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 September 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            3,910,137
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 September 30, 2005 (Unaudited)
           and December 31, 2004 (Restated) (Audited)                          3
         Unaudited Consolidated Statements of Operations for the three
           and nine months ended September 30, 2005 and 2004                   4
         Unaudited Consolidated Statements of Stockholders' Equity
           for the nine months ended September 30, 2005 and 2004               5
         Unaudited Consolidated Statements of Cash Flows for the nine
           months ended September 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           32
ITEM 4.  Controls and Procedures                                              32

PART II. OTHER INFORMATION

ITEM 1.  Legal Proceedings                                                    33
ITEM 2.  Unregistered Sales Of Equity Securities and Use of Proceeds          33
ITEM 3.  Defaults Upon Senior Securities                                      33
ITEM 4.  Submission of Matters to a Vote of Security Holders                  33
ITEM 5.  Other Information                                                    33
ITEM 6.  Exhibits                                                             33

SIGNATURES                                                                    34

CERTIFICATIONS                                                                35

                           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>
                                                                         September 30,  December 31,
                                                                            2005            2004
                                                                         (Unaudited)     (Restated)
                                                                           --------       --------
<S>                                                                        <C>            <C>
                                     ASSETS
Current Assets:
   Cash and cash equivalents                                               $  5,806       $  6,101
   Accounts receivable, net                                                   4,652          5,081
   Inventories, net                                                          27,925         43,440
   Prepaid expenses and other current assets                                    788            634
   Deferred and prepaid income taxes                                          1,464          1,464
                                                                           --------       --------
     Total current assets                                                    40,635         56,720

Property and equipment, net                                                  13,074         13,854
Other assets                                                                  2,857          3,649
                                                                           --------       --------

     Total assets                                                          $ 56,566       $ 74,223
                                                                           ========       ========

                        LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Floor plan notes payable - trade                                        $  5,382       $ 17,382
   Floor plan notes payable - non-trade                                      20,961         25,092
   Accounts payable and accrued expenses                                      4,366          5,106
   Current maturities of long-term debt and capital lease obligations         5,293          5,505
   Deferred revenue                                                             500            735
                                                                           --------       --------
     Total current liabilities                                               36,502         53,820

Long-term debt and capital lease obligations                                  8,056          8,621
Long-term deferred income taxes                                                 123            123
Other long-term liabilities and deferred revenue                                703            726
                                                                           --------       --------
     Total liabilities                                                       45,384         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, 3,910,137 and 3,870,137 shares issued
     and outstanding, respectively                                                4              4
   Common stock, Class B, $.001 par value, 3,760,000 shares
     authorized, 2,579,252 and 3,519,252 shares issued
     and outstanding, respectively                                                2              3
   Additional paid-in capital                                                29,022         30,017
   Accumulated deficit                                                      (17,846)       (19,091)
                                                                           --------       --------
     Total stockholders' equity                                              11,182         10,933
                                                                           --------       --------
     Total liabilities and stockholders' equity                            $ 56,566       $ 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 Nine Months
                                                                  Ended September 30,                    Ended September 30,
                                                            -------------------------------         -------------------------------
                                                               2005                2004                2005                2004
                                                            -----------         -----------         -----------         -----------
<S>                                                         <C>                 <C>                 <C>                 <C>
Revenues
   New vehicle sales                                        $    38,543         $    44,291         $   117,213         $   130,182
   Used vehicle sales                                            15,723              16,943              48,204              49,633
   Parts and service sales                                        5,246               5,984              17,311              18,098
   Other, net                                                     1,821               2,064               5,661               5,969
                                                            -----------         -----------         -----------         -----------

      Total revenues                                             61,333              69,282             188,389             203,882

Cost of sales
   New vehicle                                                   35,956              41,474             109,459             121,789
   Used vehicle                                                  14,280              15,359              43,651              44,921
   Parts and service                                              2,372               2,697               7,885               8,269
                                                            -----------         -----------         -----------         -----------

      Total cost of sales                                        52,608              59,530             160,995             174,979
                                                            -----------         -----------         -----------         -----------

      Gross profit                                                8,725               9,752              27,394              28,903

Selling, general and administrative expenses                      7,749               8,307              23,457              25,448
                                                            -----------         -----------         -----------         -----------

      Income from operations                                        976               1,445               3,937               3,455

   Interest income                                                   64                  53                 193                 134
   Interest (expense)                                              (802)               (775)             (2,646)             (2,406)
   Other income                                                      --                  63                 591                  66
   Other (expense)                                                   --                  (5)                 --                  (9)
                                                            -----------         -----------         -----------         -----------

Pre-tax income                                                      238                 781               2,075               1,240
      Provision for income taxes                                     95                 211                 830                 335
                                                            -----------         -----------         -----------         -----------

Net income                                                  $       143         $       570         $     1,245         $       905
                                                            ===========         ===========         ===========         ===========

Earnings per share, basic                                   $      0.02         $      0.08         $      0.19         $      0.12
                                                            ===========         ===========         ===========         ===========

Earnings per share, diluted                                 $      0.02         $      0.08         $      0.18         $      0.12
                                                            ===========         ===========         ===========         ===========

Weighted average shares outstanding, basic                    6,451,128           7,389,389           6,660,012           7,252,529
Weighted average shares outstanding, diluted                  6,646,549           7,493,208           6,811,927           7,429,892
</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
                                    Common Stock                 Common Stock            Additional                      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                         --            --            --             --             --            905             905
                               --------      --------      --------       --------       --------       --------        --------

Balance at
  September 30, 2004              3,870      $      4         3,519       $      3       $ 30,017       $(21,934)       $  8,090
                               ========      ========      ========       ========       ========       ========        ========

Balance at
  December 31, 2004
                                  3,870      $      4         3,519       $      3       $ 30,017       $(19,091)       $ 10,933
Net income                           --            --            --             --             --          1,245           1,245
Exercise of
  stock options                      40            --            --             --             47             --              47
Litigation
  Settlement
  (Note 9)                           --            --          (940)            (1)        (1,042)            --          (1,043)
                               --------      --------      --------       --------       --------       --------        --------

Balance at
September 30, 2005                3,910      $      4         2,579       $      2       $ 29,022       $(17,846)       $ 11,182
                               ========      ========      ========       ========       ========       ========        ========
</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 Nine Months ended
                                                                                     September 30,
                                                                               2005              2004
                                                                                              (Restated)
                                                                             ---------         ---------
<S>                                                                          <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                   $   1,245         $     905
Adjustments to reconcile net income to net cash
   provided by operating activities -
   Depreciation and amortization                                                   965               950
   Loss on sale of property and equipment                                           --                 8
   (Gain) on disposal of dealership                                               (587)               --
   Deferred income taxes                                                           830               335
   Changes in assets and liabilities:
      Accounts receivable, net                                                     275            (1,190)
      Inventories, net                                                           9,347               (85)
      Prepaid expenses and other current assets                                   (154)              (47)
      Prepaid taxes                                                               (176)             (202)
      Other assets                                                                  18                 8
      Floor plan notes payable - trade                                          (5,336)            1,189
      Accounts payable and accrued expenses                                       (859)              (99)
      Deferred revenue - current                                                  (235)              209
      Other long-term liabilities and deferred revenue                             (23)               35
                                                                             ---------         ---------
   Net cash provided by operating activities                                     5,310             2,016

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                                             (132)           (1,821)
                                                                             ---------         ---------
   Net cash (used in) investing activities                                        (132)           (1,821)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from floor plan notes payable - non-trade                          121,793           121,356
   Payment of floor plan notes payable - non-trade                            (125,924)         (121,884)
   Principal payments of long-term debt and capital lease obligations           (1,614)           (1,707)
   Proceeds from long-term borrowings                                              225             1,368
   Exercise of stock options and warrants                                           47               257
                                                                             ---------         ---------
   Net cash (used in) financing activities                                      (5,473)             (610)

Net (decrease) in cash and cash equivalents                                       (295)             (415)
CASH AND CASH EQUIVALENTS, beginning of period                                   6,101             5,639
                                                                             ---------         ---------
CASH AND CASH EQUIVALENTS, end of period                                     $   5,806         $   5,224
                                                                             =========         =========

 Cash paid for - Interest                                                    $   2,717         $   2,485
 Cash paid for - Taxes                                                       $     176         $     202
 Purchases financed by capital lease obligations                             $     801         $   1,013
</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 9 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.    RESTATEMENT

      Hometown has restated its Balance Sheets and Statements of Cash Flows for
periods prior to June 30, 2005. The balance sheets restatement is to breakdown
the floor plan notes payable into trade and non-trade components, where it had
previously been shown as a single line item, which has been consistent with
industry practice. The Statements of Cash Flows reclassification is to show the
non-trade component of floor plan notes payable as a financing activity, where
it had been shown as an operating activity. 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. The changes do not affect working capital or total
cash flows. See Note 7.

<TABLE>
<CAPTION>
(in thousands)                                                       Year ended                  Nine months ended
                                                                  December 31, 2004             September 30, 2004
                                                           ------------------------------  ------------------------------
                                                             Previously       Restated       Previously        Restated
                                                              Reported                       Reported
                                                           --------------  --------------  -------------  ---------------
<S>                                                       <C>               <C>               <C>               <C>
Balance Sheets:

Floor plan notes payable - trade                          $  42,474         $  17,382         $  38,664         $  16,658
Floor plan notes payable - non- trade                     $      --         $  25,092         $      --         $  22,006

Statements of Cash Flows:

Floor plan notes payable - trade                                                              $     661         $   1,189
Net cash provided by operating activities                                                     $   1,488         $   2,016

Proceeds from floor plan notes payable - non-trade                                            $      --         $ 121,356
Payment of floor plan notes payable - non-trade                                               $      --         $(121,884)
Net cash (used in) financing activities                                                       $     (82)        $    (610)
</TABLE>

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Basis of Presentation

      The accompanying consolidated balance sheet as of September 30, 2005, the
consolidated statements of operations for the three and nine months ended
September 30, 2005 and 2004, the consolidated statements of stockholders' equity
and the consolidated statements of cash flows for the nine months ended
September 30, 2005 and 2004, are unaudited. The consolidated balance sheet as of
December 31, 2004 and the consolidated statement of cash flows for the nine
months ended September 30, 2004 have been restated. (See Note 2) The
consolidated financial statements include all significant majority-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.


                                       7
<PAGE>

      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 amended annual report on Form 10-K/A Amendment No. 1.

      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 September 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.

<TABLE>
<CAPTION>
(in thousands, except per share data)                        Three Months Ended                  Nine Months Ended
-------------------------------------                          September 30,                        September 30,
                                                        ---------------------------         ---------------------------
                                                           2005              2004              2005              2004
                                                        ---------         ---------         ---------         ---------
<S>                                                     <C>               <C>               <C>               <C>
Net income, as reported                                 $     143         $     570         $   1,245         $     905
Deduct: Total stock-based employee compensation
  expense determined under fair value based method
  for all awards, net of related tax effects (1)               (2)               (7)               (7)              (21)
                                                        ---------         ---------         ---------         ---------
Pro forma net income                                    $     141         $     563         $   1,238         $     884
                                                        =========         =========         =========         =========

Earnings per share:
Basic, as reported                                      $    0.02         $    0.08         $    0.19         $    0.12
Basic, pro forma                                        $    0.02         $    0.08         $    0.19         $    0.12

Diluted, as reported                                    $    0.02         $    0.08         $    0.18         $    0.12
Diluted, pro forma                                      $    0.02         $    0.08         $    0.18         $    0.12
</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.


                                       8
<PAGE>

      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.

      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.


                                       9
<PAGE>

4.    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 498,000 shares of common stock
were outstanding as of September 30, 2005. Options and warrants to purchase
approximately 556,000 shares of common stock were outstanding as of September
30, 2004. Basic and diluted weighted average shares for the three and nine
months ended September 30, 2005 and 2004 are as follows:

<TABLE>
<CAPTION>
                                             Three Months Ended               Nine Months Ended
                                                 September 30,                   September 30,
                                        --------------------------        --------------------------
                                          2005             2004             2005             2004
                                        ---------        ---------        ---------        ---------
<S>                                     <C>              <C>              <C>              <C>
Basic, Weighted Average Shares          6,451,128        7,389,389        6,660,012        7,252,529
                                        =========        =========        =========        =========

Common Stock Equivalents                  195,421          103,819          151,915          177,363
                                        ---------        ---------        ---------        ---------
Diluted, Weighted Average Shares        6,646,549        7,493,208        6,811,927        7,429,892
                                        =========        =========        =========        =========
</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. During the third quarter of 2005,
stock options to purchase 40,000 Class A shares were exercised. Also, the three
and nine months ended September 30, 2005 includes a gain on the transfer of the
Westwood dealership of $587,000. See Note 9.

      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 nine months ended September 30, 2005, options to purchase
99,000 shares of Hometown common stock were excluded from the calculation of
diluted income per share due to the option prices being greater than the average
market price of the common shares during the period. For the three and nine
months ended September 30, 2004, options and warrants to purchase 286,000 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
September 30, 2005 and 2004 is $0.02 and $0.08, respectively. The basic and
diluted income per share for the nine months ended September 30, 2005 is $0.19
and $0.18, respectively. The basic and diluted income per share for the nine
months ended September 30, 2004 was $0.12.


                                       10
<PAGE>

5.    INVENTORIES

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

      (in thousands)                                  9/30/05      12/31/04
      --------------                                 --------      --------

      New Vehicles                                   $ 18,152      $ 33,616
      Used Vehicles                                     8,035         7,761
      Parts, accessories and other                      1,738         2,063
                                                     --------      --------
         Total Inventories                           $ 27,925      $ 43,440
                                                     ========      ========

      The lower of cost or market adjustment was $0.5 million and $0.7 million
at September 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 9.

6.    INTANGIBLE ASSETS

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

      (in thousands)                                   9/30/05      12/31/04
      --------------                                  --------      --------

      Deferred finance charges                        $    272      $    272
      Accumulated amortization                            (136)         (121)
      Non-compete agreement                                381           381
      Accumulated amortization                            (381)         (333)
      Franchise Fee                                         10            10
      Accumulated amortization                              (5)           (3)
                                                      --------      --------
         Net intangible assets                        $    141      $    206
                                                      ========      ========

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

7.    FLOOR PLAN NOTES PAYABLE

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

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

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


                                       11
<PAGE>

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

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

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

8.    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 $4,079,000 of related long-term debt to
current at September 30, 2005. Total debt for this mortgage at September 30,
2005 is $4,396,000. 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
$1,300,000. 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.

9.    COMMITMENTS AND CONTINGENCIES

      Litigation

      During the fourth quarter of 2004, Hometown announced that it had resolved
in principle to settle the litigation matters described in Footnote 9 in the
Notes to Unaudited Consolidated Financial Statements as contained in Hometown's
Form 10-Q as filed with the Securities and Exchange Commission on November 12,
2004. On March 3, 2005 the execution and delivery of a settlement agreement and
applicable releases of claims from all parties to the litigation was completed.
The settlement agreement settled all claims made by Salvatore A. Vergopia and
Edward A. Vergopia, former directors and executive officers of the Corporation,
and Janet Vergopia, the wife of Salvatore A. Vergopia (the "Vergopias"). The
settlement also finally resolved the related insurance coverage litigation with
Universal Underwriters Group and The Chubb Group of Insurance Companies. The
gross payment to the Vergopias by all parties was $4 million of which $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.


                                       12
<PAGE>

      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
10 - "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.

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

      As of September 30, 2005, Hometown has incurred approximately $83,000 in
relation to the complaint, which amount has been expensed and is included in
Selling General and Administrative Expenses on Hometown's Unaudited Consolidated
Statements of Operations for the Three and Nine Months Ended September 30, 2005.

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


                                       13
<PAGE>

      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 September 30, 2005 the mortgage debt balance is $4.1
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 September 30, 2005 is $5.8 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 September 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.

<TABLE>
<CAPTION>
                                                                         Additions To                     Balance At
                                                      Balance At           Costs and                        End of
             Reserve for Policy Work               Beginning of Year       Expenses        Deductions       Quarter
             -----------------------               -----------------       --------        ----------       -------
<S>                                                   <C>                 <C>             <C>             <C>
Nine Months Ended September 30, 2005                  $208,000            $890,000        $(800,000)      $298,000
</TABLE>


                                       14
<PAGE>

      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 $1.8 million and $1.7 million for nine months
ended September 30, 2005 and September 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 September 30, 2005
and December 31, 2004, Hometown had $1,099,000 and $1,140,000 of related
deferred revenue, respectively. During the nine months ended September 30, 2005,
these dealerships generated approximately $293,000 of related warranty service
and insurance revenue, which was deferred. During the same period, approximately
$334,000 of deferred revenue was amortized to Other Revenues, net. At September
30, 2005 and December 31, 2004, Hometown also had other deferred revenue of
$103,000 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 three months through February 18, 2006. Previously
on March 13, 2003, Hometown was notified by Toyota Motor Sales, U.S.A., that
Hometown must correct certain operational deficiencies or make substantial
progress toward rectifying such deficiencies. Toyota had previously expressed
concerns that the financial resources of the Toyota dealerships were being used
to finance the cash flow deficits of other Hometown dealerships and that because
of this the financial health of the Toyota dealerships were detrimentally
affected by a net working capital deficiency. Toyota requested and Hometown
provided a written action plan and consolidated financial forecast. Toyota also
expressed concerns about the impact of Ford Motor Credit's financing terms upon
the Toyota dealerships and the existing litigation, which has now been settled,
including the Vergopias as discussed above. Hometown developed and implemented
plans to correct the operational deficiencies that would bring Hometown into
compliance. Hometown has obtained written confirmations from Ford Motor Credit
in response to Toyota's requests for information relating to financing
arrangements. In addition, Hometown has improved net working capital through the
sale of a Chrysler/Jeep sales and service franchise in the second quarter of
2003 and advances on warranty income from Hometown's Extended Service Plan
vendor. Hometown has been in regular contact with Toyota to review the efforts
of Hometown to resolve the deficiencies alleged by Toyota. The two Toyota
dealerships for the fiscal year ended December 31, 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.

10.   EXCHANGE AGREEMENT

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

      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.


                                       15
<PAGE>

      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), $1.1
million for financing the split-off costs and associated severance costs, and
the $0.4 million balance for working capital for Hometown. As of September 30,
2005, Hometown has incurred approximately $474,000 of the aforementioned
split-off costs, which amount has been expensed and is included in Selling
General and Administrative Expenses on Hometown's Unaudited Consolidated
Statements of Operations for the Three and Nine Months Ended September 30, 2005.

      Following the split-off, Hometown Auto will have a total of 3,885,153
common shares (3,108,401 Class A common shares and 776,752 Class B common
shares), with William C. Muller, Jr. (and his immediate and extended family)
holding 367,500 Class A common shares and 776,752 Class B common shares of
Hometown Auto. [Note: Hometown Auto Class B common shares have 10 for 1 voting
rights versus Class A common shares which are voted on a 1 to 1 basis.]

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

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


                                       16
<PAGE>

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

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

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

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

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


                                       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 and Form 10-K/A for the year ended December 31, 2004.

Restatement

      Hometown has restated its Balance Sheets and Statements of Cash Flows for
periods prior to June 30, 2005. The balance sheets restatement is to breakdown
the floor plan notes payable into trade and non-trade components, where it had
previously been shown as a single line item, which has been consistent with
industry practice. The Statements of Cash Flows reclassification is to show the
non-trade component of floor plan notes payable as a financing activity, where
it had been shown as an operating activity. 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. The changes do not affect working capital or total
cash flows. See Note 7 to the unaudited consolidated financial statements.

<TABLE>
<CAPTION>
 (in thousands)                                                     Year ended                   Nine months ended
                                                                December 31, 2004                September 30, 2004
                                                          ---------------------------------------------------------------
                                                          Previously        Restated         Previously          Restated
                                                           Reported                           Reported
                                                          ---------------------------------------------------------------
<S>                                                       <C>               <C>               <C>               <C>
Balance Sheets:

Floor plan notes payable - trade                          $  42,474         $  17,382         $  38,664         $  16,658
Floor plan notes payable - non-trade                      $      --         $  25,092         $      --         $  22,006

Statements of Cash Flows:

Floor plan notes payable - trade                                                              $     661         $   1,189
Net cash provided by operating activities                                                     $   1,488         $   2,016

Proceeds from floor plan notes payable - non-trade                                            $      --         $ 121,356
Payment of floor plan notes payable - non-trade                                               $      --         $(121,884)
Net cash (used in) financing activities                                                       $     (82)        $    (610)
</TABLE>

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.


                                       18
<PAGE>

      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 9 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.

      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 September 30, 2005 and 2004, and $0.2 million in the
nine months ended September 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.


                                       19
<PAGE>

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

<TABLE>
<CAPTION>
Revenues
                                                   For the Three Months Ended
                                                          September 30,
                                                     ----------------------       Increase             %
(in thousands, except per vehicle data)               2005           2004        (Decrease)         Change
---------------------------------------              -------        -------        -------         -------
<S>                                                  <C>            <C>            <C>                 <C>
New vehicle data:
   Retail revenues - same store                      $37,922        $36,688        $ 1,234             3.4%
   Retail revenues - other stores (1)                     --          7,145         (7,145)            *
                                                     -------        -------        -------         -------
     Total new retail revenues                        37,922         43,833         (5,911)          (13.5)%

   Fleet revenues - same store                           621            458            163            35.6%
                                                     -------        -------        -------         -------
Total new vehicles revenues, as reported             $38,543        $44,291        $(5,748)          (13.0)%
                                                     =======        =======        =======         =======

   New retail units - same store                       1,484          1,429             55             3.8%
   New retail units - other stores (1)                    --            204           (204)            *
   Fleet units                                            38             30              8            26.7%
                                                     -------        -------        -------         -------
      Total new vehicle units                          1,522          1,663           (141)           (8.5)%

Used vehicle data:
   Retail revenues - same store                      $12,151        $12,243        $   (92)           (0.8)%
   Retail revenues - other stores (1)                     --            968           (968)            *
                                                     -------        -------        -------         -------
      Total used retail revenues                      12,151         13,211         (1,060)           (8.0)%

   Wholesale revenues - same store                     3,572          3,208            364            11.3%
   Wholesale revenues - other stores (1)                  --            524           (524)            *
                                                     -------        -------        -------         -------
       Total wholesale revenues                        3,572          3,732           (160)           (4.3)%

Total used vehicle revenue, as reported              $15,723        $16,943        $(1,220)           (7.2)%
                                                     =======        =======        =======         =======

Used retail units - same store                           745            805            (60)           (7.5)%
Used retail units - other stores (1)                      --             59            (59)            *
Used wholesale units - same store                        844            868            (24)           (2.8)%
Used wholesale units - other stores (1)                   --             64            (64)            *
                                                     -------        -------        -------         -------
   Total used units                                    1,589          1,796           (207)          (11.5)%
                                                     =======        =======        =======         =======

Parts and service:
Parts and service revenues - same store              $ 5,246        $ 4,963        $   283             5.7%
Parts and service revenues - other stores (1)             --          1,021         (1,021)            *
                                                     -------        -------        -------         -------
   Total parts and service revenue                   $ 5,246        $ 5,984        $  (738)          (12.3)%
                                                     =======        =======        =======         =======

Other revenues, net:
Other revenues, net - same store                     $ 1,821        $ 1,927        $  (106)           (5.5)%
Other revenues, net - other stores (1)                    --            137           (137)            *
                                                     -------        -------        -------         -------
   Total other revenues, net, as reported            $ 1,821        $ 2,064        $  (243)          (11.8)%
                                                     =======        =======        =======         =======

Total revenue:
   Same store                                        $61,333        $59,487        $ 1,846             3.1%
   Other stores (1)                                       --          9,795         (9,795)            *
                                                     -------        -------        -------         -------
      Total revenue, as reported                     $61,333        $69,282        $(7,949)          (11.5)%
                                                     =======        =======        =======         =======
</TABLE>


                                       20
<PAGE>

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

      * - Percentage is 100% or greater.

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

      Total revenue decreased $8.0 million, or 11.5% to $61.3 million for the
three months ended September 30, 2005 from $69.3 million for the three months
ended September 30, 2004. Same store total revenues increased $1.8 million or
3.1% to $61.3 million for the three months ended September 30, 2005 from $59.5
million for the three months ended September 30, 2004. Same store new retail
revenues increased $1.2 million, or 3.4% to $37.9 million for the three months
ended September 30, 2005 from $36.7 million for the three months ended September
30, 2004. This increase was primarily due to the 3.8% additional units ($1.4
million) sold in 2005 compared to 2004 partially offset by a small decrease
(0.5%) in average selling price ($0.2 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 ($2.0 million), partially offset by a decline at our Lincoln Mercury
dealerships ($1.0 million). The increase ($0.4 million) attributable to the
remaining dealerships was aided by the "Employee Pricing Plan" promotion, which
aided unit sales. 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 have
declined. Same store used vehicle retail revenues decreased just under $0.1
million, or 0.8% to $12.2 million for the three months ended September 30, 2005
from $12.2 million for the three months ended September 30, 2004. This decrease
was primarily due to a 7.5% decrease in units ($0.9 million) sold in 2005
compared to 2004, partially offset by a 7.2% increase in average selling price
($0.8 million) in 2005 compared to 2004. Contributing to the decrease in units
was the aforementioned "Employee Pricing Plan", which pushed potential buyers of
used vehicles toward the purchase of a new vehicle. The retail used vehicle
market continues to be challenging, with most dealerships experiencing a
decrease in units for the third quarter. Certain used vehicles that have high
gas mileage saw their values increase in the third quarter as the price of
gasoline soared, contributing to the increase in average selling price of used
vehicles. Same store wholesale revenues increased $0.4 million, or 11.3% to $3.6
million for the three months ended September 30, 2005 from $3.2 million for the
three months ended September 30, 2004 due to continued 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 is down compared to the prior
year. 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. Wholesale prices began to weaken toward the
latter part of the third quarter with the increase in used car inventories. The
"Employee Pricing Program" caused a surge in new vehicle sales, that brought in
more used cars as trade-ins.

      Parts and service revenue decreased $0.8 million or 12.3% to $5.2 million
for the three months ended September 30, 2005 from $6.0 million for the three
months ended September 30, 2004. On a same store basis, parts and service
revenue increased $0.2 million or 5.7% to $5.2 million for the three months
ended September 30, 2005 from $5.0 million for the three months ended September
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.

      Other dealership revenues decreased $0.3 million, or 11.8% to $1.8 million
for the three months ended September 30, 2005 from $2.1 million for the three
months ended September 30, 2004. On a same store basis, other dealership
revenues decreased $0.1 million or 5.5% to $1.8 million for the three months
ended September 30, 2005 from $1.9 million for the three months ended September
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.


                                       21
<PAGE>

<TABLE>
<CAPTION>
Gross Profit                                             For the Three Months Ended
                                                                 September 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                      $ 2,568          $ 2,453          $   115             4.7%
   Retail gross profit - other stores (1)                     13              360             (347)          (96.4)%
                                                         -------          -------          -------         -------
     Total new retail gross profit                         2,581            2,813             (232)           (8.2)%

   Fleet gross profit                                          6                4                2            50.0%
                                                         -------          -------          -------         -------
Total new vehicles gross profit, as reported             $ 2,587          $ 2,817          $  (230)           (8.2)%
                                                         =======          =======          =======         =======
     Gross profit percentage                                 6.7%             6.4%
                                                         -------          -------
   New retail units - same store                           1,484            1,429               55             3.8%
   New retail units - other stores (1)                        --              204             (204)              *
   Fleet units                                                38               30                8            26.7%
                                                         -------          -------          -------         -------
      Total new vehicle units                              1,522            1,663             (141)           (8.5)%
                                                         =======          =======          =======         =======

Used vehicle data:
   Retail gross profit - same store                      $ 1,452          $ 1,486          $   (34)           (2.3)%
   Retail gross profit - other stores (1)                     19               76              (57)          (75.0)%
                                                         -------          -------          -------         -------
      Total used retail gross profit                       1,471            1,562              (91)           (5.8)%

   Wholesale gross profit - same store                       (28)              35              (63)              *
   Wholesale gross profit - other stores (1)                  --              (13)              13               *
                                                         -------          -------          -------         -------
       Total wholesale gross profit                          (28)              22              (50)              *

Total used vehicle gross profit, as reported             $ 1,443          $ 1,584          $  (141)           (8.9)%
                                                         =======          =======          =======         =======
Gross profit percentage                                      9.2%             9.3%
                                                         =======          =======

Used retail units - same store                               745              805              (60)           (7.5)%
Used retail units - other stores (1)                          --               59              (59)              *
Used wholesale units - same store                            844              868              (24)           (2.8)%
Used wholesale units - other stores (1)                       --               64              (64)              *
                                                         -------          -------          -------         -------
   Total used units                                        1,589            1,796             (207)          (11.5)%
                                                         =======          =======          =======         =======

Parts and service:
Parts and service gross profit - same store              $ 2,874          $ 2,696          $   178             6.6%
Parts and service gross profit - other stores (1)             --              591             (591)              *
                                                         -------          -------          -------         -------
   Total parts and service revenue                       $ 2,874          $ 3,287          $  (413)          (11.8)%
                                                         =======          =======          =======         =======
     Gross profit percentage                                54.8%            54.9%
                                                         =======          =======

Other gross profit:
Other gross profit - same store                          $ 1,821          $ 1,927          $  (106)           (5.5)%
Other gross profit - other stores (1)                         --              137             (137)              *
                                                         -------          -------          -------         -------
   Total other gross profit, as reported                 $ 1,821          $ 2,064          $  (243)          (11.8)%
                                                         =======          =======          =======         =======
   Gross profit percentage                                 100.0%           100.0%
                                                         =======          =======

Other gross profit PVR - same store                      $   817          $   863          $   (46)           (5.3)%
Other gross profit PVR - other stores (1)                    N/A              521              N/A             N/A
                                                         -------          -------          -------         -------
   Total other gross profit PVR, as reported             $   817          $   827          $   (10)           (1.2)%
                                                         =======          =======          =======         =======
</TABLE>


                                       22
<PAGE>

<TABLE>
<CAPTION>
Gross Profit - (continued)                             For the Three Months Ended
                                                               September 30,
                                                         ------------------------          Increase           %
(in thousands, except per vehicle data)                    2005             2004          (Decrease)        Change
---------------------------------------                  -------          -------          -------         -------
<S>                                                      <C>              <C>              <C>             <C>
Total gross profit:
   Same store                                            $ 8,693          $ 8,601          $    92             1.1%
   Other stores (1)                                           32            1,151           (1,119)          (97.2)%
                                                         -------          -------          -------         -------
      Total gross profit, as reported                    $ 8,725          $ 9,752          $(1,027)          (10.5)%
                                                         =======          =======          =======         =======
   Gross profit percentage                                  14.2%            14.1%
                                                         =======          =======
</TABLE>

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

      * - Percentage is 100% or greater.
      N/A - Not applicable due to -0- unit sales.

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

      Total gross profit decreased $1.1 million, or 10.5%, to $8.7 million for
the three months ended September 30, 2005, from $9.8 million for the three
months ended September 30, 2004. Same store total gross profit increased $0.1
million, or 1.1% to $8.7 million for the three months ended September 30, 2005,
from $8.6 million for the three months ended September 30, 2004. Same store
gross profit on new retail vehicle sales increased $0.1 million, or 4.7%, to
$2.6 million for the three months ended September 30, 2005, from $2.5 million
for the three months ended September 30, 2004. The increase in gross profit is
primarily attributable to a 3.8% increase in unit sales combined with a 0.8%
increase in new retail gross profit per unit. Similar to revenues, the gain is
mostly attributable to the Toyota dealerships ($0.2 million), partially offset
by decreases at certain other dealerships, primarily Lincoln Mercury.

      Same store gross profit on used vehicle retail sales decreased less than
$0.1 million, or 2.3%, to $1.5 million for the three months ended September 30,
2005, from $1.5 million for the three months ended September 30, 2004. Similar
to revenues, the decrease is primarily attributable to the 7.5% decrease ($0.1
million) in units sold, partially offset by a 5.6% increase in average gross
profit per unit (less than $0.1 million). The company strives to maintain a
certain gross profit percentage, so the increase in the average revenue per
vehicle sold at retail should translate into a higher gross profit per unit. The
wholesale market began to weaken in the third quarter, causing the decrease in
related gross profit. Although the vehicles were of high quality, generating a
relatively high sales price, in many instances the wholesale value decreased to
below our cost.

      Same store parts and service gross profit increased $0.2 million, or 6.6%,
to $2.9 million for the three months ended September 30, 2005, from $2.7 million
for the three months ended September 30, 2004 primarily due the 5.7% increase in
parts and service revenues.

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

      S,G&A decreased $0.6 million, or 7.2%, to $7.7 million for the three
months ended September 30, 2005 from $8.3 million for the three months ended
September 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). Data processing costs decreased
(less than $0.1 million) primarily due to the expiration of certain contracts
where the ongoing costs for the similar service have decreased under the terms
of the new contracts. Partially offsetting this are costs associated with the
Exchange Agreement of $0.5 million and legal costs associated with the related
class action lawsuit of $0.1 million. See Notes 9 and Note 10 to the unaudited
consolidated financial statements.


                                       23
<PAGE>

      Interest Expense

      Interest expense increased less than $0.1 million, remaining constant at
$0.8 million for the three months ended September 30, 2005 and September 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 September 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 decreased $0.5 million to $0.1 million for the three months
ended September 30, 2005, from $0.6 million for the three months ended September
30, 2004. See above for explanation of 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 4 to the unaudited consolidated
financial statements.

      The basic and diluted income per share for the three months ended
September 30, 2005 and 2004 is $0.02 and $0.08, respectively.


                                       24
<PAGE>

Nine months ended September 30, 2005 compared with nine months ended September
30, 2004.

<TABLE>
<CAPTION>
Revenues                                            For the Nine Months Ended
                                                           September 30,
                                                     ------------------------        Increase            %
(in thousands, except per vehicle data)                2005            2004         (Decrease)         Change
---------------------------------------              --------        --------        --------         --------
<S>                                                  <C>             <C>             <C>              <C>
New vehicle data:
   Retail revenues - same store                      $105,877        $103,566        $  2,311              2.2%
   Retail revenues - other stores (1)                   9,022          25,535         (16,513)           (64.7)%
                                                     --------        --------        --------         --------
      Total new retail revenues                       114,899         129,101         (14,202)           (11.0)%

   Fleet revenues - same store                          2,314           1,081           1,233              *
                                                     --------        --------        --------         --------
Total new vehicles revenues, as reported             $117,213        $130,182        $(12,969)           (10.0)%
                                                     ========        ========        ========         ========

   New retail units - same store                        4,122           4,032              90              2.2%
   New retail units - other stores (1)                    245             717            (472)           (65.8)%
   Fleet units                                            132              65              67              *
                                                     --------        --------        --------         --------
      Total new vehicle units                           4,499           4,814            (315)            (6.5)%

Used vehicle data:
   Retail revenues - same store                      $ 36,181        $ 35,289        $    892              2.5%
   Retail revenues - other stores (1)                     789           3,384          (2,595)           (76.7)%
                                                     --------        --------        --------         --------
      Total used retail revenues                       36,970          38,673          (1,703)            (4.4)%

   Wholesale revenues - same store                     10,815           9,942             873              8.8%
   Wholesale revenues - other stores (1)                  419           1,018            (599)           (58.8)%
                                                     --------        --------        --------         --------
      Total wholesale revenues                         11,234          10,960             274              2.5%

Total used vehicle revenue, as reported              $ 48,204        $ 49,633        $ (1,429)            (2.9)%
                                                     ========        ========        ========         ========

Used retail units - same store                          2,194           2,340            (146)            (6.2)%
Used retail units - other stores (1)                       45             220            (175)           (79.5)%
Used wholesale units - same store                       2,424           2,630            (206)            (7.8)%
Used wholesale units - other stores                        59             137             (78)           (56.9)%
                                                     --------        --------        --------         --------
   Total used units                                     4,722           5,327            (605)           (11.4)%
                                                     ========        ========        ========         ========

Parts and service:
Parts and service revenues - same store              $ 15,804        $ 15,038        $    766              5.1%
Parts and service revenues - other stores (1)           1,507           3,060          (1,553)           (50.8)%
                                                     --------        --------        --------         --------
   Total parts and service revenue                   $ 17,311        $ 18,098        $   (787)            (4.3)%
                                                     ========        ========        ========         ========

Other revenues, net:
Other revenues, net - same store                     $  5,542        $  5,503        $     39              0.7%
Other revenues, net - other stores (1)                    119             466            (347)           (74.5)%
                                                     --------        --------        --------         --------
   Total other revenues, net, as reported            $  5,661        $  5,969        $   (308)            (5.2)%
                                                     ========        ========        ========         ========

Total revenue:
   Same store                                        $176,533        $170,419        $  6,114              3.6%
   Other stores (1)                                    11,856          33,463         (21,607)           (64.6)%
                                                     --------        --------        --------         --------
      Total revenue, as reported                     $188,389        $203,882        $(15,493)            (7.6)%
                                                     ========        ========        ========         ========
</TABLE>

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

      * - Percentage is 100% or greater.

                                       25
<PAGE>

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

      Total revenue decreased $15.5 million, or 7.6% to $188.4 million for the
nine months ended September 30, 2005 from $203.9 million for the nine months
ended September 30, 2004. Same store total revenues increased $6.1 million or
3.6% to $176.5 million for the nine months ended September 30, 2005 from $170.4
million for the nine months ended September 30, 2004. Same store new retail
revenues increased $2.3 million, or 2.2% to $105.9 million for the nine months
ended September 30, 2005 from $103.6 million for the nine months ended September
30, 2004. This increase was directly attributable to the 2.2% increase in
additional units ($2.3 million) sold in 2005 compared to 2004. The increase in
same store new retail revenues was primarily due to increases at our Toyota
dealerships ($5.7 million), partially offset by a decline at our Lincoln Mercury
dealerships ($3.7 million). The increase ($0.4 million) attributable to the
remaining dealerships occurred during the third quarter and was aided by the
"Employee Pricing Plant" promotion, which aided unit sales. 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 $0.9 million, or 2.5% to $36.2 million for the nine months
ended September 30, 2005 from $35.3 million for the nine months ended September
30, 2004. This increase was primarily due to a 9.3% increase in average selling
price ($3.1 million) in 2005 compared to 2004, partially offset by a 6.2%
decrease in units sold ($2.2 million). Although the used vehicle market has been
challenging, personnel changes in certain dealerships enabled Hometown to show
an increase over the prior year. Contributing to the decrease in units was the
aforementioned "Employee Pricing Plan", which occurred in the third quarter of
2005, which pushed potential buyers of used vehicles toward the purchase of a
new vehicle. The retail used vehicle market continues to be difficult, with most
dealerships experiencing a decrease in units for the third quarter. Certain used
vehicles that have high gas mileage saw their values increase in the third
quarter as the price of gasoline soared, contributing to the increase in average
selling price of used vehicles. Same store wholesale revenues increased $0.9
million, or 8.8% to $10.8 million for the nine months ended September 30, 2005
from $9.9 million for the nine months ended September 30, 2004 due to increased
strength in the wholesale market compared to the prior year. The increase in
average selling price is also a function of the retail sales unit volume. High
quality vehicles that were taken as trade-ins at the time of new vehicle
purchases, were not all sold at retail, necessitating being sold at wholesale,
generating higher prices. Wholesale prices began to weaken toward the latter
part of the third quarter with the increase in used car inventories. The
"Employee Pricing Program" caused a surge in new vehicle sales, that brought in
more used cars as trade-ins.

      Parts and service revenue decreased $0.8 million or 4.3% to $17.3 million
for the nine months ended September 30, 2005 from $18.1 million for the nine
months ended September 30, 2004. On a same store basis, parts and service
revenue increased $0.8 million or 5.1% to $15.8 million for the nine months
ended September 30, 2005 from $15.0 million for the nine months ended September
30, 2004. The increase was primarily due to the Toyota dealerships ($0.6
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 $0.3 million, or 5.2% to $5.7 million
for the nine months ended September 30, 2005 from $6.0 million for the nine
months ended September 30, 2004. On a same store basis, other dealership
revenues increased less than $0.1 million or 0.7% to $5.5 million for the nine
months ended September 30, 2005 from $5.5 million for the nine months ended
September 30, 2004. This is primarily attributable to an increase in extended
service plan revenue in the first quarter of 2005, which has been decreasing
through the remainder of the year, offset by a decrease in finance revenue due
to a decrease in penetration rates.


                                       26
<PAGE>

<TABLE>
<CAPTION>
Gross Profit                                            For the Nine Months Ended
                                                               September 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                      $  7,256          $  7,199         $     57              0.8%
   Retail gross profit - other stores (1)                     477             1,186             (709)           (59.8)%
                                                         --------          --------         --------         --------
      Total new retail gross profit                         7,733             8,385             (652)            (7.8)%

   Fleet gross profit                                          21                 8               13              *
                                                         --------          --------         --------         --------
Total new vehicles gross profit, as reported             $  7,754          $  8,393         $   (639)            (7.6)%
                                                         ========          ========         ========         ========
     Gross profit percentage                                  6.6%              6.4%
                                                         --------          --------

   New retail units - same store                            4,122             4,032               90              2.2%
   New retail units - other stores (1)                        245               717             (472)           (65.8)%
   Fleet units                                                132                65               67              *
                                                         --------          --------         --------         --------
      Total new vehicle units                               4,499             4,814             (315)            (6.5)%
                                                         ========          ========         ========         ========

Used vehicle data:
   Retail gross profit - same store                      $  4,170          $  4,246         $    (76)            (1.8)%
   Retail gross profit - other stores (1)                     125               297             (172)           (57.9)%
                                                         --------          --------         --------         --------
      Total used retail gross profit                        4,295             4,543             (248)            (5.5)%

   Wholesale gross profit - same store                        264               162              102             63.0%
   Wholesale gross profit - other stores (1)                   (6)                7              (13)             *
                                                         --------          --------         --------         --------
      Total wholesale gross profit                            258               169               89             52.7%

Total used vehicle gross profit, as reported             $  4,553          $  4,712         $   (159)            (3.4)%
                                                         ========          ========         ========         ========
Gross profit percentage                                       9.4%              9.5%
                                                         ========          ========

Used retail units - same store                              2,194             2,340             (146)            (6.2)%
Used retail units - other stores (1)                           45               220             (175)           (79.5)%
Used wholesale units - same store                           2,424             2,630             (206)            (7.8)%
Used wholesale units - other stores                            59               137              (78)           (56.9)%
                                                         --------          --------         --------         --------
   Total used units                                         4,722             5,327             (605)           (11.4)%
                                                         ========          ========         ========         ========

Parts and service:
Parts and service gross profit - same store              $  8,563          $  8,103         $    460              5.7%
Parts and service gross profit - other stores (1)             863             1,726             (863)           (50.0)%
                                                         --------          --------         --------         --------
   Total parts and service revenue                       $  9,426          $  9,829         $   (403)            (4.1)%
                                                         ========          ========         ========         ========
     Gross profit percentage                                 54.5%             54.3%
                                                         ========          ========

Other gross profit:
Other gross profit - same store                          $  5,542          $  5,503         $     39              0.7%
Other gross profit - other stores (1)                         119               466             (347)           (74.5)%
                                                         --------          --------         --------         --------
   Total other gross profit, as reported                 $  5,661          $  5,969         $   (308)            (5.2)%
                                                         ========          ========         ========         ========
   Gross profit percentage                                  100.0%            100.0%
                                                         ========          ========

Other gross profit PVR - same store                      $    877          $    864         $     13              1.6%
Other gross profit PVR - other stores (1)                     410               497              (87)           (17.5)%
                                                         --------          --------         --------         --------
   Total other gross profit PVR, as reported             $    857          $    817         $     40              4.9%
                                                         ========          ========         ========         ========
</TABLE>


                                       27
<PAGE>

<TABLE>
<CAPTION>
Gross Profit - (continued)                              For the Nine Months Ended
                                                               September 30,
                                                         --------------------------         Increase            %
(in thousands, except per vehicle data)                    2005              2004          (Decrease)         Change
---------------------------------------                  --------          --------         --------         --------
<S>                                                      <C>               <C>              <C>                   <C>
Total gross profit:
   Same store                                            $ 25,816          $ 25,221         $    595              2.4%
   Other stores (1)                                         1,578             3,682           (2,104)           (57.1)%
                                                         --------          --------         --------         --------
      Total gross profit, as reported                    $ 27,394          $ 28,903         $ (1,509)            (5.2)%
                                                         ========          ========         ========         ========
   Gross profit percentage                                   14.5%             14.2%
                                                         ========          ========
</TABLE>

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

      * - Percentage is 100% or greater.

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

      Total gross profit decreased $1.5 million, or 5.2%, to $27.4 million for
the nine months ended September 30, 2005, from $28.9 million for the nine months
ended September 30, 2004. Same store total gross profit increased $0.6 million,
or 2.4% to $25.8 million for the nine months ended September 30, 2005, from
$25.2 million for the nine months ended September 30, 2004. Same store gross
profit on new retail vehicle sales increased less than $0.1 million, or 0.8%, to
$7.3 million for the nine months ended September 30, 2005, from $7.2 million for
the nine months ended September 30, 2004. The increase in gross profit is
primarily attributable to a 2.2% increase in unit sales partially offset by a
1.5% 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 increase
was due mostly to the Toyota dealerships partially offset by a decline at the
Lincoln Mercury dealerships.

      Same store gross profit on used vehicle retail sales decreased less than
$0.1 million, or 1.8%, to $4.2 million for the nine months ended September 30,
2005, from $4.2 million for the nine months ended September 30, 2004. The
overall decrease is attributable to the 6.2% decrease in units sold partially
offset by a 4.7% increase in average gross profit per unit. The company strives
to maintain a certain gross profit percentage, so the increase in the average
revenue per vehicle sold at retail should translate into a higher gross profit
per unit. In addition, strength in the wholesale market, during the first half
of the year, enabled the company to increase its wholesale gross profit compared
to the prior year.

      Same store parts and service gross profit increased $0.5 million, or 5.7%,
to $8.6 million for the nine months ended September 30, 2005, from $8.1 million
for the nine months ended September 30, 2004 primarily due to the 5.1% increase
parts and service revenues. Similar to revenues, the increase is primarily
attributable to the Toyota dealerships.

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

      S,G&A decreased $1.9 million, or 7.5%, to $23.5 million for the nine
months ended September 30, 2005 from $25.4 million for the nine months ended
September 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 $2.1 million). Additional decreases totaled
approximately $0.3 million, comprising primarily of decreases in rent and
related building costs ($0.1 million), legal and professional fees ($0.1
million) and data processing costs ($0.1 million). The decrease in rent is
primarily due to purchasing a building in September 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, partially offset by legal
costs incurred during the third quarter of 2005 associated with a class action
lawsuit ($0.1 million). See Note 9 to the unaudited consolidated financial
statements. The decrease in data processing costs is primarily due to the
expiration of certain contracts where the ongoing costs for the similar service
have decreased under the terms of the new contracts. Partially offsetting these
are costs associated with the Exchange Agreement of $0.5 million. See Note 10 to
the unaudited consolidated financial statements.


                                       28
<PAGE>

      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 9 to the unaudited consolidated
financial statements.

      Interest Expense

      Interest expense increased $0.2 million, or 8.3%, to $2.6 million for the
nine months ended September 30, 2005, from $2.4 million for the nine months
ended September 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 nine months ended September
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 $0.3 million to $1.2 million for the nine months
ended September 30, 2005, from $0.9 million for the nine months ended September
30, 2004. The increase is primarily 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 4 to the unaudited consolidated
financial statements.

      The basic and diluted income per share for the nine months ended September
30, 2005 is $0.19 and $0.18, respectively. The basic and diluted income per
share for the nine months ended September 30, 2004 was $0.12.

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.


                                       29
<PAGE>

Seasonality

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

Effects of Inflation

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

Liquidity and Capital Resources

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

      Cash and Cash Equivalents

      Total cash and cash equivalents was $5.8 million and $6.1 million at
September 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:

                                                        Nine months ended
      (in thousands)                                     September 30,
      --------------                                   ------------------
                                                          2005       2004
                                                       -------    -------

      Net cash provided by operating activities        $ 5,310    $ 2,016
      Net cash (used in) investing activities             (132)    (1,821)
      Net cash (used in) financing activities           (5,473)      (610)
                                                       -------    -------
      Net (decrease) in cash and cash equivalents      $  (295)   $  (415)
                                                       =======    =======

      For the nine months ended September 30, 2005, net cash provided from
operations of $5.3 million primarily consists of: (i) net income of $1.2 million
plus non-cash items of $1.2 million (totaling $2.4 million), (ii) a decrease in
inventory of $9.3 million less the decrease in floor plan liability - trade of
$5.3 million, (iii) a decrease in accounts receivable of $0.3 million, primarily
due to owning one less dealership; partially offset by (iv) a decrease in
accounts payable and accrued expenses of $0.9 million, primarily due to payment
of litigation settlements and owning one less dealership, (v) an increase in
prepaid expenses and other current assets of $0.1 million, (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. Net cash used in
investing activities of $0.1 million is due to miscellaneous capital
expenditures. Net cash used in financing activities of $5.5 million is due to:
(i) the net change in non-trade floorplan notes payable of $4.1 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 $1.6 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) and exercise of stock options (less than $0.1
million).

      For the nine months ended September 30, 2004, net cash provided from
operations of $2.0 million primarily consists of: (i) net income of $0.9 million
plus non-cash items of $1.3 million (totaling $2.2 million); (ii) an increase in
floor plan liability - trade of $1.2 million less the increase in inventory of
$0.1 million; and (iii) an increase in other long term liabilities and deferred
revenue of $0.2 million, primarily due to an advance from Hometown's extended
service plan provider; partially offset by (iv) an increase in accounts
receivable of $1.2 million due to the increased level of sales that occurred in
September 2004 compared to December 2003, (v) prepaid income taxes of $0.2
million and (vi) a decrease in accounts payable and accrued expenses of $0.1
million. 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 $1.8 million is due to capital
expenditures, primarily the Brattleboro, Vt. building purchased in September
2004 for $1.5 million. Net cash used in financing activities of $0.6 million is
due to: (i) principal payments of long-term debt and capital lease obligations
of $1.7 million, (ii) the net change (decrease) in non-trade floorplan notes
payable of $0.5 million (see operating activities); partially offset by (iii)
proceeds from long-term borrowings of $1.4 million and (iv) exercise of warrants
of $0.3 million. The long-term borrowings were used to acquire the Brattleboro,
Vt. building discussed above.


                                       30
<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 $4.7 million in accounts receivable, net at September 30,
2005 compared to $5.1 million at December 31, 2004. The decrease in receivables
is due to the transfer of the Westwood dealership ($0.5 million). See Note 9 to
the unaudited consolidated financial statements. Partially offsetting this is an
increase due to a slight increase in sales in the month of September 2005
compared to December 2004. The majority of accounts receivables, $2.3 million
and $2.4 million as of September 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 $1.2 million and $1.7 million as of
September 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 $0.2 million due from
Lincoln Mercury related to the Westwood dealership transfer.) The allowance for
doubtful accounts is $0.2 million at September 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 $27.9 million in inventories, net at September 30, 2005
compared to $43.4 million at December 31, 2004. The majority of inventory, $18.2
million and $33.6 million as of September 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
September 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 9 to the unaudited consolidated financial
statements.

      Floor Plan Financing

      See Note 7 to the unaudited consolidated financial statements.


                                       31
<PAGE>

      Long-Term Debt and Capital Lease Obligations

      See Note 8 to the unaudited consolidated financial statements.

      Commitments and Contingencies

      See Note 9 to the unaudited consolidated financial statements.

Forward Looking Statement

      When used in the 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 September 30, 2005 of
$26.3 million, a 1% change in the prime rate would result in a $0.3 million
change to annual floor plan interest expense.

      At September 30, 2005, Hometown invested $4.7 million of excess cash, of
which $0.8 million was invested in money market accounts paying a weighted
average interest rate of 3.23% at September 30, 2005, and $3.9 million was
invested in a Ford Motor Credit Company cash management account paying interest
of 7.75% at September 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.


                                       32
<PAGE>

      At September 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.

                           PART II. OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

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

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

            NONE

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

            NONE

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

            NONE

ITEM 5.     OTHER INFORMATION

            NONE

ITEM 6.     EXHIBITS

            31.1  Chief Executive Officer 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


                                       33
<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.


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


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


                                       34