.9 million for the year ended December 31, 2004 due to increased
      strength in the wholesale market compared to the prior year. The increase in
      average selling price is also a function of the retail sales unit volume. High
      quality vehicles that were taken as trade-ins at the time of new vehicle
      purchases, were not all sold at retail, necessitating being sold at wholesale,
      generating higher prices. The “Employee Pricing Program” caused a surge in new
      vehicle sales, that brought in more used cars as trade-ins.





Parts
      and
      service revenue decreased $1.5 million or 6.3% to $22.7 million for the year
      ended December 31, 2005 from $24.2 million for the year ended December 31,
      2004.
      On a same store basis, parts and service revenue increased $1.0 million or
      5.1%
      to $21.2 million for the year ended December 31, 2005 from $20.2 million for
      the
      year ended December 31, 2004. The increase was primarily due to the Toyota
      ($0.8
      million) dealerships and is attributable to the increase in the dealerships
      new
      vehicles revenues. These dealerships have been able to attract these customers
      to remain with the dealership for their vehicle maintenance needs. As part
      of
      the new car sales process you also strive to gain that customer as a service
      customer as well. Mazda also experienced an increase ($0.2 million) primarily
      due to continuing to build on its service customer base, as the brand has only
      been sold by Hometown since 1999.





32


Other
      dealership revenues decreased $0.8 million, or 10.1% to $7.3 million for the
      year ended December 31, 2005 from $8.1 million for the year ended December
      31,
      2004. On a same store basis, other dealership revenues decreased $0.3 million
      or
      4.8% to $7.2 million for the year ended December 31, 2005 from $7.5 million
      for
      the year ended December 31, 2004. This is primarily attributable to a decrease
      in new vehicle finance revenue due to a decrease in less vehicles sold combined
      with decreased revenue earned on the financing transaction.




***Gross
                Profit***
            
            For
                the Year EndedDecember
                31,2005
            
            2004
            
            Increase
            
            %(in
                thousands, except per vehicle data)
            
            
            
            Restated
            
            (Decrease)
            
            ChangeNew
                vehicle data:Retail gross profit - same store
            
            $
            8,791
            
            $
            9,289
            
            $
            (498
            )
            
            (5.4
            )%Retail gross profit - other stores (1)
            
            
            552
            
            
            1,416
            
            
            (864
            )
            
            (61.0
            )%Total new retail gross profit
            
            
            9,343
            
            
            10,705
            
            
            (1,362
            )
            
            (12.7
            )%Fleet gross profit
            
            
            36
            
            
            16
            
            
            20
            
            
            *Total
                new vehicles gross profit, as reported
            
            $
            9,379
            
            $
            10,721
            
            $
            (1,342
            )
            
            (12.5
            )%Gross profit percentage
            
            
            6.6
            %
            
            6.4
            %New retail units - same store
            
            
            5,009
            
            
            5,209
            
            
            (200
            )
            
            (3.8
            )%New retail units - other stores (1)
            
            
            245
            
            
            871
            
            
            (626
            )
            
            (71.9
            )%Fleet units
            
            
            224
            
            
            135
            
            
            89
            
            
            65.9
            %Total
                new vehicle units
            
            
            5,478
            
            
            6,215
            
            
            (737
            )
            
            (11.9
            )%Used
                vehicle data:Retail gross profit - same store
            
            $
            5,458
            
            $
            5,734
            
            $
            (276
            )
            
            (4.8
            )%Retail gross profit - other stores (1)
            
            
            74
            
            
            355
            
            
            (281
            )
            
            (79.2
            )%Total
                used retail gross profit
            
            
            5,532
            
            
            6,089
            
            
            (557
            )
            
            (9.1
            )%Wholesale gross profit - same store
            
            
            188
            
            
            181
            
            
            7
            
            
            3.9
            %Wholesale gross profit - other stores (1)
            
            
            (6
            )
            
            3
            
            
            (9
            )
            
            *Total wholesale gross profit
            
            
            182
            
            
            184
            
            
            (2
            )
            
            1.1
            %Total
                used vehicle gross profit, as reported
            
            $
            5,714
            
            $
            6,273
            
            $
            (559
            )
            
            (8.9
            )%Gross
                profit percentage
            
            
            9.3
            %
            
            9.6
            %Used
                retail units - same store
            
            
            2,803
            
            
            3,071
            
            
            (268
            )
            
            (8.7
            )%Used
                retail units - other stores (1)
            
            
            45
            
            
            258
            
            
            (213
            )
            
            (82.6
            )%Used
                wholesale units - same store
            
            
            3,018
            
            
            3,399
            
            
            (381
            )
            
            (11.2
            )%Used
                wholesale units - other stores (1)
            
            
            59
            
            
            177
            
            
            (118
            )
            
            (66.7
            )%Total used units
            
            
            5,925
            
            
            6,905
            
            
            (980
            )
            
            (14.2
            )%Parts
                and service:Parts
                and service gross profit - same store
            
            $
            11,486
            
            $
            10,880
            
            $
            606
            
            
            5.6
            %Parts
                and service gross profit - other stores (1)
            
            
            863
            
            
            2,296
            
            
            (1,433
            )
            
            (62.4
            )%Total parts and service revenue
            
            $
            12,349
            
            $
            13,176
            
            $
            (827
            )
            
            (6.3
            )%Gross profit percentage
            
            
            54.4
            %
            
            54.4
            %


33




***Gross
                Profit - (continued)***
            
            For
                the Year EndedDecember
                31,2005
            
            2004
            
            Increase
            
            %(in
                thousands, except per vehicle data)
            
            
            
            Restated
            
            (Decrease)
            
            ChangeOther
                gross profit:Other
                gross profit - same store
            
            $
            7,184
            
            $
            7,545
            
            $
            (361
            )
            
            (4.8
            )%Other
                gross profit - other stores (1)
            
            
            112
            
            
            572
            
            
            (460
            )
            
            (80.4
            )%Total other gross profit, as reported
            
            $
            7,296
            
            $
            8,117
            
            $
            (821
            )
            
            (10.1
            )%Gross profit percentage
            
            
            100.0
            %
            
            100.0
            %Other
                gross profit PVR - same store
            
            $
            920
            
            $
            911
            
            $
            8
            
            
            0.9
            %Other
                gross profit PVR - other stores (1)
            
            
            386
            
            
            507
            
            
            (120
            )
            
            (23.8
            )%Total other gross profit PVR, as reported
            
            $
            901
            
            $
            863
            
            $
            38
            
            
            4.4
            %Total
                gross profit:Same store
            
            $
            33,143
            
            $
            33,645
            
            $
            (502
            )
            
            (1.5
            )%Other stores (1)
            
            
            1,595
            
            
            4,642
            
            
            (3,047
            )
            
            (65.6
            )%Total
                gross profit, as reported
            
            $
            34,738
            
            $
            38,287
            
            $
            (3,549
            )
            
            (9.3
            )%Gross profit percentage
            
            
            14.9
            %
            
            14.4
            %





(1)
      Represents the Westwood Lincoln Mercury dealership operations transferred on
      May
      11, 2005 and the used car outlet closed August 2004.





*
      -
      Percentage is 100% or greater.





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





Total
      gross profit decreased $3.6 million, or 9.3%, to $34.7 million for the year
      ended December 31, 2005, from $38.3 million for the year ended December 31,
      2004. Same store total gross profit decreased $0.5 million, or 1.5% to $33.1
      million for the year ended December 31, 2005, from $33.6 million for the year
      ended December 31, 2004. Same store gross profit on new retail vehicle sales
      decreased $0.5 million, or 5.4%, to $8.8 million for the year ended December
      31,
      2005, from $9.3 million for the year ended December 31, 2004. The decrease
      in
      gross profit is primarily attributable to a 3.8% decrease in unit sales combined
      with a 1.6% decrease in new retail gross profit per unit. It is expected that
      margins on new vehicles will continue to be under pressure as the manufacturers
      continue to contend with competitive pricing issues. Similar to revenues,
      declines at the Lincoln Mercury ($0.3 million), Ford ($0.2 million), Chevrolet
      ($0.1 million) and Chrysler/Jeep dealerships (less than $0.1 million) were
      partially offset by increases at the Toyota ($0.1 million) and Mazda dealerships
      (less than $0.1 million).





Same
      store gross profit on used vehicle retail sales decreased $0.2 million, or
      4.8%,
      to $5.5 million for the year ended December 31, 2005, from $5.7 million for
      the
      year ended December 31, 2004. The overall decrease is attributable to an 8.7%
      decrease in units sold partially offset by a 4.3% increase in average gross
      profit per unit. The company strives to maintain a certain gross profit
      percentage, so the increase in the average revenue per vehicle sold at retail
      should translate into a higher gross profit per unit.





Same
      store parts and service gross profit increased $0.6 million, or 5.6%, to $11.5
      million for the year ended December 31, 2005, from $10.9 million for the year
      ended December 31, 2004 primarily due to the 5.1% increase parts and service
      revenues. Similar to revenues, the increase is primarily attributable to the
      Toyota and Mazda dealerships.




34





***Selling,
      General and Administrative Expenses***





S,G&A
      decreased $3.7 million, or 11.1%, to $29.7 million for the year ended December
      31, 2005 from $33.4 million for the year ended December 31, 2004. This decrease
      was primarily attributable to the closing of the used car outlet in August
      2004
      and the transfer of the Westwood dealership in May 2005 (together totaling
      $3.1
      million). On a same store basis, S,G&A decreased $0.6 million, or 2.1%, to
      $28.4 million for the year ended December 31, 2005 from $29.0 million for the
      year ended December 31, 2004. This decrease consists primarily of decreases
      in
      payroll and related costs ($0.2 million), rent and related building costs ($0.1
      million), advertising costs ($0.1 million), reduction of reserves ($0.1
      million), legal, audit and other professional fees ($0.1 million), reduced
      policy costs ($0.1 million), data processing costs ($0.2 million) and various
      other net reductions ($0.2 million). The decrease in payroll and related costs
      is primarily due to a reduction in gross profit, as a portion of payroll costs
      are commission based and therefore variable and a reduction in headcount. The
      decrease in rent is primarily due to purchasing a building in September 2004,
      which Hometown had previously rented. Advertising was scaled back in the fourth
      quarter 2005 from 2004 levels. Reductions in reserves were associated with
      decreased revenues. The decrease in legal, audit and other professional fees
      was
      primarily due to the settlement of certain litigation at the end of 2004,
      partially offset by legal costs incurred during the third and fourth quarters
      of
      2005 associated with a class action lawsuit ($0.16 million). See Note 15 to
      the
      consolidated financial statements. Reduced policy costs (used vehicle warranties
      and the labor portion of service warranties plus the costs associated with
      free
      products or services, see Note 15 to the consolidated financial statements)
      are
      primarily due to a reduction of vehicles sold. The decrease in data processing
      costs is primarily due to the expiration of certain contracts where the ongoing
      costs for the similar service have decreased under the terms of the new
      contracts. Partially offsetting these are costs associated with the Exchange
      Agreement of $0.5 million. See Note 19 to the consolidated financial statements.





***Interest
      Income***





Interest
      income increased $0.1 million, or 50%, to $0.3 million for the year ended
      December 31, 2005 from $0.2 million for the year ended December 31, 2004. The
      increase is primarily the result of increases in the interest rate paid by
      the
      Ford Motor Credit Company cash management account, which was paying interest
      of
      8.25% at December 31, 2005. The cash management account interest rate is tied
      to
      the rate charged on Hometown’s floor plan financing arrangement.





***Interest
      Expense***





Interest
      expense increased $0.3 million, or 9.1%, to $3.6 million for the year ended
      December 31, 2005, from $3.3 million for the year ended December 31, 2004.
      The
      increase is primarily due to an increase of floorplan interest expense resulting
      from higher interest rates partially offset by decreased borrowings resulting
      from one less dealership in 2005 compared to 2004 and lower average inventories
      at the remaining dealerships.





***Other
      Income***





In
      May
      2005, Hometown completed the transfer of certain assets in relation to the
      settlement of litigation matters resulting in a gain of approximately $0.6
      million recorded in Other Income for 2005. See Note 15 to the consolidated
      financial statements. Other income for 2004 primarily includes $0.1 million
      received from General Motors Corp. related to the termination of the Oldsmobile
      product line.





***Provision
      (benefit) for income tax***





The
      effective income tax rate was 45.1% for the year ended December 31, 2005 and
      was
      not comparable to 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 difference in the 2005 rate from the expected
      effective tax rate of approximately 40.0% is primarily due to 2005 net operating
      losses incurred in certain states where a full valuation reserve has been
      recorded due to not being able to project sufficient income to recover the
      deferred tax asset for those states. The difference in the 2004 rate from the
      expected effective tax rate of approximately 40.0% is primarily due to the
      reduction of the valuation allowance on the deferred tax asset due to the
      ability to project sufficient income to recover the deferred tax asset. At
      December 31, 2005, Hometown has a deferred tax asset of $0.3 million, net of
      a
      valuation allowance, related to its net operating losses. The state net
      operating losses began to expire in 2005. The expiring state NOL’s are fully
      reserved. The federal net operating losses begin to expire in 2021. Hometown
      believes this net deferred tax asset will be realized within the next three
      years based on current projections. See Note 12 to the consolidated financial
      statements.


35




***Net
      Income***





Net
      income decreased $2.6 million to $1.3 million for the year ended December 31,
      2005, from $3.9 million for the year ended December 31, 2004. See above for
      explanation of changes.





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





“Basic
      earnings per share” is computed by dividing net income by the weighted average
      common shares outstanding. “Diluted earnings per share” is computed by dividing
      net income by the weighted average common shares outstanding adjusted for the
      incremental dilution of potentially dilutive securities.





The
      basic
      and diluted income per share for the year ended December 31, 2005 is $0.20
      and
      $0.19, respectively. The basic and diluted income per share for the year ended
      December 31, 2004 is $0.54 and $0.53, respectively. See Note 11 to the
      consolidated financial statements.





**Year
      Ended December 31, 2004 (Restated) Compared to Year Ended December 31, 2003
      (Restated)**




***Revenues***
                
                For
                    the Year EndedDecember
                    31,2004
                
                2003
                
                Increase
                
                %(in
                    thousands, except per vehicle data)
                
                Restated
                
                Restated
                
                (Decrease)
                
                ChangeNew
                    vehicle data:Retail revenues - same store
                
                $
                134,313
                
                $
                140,850
                
                $
                (6,537
                )
                
                (4.6
                )%Retail revenues - other stores (1)
                
                
                31,440
                
                
                32,893
                
                
                (1,453
                )
                
                (4.4
                )%Total new retail revenues
                
                
                165,753
                
                
                173,743
                
                
                (7,990
                )
                
                (4.6
                )%Fleet revenues - same store
                
                
                2,179
                
                
                6,872
                
                
                (4,693
                )
                
                (68.3
                )%Total
                    new vehicles revenues, as reported
                
                $
                167,932
                
                $
                180,615
                
                $
                (12,683
                )
                
                (7.0
                )%New retail units - same store
                
                
                5,209
                
                
                5,525
                
                
                (316
                )
                
                (5.7
                )%New retail units - other stores  (1)
                
                
                871
                
                
                940
                
                
                (69
                )
                
                (7.3
                )%Fleet units
                
                
                135
                
                
                445
                
                
                (310
                )
                
                (69.7
                )%Total
                    new vehicle units
                
                
                6,215
                
                
                6,910
                
                
                (695
                )
                
                (10.1
                )%Used
                    vehicle data:Retail revenues - same store
                
                $
                46,821
                
                $
                48,837
                
                $
                (2,016
                )
                
                (4.1
                )%Retail revenues - other stores (1)
                
                
                4,188
                
                
                4,697
                
                
                (509
                )
                
                (10.8
                )%Total
                    used retail revenues
                
                
                51,009
                
                
                53,534
                
                
                (2,525
                )
                
                (4.7
                )%





36


***Revenues
                  - (continued)***
              
              For
                  the Year EndedDecember
                  31,2004
              
              2003
              
              Increase
              
              %(in
                  thousands, except per vehicle data)
              
              Restated
              
              Restated
              
              (Decrease)
              
              ChangeWholesale revenues - same store
              
              
              12,906
              
              
              11,597
              
              
              1,309
              
              
              11.3
              %Wholesale revenues - other stores (1)
              
              
              1,411
              
              
              1,412
              
              
              (1
              )
              
              (0.1
              )%Total wholesale revenues
              
              
              14,317
              
              
              13,009
              
              
              1,308
              
              
              10.1
              %Total
                  used vehicle revenue, as reported
              
              $
              65,326
              
              $
              66,543
              
              $
              (1,217
              )
              
              (1.8
              )%Used
                  retail units - same store
              
              
              3,071
              
              
              3,345
              
              
              (274
              )
              
              (8.2
              )%Used
                  retail units - other stores (1)
              
              
              258
              
              
              338
              
              
              (80
              )
              
              (23.7
              )%Used
                  wholesale units - same store
              
              
              3,399
              
              
              2,986
              
              
              413
              
              
              13.8
              %Used
                  wholesale units - other stores (1)
              
              
              177
              
              
              158
              
              
              19
              
              
              12.0
              %Total used units
              
              
              6,905
              
              
              6,827
              
              
              78
              
              
              1.1
              %Parts
                  and service:Parts
                  and service revenues - same store
              
              $
              20,161
              
              $
              19,948
              
              $
              213
              
              
              1.1
              %Parts
                  and service revenues - other stores (1)
              
              
              4,058
              
              
              4,673
              
              
              (615
              )
              
              (13.2
              )%Total parts and service revenue
              
              $
              24,219
              
              $
              24,621
              
              $
              (402
              )
              
              (1.6
              )%Other
                  revenues, net:Other
                  revenues, net - same store
              
              $
              7,545
              
              $
              7,621
              
              $
              (76
              )
              
              (1.0
              )%Other
                  revenues, net - other stores (1)
              
              
              572
              
              
              601
              
              
              (29
              )
              
              (4.8
              )%Total other revenues, net, as reported
              
              $
              8,117
              
              $
              8,222
              
              $
              (105
              )
              
              (1.3
              )%Total
                  revenue:Same store
              
              $
              223,925
              
              $
              235,725
              
              $
              (11,800
              )
              
              (5.0
              )%Other stores (1)
              
              
              41,669
              
              
              44,276
              
              
              (2,607
              )
              
              (5.9
              )%Total
                  revenue, as reported
              
              $
              265,594
              
              $
              280,001
              
              $
              (14,407
              )
              
              (5.1
              )%







(1)
      Represents the used car outlet closed August 2004.




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





Total
      revenue decreased $14.4 million, or 5.1% to $265.6 million for the year ended
      December 31, 2004 from $280.0 million for the year ended December 31, 2003.
      Same
      store total revenues decreased $11.8 million or 5.0% to $223.9 million for
      the
      year ended December 31, 2004 from $235.7 million for the year ended December
      31,
      2003.





Same
      store new retail revenues decreased $6.6 million, or 4.6% to $134.3 million
      for
      the year ended December 31, 2004 from $140.9 million for the year ended December
      31, 2003. This decrease was primarily due to the 5.7% decrease in units ($8.1
      million) sold in 2004 compared to 2003, partially offset by a 1.1% increase
      in
      average revenue per unit ($1.5 million). Most dealerships experienced a decrease
      in new retail revenues from 2003 to 2004. Decreases at Hometown’s Ford ($2.4
      million), Lincoln Mercury ($2.1 million), Toyota ($2.1 million) and Mazda
      dealerships ($0.8 million) were partially offset by increases at the Chevrolet
      ($0.5 million) and Chrysler/Jeep dealerships ($0.4 million).





Same
      store used vehicle retail revenues decreased $2.0 million, or 4.1% to $46.8
      million for the year ended December 31, 2004 from $48.8 million for the year
      ended December 31, 2003. This decrease was primarily due to an 8.2% decrease
      in
      units sold ($4.0 million), partially offset by a 4.4% increase in average
      selling price ($2.0 million) in 2004 compared to 2003. Same store wholesale
      revenues increased $1.3 million, or 11.3% to $12.9 million for the year ended
      December 31, 2004 from $11.6 million for the year ended December 31, 2003
      primarily due to the increase in units sold ($1.6 million) partially offset
      by a
      2.2% decrease in average selling price ($0.3 million). The decrease in wholesale
      average selling price is a function of the vehicles that were taken as trade-ins
      at the time of new vehicle purchases. Although the average selling price on
      wholesale decreased in 2004 from 2003, average gross profit per unit increased
      slightly. The decrease in used vehicle sales at retail caused more vehicles
      to
      be sold at wholesale to manage used vehicle inventory levels.


37







Parts
      and
      service revenue decreased $0.4 million or 1.6% to $24.2 million for the year
      ended December 31, 2004 from $24.6 million for the year ended December 31,
      2003.
      On a same store basis, parts and service revenue increased $0.3 million or
      1.1%
      to $20.2 million for the year ended December 31, 2004 from $19.9 million for
      the
      year ended December 31, 2003. The increase was primarily due to the Toyota
      ($0.5
      million) dealerships with all others resulting in a net decrease.





Other
      dealership revenues decreased $0.1 million, or 1.3% to $8.1 million for the
      year
      ended December 31, 2004 from $8.2 million for the year ended December 31, 2003.
      On a same store basis, other dealership revenues decreased less than $0.1
      million or 1.0% to $7.5 million for the year ended December 31, 2004 from $7.6
      million for the year ended December 31, 2003.




***Gross
                  Profit***
              
              For
                  the Year EndedDecember
                  31,2004
              
              2003
              
              Increase
              
              %(in
                  thousands, except per vehicle data)
              
              Restated
              
              Restated
              
              (Decrease)
              
              ChangeNew
                  vehicle data:Retail gross profit - same store
              
              $
              9,289
              
              $
              9,995
              
              $
              (706
              )
              
              (7.1
              )%Retail gross profit - other stores (1)
              
              
              1,416
              
              
              1,990
              
              
              (574
              )
              
              (28.8
              )%Total new retail gross profit
              
              
              10,705
              
              
              11,985
              
              
              (1,280
              )
              
              (10.7
              )%Fleet gross profit
              
              
              16
              
              
              51
              
              
              (35
              )
              
              (68.6
              )%Total
                  new vehicles gross profit, as reported
              
              $
              10,721
              
              $
              12,036
              
              $
              (1,315
              )
              
              (10.9
              )%Gross profit percentage
              
              
              6.4
              %
              
              6.7
              %New retail units - same store
              
              
              5,209
              
              
              5,525
              
              
              (316
              )
              
              (5.7
              )%New retail units - other stores (1)
              
              
              871
              
              
              940
              
              
              (69
              )
              
              (7.3
              )%Fleet units
              
              
              135
              
              
              445
              
              
              (310
              )
              
              (69.7
              )%Total
                  new vehicle units
              
              
              6,215
              
              
              6,910
              
              
              (695
              )
              
              (10.1
              )%Used
                  vehicle data:Retail gross profit - same store
              
              $
              5,734
              
              $
              5,845
              
              $
              (111
              )
              
              (1.9
              )%Retail gross profit - other stores (1)
              
              
              355
              
              
              428
              
              
              (73
              )
              
              (17.1
              )%Total
                  used retail gross profit
              
              
              6,089
              
              
              6,273
              
              
              (184
              )
              
              (2.9
              )%Wholesale gross profit - same store
              
              
              181
              
              
              130
              
              
              51
              
              
              39.2
              %Wholesale gross profit - other stores (1)
              
              
              3
              
              
              (12
              )
              
              15
              
              
              *Total wholesale gross profit
              
              
              184
              
              
              118
              
              
              66
              
              
              55.9
              %Total
                  used vehicle gross profit, as reported
              
              $
              6,273
              
              $
              6,391
              
              $
              (118
              )
              
              (1.8
              )%Gross
                  profit percentage
              
              
              9.6
              %
              
              9.6
              %




38




***Gross
                  Profit  -(continued)***
              
              For
                  the Year EndedDecember
                  31,2004
              
              2003
              
              Increase
              
              %(in
                  thousands, except per vehicle data)
              
              
              
              Restated
              
              (Decrease)
              
              ChangeUsed
                  retail units - same store
              
              
              3,071
              
              
              3,345
              
              
              (274
              )
              
              (8.2
              )%Used
                  retail units - other stores (1)
              
              
              258
              
              
              338
              
              
              (80
              )
              
              (23.7
              )%Used
                  wholesale units - same store
              
              
              3,399
              
              
              2,986
              
              
              413
              
              
              13.8
              %Used
                  wholesale units - other stores (1)
              
              
              177
              
              
              158
              
              
              19
              
              
              12.0
              %Total used units
              
              
              6,905
              
              
              6,827
              
              
              78
              
              
              1.1
              %Parts
                  and service:Parts
                  and service gross profit - same store
              
              $
              10,880
              
              $
              10,711
              
              $
              169
              
              
              1.6
              %Parts
                  and service gross profit - other stores (1)
              
              
              2,296
              
              
              2,611
              
              
              (315
              )
              
              (12.1
              )%Total parts and service revenue
              
              $
              13,176
              
              $
              13,322
              
              $
              (146
              )
              
              (1.1
              )%Gross profit percentage
              
              
              54.4
              %
              
              54.1
              %Other
                  gross profit:Other
                  gross profit - same store
              
              $
              7,545
              
              $
              7,621
              
              $
              (76
              )
              
              (1.0
              )%Other
                  gross profit - other stores (1)
              
              
              572
              
              
              601
              
              
              (29
              )
              
              (4.8
              )%Total other gross profit, as reported
              
              $
              8,117
              
              $
              8,222
              
              $
              (105
              )
              
              (1.3
              )%Gross profit percentage
              
              
              100.0
              %
              
              100.0
              %Other
                  gross profit PVR - same store
              
              $
              911
              
              $
              859
              
              $
              52
              
              
              6.1
              %Other
                  gross profit PVR - other stores (1)
              
              
              507
              
              
              470
              
              
              36
              
              
              7.7
              %Total other gross profit PVR, as reported
              
              $
              863
              
              $
              810
              
              $
              52
              
              
              6.5
              %Total
                  gross profit:Same store
              
              $
              33,645
              
              $
              34,353
              
              $
              (708
              )
              
              (2.1
              )%Other stores (1)
              
              
              4,642
              
              
              5,618
              
              
              (976
              )
              
              (17.4
              )%Total
                  gross profit, as reported
              
              $
              38,287
              
              $
              39,971
              
              $
              (1,684
              )
              
              (4.2
              )%Gross profit percentage
              
              
              14.4
              %
              
              14.3
              %





(1)
      Represents the used car outlet closed August 2004.





*
      -
      Percentage is 100% or greater.





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





Total
      gross profit decreased $1.7 million, or 4.2%, to $38.3 million for the year
      ended December 31, 2004, from $40.0 million for the year ended December 31,
      2003. Same store total gross profit decreased $0.7 million, or 2.1% to $33.6
      million for the year ended December 31, 2004, from $34.4 million for the year
      ended December 31, 2003. Same store gross profit on new retail vehicle sales
      decreased $0.7 million, or 7.1%, to $9.3 million for the year ended December
      31,
      2004, from $10.0 million for the year ended December 31, 2003. The decrease
      in
      gross profit is primarily attributable to a 5.7% decrease in unit sales ($0.6
      million) combined with a 1.4% decrease in new retail gross profit per unit.





Same
      store gross profit on used vehicle retail sales decreased $0.1 million, or
      1.9%,
      to $5.7 million for the year ended December 31, 2004, from $5.8 million for
      the
      year ended December 31, 2003. The overall decrease is attributable to an 8.2%
      decrease in units sold ($0.5 million), partially offset by a 6.9% increase
      in
      average gross profit per unit ($0.4 million). The company strives to maintain
      a
      certain gross profit percentage, so the increase in the average revenue per
      vehicle sold at retail should translate into a higher gross profit per unit.


39




Same
      store parts and service gross profit increased $0.2 million, or 1.6%, to $10.9
      million for the year ended December 31, 2004, from $10.7 million for the year
      ended December 31, 2003 primarily due to the 1.1% increase parts and service
      revenues. Similar to revenues, the increase is primarily attributable to the
      Toyota dealerships.





***Selling,
      General and Administrative Expenses***





Selling,
      general and administrative expenses decreased $1.4 million, or 4.0%, to $33.4
      million for the year ended December 31, 2004, from $34.8 million for the year
      ended December 31, 2003. On a same store basis, S,G&A decreased $0.8
      million, or 2.7%, to $29.0 million for the year ended December 31, 2004 from
      $29.8 million for the year ended December 31, 2003. Decreases in payroll and
      related costs ($0.9 million), legal and other professional fees ($0.5 million)
      and reserves for charge-backs ($0.3 million), were partially offset by an
      increase in advertising costs ($0.5 million), policy costs ($0.2 million),
      rent
      and related building costs ($0.1 million) and various other costs ($0.1
      million). The decrease in payroll and related costs is primarily due to a
      reduction in gross profit, as a portion of payroll costs are commission based
      and therefore variable and a reduction in headcount. The decrease in legal,
      audit and other professional fees were primarily due to certain settlement
      costs
      incurred in 2003 compared to 2004. Also higher litigation costs were incurred
      in
      2003 compared to 2004 in relation to certain lawsuits later settled in 2004.
      Reductions in reserves were associated with decreased revenues. Advertising
      was
      increased in 2004 compared to 2003, in an effort to increase revenues. The
      increase in rent is primarily due to increases in real estate taxes primarily
      associated with a new dealership completed in 2003. Increased policy costs
      (used
      vehicle warranties and the labor portion of service warranties plus the costs
      associated with free products or services, see Note 15 to the consolidated
      financial statements) are due to an increase in the cost of services performed
      per vehicle sold in 2004 compared to 2003.





***Interest
      Income***





Interest
      income increased $0.1 million, or 100%, to $0.2 million for the year ended
      December 31, 2004 from $0.1 million for the year ended December 31, 2003. The
      increase is primarily the result of investing excess cash in a Ford Motor Credit
      Company cash management account paying interest of 6.25% at December 31, 2004.
      The cash management account interest rate is tied to the rate charged on
      Hometown’s floor plan financing arrangement.





***Interest
      Expense***





Interest
      expense increased $0.3 million, or 10.0%, to $3.3 million for the year ended
      December 31, 2004 from $3.0 million for the year ended December 31, 2003. The
      increase is primarily attributable to an increase in floor plan interest expense
      resulting form higher average borrowings.




***Other
      Income***





Other
      income for 2004 primarily includes $0.1 million received from General Motors
      Corp. related to the termination of the Oldsmobile product line. Other income
      for 2003 primarily includes a gain of approximately $0.9 million resulting
      from
      the sale of a Chrysler/Jeep Sales and Service Franchise in Waterbury, CT in
      June
      2003.





***Provision
      (benefit) for income tax***





The
      effective income tax rate for the year ended December 31, 2004 was not
      comparable to the 19.7% for the year ended December 31, 2003. The rates were
      based on current forecasts of income before taxes, and current forecasts of
      permanent differences between tax and book income. The difference in rates
      for
      both years from the expected effective tax rate of approximately 40.0% is
      primarily due to a reduction in the valuation allowance for both periods. The
      2004 difference is primarily due to the reduction of the valuation allowance
      on
      the deferred tax asset due to the ability to project sufficient income to
      recover the deferred tax asset. The 2003 difference is primarily due to the
      reduction of a valuation allowance related to goodwill
      that was deducted related with the sale of the Chrysler/Jeep
      Sales and Service Franchise as well as amortization of goodwill for
      tax
      purposes. At December 31, 2004, Hometown
      has a deferred tax asset of $0.6 million, net of a valuation allowance, related
      to its net operating losses. The state net operating losses begin to expire
      in
      2005. The federal net operating losses begin to expire in 2021. Hometown
      believes this net deferred tax asset will be realized within the next three
      years based on current projections. See Note 12 to the
      consolidated financial statements .


40




***Net
      Income***





Net
      income improved $1.4 million, to income of $3.9 million for the year ended
      December 31, 2004, from $2.5 million for the year ended December 31, 2003.
      See
      changes described above.





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





“Basic
      earnings per share” is computed by dividing net income by the weighted average
      common shares outstanding. “Diluted earnings per share” is computed by dividing
      net income by the weighted average common shares outstanding adjusted for the
      incremental dilution of potentially dilutive securities.





The
      basic
      and diluted income per share for the year ended December 31, 2004 is $0.54
      and
      $0.53, respectively. The basic and diluted income per share for the year ended
      December 31, 2003 is $0.35. See Note 11 to the consolidated financial
      statements.





***Cyclicality***





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





***Seasonality***





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





***Effects
      of Inflation***





Due
      to
      the relatively low levels of inflation experienced in fiscal 2004 and 2003,
      inflation did not have a significant effect on the results of Hometown during
      those periods.





41





***Liquidity
      and Capital Resources***





*Cash
      and Cash Equivalents*





Total
      cash and cash equivalents at December 31, 2005 and 2004, was $6.5 million and
      $6.1 million, respectively.





*Cash
      Flow from Operations*





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





For
                the years ended December 31,(in
                thousands)
            
            
            2005
            
            
            2004
            
            
            2003Net
                cash provided by operating activities
            
            $
            1,150
            
            $
            571
            
            $
            5,826Net
                cash provided by (used in) investing activities
            
            
            (324
            )
            
            (2,121
            )
            
            132Net
                cash provided by (used in) financing activities
            
            
            (474
            )
            
            2,012
            
            
            (3,943
            )Net
                increase in cash and cash equivalents
            
            $
            352
            
            $
            462
            
            $
            2,015





For
      the
      year ended December 31, 2005, net cash provided from operating activities of
      $1.2 million primarily consists of: (i) net income of $1.3 million plus non-cash
      items of $1.4 million (totaling $2.7 million), (ii) a decrease in inventory
      of
      $3.8 million less the decrease in floor plan liability - trade of $4.0 million,
      (iii) a decrease in accounts receivable of $0.6 million, primarily due to owning
      one less dealership and a decrease in revenues in December 2005 and the fourth
      quarter 2005 compared to the corresponding 2004 period; partially offset by
      (iv)
      a decrease in accounts payable and accrued expenses of $1.3 million, primarily
      due to payment of litigation settlements, owning one less dealership and a
      general decrease associated with less sales activity in December 2005 compared
      to 2004, and (v) amortization of deferred revenue of $0.6 million, due to
      amortization of deferred extended service plan revenue from the Connecticut
      dealerships ($0.3 million) and recognition of an advance for the extended
      service plan provider ($0.3 million). (See Notes 2 and 4 to the consolidated
      financial statements.) Inventory and related floor plan liability (trade and
      non-trade) decreased due to improved new vehicle inventory management. Net
      cash
      used in investing activities of $0.3 million is due to miscellaneous capital
      expenditures, primarily dealership equipment and leasehold improvements. Net
      cash used in financing activities of $0.5 million is due to principal payments
      of long-term debt and capital lease obligations of $2.0 million; partially
      offset by (i) the net change in non-trade floorplan notes payable of $1.2
      million (which increased due to timing of floor plan payments) and (ii) proceeds
      from long-term borrowings of $0.3 million (used to fund the build-out of the
      corporate office which was built in December 2004) and (iii) exercise of stock
      options (less than $0.1 million).





For
      the
      year ended December 31, 2004, net cash provided from operations of $0.6 million
      is primarily due to: (i) net income of $3.9 million plus non-cash items of
      $(0.8) million (totaling $3.1 million) and (ii) a decrease in accounts
      receivable of $1.0 million. Partially offsetting this were (i) an increase
      in
      inventory of $4.5 million that was partially offset by an increase in floor
      plan
      notes payable - trade of $1.9 million, (ii) decreases in accounts payable and
      accrued expenses of $0.7 million and (iii) amortization of deferred revenue
      of
      $0.2 million. Inventory (primarily new vehicle inventory) and related floor
      plan
      liability (trade and non-trade) increased due to inventory that was purchased
      with the expectation of higher sales in 2004, which did not materialize. Sales
      of new vehicles actually decreased $12.7 million in 2004 from the 2003 period,
      resulting in an increase in new vehicle inventory at December 31, 2004 due
      to
      the higher purchasing level. Net cash used in investing activities of $2.1
      million is due to capital expenditures of $2.1 million and is primarily due
      to
      the Brattleboro, VT building purchased in June 2004 for $1.5 million. Net cash
      provided by financing activities of $2.0 million is due to: (i) the net change
      (increase) in non-trade floor plan notes payable of $2.6 million (which
      increased due to a similar change in related inventory, see operating
      activities), (ii) proceeds from long-term borrowings of $1.4 million and (iii)
      exercise of warrants of $0.26 million; partially offset by principal payments
      of
      long-term debt and capital lease obligations of $2.2 million. The long-term
      borrowings were used to acquire the Brattleboro, VT building discussed
      above.


42




*Capital
      Expenditures*





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





*Use
      of Estimates and Critical Accounting Policies*





Preparation
      of financial statements in conformity with accounting principles generally
      accepted in the United States requires management to make estimates and
      assumptions that affect amounts of assets and liabilities and disclosures of
      contingent assets and liabilities as of the date of the financial statements
      and
      reported amounts of revenues and expenses during the periods presented. Actual
      amounts could differ from those estimates. A summary of our significant
      accounting policies is presented in the Notes to Consolidated Financial
      Statements.





*Revenue
      Recognition*




Revenues
      for vehicle and parts sales are recognized upon delivery to or acceptance by
      the
      customer. Revenues for vehicle service are recognized when the service has
      been
      completed. Sales discounts and service coupons are accounted for as a reduction
      to the sales price at the point of sale. Manufacturer incentives and rebates
      are
      not recognized until earned in accordance with respective manufacturers
      incentive programs. See Note 13 to the consolidated financial statements for
      effect of EITF 02-16 "Accounting by a Customer (Including a Reseller) for
      Certain Consideration Received from a Vendor".





*Finance,
      Insurance and Service Contract Income Recognition*




Hometown
      arranges financing for customers through various institutions and receives
      financing fees equal to the difference between the loan rates charged to
      customers and the predetermined financing rates set by the financing
      institution. Hometown receives payment of finance fees from the financing
      institution approximately 30 days after the financing institution receives
      the
      contract. In addition, Hometown receives commissions from the sale of credit
      life and disability insurance based on the premiums charged to the customer
      by
      the insurance company; and commissions from the sale of extended service
      contracts to customers based on the difference between the price paid by the
      customer for the service contract and the premium paid to the primary obligor.
      These commissions are received upfront at the time the vehicle was sold. The
      revenues from financing fees and commissions are generally recorded at the
      time
      of the sale of the vehicles. Hometown is not the principal in these
      transactions. Hometown acts as the agent for the financing institution or vendor
      that is providing the service. These revenues are recorded on a net basis.





These
      revenues are recorded in Revenues, Other in the Statement of Operations.
      Revenues from sales of third party extended service contracts were $2.4 million
      and $2.5 million for the years ended December 31, 2005 and 2004, respectively.
      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. 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.
      (See Note 2 to the consolidated financial statements.) For these dealerships,
      Hometown recorded the revenue as a liability and amortizes the amount into
      revenue over a five-year period. At December 31, 2005 and 2004 Hometown had
      $317,000 and $603,000 of related deferred revenue, respectively. This deferred
      revenue will be recognized over the next three years as follows: 2006 -
      $191,000, 2007 - $100,000 and 2008 - $26,000. Approximately $286,000 and
      $398,000 of deferred revenue was amortized to Other Revenues, net during the
      2005 and 2004 periods, respectively. At December 31, 2005, Hometown also had
      other deferred revenue of $16,000, which represents the balance of a $500,000
      advance on warranty income from Hometown’s Extended Service Plan vendor received
      June 2004. The balance of this advance will be earned during the first quarter
      of 2006. There were no fees or other costs associated with the
      advance.


43







Hometown
      may be charged back (“charge-backs”) for unearned financing fees, insurance or
      service contract commissions in the event of early termination of the contracts
      by the customers. For finance fees, if a customer were to terminate their
      contract prior to the scheduled maturity, generally three to five years,
      Hometown may be charged back for a portion of the finance fee received. The
      time
      period whereby Hometown is subject to charge-backs is generally from 90 days
      to
      180 days. For certain other contracts Hometown is subject to charge-backs for
      the life of the loan. Generally, if a customer makes their first three to six
      payments and subsequently pays off the loan, Hometown will not be charged back
      by the financing institution. Hometown pays for this in the form of a reduction
      of the finance fee. In the case of insurance or service contracts, Hometown
      is
      subject to charge-backs for the life of the related insurance policy or service
      contract. In the case of early termination, the vendor will bill us back a
      pro-rated portion of our commission. The reserves for future charge backs are
      based on historical operating results and the termination provisions of the
      applicable contracts. At the time of sale, Hometown records finance, insurance
      and service contract income, net of estimated charge-backs. This is included
      in
      other dealership revenue in the accompanying consolidated financial
      statements.





*Receivables*





Hometown
      had $4.3 million in accounts receivable, net at December 31, 2005 compared
      to
      $5.1 million at December 31, 2004. A substantial portion of those receivables,
      $1.7 million and $2.4 million as of December 31, 2005 and 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. Of the remaining
      amount, $0.9 million and $1.6 million as of December 31, 2005 and 2004,
      respectively, represents amounts due from manufactures for such items as
      warranty claims and incentive reimbursements. Parts and service receivables
      were
      $0.4 million and $0.6 million as of December 31, 2005 and 2004, respectively.
      These categories decreased from 2004 primarily due to the transfer of the
      Westwood dealership ($0.8 million) (S ee
      Note
      15 to
      the
      consolidated financial statements) and a 15.5% and 16.3% decrease in all other
      dealerships revenue in December 2005 and the fourth quarter 2005 compared to
      the
      corresponding 2004 period ($0.8 million), respectively. Certain receivables
      due
      from manufacturers are due on a quarterly basis. Other receivables increased
      to
      $1.2 million from $0.5 million as of December 31, 2005 and 2004, respectively,
      primarily due to sales to a rent-a-car company in December 2005 ($0.3 million),
      an increase in non-trade receivables with a manufacturer ($0.1 million) and
      a
      decrease in the allowance for bad debts, which is netted in this category ($0.1
      million).





In
      assessing our allowance for doubtful accounts, we consider historical losses
      as
      well as current performance with respect to past due accounts. The allowance
      for
      doubtful accounts is $0.2 million and $0.3 million at December 31, 2005 and
      2004, respectively. The decrease in the allowance is primarily due to a decrease
      in the total receivables outstanding at December 31, 2005 and a slight
      improvement in the accounts receivable ageing.





*Inventories*





Hometown
      had $33.5 million in inventories, net at December 31, 2005 compared to $43.4
      million at December 31, 2004. The majority of inventory, $24.5 million and
      $33.6
      million as of December 31, 2005 and 2004, respectively, is new vehicle
      inventory. This decrease is primarily due one less dealership (Westwood Lincoln
      Mercury - $6.1 million) along with an improvement (reduction) in inventory
      levels at our dealerships due to better inventory management. New, used and
      demonstrator vehicle values are stated at the lower of cost or market,
      determined on a specific unit basis. Parts and accessories are stated at the
      lower of cost (determined on a first-in, first-out basis) or market. Hometown
      assesses the lower of cost or market reserve requirement for vehicles, on an
      individual unit basis, taking into consideration historical loss rates, the
      age
      and composition of the inventory and current market conditions. The lower of
      cost or market adjustment was $0.4 million and $0.7 million at December 31,
      2005
      and 2004, respectively. The decrease in the lower of cost or market adjustment
      was primarily due to the transfer of the Westwood dealership. See Note 15 to
      the
      consolidated financial statements.


44








***Floor
      Plan Financing***




See
      Note
      7 to the consolidated financial statements.





***Other
      Indebtedness***





In
      addition to floor plan financing, Hometown has long-term debt and capital lease
      obligations of $13.1 million, which is primarily attributable to real estate
      mortgage notes payable of $7.0 million due in monthly installments including
      interest at 10.0% that matures in May 2014, real estate capital lease
      obligations of $4.0 million due in monthly installments including interest
      at
      10.0% that matures in December 2013, real estate mortgage note payable of $1.0
      million including interest at 7.0% through May 2009 at which time the terms
      of
      the loan will be renegotiated, and capital lease obligations on rental vehicles
      of $0.7 million due in monthly installments including interest ranging from
      4.5%
      to 7.3%  that
      matures through December 2009. See Notes 8, 9 and 14 to the consolidated
      financial statements.





Hometown
      is subject to certain financial covenants calculated semi-annually at June
      30 th and
      December 31st, related to its real estate mortgages. Significant financial
      covenants are: (i) a Fixed Cost Coverage Ratio (a defined cash flow ratio)
      calculation and (ii) an Adjusted Net Worth calculation as defined. Hometown
      has
      been in default of its loan agreement for Baystate Lincoln Mercury since
      December 31, 2004 for failure to comply with the Fixed Cost Coverage Ratio
      covenant caused by losses incurred at the dealership. Accordingly, Hometown
      has
      reclassified $4.0 million of related long-term debt to current at December
      31,
      2005. Total debt for this mortgage at December 31, 2005 is $4.3 million. On
      February 9, 2005, this mortgage was refinanced in connection with the
      acquisition of a Nissan Sales and Service Franchise. (See Note 20 to the
      consolidated financial statements.) In accordance with terms of the original
      mortgage, Hometown paid a prepayment penalty of $1.0 million, which will be
      expensed in Hometown’s first quarter Consolidated Statements of
      Operations.





As
      of
      December 31, 2005, Hometown has the following contractual
      obligations:





(In
                thousands)
            
            Total
            
            Less
                than
              1
                year
            
            1-3
                years
            
            3-5
                years
            
            More
                than
              5
                yearsFloor
                Plan - trade
            
            $
            6,697
            
            $
            6,697
            
            
            —
            
            
            —
            
            
            —Floor
                Plan - non-trade
            
            $
            26,265
            
            $
            26,265
            
            
            —
            
            
            —
            
            
            —Long
                term debt and capital lease obligations
            
            $
            13,129
            
            $
            5,245
            
            $
            1,899
            
            $
            1,783
            
            $
            4,202Operating
                leases:Third parties
            
            $
            815
            
            $
            259
            
            $
            515
            
            $
            41
            
            $
            —Related parties
            
            $
            5,884
            
            $
            733
            
            $
            1,466
            
            $
            1,471
            
            $
            2,214Interest
            
            $
            9,246
            
            $
            5,562
            
            $
            1,463
            
            $
            1,119
            
            $
            1,102Total
            
            $
            62,036
            
            $
            44,761
            
            $
            5,343
            
            $
            4,414
            
            $
            7,518





45





***Company
      Guarantees***





See
      Note
      15 to the consolidated financial statements.





***Company
      Warranties***





See
      Note
      15 to the consolidated financial statements.





***Franchise
      Agreements***





See
      Note
      15 to the consolidated financial statements.





***Acquisitions
      and Dispositions***





See
      Notes
      18, 19 and 20 to the consolidated financial statements.





***Related
      Party Transactions***





Hometown
      has leased from various affiliates the premises occupied by certain of its
      dealerships and guaranteed the related mortgage debt of certain dealerships.
      (As
      of February 28, 2006,Hometown no longer guarantees the aforementioned mortgage
      debt.) Each of the governing leases became effective as of the closing of the
      initial public offering, has a term expiring in 2013, is on a triple net basis
      and provides for a consumer price index ("CPI") increase to the base rent on
      January 1, 2009. Total expense for operating leases and rental agreements with
      related parties was $0.9 million for the year ended December 31, 2005 and future
      minimum payments under these lease agreements as of December 31, 2005 is $5.9
      million. Two of the leases are treated as capital leases. Total payments for
      these leases were $0.9 million for the year ended December 31, 2005. This
      practice is fairly common in the automotive retail industry. See Item 13 -
      “Certain Relationships and Related Transactions”.





***Litigation***





See
      Item
      3. - Legal Proceedings and Note 15 to the consolidated financial
      statements.





***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
      outstanding (trade and non-trade) at December 31, 2005 of $33.0 million, a
      1%
      change in the borrowing rate would result in a $0.3 million change to annual
      floor plan interest expense.





At
      December 31, 2005, Hometown invested $5.7 million of excess cash, of which
      $1.2
      million was invested in money market accounts paying a weighted average interest
      rate of 2.38% at December 31, 2005, and $4.5 million was invested in a Ford
      Motor Credit Company cash management account paying interest of 8.25% at
      December 31, 2005. The cash management account interest rate is tied to the
      rate
      charged on Hometown’s floor plan financing arrangement.





***New
      Accounting Pronouncements***





See
      Note
      3 to the consolidated financial statements.





46





***Forward
      Looking Statement***





When
      used
      in the Annual Report on Form 10K, 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
      7A.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**





See
      Management Discussion and Analysis - Quantitative and Qualitative Disclosure
      about Market Risk.








**ITEM
      8.**  **FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**





The
      consolidated financial statements of Hometown required by this item are set
      forth beginning on page F-1.








**ITEM
      9.**  **CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURES**





None








**ITEM
      9A.**  **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
      December 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 at the reasonable assurance
      level.


47




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





**ITEM
      9B.**  **OTHER
      INFORMATION**





None

















48





**PART
      III**





**ITEM
      10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**





**Directors
      and Executive Officers**





Information
      regarding directors and nominees for directors of Hometown is included under
      the
      caption entitled “Election of Directors” in the 2006 Proxy Statement and is
      incorporated herein by reference.





The
      executive officers and directors of Hometown and their respective ages as of
      March 24, 2006 are as follows:





**Name**
            
            **Age**
            
            **Position**
            
            **Director
                Since**Corey
                Shaker
            
            48
            
            President,
                Chief Operating Officer, Chief Executive Officer and
                Director
            
            1997William
                C. Muller Jr.
            
            54
            
            Regional
                Vice President - South Division and Director
            
            1997Steven
                Shaker
            
            37
            
            Regional
                Vice President - North Division
            
            Not
                a directorJoseph
                Shaker
            
            38
            
            Regional
                Vice President - East Division and Director
            
            1997Charles
                F. Schwartz
            
            50
            
            Chief
                Financial Officer
            
            Not
                a directorBernard
                J. Dzinski, Jr. *
            
            42
            
            Director
            
            2003Steven
                A. Fournier *
            
            51
            
            Director
            
            2002Timothy
                C. Moynahan *
            
            66
            
            Director
            
            2002


______________


*Member
      of Audit, Compensation and Nominating/Governance Committees





All
      directors hold office until the next annual meeting of shareholders and until
      their successors are duly elected and qualified. Officers are elected to serve
      subject to the discretion of the Board of Directors.





Set
      forth
      below is a brief description of the background and business experience of the
      executive officers and directors of Hometown:





*Corey
      E. Shaker* was
      named President and Chief Operating Officer on February 7, 2000, and added
      the
      title of Chief Executive Officer on August 29, 2000. In addition, he was Vice
      President-Connecticut Operations since October 1, 1997 and was in charge of
      Hometown's Company-wide sales training efforts. Prior to that, from 1989 he
      was
      Chief Operating Officer and General Manager of Family Ford Inc. where he was
      responsible for all aspects of its operations. He is a past member of NADA
      Ford
      F01 20 group. He was awarded the Lincoln Mercury Salesperson of the Nation
      award
      in 1980 and is a three-time winner of the Lincoln Mercury Inner Circle award.
      He
      is also a first cousin to Steven Shaker, the Regional VP - North Division,
      and
      Joseph Shaker, the Regional VP - East Division and director of Hometown. He
      holds a B.S. in Business Administration from Providence College.





*William
      C. Muller Jr.* has been
      Regional Vice President - South Division since March 2000. Mr. Muller has been
      Vice President-New Jersey Operations since October 1, 1997. In addition,
      from 1980 he was the President of Muller Toyota, Inc. and of Muller Chevrolet,
      Oldsmobile, Isuzu, Inc (both of which are currently known as Muller Automotive
      Group, Inc. and Muller Chevrolet Inc., respectively.) Under his management,
      Muller Toyota has been: (a) a 15-time recipient of Toyota's Prestigious
      President's Award, given to those dealers with superior levels of customer
      satisfaction who also exceed capital standards and have high market penetration
      and facilities that meet or exceed Toyota standards; (b) a 15-time
      recipient of Toyota Parts Excellence Award; (c) a 10-time winner of the
      Toyota Service Excellence Award; and (d) a 14-time winner of Toyota's Sales
      Excellence Award. He holds a B.A. degree from Fairleigh Dickinson University.


49




*Steven
      Shaker* has been
      Regional Vice President - North Division since March 2000. Mr. Shaker had been
      a
      Vice President in charge of Parts and Service since October 1, 1997. In
      addition, from 1992 he was Director of Parts and Service of all of the Shaker
      Group's operations and was instrumental in the implementation of the pilot
      program to develop the Ford Motor Company's first Autocare automobile service
      center. He is the brother of Joseph Shaker and a first cousin of Corey Shaker,
      each respectively an officer and director of Hometown. He holds a B.A. degree
      from Salve Regina College.





*Joseph
      Shaker* has been
      Regional Vice President - East Division since 2002. Mr. Shaker served as
      President and Chief Executive Officer of CarDay, Inc.; an internet based used
      vehicle exchange company between 2000 and 2002. He was President and Chief
      Operating Officer of Hometown from 1997 to 2000. In addition, between 1991
      and
      1997 he served as the Chief Operating Officer of Shaker's Lincoln Mercury,
      Shaker's Jeep Eagle and Lincoln Mercury Autocare in Connecticut. Since 2002
      he
      has served as a member of the Mazda Dealer Advisory Counsel, was Chairman of
      the
      Counsel for 2004, and was elected Immediate Past Chairman for 2005. Mr. Shaker
      is also a member of the newly formed Ford Motor Credit Dealer/Retailer Advisory
      Board. Mr. Shaker is also a board member of VPRO, a privately held software
      company specializing in digital photography in the auto and insurance
      industries. He is the brother of Steven Shaker, the Regional VP - North
      Division, and a first cousin of Corey Shaker, the Chief Executive Officer and
      a
      director of Hometown. He holds a B.S. (Management) degree from Bentley
      College.





*Charles
      F. Schwartz* has been
      Chief Financial Officer since January 2002. From November 2001 through January
      2002 he was the Assistant to the CEO. Prior to joining Hometown, he was the
      Vice
      President and Chief Financial Officer for Staples Communications, a nationwide
      integrator of communications solutions from 2000 - 2001. From 1993 - 2000 he
      was
      the Senior Vice President, Chief Financial Officer and Chief of Staff for
      People’s Choice TV Corporation, a wireless communications company. From 1989
      through 1993, Mr. Schwartz had been Chief Financial Officer of Jimbo’s Jumbos,
      Incorporated, an affiliate of Chock Full O’ Nuts. Mr. Schwartz is
      a
      Certified Public Accountant. He holds a B.B.A. degree in accounting from Bernard
      M. Baruch College in New York City.




*Bernard
      J. Dzinski,* Jr. has
      been employed by Lenkowski Lonergan & Co., LLP since 2004. Prior to 2004, he
      was a partner with Charles Heaven & Co., CPA’s. He currently serves on the
      Board of Directors of the Waterbury Rotary Club. He also serves as Director,
      Treasuer and Executive Committee member of Holy Cross High School, located
      in
      Waterbury, Connecticut. Mr. Dzinski received a Bachelor of Science in Accounting
      from Providence College in 1985 and is a Certified Public Accountant. He is
      a
      member of the American Institute of Certified Public Accountants and the
      Connecticut Society of Certified Public Accountants.





*Steven
      A. Fournier* has been
      the President and Chief Executive Officer of Gar-Kenyon Technologies, a
      manufacturer of hydraulic aerospace components, since December 2001. He
      previously was President and Chief Operating Officer of Matthews Ventures,
      a
      diversified holding company, from 1992. Mr. Fournier is a Director of the
      Naugatuck Chamber of Commerce. Mr. Fournier received a Bachelor of Science
      Degree in Accounting from Bentley College in 1975 and is a Certified Public
      Accountant.





*Timothy
      C. Moynahan* has been
      a founding partner in the law firm Moynahan, Minnella, Broderick and Tindall
      since 1974. Mr. Moynahan is a director of The Institute of Human Virology,
      at
      the University of Maryland School of Medicine. He is also the President of
      the
      Connecticut Chapter of the Ireland Chamber of Commerce, a non-profit
      organization which promotes economic relationships between the United States
      and
      Ireland and is Vice-President of the Paula A. Moynahan Skin Care Company, a
      manufacturer of skin care products. Mr. Moynahan holds a BS degree in History
      from Providence College and a JD degree from Catholic University School of
      Law.


50





**Committees
      of the Board of Directors**





Hometown's
      Board of Directors has established a Compensation Committee, whose members
      are
      Messrs. Dzinski, Fournier and Moynahan. The Compensation Committee reviews
      and
      recommends to the Board of Directors the compensation and benefits of all
      officers of Hometown, reviews general policy matters relating to compensation
      and benefits of employees of Hometown and administers the issuance of stock
      options and discretionary cash bonuses to Hometown's officers, employees,
      directors and consultants.





The
      Company has a separately designated standing Audit Committee whose members
      are
      Bernard J. Dzinski, Jr., Steven A. Fournier and Timothy C. Moynahan. The Audit
      Committee meets with management and Hometown’s independent public accountants to
      determine the adequacy of internal controls and other financial reporting
      matters. The Board of Directors has determined that Bernard J. Dzinski, Jr.
      and
      Steven A. Fournier, each qualify as an audit committee financial expert, as
      such
      term is defined in recently adopted rules of the Securities and Exchange
      Commission implementing requirements of the Sarbanes-Oxley Act of 2002. In
      addition, Bernard J. Dzinski, Jr., Steven A. Fournier and Timothy C. Moynahan
      are independent within the meaning of Item 7(d)(3) of Schedule 14A of the
      Exchange Act.





The
      Company also has
      a
      separately designated standing Nominating/Corporate
      Governance Committee whose
      members are Bernard J. Dzinski, Jr., Steven A. Fournier and Timothy C. Moynahan. The
      Committee assists the Board with respect to corporate governance matters,
      including the composition and function of the Board. The Committee has the
      responsibilities set forth in its Charter with respect to identifying
      individuals qualified to become members of the Board, recommending qualified
      members to the Board when vacancies occur, recommending changes in the size
      and
      composition of the Board or any Committees, periodically developing and
      recommending to the Board updates to the Governance Guidelines, and overseeing
      the annual evaluation of the Board and Committees. The criteria that the
      Committee applies to Director nominees is set forth in the Charter of the
      Committee. The Committee considers suggestions from many sources, including
      shareholders, regarding possible candidates for director. The Committee reviews
      the qualifications and backgrounds of all the candidates and recommends the
      slate of candidates to be nominated for election at the annual meeting of
      shareholders. Shareholder recommendations for nominees to the Board will be
      given appropriate consideration by the Committee for recommendation to the
      Board
      based upon the nominee’s qualifications in the same manner as all other
      candidates. Shareholder nominee recommendations should be submitted in writing
      to the Chairman of the Nominating/Governance in care of the Corporate
      Secretary.





Hometown
      has adopted a Code of Business Conduct and Ethics that applies to all of
      Hometown’s employees and directors, including its principal executive officer,
      principal financial officer and principal accounting officer. Hometown has
      also
      adopted a Code of Ethics for the Chief Executive Officer, Chief Financial
      Officer and Chief Accounting Officer. Hometown’s Code of Business Conduct and
      Ethics covers all areas of professional conduct including, but not limited
      to,
      conflicts of interest, disclosure obligations, protections for persons reporting
      questionable behavior, confidential information, protection of company assets,
      as well as compliance with all laws, rules and regulations applicable to
      Hometown’s business. Hometown’s Code of Ethics for the Chief Executive Officer,
      Chief Financial Officer and Chief Accounting Officer reinforces the Code of
      Business Conduct and Ethics and covers standards of ethical conduct, timely
      and
      truthful disclosures, legal compliance and reporting of known or suspected
      violations.





A
      copy of
      Hometown’s Code of Business Conduct and Ethics and the Code of Ethics for the
      Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer
      are posted on its website at www.htauto.com. In the event that an amendment
      to,
      or a waiver from, a provision of Hometown’s Code of Business Conduct and Ethics
      or the Code of Ethics that applies to any of Hometown’s officers or directors is
      necessary, Hometown intends to post such information on its website.


51




Hometown
      undertakes to provide without charge to any person, upon written or verbal
      request of such person, a copy of Hometown’s Code of Business Conduct and Ethics
      and Code of Ethics. Requests should be directed in writing to Chief Financial
      Officer, Hometown Auto Retailers, Inc., 1309 South Main Street, Waterbury,
      CT
      06706, or by telephone to (203) 756-1300.





**ITEM
      11.**  **EXECUTIVE
      COMPENSATION**





**Summary
      Compensation.**





The
      following table presents certain information concerning compensation paid or
      accrued for services rendered to Hometown in all capacities during the three
      years ended December 31, 2005, for the Chief Executive Officer and the other
      executive officers of Hometown whose aggregate annual base salary exceeded
      $100,000 (collectively, the "Named Executive Officers").





**COMPENSATION
                TABLE**





**Annual
                Compensation****Name
                and Principal Position**
            
            **Fiscal
                Annual**
              **Year**
              **Compensation**
            
            **$
                Salary**
            
            **Bonus**
              **(1)**
            
            **Other**
              **(2)**
            
            **Option**
              **Grants**Corey
                E. Shaker,
              President
                and Chief Executive Officer
            
            2005
              2004
              2003
            
            257,500
              257,500
              250,000
            
            102,645
              35,168
              66,923
            
            18,114
              18,202
              16,073
            
            —
              —
              —William
                C. Muller, Jr.
              Regional
                Vice President-South Division
            
            2005
              2004
              2003
            
            215,000
              215,000
              215,000
            
            69,024
              134,346
              155,319
            
            19,649
              20,046
              17,384
            
            —
              —
              —Steven
                Shaker,
              Regional
                Vice President-North Division
            
            2005
              2004
              2003
            
            150,000
              150,000
              125,000
            (3)
            —
              —
              —
            
            5,900
              5,745
              3,542
            
            —
              —
              —Joseph
                Shaker,
              Regional
                Vice President-East Division
            
            2005
              2004
              2003
            
            212,700
              200,000
              200,000
            
            —
              —
              53,461
            
            10,400
              10,600
              10,400
            
            —
              —
              —Charles
                F. Schwartz,
              Chief
                Financial Officer and Secretary
            
            2005
              2004
              2003
            
            195,000
              195,000
              180,000
            
            47,058
              33,034
              39,385
            
            6,852
              5,970
              5,402
            
            20,000
              —
              50,000


_________________________


(1)
            The
                amounts shown are cash bonuses earned in the specified year. A portion
                of
                these bonuses may be paid in the first quarter of the following
                year.


(2)
            Primarily
                use of vehicles.


(3)
            A
                portion of this salary was received in
                2005.





52





**OPTION
      GRANTS IN LAST FISCAL YEAR**





**Name**
            
            Number
                of
              Shares
              Underlying
              Options
              Granted(#)
                (1)
            
            Percent
                of
              Total
                Options
              Granted
                to
              Employees
                in
              Fiscal
                Year 2005
            
            Exercise
              Price
              ($/Share)
            
            Expiration
                Date
            
            Potential
                Realizable
              Value
                At Assumed
              Annual
                Rates of Stock
              Price
                Appreciation for
              Option
              Term(2)5%
            
            10%Charles
                F. Schwartz
            
            20,000
            
            100%
            
            $1.25
            
            May
                2015
            
            $15,722
            
            $39,844





(1)
            The
                options vest with respect to one-third of the shares of Common Stock
                covered by the options on each of the first, second and third anniversary
                of the Option Grant Date, May 13, 2005.





(2)
            Potential
                realizable values are net of exercise price but before taxes, and
                are
                based on the assumption that the Common Stock of Hometown appreciates
                at
                the annual rate shown (compounded annually) from the date of grant
                until
                the expiration date of the respective options. All the options issued
                in
                2005 were issued at the market price at the date of issuance. These
                numbers are calculated based on Securities and Exchange Commission
                requirements and do not reflect Hometown's projection or estimate
                of
                future stock price growth. Actual gains, if any, on stock option
                exercises
                are dependent on the future financial performance of Hometown, overall
                market conditions and the option holder's continued employment through
                the
                vesting period. This table does not take into account any appreciation
                in
                the price of the Common Stock from the date of grant to the date
                of this
                Form 10-K.





**AGGREGATED
      OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
      VALUES**





The
      following table summarizes options exercised during fiscal 2005 and presents
      the
      value of unexercised options held by the Named Executive Officers at fiscal
      year
      end:





**Name**
            
            **Acquired**
              **on**
              **Exercise**
            
            **Value**
              **Realized**
            
            **Number
                of Securities**
              **Underlying**
              **Unexercised
                Options at**
              **Fiscal
                Year-End**
              **Exercisable
                (E)**
              **Unexercisable
                (U)**
            
            **Value
                of Unexercised**
              **In-the-Money**
              **Options
                at Fiscal**
              **Year-End**
              **Exercisable
                (E)**
              **Unexercisable
                (U)**Corey
                E. Shaker
              President
                and Chief Executive Officer
            
            —
            
            —
            
            100,000  E
            
            $42,250  EWilliam
                C. Muller, Jr.
              Regional
                Vice President - South
            
            —
            
            —
            
            30,000  E
            
            $750  ESteven
                Shaker
              Regional
                Vice President - North
            
            —
            
            —
            
            30,000  E
            
            $750
                  ECharles
                F. Schwartz,
              Chief
                Financial Officer and Secretary
            
            —
            
            —
            
            83,333  E
              36,667  U
            
            $63,000  E
              $17,000  U





53





In
      general, the option agreements shall be exercisable only so long as the Optionee
      shall continue to be an employee of Hometown and within the thirty-day period
      after the date of termination of his employment to the extent it was exercisable
      on the day prior to the date of termination. In the event the Optionee is unable
      to continue his employment with Hometown as a result of his total and permanent
      disability, he may, but only within three (3) months from the date of
      disability, exercise the option to the extent he was entitled to exercise it
      at
      the date of such disability. In the event of death of the Optionee, the option
      may be exercised, at any time within twelve (12) months following the date
      of
      death, by the Optionee's estate or by a person who acquired the right to
      exercise this option by bequest or inheritance, but only to the extent of the
      right that would have accrued had the Optionee continued living one (1) month
      after the date of death, provided that at the time of his death the Optionee
      is
      an employee of Hometown and shall have been in Continuous Status (as defined
      in
      Hometown’s Stock Option Plan) as an employee from the date hereof; or within
      thirty (30) days after the termination of Continuous Status as an employee,
      the
      option may be exercised, at any time within three (3) months following the
      date
      of death, by the Optionee's estate or by a person who acquired the right to
      exercise the Option by bequest or inheritance, but only to the extent of the
      right to exercise that had accrued at the date of termination.





**Employment
      Contracts**




None
      of
      the officers of Hometown have employment agreements. However, a Severance
      Agreement has been entered into between Hometown and its Chief Financial
      Officer, Charles F. Schwartz. The Agreement and the benefits under the Agreement
      are contingent upon the settlement of the complaint filed on June 30, 2005
      in
      the Court of Chancery of the State of Delaware by Steven N. Bronson, Louis
      J.
      Meade and Leonard Hagan against Hometown and its directors as described in
      Item
      3 Legal Proceedings and upon the completion of the Exchange Agreement as
      described in Item 1 Business-Exchange Agreement. In the event that the
      litigation is not settled or Hometown or any other party to the Exchange
      Agreement abandons or terminates the Exchange agreement, Mr. Schwartz will
      not
      be entitled to any payments under the Agreement. Pursuant to the agreement,
      for
      a period of approximately two months following the completion of the Exchange
      Agreement, Mr. Schwartz will continue as an at-will employee of Hometown and
      for
      an additional ten months he will be available to assist Hometown, provide
      information and otherwise be available to Hometown as necessary, with the
      combined period of such services to be one year. As consideration for such
      services, Mr. Schwartz will be compensated on a bi-weekly basis at a rate equal
      to his present salary plus the average amount of his bonus received over the
      last three years.





**Compensation
      Committee Interlocks and Insider Participation in Compensation Decisions**





None
      of
      the directors serving on the Compensation Committee are employees or officers
      of
      Hometown. No director or executive officer of Hometown is a director or
      executive officer of any other corporation that has a director or executive
      officer who is also a director of Hometown.





**1998
      Stock Option Plan**





In
      February 1998, as further amended in August 2002, in order to attract and
      retain persons necessary for the success of Hometown, Hometown adopted its
      1998
      Stock Option Plan (the "Stock Option Plan") covering up to 830,000 shares of
      Class A Common Stock. Pursuant to the Stock Option Plan, officers,
      directors and key employees of Hometown and consultants to Hometown are eligible
      to receive incentive and/or non-incentive stock options. The Board of Directors
      will administer the Stock Option Plan, which expires in January 2008, or a
      committee designated by the Board of Directors. The selection of participants,
      allotment of shares, determination of price and other conditions relating to
      the
      purchase of options will be determined by the Board of Directors, or a committee
      thereof, in its sole discretion. Stock options granted under the Stock Option
      Plan are exercisable for a period of up to 10 years from the date of grant
      at an
      exercise price which is not less than the fair market value of the Common Stock
      on the date of the grant, except that the term of an incentive stock option
      granted under the Stock Option Plan to a stockholder owning more than 10% of
      the
      outstanding Common Stock may not exceed five years and its exercise price may
      not be less than 110% of the fair market value of the Common Stock on the date
      of the grant. For grants to the Named Executive Officers see the chart above
      titled “AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
      OPTION VALUES.”


54




**Employee
      Benefit Plan**





Hometown
      maintains the Hometown Auto Retailers, Inc. 401(k) Plan, as amended, (the
“Plan”) effective October 1, 1999, for the benefit of eligible employees, as
      defined. Participants may make voluntary contributions of up to 50% of their
      compensation, subject to certain IRS limitations. Hometown may make annual
      matching contributions to the Plan at its discretion. Hometown made
      contributions of $19,000, $18,000 and $24,000 to the Plan for the years ended
      December 31, 2005, 2004, and 2003, respectively.





**Compensation
      of Directors**





Each
      non-employee Director receives a fee of $1,000, for each meeting attended in
      person and $800 for each meeting attended telephonically and reimbursement
      for
      travel costs and other out-of-pocket expenses incurred in attending each
      Directors' meeting. In addition, committee members receive $500 for each
      committee meeting attended in person, other than meeting directly following
      or
      preceding Board meetings and $400 for each committee meeting attended
      telephonically. In addition, each non-employee Director receives options to
      purchase an additional 2,500 shares of Common Stock on the date of Hometown's
      annual stockholders' meeting. Such options will have an exercise price equal
      to
      the fair market value of the Common Stock on the date of grant and will vest
      one-third upon grant and one-third on each of the first and second anniversary
      of the date of grant.





**Limitation
      of Directors' Liability and Indemnification**





The
      Delaware General Corporation Law (the “DGCL”) authorizes corporations to limit
      or eliminate the personal liability of directors to corporations and their
      shareholders for monetary damages for breach of directors' fiduciary duty of
      care. Hometown's Certificate of Incorporation limits the liability of Directors
      of Hometown to Hometown or its shareholders to the fullest extent permitted
      by
      Delaware law.





Hometown's
      Certificate of Incorporation provides mandatory indemnification rights to any
      officer or Director of Hometown who, by reason of the fact that he or she is
      an
      officer or Director of Hometown, is involved in a legal proceeding of any
      nature. Such indemnification rights include reimbursement for expenses incurred
      by such officer or Director in advance of the final disposition of such
      proceeding in accordance with the applicable provisions of the DGCL. Insofar
      as
      indemnification for liabilities under the Securities Act may be provided to
      officers and Directors or persons controlling Hometown, Hometown has been
      informed that in the opinion of the Securities and Exchange Commission such
      indemnification is against public policy as expressed in the Securities Act
      and
      is, therefore, unenforceable.





Except
      for the litigation described in Item 3 above, there
      is
      no pending litigation or proceeding involving a Director, officer, employee
      or
      agent of Hometown in which indemnification by Hometown will be required or
      permitted.





**Report
      of the Compensation Committee on Executive Compensation**





The
      primary purposes of the Compensation Committee are to establish and maintain
      competitive, fair and equitable compensation practices designed to attract
      and
      retain key management employees throughout the Corporation and to establish
      appropriate incentives to motivate and reward key management employees for
      achieving or exceeding established performance goals; and to oversee the
      competency and qualifications of senior management personnel and the provisions
      of senior management succession planning. The Compensation Committee is
      responsible for a broad range of activities which include (i) recommending
      to
      the full Board of Directors the salary(ies) of the Chairman of the Board, Chief
      Executive Officer, Chief Operating Officer and Chief Financial Officer after
      an
      evaluation of market data, internal salary relationships as provided by the
      Corporation’s executive compensation professionals, and such other factors as
      the Committee deems appropriate; (ii) recommending to the full Board of
      Directors the salaries for other elected Corporate Officers and selected key
      management employees after reviewing the recommendations made by the Chief
      Executive Officer and the Chief Operating Officer; (iii) recommending to the
      full Board of Directors the type of incentive plans, if any, which will be
      offered to management employees; and (iv) administering the Corporation’s 1998
      Incentive Stock Option Plan, to include, after reviewing the recommendations
      of
      the Chief Executive Officer and the Chief Operating Officer, determining the
      employees to be eligible for plan participation.




COMPENSATION
                  COMMITTEE
                
                Steven
                  Fournier
                Chairman


55








The above
      graph shows a comparison of cumulative total returns for Hometown, the NASDAQ
      Market Index, and a Peer Group from Hometown’s SIC Code Index from the date of
      the initial public offering.





(1)  The
      Peer
      Group Index includes the following companies: Asbury Automotive Group, Auto
      Nation Inc., CarMax Inc., Group 1 Automotive, Inc., Lithia Motors Inc., Rush
      Enterprises, Inc., Sonic Automotive Inc. and United Auto Group,
      Inc.





56





**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**





The
      following table sets forth certain information known to Hometown regarding
      the
      beneficial ownership of Common Stock as of March 24, 2006 by (i) each person
      known to Hometown to be the beneficial owner of more than 5% of its outstanding
      shares of Common Stock, (ii) each Director of Hometown, (iii) each Named
      Executive Officer and (iv) all Directors, and Executive Officers of Hometown
      as
      a group. Except as otherwise indicated, the persons or entities listed below
      have sole voting and investment power with respect to all shares of Common
      Stock
      owned by them.




A
      person
      is deemed to be a beneficial owner of securities that can be acquired by such
      person within 60 days from the filing of this Form 10-K upon the exercise of
      options and warrants or conversion of convertible securities. Each beneficial
      owner’s percentage ownership is determined by dividing the number of shares
      beneficially owned by that person by the total number of shares beneficially
      owned, increased to reflect the shares underlying the options, warrants and
      convertible securities that are held by such person, but not held by any other
      person.




·
            As
                of March 24, 2006, the total number of shares outstanding is 6,489,389,
                of
                which 3,910,137 shares are Class A common stock and 2,579,252 shares
                are
                Class B common stock.




The
      total
      number of votes is based on the combined total of Class A and Class B common
      stock beneficially owned by the beneficial owner. The voting power percentage
      of
      each beneficial owner is determined by dividing the number of votes held by
      that
      person by the total number of votes outstanding, increased to reflect the number
      of votes of the shares underlying the options, warrants and convertible
      securities that are held by such person, but not held by any other person.




·
            As
                of March 24, 2006, the total number of votes outstanding is 29,702,657,
                of
                which 3,910,137 votes are from Class A common stock outstanding and
                25,792,520 votes are from Class B common stock
                outstanding;




·
            Class
                A common stock have one (1) vote per share;
                and




·
            Class
                B common stock have ten (10) votes per share.****




Common
                  Stock
                Beneficially
                  Owned
              
              %
                  of Outstanding
                Equity
                  Owned
              
              
              
              %
                  of
                Aggregate
                  voting
                Power
                  of all
                Classes**Name
                  of Beneficial Owner**
              
              Class
                  A
              
              Class
                  B
              
              Class
                  A
              
              Class
                  B
              
              TotalOfficers
                  and DirectorsCorey
                  E. Shaker
              
              220,214
              
              265,080
              
              5.49
              
              10.28
              
              7.36
              
              9.63William
                  C. Muller, Jr.
              
              392,000
              
              761,752
              
              9.95
              
              29.53
              
              17.70
              
              26.94Steven
                  Shaker
              
              145,142
              
              206,424
              
              3.68
              
              8.00
              
              5.39
              
              7.43Joseph
                  Shaker
              
              148,000
              
              321,812
              
              3.79
              
              12.48
              
              7.24
              
              11.33Charles
                  F. Schwartz
              
              106,666
              
              —
              
              2.66
              
              —
              
              1.62
              
              **Bernard
                  J. Dzinski Jr.
              
              31,667
              
              —
              
              **
              
              —
              
              **
              
              **Steven
                  A. Fournier
              
              36,667
              
              —
              
              **
              
              —
              
              **
              
              **Timothy
                  C. Moynahan
              
              36,667
              
              —
              
              **
              
              —
              
              **
              
              **All
                  Directors, and Executive Officers as a group (8 persons)
              
              1,117,023
              
              1,555,068
              
              26.09
              
              60.29
              
              38.95
              
              55.42**5%
                  Beneficial Owners**Janet
                  Shaker
              
              71,428
              
              227,668
              
              1.83
              
              8.83
              
              4.61
              
              7.91Paul
                  Shaker
              
              —
              
              218,268
              
              —
              
              8.46
              
              3.36
              
              7.35Edward
                  D. Shaker
              
              124,642
              
              206,612
              
              3.17
              
              8.01
              
              5.09
              
              7.37Edward
                  Shaker
              
              125,842
              
              175,404
              
              3.22
              
              6.80
              
              4.64
              
              6.33Richard
                  Shaker
              
              131,642
              
              175,404
              
              3.35
              
              6.80
              
              4.72
              
              6.34Steven
                  N. Bronson
              
              381,817
              
              —
              
              9.76
              
              —
              
              5.88
              
              1.29Louis
                  Meade
              
              150,000
              
              —
              
              3.84
              
              —
              
              2.31
              
              **
 *****
      Ownership is less than 1%***






57





Corey
      Shaker has an address at c/o Hometown Auto Retailers, Inc., 1309 South Main
      Street, Waterbury, Connecticut 06706. His beneficial ownership of our common
      stock includes:


·
            265,080
                shares of Class B common stock, of which 15,980 shares are held by
                the
                Edward Shaker Family Trust of which he is the Trustee and a
                beneficiary;


·
            120,214
                shares of Class A common stock, including 72 shares (24 shares each
                for
                his children, Lindsay, Kristen and Edward) of which he is
                custodian;


·
            Options
                exercisable within the next 60 days to purchase shares of Class A
                common
                stock as follows:


o
            25,000
                shares at $2.25 per share;


o
            25,000
                shares at $1.25 per share;


o
            50,000
                shares at $0.48 per share;





William
      Muller, Jr. has an address **** at **** c/o
      Muller Toyota Inc., Route 31, PO Box J, Clinton, New Jersey 08809. His
      beneficial ownership of our common stock includes:


·
            761,752
                shares of Class B common stock;


·
            360,750
                shares of Class A common stock;


·
            1,250
                shares of Class A common stock owned by his wife,
                Michele;


·
            Options
                exercisable within the next 60 days to purchase shares of Class A
                common
                stock as follows:


o
            15,000
                shares at $2.25 per share;


o
            15,000
                shares at $1.25 per share;





Steven
      Shaker has an address at c/o Family Ford, Inc., 1200 Wolcott Street, Waterbury,
      Connecticut 06705. His beneficial ownership of our common stock
      includes:


·
            206,424
                shares of Class B common stock;


·
            115,142
                shares of Class A common stock;


·
            Options
                exercisable within the next 60 days to purchase shares of Class A
                common
                stock as follows:


o
            15,000
                shares at $2.25 per share;


o
            15,000
                shares at $1.25 per share;





Joseph
      Shaker has an address at c/o Baystate Lincoln Mercury, 571 Worcester Road,
      Framingham, Massachusetts 01701. His beneficial ownership of our common stock
      includes:


·
            321,812
                shares of Class B common stock of which 15,980 shares are held by
                the
                Richard Shaker Family Trust which Mr. Shaker is the Trustee and a
                beneficiary; and 40,000 shares are held by the Shaker Irrevocable
                Trust of
                which Mr. Shaker is Trustee;


·
            148,000
                shares of Class A common stock, including 174 shares (held for his
                son,
                Matthew) of which he is custodian;





Charles
      F. Schwartz has an address at c/o Hometown Auto Retailers, Inc., 1309 South
      Main
      Street, Waterbury, Connecticut 06706. His beneficial ownership of our common
      stock consists of options exercisable within the next 60 days to purchase shares
      of Class A common stock as follows:


o
            6,666
                shares at $1.25 per share;


o
            50,000
                shares at $0.68 per share;


o
            50,000
                shares at $0.34 per share.





Bernard
      J. Dzinski Jr. has an address at 141 East Main Street, Waterbury, CT 06721.
      His
      beneficial ownership of our common stock consist of options exercisable within
      the next 60 days to purchase shares of Class A common stock as
      follows:


o
            1,667
                shares at $1.05 per share;


o
            30,000
                shares at $0.42 per share.


58








Steven
      A.
      Fournier has an address at 238 Water Street, Naugatuck, Connecticut 06770.
      His
      beneficial ownership of our common stock consist of options exercisable within
      the next 60 days to purchase shares of Class A common stock as
      follows:


o
            1,667
                shares at $1.05 per share;


o
            30,000
                shares at $0.58 per share;


o
            5,000
                shares at $0.42 per share.





Timothy
      C. Moynahan has an address at 141 East Main Street, Waterbury, Connecticut
      06722. His beneficial ownership of our common stock consist of options
      exercisable within the next 60 days to purchase shares of Class A common stock
      as follows:


o
            1,667
                shares at $1.05 per share;


o
            30,000
                shares at $0.48 per share;


o
            5,000
                shares at $0.42 per share;





Janet
      Shaker has an address at c/o Family Ford, Inc., 1200 Wolcott Street, Waterbury,
      Connecticut 06705.





Paul
      Shaker has an address at 210 Munson Road, Middlebury, Connecticut
      06762.





Edward
      D.
      Shaker has an address at c/o Shakers Lincoln Mercury, Inc. 831 Straits Turnpike,
      Watertown, Connecticut 06795. His beneficial ownership of our common stock
      includes:


·
            206,612
                shares of Class B common stock;


·
            107,142
                shares of Class A common stock; and


·
            Options
                exercisable within the next 60 days to purchase shares of Class A
                common
                stock as follows:


o
            8,750
                shares at $2.25 per share;


o
            8,750
                shares at $1.25 per share;





Edward
      Shaker has an address at c/o Hometown Auto Retailers, Inc., 1309 South Main
      Street, Waterbury, Connecticut 06706. His beneficial ownership of our common
      stock includes 13,700 shares of Class A common stock owned by his wife,
      Lillian.





Richard
      Shaker has an address at c/o Shakers Lincoln Mercury, Inc. 831 Straits Turnpike,
      Watertown, Connecticut 06795. His beneficial ownership of our common stock
      includes:


·
            175,404
                shares of Class B common stock;


·
            114,142
                shares of Class A common stock; and


·
            Options
                exercisable within the next 60 days to purchase shares of Class A
                common
                stock as follows:


o
            8,750
                shares at $2.25 per share;


o
            8,750
                shares at $1.25 per share;





Steven
      N.
      Bronson has an address at 100 Mill Plain Road, Danbury, Connecticut 06811.





Louis
      Meade has an address at 44 Red Road, Chatham, New Jersey 07928.








59





**Equity
      Compensation Plan Information**





Plan
                category
            
            Number
                of securities
              to
                be issued upon
              exercise
                of
              outstanding
                options,
              warrants
                and rights
              (a)
            
            Weighted-average
              exercise
                price of
              outstanding
                options,
              warrants
                and rights
            
            Number
                of securities
              remaining
                available for
              future
                issuance under
              equity
                compensation plans
              (excluding
                securities
              reflected
                in column (a))Equity
                compensation plans approved by security holders
            
            
            497,500
            
            $
            1.03
            
            
            332,500Equity
                compensation plans not approved by security holders
            
            
            None
            
            
            None
            
            
            NoneTotal
            
            
            497,500
            
            $
            1.03
            
            
            332,500





In
      February 1998, as further amended in August 2002, in order to attract and retain
      persons necessary for the success of Hometown, Hometown adopted
      its 1998 Stock Option Plan covering up to 830,000 shares of Class A Common
      Stock. See Note 17 to
      the
      consolidated financial statements.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934 requires Hometown's officers and
      directors, and persons who own more than ten-percent of a registered class
      of
      Hometown's equity securities, to file reports of ownership and changes in
      ownership with the Securities and Exchange Commission ("SEC"). Officers,
      directors and greater than ten-percent stockholders are required by SEC
      regulation to furnish Hometown with copies of all Section 16(a) forms they
      file.





To
      the
      best of Hometown's knowledge, based solely on review of the copies of such
      forms
      furnished to Hometown, or written representations that no other forms were
      required, Hometown believes that all Section 16(a) filing requirements
      applicable with respect to all its current officers, directors and ten percent
      shareholders have been complied with as of the filing date of this Annual
      Report. However, Charles F. Schwartz was late in filing one (1) Statement of
      Changes in Beneficial Ownership on Form 4 during 2005 but has subsequently
      come
      in compliance. With respect to any former directors, officers, and ten-percent
      shareholders of Hometown, Hometown does not have any knowledge of any known
      failures to comply with the filing requirements of Section 16(a).








**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





**Leases**





Hometown
      has leased from various affiliates the premises occupied by certain of its
      dealerships. Each of the governing leases became effective as of the closing
      of
      the initial public offering, has a term expiring in 2013, is on a triple net
      basis and provides for a consumer price index ("CPI") increase to the base
      rent
      on January 1, 2009. Hometown believes that each lease was at their fair
      market value at inception.





***Shaker
      Group.*** Hometown
      leases, for an annual base rental of approximately $274,000, the premises
      occupied by its Lincoln Mercury dealership in Watertown, Connecticut, from
      Shaker Enterprises, a Connecticut general partnership whose seven partners
      include Joseph Shaker, Corey Shaker, Steven Shaker, Janet Shaker, Edward D.
      Shaker, Edward Shaker and Richard Shaker. Hometown leases, for an annual base
      rental of approximately $274,000 and $82,000 respectively, the premises occupied
      by the Family Ford and Shaker Auto Outlet dealerships in Waterbury, CT from
      Joseph Shaker Realty, a Connecticut general partnership whose three partners
      are
      Richard Shaker, Edward Shaker and Rose Shaker. Richard Shaker is the father
      of
      Steven Shaker, Edward D. Shaker and Joseph Shaker. Edward Shaker is the father
      of Corey Shaker and Janet Shaker and Rose Shaker is the aunt of Steven Shaker,
      Joseph Shaker, Edward D. Shaker, Corey Shaker and Janet Shaker. Corey Shaker
      is
      the CEO, Director and a principal stockholder of Hometown. Steven Shaker is
      the
      Regional Vice President - North Division and a principal stockholder of
      Hometown. Joseph Shaker is the Regional Vice President - East Division, Director
      and a principal stockholder of Hometown. Edward D. Shaker and Janet Shaker
      are
      principal stockholders of Hometown.


60





***Muller
      Group.*** Hometown
      leases, for an annual base rental of approximately $411,000
      and $452,000 respectively the premises occupied by its Toyota (“Toyota”)
      dealership in Clinton, New Jersey and its Chevrolet (“Chevy”) dealership in
      Stewartsville, New Jersey from Rellum Realty Company, a New Jersey general
      partnership, one of whose two partners is William C. Muller Jr. Mr. Muller
      is Regional Vice President - South Division, director and a principal
      stockholder of Hometown. The
      Toyota and Chevy leases are treated as capital leases. 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. Hometown recorded the lease
      as a capital lease. As of December 31, 2005 the mortgage debt balance is $4.0
      million, which agrees with the capital lease obligation. On
      February 28, 2006, Rellum Realty Company refinanced their mortgage. As part
      of
      that refinancing, Hometown was released from its guaranty of the mortgage
      debt.








**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





**Audit
      Fees**





The
      aggregate fees and expenses billed for the professional services rendered by
      BDO
      Seidman, LLP for the audit of Hometown's annual financial statements included
      in
      Hometown's Form 10-K filing for fiscal year 2005 and 2004 and the reviews of
      Hometown's quarterly financial statements included in Hometown's First, Second
      and Third Quarter Form 10-Q filings for fiscal year 2005 and 2004 totaled
      approximately $168,000 and $144,000, respectively. The 2005 period included
      $16,000 in fees associated with review of Hometown’s response to an SEC comment
      letter.





**Audit
      Related Fees**





In
      addition to those included under the paragraph “Audit Fees”, Hometown incurred
      $25,000 and approximately $15,000 in audit related fees for professional
      services rendered by BDO Seidman, LLP for the 2005 and 2004 fiscal years,
      respectively. The 2005 fees were associated with Hometown’s pending Exchange
      Agreement. The 2004 fees were incurred in relation to new accounting
      pronouncements affecting the 2004 audit.





**Tax
      Fees**





Hometown
      incurred tax fees of approximately $113,000 and $16,000 for professional
      services rendered by BDO Seidman, LLP for tax compliance, tax advice and tax
      planning during the 2005 and 2004 fiscal years, respectively. The 2005 services
      were comprised of costs associated with tax opinions concerning Hometown’s
      pending Exchange Agreement. See Note 19 to the consolidated financial
      statements. The 2004 services were comprised of research discussions regarding
      tax treatment of a litigation settlement.




61





**All
      Other Fees**





Hometown
      incurred other fees for professional services rendered by BDO Seidman, LLP
      other
      than the services covered in the paragraphs above titled “Audit Fees” and “Audit
      Related Fees” of approximately $0 for the 2005 and 2004 fiscal years.





**Audit
      Committee Pre-Approval Policy**





Hometown’s
      Audit Committee has authorized the Chief Financial Officer to incur up to $5,000
      per fiscal year on accounting research projects outside the scope of normal
      audit services rendered by BDO Seidman, LLP for the audit of Hometown's annual
      financial statements included in Hometown's Form 10-K filing and the reviews
      of
      Hometown's quarterly financial statements included in Hometown's Form 10-Q
      filings. Such amount is less than 5% of the annual fees paid to BDO Seidman,
      LLP
      for its Form 10-K and Form 10-Q filings. No fees were incurred in fiscal 2005
      that were not approved by the Audit Committee pursuant to this
      policy.





**Audit
      Committee Consideration**





Hometown's
      Audit Committee has considered whether BDO Seidman, LLP’s provision of the
      services which generated the Audit and Other Fees reported above was compatible
      with maintaining BDO Seidman, LLP's independence as Hometown’s principal
      independent accounting firm.





**Work
      Performed by Principal Accountant's Full Time Permanent
      Employees**





BDO
      Seidman, LLP’s services rendered in performing Hometown's audits for fiscal year
      2005 and 2004 were performed by full time, permanent employees and partners
      of
      BDO Seidman, LLP.







62


**PART
      IV**





**ITEM
      15.**  **EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES**




**Exhibits:**
              
              **Description**No.3.1
              
              Certificate
                  of Incorporation of Dealer-Co., Inc. (NY-3/10/97)3.2
              
              Certificate
                  of Incorporation of Hometown Auto Retailers, Inc.
                  (Del-6/5/97)3.3
              
              Certificate
                  of Ownership and Merger of Dealer-Co., Inc. into Hometown Auto
                  Retailers,
                  Inc. (Del-6/27/97)3.4
              
              Certificate
                  of Merger of Dealer-Co., Inc. and Hometown Auto Retailers, Inc.
                  into
                  Hometown Auto Retailers, Inc. (the "Company")
                  (NY-9/11/97)3.5
              
              Certificate
                  of Amendment of the Certificate of Incorporation filed February
                  19,
                  19983.6
              
              Certificate
                  of Amendment of the Certificate of Incorporation filed June 8,
                  1998(1)
                  3.7
              
              Certificate
                  of Amendment of the Certificate of Incorporation filed December
                  7,
                  20003.8
              
              By-Laws
                  of Hometown4.1
              
              Form
                  of Class A Common Stock Certificate4.2
              
              Form
                  of Class B Common Stock Certificate4.3
              
              Form
                  of Warrant Agreement between Hometown and Paulson Investment Company
                  and
                  related Warrant4.4
              
              Stock
                  Option Plan of Hometown(2)
                  4.5
              
              Form
                  of 3-year warrant issued in the Private Placement of units on July
                  25,
                  2001(2)
                  4.6
              
              Copy
                  of the $240,000 Non-negotiable Promissory Note made by Hometown
                  to Autos
                  of Newburgh, Inc.(2)
                  4.7
              
              Copy
                  of the Settlement Agreement, dated June 28, 2001, between Hometown
                  and
                  Autos of Newburgh, Inc.10.1
              
              Exchange
                  Agreement, dated as of the 1st day of July, 1997, among the Registrant
                  and
                  the members of the Shaker Group, the Muller Group and the Westwood
                  Group10.2
              
              Agreement,
                  dated July 2, 1997, between the Registrant and Brattleboro Chrysler
                  Plymouth Dodge, Inc. and Amendments dated November 11, 1997, April
                  14,
                  1998 and July 8, 199810.3
              
              Agreement,
                  dated August 14, 1997, between the Registrant and Leominster Lincoln
                  Mercury, Inc., dba Bay State Lincoln Mercury and Amendments dated
                  October
                  31, 1997 and April 14, 1998, respectively10.4
              
              Stockholders
                  Agreement, dated as of the 16th day of February 1998, among the
                  Shaker
                  Stockholders, the Muller Stockholders and the Westwood
                  Stockholders10.5
              
              Employment
                  Agreement, dated as of the 20th day of April, 1998, between the
                  Registrant
                  and Salvatore A. Vergopia10.6
              
              Employment
                  Agreement, dated as of the 20th day of April, 1998, between the
                  Registrant
                  and William C. Muller Jr.10.7
              
              Employment
                  Agreement, dated as of the 20th day of April, 1998, between the
                  Registrant
                  and Corey Shaker10.8
              
              Employment
                  Agreement, dated as of the 20th day of April, 1998, between the
                  Registrant
                  and Edward A.
                  Vergopia


63


10.9
              
              Employment
                  Agreement, dated as of the 20th day of April, 1998, between the
                  Registrant
                  and James Christ10.10
              
              Employment
                  Agreement, dated as of the 20th day of April, 1998, between the
                  Registrant
                  and Steven Shaker10.11
              
              Lease,
                  dated as of April 20, 1998, between Shaker Enterprises, as landlord,
                  and
                  Hometown (Lincoln/Mercury dealership in Watertown, CT.)10.12
              
              Lease,
                  dated as of April 20, 1998, between Joseph Shaker Realty Company,
                  as
                  landlord, and Hometown (Ford dealership in Waterbury,
                  CT.)10.13
              
              Lease,
                  dated as of April 20, 1998, between Joseph Shaker Realty Company,
                  as
                  landlord, and Hometown (Jeep/Eagle dealership Waterbury,
                  CT.)10.14
              
              Lease,
                  dated as of April 20, 1998, between Rellum Realty Company, as landlord,
                  and Hometown (Toyota dealership in Clinton, NJ)10.15
              
              Lease,
                  dated as of April 20, 1998, between Rellum Realty Company, as landlord,
                  and Hometown (Chevrolet/Oldsmobile/Isuzu dealership In Stewartville,
                  NJ)10.16
              
              Lease,
                  dated as of April 20, 1998, between Salvatore A. Vergopia and Janet
                  Vergopia, as landlord, and Hometown (Lincoln Mercury dealership
                  in
                  Emerson, NJ)10.17
              
              Inventory
                  Loan and Security Agreement between Toyota Motor Credit Corporation
                  and
                  Muller Toyota, Inc.; Commercial Promissory Notes; Dealer Floor
                  Plan
                  Agreement10.18
              
              Ford
                  Motor Company Automotive Wholesale Installment Sale and Security
                  Agreement
                  with Shakers, Inc.; Power of Attorney for Wholesale Installment
                  Sale
                  Contract; and Automotive Installment Sale Contract10.19
              
              Ford
                  Motor Company Automotive Wholesale Installment Sale and Security
                  Agreement
                  with Family Ford, Inc. and Power of Attorney for
                  Wholesale10.20
              
              Chrysler
                  Financial Security Agreement and Master Credit Agreement with Shaker's
                  Inc.10.21
              
              Lease,
                  dated as of April 20, 1998, between Thomas E. Cosenzi optionees
                  as
                  landlord, and Hometown (Chrysler Plymouth dealerships in N. Brattleboro,
                  VT.)10.22
              
              Form
                  of Stock Option Agreement with schedule of optionees10.23
              
              Agreement
                  dated May 28, 1998, between the Registrant and Pride Auto Center,
                  Inc. (an
                  Acquisition)10.24
              
              Supplemental
                  Agreement to Dealer Sales and Service Agreement (Publicly Traded
                  Company)
                  dated April 27, 1998 among Muller Chevrolet, Oldsmobile, Isuzu, Inc.,
                  Hometown Auto Retailers, Inc. and American Isuzu Motors,
                  Inc.10.25
              
              Letter
                  consent for ownership change and initial public offering from Toyota
                  Motor
                  Sales, USA, Inc. dated July 24, 199810.26
              
              Supplemental
                  Agreement to General Motors Corporation Dealer Sales and Service
                  Agreement
                  between Hometown Auto Retailers, Inc. and General Motors, dated
                  July 20, 1998.10.27
              
              Letter
                  consent from Ford Motor Company to Hometown Auto Retailers, Inc.
                  relating
                  to the Ford Division and Lincoln Mercury Division dated July 24,
                  1998.10.28
              
              Credit
                  Agreement dated January 6, 1999 among the registrant, specified
                  subsidiaries, General Electric Capital Corporation, and other specified
                  lenders. All Annexes A through I.(1)
                  10.29
              
              Credit
                  Agreement dated March 14, 2001 among the registrant, subsidiaries
                  of the
                  registrant, and Ford Motor Credit Company.(2)
                  10.30
              
              Guarantee
                  Agreement dated January 5, 1999 among the registrant and Falcon
                  Financial,
                  LLC.




64




(2)10.31
              
              Modification
                  Agreement dated January 6, 1999 among the registrant, subsidiaries
                  of the
                  registrant and Falcon Financial, LLC.(4)10.32
              
              Acquisition
                  Agreement, dated December 5, 2005, between the Registrant and Nissan
                  of
                  Natick, Inc.(5)10.33
              
              $6,035,000.00
                  Promissory Note dated February 9, 2006 from Bay State Realty Holding,
                  Inc.
                  to Ford Motor Credit Company.(5)10.34
              
              Mortgage
                  Assignment Of Leases And Rents Security Agreement Fixture Filing
                  dated
                  February 9, 2006 from Bay State Realty Holdings, inc. to Ford Motor
                  Credit
                  Company.(5)10.35
              
              Guaranty
                  And Security Agreement dated February 9, 2006 from Hometown Auto
                  Framingham, Inc., Family Ford, inc., Shaker’s Inc., Hometown Brattleboro,
                  Inc., and Shaker Auto Group, Inc. to Ford Motor Credit
                  Company.(5)10.36
              
              Environmental
                  Indemnity Agreement dated February 9, 2006 from Bay State Realty
                  Holding,
                  Inc., Hometown Auto Framingham, Inc., Family Ford, Inc., Shaker’s Inc.,
                  Hometown Brattleboro, Inc., Shaker Auto Group, Inc., Corey Shaker,
                  Joseph
                  Shaker, Steven Shaker, Janet Shaker, and Edward Shaker to Ford
                  Motor
                  Credit Company.(5)10.37
              
              Cross-Default
                  And Cross-Collateralization Agreement dated February 9, 2006 from
                  Bay
                  State Realty Holding, Inc., Hometown Auto Framingham, Inc., Family
                  Ford,
                  Inc., Shaker’s Inc., Hometown Brattleboro, Inc., Shaker Auto Group, Inc.,
                  Corey Shaker, Joseph Shaker, Steven Shaker, Janet Shaker, and Edward
                  Shaker to Ford Motor Credit Company.(5)10.38
              
              Master
                  Loan And Security Agreement dated February 9, 2006 by and between
                  Hometown
                  Auto Framingham, Inc. and Ford Motor Credit Company.(5)10.39
              
              Loan
                  Supplement to Master Loan And Security Agreement dated February
                  9, 2006 by
                  and between Hometown Auto Framingham, Inc. and Ford Motor Credit
                  Company.(5)10.40
              
              Continuing
                  Guaranty And Security Agreement dated February 9, 2006 from Bay
                  State
                  Realty Holdings, Inc., Family Ford, Inc., Shaker’s Inc., Hometown
                  Brattleboro, Inc., and Shaker Auto Group, Inc.(5)10.41
              
              Cross-Default
                  And Cross-Collateralization Agreement dated February 9, 2006 from
                  Hometown
                  Auto Framingham, Inc., Joseph Shaker, Bay State Realty Holdings,
                  Inc.,
                  Family Ford, Inc., Shaker’s Inc., Hometown Brattleboro, Inc., Shaker Auto
                  Group, Inc., Corey Shaker, Steven Shaker, Janet Shaker, and Edward
                  Shaker
                  to Ford Motor Credit Company.(3)
                  14.1
              
              Code
                  of Ethics for Chief Executive Officer, Chief Financial Officer
                  and Chief
                  Accounting Officer(3)
                  14.2
              
              Code
                  of Business Conduct and Ethics(5)
                  21.1
              
              Subsidiaries
                  of the Registrant(5)
                  31.1
              
              Chief
                  Executive Officer Certification pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002(5)
                  31.2
              
              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(5)
                  32.1
              
              Chief
                  Executive Officer Certification(5)
                  32.2
              
              Chief
                  Financial Officer
                  Certification


_______________________


*Unless
      otherwise indicated all exhibits were previously filed as an exhibit to
      Hometown’s Registration Statement on Form S-1 (File No 333-52763), and
      incorporated herein by reference.





(1)
            Filed
                as an exhibit to Hometown’s Form 10-K for the period ending December 31,
                2000, and incorporated herein by
                reference.


65





(2)
            Filed
                as an exhibit to Hometown’s Form 10-K for the period ending December 31,
                2001, and incorporated herein by
                reference.


(3)
            Filed
                as an exhibit to Hometown’s Form 10-K for the period ending December 31,
                2003, and incorporated herein by
                reference.


(4)
            Filed
                as an Exhibit to Hometown’s Form 8-K dated December 7,
                2005.


(5)
            Filed
                herewith.





**Financial
      Statement Schedules:**





See
      below, beginning on page F-1.





**Supplemental
      Schedules:**





Report
      of
      Independent Registered Public Accounting Firm on Schedule is set forth on page
      S-1.





Schedule
      II - Valuation and Qualifying Accounts for the years ended December 31, 2005,
      2004, and 2003 is set forth hereafter on page S-2.









66


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d), the Securities Exchange Act of
      1934,
      the registrant has duly caused this Report to be signed on March 24, 2006 on
      its
      behalf by the undersigned, thereunto duly authorized.




Hometown
              Auto
              Retailers, Inc.By:
            /s/ Corey
              ShakerCorey
              Shaker, President and Chief Executive
              Officer




Pursuant
      to the requirements of the Securities Act of 1934, this Report has been signed
      below by the following persons on behalf of the registrant and in the capacities
      indicated.





/s/
                Corey ShakerCorey
                Shaker
            
            President,
                Chief Executive Officer and Director/s/
                Charles F. SchwartzCharles
                F. Schwartz
            
            Chief
                Financial Officer/s/
                Bernard J. Dzinski, Jr.Bernard
                J. Dzinski, Jr.
            
            Director/s/
                Steven A. FournierSteven
                A. Fournier
            
            Director/s/
                Timothy C. MoynahanTimothy
                C. Moynahan
            
            Director/s/
                William C. Muller, Jr.William
                C. Muller, Jr.
            
            Director/s/
                Joseph ShakerJoseph
                Shaker
            
            Director







67


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




PageReport
                  of Independent Registered Public Accounting Firm
              F-2Financial
                  Statements:Consolidated
                  Balance Sheets as of December 31, 2005 and (2004 Restated)
              F-3Consolidated
                  Statements of Operations for each of the three yearsin
                  the period ended December 31, 2005 (2004 and 2003
                  Restated)
              F-4Consolidated
                  Statements of Stockholders’ Equity for each of the three yearsin
                  the period ended December 31, 2005 (2004 and 2003
                  Restated)
              F-5Consolidated
                  Statements of Cash Flows for each of the three yearsin
                  the period ended December 31, 2005 (2004 and 2003
                  Restated)
              F-6Notes
                  to Consolidated Financial Statements
              F-7Report
                  of Independent Registered Public Accounting Firm on
                  Schedule
              S-1Schedule
                  II - Valuation and Qualifying Accounts
              S-2






F-1





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Shareholders and Directors of Hometown Auto Retailers, Inc.





We
      have
      audited the accompanying consolidated balance sheets of Hometown Auto Retailers,
      Inc. as of December 31, 2005 and 2004 and the related consolidated
      statements of operations, stockholders’ equity and cash flows for each of the
      three years in the period ended December 31, 2005. These financial statements
      are the responsibility of Hometown Auto Retailers, Inc.’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An
      audit
      includes consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. Accordingly, we express no
      such opinion. An
      audit
      also includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audits provide
      a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Hometown Auto Retailers,
      Inc. as of December 31, 2005 and 2004, and the results of its operations
      and its cash flows for each of the three years in the period ended December
      31,
      2005 , in
      conformity with accounting principles generally accepted in the Unites
      States.





As
      discussed in Note 2 to the consolidated financial statements, the Company
      restated the balance sheets as of December 31, 2004 and 2003 and the related
      consolidated statements of operations, cash flows and stockholders’ equity for
      the years then ended.








New
                York, New York
            /s/
                BDO Seidman, LLPMarch
                17, 2006
            BDO
                Seidman, LLP





F-2


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





December
                31,
            
            December
                31,ASSETS
            
            2005
            
            2004(Restated)Current
                Assets:Cash and cash equivalents
            
            $
            6,453
            
            $
            6,101Accounts receivable, net
            
            
            4,330
            
            
            5,081Inventories, net
            
            
            33,542
            
            
            43,440Prepaid expenses and other current assets
            
            
            568
            
            
            634Deferred and prepaid income taxes
            
            
            1,039
            
            
            1,412Total current assets
            
            
            45,932
            
            
            56,668Property
                and equipment, net
            
            
            13,035
            
            
            13,854Other
                assets
            
            
            2,919
            
            
            3,486Total assets
            
            $
            61,886
            
            $
            74,008LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent
                Liabilities:Floor plan notes payable - trade
            
            $
            6,697
            
            $
            17,382Floor plan notes payable - non-trade
            
            
            26,265
            
            
            25,092Accounts payable and accrued expenses
            
            
            3,909
            
            
            5,106Current maturities of long-term debt and capital lease obligations
            
            
            5,245
            
            
            5,505Deferred revenue
            
            
            207
            
            
            605Total current liabilities
            
            
            42,323
            
            
            53,690Long-term
                debt and capital lease obligations
            
            
            7,884
            
            
            8,621Long-term
                deferred income taxes
            
            
            —
            
            
            123Other
                long-term liabilities and deferred revenue
            
            
            128
            
            
            319Total liabilities
            
            
            50,335
            
            
            62,753Commitments
                and ContingenciesStockholders'
                EquityPreferred stock, $.001 par value, 2,000,000 sharesauthorized, no shares issued and outstanding
            
            
            —
            
            
            —Common stock, Class A, $.001 par value, 12,000,000 sharesauthorized, 3,910,137 and 3,870,137 shares issuedand outstanding, respectively
            
            
            4
            
            
            4Common stock, Class B, $.001 par value, 3,760,000 sharesauthorized, 2,579,252 and 3,519,252 shares issuedand outstanding, respectively
            
            
            2
            
            
            3Additional paid-in capital
            
            
            29,022
            
            
            30,017Accumulated deficit
            
            
            (17,477
            )
            
            (18,769
            )Total stockholders' equity
            
            
            11,551
            
            
            11,255Total liabilities and stockholders' equity
            
            $
            61,886
            
            $
            74,008




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





F-3


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





For
                the Years Ended December 31,2005
            
            2004
            
            2003(Restated)
            
            (Restated)RevenuesNew vehicle sales
            
            $
            141,938
            
            $
            167,932
            
            $
            180,615Used vehicle sales
            
            
            61,159
            
            
            65,326
            
            
            66,543Parts and service sales
            
            
            22,687
            
            
            24,219
            
            
            24,621Other, net
            
            
            7,296
            
            
            8,117
            
            
            8,222Total
                revenues
            
            
            233,080
            
            
            265,594
            
            
            280,001Cost
                of salesNew vehicle
            
            
            132,559
            
            
            157,211
            
            
            168,579Used vehicle
            
            
            55,445
            
            
            59,053
            
            
            60,152Parts and service
            
            
            10,338
            
            
            11,043
            
            
            11,299Total cost of sales
            
            
            198,342
            
            
            227,307
            
            
            240,030Gross profit
            
            
            34,738
            
            
            38,287
            
            
            39,
                971Selling,
                general and administrative expenses
            
            
            29,735
            
            
            33,371
            
            
            34,840Income from operations
            
            
            5,003
            
            
            4,916
            
            
            5,131Interest income
            
            
            298
            
            
            204
            
            
            82Interest (expense)
            
            
            (3,550
            )
            
            (3,281
            )
            
            (3,037
            )Other income
            
            
            602
            
            
            135
            
            
            956Other (expense)
            
            
            —
            
            
            (9
            )
            
            (3
            )Pre-tax
                income
            
            
            2,353
            
            
            1,965
            
            
            3,129Provision
                (benefit) for income taxes
            
            
            1,061
            
            
            (1,970
            )
            
            616Net
                income
            
            $
            1,292
            
            $
            3,935
            
            $
            2,513Earnings
                per share, basic
            
            $
            0.20
            
            $
            0.54
            
            $
            0.35Earnings
                per share, diluted
            
            $
            0.19
            
            $
            0.53
            
            $
            0.35Weighted
                average shares outstanding, basic
            
            
            6,617,005
            
            
            7,286,931
            
            
            7,175,105Weighted
                average shares outstanding, diluted
            
            
            6,770,278
            
            
            7,439,024
            
            
            7,215,492




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


F-4





**HOMETOWN
                AUTO RETAILERS, INC.****CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS’ EQUITY****For
                the years ended December 31, 2005, 2004 (Restated) and 2003
                (Restated)****(in
                thousands)**





Class
                A
            
            Class
                BCommon
                Stock
            
            Common
                Stock
            
            Additional
            
            
            
            TotalPaid-in
            
            (Accumulated
            
            Stockholders’Shares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Deficit)
            
            EquityBalance
                at
              December
                31,
                2002
            
            
            3,564
            
            $
            3
            
            
            3,611
            
            $
            4
            
            $
            29,760
            
            $
            (25,217
            )
            $
            4,550Conversion
                of Class B   Common to Class A Common
            
            
            92
            
            
            1
            
            
            (92
            )
            
            (1
            )
            
            —
            
            
            —
            
            
            —Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,513
            
            
            2,513Balance
                at
              December
                31,
                2003
            
            
            3,656
            
            $
            4
            
            
            3,519
            
            $
            3
            
            $
            29,760
            
            $
            (22,704
            )
            $
            7,063Exercise
                of warrants
            
            
            214
            
            
            —
            
            
            —
            
            
            —
            
            
            257
            
            
            —
            
            
            257Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3,935
            
            
            3,935Balance
                at
              December
                31,
                2004
            
            
            3,870
            
            $
            4
            
            
            3,519
            
            $
            3
            
            $
            30,017
            
            $
            (18,769
            )
            $
            11,255Exercise
                of stock options
            
            
            40
            
            
            —
            
            
            —
            
            
            —
            
            
            47
            
            
            —
            
            
            47Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,292
            
            
            1,292Litigation
                settlement
              (Note
                15)
            
            
            —
            
            
            —
            
            
            (940
            )
            
            (1
            )
            
            (1,042
            )
            
            —
            
            
            (1,043
            )Balance
                at
              December
                31, 2005
            
            
            3,910
            
            $
            4
            
            
            2,579
            
            $
            2
            
            $
            29,022
            
            $
            (17,477
            )
            $
            11,551





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





F-5





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





For
                the Years Ended December 31,2005
            
            2004
            
            2003(Restated)
            
            (Restated)CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            1,292
            
            $
            3,935
            
            $
            2,513Adjustments
                to reconcile net income to net cashprovided
                by operating activities -Depreciation
                and amortization
            
            
            1,273
            
            
            1,269
            
            
            1,328(Gain) loss on sale/disposal of sales and service andproperty and equipment
            
            
            (587
            )
            
            8
            
            
            (939
            )Deferred income taxes
            
            
            727
            
            
            (2,162
            )
            
            209Changes in assets and liabilities:Accounts receivable, net
            
            
            597
            
            
            977
            
            
            (1,127
            )Inventories, net
            
            
            3,779
            
            
            (4,481
            )
            
            2,335Prepaid expenses and other current assets
            
            
            66
            
            
            (9
            )
            
            (133
            )Prepaid taxes
            
            
            35
            
            
            (41
            )
            
            47Other assets
            
            
            (106
            )
            
            44
            
            
            43Floor plan notes payable - trade
            
            
            (4,021
            )
            
            1,913
            
            
            1,034Accounts payable and accrued expenses
            
            
            (1,316
            )
            
            (692
            )
            
            733Deferred revenue - current
            
            
            (398
            )
            
            95
            
            
            (78
            )Other long-term liabilities and deferred revenue
            
            
            (191
            )
            
            (285
            )
            
            (139
            )Net cash provided by operating activities
            
            
            1,150
            
            
            571
            
            
            5,826CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment, net
            
            
            (324
            )
            
            (2,121
            )
            
            (810
            )Proceeds from sale of sales and service franchise andproperty
                and equipment
            
            
            —
            
            
            —
            
            
            942Net cash provided by (used in) investing activities
            
            
            (324
            )
            
            (2,121
            )
            
            132CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds from floor plan notes payable - non-trade
            
            
            160,015
            
            
            163,361
            
            
            177,160Payment of floor plan notes payable - non-trade
            
            
            (158,842
            )
            
            (160,803
            )
            
            (178,713
            )Proceeds from long-term borrowings
            
            
            314
            
            
            1,418
            
            
            74Principal payments of long-term debt and capital lease
                obligations
            
            
            (2,008
            )
            
            (2,221
            )
            
            (2,464
            )Exercise of stock options and warrants
            
            
            47
            
            
            257
            
            
            —Net cash provided by (used in) financing activities
            
            
            (474
            )
            
            2,012
            
            
            (3,943
            )Net
                increase in cash and cash equivalents
            
            
            352
            
            
            462
            
            
            2,015CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            6,101
            
            
            5,639
            
            
            3,624CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            6,453
            
            $
            6,101
            
            $
            5,639Cash
                paid for - Interest
            
            $
            3,562
            
            $
            3,233
            
            $
            3,087Cash
                paid for - Taxes
            
            $
            245
            
            $
            259
            
            $
            366Purchases
                financed by capital lease obligations
            
            $
            905
            
            $
            1,430
            
            $
            1,239


In
                2005, Hometown received 940,00 shares of Class B Common Stock worth
                approximately $1,043,000 - see Notes
                3 and 15




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




F-6





**HOMETOWN
      AUTO RETAILERS, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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




*Business
      of Hometown Auto Retailers Inc.*





Hometown
      was founded on March 10, 1997 as Dealerco, Inc., a New York Corporation, and
      was
      later merged into Hometown Auto Retailers, Inc., a Delaware Corporation
      (“Hometown” or the “Company”). Hometown’s purpose was to consolidate and operate
      automobile dealerships in the Northeast, primarily in New Jersey and New
      England. Hometown was formed to combine three dealership groups (the “Core
      Operating Companies”) located in New Jersey and Connecticut, one of which was
      considered the accounting acquirer (“Shaker”), acquire two other dealerships
      (the “Acquisitions”) located in Vermont and Massachusetts, complete an initial
      public offering (the “Offering”) of its Common Stock and, subsequent to the
      Offering, continue to acquire, through merger or purchase, additional
      dealerships to expand its regional operations.





*Basis
      of Presentation*





In
      July
      1998, Hometown simultaneously completed the combination of the Core Operating
      Companies, the Acquisitions and the Offering. The Core Operating Companies
      were
      acquired in exchange for common stock of Hometown. The Acquisitions were
      acquired for cash.





*Principals
      of Consolidation*





The
      consolidated financial statements include all significant majority-owned
      subsidiaries. All intercompany accounts and transactions among the consolidated
      subsidiaries have been eliminated.





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) factors
      related to the automobile and truck manufacturers from which Hometown holds
      franchises (“Manufacturer”), primarily the historical timing of major
      Manufacturer incentive programs and model changeovers, (ii) weather-related
      factors, which primarily affect parts and service and (iii) consumer buying
      patterns.





**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





F-7





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 Form 10K, Hometown
      has restated prior year financial statements to reflect this
      change.





The
      effect of this restatement was to increase pre-tax income $313,000 and $224,000
      for the years ended December 31, 2004 and 2003, respectively. The after tax
      effects was to increase net income by $187,000 and $135,000 for the years ended
      December 31, 2004 and 2003, respectively. The effect of these adjustments was
      to
      increase basic and diluted earnings per share by $0.03 and $0.02 for the years
      ended December 31, 2004 and 2003, respectively.





Deferred
      revenue recorded as of June 30, 2003, will continue to be taken into income
      over
      the remaining life of the contract. At December 31, 2005, Hometown had $317,000
      of related deferred revenue remaining. This deferred revenue will be recognized
      over the next three years as follows: 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.





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





Year
                ended
            
            Year
                ended(in
                thousands)
            
            December
                31, 2004
            
            December
                31, 2003Previously
            
            Restated
            
            Previously
            
            RestatedReported
            
            
            
            Reported**Balance
                Sheets:**Deferred
                and prepaid income taxes
            
            $
            1,464
            
            $
            1,412
            
            
            —
            
            
            —Total
                current assets
            
            $
            56,720
            
            $
            56,668
            
            
            —
            
            
            —Other
                assets
            
            $
            3,649
            
            $
            3,486
            
            
            —
            
            
            —Total
                Assets
            
            $
            74,223
            
            $
            74,008
            
            
            —
            
            
            —Deferred
                revenue
            
            $
            735
            
            $
            605
            
            
            —
            
            
            —Total
                current liabilities
            
            $
            53,820
            
            $
            53,690
            
            
            —
            
            
            —Other
                long-term liabilities and deferred revenue
            
            $
            726
            
            $
            319
            
            
            —
            
            
            —Total
                liabilities
            
            $
            63,290
            
            $
            62,753
            
            
            —
            
            
            —Accumulated
                deficit
            
            $
            (19,091
            )
            $
            (18,769
            )
            
            —
            
            
            —Total
                stockholders’ equity
            
            $
            10,933
            
            $
            11,255
            
            
            —
            
            
            —Total
                liabilities and stockholders’ equity
            
            $
            74,223
            
            $
            74,008
            
            
            —
            
            
            —


F-8





***(continued)***
            
            Year
                ended
            
            Year
                endedDecember
                31, 2004
            
            December
                31, 2003Previously
            
            Restated
            
            Previously
            
            RestatedReported
            
            
            
            Reported**Statements
                of Operations:**Other
                revenues, net
            
            $
            7,804
            
            $
            8,117
            
            $
            7,998
            
            $
            8,222Total
                revenues
            
            $
            265,281
            
            $
            265,594
            
            $
            279,777
            
            $
            280,001Gross
                profit
            
            $
            37,974
            
            $
            38,287
            
            $
            39,747
            
            $
            39,971Income
                from operations
            
            $
            4,603
            
            $
            4,916
            
            $
            4,907
            
            $
            5,131Pre-tax
                income
            
            $
            1,652
            
            $
            1,965
            
            $
            2,905
            
            $
            3,129Provision
                (benefit) for income taxes
            
            $
            (2,096
            )
            $
            (1,970
            )
            $
            527
            
            $
            616Net
                income
            
            $
            3,748
            
            $
            3,935
            
            $
            2,378
            
            $
            2,513Earnings
                per share, basic
            
            $
            0.51
            
            $
            0.54
            
            $
            0.33
            
            $
            0.35Earnings
                per share, diluted
            
            $
            0.50
            
            $
            0.53
            
            $
            0.33
            
            $
            0.35**Statements
                of Cash Flows:**Net
                income
            
            $
            3,748
            
            $
            3,935
            
            $
            2,378
            
            $
            2,513Deferred
                income taxes
            
            $
            (2,288
            )
            $
            (2,162
            )
            $
            120
            
            $
            209Deferred
                revenue - current
            
            $
            126
            
            $
            95
            
            $
            21
            
            $
            (78
            )Other
                long-term liabilities and deferred revenue
            
            $
            (3
            )
            $
            (285
            )
            $
            (14
            )
            $
            (139
            )Net
                cash provided by operating activities
            
            $
            571
            
            $
            571
            
            $
            5,826
            
            $
            5,826





In
      addition, Hometown previously restated its Balance Sheets and Statements of
      Cash
      Flows on Form 10-K/A for the year ended December 31, 2004 to comply with
      guidance under SFAS 95, “Statement of Cash Flows”, which states that payments to
      suppliers should be classified as an operating activity. The balance sheets
      restatement is to breakdown the floor plan notes payable into trade and
      non-trade components, where it had previously been shown as a single line item,
      which has been consistent with industry practice. The Statements of Cash Flows
      reclassification was to show the non-trade component of floor plan notes payable
      as a financing activity, where it had been shown as an operating activity.
      The
      floor plan lender is FMCC, an affiliate of Ford, Lincoln and Mercury; therefore;
      floor plan notes payable amounts due from purchases of inventory from Ford,
      Lincoln and Mercury are classified as floor plan - trade and the related
      borrowings and payments are to be classified as operating activities in the
      Statements of Cash Flows. Amounts due for inventory purchases from all other
      manufacturers are classified as floor plan notes payable - non-trade and the
      related borrowings and payments are to be classified as financing activities
      in
      the Statements of Cash Flows. The
      changes do not affect working capital or total cash flows. See
      Note
      7 to the consolidated financial statements.




F-9




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





*Major
      Suppliers and Franchise Agreements*




Hometown
      purchases substantially all of its new vehicles at the prevailing prices charged
      by the applicable Manufacturers to all franchised dealers. Hometown's sales
      volume could be adversely impacted by the manufacturers' inability to supply
      it
      with an adequate supply of popular models or as a result of an unfavorable
      allocation of vehicles by the manufacturer.





Each
      Manufacturers franchise agreement contains provisions which may limit, without
      the consent of the applicable manufacturer, changes in dealership management
      and
      ownership, place certain restrictions on the dealership (such as minimum working
      capital requirements) and provide for termination of the franchise agreement
      by
      the manufacturer in certain instances. See Note 15 - Franchise Agreements
      section.





*Revenue
      Recognition*




Revenues
      for vehicle and parts sales are recognized upon delivery to or acceptance by
      the
      customer. Revenues for vehicle service are recognized when the service has
      been
      completed. Sales discounts and service coupons are accounted for as a reduction
      to the sales price at the point of sale. Manufacturer incentives and rebates
      are
      not recognized until earned in accordance with respective manufacturers
      incentive programs. See Note 13 for effect of EITF 02-16 "Accounting by a
      Customer (Including a Reseller) for Certain Consideration Received from a
      Vendor".





*Finance,
      Insurance and Service Contract Income Recognition*




Hometown
      arranges financing for customers through various institutions and receives
      financing fees equal to the difference between the loan rates charged to
      customers and the predetermined financing rates set by the financing
      institution. In addition, Hometown receives commissions from the sale of credit
      life and disability insurance and extended service contracts to customers.
      The
      revenues from financing fees and commissions are generally recorded at the
      time
      of the sale of the vehicles. These revenues are recorded on a net basis. The
      primary obligor is the institution underwriting the extended service contract.
      These revenues are recorded in Revenues, Other in the Statement of Operations.
      Revenues from sales of third party extended service contracts were $2.5 million
      and $2.4 million for the years ended December 31, 2005 and 2004, respectively.
      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. 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 December 31,
      2005
      and 2004 Hometown had $317,000 and $603,000 of related deferred revenue,
      respectively. (See Note 2.) At December 31, 2005 and 2004, Hometown also had
      other deferred revenue of $16,000 and $319,000, respectively, which represents
      the balance of a $500,000 advance on warranty income from Hometown’s Extended
      Service Plan vendor received June 2004. The balance of this advance will be
      earned during the first quarter of 2006. There were no fees or other costs
      associated with the advance.






F-10





Hometown
      may be charged back (“charge-backs”) for unearned financing fees, insurance or
      service contract commissions in the event of early termination of the contracts
      by the customers. The reserves for future charge backs are based on historical
      operating results and the termination provisions of the applicable contracts.
      Finance, insurance and service contract income, net of estimated charge-backs,
      are included in other dealership revenue in the accompanying consolidated
      financial statements.





*Cash
      and Cash Equivalents*




Cash
      and
      cash equivalents include cash on hand, cash on deposit, marketable securities
      and liquid investments, such as money market accounts, that have an original
      maturity of three months or less at the date of purchase.





*Contracts-in-Transit*





Contracts-in-transit,
      included in Accounts Receivable net, represent receivables from finance
      companies for the portion of the vehicle purchase price financed by customers
      through sources arranged by Hometown.





*Inventories*




New,
      used
      and demonstrator vehicle values are stated at the lower of cost or market,
      determined on a specific unit basis. Parts, accessories and other 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 reserves were $0.4 million and $0.7 million at December
      31, 2005 and 2004, respectively.





*Property
      and Equipment*




Property
      and equipment are recorded at cost and depreciated using the straight-line
      method over the estimated useful lives of the assets. Leasehold improvements
      are
      capitalized and amortized over the lesser of the life of the lease or the
      estimated useful life of the asset.





*Capital
      Lease Obligations*





Hometown
      classifies two dealership leases and certain vehicle leases as capital leases.
      Hometown depreciates these assets over the lesser of the asset’s useful life or
      the terms of the lease agreements.





*Company
      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. Hometown
      guarantees certain mortgage debt obligations of the lessor, related to two
      dealership leases. Hometown was released from this guaranty February 28, 2006.
      See Note 15 - Guarantees Section.





F-11




*Company
      Warranties*





Hometown’s
      new vehicle sales and certain used vehicle sales have manufacturer warranties.
      Hometown also provides limited warranties on certain used vehicles sold at
      retail. Hometown also sells parts and service. Manufacturer parts and service
      are covered by limited warranties. It is Hometown’s policy to provide reserves
      for warranty costs based on available historical information. Also, certain
      Hometown dealerships provide a ten-year 250,000-mile limited engine warranty
      on
      new vehicles. The cost of this warranty is charged to the cost of sale of the
      vehicle. The warranty covers certain parts and labor for ten-years or until
      the
      vehicle reaches an odometer reading of 250,000 miles, whichever comes
      sooner.





*Impairment
      of Long-lived Assets*





Hometown
      periodically reviews long-lived assets for impairment whenever changes in the
      circumstances indicate that the carrying amount of the assets may not be fully
      recoverable. Hometown considers relevant cash flow, management’s strategic
      plans, and significant decreases in the market value of the asset and other
      available information in assessing whether the carrying value of the assets
      can
      be recovered. When such events occur, Hometown compares the carrying amount
      of
      the assets to undiscounted expected future cash flows from the use and eventual
      disposition of the asset. If this comparison indicates impairment, the carrying
      amount would then be compared to the fair value of the long-lived asset. An
      impairment loss would be measured as the amount by which the carrying value
      of
      the long-lived asset exceeds its fair value. The difference would be recorded
      as
      an impairment of assets. Hometown does not believe any impairment exists based
      on this methodology.





*Income
      Taxes*




Hometown
      accounts for income taxes in accordance with SFAS No. 109, “Accounting for
      Income Taxes.” Under this method, deferred income taxes are recorded based upon
      differences between the financial reporting and tax bases of assets and
      liabilities and are measured using the enacted tax rates and laws that will
      be
      in effect when the underlying assets are realized or liabilities are settled.
      A
      valuation allowance reduces deferred tax assets when it is more likely than
      not
      that some or all of the deferred tax assets will not be realized. See Note
      12.





*Interest
      Expense*




Automobile
      manufacturers periodically provide floor plan interest assistance, or subsidies,
      which reduce the dealer’s cost of financing. The accompanying consolidated
      financial statements reflect interest expense gross. Floor plan interest
      assistance is recorded as a reduction of cost of sales when the vehicle is
      sold.
      See Note 7.




*Fair
      Value of Financial Instruments*




Hometown’s
      financial instruments consist primarily of cash and cash equivalents, floor
      plan
      notes payable and long-term debt. The carrying amounts of cash equivalents
      approximate fair value due to the short maturity of those instruments. The
      carrying amounts of floor plan notes payable approximate fair value due to
      their
      variable interest rates. The fair market value of long-term debt approximated
      the carrying value at December 31, 2005. The fair value of long-term debt is
      estimated based on the current rates offered for similar debt instruments with
      the same remaining maturities.





F-12





*Advertising
      and Promotion*




Hometown
      expenses advertising and promotion as incurred. Automobile Manufacturers
      periodically provide advertising assistance, or subsidies. In accordance with
      EITF Issue No. 02-16, this is recorded as a reduction of the dealer’s
      advertising expense if directly related to the performance of advertising in
      accordance with manufacturer guidelines or as a reduction of cost of sales
      upon
      sale of the vehicle. See Note 13.





*Concentration
      of Credit Risk*




Financial
      instruments that potentially subject Hometown to a concentration of credit
      risk
      consist principally of cash, cash equivalents, contracts-in-transit and accounts
      receivable. Hometown maintains cash balances at financial institutions that
      may,
      at times, be in excess of federally insured levels. Also, Hometown grants credit
      to individual customers and local companies in the automobile repair business
      such as automotive parts stores, automotive mechanics, and automotive body
      repair shops. Hometown performs ongoing credit evaluations of its customers
      and
      generally does not require collateral. Hometown maintains an allowance for
      doubtful accounts at a level which management believes is sufficient to provide
      for potential credit losses.





*Earnings
      per Share*





“Basic
      earnings per share” represents net income divided by the weighted average shares
      outstanding. “Diluted earnings per share” represents net income divided by
      weighted average shares outstanding adjusted for the incremental dilution of
      potentially dilutive securities. See Note 11.





*Stock-based
      Compensation*





At
      December 31, 2005, Hometown has one stock-based employee compensation plan,
      the
      1998 Stock Option Plan (the “Stock Option Plan”) that is described more fully in
      Note 17. 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.





F-13





Year
                Ended December 31,(in
                thousands, except per share data)
            
            2005
            
            2004
            
            2003Net
                income, as reported
            
            $
            1,292
            
            $
            3,935
            
            $
            2,513Deduct:
                Total stock-based employee
              compensation
                expense determined under fair
              value
                based method for all awards, net of
              related
                tax effects (1)
            
            
            (9
            )
            
            (23
            )
            
            (35
            )Pro
                forma net income
            
            $
            1,283
            
            $
            3,912
            
            $
            2,478Earnings
                per share:Basic,
                as reported
            
            $
            0.20
            
            $
            0.54
            
            $
            0.35Basic,
                pro forma
            
            $
            0.20
            
            $
            0.54
            
            $
            0.35Diluted,
                as reported
            
            $
            0.19
            
            $
            0.53
            
            $
            0.35Diluted,
                pro forma
            
            $
            0.19
            
            $
            0.53
            
            $
            0.34





(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.





*Use
      of Estimates*




The
      preparation of consolidated financial statements in conformity with accounting
      principals generally accepted in the United States requires management to make
      estimates and assumptions in determining the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the consolidated financial statements and the reported amounts of revenues
      and
      expenses during the reporting period. Actual results could differ from these
      estimates.





*Supplemental
      Cash flow Information*





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





*Reclassification*





Certain
      prior year amounts have been reclassified to conform to the 2005
      presentation.





*Segments*





Hometown’s
      management considers its business to be a single segment-Automotive Retailing.
      Hometown’s sales and services are through similar distribution channels, and
      Hometown’s customers are similar for all sources of revenues. Management
      evaluates its operating results by dealerships, which are all located in the
      Northeastern United States.







F-14


*New
      Accounting Pronouncements*





In
      May
      2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standards No. 154, “Accounting Changes and Error
      Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3”
(“SFAS 154”). This Statement replaces APB Opinion No. 20, “Accounting Changes,”
and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial
      Statements.” SFAS 154 changes the requirements for the accounting for and
      reporting of a change in accounting principle. Previously, most voluntary
      changes in accounting principles required recognition through a cumulative
      adjustment within net income of the period of the change. SFAS 154 requires
      retrospective application to prior periods’ financial statements, unless it is
      impracticable to determine either the period-specific effects or the cumulative
      effect of the change. SFAS 154 is effective for accounting changes made in
      fiscal years beginning after December 15, 2005; however, the Statement does
      not
      change the specific transition provisions of any existing or future accounting
      pronouncements. The adoption of this statement is not expected to have a
      material effect on our financial position or results of operations.





In
      December 2004, the FASB issued SFAS 123R, “Share-Based Payment.” ** This
      statement is a revision of SFAS 123, “Accounting for Stock-Based Compensation”
and supersedes APB 25, “Accounting for Stock Issued to Employees,” and is
      effective as of the next fiscal year that begins after June 15, 2005. SFAS
      123R
      establishes standards on accounting for transactions in which an entity obtains
      employee services in share-based payment transactions. This statement requires
      measurement of the cost of employee services received in exchange for an award
      of equity instruments based on the grant-date fair value of the award. That
      cost
      will be recognized over the period during which an employee is required to
      provide service in exchange for the award, which is usually the vesting period.
      SFAS 123R also addresses transactions in which an entity incurs liabilities
      in
      exchange for goods or services that are based on the fair value of the entity’s
      equity instruments or that may be settled by the issuance of those equity
      instruments. The adoption of this statement is not expected to have a material
      effect on our financial position or results of operations. We intend to
      implement the provisions of this statement in the first quarter of 2006. In
      March
      2005, the SEC issued Staff Accounting Bulletin No. 107, “Share-Based Payments”
(“SAB 107”). SAB 107 expresses views of the SEC regarding the interaction
      between SFAS and certain SEC rules and regulations and provides the SEC’s views
      regarding the valuation of share-based compensation for public companies. We
      will apply the principles of SAB 107 in conjunction with our adoption of SFAS
      123R. The adoption of this statement in conjunction with the adoption of SFAS
      123R is not expected to have a material effect on our financial position or
      results of operations.





In
      March
      2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for
      Conditional Asset Retirement Obligations.” FIN 47 clarifies that the term
“conditional asset retirement obligation” as used in SFAS No. 143, “Accounting
      for Assets Retirements Obligations,” refers to a legal obligation to perform an
      asset retirement activity in which the timing and/or method of settlement are
      conditional on a future event that may or may not be within the control of
      the
      entity. Furthermore, the uncertainty about the timing and or method of
      settlement of a conditional asset retirement obligation should be factored
      into
      the measurement of the liability when sufficient information exists. FIN 47
      clarifies that an entity is required to recognize the liability for the fair
      value of a conditional asset obligation when incurred if the liability’s fair
      value can be reasonably estimated. The
      adoption of this statement is not expected to have a material effect on our
      financial position or results of operations. We intend to implement the
      provisions of this statement in the first quarter of 2006.




F-15


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.
      See Notes 10 and 15 - Guarantees section. As of February 28, 2006, Hometown
      no
      longer guarantees the mortgage of this company. The adoption of this
      interpretation did not have a material effect on Hometown’s financial
      statements.





**4.**
            **DETAILS
                OF CERTAIN BALANCE SHEET
                ACCOUNTS**





*Accounts
      receivable, net consist of the following:*





December
                31,(in
                thousands)
            
            2005
            
            2004Due
                from manufacturers
            
            $
            920
            
            $
            1,584Due
                from finance companies
            
            
            1,747
            
            
            2,378Parts
                and service receivables
            
            
            443
            
            
            637Other
            
            
            1,220
            
            
            482Total
                receivables, net
            
            $
            4,330
            
            $
            5,081





The
      allowance for doubtful accounts was $0.2 million and $0.3 million as of December
      31, 2005 and 2004, respectively. In assessing the allowance for doubtful
      accounts, Hometown considers historical losses as well as current performance
      with respect to past due accounts.





*Inventories,
      net consist of the following:*





December
                31,(in
                thousands)
            
            2005
            
            2004New
                Vehicles
            
            $
            24,474
            
            $
            33,616Used
                Vehicles
            
            
            7,284
            
            
            7,761Parts,
                accessories and other
            
            
            1,784
            
            
            2,063Total
                Inventories
            
            $
            33,542
            
            $
            43,440







F-16


New,
      used
      and demonstrator vehicle values are stated at the lower of cost or market,
      determined on a specific unit basis. Parts and accessories are stated at the
      lower of cost (determined on a first-in, first-out basis) or market. Hometown
      assesses the lower of cost or market reserve requirement for vehicles, on an
      individual unit basis, taking into consideration historical loss rates, the
      age
      and composition of the inventory and current market conditions. The lower of
      cost or market adjustment was $0.4 million and $0.7 million at December 31,
      2005
      and 2004, respectively. The decrease in the new vehicles inventory was primarily
      due to the transfer of the Westwood dealership ($6.1 million) along with an
      improvement (reduction) in inventory levels at our dealerships due to better
      inventory management. The decrease in the lower of cost or market adjustment
      was
      primarily due to the transfer of the Westwood dealership. See Note 15 -
      Litigation section.





*Prepaid
      Expenses and Other Current Assets - Assets Held For Sale*





Included
      in Prepaid Expenses and Other Current Assets as of December 31, 2005 and 2004
      is
      land held for sale of $300,000. The land held for sale is not being used in
      Hometown’s business. Prior to December 31, 2003, Hometown decided to sell the
      property and has been marketing the property, but has been hampered by certain
      state environmental regulations, which were passed in 2004. Hometown is
      attempting to sell the property subject to the buyer receiving the approvals
      or
      variances necessary to develop the property.





*Accounts
      payable and accrued expenses consist of the following:*





December
                31,(in
                thousands)
            
            2005
            
            2004Accounts
                payable, trade
            
            $
            1,255
            
            $
            2,320Accrued
                compensation costs
            
            
            600
            
            
            684Sales
                and use tax
            
            
            352
            
            
            464Reserve
                for finance, insurance and service contract charge-backs
            
            
            389
            
            
            415Accrued
                legal and professional fees
            
            
            229
            
            
            315Accrued
                interest
            
            
            274
            
            
            286Reserve
                for policy work expenses
            
            
            202
            
            
            208Customer
                payoffs
            
            
            187
            
            
            135Other
                accrued expenses
            
            
            421
            
            
            279Total
            
            $
            3,909
            
            $
            5,106





The
      decrease in accounts payable, trade is primarily due to payment of the Vergopia
      settlement of $0.6 million (See Note 15 - Litigation section) and payment of
      another legal settlement of $0.1 million, both of which were included in
      accounts payable, trade at December 2004. In addition, having one less
      dealership and a general decrease associated with less sales activity in
      December 2005 compared to 2004 contributed to the decrease.





*Other
      long-term liabilities and deferred revenue*





Hometown
      receives commissions from the sale of insurance products and extended service
      contracts to customers. These revenues are recorded on a net basis. Prior to
      July 1, 2003,





F-17


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. 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 over a five-year period. At
      December 31, 2005 Hometown had $333,000 of deferred revenue of which $207,000
      was current and $126,000 was long-term. Included in this amount is other
      deferred revenue of $16,000, which represents the balance of a $500,000 advance
      on warranty income from Hometown’s Extended Service Plan vendor received June
      2004. The balance of this advance will be earned during the first quarter of
      2006. There were no fees or other costs associated with the advance. At December
      31, 2004 Hometown had $922,000 of deferred revenue of which $605,000 was current
      and $317,000 was long-term. Included in this amount is other deferred revenue
      of
      $319,000 related to the advance discussed above. See Note 2.





**5.**
            **PROPERTY
                AND EQUIPMENT, NET**





*Property
      and equipment consist of the following:*





December
                31,(in
                thousands)
            
            Lives
                in Years
            
            2005
            
            2004Land
            
            
            —
            
            $
            4,246
            
            $
            4,246Land
                improvements
            
            
            15
                to 21
            
            
            84
            
            
            84Buildings
                and leasehold improvements   (1)
            
            
            7
                to 31.5
            
            
            11,971
            
            
            12,101Machinery,
                equipment, furniture and fixtures
            
            
            3
                to 10
            
            
            3,035
            
            
            3,321Vehicles
            
            
            2
                to 3
            
            
            156
            
            
            171Construction
                in progress
            
            
            
            
            
            49
            
            
            224Sub-total
            
            
            
            
            
            19,541
            
            
            20,147Less
                - accumulated depreciation and amortization
            
            (6,506
            )
            
            (6,293
            )Total
            
            
            
            
            $
            13,035
            
            $
            13,854




(1)
              Shorter
                  of estimated useful life or lease
                  term.





Included
      in buildings and leasehold improvements are capital leases for two dealerships
      totaling $5,180,000 for the years ended December 31, 2005 and 2004 which are
      leased from related parties. See Notes 9, 10 and 14. Hometown begins
      depreciating assets once the asset is placed in service. Depreciation and
      amortization expense for property and equipment for the years ended December
      31,
      2005, 2004 and 2003 was $948,000, $932,000 and $944,000 respectively.





In
      June
      2004, Hometown exercised an option to buy the building leased by its
      Brattleboro, VT dealership. The purchase price was $1.5 million plus closing
      costs. The purchase was financed by a bank loan and a note held by the seller.
      See Note 8.





F-18


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





As
      of
      December 31, 2005 and 2004, the Company’s intangible assets consisted of the
      following:





December
                31,(in
                thousands)
            
            2005
            
            2004Deferred
                finance charges
            
            $
            272
            
            $
            272Accumulated
                amortization
            
            
            (142
            )
            
            (121
            )Non-compete
                agreement
            
            
            —
            
            
            381Accumulated
                amortization
            
            
            —
            
            
            (333
            )Franchise
                fee
            
            
            10
            
            
            10Accumulated
                amortization
            
            
            (5
            )
            
            (3
            )Net
                intangible assets (a)
            
            $
            135
            
            $
            206





(a)
      These
      assets are included in Other Assets in the consolidated financial
      statements.





Aggregate
      Amortization Expense of Intangible Assets for the years ended December 2005,
      2004 and 2003 is $71,000, $87,000 and $85,000, respectively.





Estimated
      Amortization Expense of Intangible Assets, in thousands:





For
                the year ended 12/31/06
            $23For
                the year ended 12/31/07
            $18For
                the year ended 12/31/08
            $15For
                the year ended 12/31/09
            $14For
                the year ended 12/31/10
            $14




**7.**
            **FLOOR
                PLAN NOTES PAYABLE AND INTEREST
                EXPENSE**




December
                31,(in
                thousands)
            
            2005
            
            2004Floor
                plan notes payable - trade
            
            $
            6,697
            
            $
            17,382Floor
                plan notes payable - non-trade
            
            $
            26,265
            
            $
            25,092Floor
                plan interest expense
            
            $
            2,142
            
            $
            1,877





Since
      March 15, 2001, 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.




F-19


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.





As
      of
      December 31, 2005 Hometown’s floor plan liability (trade and non-trade) with
      FMCC is $33.0 million. The FMCC agreement has no set maturity date and it is
      the
      intention of Hometown to continue with this financing on an ongoing
      basis.





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
      and FMCC financing volume. At December 31, 2005, interest rates were
      approximately 7.05% for new vehicles and 9.00% for used vehicles. At December
      31, 2004, interest rates were approximately 4.94% for new vehicles and 7.00%
      for
      used vehicles. The average interest rate was approximately 6.29%, 4.42% and
      4.25% for 2005, 2004 and 2003, respectively.





Automobile
      manufacturers periodically provide floor plan interest assistance, or subsidies,
      which reduce the dealer’s cost of financing. The accompanying consolidated
      financial statements reflect interest expense gross. Floor plan interest
      assistance was $1.3 million, $1.5 million and $1.6 million for the years ended
      December 31, 2005, 2004 and 2003, respectively, and is recorded as a reduction
      of cost of sales when the vehicle is sold. Of these amounts, $0.2 million,
      $0.3
      million and $0.3 million was recorded as a reduction of inventory for each
      of
      the years ending December 31, 2005, 2004 and 2003.







F-20


**8.**
            **LONG-TERM
                DEBT AND CAPITAL LEASE
                OBLIGATIONS**





December
                31,(in
                thousands)
            
            2005
            
            2004Real
                estate mortgage notes payable, due in monthly installments including
                interest at 10.0%, maturing May 2014. (a)
            
            $
            6,974
            
            $
            7,447Real
                estate capital lease obligations, due in monthly installments including
                interest at 10.0%, maturing December 2013. See Note 9.
            
            
            3,979
            
            
            4,335Real
                estate mortgage note payable. (b)
            
            
            979
            
            
            1,025Capital
                lease obligations on rental vehicles, due in monthly installments
                including interest ranging from 4.5% to 9.9%, maturing on various
                dates
                through December 2009. See Note 9.
            
            
            740
            
            
            892Real
                estate mortgage note payable, due in monthly installments including
                interest at 10.5%, maturing April 2007. Note partially finances the
                Brattleboro building purchase. See Note 5.
            
            
            145
            
            
            241Note
                payable on leasehold improvement, due in monthly installments including
                interest at 6.41%, maturing January 2010.
            
            
            184
            
            
            —Various
                due in monthly installments including interest ranging from 5.3%
                to 15.6%,
                maturing on various dates through August 2010.
            
            
            128
            
            
            138Notes
                payable on rental vehicles, due in monthly installments including
                interest
                of 6.5%, matured December 2005.
            
            
            —
            
            
            4813,129
            
            
            14,126Less:
                Current portion
            
            
            5,245
            
            
            5,505Total
                Long Term Debt and Capital Lease Obligations (a)
            
            $
            7,884
            
            $
            8,621





(a)
                Hometown is subject to certain financial covenants calculated
                semi-annually at June 30thand December 31st, related to its real estate mortgages. Significant
                financial covenants are: (i) a Fixed Cost Coverage Ratio (a defined
                cash
                flow ratio) calculation and (ii) an Adjusted Net Worth calculation
                as
                defined. Hometown has been in default of its loan agreement for Baystate
                Lincoln Mercury since December 31, 2004 for failure to comply with
                the
                Fixed Cost Coverage Ratio covenant caused by losses incurred at the
                dealership. Accordingly, Hometown has reclassified $4.0 million of
                related
                long-term debt to current at December 31, 2005. Total debt for this
                mortgage at December 31, 2005 is $4.3 million. On February 9, 2006,
                this
                mortgage was refinanced in connection with the acquisition of a Nissan
                Sales and Service Franchise. (see Note 20.) In accordance with terms
                of
                the original mortgage, Hometown paid a prepayment penalty of $1.0
                million,
                which will be expensed in Hometown’s first quarter Consolidated Statements
                of Operations.(b)
                Mortgage partially financing the Brattleboro building purchase (see
                Note
                5) has an interest rate of 7.0% through May 2009 and is variable
                thereafter. The monthly payments are sufficient to amortize the loan
                over
                a 15-year period. After 10 years, May 2014, the terms of the bank
                loan
                will be renegotiated.




F-21




Maturities
        of long-term debt and capital lease obligations for each of the next five
        years
        and thereafter are as follows:





Year
                ending
            
            Aggregate(in
              thousands)
            
            December
                31,
            
            Obligation2006
            
            $
            5,2452007
            
            
            9492008
            
            
            9502009
            
            
            9482010
            
            
            835Thereafter
            
            
            4,202Total
            
            $
            13,129




**9.**
            **CAPITAL
                LEASES**





The
      following is an analysis of the leased property under capital leases by major
      classes:




Asset
                Balances at December 31,(in
                thousands)
            
            2005
            
            2004Rental
                and loaner vehicles
            
            $
            870
            
            $
            981Less:  Accumulated
                amortization
            
            
            (125
            )
            
            (89
            )Net rental and loaner vehicles (included in Inventories)
            
            $
            745
            
            $
            892Buildings
            
            $
            5,180
            
            $
            5,180Less:  Accumulated
                amortization
            
            
            (2,493
            )
            
            (2,156
            )Net Buildings (included in Property & Equipment)
            
            $
            2,687
            
            $
            3,024





F-22


The
      following is a schedule by years of future minimum lease payments under capital
      leases together with the present value of the net minimum lease payments as
      of
      December 31, 2005:





Year
                ending
            
            Minimum
                Lease(in
                thousands)
            
            December
                31,
            
            Payments2006
            
            $
            1,0202007
            
            
            1,0202008
            
            
            1,0182009
            
            
            9362010
            
            
            756Thereafter
            
            
            2,621Total
                minimum lease payments
            
            7,371Less:  Amount
                representing estimated executory costs, included
              in total minimum lease payments
            
            (124
            )Net
                minimum lease payments
            
            7,247Less:  Amount
                representing interest
            
            (2,528
            )Present
                value of net minimum lease payments *
            $
            4,719




*  Reflected
        in the balance sheet as current and non-current obligations under capital
        leases
        of $512 and $4,207, respectively.





**10.**
            **RELATED
                PARTY TRANSACTIONS**




*Leases*




Certain
      officers of Hometown lease to the dealerships the premises under various leases,
      two of which are classified as capital leases. See Notes 5, 9 and 14. 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. Hometown recorded the lease
      as a capital lease. As of December 31, 2005 the mortgage debt balance is $4.0
      million, which equals the capital lease obligation. On February 28, 2006, Rellum
      Realty Company refinanced their mortgage. As part of that refinancing, Hometown
      was released from its guaranty of the mortgage debt.





**11.**
            **CAPITAL
                STRUCTURE AND PER SHARE
                DATA**





*Preferred
      Stock*





Hometown's
      Certificate of Incorporation provides that its Board of Directors has the
      authority, without further action by the holders of the outstanding Common
      Stock, to issue up to two million shares of Preferred Stock from time to time
      in
      one or more classes or series, to fix the number of shares constituting any
      class or series and the stated value thereof, if different from par





F-23


value,
      and to fix the terms of any such series or class, including dividend rights,
      dividend rates, conversion or exchange rights, voting rights, rights and terms
      of redemption (including sinking fund provisions), the redemption price and
      the
      liquidation preference of such class or series. As of December 31, 2005 and
      2004, Hometown does not have any Preferred Stock outstanding. The designations,
      rights and preferences of any Preferred Stock would be set forth in a
      Certificate of Designation which would be filed with the Secretary of the State
      of Delaware.




*Common
      Stock - Class A and Class B*





The
      Class
      A Common Stock and the Class B Common Stock each have a par value of $.001
      per
      share and are identical in all respects, except voting rights and the
      convertibility of the Class B Common Stock. Subject to any special voting rights
      of any series of Preferred Stock that may be issued in the future, the holders
      of Class A Common Stock are entitled to one vote per share and the holders
      of
      Class B Common Stock are entitled to ten votes per share. Except as otherwise
      required by law, both Class A Common Stock and Class B Common Stock vote
      together as one class on all matters to be voted on by stockholders of Hometown,
      including the election of directors. Class A Common Stock is not convertible.
      The Class B Common Stock is convertible into Class A Common Stock on a share
      for
      share basis, at any time at the election of the holder and is automatically
      converted into Class A Common Stock upon any transfer to a person who is not
      then an officer or director of Hometown or of a subsidiary of Hometown. All
      of
      the outstanding shares of Class B Common Stock represent approximately 87%
      of
      the aggregate voting power of Hometown. E xecutive
      officers and directors control approximately 55% of the aggregate voting
      power of Hometown. Neither class of Common Stock has redemption, preemptive
      or
      sinking fund rights. Holders of both classes of Common Stock are entitled to
      dividends as and when declared by the Board of Directors from funds legally
      available therefore and, upon liquidation, dissolution or winding up of
      Hometown, to participate ratably in all assets remaining after payment of all
      liabilities. All shares of Common Stock issued and outstanding are fully-paid
      and non-assessable.





*Warrants*





In
      connection with a Private Equity Financing in July 2001, Hometown issued
      warrants that entitled the holders to purchase up to 487,498 shares of Class
      A
      Common Stock at a purchase price of $1.20 per share, exercisable over a
      three-year period. In June 2004, 214,284 warrants were exercised for
      approximately $257,000 and 214,284 shares of Class A Common Stock were issued.
      All remaining warrants expired in July 2004.





*Per
      Share Data*





“Basic
      earnings per share” is computed by dividing net income by the weighted average
      common shares outstanding. “Diluted earnings per share” is computed by dividing
      net income by the weighted average common shares outstanding adjusted for the
      incremental dilution of potentially dilutive securities. Options to purchase
      approximately 498,000 shares and 518,000 shares of common stock were outstanding
      during 2005 and 2004, respectively. Options and warrants to purchase
      approximately 1,112,000 shares of common stock were outstanding during 2003.
      Basic and diluted weighted average shares for the years ended December 31,
      2005,
      2004 and 2003 are as follows:





F-24





Year
                Ended December 31,2005
            
            2004
            
            2003Basic,
                Weighted Average Shares
            
            
            6,617,005
            
            
            7,286,931
            
            
            7,175,105Common
                Stock Equivalents
            
            
            153,273
            
            
            152,093
            
            
            40,387Diluted,
                Weighted Average Shares
            
            
            6,770,278
            
            
            7,439,024
            
            
            7,215,492





Basic
      weighted average shares reflect a reduction of 940,000 Class B shares from
      the
      settlement of the Vergopia litigation on March 3, 2005. These shares have been
      cancelled as of May 13, 2005. During the third quarter of 2005, stock options
      to
      purchase 40,000 Class A shares were exercised. Also, the year ended December
      31,
      2005 includes a gain on the transfer of the Westwood dealership of $587,000
      (see
      Note 15 - Litigation section) and costs associated with the Exchange Agreement
      of $502,000 and related lawsuit of $160,000 (see Notes 19 and 15 - Litigation
      section, respectively). The year ended December 31, 2004 includes a tax benefit
      recorded primarily due to the reduction of a valuation allowance on the deferred
      tax asset related to tax deductible unamortized goodwill and net operating
      losses. The year ended December 31, 2003 includes a tax benefit recorded
      primarily due to the reduction of a valuation allowance on the deferred tax
      asset related to tax deductible unamortized goodwill. See Note 12. 2003 also
      includes a $936,000 gain on the sale of a Chrysler/Jeep Sales and Service
      Franchise in June 2003.





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, 2004
      and
      2003, options and warrants to purchase 99,000, 248,000 and 842,000 shares,
      respectively, of Hometown common stock were excluded from the calculation of
      diluted income per share due to the options and warrant prices being greater
      than the average market price of the common shares during the period.





The
      basic
      and diluted income per share for the year ended December 31, 2005 is $0.20
      and
      $0.19, respectively. The basic and diluted income per share for the year ended
      December 31, 2004 is $0.54 and $0.53, respectively. The basic and diluted income
      per share for the year ended December 31, 2003 is $0.35.





**12.**
            **INCOME
                TAXES**





(in
                thousands)
            
            December
                31,2005
            
            2004
            
            2003Federal:Current
            
            $
            16
            
            $
            (31
            )
            $
            60Deferred
            
            
            633
            
            
            (1,879
            )
            
            274State:Current
            
            
            318
            
            
            223
            
            
            347Deferred
            
            
            94
            
            
            (283
            )
            
            (65
            )Provision
                (Benefit) for Income Taxes
            
            $
            1,061
            
            $
            (1,970
            )
            $
            616





F-25


Actual
      income tax expense (benefit) differs from income tax expense computed by
      applying a U.S. federal statutory corporate tax rate of 34% to income before
      income taxes as follows:





December
                31,(in
                thousands)
            
            2005
            
            2004
            
            2003Provision
                at the statutory rate
            
            
            34.0
            %
            
            34.0
            %
            
            34.0
            %Increase
                (decrease) resulting from:State income tax, net of benefit for
              Federal
                deduction
            
            
            11.6
            %
            
            (2.0
            )%
            
            5.9
            %Change in valuation allowance (a)
            
            
            2.2
            %
            
            (126.7
            )%
            
            (14.4
            )%Adjustment for prior year over accruals
            
            
            (3.6
            )%
            
            (5.7
            )%
            
            (5.8
            )%Other
            
            
            0.9
            %
            
            (0.1
            )%
            
            0.0
            %Effective
                tax rate
            
            
            45.1
            %
            
            (100.3
            )%
            
            19.7
            %





Deferred
      income taxes are provided for temporary differences in the recognition of income
      and expenses for financial reporting purposes and for tax purposes. The tax
      effects of these temporary differences representing deferred tax assets and
      liabilities result principally from the following:





December
                31,(in
                thousands)
            
            2005
            
            2004**Deferred
                income taxes and taxes receivable - short-term:**Tax
                assets related to goodwill
            
            $241
            
            $
                216Current
                net operating loss carryforward (c)
            
            249
            
            319Reserves
                and accruals not deductible until paid
            
            405
            
            538Tax
                on current portion of deferred revenue
            
            82
            
            294Tax
                prepayments and prior year overpayments
            
            62
            
            97Total
            
            $
            1,039
            
            $
            1,412**Deferred
                tax assets - long-term:**(b)Tax
                assets related to goodwill
            
            $
            1,903
            
            $
            2,199Net
                operating loss carryforward (c)
            
            
            1,010
            
            
            1,159Tax
                on long term portion of deferred revenue
            
            
            42
            
            
            127Deferred
                tax on capital leases treated as operating
              leases
                for tax purposes
            
            
            377
            
            
            353Other
            
            
            119
            
            
            74Valuation
                allowance (a)
            
            
            (1,204
            )
            
            (1,153
            )Total
            
            $
            2,247
            
            $
            2,759




F-26




**Deferred
                tax liabilities - long-term:**Depreciation
            
            $
            —
            
            $
            (123
            )Total
            
            $
            —
            
            $
            (123
            )Net
                deferred tax  assets - short term
            
            $
            977
            
            $
            1,315Net
                deferred tax  assets - long term
            
            
            3,451
            
            
            3,789Valuation
                allowance on long-term assets
            
            
            (1,204
            )
            
            (1,153
            )Net
                deferred tax asset
            
            $
            3,224
            
            $
            3,951





(a)
      The
      2005 valuation allowance of $1.2 million consists of $1.0 million in relation
      to
      State NOL’s of $10.8 million not expected to be utilized and $0.2 million in
      relation to the State tax effect from goodwill amortization not expected to
      be
      utilized. In 2004, the deferred tax asset valuation allowance decreased by
      $2.5
      million. This decrease is primarily the result of Hometown’s analysis of the
      likelihood of realizing the future tax benefit of tax loss carryforwards and
      additional temporary differences. Realization of the net deferred tax asset
      (net
      of recorded valuation allowance) is dependent upon profitable operations and
      future reversals of existing taxable temporary differences. Although realization
      is not assured, Hometown believes it is more likely than not that the
      net-recorded benefits will be realized through the reduction of future taxable
      income. The amount of the net deferred tax assets considered realizable,
      however, could be reduced in the near term if actual future taxable income
      is
      lower than estimated, or if there are differences in the timing or amount of
      future reversals of existing taxable temporary differences.





(b)
      Long-term deferred tax assets are recorded in other assets in the consolidated
      balance sheets.





(c)
      Federal NOL’s of $0.7 million begin to expire in 2021. State NOL’s of $0.7
      million expired in 2005. The remaining State NOL’s of $11.2 million begin to
      expire in 2006. NOL’s that have expired in 2005 had a valuation allowance for
      the entire amount of the tax benefit. NOL’s that will expire in 2006 have a
      valuation allowance for the entire amount of the tax benefit. See (a)
      above.





**13.**
            **ADVERTISING
                AND PROMOTION**




Hometown
      expenses advertising and promotion as incurred. Advertising and promotion
      expenses included in Selling, General and Administrative Expenses, net certain
      of manufacturers’ rebates and assistance, were approximately $3.4 million, $3.9
      million and $3.3 million for the years ended December 31, 2005, 2004 and 2003,
      respectively. Manufacturers advertising rebates and assistance recorded as
      a
      reduction of advertising expense was approximately $0.6 million, $0.4 million
      and $0.7 million for the years ended December 31, 2005, 2004 and 2003,
      respectively.





Certain
      manufacturers will charge Hometown for national and regional advertising in
      the
      invoice price of the vehicle. These charges are included in the cost of vehicles
      sold by Hometown. The expense is recognized in cost of sales upon the sale
      of
      the vehicle.





Certain
      manufacturers will reimburse the dealerships for a portion of these advertising
      costs upon providing the manufacturer documentation of advertising performed
      by
      the dealership according to the manufacturers advertising and marketing program
      guidelines. These rebates were





F-27


$0.6
      million, $0.4 million and $0.7 million in 2005, 2004 and 2003, respectively,
      and
      were recorded as a reduction of advertising expense. Other manufacturers
      reimburse dealerships a flat amount of the advertising charged without any
      advertising required by the dealerships. In 2005, 2004 and 2003, in accordance
      with EITF Issue No. 02-16, these amounts are reflected as a reduction of the
      inventory amount and as a reduction of cost of sales upon sale of the vehicle.
      Approximately $0.3 million has been reflected as a reduction of cost of sales
      in
      2005, 2004 and 2003.


**14.**
            **OPERATING
                LEASES**




Hometown
      has executed leases for the premises occupied by its dealerships. Hometown
      accounts for operating leases on a straight-line basis. None of Hometown’s
      property leases have rents that escalate at a fixed rate over time. One lease
      contains an option to purchase at the end of the current lease term or end
      of
      the extension term at the then fair market value of the property. Certain of
      the
      leases are with related parties. Hometown also has operating leases relating
      to
      its data processing equipment. The minimum rental commitments required under
      these operating leases after December 31, 2004 are as follows:





Year
                ending December 31,
            
            Total
                Obligation
            
            Related
                Parties
            
            Other(in
                thousands)2006
            
            $
            992
            
            $
            733
            
            $
            2592007
            
            
            992
            
            
            733
            
            
            2592008
            
            
            989
            
            
            733
            
            
            2562009
            
            
            764
            
            
            733
            
            
            312010
            
            
            748
            
            
            738
            
            
            10Thereafter
            
            
            2,214
            
            
            2,214
            
            
            —Total
                (1)(2)
            
            $
            6,699
            
            $
            5,884
            
            $
            815





(1)
      Certain leases contain escalation clauses that are based on increases in the
      published Consumer Price Index and accordingly are not included in the minimum
      rental commitment schedule until the increase takes place. Also, certain of
      the
      leases contain renewal options and require Hometown to pay for real estate
      taxes
      and occupancy costs, none of which are included in the minimum rental commitment
      schedule.





Total
      expense for operating leases and rental agreements was $1,292,000, $1,859,000
      and $1,851,000 for the years ended December 31, 2005, 2004 and 2003,
      respectively. Rental expense for the years ended December 31, 2005, 2004 and
      2003, does not include sub-lease income received of $23,000, $20,000 and $3,000,
      respectively. The sub-lease agreement expired in 2005.





Total
      expense for operating leases and rental agreements with related parties was
      $896,000, $1,149,000 and $912,000 for the years ending December 31, 2005, 2004
      and 2003, respectively.







F-28


**15.**
            **COMMITMENTS
                AND CONTINGENCIES**




*Litigation*





During
      the fourth quarter of 2004, Hometown announced that it had resolved in principle
      to settle the litigation matters described in Footnote 9 in the Notes to
      Unaudited Consolidated Financial Statements as contained in Hometown’s Form 10-Q
      as filed with the Securities and Exchange Commission on November 12, 2004.
      On
      March 3, 2005 the execution and delivery of a settlement agreement and
      applicable releases of claims from all parties to the litigation was completed.
      The settlement agreement settled all claims made by Salvatore A. Vergopia and
      Edward A. Vergopia, former directors and executive officers of the Corporation,
      and Janet Vergopia, the wife of Salvatore A. Vergopia (the “Vergopias”). The
      settlement also finally resolved the related insurance coverage litigation
      with
      Universal Underwriters Group and The Chubb Group of Insurance Companies. The
      gross payment to the Vergopias by all parties was $4 million of which $0.6
      million was paid by Hometown in March 2005. The settlement with the Vergopias
      and the insurers included an exchange of mutual releases of claims among the
      parties and a withdrawal of all claims with prejudice and without costs or
      attorneys fees to any party. On May 11, 2005, the parties completed the transfer
      to the Vergopias of certain Westwood Lincoln Mercury Sales, Inc. assets,
      including its Lincoln Mercury franchise and the termination of Hometown’s
      Westwood, New Jersey lease. Hometown received all of the 940,000 shares of
      Class
      B Common Stock owned by the Vergopias in March 2005. The Settlement Agreement
      does not constitute an admission of liability or wrongdoing by any party.





The
      940,000 shares of Hometown stock was recorded at fair market value on March
      3,
      2005, the date of the executed settlement agreement, and is shown as a reduction
      of Stockholders’ Equity of $1.0 million, primarily Additional Paid-in-Capital.
      (See Statements of Stockholders Equity.) The assets and liabilities transferred
      to the Vergopias was recorded as a reduction of those accounts at book value
      on
      May 11, 2005 resulting in a gain of approximately $0.6 million from the
      transaction. Hometown wrote off the goodwill associated with this franchise
      in
      2002 and expensed the aforementioned $0.6 million March payment in prior
      periods.





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







F-29


On
      July
      8, 2005 Hometown issued a press release in which it announced its receipt of
      notice of the commencement of a lawsuit against Hometown and an indefinite
      delay
      in the mailing to Hometown’s stockholders of the Information Statement prepared
      in connection with the Exchange Agreement announced by Hometown on June 2,
      2005.
      The press release was filed with the Securities and Exchange Commission as
      part
      of Hometown’s Form 8-K filed on July 8, 2005. See Note 19 to the consolidated
      financial statements.





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





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





As
      of
      December 31, 2005, Hometown has incurred approximately $0.2 million in relation
      to the complaint, which amount has been expensed and is included in Selling
      General and Administrative Expenses on Hometown’s Consolidated Statements of
      Operations for the Year Ended December 31, 2005.




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





F-30


required
      to make the mortgage payments, but does not take ownership of the property.
      Hometown recorded the lease as a capital lease. As of December 31, 2005 the
      mortgage debt balance is $4.0 million, which agrees to the capital lease
      obligation. See Notes 8 and 9 to the consolidated financial statements. On
      February 28, 2006, Rellum Realty Company refinanced their mortgage. As part
      of
      that refinancing, Hometown was released from its guaranty of the mortgage
      debt.





*Warranties*





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





Hometown
      records a reserve referred to as “policy” for used vehicle warranties and the
      labor portion of service warranties based on available historical information.
      Also included in this reserve are (i) the costs associated with free products
      or
      services that may be offered to a retail customer for purposes of maintaining
      goodwill with that particular service customer or new or used vehicle customer,
      or (ii) the free products or service may be part of a service maintenance
      program whereby customers may receive certain services for free if they maintain
      a certain level of service at the dealership. At December 31, 2005 and 2004,
      Hometown has a reserve of $202,000 and $208,000, respectively. The reserve
      is
      based on the last three months of used vehicle units sold and the average cost
      of repairs, including free parts and service, over the last twelve months.
      While
      Hometown believes its estimated liability for product warranties and free parts
      and service is adequate and that the judgment applied is appropriate, the
      estimated liability for product warranties and free parts and service could
      differ materially from future actual costs.





Reserve
                for Policy Work
            Balance
                At
              Beginning
                of
              Year
            Additions
                To
              Costs
                and
              Expenses
            Deductions
            Balance
                At
              End
                of YearYear
                Ended 12/31/05
            $208,000
            $1,034,000
            $(1,040,000)
            $202,000Year
                Ended 12/31/04
            $175,000
            $1,207,000
            $(1,174,000)
            $208,000Year
                Ended 12/31/03
            $172,000
            $1,019,000
            $(1,016,000)
            $175,000





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





F-31


*Franchise
      Agreements*





Toyota
      Motor Sales, U.S.A., Inc. has extended Hometown’s current Toyota Dealer
      Agreement on a periodic basis since March of 2003. The most recent extension
      was
      for a period of three months through May 18, 2006. Previously on March 13,
      2003,
      Hometown was notified by Toyota Motor Sales, U.S.A., that Hometown must correct
      certain operational deficiencies or make substantial progress toward rectifying
      such deficiencies. Toyota had previously expressed concerns that the financial
      resources of the Toyota dealerships were being used to finance the cash flow
      deficits of other Hometown dealerships and that because of this the financial
      health of the Toyota dealerships were detrimentally affected by a net working
      capital deficiency. Toyota requested and Hometown provided a written action
      plan
      and consolidated financial forecast. Toyota also expressed concerns about the
      impact of Ford Motor Credit’s financing terms upon the Toyota dealerships and
      the existing litigation, which has now been settled, including the Vergopias as
      discussed above .
      Hometown developed and implemented plans to correct the operational deficiencies
      that would bring Hometown into compliance. Hometown has obtained written
      confirmations from Ford Motor Credit in response to Toyota’s requests for
      information relating to financing arrangements. In addition, Hometown has
      improved net working capital through the sale of a Chrysler/Jeep sales and
      service franchise in the second quarter of 2003 and advances on warranty income
      from Hometown’s Extended Service Plan vendor. Hometown has been in regular
      contact with Toyota to review the efforts of Hometown to resolve the
      deficiencies alleged by Toyota. The two Toyota dealerships for the fiscal year
      ended December 31, 2005 had combined revenues of $104.0 million and pre-tax
      income before allocation of corporate costs of $2.4 million. Hometown believes
      that it has corrected the alleged net working capital deficiency for the Toyota
      dealerships and that it has undertaken reasonable steps to alleviate the
      concerns expressed by Toyota. However, there can be no assurance that Toyota
      will enter into a new dealer agreement with Hometown and Toyota has reserved
      the
      right to terminate the Toyota Dealership Agreements if sufficient progress
      is
      not made to correct the alleged deficiencies. Should Hometown be notified by
      Toyota that they intend to terminate the Toyota Dealership Agreements, Hometown
      believes it would have a reasonable amount of time to cure the
      defaults.





**16.**
            **EMPLOYEE
                BENEFIT PLANS**





Hometown
      maintains the Hometown Auto Retailers, Inc. 401(k) Plan (the “Plan”) for the
      benefit of eligible employees, as defined. Participants may make voluntary
      contributions of up to 50% of their compensation, subject to certain IRS
      limitation. Hometown may make annual matching contributions to the Plan at
      its
      discretion. Hometown made contributions of $19,000, $18,000 and $24,000 for
      the
      years ended December 31, 2005, 2004 and 2003, respectively.





**17.**
            **STOCK
                OPTION PLAN**





In
      February 1998, as further amended in August 2002, in order to attract and retain
      persons necessary for the success of Hometown, Hometown adopted
      its 1998 Stock Option Plan (the "Stock Option Plan") covering up to 830,000
      shares of Class A Common Stock. Pursuant to the Stock Option Plan, officers,
      directors, key employees of Hometown and consultants to Hometown are eligible
      to
      receive incentive and/or non-incentive stock options. The Stock Option Plan,
      which expires in January 2008, is administered by the Board of Directors or
      a
      committee designated by the Board of Directors. The selection of participants,
      allotment of shares,





F-32





determination
      of price and other conditions relating to the purchase of options will be
      determined by the Board of Directors, or a committee thereof, in its sole
      discretion. Stock options granted under the Stock Option Plan are exercisable
      for a period of up to ten years from the date of grant at an exercise price
      which is
      not
      less than the fair market value of the Common Stock on the date of the grant,
      except that the term of an incentive stock option granted under the Stock Option
      Plan to a stockholder owning more than 10% of the outstanding Common Stock
      may
      not exceed five years and its exercise price may not be less than 110% of the
      fair market value of the Common Stock on the date of the grant.





The
      following tables summarizes information about stock option activity and
      amounts:





Number
                of
              Shares
            
            Weighted
              Average
                Price
              per
                Share
            
            Weighted
              Average
                Fair
              ValueBalance
                at December 31, 2002
            
            
            710,750
            
            $
            3.60Options
                Granted
            
            
            100,000
            
            
            0.38
            
            $
            0.27Canceled
            
            
            (186,250
            )
            
            7.47Balance
                at December 31, 2003
            
            
            624,500
            
            $
            1.93Options
                Granted
            
            
            10,000
            
            
            1.05
            
            $
            0.67Canceled
            
            
            (117,000
            )
            
            5.79Balance
                at December 31, 2004
            
            
            517,500
            
            $
            1.04Options
                Granted
            
            
            20,000
            
            
            1.25
            
            $
            1.01Exercised
            
            
            (40,000
            )
            
            1.19Balance
                at December 31, 2005
            
            
            497,500
            
            $
            1.03Exercisable
                at December 31, 2003
            
            
            413,000
            
            $
            2.45Exercisable
                at December 31, 2004
            
            
            444,169
            
            $
            1.13Exercisable
                at December 31, 2005
            
            
            457,501
            
            $
            1.05





Range
                of
              Exercise
              Prices
            
            Number
                of
              Options
              Outstanding
                at
              12/31/05
            
            Weighted
              Average
              Remaining
              Life
            
            Weighted
              Average
                Exercise
              Price
              Per
                Share
            
            Options
              Exercisable
              at
                12/31/05
            
            Weighted
                Avg.
              Exercise
                Price$0.34
                to $0.65
            
            
            220,000
            
            
            2.96
            
            $
            0.45
            
            
            203,333
            
            $
            0.46$0.68
                to $1.50
            
            
            178,750
            
            
            3.10
            
            $
            1.08
            
            
            155,418
            
            $
            1.06$2.25
            
            
            98,750
            
            
            0.38
            
            $
            2.25
            
            
            98,750
            
            $
            2.25497,500
            
            
            2.50
            
            $
            1.03
            
            
            457,501
            
            $
            1.05





In
      accordance with SFAS No. 123, “Accounting for Stock-Based Compensation”, the
      fair value of option grants is estimated on the date of grant using the
      Black-Scholes option-pricing model for pro forma footnote purposes.




F-33





In
      2005,
      the dividend yield was assumed to be 0%, the risk-free interest rate was 3.82%,
      the expected option life was 10 years and the expected volatility was 75%.
      In
      2004, the dividend yield was assumed to be 0%, the risk-free interest rate
      was
      3.93%, the expected option life was 5 years and the expected volatility was
      75%.
      In 2003, the dividend yield was assumed to be 0%, the risk-free interest rate
      ranged from 3.0% to 3.2%, the expected option life was 5 to 10 years and the
      expected volatility was 75%.





See
      Note
      3 for impact of accounting for stock options using the fair value method of
      accounting according to SFAS 123.





**18.**
            **OTHER
                INCOME / OTHER EXPENSE**





The
      significant components of Other Income and Other Expense are:





Year
                Ended December 31,(in
                thousands)
            
            2005
            
            2004
            
            2003**Other
                Income:**Gain
                in relation to litigation settlement
            
            $
            587
            
            $
            —
            
            $
            —Oldsmobile
                termination payment
            
            
            —
            
            
            127
            
            
            —Gain
                on sale of Sales and Service Franchise
            
            
            —
            
            
            —
            
            
            936Other
            
            
            15
            
            
            8
            
            
            20Total
                Other Income
            
            $
            602
            
            $
            135
            
            $
            956**Other
                Expense:**Miscellaneous
            
            $
            —
            
            $
            (9
            )
            $
            (3
            )Total
                Other Expense
            
            $
            —
            
            $
            (9
            )
            $
            (3
            )





In
      May
      2005, Hometown completed the transfer of certain assets in relation to the
      settlement of litigation matters resulting in a gain of approximately $587,000
      and is included in Other Income in Hometown’s Consolidated Statement of
      Operations for the year ended December 31, 2005. See Note 15 - Litigation
      section.





Hometown
      received $127,000 from General Motors Corp. related to the termination of the
      Oldsmobile product line, which was recorded in Other Income in Hometown’s
      Consolidated Statement of Operations for the year ended December 31,
      2004.





On
      June
      3, 2003 Hometown sold the Chrysler/Jeep Sales and Service Franchise for its
      Waterbury, CT store for $950,000 in cash. The transaction resulted in Hometown
      recording a $936,000 gain on the sale and is included in Other Income in
      Hometown’s Consolidated Statement of Operations for the year ended December 31,
      2003. Hometown relocated its corporate offices to this location in January
      2005.
      The lease for the property expires in 2013. Hometown wrote off the goodwill
      associated with this franchise in 2002.





F-34





**19.**
            **EXCHANGE
                AGREEMENT**





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





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





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





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





The
      automobile franchises operated by the New England subsidiaries
      include:


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


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


·
            Family
                Ford (Waterbury, Conn.),


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


·
            Wellesley
                Mazda (Wellesley, Mass.),


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





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


·
            Baystate
                Realty (Framingham, Mass.), and


·
            Brattleboro
                Realty (Brattleboro, Vt.).





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


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


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


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





F-35





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





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





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





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





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





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





On
      June
      17, 2005, Hometown filed a Preliminary Schedule 14C Information Statement
      (“Information Statement”) with the Securities and Exchange Commission which
      describes the proposed exchange transactions. The Preliminary Schedule 14C
      Information Statement included the disclosure that the members of the Board
      of
      Directors of the Company were sent a letter dated June 14, 2005 signed by Steven
      Bronson, Louis J. Meade and Leonard Hagan, which letter was included in an
      amendment to a Schedule 13D filed by Steven Bronson with the Securities and
      Exchange Commission on June 15, 2005. In the letter, Messrs. Bronson, Meade
      and
      Hagan (the “Holders”) stated that they own an aggregate of 16.31% of the
      Company’s Class A Common Stock. In the letter, the Holders also stated their
      belief that the Exchanges will have a material adverse effect on the Company
      and
      the shareholders who are not parties to the Exchanges, and





F-36





are
      not
      in the best interests of the Company and its shareholders. They further stated
      their belief that the Exchanges violate the Board’s statutory and common law
      fiduciary duties and demand that the Company abandon the Exchanges, that the
      Board appoint a new Compensation Committee, that the President of the Company
      resign, that the Board appoint a Special Committee to explore all options for
      maximizing shareholder value, including conversion of the Company’s Class B
      Common Stock into Class A Common Stock, that provision be made for minority
      shareholder representation on the Board, and that the Shaker Group reimburse
      the
      Company for its costs in pursuing the Exchanges.





On
      July
      8, 2005 Hometown issued a press release in which it announced (i) its receipt
      of
      notice of the lawsuit which is described above, see Note 15 - “Litigation”, in
      which the plaintiffs seek equitable and monetary relief, including rescission
      of
      the Exchange Agreement, and (ii) an indefinite delay in the mailing of the
      Information Statement to Hometown’s stockholders. The press release was also
      filed with the Securities and Exchange Commission, as part of Hometown’s Form
      8-K filed on July 8, 2005.





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




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





**20.**
            **SUBSEQUENT
                EVENTS**





On
      February 9, 2006 Hometown completed the acquisition of a Nissan franchise.
      Pursuant to the terms of the Asset and Franchise Purchase Agreement, Hometown
      purchased a Nissan sales and service franchise and certain assets including
      customer lists, certain new parts and accessories, special tools and new vehicle
      inventory. Hometown did not assume any liabilities. The purchase price was
      $2.0
      million plus approximately $0.1 million for certain special tools and parts
      and
      accessories. In addition, Hometown received a credit for holdbacks, floor plan
      assistance and advertising credits of less than $0.1 million and assumed the
      new
      vehicle inventory on hand which was financed under Registrant’s existing floor
      plan financing with Ford Motor Credit Corporation.





With
      regard to the pending Exchange Agreement (see Note 19) with the New England
      Subsidiaries of Hometown and the stockholders of Hometown in the Shaker Group,
      the assets





F-37





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





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





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





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





The
      Mortgage Loan is unconditionally guaranteed by the following corporate
      subsidiaries of the Registrant (collectively, the “Corporate Guarantors”):
      Hometown Auto Framingham, Inc., Family Ford, Inc., Shakers, Inc., Hometown
      Brattleboro, Inc., Shaker Auto Group, Inc., and by certain shareholders (the
      “Individual Guarantors”). Hometown has agreed to indemnify the Individual
      Guarantors in the event that the Exchange Agreement is not consummated. The
      Mortgage Loan is secured by a first mortgage on real estate and improvements
      owned by the Borrower at 571 Worcester Road, Framingham, Massachusetts (the
      “Property”), a first security interest in the Borrower’s and each Corporate
      Guarantor’s personal property, a collateral assignment of a lease by and between
      the Borrower and Hometown Auto Framingham, Inc., and a collateral assignment
      of
      all leases of real or personal property used in connection with the Property.
      Furthermore, the Mortgage Loan is “cross-defaulted” and “cross-collateralized”
with: (i) the Capital Loan from Lender to Hometown Auto Framingham, Inc. recited
      below; (ii) a Wholesale Line of Credit made by Lender to Hometown Auto
      Framingham, Inc. dated March 2, 2001; (iii) a Wholesale Line of Credit made
      by
      Lender to Family Ford, Inc. dated February 28, 2001; (iv) a Wholesale Line
      of
      Credit made by Lender to Shakers Inc. dated February 28, 2001; (v) a Wholesale
      Line of Credit made by Lender to Hometown Brattleboro, Inc. dated March 2,
      1001;
      (vi) any and all other loans now or hereafter outstanding made by Lender to
      Borrower and/or the Guarantors; and (vii) any and all extensions, increases,
      amendments, renewals and modifications of the foregoing
      obligations.





F-38





The
      Capital Loan bears interest at a variable rate, equal to 2.50% per annum above
      the Prime Rate (which as of the closing on the Capital Loan resulted in an
      effective rate of 10.0%), and is payable in 59 consecutive monthly installments
      of principal in the amount of $12,500 each commencing on the fifteenth day
      of
      the first month following the closing, together with accrued interest, with
      a
      final balloon payment due upon maturity five (5) years from the closing date.
      The Capital Loan was made to Hometown Auto Framingham, Inc. (the “Borrower”) by
      the Lender and is unconditionally guaranteed by the following corporate
      subsidiaries of the Registrant (collectively, the “Corporate Guarantors”): Bay
      State Realty Holdings, Inc., Family Ford, Inc., Shakers, Inc., Hometown
      Brattleboro, Inc., Shaker Auto Group, Inc., and by certain shareholders. The
      Capital Loan is secured by a first security interest in the Borrower’s and each
      Corporate Guarantor’s personal property, and is also “cross-defaulted” and
“cross-collateralized” with: (i) the Mortgage Loan from Lender to Bay State
      Realty Holdings, Inc. recited above; (ii) a Wholesale Line of Credit made by
      Lender to Hometown Auto Framingham, Inc. dated March 2, 2001; (iii) a Wholesale
      Line of Credit made by Lender to Family Ford, Inc. dated February 28, 2001;
      (iv)
      a Wholesale Line of Credit made by Lender to Shakers Inc. dated February 28,
      2001; (v) a Wholesale Line of Credit made by Lender to Hometown Brattleboro,
      Inc. dated March 2, 1001; (vi) any and all other loans now or hereafter
      outstanding made by Lender to Borrower and/or the Guarantors; and (vii) any
      and
      all extensions, increases, amendments, renewals and modifications of the
      foregoing obligations.




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





F-39





**21.**
            **UNAUDITED
                QUARTERLY FINANCIAL DATA**





**For
      the year ended December 31, 2005**


(in
      thousands, except per share data)





**1****st****Qtr.**
            
            **2****nd****Qtr.**
            
            **3****rd****Qtr.**
            
            **4****th****Qtr.**
            
            **Total
                Year****Restated**
            
            **Restated**
            
            **Restated**Net
                Sales
            
            $
            61,815
            
            $
            65,354
            
            $
            61,393
            
            $
            44,518
            
            $
            233,080Gross
                profit
            
            
            9,355
            
            
            9,427
            
            
            8,785
            
            
            7,171
            
            
            34,738Income
                before taxes
            
            
            498
            
            
            1,452
            
            
            298
            
            
            105
            
            
            2,353Net
                income
            
            $
            297
            
            $
            873
            
            $
            179
            
            $
            (57
            )
            $
            1,292Per
                share information:Earnings
                per share, basic
            
            $
            0.04
            
            $
            0.14
            
            $
            0.03
            
            $
            (0.01
            )
            $
            0.20Earnings
                per share, diluted
            
            $
            0.04
            
            $
            0.13
            
            $
            0.03
            
            $
            (0.01
            )
            $
            0.19Weighted
                average shares, basic
            
            
            7,086.5
            
            
            6,449.4
            
            
            6,451.1
            
            
            6,660.0
            
            
            6,617.0Weighted
                average shares, diluted
            
            
            7,211.0
            
            
            6,584.4
            
            
            6,646.5
            
            
            6,811.9
            
            
            6,770.3





Restated
      - See Note 2.








**For
      the year ended December 31, 2004 (Restated)**


(in
      thousands, except per share data)





**1****st****Qtr.**
            
            **2****nd****Qtr.**
            
            **3****rd****Qtr.**
            
            **4****th****Qtr. (*)**
            
            **Total
                Year**Net
                Sales
            
            $
            65,995
            
            $
            68,807
            
            $
            69,334
            
            $
            61,458
            
            $
            265,594Gross
                profit
            
            
            9,637
            
            
            9,716
            
            
            9,804
            
            
            9,130
            
            
            38,287Income
                before taxes
            
            
            257
            
            
            404
            
            
            833
            
            
            471
            
            
            1,965Net
                income
            
            $
            187
            
            $
            295
            
            $
            608
            
            $
            2,845
            
            $
            3,935Per
                share information:Earnings
                per share, basic
            
            $
            0.03
            
            $
            0.04
            
            $
            0.08
            
            $
            0.39
            
            $
            0.54Earnings
                per share, diluted
            
            $
            0.03
            
            $
            0.04
            
            $
            0.08
            
            $
            0.38
            
            $
            0.53Weighted
                average shares, basic
            
            
            7,175.1
            
            
            7,191.6
            
            
            7,389.4
            
            
            7,389.4
            
            
            7,286.9Weighted
                average shares, diluted
            
            
            7,471.3
            
            
            7,324.5
            
            
            7,493.2
            
            
            7,466.2
            
            
            7,439.0





Restated
      - See Note 2.





(*)
      The
      fourth quarter of 2004 contains a tax valuation adjustment of $2.5 million.
      See
      Note 12.





F-40





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
      SCHEDULE**








To
      the
      Shareholders and Directors of Hometown Auto Retailers, Inc.





The
      audits referred to in our report dated March 17, 2006, relating to the
      consolidated financial statements of Hometown
      Auto Retailers, Inc. ,
      which
      is contained in Item 8 of this Form 10-K  included
      the audits of the financial statement schedules for the years ended December
      31,
      2005, 2004 and 2003 listed in the accompanying index. These financial statement
      schedules are the responsibility of the Company's management. Our responsibility
      is to express an opinion on these financial statement schedules based upon
      our
      audits.





In
      our
      opinion such financial statement schedules present fairly, in all material
      respects, the information set forth therein.








New
                York, New York
            /s/
                BDO Seidman, LLPMarch
                17, 2006
            BDO
                Seidman, LLP







S-1





**SCHEDULE
      II**


**VALUATION
      AND QUALIFYING ACCOUNTS**


For
      the
      years ended December 31, 2005, 2004 and 2003





Account
                Description
            
            Balance
                at
              Beginning
              of
                Year
            
            Additions
              charged
                to
              Costs
                and
              Expenses
            
            Deductions,
              net
                of
              Write-offs
            
            Other
              Adjustments
            
            Balance
                at
              End
              of
                Year*Reserves
                for:**Finance
                contract charge-backs*Year
                ended December 31, 2005
            
            $
            180,000
            
            $
            247,000
            
            $
            (302,000
            )
            $
            —
            
            $
            125,000Year
                ended December 31, 2004
            
            $
            190,000
            
            $
            317,000
            
            $
            (327,000
            )
            $
            —
            
            $
            180,000Year
                ended December 31, 2003
            
            $
            162,000
            
            $
            277,000
            
            $
            (249,000
            )
            $
            —
            
            $
            190,000*Insurance
                contract charge-backs*Year
                ended December 31, 2005
            
            $
            45,000
            
            $
            40,000
            
            $
            (28,000
            )
            $
            —
            
            $
            57,000Year
                ended December 31, 2004
            
            $
            35,000
            
            $
            34,000
            
            $
            (24,000
            )
            $
            —
            
            $
            45,000Year
                ended December 31, 2003
            
            $
            35,000
            
            $
            14,000
            
            $
            (14,000
            )
            $
            —
            
            $
            35,000*Service
                contract charge-backs*Year
                ended December 31, 2005
            
            $
            190,000
            
            $
            155,000
            
            $
            (138,000
            )
            $
            —
            
            $
            207,000Year
                ended December 31, 2004
            
            $
            285,000
            
            $
            12,000
            
            $
            (107,000
            )
            $
            —
            
            $
            190,000Year
                ended December 31, 2003
            
            $
            96,000
            
            $
            369,000
            
            $
            (180,000
            )
            $
            —
            
            $
            285,000*Guarantees
                on finance contracts*Year
                ended December 31, 2005
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Year
                ended December 31, 2004
            
            $
            24,000
            
            $
            (21,000
            )
            $
            (3,000
            )
            $
            —
            
            $
            —Year
                ended December 31, 2003
            
            $
            78,000
            
            $
            (21,000
            )
            $
            (33,000
            )
            $
            —
            
            $
            24,000*Policy
                work expenses*Year
                ended December 31, 2005
            
            $
            208,000
            
            $
            1,034,000
            
            $
            (1,040,000
            )
            $
            —
            
            $
            202,000Year
                ended December 31, 2004
            
            $
            175,000
            
            $
            1,207,000
            
            $
            (1,174,000
            )
            $
            —
            
            $
            208,000Year
                ended December 31, 2003
            
            $
            172,000
            
            $
            1,019,000
            
            $
            (1,016,000
            )
            $
            —
            
            $
            175,000*Allowance
                for doubtful accounts*Year
                ended December 31, 2005
            
            $
            270,000
            
            $
            (60,000
            )
            $
            (32,000
            )
            $
            —
            
            $
            178,000Year
                ended December 31, 2004
            
            $
            300,000
            
            $
            98,000
            
            $
            (128,000
            )
            $
            —
            
            $
            270,000Year
                ended December 31, 2003
            
            $
            207,000
            
            $
            122,000
            
            $
            (29,000
            )
            $
            —
            
            $
            300,000




S-2