SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 2005


                        Commission file number: 000-24669


                          HOMETOWN AUTO RETAILERS, INC.
             (Exact name of Registrant as specified in its charter)

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

                             1309 South Main Street
                               Waterbury, CT 06706
               (Address of principal executive offices) (Zip code)

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

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

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

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

                      Title                                          Outstanding
------------------------------------------------                     -----------
Common Stock, Class A, par value $.001 per share                      3,870,137
Common Stock, Class B, par value $.001 per share                      2,579,252


<PAGE>


                                      INDEX

                                                                            Page
PART I.   FINANCIAL INFORMATION

ITEM 1.   Consolidated Balance Sheets at June 30, 2005 (Unaudited)
          and December 31, 2004 (Restated) (Audited)                           3
          Unaudited Consolidated Statements of Operations for the three
          and six months ended June 30, 2005 and 2004                          4
          Unaudited Consolidated Statements of Stockholders' Equity for
          the six months ended June 30, 2005 and 2004                          5
          Unaudited Consolidated Statements of Cash Flows for the six
          months ended June 30, 2005 and 2004 (Restated)                       6
          Notes to Unaudited Consolidated Financial Statements                 7
ITEM 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                           18
ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk          31
ITEM 4.   Controls and Procedures                                             31

PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings                                                   32
ITEM 2.   Unregistered Sales Of Equity Securities and Use of Proceeds         32
ITEM 3.   Defaults Upon Senior Securities                                     32
ITEM 4.   Submission of Matters to a Vote of Security Holders                 32
ITEM 5.   Other Information                                                   32
ITEM 6.   Exhibits                                                            32

SIGNATURES                                                                    33

CERTIFICATIONS                                                                34

                           FORWARD LOOKING STATEMENTS

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


                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                             June 30,      December 31,
                                     ASSETS                                   2005            2004
                                                                           (Unaudited)      (Restated)
                                                                           ----------       ----------
<S>                                                                        <C>              <C>
Current Assets:
   Cash and cash equivalents                                               $    5,050       $    6,101
   Accounts receivable, net                                                     5,467            5,081
   Inventories, net                                                            32,013           43,440
   Prepaid expenses and other current assets                                    1,011              634
   Deferred and prepaid income taxes                                            1,464            1,464
                                                                           ----------       ----------
     Total current assets                                                      45,005           56,720

Property and equipment, net                                                    13,264           13,854
Other assets                                                                    2,955            3,649
                                                                           ----------       ----------

     Total assets                                                          $   61,224       $   74,223
                                                                           ==========       ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Floor plan notes payable - trade                                        $    8,440       $   17,382
   Floor plan notes payable - non-trade                                        21,907           25,092
   Accounts payable and accrued expenses                                        4,784            5,106
   Current maturities of long-term debt and capital lease obligations           5,400            5,505
   Deferred revenue                                                               562              735
                                                                           ----------       ----------
     Total current liabilities                                                 41,093           53,820

Long-term debt and capital lease obligations                                    8,302            8,621
Long-term deferred income taxes                                                   123              123
Other long-term liabilities and deferred revenue                                  714              726
                                                                           ----------       ----------
     Total liabilities                                                         50,232           63,290

Commitments and Contingencies

Stockholders' Equity
   Preferred stock, $.001 par value, 2,000,000 shares
   authorized, no shares issued and outstanding                                    --               --
   Common stock, Class A, $.001 par value, 12,000,000 shares
   authorized, 3,870,137 shares issued and outstanding                              4                4
   Common stock, Class B, $.001 par value, 3,760,000 shares
   authorized, 2,579,252 and 3,519,252 shares issued, respectively                  2                3
   Additional paid-in capital                                                  28,975           30,017
   Accumulated deficit                                                        (17,989)         (19,091)
                                                                           ----------       ----------
     Total stockholders' equity                                                10,992           10,933
                                                                           ----------       ----------
     Total liabilities and stockholders' equity                            $   61,224       $   74,223
                                                                           ==========       ==========
</TABLE>

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


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                        For the Three Months                For the Six Months
                                                           Ended June 30,                     Ended June 30,
                                                  -----------------------------       -----------------------------
                                                     2005               2004              2005             2004
                                                  -----------       -----------       -----------       -----------
<S>                                               <C>               <C>               <C>               <C>
Revenues
   New vehicle sales                              $    40,645       $    44,776       $    78,670       $    85,891
   Used vehicle sales                                  16,921            15,780            32,481            32,690
   Parts and service sales                              5,909             6,155            12,065            12,114
   Other, net                                           1,815             2,011             3,840             3,905
                                                  -----------       -----------       -----------       -----------

      Total revenues                                   65,290            68,722           127,056           134,600

Cost of sales
   New vehicle                                         37,911            41,960            73,503            80,315
   Used vehicle                                        15,368            14,318            29,371            29,562
   Parts and service                                    2,648             2,813             5,513             5,572
                                                  -----------       -----------       -----------       -----------

      Total cost of sales                              55,927            59,091           108,387           115,449
                                                  -----------       -----------       -----------       -----------

      Gross profit                                      9,363             9,631            18,669            19,151

Selling, general and administrative expenses            7,699             8,493            15,708            17,141
                                                  -----------       -----------       -----------       -----------
      Income from operations                            1,664             1,138             2,961             2,010

   Interest income                                         59                37               129                81
   Interest (expense)                                    (924)             (857)           (1,844)           (1,631)
   Other income                                           589                 1               591                 3
   Other (expense)                                         --                --                --                (4)
                                                  -----------       -----------       -----------       -----------

Pre-tax income                                          1,388               319             1,837               459
      Provision for income taxes                          554                86               735               124
                                                  -----------       -----------       -----------       -----------

Net income                                        $       834       $       233       $     1,102       $       335
                                                  ===========       ===========       ===========       ===========

Earnings per share, basic                         $      0.13       $      0.03       $      0.16       $      0.05
                                                  ===========       ===========       ===========       ===========

Earnings per share, diluted                       $      0.13       $      0.03       $      0.16       $      0.05
                                                  ===========       ===========       ===========       ===========


Weighted average shares outstanding, basic          6,449,389         7,191,588         6,766,185         7,183,347
Weighted average shares outstanding, diluted        6,584,446         7,324,514         6,895,987         7,397,886
</TABLE>

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


                                       4
<PAGE>

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

<TABLE>
<CAPTION>

                                Class A                     Class B                             Retained
                             Common Stock                Common Stock            Additional     Earnings          Total
                       ------------------------    -------------------------      Paid-in     (Accumulated    Stockholders'
                         Shares        Amount        Shares         Amount        Capital        Deficit)        Equity
                       ----------    ----------    ----------     ----------     ----------     ----------     ----------
<S>                    <C>           <C>           <C>            <C>            <C>            <C>            <C>
Balance at
December 31, 2003           3,656    $        4         3,519     $        3     $   29,760     $  (22,839)    $    6,928
Exercise of
Warrants                      214            --            --             --            257             --            257
Net income                     --            --            --             --             --            335            335
                       ----------    ----------    ----------     ----------     ----------     ----------     ----------

Balance at
June 30, 2004               3,870    $        4         3,519     $        3     $   30,017     $  (22,504)    $    7,520
                       ==========    ==========    ==========     ==========     ==========     ==========     ==========


Balance at
December 31, 2004           3,870    $        4         3,519     $        3     $   30,017     $  (19,091)    $   10,933
Net income                     --            --            --             --             --          1,102          1,102
Litigation
Settlement
(Note 8)                       --            --          (940)            (1)        (1,042)            --         (1,043)
                       ----------    ----------    ----------     ----------     ----------     ----------     ----------

Balance at
June 30, 2005               3,870    $        4         2,579     $        2     $   28,975     $  (17,989)    $   10,992
                       ==========    ==========    ==========     ==========     ==========     ==========     ==========
</TABLE>

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


                                       5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                        For the Six Months ended June 30,
                                                                              2005          2004
                                                                                          (Restated)
                                                                           ----------     ----------
<S>                                                                        <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                 $    1,102     $      335
Adjustments to reconcile net income to net cash
   provided by operating activities -
   Depreciation and amortization                                                  657            628
   Loss on sale of property and equipment                                          --              4
   (Gain) on disposal of dealership                                              (587)            --
   Deferred income taxes                                                          735            124
   Changes in assets and liabilities:
      Accounts receivable, net                                                   (540)           187
      Inventories, net                                                          4,977        (11,559)
      Prepaid expenses and other current assets                                  (377)           (15)
      Prepaid taxes                                                              (156)          (191)
      Other assets                                                                 36             12
      Floor plan notes payable - trade                                         (2,278)         7,822
      Accounts payable and accrued expenses                                      (441)            17
      Deferred revenue                                                           (173)           307
      Other long-term liabilities and deferred revenue                            (12)            73
                                                                           ----------     ----------
   Net cash provided by (used in) operating activities                          2,943         (2,256)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                                             (91)        (1,684)
                                                                           ----------     ----------
   Net cash (used in) investing activities                                        (91)        (1,684)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from floor plan notes payable - non-trade                          78,932         84,648
   Payment of floor plan notes payable - non-trade                            (82,117)       (79,915)
   Principal payments of long-term debt and capital lease obligations            (943)          (957)
   Proceeds from long-term borrowings                                             225          1,350
   Exercise of warrants                                                            --            257
                                                                           ----------     ----------
   Net cash provided by (used in) financing activities                         (3,903)         5,383

Net increase (decrease) in cash and cash equivalents                           (1,051)         1,443
CASH AND CASH EQUIVALENTS, beginning of period                                  6,101          5,639
                                                                           ----------     ----------
CASH AND CASH EQUIVALENTS, end of period                                   $    5,050     $    7,082
                                                                           ==========     ==========

 Cash paid for - Interest                                                  $    1,891     $    1,630
 Cash paid for - Taxes                                                     $      156     $      191
 Purchases financed by capital lease obligations                           $      464     $      590
</TABLE>

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

Supplemental Cash flow Information:

      On May 11, 2005 Hometown transferred certain assets and liabilities to the
Vergopia's  resulting in a gain of  approximately  $587,000 on the  transaction.
(See note 8 to the unaudited  financial  statements.)  Hometown received 940,000
shares of Hometown  Common Stock valued at  $1,043,000  in exchange for Accounts
Receivable  of  $154,000,  New Vehicle and Parts  Inventory of  $6,786,000,  Net
Property  and  Equipment  of  $195,000,  Floor  Plan  Notes  Payable  - Trade of
$6,664,000  and Other Debt of  $134,000.  Costs of $119,000  are included in the
computation of the gain.


                                       6
<PAGE>

                          HOMETOWN AUTO RETAILERS, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.    BUSINESS AND ORGANIZATION

      Business of Hometown Auto Retailers, Inc. ("Hometown" or the "Company")

      Hometown  sells new and used cars and light trucks,  provides  maintenance
and repair services,  sells  replacement  parts and provides related  financing,
insurance  and  service  contracts  through  8  franchised   dealerships  and  1
stand-alone  service  facility,  located in New Jersey,  New York,  Connecticut,
Massachusetts  and Vermont.  Hometown's  dealerships  offer 9 American and Asian
automotive brands including  Chevrolet,  Chrysler,  Dodge, Ford, Jeep,  Lincoln,
Mazda, Mercury and Toyota.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Basis of Presentation

      The  accompanying  consolidated  balance  sheet as of June 30,  2005,  the
consolidated  statements of  operations  for the three and six months ended June
30, 2005 and 2004, the consolidated  statements of stockholders'  equity and the
consolidated statements of cash flows for the six months ended June 30, 2005 and
2004,  are  unaudited.   The  consolidated   financial  statements  include  all
significant majority-owned  subsidiaries.  All significant intercompany balances
and transactions have been eliminated in consolidation.

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

      Certain  information  and  footnote  disclosures,   normally  included  in
financial  statements  prepared in accordance with generally accepted accounting
principles, were omitted.  Accordingly,  these consolidated financial statements
should be read in conjunction  with the  consolidated  financial  statements and
notes  thereto  for the year ended  December  31,  2004,  which are  included in
Hometown's filing of its annual report on Form 10-K.

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

      Stock-based Compensation

      At June 30, 2005, Hometown has one stock-based employee compensation plan,
the 1998 Stock Option Plan (the "Stock  Option  Plan").  As allowed by SFAS 148,
Hometown  has elected not to use one of the  alternative  methods of  transition
available  for a voluntary  change to the fair value based method of  accounting
for stock-based employee compensation. Hometown accounts for this plan under the
recognition and measurement  principles of Accounting  Principles  Board ("APB")
Opinion  No.  25,  "Accounting  for Stock  Issued  to  Employees",  and  related
Interpretations.  No stock-based employee  compensation cost is reflected in net
income,  as all options granted under those plans had an exercise price equal to
or greater than the market value of the  underlying  common stock on the date of
grant. The following table illustrates the effect on net income and earnings per
share if the company had applied the fair value  recognition  provisions of FASB
Statement No. 123,  "Accounting  for Stock-Based  Compensation",  to stock-based
employee compensation.


                                       7
<PAGE>

<TABLE>
<CAPTION>
(in thousands, except per share data)                     Three Months Ended          Six Months Ended
                                                               June 30,                   June 30,
                                                      ------------------------    ------------------------
                                                         2005          2004          2005          2004
                                                      ----------    ----------    ----------    ----------
<S>                                                   <C>           <C>           <C>           <C>
Net income, as reported                               $      834    $      233    $    1,102    $      335
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (1)
                                                              (2)           (7)           (5)          (14)
                                                      ----------    ----------    ----------    ----------
Pro forma net income                                  $      832    $      226    $    1,097    $      321
                                                      ==========    ==========    ==========    ==========

Earnings per share:
Basic, as reported                                    $     0.13    $     0.03    $     0.16    $     0.05
Basic, pro forma                                      $     0.13    $     0.03    $     0.16    $     0.04

Diluted, as reported                                  $     0.13    $     0.03    $     0.16    $     0.05
Diluted, pro forma                                    $     0.13    $     0.03    $     0.16    $     0.04
</TABLE>

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

      New Accounting Pronouncements

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

      In  March  2005,  the  SEC  issued  Staff  Accounting  Bulletin  No.  107,
"Share-Based Payments" ("SAB 107"). SAB 107 expresses views of the SEC regarding
the interaction  between SFAS and certain SEC rules and regulations and provides
the SEC's views regarding the valuation of share-based  compensation  for public
companies.  We are currently evaluating the adoption of SFAS 123R and the impact
that this statement  will have on our results of  operations.  We will apply the
principles of SAB 107 in conjunction with our adoption of SFAS 123R.

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


                                       8
<PAGE>

      In December 2004, the FASB issued SFAS 123R,  "Share-Based  Payment." This
statement is a revision of SFAS 123,  "Accounting for Stock-Based  Compensation"
and  supersedes  APB 25,  "Accounting  for Stock  Issued to  Employees,"  and is
effective as of the next fiscal year that begins after June 15, 2005.  SFAS 123R
establishes  standards on accounting for transactions in which an entity obtains
employee services in share-based payment  transactions.  This statement requires
measurement of the cost of employee  services  received in exchange for an award
of equity instruments based on the grant-date fair value of the award. That cost
will be  recognized  over the period  during  which an  employee  is required to
provide service in exchange for the award,  which is usually the vesting period.
SFAS 123R also addresses  transactions in which an entity incurs  liabilities in
exchange for goods or services  that are based on the fair value of the entity's
equity  instruments  or that may be  settled  by the  issuance  of those  equity
instruments.  The adoption of this  statement is not expected to have a material
effect  on our  financial  position  or  results  of  operations.  We  intend to
implement the provisions of this statement in the first quarter of 2006.

      In  January  2003,  the  FASB  issued  Interpretation  No.  46  (FIN  46),
Consolidation of Variable  Interest  Entities,  an  Interpretation of Accounting
Research  Bulletin No. 51. The  objective of this  interpretation  is to provide
guidance on how to identify a variable  interest entity ("VIE") and requires the
VIE to be consolidated by its primary  beneficiary.  The primary  beneficiary is
the party that absorbs a majority of the VIE's expected losses and/or receives a
majority of the entity's expected  residual returns,  if they occur. In December
2003,  the FASB  issued  FIN  46(R)  ("Revised  Interpretations")  delaying  the
effective date for certain  entities  created before February 1, 2003 and making
other  amendments to clarify the  application  of the guidance.  In adopting FIN
46(R)  Hometown has evaluated its variable  interests to determine  whether they
are in fact VIE's and whether  Hometown was the primary  beneficiary of the VIE.
This evaluation  resulted in determining  that Hometown has a VIE with a related
party,  whereby  Hometown  guarantees  the  mortgage  debt of the  company.  The
adoption of this  interpretation  did not have a material  effect on  Hometown's
financial statements.

3.    EARNINGS PER SHARE

      "Basic  earnings  per share" is  computed  by  dividing  net income by the
weighted  average  common shares  outstanding.  "Diluted  earnings per share" is
computed  by  dividing  net  income  by  the  weighted   average  common  shares
outstanding  adjusted  for the  incremental  dilution  of  potentially  dilutive
securities.  Options to purchase  approximately  538,000  shares of common stock
were  outstanding  as of  June  30,  2005.  Options  and  warrants  to  purchase
approximately  829,000  shares of common stock were  outstanding  as of June 30,
2004.  Basic and diluted  weighted  average  shares for the three and six months
ended June 30, 2005 and 2004 are as follows:

<TABLE>
<CAPTION>
                                    Three Months Ended June 30,     Six Months Ended June 30,
                                      ------------------------      ------------------------
                                        2005           2004            2005           2004
                                      ---------      ---------      ---------      ---------
<S>                                   <C>            <C>            <C>            <C>
Basic, Weighted Average Shares        6,449,389      7,191,588      6,766,185      7,183,347
                                      =========      =========      =========      =========

Common Stock Equivalents                135,057        132,926        129,803        214,539
                                      ---------      ---------      ---------      ---------
Diluted, Weighted Average Shares      6,584,446      7,324,514      6,895,987      7,397,886
                                      =========      =========      =========      =========
</TABLE>

      Basic  weighted  average  shares  reflect a reduction  of 940,000  Class B
shares from the  settlement of the Vergopia  litigation on March 3, 2005.  These
shares have been  cancelled as of May 13, 2005.  Also,  the three and six months
ended June 30, 2005  includes a gain on the transfer of the Westwood  dealership
of $587,000. See Note 8.

      The common stock equivalents are options and warrants whose exercise price
is less than the average  market price of the common  shares  during the period.
For the three and six months  ended June 30, 2005,  options to purchase  217,000
shares of Hometown  common stock were excluded from the  calculation  of diluted
income per share due to the option prices being greater than the average  market


                                       9
<PAGE>

price of the common shares during the period. For the three and six months ended
June 30,  2004,  options and  warrants to purchase  549,000 and 133,000  shares,
respectively  of Hometown  common stock were  excluded from the  calculation  of
diluted  income per share due to the options and warrant  prices  being  greater
than the average market price of the common shares during the period.

      The basic and diluted income per share for the three months ended June 30,
2005 and 2004 is $0.13 and $0.03, respectively. The basic and diluted income per
share  for the six  months  ended  June 30,  2005 and 2004 is $0.16  and  $0.05,
respectively.

4.    INVENTORIES

      New,  used and  demonstrator  vehicles  are stated at the lower of cost or
market, determined on a specific unit basis. Parts and accessories are stated at
the  lower of cost  (determined  on a  first-in,  first-out  basis)  or  market.
Inventories, net consist of the following:

     (in thousands)                      6/30/05     12/31/04
                                        ---------    ---------
      New Vehicles                      $  21,834    $  33,616
      Used Vehicles                         8,402        7,761
      Parts, accessories and other          1,777        2,063
                                        ---------    ---------
         Total Inventories              $  32,013    $  43,440
                                        =========    =========

      The lower of cost or market  adjustment  was $0.5 million and $0.7 million
at June 30, 2005 and December 31,  2004,  respectively.  The decrease in the new
vehicles inventory was primarily due to the transfer of the Westwood  dealership
($6.5 million) along with an improvement  (reduction) in inventory levels at our
dealerships  due to better  inventory  management.  The decrease in the lower of
cost or market  adjustment  was  primarily  due to the  transfer of the Westwood
dealership. See Note 8.

5.    INTANGIBLE ASSETS

      As of June 30, 2005 and December 31, 2004,  Hometown's  intangible  assets
consisted of the following:

      (in thousands)                6/30/05     12/31/04
                                    -------     -------
      Deferred finance charges      $   272     $   272
      Accumulated amortization         (131)       (121)
      Non-compete agreement             381         381
      Accumulated amortization         (365)       (333)
      Franchise Fee                      10          10
      Accumulated amortization           (4)         (3)
                                    -------     -------
         Net intangible assets      $   163     $   206
                                    =======     =======

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


                                       10
<PAGE>

6.    FLOOR PLAN NOTES PAYABLE

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

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

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

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

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

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

7.    LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

      Hometown   is   subject   to  certain   financial   covenants   calculated
semi-annually  at June  30th 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  $4,160,000 of related long-term debt to
current at June 30,  2005.  Total  debt for this  mortgage  at June 30,  2005 is
$4,469,000.  On March 16,  2005,  the lender  notified  Hometown  that it is not
declaring an event of default in connection  with the loan,  however,  reserving
all rights to declare  an event of  default in the future  should the  financial
covenant  default not be cured.  If an event of default was declared and only at
the lenders option,  Hometown could be required to pay all outstanding debt plus
a defeasance  penalty and transaction costs totaling  approximately  $1,400,000.
Although  Hometown  does not believe the lender will call the loan, in the event
it is called, Hometown believes it would be able to secure alternate financing.

8.    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


                                       11
<PAGE>

Edward A. Vergopia,  former directors and executive officers of the Corporation,
and Janet  Vergopia,  the wife of Salvatore A. Vergopia (the  "Vergopias").  The
settlement also finally resolved the related insurance coverage  litigation with
Universal  Underwriters  Group and The Chubb Group of Insurance  Companies.  The
gross payment to the  Vergopias by all parties was $4 million of which  $600,000
was paid by Hometown in March 2005.  The  settlement  with the Vergopias and the
insurers included an exchange of mutual releases of claims among the parties and
a withdrawal of all claims with prejudice and without costs or attorneys fees to
any party. On May 11, 2005, the parties  completed the transfer to the Vergopias
of certain  Westwood Lincoln Mercury Sales,  Inc. assets,  including its Lincoln
Mercury franchise and the termination of Hometown's Westwood,  New Jersey lease.
Hometown received all of the 940,000 shares of Class B Common Stock owned by the
Vergopias  in March  2005.  The  Settlement  Agreement  does not  constitute  an
admission of liability or wrongdoing by any party.

      The 940,000  shares of Hometown stock was recorded at fair market value on
March 3, 2005, the date of the executed settlement agreement,  and is shown as a
reduction  of   Stockholders'   Equity  of  $1,043,000,   primarily   Additional
Paid-in-Capital.  (See Unaudited  Statements of Stockholders  Equity) The assets
and  liabilities  transferred  to the  Vergopias  was recorded as a reduction of
those  accounts  at  book  value  on  May  11,  2005  resulting  in  a  gain  of
approximately  $600,000 from the  transaction.  Hometown  wrote off the goodwill
associated with this franchise in 2002 and expensed the aforementioned  $600,000
March payment in prior periods.

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

      On July 8, 2005 Hometown  issued a press release in which it announced its
receipt  of notice of the  commencement  of a lawsuit  against  Hometown  and an
indefinite  delay in the mailing to Hometown's  stockholders  of the Information
Statement  prepared in  connection  with the  Exchange  Agreement  announced  by
Hometown on June 2, 2005.  The press release was filed with the  Securities  and
Exchange  Commission  as part of  Hometown's  Form 8-K  filed  on July 8,  2005.
Further information about the Exchange Agreement is set forth below under Note 9
- "Exchange Agreement".

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


                                       12
<PAGE>

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

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

      Guarantees

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

      In connection with the acquisition in 1999 of real estate used by Baystate
Lincoln Mercury, Hometown guaranteed the mortgage debt of Rellum Realty Company.
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 June 30, 2005 the mortgage  debt balance is $4.2 million,
which  agrees to the capital  lease  obligation.  Hometown  makes  annual  lease
payments of $864,000 to the landlord.  The annual mortgage  payments made by the
landlord total  approximately  $774,000.  The mortgage matures March 2013. Total
undiscounted payments (principal plus interest) that would have to be made under
the guaranty as of June 30, 2005 is $6.0 million.

      Warranties

      Hometown's   new  vehicle  sales  and  certain  used  vehicle  sales  have
manufacturer  warranties that specify  coverage and period.  In these instances,
Hometown is reimbursed by the  manufacturer for the cost of parts and service on
the vehicle  covered by these  warranties,  as  specified  by the  manufacturer.
Hometown also provides a limited  warranty on used vehicles sold at retail.  The
warranty  period is as  agreed  upon by the  customer  and may be  subject  to a
minimum period as mandated by the state.  The typical  warranty period ranges up
to three months.  Hometown also sells parts and service.  Manufacturer parts are
covered by limited  warranties,  as specified by the manufacturer.  Service also
has a limited  warranty;  whereby the part and  certain  labor costs are covered
under the limited  manufacturer  warranty.  Also,  certain Hometown  dealerships
provide a three or five year  100,000-mile  limited  warranty on new and/or used
vehicles.  The  cost of this  warranty  is  charged  to the  cost of sale of the
vehicle.  The warranty  covers certain parts and service for three or five years
or until the vehicle  reaches an odometer  reading of 100,000  miles,  whichever
comes sooner. The warranty is insured, making the cost of the warranty fixed for
Hometown.  The insurance company pays costs associated with the warranty work to
Hometown.  An  insurance  company  that is wholly  owned by Ford  Motor  Company
reinsures the insurance policy. If the insurance company were to fail,  Hometown
would be responsible for the costs of the service. Hometown has not recorded any
additional reserve for this warranty program.

      Hometown  records a  reserve  referred  to as  "policy"  for used  vehicle
warranties  and the labor  portion  of  service  warranties  based on  available
historical  information.  Also  included  in this  reserve  are  (i)  the  costs
associated  with free  products  or  services  that may be  offered  to a retail
customer for  purposes of  maintaining  goodwill  with that  particular  service
customer or new or used vehicle  customer,  or (ii) the free products or service
may be part of a service  maintenance  program  whereby the customer may receive
certain  services  for free if he  maintains  a certain  level of service at the
dealership.  At June 30, 2005 and December  31, 2004,  Hometown has a reserve of
$298,000  and  $208,000,  respectively.  The  reserve is based on the last three
months of used  vehicle  units sold and the average  cost of repairs,  including
free parts and service, over the last twelve months. While Hometown believes its
estimated  liability  for  product  warranties  and free  parts and  service  is
adequate and that the judgment applied is appropriate,  the estimated  liability
for product  warranties and free parts and service could differ  materially from
future actual costs.


                                       13
<PAGE>

<TABLE>
<CAPTION>
                                          Balance At       Additions To Costs                    Balance At End
    Reserve for Policy Work            Beginning of Year      and Expenses        Deductions       of Quarter
------------------------------        ------------------    ----------------    -------------    --------------
<S>                                        <C>                  <C>               <C>               <C>
Six Months Ended June 30, 2005             $208,000             $628,000          $(538,000)        $298,000
</TABLE>

      Hometown  also sells  extended  service  contracts as an agent for a third
party for which it receives a commission. The primary obligor is the institution
underwriting  the service  contract.  These  revenues  are recorded in Revenues,
Other in the  Statement  of  Operations.  Revenues  from  sales  of third  party
extended  service  contracts  was $1.2  million and $1.1  million for six months
ended June 30, 2005 and June 30,  2004,  respectively.  Connecticut  dealerships
operate  under state  laws,  which make the dealers  responsible  for  providing
warranty  service  and  insurance  in the  event  of  default  by the  insurance
carriers.  Accordingly,  commissions on insurance and service contract sales are
required to be recognized over the life of the related  insurance  product.  For
these dealerships, Hometown records the revenue as a liability and amortizes the
amount into revenue over a five-year  period.  At June 30, 2005 and December 31,
2004,  Hometown had  $1,110,000  and  $1,140,000  of related  deferred  revenue,
respectively.  During the six  months  ended June 30,  2005,  these  dealerships
generated  approximately  $188,000 of related  warranty  service  and  insurance
revenue, which was deferred.  During the same period,  approximately $218,000 of
deferred  revenue was  amortized  to Other  Revenues,  net. At June 30, 2005 and
December  31, 2004,  Hometown  also had other  deferred  revenue of $165,000 and
$319,000, respectively.

      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 two months through September 18, 2005.  Previously
on March 13, 2003,  Hometown was  notified by Toyota Motor Sales,  U.S.A.,  that
Hometown  must correct  certain  operational  deficiencies  or make  substantial
progress toward rectifying such  deficiencies.  Toyota had previously  expressed
concerns that the financial  resources of the Toyota dealerships were being used
to finance the cash flow deficits of other Hometown dealerships and that because
of this the  financial  health  of the  Toyota  dealerships  were  detrimentally
affected by a net working  capital  deficiency.  Toyota  requested  and Hometown
provided a written action plan and consolidated financial forecast.  Toyota also
expressed  concerns about the impact of Ford Motor Credit's financing terms upon
the Toyota dealerships and the existing litigation,  which has now been settled,
including the Vergopias as discussed above.  Hometown  developed and implemented
plans to correct the  operational  deficiencies  that would bring  Hometown into
compliance.  Hometown has obtained written  confirmations from Ford Motor Credit
in  response  to  Toyota's  requests  for  information   relating  to  financing
arrangements. In addition, Hometown has improved net working capital through the
sale of a  Chrysler/Jeep  sales and service  franchise in the second  quarter of
2003 and  advances on warranty  income from  Hometown's  Extended  Service  Plan
vendor.  Hometown has been in regular  contact with Toyota to review the efforts
of  Hometown  to resolve  the  deficiencies  alleged  by Toyota.  The two Toyota
dealerships for the fiscal year ended December 31, 2004 had combined revenues of
$98.1 million and pre-tax  income before  allocation of corporate  costs of $2.2
million. Hometown believes that it has corrected the alleged net working capital
deficiency  for the Toyota  dealerships  and that it has  undertaken  reasonable
steps to alleviate the concerns  expressed by Toyota.  However,  there can be no
assurance  that Toyota will enter into a new dealer  agreement with Hometown and
Toyota has reserved the right to terminate the Toyota  Dealership  Agreements if
sufficient  progress  is not made to correct the  alleged  deficiencies.  Should
Hometown  be  notified  by Toyota  that  they  intend to  terminate  the  Toyota
Dealership  Agreements,  Hometown  believes it would have a reasonable amount of
time to cure the defaults.


                                       14
<PAGE>

9.    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:

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

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

      o     Family Ford (Waterbury, Conn.),

      o     Shaker's Lincoln Mercury (Watertown, Conn.),

      o     Wellesley Mazda (Wellesley, Mass.),

      o     Shaker's Auto Care (Naugatuck, Conn.).

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

      o     Baystate Realty (Framingham, Mass.), and

      o     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:

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

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

      o     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), $700,000
for financing the split-off  costs, and the $800,000 balance for working capital
for Hometown.


                                       15
<PAGE>

      Following  the  split-off,  Hometown  Auto will have a total of  3,845,153
Class A 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 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 8 -
"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.

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


                                       16
<PAGE>

      As of June 30,  2005,  Hometown  has  incurred  approximately  $321,000 in
relation to the Exchange Agreement  transaction,  which amount has been deferred
and is included in Prepaid  Expenses and Other Current Assets on Hometown's June
30, 2005 Balance Sheet.

10.   RECLASSIFICATION OF BALANCE SHEETS AND STATEMENTS OF CASH FLOWS

      Hometown is in the process of restating its Balance  Sheets and Statements
of Cash Flows in its  filings in its  December  31, 2004 Form 10-K and March 31,
2005 Form 10-Q.  The balance sheets  reclassification  is to breakdown its floor
plan notes payable into trade and non-trade components,  where it had previously
been shown as a single line item,  which is consistent  with industry  practice.
The Statements of Cash Flows reclassification is to show the non-trade component
of floor plan notes payable as a financing activity,  where it had been shown as
an  operating  activity.  This  reclassification  is being  done 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 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.
See Note 6.


                                       17
<PAGE>

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

      Management's discussion and analysis of financial condition and results of
operations  is based on the  historical  financial  statements  of Hometown Auto
Retailers,  Inc. and contains forward-looking  statements that involve risks and
uncertainties.  Hometown's  actual  results  may  differ  materially  from those
discussed in the  forward-looking  statements as a result of various factors, as
described  under "Risk Factors" as detailed on Hometown's  annual report on Form
10-K for the year ended December 31, 2004.

Overview

      Hometown  sells new and used cars and light trucks,  provides  maintenance
and repair services,  sells  replacement  parts and provides related  financing,
insurance  and  service  contracts  through  8  franchised   dealerships  and  1
stand-alone  service  facility  located in New  Jersey,  New York,  Connecticut,
Massachusetts  and Vermont.  Hometown's  dealerships  offer 9 American and Asian
automotive brands including  Chevrolet,  Chrysler,  Dodge, Ford, Jeep,  Lincoln,
Mazda, Mercury and Toyota.

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

      We assess the growth of our revenues  and gross  profit by  comparing  the
year-to-year  results of our dealerships that have operated  continuously during
the periods being compared.  Hometown's operating results reflect the closing of
a used vehicles outlet in August 2004. Also,  during the fourth quarter of 2004,
Hometown  announced  that  it had  resolved  in  principal  to  resolve  certain
litigation  matters  (See  Note  8  to  the  unaudited   consolidated  financial
statements),  which  resulted in the  transfer of the Westwood  Lincoln  Mercury
dealership  during the second quarter of 2005.  Both  contribute to decreases in
sales and gross  profit  from 2004 to 2005,  as well as a decrease  in  selling,
general and administrative  expenses.  We have segregated both operations in the
analysis that follows to allow for a better comparison of the results.

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

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

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

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


                                       18
<PAGE>

      Selling,   general  and  administrative   expenses  ("SG&A")  consist  of:
compensation and related taxes and benefits, advertising,  building costs (rent,
utilities, real estate taxes, depreciation), data processing and other operating
expenses.  A large amount of  compensation  is variable in that it is commission
based and certain significant expenses,  such as advertising,  are controllable.
Hometown also includes  certain  distribution  costs in SG&A which other similar
companies may include in cost of sales. These costs total less than $0.1 million
in the three  months  ended June 30,  2005 and 2004,  and $0.1  million and $0.2
million in the six months ended June 30, 2005 and 2004, respectively.

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

Three months ended June 30, 2005 compared with three months ended June 30, 2004.

<TABLE>
<CAPTION>
Revenues                                    For the Three Months Ended
                                                      June 30,
                                              ----------------------    Increase          %
(in thousands, except per vehicle data)          2005         2004      (Decrease)     Change
                                              ---------    ---------    ---------     ---------
<S>                                           <C>          <C>          <C>           <C>
New vehicle data:
   Retail revenues - same store               $  35,705    $  33,918    $   1,787           5.3%
   Retail revenues - other stores (1)             3,927       10,273       (6,346)        (61.8)%
                                              ---------    ---------    ---------     ---------
     Total new retail revenues                   39,632       44,191       (4,559)        (10.3)%

   Fleet revenues - same store                    1,013          585          428          73.1%
                                              ---------    ---------    ---------     ---------
Total new vehicles revenues, as reported      $  40,645    $  44,776    $  (4,131)         (9.2)%
                                              =========    =========    =========     =========

   New retail units - same store                  1,384        1,336           48           3.6%
   New retail units - other stores (1)              103          286         (183)        (64.0)%
   Fleet units                                       53           33           20          60.6%
                                              ---------    ---------    ---------     ---------
      Total new vehicle units                     1,540        1,655         (115)         (6.9)%

Used vehicle data:
   Retail revenues - same store               $  12,383    $  10,707    $   1,676          15.7%
   Retail revenues - other stores (1)               104        1,188       (1,084)        (91.2)%
                                              ---------    ---------    ---------     ---------
      Total used retail revenues                 12,487       11,895          592           5.0%

   Wholesale revenues - same store                4,158        3,614          544          15.1%
   Wholesale revenues - other stores (1)            276          271            5           1.8%
                                              ---------    ---------    ---------     ---------
       Total wholesale revenues                   4,434        3,885          549          14.1%

Total used vehicle revenue, as reported       $  16,921    $  15,780    $   1,141           7.2%
                                              =========    =========    =========     =========

Used retail units - same store                      751          701           50           7.1%
Used retail units - other stores (1)                  6           80          (74)        (92.5)%
Used wholesale units - same store                   911          887           24           2.7%
Used wholesale units - other stores (1)              35           45          (10)         22.2%
                                              ---------    ---------    ---------     ---------
   Total used units                               1,703        1,713          (10)          0.6%
                                              =========    =========    =========     =========
</TABLE>


                                       19
<PAGE>

<TABLE>
<CAPTION>
Revenues - (continued)                            For the Three Months Ended
                                                            June 30,
                                                   ------------------------      Increase           %
(in thousands, except per vehicle data)              2005           2004        (Decrease)        Change
                                                   ---------      ---------      ---------       ---------
<S>                                                <C>            <C>            <C>             <C>
Parts and service:
Parts and service revenues - same store            $   5,419      $   5,114      $     305             6.0%
Parts and service revenues - other stores (1)            490          1,041           (551)          (52.9)%
                                                   ---------      ---------      ---------       ---------
   Total parts and service revenue                 $   5,909      $   6,155      $    (246)           (4.0)%
                                                   =========      =========      =========       =========

Other revenues, net:
Other revenues, net - same store                   $   1,792      $   1,853      $     (61)           (3.3)%
Other revenues, net - other stores (1)                    23            158           (135)          (85.4)%
                                                   ---------      ---------      ---------       ---------
   Total other revenues, net, as reported          $   1,815          2,011      $    (196)           (9.8)%
                                                   =========      =========      =========       =========

Total revenue:
   Same store                                      $  60,470      $  55,791      $   4,679             8.4%
   Other stores (1)                                    4,820         12,931         (8,111)          (62.7)%
                                                   ---------      ---------      ---------       ---------
      Total revenue, as reported                   $  65,290      $  68,722      $  (3,432)           (5.0)%
                                                   =========      =========      =========       =========
</TABLE>

      (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 $3.4 million,  or 5.0% to $65.3 million for three
months  ended June 30, 2005 from $68.7  million for three  months ended June 30,
2004. Same store total revenues  increased $4.7 million or 8.4% to $60.5 million
for the three months ended June 30, 2005 from $55.8 million for the three months
ended June 30, 2004. Same store new retail revenues  increased $1.8 million,  or
5.3% to $35.7  million for three months  ended June 30, 2005 from $33.9  million
for three months ended June 30, 2004.  This  increase was  primarily  due to the
3.6%  additional  units ($1.2  million) sold in 2005 compared to 2004 and a 1.6%
increase  in average  selling  price  ($0.6  million)  in 2005  compared to 2004
reflecting  a slight  change in product mix within the brands.  The  increase in
same store new retail  revenues  was  primarily  due to  increases at our Toyota
dealerships  ($2.4  million).  Hometown's new retail  revenues are indicative of
sales  reported  by  our  manufacturers  nationally,   Toyota  continues  to  be
experiencing  growth in the United States while the domestics remain stagnant or
decline.  Same store used vehicle retail  revenues  increased  $1.7 million,  or
15.7% to $12.4  million for three months ended June 30, 2005 from $10.7  million
for three  months ended June 30, 2004.  This  increase was split  between a 7.1%
increase  in  units  ($0.8  million)  sold in 2005  compared  to 2004 and a 7.9%
increase  in average  selling  price ($0.9  million)  in 2005  compared to 2004.
Although  the used  vehicle  market  has been  difficult,  personnel  changes in
certain dealerships  enabled Hometown to show an increase for the quarter.  Same
store wholesale  revenues  increased $0.5 million,  or 15.1% to $4.1 million for
three  months  ended June 30, 2005 from $3.6 million for three months ended June
30, 2004 due to  increased  strength in the  wholesale  market.  The increase in
average selling price for wholesale units is also a function of the retail sales
unit  volume,  which  although  up over  the  prior  year is  still  lower  than
historical  levels.  High quality  vehicles  that were taken as trade-ins at the
time of new vehicle purchases, were not all sold at retail,  necessitating being
sold at wholesale, generating higher prices.

      Parts and service  revenue  decreased $0.2 million or 4.0% to $5.9 million
for the three  months ended June 30, 2005 from $6.1 million for the three months
ended June 30, 2004. On a same store basis,  parts and service revenue increased
$0.3  million or 6.0% to $5.4  million for the three  months ended June 30, 2005
from $5.1 million for the three  months  ended June 30,  2004.  The increase was
primarily due to the Toyota  dealerships ($0.2 million),  and is attributable to
the increase in the dealerships new vehicles  revenues.  These  dealerships have
been  working to have  these  customers  remain  with the  dealership  for their
vehicles maintenance needs. As part of the new car sales process you also strive
to gain that customer as a service customer as well.


                                       20
<PAGE>

      Other dealership  revenues decreased $0.2 million, or 9.8% to $1.8 million
for the three  months ended June 30, 2005 from $2.0 million for the three months
ended June 30, 2004. On a same store basis, other dealership  revenues decreased
less than $0.1  million or 3.3% to $1.8  million for the three months ended June
30,  2005 from $1.9  million  for the three  months  ended June 30,  2004.  This
decrease is primarily attributable to decreases in sales of third party extended
service  plans for new vehicles  (due to a decrease in service plan  penetration
per new vehicle sold) and finance income for new vehicles.

<TABLE>
<CAPTION>
Gross Profit                                          For the Three Months Ended
                                                               June 30,
                                                      -------------------------     Increase          %
(in thousands, except per vehicle data)                   2005          2004       (Decrease)      Change
                                                       ---------      ---------     ---------     ---------
<S>                                                    <C>            <C>           <C>           <C>
New vehicle data:
   Retail gross profit - same store                    $   2,487      $   2,431     $      56           2.3%
   Retail gross profit - other stores (1)                    239            381          (142)        (37.3)%
                                                       ---------      ---------     ---------     ---------
     Total new retail gross profit                         2,726          2,812           (86)         (3.1)%

   Fleet gross profit                                          8              4             4           100%
                                                       ---------      ---------     ---------     ---------
Total new vehicles gross profit, as reported           $   2,734      $   2,816     $     (82)         (2.9)%
                                                       =========      =========     =========     =========
     Gross profit percentage                                 6.7%          6.3%
                                                       ---------     ---------

   New retail units - same store                           1,384          1,336            48           3.6%
   New retail units - other stores (1)                       103            286          (183)        (64.0)%
   Fleet units                                                53             33            20          60.6%
                                                       ---------      ---------     ---------     ---------
      Total new vehicle units                              1,540          1,655          (115)         (6.9)%
                                                       =========      =========     =========     =========

Used vehicle data:
   Retail gross profit - same store                    $   1,366      $   1,277     $      89           7.0%
   Retail gross profit - other stores (1)                     73            106           (33)        (31.1)%
                                                       ---------      ---------     ---------     ---------
      Total used retail gross profit                       1,439          1,383            56           4.0%

   Wholesale gross profit - same store                       135             66            69             *
   Wholesale gross profit - other stores (1)                 (21)            13           (34)            *
                                                       ---------      ---------     ---------     ---------
       Total wholesale gross profit                          114             79            35          44.3%

Total used vehicle gross profit, as reported           $   1,553      $   1,462     $      91           6.2%
                                                       =========      =========     =========     =========
Gross profit percentage                                      9.2%          9.3%
                                                       =========     =========

Used retail units - same store                               751            701            50           7.1%
Used retail units - other stores (1)                           6             80           (74)        (92.5)%
Used wholesale units - same store                            911            887            24           2.7%
Used wholesale units - other stores (1)                       35             45           (10)         22.2%
                                                       ---------      ---------     ---------     ---------
   Total used units                                        1,703          1,713           (10)          0.6%
                                                       =========      =========     =========     =========

Parts and service:
Parts and service gross profit - same store            $   2,986      $   2,756     $     230           8.3%
Parts and service gross profit - other stores (1)            275            586          (311)        (53.1)%
                                                       ---------      ---------     ---------     ---------
   Total parts and service revenue                     $   3,261      $   3,342     $     (81)         (2.4)%
                                                       =========      =========     =========     =========
     Gross profit percentage                                55.2%         54.3%
                                                       =========     =========
</TABLE>


                                       21
<PAGE>

<TABLE>
<CAPTION>
Gross Profit  -(continued)                       For the Three Months Ended
                                                           June 30,
                                                  -------------------------       Increase           %
(in thousands, except per vehicle data)             2005            2004         (Decrease)        Change
                                                  ---------       ---------       ---------       ---------
<S>                                               <C>             <C>             <C>             <C>
Other gross profit:
Other gross profit - same store                   $   1,792       $   1,853       $     (61)           (3.3)%
Other gross profit - other stores (1)                    23             158            (135)          (85.4)%
                                                  ---------       ---------       ---------       ---------
   Total other gross profit, as reported          $   1,815       $   2,011       $    (196)           (9.7)%
                                                  =========       =========       =========       =========
   Gross profit percentage                            100.0%          100.0%
                                                  =========       =========

Other gross profit PVR - same store               $     839       $     910             (71)           (7.8)%
Other gross profit PVR - other stores (1)               211             432            (221)          (51.2)%
                                                  ---------       ---------       ---------       ---------
   Total other gross profit PVR, as reported      $     809       $     823             (14)           (1.7)%
                                                  =========       =========       =========       =========

Total gross profit:
   Same store                                     $   8,774       $   8,387       $     387             4.6%
   Other stores (1)                                     589           1,244            (655)          (52.7)%
                                                  ---------       ---------       ---------       ---------
      Total gross profit, as reported             $   9,363       $   9,631       $    (268)           (2.8)%
                                                  =========       =========       =========       =========
   Gross profit percentage                             14.3%           14.0%
                                                  =========       =========
</TABLE>

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

      * - Percentage exceeds 100%.

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

      Total gross profit  decreased  $0.3 million,  or 2.8%, to $9.4 million for
the three  months  ended June 30,  2005,  from $9.6 million for the three months
ended June 30, 2004.  Same store total gross profit  increased $0.4 million,  or
4.6% to $8.8 million for the three months ended June 30, 2005, from $8.4 million
for the three months ended June 30, 2004.  Same store gross profit on new retail
vehicle sales increased less than $0.1 million, or 2.3%, to $2.5 million for the
three months  ended June 30, 2005,  from $2.4 million for the three months ended
June 30, 2004. The increase in gross profit is primarily  attributable to a 3.6%
increase  in unit sales  (less  than $0.1  million)  partially  offset by a 1.3%
decrease in new retail gross profit per unit. It is expected that margins on new
vehicles will  continue to be under  pressure as the  manufacturers  continue to
contend with competitive pricing issues. Similar to revenues, the gain is mostly
attributable to the Toyota dealerships.

      Same store  gross  profit on used  vehicle  retail  sales  increased  $0.1
million, or 7.0%, to $1.4 million for the three months ended June 30, 2005, from
$1.3 million for the three months ended June 30, 2004.  The overall  increase is
directly  attributable to the 7.1% increase in units sold.  Average gross profit
per unit remained  unchanged  during the quarter.  In addition,  strength in the
wholesale  market  enabled  the  company to double its  wholesale  gross  profit
compared to the prior year during the quarter.

      Same store parts and service gross profit increased $0.2 million, or 8.3%,
to $3.0 million for the three months ended June 30, 2005,  from $2.8 million for
the three months ended June 30, 2004  primarily  due the 6.0%  increase in parts
and service revenues.

      Selling, General and Administrative Expenses ("S,G&A")

      S,G&A  decreased  $0.8  million,  or 9.4%,  to $7.7  million for the three
months ended June 30, 2005 from $8.5 million for the three months ended June 30,
2004.  This decrease was primarily  attributable  to the closing of the used car
outlet in August 2004 and the  transfer of the Westwood  dealership  in May 2005
(together  totaling $0.7 million).  Additional  decreases totaled less than $0.1
million.  Decreases in rent and related  building costs (less than $0.1 million)


                                       22
<PAGE>

and legal and  professional  fees (less than $0.1 million) were partially offset
by an  increase  in payroll and  related  taxes  (less than $0.1  million).  The
decrease in rent is due to  purchasing a building in June 2004,  which  Hometown
had previously  rented.  The decrease in legal and professional  fees was due to
the settlement of certain litigation at the end of 2004. The increase in payroll
and related taxes is associated with commissions paid on increased gross profit.

      Other Income

      In May 2005, Hometown completed the transfer of certain assets in relation
to the  settlement of litigation  matters  resulting in a gain of  approximately
$587,000  recorded in Other  Income.  See Note 8 to the  unaudited  consolidated
financial statements.

      Interest Expense

      Interest expense increased less than $0.1 million,  remaining  constant at
$0.9 million for the three  months  ended June 30, 2005 and June 30,  2004.  The
increase is primarily due to an increase of floorplan interest expense resulting
from higher interest rates partially  offset by decreased  borrowings  resulting
from one less dealership in 2005 compared to 2004 and lower average  inventories
at the remaining dealerships.

      Provision for income tax

      The  effective  income tax rate was 40% in the quarter ended June 30, 2005
and 27% in the same period of 2004. The rates were based on current forecasts of
income before taxes, and current forecasts of permanent  differences between tax
and book income.  The 2005 rate reflects the expected effective tax rate for the
year.  The 2004 rate reflects the expected  full year  effective tax rate of 40%
adjusted for a reduction in the  valuation  allowance  associated  with the 2004
amortization  of goodwill for tax purposes.  At December 31, 2004 deferred taxes
were adjusted primarily to reflect a reduction of the valuation allowance on the
deferred  tax asset due to the ability to project  sufficient  income to recover
the deferred tax asset. Deferred taxes, including the valuation allowance,  will
be reviewed throughout fiscal 2005.

      Net Income

      Net income  increased  $0.6  million to $0.8  million for the three months
ended June 30, 2005, from $0.2 million for the three months ended June 30, 2004.
A  substantial  amount of the  increase  is due to a gain on transfer of certain
assets in relation to  settlement of  litigation  recorded in Other Income.  See
above for explanation of other changes.

      Earnings Per Share, Basic and Diluted and Weighted Average Shares

      "Basic  earnings  (loss) per share" is  computed  by  dividing  net income
(loss) by the weighted  average  common shares  outstanding.  "Diluted  earnings
(loss) per share" is  computed  by dividing  net income  (loss) by the  weighted
average  common  shares  outstanding  adjusted for the  incremental  dilution of
potentially  dilutive  securities.  See  Note  3 to the  unaudited  consolidated
financial statements.

      The basic and diluted income per share for the three months ended June 30,
2005 and 2004 is $0.13 and $0.03, respectively.


                                       23
<PAGE>

Six months ended June 30, 2005 compared with six months ended June 30, 2004.

<TABLE>
<CAPTION>
Revenues                                           For the Six Months Ended
                                                            June 30,
                                                   ------------------------     Increase          %
(in thousands, except per vehicle data)               2005          2004       (Decrease)       Change
                                                   ----------    ----------    ----------     ----------
<S>                                                <C>           <C>           <C>            <C>
New vehicle data:
   Retail revenues - same store                    $   67,955    $   66,878    $    1,077            1.6%
   Retail revenues - other stores (1)                   9,022        18,390        (9,368)         (50.9)%
                                                   ----------    ----------    ----------     ----------
     Total new retail revenues                         76,977        85,268        (8,291)          (9.7)%

   Fleet revenues - same store                          1,693           623         1,070          171.7%
                                                   ----------    ----------    ----------     ----------
Total new vehicles revenues, as reported           $   78,670    $   85,891    $   (7,221)          (8.4)%
                                                   ==========    ==========    ==========     ==========

   New retail units - same store                        2,638         2,603            35            1.3%
   New retail units - other stores (1)                    245           513          (268)         (52.2)%
   Fleet units                                             94            35            59              *
                                                   ----------    ----------    ----------     ----------
      Total new vehicle units                           2,977         3,151          (174)          (5.5)%

Used vehicle data:
   Retail revenues - same store                    $   24,030    $   23,046    $      984            4.3%
   Retail revenues - other stores (1)                     789         2,416        (1,627)         (67.3)%
                                                   ----------    ----------    ----------     ----------
      Total used retail revenues                       24,819        25,462          (643)          (2.5)%

   Wholesale revenues - same store                      7,243         6,734           509            7.6%
   Wholesale revenues - other stores (1)                  419           494           (75)         (15.2)%
                                                   ----------    ----------    ----------     ----------
       Total wholesale revenues                         7,662         7,228           434            6.0%

Total used vehicle revenue, as reported            $   32,481    $   32,690    $     (209)          (0.6)%
                                                   ==========    ==========    ==========     ==========

Used retail units - same store                          1,449         1,535           (86)          (5.6)%
Used retail units - other stores (1)                       45           161          (116)         (72.0)%
Used wholesale units - same store                       1,580         1,762          (182)         (10.3)%
Used wholesale units - other stores                        59            73           (14)         (19.2)%
                                                   ----------    ----------    ----------     ----------
   Total used units                                     3,133         3,531          (398)         (11.3)%
                                                   ==========    ==========    ==========     ==========

Parts and service:
Parts and service revenues - same store            $   10,559    $   10,075    $      484            4.8%
Parts and service revenues - other stores (1)           1,506         2,039          (533)         (26.1)%
                                                   ----------    ----------    ----------     ----------
   Total parts and service revenue                 $   12,065    $   12,114    $      (49)          (0.4)%
                                                   ==========    ==========    ==========     ==========

Other revenues, net:
Other revenues, net - same store                   $    3,722    $    3,577           145            4.1%
Other revenues, net - other stores (1)                    118           328          (210)         (64.0)%
                                                   ----------    ----------    ----------     ----------
   Total other revenues, net, as reported          $    3,840    $    3,905           (65)          (1.7)%
                                                   ==========    ==========    ==========     ==========

Total revenue:
   Same store                                      $  115,202    $  110,933    $    4,269            3.8%
   Other stores (1)                                    11,854        23,667       (11,813)         (49.9)%
                                                   ----------    ----------    ----------     ----------
      Total revenue, as reported                   $  127,056    $  134,600    $   (7,544)          (5.6)%
                                                   ==========    ==========    ==========     ==========
</TABLE>

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

      * - Percentage exceeds 100%.


                                       24
<PAGE>

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

      Total revenue  decreased  $7.5 million,  or 5.6% to $127.1 million for six
months  ended June 30,  2005 from $134.6  million for six months  ended June 30,
2004. Same store total revenues increased $4.3 million or 3.8% to $115.2 million
for the six months  ended June 30, 2005 from  $110.9  million for the six months
ended June 30, 2004. Same store new retail revenues  increased $1.1 million,  or
1.6% to $68.0  million for six months ended June 30, 2005 from $66.9 million for
six months  ended June 30,  2004.  This  increase  was  primarily  due to a 1.3%
increase in additional  units ($0.9  million) sold in 2005 compared to 2004. The
increase in same store new retail revenues was primarily due to increases at our
Toyota  dealerships  ($3.6  million)  offset by decline at our  Lincoln  Mercury
dealerships  ($2.7  million).  Hometown's new retail  revenues are indicative of
sales  reported  by  our  manufacturers  nationally,   Toyota  continues  to  be
experiencing  growth in the United States while the domestics remain stagnant or
decline. Same store used vehicle retail revenues increased $1.0 million, or 4.3%
to $24.0  million for six months ended June 30, 2005 from $23.0  million for six
months ended June 30, 2004.  This increase was primarily due to a 10.5% increase
in average  selling  price ($2.3  million) in 2005  compared to 2004,  partially
offset by a 5.6%  decrease  in units  sold  ($1.3  million).  Although  the used
vehicle  market has been  difficult,  personnel  changes in certain  dealerships
enabled  Hometown to show an increase over the prior year.  Same store wholesale
revenues  increased  $0.5 million,  or 7.6% to $7.2 million for six months ended
June 30,  2005 from $6.7  million  for six  months  ended  June 30,  2004 due to
increased  strength in the  wholesale  market.  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.

      Parts and  service  revenue  decreased  less than $0.1  million or 0.4% to
$12.1  million for the six months ended June 30, 2005 from $12.1 million for the
six months ended June 30, 2004. On a same store basis, parts and service revenue
increased  $0.5  million or 4.8% to $10.6  million for the six months ended June
30, 2005 from $10.1 million for the six months ended June 30, 2004. The increase
was primarily due to the Toyota dealerships ($0.3 million),  and is attributable
to the increase in the dealerships new vehicles revenues. These dealerships have
been able to attract  these  customers to remain with the  dealership  for their
vehicle  maintenance needs. As part of the new car sales process you also strive
to gain that customer as a service customer as well.

      Other  dealership  revenues  decreased less than $0.1 million,  or 1.7% to
$3.8  million for the six months  ended June 30, 2005 from $3.9  million for the
six months ended June 30, 2004. On a same store basis, other dealership revenues
increased $0.1 million or 4.1% to $3.7 million for the six months ended June 30,
2005 from $3.6 million for the six months ended June 30, 2004. This is primarily
attributable  to an  increase  in  extended  service  plan  revenue in the first
quarter of 2005, which decreased through the second quarter.

<TABLE>
<CAPTION>
Gross Profit                                    For the Six Months Ended
                                                          June 30,
                                                  ---------------------     Increase        %
(in thousands, except per vehicle data)             2005         2004      (Decrease)     Change
                                                  --------     --------     --------     --------
<S>                                               <C>          <C>          <C>          <C>
New vehicle data:
   Retail gross profit - same store               $  4,646     $  4,746         (100)        (2.1)%
   Retail gross profit - other stores (1)              506          826         (320)       (38.7)%
                                                  --------     --------     --------     --------
     Total new retail gross profit                   5,152        5,572         (420)        (7.5)%

   Fleet gross profit                                   15            4           11            *
                                                  --------     --------     --------     --------
Total new vehicles gross profit, as reported      $  5,167     $  5,576         (409)        (7.4)%
                                                  ========     ========     ========     ========
     Gross profit percentage                           6.6%         6.5%
                                                  --------     --------
</TABLE>


                                       25
<PAGE>

<TABLE>
<CAPTION>
Gross Profit - (continued)                              For the Six Months Ended
                                                                June 30,
                                                       --------------------------      Increase          %
(in thousands, except per vehicle data)                     2005             2004     (Decrease)      Change
                                                       ----------      ----------     ----------     ----------
<S>                                                    <C>             <C>            <C>            <C>
   New retail units - same store                            2,638           2,603             35            1.3%
   New retail units - other stores (1)                        245             513           (268)         (52.2)%
   Fleet units                                                 94              35             59          168.6%
                                                       ----------      ----------     ----------     ----------
      Total new vehicle units                               2,977           3,151           (174)          (5.5)%
                                                       ==========      ==========     ==========     ==========

Used vehicle data:
   Retail gross profit - same store                    $    2,689      $    2,760            (71)          (2.6)%
   Retail gross profit - other stores (1)                     135             221            (86)         (38.9)%
                                                       ----------      ----------     ----------     ----------
      Total used retail gross profit                        2,824           2,981           (157)          (5.3)%

   Wholesale gross profit - same store                        293             127            166              *
   Wholesale gross profit - other stores (1)                   (7)             20            (27)             *
                                                       ----------      ----------     ----------     ----------
       Total wholesale gross profit                           286             147            139           94.6%

Total used vehicle gross profit, as reported           $    3,110      $    3,128            (18)          (0.6)%
                                                       ==========      ==========     ==========     ==========
Gross profit percentage                                       9.6%           9.6%
                                                       ==========     ==========

Used retail units - same store                              1,449           1,535            (86)          (5.6)%
Used retail units - other stores (1)                           45             161           (116)         (72.0)%
Used wholesale units - same store                           1,580           1,762           (182)         (10.3)%
Used wholesale units - other stores                            59              73            (14)         (19.2)%
                                                       ----------      ----------     ----------     ----------
   Total used units                                         3,133           3,531           (398)         (11.3)%
                                                       ==========      ==========     ==========     ==========

Parts and service:
Parts and service gross profit - same store            $    5,690      $    5,407            283            5.2%
Parts and service gross profit - other stores (1)             862           1,135           (273)         (24.1)%
                                                       ----------      ----------     ----------     ----------
   Total parts and service revenue                     $    6,552      $    6,542             10            0.2%
                                                       ==========      ==========     ==========     ==========
     Gross profit percentage                                 54.3%          54.0%
                                                       ==========     ==========

Other gross profit:
Other gross profit - same store                        $    3,722      $    3,577            145            4.1%
Other gross profit - other stores (1)                         118             329           (211)         (64.1)%
                                                       ----------      ----------     ----------     ----------
   Total other gross profit, as reported               $    3,840      $    3,906            (66)          (1.7)%
                                                       ==========      ==========     ==========     ==========
   Gross profit percentage                                  100.0%         100.0%
                                                       ==========     ==========

Other gross profit PVR - same store                    $      911      $      864             47            5.4%
Other gross profit PVR - other stores (1)                     407             488            (81)         (16.6)%
                                                       ----------      ----------     ----------     ----------
   Total other gross profit PVR, as reported           $      877      $      812             65            8.0%
                                                       ==========      ==========     ==========     ==========

Total gross profit:
   Same store                                          $   17,055      $   16,621            434            2.6%
   Other stores (1)                                         1,614           2,530           (916)         (36.2)%
                                                       ----------      ----------     ----------     ----------
      Total gross profit, as reported                  $   18,669      $   19,151           (482)          (2.5)%
                                                       ==========      ==========     ==========     ==========
   Gross profit percentage                                   14.8%          15.0%
                                                       ==========     ==========
</TABLE>

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

      * - Percentage exceeds 100%.


                                       26
<PAGE>

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

      Total gross profit  decreased $0.5 million,  or 2.5%, to $18.7 million for
the six months ended June 30, 2005,  from $19.2 million for the six months ended
June 30, 2004. Same store total gross profit increased $0.4 million,  or 2.6% to
$17.0 million for the six months ended June 30, 2005, from $16.6 million for the
six months ended June 30, 2004.  The increase is mostly from the second  quarter
of 2005.  Same store gross profit on new retail  vehicle  sales  decreased  $0.1
million,  or 2.1%, to $4.6 million for the six months ended June 30, 2005,  from
$4.7  million  for the six months  ended June 30,  2004.  The  decrease in gross
profit is primarily  attributable  to a 3.4% decrease in new retail gross profit
per unit partially  offset by a 1.3% increase in unit sales. It is expected that
margins on new vehicles will continue to be under pressure as the  manufacturers
continue to contend with competitive  pricing issues.  Similar to revenues,  the
decline was due mostly to the Lincoln Mercury dealerships  partially offset by a
gain at the Toyota dealerships.

      Same store gross profit on used vehicle  retail sales  decreased less than
$0.1  million,  or 2.6%, to $2.7 million for the six months ended June 30, 2005,
from $2.8 million for the six months ended June 30, 2004.  The overall  decrease
is  attributable  to the 5.6% decrease in units sold partially  offset by a 3.2%
increase  in  average  gross  profit  per unit.  In  addition,  strength  in the
wholesale  market  enabled the company to increase  its  wholesale  gross profit
compared to the prior year.

      Same store parts and service gross profit increased $0.3 million, or 5.2%,
to $5.7 million for the six months  ended June 30,  2005,  from $5.4 million for
the six months ended June 30, 2004  primarily due to the 4.8% increase parts and
service  revenues.  Similar to revenues,  most of the  increase  came during the
second quarter and is primarily attributable to the Toyota dealerships.

      Selling, General and Administrative Expenses ("S,G&A")

      S,G&A decreased $1.4 million, or 8.2%, to $15.7 million for the six months
ended June 30, 2005 from $17.1  million for the six months  ended June 30, 2004.
This decrease was primarily  attributable  to the closing of the used car outlet
in August 2004 and the transfer of the Westwood dealership in May 2005 (together
totaling $1.1 million). Additional decreases totaled approximately $0.3 million,
comprising  primarily  of  decreases  in rent and related  building  costs ($0.1
million) and legal and professional fees ($0.2 million). The decrease in rent is
primarily  due to  purchasing  a  building  in June  2004,  which  Hometown  had
previously  rented.  The decrease in legal and professional  fees was due to the
settlement of certain litigation at the end of 2004.

      Other Income

      In May 2005, Hometown completed the transfer of certain assets in relation
to the  settlement of litigation  matters  resulting in a gain of  approximately
$587,000  recorded in Other  Income.  See Note 8 to the  unaudited  consolidated
financial statements.

      Interest Expense

      Interest expense  increased $0.2 million,  or 13%, to $1.8 million for the
six months ended June 30, 2005,  from $1.6 million for the six months ended June
30, 2004.  The increase is  primarily  due to an increase of floorplan  interest
expense  resulting  from higher  interest  rates  partially  offset by decreased
borrowings resulting from one less dealership in 2005 compared to 2004 and lower
average inventories at the remaining dealerships.

      Provision for income tax

      The  effective  income tax rate was 40% in the six  months  ended June 30,
2005 and 27% in the same  period  of  2004.  The  rates  were  based on  current
forecasts of income before taxes, and current forecasts of permanent differences
between tax and book income.  The 2005 rate reflects the expected  effective tax
rate for the year.  The 2004 rate reflects the expected full year  effective tax
rate of 40% adjusted for a reduction in the valuation allowance  associated with
the 2004  amortization  of  goodwill  for tax  purposes.  At  December  31, 2004
deferred  taxes were adjusted  primarily to reflect a reduction of the valuation


                                       27
<PAGE>

allowance  on the  deferred  tax asset due to the ability to project  sufficient
income to  recover  the  deferred  tax  asset.  Deferred  taxes,  including  the
valuation allowance, will be reviewed throughout fiscal 2005.

      Net Income

      Net income increased $0.8 million to $1.1 million for the six months ended
June 30,  2005,  from $0.3  million for the six months  ended June 30,  2004.  A
substantial  amount of the  increase  is due to a gain on  transfer  of  certain
assets in relation to  settlement of  litigation  recorded in Other Income.  See
above for explanation of other changes.

      Earnings Per Share, Basic and Diluted and Weighted Average Shares

      "Basic  earnings  (loss) per share" is  computed  by  dividing  net income
(loss) by the weighted  average  common shares  outstanding.  "Diluted  earnings
(loss) per share" is  computed  by dividing  net income  (loss) by the  weighted
average  common  shares  outstanding  adjusted for the  incremental  dilution of
potentially  dilutive  securities.  See  Note  3 to the  unaudited  consolidated
financial statements.

      The basic and diluted income per share for the three months ended June 30,
2005 and 2004 is $0.16 and $0.05, respectively.

Cyclicality

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

Seasonality

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

Effects of Inflation

      Due to the relatively low levels of inflation  experienced in the 2005 and
2004  periods,  inflation  did not have a  significant  effect on the results of
Hometown during those periods.


                                       28
<PAGE>

Liquidity and Capital Resources

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

      Cash and Cash Equivalents

      Total cash and cash  equivalents was $5.1 million and $6.1 million at June
30, 2005 and December 31, 2004, respectively.

      Cash Flow from Operations

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

<TABLE>
<CAPTION>
                                                                    Six months ended
     (in thousands)                                                    June 30,
                                                                -----------------------
                                                                   2005          2004
                                                                ---------     ---------
<S>                                                             <C>           <C>
      Net cash provided by (used in) operating activities       $   2,943     $  (2,256)
      Net cash (used in) investing activities                         (91)       (1,684)
      Net cash provided by (used in) financing activities          (3,903)        5,383
                                                                ---------     ---------
      Net increase (decrease) in cash and cash equivalents      $  (1,051)    $   1,443
                                                                =========     =========
</TABLE>

      For the six months ended June 30, 2005, net cash provided from  operations
of $2.9  million  primarily  consists  of: (i) net income of $1.1  million  plus
non-cash  items of $0.8  million  (totaling  $1.9  million),  (ii) a decrease in
inventory of $5.0  million less the decrease in floor plan  liability - trade of
$2.3  million;  partially  offset by (iii) a decrease  in  accounts  payable and
accrued  expenses  of $0.4  million,  primarily  due to  payment  of  litigation
settlements,  (iv) an increase in accounts receivable of $0.5 million, primarily
due to the funds to be received from Lincoln  Mercury related to the transfer of
the Westwood  dealership,  (v) an increase in prepaid expenses and other current
assets of $0.4 million,  primarily due to payment of costs  associated  with the
pending exchange agreement, (vi) prepaid income taxes of $0.2 million, and (vii)
amortization  of deferred  revenue of $0.2 million.  Inventory and related floor
plan  liability  (trade and  non-trade)  decreased  due to improved  new vehicle
inventory  management.  Total  floor  plan  liability  decreased  more  than the
decrease in inventory due to an increase in used vehicle  inventory in excess of
the used floor plan limit.  This was  primarily  due to a planned  used  vehicle
special  event  sale that took place in July  2005.  Net cash used in  investing
activities of $0.1 million is due to  miscellaneous  capital  expenditures.  Net
cash used in financing  activities of $3.9 million is due to: (i) the net change
in non-trade  floorplan notes payable of $3.2 million (which  decreased due to a
similar  change  in  related  inventory,  see  operating  activities)  and  (ii)
principal  payments of  long-term  debt and capital  lease  obligations  of $0.9
million;  partially offset by proceeds from long-term borrowings of $0.2 million
(used to fund the build-out of the corporate  office which was built in December
2004).

      For the six months ended June 30,  2004,  net cash used in  operations  of
$2.3 million primarily consists of: (i) net income of $0.3 million plus non-cash
items of $0.8 million (totaling $1.1 million);  (ii) an increase in inventory of
$11.6 million less the increase in floor plan liability - trade of $7.8 million;
and (iii) an increase in other long term  liabilities  and  deferred  revenue of
$0.4 million,  primarily due to an advance from Hometown's extended service plan
provider.  Inventory  and related  floor plan  liability  (trade and  non-trade)
increased due to dealerships  increasing  inventory  levels in  anticipation  of
increased sales which did not materialize.  Total floor plan liability increased
more than the increase in inventory  due to timing of floor plan  payments.  Net
cash  used  in  investing   activities   of  $1.7  million  is  due  to  capital
expenditures, primarily the Brattleboro, VT. building purchased in June 2004 for
$1.5 million.  Net cash provided by financing  activities of $5.4 million is due
to: (i) the net change in  non-trade  floorplan  notes  payable of $4.7  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 $0.3 million;  partially offset by principal payments of
long-term  debt and capital lease  obligations  of $1.0  million.  The long-term
borrowings were used to acquire the Brattleboro, VT. building discussed above.


                                       29
<PAGE>

      Capital Expenditures

      Capital  expenditures  for fiscal 2005 are  expected  to be $0.3  million,
consisting   primarily  of  equipment   purchases  and  building  and  leasehold
improvements.

      Receivables

      Hometown had $5.5 million in accounts receivable at June 30, 2005 compared
to $5.1 million at December 31, 2004. The increase in receivables is due to: (i)
the increase in sales that takes place in June  compared to  December,  and (ii)
approximately   $0.5  million  due  from  Lincoln  Mercury  that  will  be  paid
approximately  180  days  subsequent  to the  close of the  Westwood  dealership
transfer;  partially  offset by a reduction  of accounts  receivable  due to the
transfer of the Westwood dealership. The majority of accounts receivables,  $2.6
million  and  $2.4   million  as  of  June  30,  2005  and  December  31,  2004,
respectively,  are due from finance  companies that provide or secure  financing
for customer  purchases,  and primarily  represent  contracts-in-transit.  These
amounts  are  typically  received  within  seven days of the  transaction.  Also
included  are amounts due from  manufacturers,  which was $1.9  million and $1.7
million as of June 30, 2005 and  December  31,  2004.  These  amounts  primarily
represent payments of rebates and other incentives that are paid on a monthly or
quarterly  basis.  (Also  included  in due  from  manufacturers  in  2005 is the
aforementioned  $0.5  million due from Lincoln  Mercury  related to the Westwood
dealership  transfer.)  The allowance  for doubtful  accounts is $0.2 million at
June 30, 2005 and $0.3 million  December 31, 2004. The decrease in the allowance
is primarily due to an improvement in the accounts receivable ageing.

      Inventories

      Hometown had $32.0 million in  inventories,  net at June 30, 2005 compared
to $43.4 million at December 31, 2004. The majority of inventory,  $21.8 million
and $33.6  million as of June 30, 2005 and December 31, 2004,  respectively,  is
new  vehicle  inventory.  The  decrease  is  primarily  due one less  dealership
(Westwood Lincoln Mercury - $6.5 million) along with an improvement  (reduction)
in inventory levels at our dealerships due to better inventory management.  New,
used and demonstrator  vehicle values are stated at the lower of cost or market,
determined on a specific  unit basis.  Parts and  accessories  are stated at the
lower of cost (determined on a first-in,  first-out  basis) or market.  Hometown
assesses the lower of cost or market  reserve  requirement  for vehicles,  on an
individual unit basis, taking into consideration  historical loss rates, the age
and  composition  of the inventory and current market  conditions.  The lower of
cost or market adjustment was $0.5 million and $0.7 million at June 30, 2005 and
December  31,  2004,  respectively.  The decrease in the lower of cost or market
adjustment  was  primarily due to the transfer of the Westwood  dealership.  See
Note 8 to the unaudited consolidated financial statements.

      Floor Plan Financing

      See Note 6 to the unaudited consolidated financial statements.

      Long-Term Debt and Capital Lease Obligations

      See Note 7 to the unaudited consolidated financial statements.

      Commitments and Contingencies

      See Note 8 to the unaudited consolidated financial statements.


                                       30
<PAGE>

Forward Looking Statement

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

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      We are  exposed  to market  risk from  changes  in  interest  rates on our
amounts  outstanding  under our floor plan  financing  arrangement,  which bears
interest at variable rates based on the prime or LIBOR borrowing rates. Based on
floor plan (trade plus non-trade) amounts  outstanding at June 30, 2005 of $30.3
million,  a 1% change in the prime rate would result in a $0.3 million change to
annual floor plan interest expense.

      At June 30, 2005,  Hometown invested $3.6 million of excess cash, of which
$1.1  million was invested in money market  accounts  paying a weighted  average
interest rate of 1.59% at June 30, 2005, and $2.5 million was invested in a Ford
Motor Credit Company cash  management  account paying  interest of 7.00% at June
30, 2005. The cash management  account interest rate is tied to the rate charged
on Hometown's floor plan financing arrangement.

ITEM 4.   CONTROLS AND PROCEDURES

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

      At June 30, 2005,  management,  with the participation of the CEO and CFO,
evaluated  the  effectiveness  of the design  and  operation  of our  disclosure
controls  and  procedures.  Based  upon  that  evaluation  and  subject  to  the
foregoing,  our  management,  including  the CEO and  CFO,  concluded  that  our
disclosure  controls and procedures  were effective at the reasonable  assurance
level to accomplish their objectives.

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


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<PAGE>

                           PART II. OTHER INFORMATION


ITEM 1.     LEGAL PROCEEDINGS

            See Note 8 - Commitments  and  Contingencies  -  Litigation,  to the
            notes to the unaudited consolidated financial statements.

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

            NONE

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

            NONE

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

            NONE

ITEM 5.     OTHER INFORMATION

            NONE

ITEM 6.     EXHIBITS

            31.1  Chief Executive Officer Certification

            31.2  Chief Financial Officer Certification

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

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


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<PAGE>

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

                                           Hometown Auto Retailers, Inc.


August 10, 2005                            By: /s/ Corey E.  Shaker
------------------------                   -------------------------------------
Date                                       Corey E. Shaker
                                           President and Chief Executive Officer


August 10, 2005                            By: /s/ Charles F. Schwartz
------------------------                   -------------------------------------
Date                                       Charles F. Schwartz
                                           Chief Financial Officer


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