SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-Q


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

                 For the quarterly period ended March 31, 2004


                       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.)

                              774 Straits Turnpike
                              Watertown, CT 06795
              (Address of principal executive offices) (Zip code)

                                 (860) 945-6900
              (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      3,655,853
      Common Stock, Class B, par value $.001 per share      3,519,252

<PAGE>

                                     INDEX

                                                                            Page
PART I.     FINANCIAL INFORMATION
ITEM 1.     Consolidated Balance Sheets at March 31, 2004 (Unaudited)
              and December 31, 2003 (Audited)                                 3
            Unaudited Consolidated Statements of Operations for the
              three months ended March 31, 2004 and 2003                      4
            Unaudited Consolidated Statements of Stockholders' Equity
              for the three months ended March 31, 2004 and 2003              5
            Unaudited Consolidated Statements of Cash Flows for the
              three months ended March 31, 2004 and 2003                      6
            Notes to Unaudited Consolidated Financial Statements              7

ITEM 2.     Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                      14

ITEM 3.     Quantitative and Qualitative Disclosures About Market Risk       20

ITEM 4.     Controls and Procedures                                          20

PART II.    OTHER INFORMATION

ITEM 1.     Legal Proceedings                                                21

ITEM 6.     Exhibits and Reports on Form 8-K                                 21

SIGNATURES                                                                   22

CERTIFICATIONS                                                               23


                           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.  Hometown's  plans and  objectives  are based,  in part,  on
assumptions involving the continued expansion of business.  Assumptions relating
to the foregoing involve  judgments with respect to, among other things,  future
economic,  competitive and market conditions and future business decisions,  all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of Hometown.  Although Hometown believes that its assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could  prove  inaccurate  and,  therefore,  there can be no  assurance  that the
forward-looking statements included in this Report will prove to be accurate. In
light  of  the  significant   uncertainties   inherent  in  the  forward-looking
statements,  the  inclusion  of such  information  should not be  regarded  as a
representation  by Hometown or any other person that the objectives and plans of
Hometown  will be achieved.  Factors  that could cause actual  results to differ
materially  from those expressed or implied by such  forward-looking  statements
include,  but are not limited to, the factors set forth herein under the 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)


                                                         March 31,  December 31,
                                  ASSETS                   2004        2003
                                                       (Unaudited)
                                                         --------    --------
Current Assets:
   Cash and cash equivalents                            $  5,819     $  5,639
   Accounts receivable, net                                6,725        6,058
   Inventories, net                                       44,531       37,774
   Prepaid expenses and other current assets                 634          625
   Deferred and prepaid income taxes                       1,401        1,349
                                                        --------     --------
     Total current assets                                 59,110       51,445

Property and equipment, net                               12,543       12,678
Other assets                                               1,108        1,141
                                                        --------     --------
     Total assets                                       $ 72,761     $ 65,264
                                                        ========     ========

             LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Floor plan notes payable                             $ 45,201     $ 38,003
   Accounts payable and accrued expenses                   6,291        5,798
   Current maturities of long-term debt and
     capital lease obligations                             1,004          996
   Deferred revenue                                          467          609
                                                        --------     --------
     Total current liabilities                            52,963       45,406

Long-term debt and capital lease obligations              11,835       12,076
Long-term deferred income taxes                              125          125
Other long-term liabilities and deferred revenue             808          729
                                                        --------     --------
     Total liabilities                                    65,731       58,336

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, 3,655,853 shares
   issued and outstanding                                      4            4
   Common stock, Class B, $.001 par value,
   3,760,000 shares authorized, 3,519,252 shares
   issued and outstanding                                      3            3
   Additional paid-in capital                             29,760       29,760
   Accumulated deficit                                   (22,737)     (22,839)
                                                        --------     --------
     Total stockholders' equity                            7,030        6,928
                                                        --------     --------
     Total liabilities and stockholders' equity         $ 72,761     $ 65,264
                                                        ========     ========

              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)

                                                        For the Three Months
                                                           Ended March 31,
                                                    ----------------------------
                                                         2004             2003
                                                    ------------    ------------
Revenues
   New vehicle sales                                $    41,115     $    35,930
   Used vehicle sales                                    16,910          16,394
   Parts and service sales                                5,959           6,216
   Other, net                                             1,894           1,780
                                                    -----------     -----------
      Total revenues                                     65,878          60,320

Cost of sales
   New vehicle                                           38,355          33,560
   Used vehicle                                          15,244          14,818
   Parts and service                                      2,759           2,922
                                                    -----------     -----------
      Total cost of sales                                56,358          51,300
                                                    -----------     -----------
      Gross profit                                        9,520           9,020

Selling, general and administrative expenses              8,621           8,446
                                                    -----------     -----------
      Income from operations                                899             574

   Interest income                                           44               7
   Interest (expense)                                      (801)           (778)
   Other income                                               2              13
   Other (expense)                                           (4)             (3)
                                                    -----------     -----------
Pre-tax income (loss)                                       140            (187)
      Provision (benefit) for income taxes                   38             (66)
                                                    -----------     -----------
Net income (loss)                                   $       102     $      (121)
                                                    ===========     ===========

Earnings (loss) per share, basic                    $      0.01     $     (0.02)
                                                    ===========     ===========

Earnings (loss) per share, diluted                  $      0.01     $     (0.02)
                                                    ===========     ===========

Weighted average shares outstanding, basic            7,175,105       7,175,105
Weighted average shares outstanding, diluted          7,471,259       7,175,105

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

                                       4
<PAGE>

                         HOMETOWN AUTO RETAILERS, INC.
           UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                              Class A               Class B                        Retained
                            Common Stock          Common Stock      Additional     Earnings      Total
                        -------------------   --------------------   Paid-in    (Accumulated  Stockholders'
                         Shares     Amount     Shares      Amount    Capital       Deficit)      Equity
                        --------   --------   --------    --------   --------      --------     --------
<S>                        <C>     <C>           <C>      <C>        <C>           <C>          <C>
Balance at
    December 31, 2002      3,564   $      3      3,611    $      4   $ 29,760      $(25,217)    $  4,550
Conversion of Class B
 Common to Class A
 Common                        1         --         (1)         --         --            --           --
Net loss                      --         --         --          --         --          (121)        (121)
                        --------   --------   --------    --------   --------      --------     --------
Balance at
 March 31, 2003            3,565   $      3      3,610    $      4   $ 29,760      $(25,338)    $  4,429
                        ========   ========   ========    ========   ========      ========     ========

Balance at
 December 31, 2003       3,656   $      4      3,519    $      3   $ 29,760      $(22,839)    $  6,928
Net income                    --         --         --          --         --           102          102
                        --------   --------   --------    --------   --------      --------     --------
Balance at
March 31, 2004             3,656   $      4      3,519    $      3   $ 29,760      $(22,737)    $  7,030
                        ========   ========   ========    ========   ========      ========     ========
</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)

                                                      For the Three Months ended
                                                              March 31,
                                                        --------------------

                                                          2004         2003
                                                        -------      -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                       $   102      $  (121)
Adjustments to reconcile net income (loss) to net cash
   provided by operating activities -
   Depreciation and amortization                            311          349
  (Gain) loss on sale of fixed assets                         4           (3)
   Deferred income taxes                                     --          (43)
   Changes in assets and liabilities:
      Accounts receivable, net                             (667)        (812)
      Inventories, net                                   (6,494)         708
      Prepaid expenses and other current assets              (9)         (75)
      Prepaid taxes                                         (52)         (38)
      Other assets                                           11           16
      Floor plan notes payable                            7,198        2,245
      Accounts payable and accrued expenses                 493          670
      Deferred revenue                                     (142)          (4)
      Other long-term liabilities and deferred revenue       79          (15)
                                                        -------      -------
   Net cash provided by operating activities                834        2,877

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                       (94)        (236)
   Proceeds from sale of property and equipment              --            6
                                                        -------      -------
   Net cash (used in) investing activities                  (94)        (230)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Principal payments of long-term debt and
     capital lease obligations                             (560)        (717)
   Proceeds from long-term borrowings                        --           39
                                                        -------      -------
   Net cash (used in) financing activities                 (560)        (678)

Net increase in cash and cash equivalents                   180        1,969
CASH AND CASH EQUIVALENTS, beginning of period            5,639        3,624
                                                        -------      -------
CASH AND CASH EQUIVALENTS, end of period                $ 5,819      $ 5,593
                                                        =======      =======
 Cash paid for - Interest                               $   770      $   777
 Cash paid for - Taxes                                  $    89      $    21
 Purchases financed by capital lease obligations        $   327      $   345

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

                                       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 9 franchised dealerships,  1 stand-alone
used car facility and 1 stand-alone service facility, located in New Jersey, New
York,  Connecticut,  Massachusetts and Vermont.  Hometown's  dealerships offer 9
American and Asian automotive brands including Chevrolet, Chrysler, Dodge, Ford,
Jeep, Lincoln, Mazda, Mercury and Toyota.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Basis of Presentation

      The  accompanying  consolidated  balance  sheet as of March 31, 2004,  the
consolidated  statements of operations for the three months ended March 31, 2004
and  2003,  the  consolidated   statements  of  stockholders'   equity  and  the
consolidated  statements of cash flows for the three months ended March 31, 2004
and 2003, are  unaudited.  The  consolidated  financial  statements  include all
significant majority-owned  subsidiaries.  All significant intercompany balances
and transactions have been eliminated in consolidation.

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

      Certain  information  and  footnote  disclosures,   normally  included  in
financial  statements  prepared in accordance with generally accepted accounting
principles, were omitted.  Accordingly,  these consolidated financial statements
should be read in conjunction  with the  consolidated  financial  statements and
notes  thereto  for the year ended  December  31,  2003,  which are  included in
Hometown's filing of its annual report on Form 10-K.

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

      Stock-based Compensation

      At March 31, 2004,  Hometown  has one  stock-based  employee  compensation
plan, the 1998 Stock Option Plan (the "Stock Option  Plan").  As allowed by SFAS
148,  Hometown  has  elected  not to  use  one of  the  alternative  methods  of
transition  available  for a voluntary  change to the fair value based method of
accounting for stock-based  employee  compensation.  Hometown  accounts for this
plan under the recognition and measurement  principles of Accounting  Principles
Board ("APB") Opinion No. 25,  "Accounting  for Stock Issued to Employees",  and
related Interpretations.  No stock-based employee compensation cost is reflected
in net income,  as all options  granted under those plans had an exercise  price
equal to or greater than the market value of the underlying  common stock on the
date of grant.  The  following  table  illustrates  the effect on net income and
earnings  per  share if the  company  had  applied  the fair  value  recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation",
to stock-based employee compensation.

                                       7
<PAGE>

                                                Three Months Ended March 31,
                                                     2004          2003
                                                  -------        -------
                                           (in thousands, except per share data)

Net income (loss), as reported                    $  102         $ (121)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (1)                        (7)            (6)
                                                  -------        -------
Pro forma net income (loss)                       $   95         $ (127)
                                                  =======        =======
Earnings (loss) per share:
Basic, as reported                                $ 0.01         $(0.02)
Basic, pro forma                                  $ 0.01         $(0.02)

Diluted, as reported                              $ 0.01         $(0.02)
Diluted, pro forma                                $ 0.01         $(0.02)

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

      New Accounting Pronouncements

      In January 2003, the FASB issued  Interpretation No. 46,  Consolidation of
Variable Interest Entities.  The objective of this  interpretation is to provide
guidance on how to identify a variable  interest  entity  ("VIE") and  determine
when  the  assets,  liabilities,   non-controlling  interests,  and  results  of
operations  of a VIE need to be included in a company's  consolidated  financial
statements.  A company that holds  variable  interests in an entity will need to
consolidate  the entity if the  company's  interest  in the VIE is such that the
company will absorb a majority of the VIE's  expected  losses  and/or  receive a
majority  of  the   entity's   expected   residual   returns,   if  they  occur.
Interpretation   No.  46  also  requires   additional   disclosures  by  primary
beneficiaries and other significant variable interest holders. In December 2003,
the FASB completed  deliberations of proposed  modifications to FIN 46 ("Revised
Interpretations")  resulting in multiple  effective dates based on the nature as
well as the creation date of the VIE.  VIE's created after January 31, 2003, but
prior to January 1, 2004,  may be  accounted  for either  based on the  original
interpretation   or  the   Revised   Interpretations.   However,   the   Revised
Interpretations must be applied no later than Hometown's first quarter of fiscal
2004.  VIE's  created  after  January  1, 2004 must be  accounted  for under the
Revised  Interpretations.  Special Purpose Entities  ("SPE's")  created prior to
February  1,  2003  may  be   accounted   for  under  the  original  or  revised
interpretation's  provisions  no later than  Hometown's  first quarter of fiscal
2004. Non-SPE's created prior to February 1, 2003, should be accounted for under
the revised  interpretation's  provisions no later than Hometown's first quarter
of fiscal 2004.  Hometown has not entered  into any material  arrangements  with
VIE's created after January 31, 2003.  The adoption of this  interpretation  did
not have any effect on Hometown's financial statements.

                                       8
<PAGE>

3.    EARNINGS PER SHARE

      "Basic  earnings  (loss) per share" is  computed  by  dividing  net income
(loss) by the weighted  average  common shares  outstanding.  "Diluted  earnings
(loss) per share" is  computed  by dividing  net income  (loss) by the  weighted
average  common  shares  outstanding  adjusted for the  incremental  dilution of
potentially dilutive securities.  Options and warrants to purchase approximately
1,063,000 and 1,428,000 shares of common stock were outstanding  during 2004 and
2003,  respectively.  Basic and diluted  weighted  average  shares for the three
months ended March 31, 2004 and 2003 are as follows:

                                Three Months Ended March 31,
                                   2004           2003
                                 ---------      ---------

  Basic, Weighted Average
  Shares                         7,175,105      7,175,105
                                 =========      =========

  Common Stock Equivalents         296,154              -
                                 ---------      ---------
  Diluted, Weighted
  Average Shares                 7,471,259      7,175,105
                                 =========      =========

      The common stock equivalents are options whose exercise price is less than
the  average  market  price of the common  shares  during the  period.  In 2004,
options and warrants to purchase  163,000  shares of Hometown  common stock were
excluded from the calculation of diluted income per share due to the options and
warrant  prices being greater than the average market price of the common shares
during the period. In 2003, options and warrants to purchase 1,428,000 shares of
Hometown  common stock were excluded from the  calculation of diluted (loss) per
share due to the effect being anti-dilutive.

      The basic and diluted  income  (loss) per share for the three months ended
March 31, 2004 and 2003 is $0.01 and $(0.02), respectively.

4.    INVENTORIES

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

                                     3/31/04  12/31/03
                                    --------  --------
                                       (in thousands)

      New Vehicles                   $34,967   $28,420
      Used Vehicles                    7,555     7,255
      Parts, accessories and other     2,009     2,099
                                    --------  --------
         Total Inventories           $44,531   $37,774
                                    ========  ========

      The lower of cost or market  reserves  were $0.7 million at March 31, 2004
and December 31, 2003, respectively.

                                       9
<PAGE>

5.    INTANGIBLE ASSETS

      As of March 31, 2004 and December 31, 2003,  Hometown's  intangible assets
consisted of the following:

                                  3/31/04  12/31/03
                                 --------  --------
                                    (in thousands)

      Deferred finance charges   $    267  $    267
      Accumulated amortization       (105)      (98)
      Non-compete agreement           381       381
      Accumulated amortization       (286)     (270)
      Franchise Fee                    10        10
      Accumulated amortization         (1)       (1)
                                 --------  --------
         Net intangible assets   $    266  $    289
                                 ========  ========


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


6.    FLOOR PLAN NOTES PAYABLE

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

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

7.    COMMITMENTS AND CONTINGENCIES

      Litigation

      In May 2001,  Hometown's  wholly-owned  subsidiary  Morristown Auto Sales,
Inc. ("Morristown") assigned the lease for the premises,  where it was operating
its Lincoln Mercury  dealership in Morristown,  New Jersey to Crestmont MM, L.P.
(the "Assignee"). On or about July 12, 2002, Morristown received notice from the
landlord that the Assignee had not paid the required  monthly  rent,  maintained
the premises in accordance with the lease,  nor provided the required  insurance
for the premises.  In September  2002,  Hometown  received notice of a complaint
filed by the landlord against  Hometown,  Morristown and certain former officers
seeking  payment of rent and other  obligations  through  June 2005.  In October
2002, Morristown filed a complaint against the Assignee to recover any potential
damages from the Assignee as provided under the lease  assignment.  The Assignee
has made a claim  against  Hometown for breach of the  assignment  agreement and
misrepresentation  of the use of the subject  property.  The  Assignee  has also
brought a claim  against  Morristown's  president,  Hometown's  Chief  Executive
Officer, for misrepresentation. Total anticipated costs for the remainder of the
lease term,  through June 2005,  is $540,000 for rent plus certain  other costs.
Hometown  believes it has meritorious  defenses to the claim and cross-claim and
intends to vigorously defend this action.  In addition,  the landlord has leased
the  premises  to another  tenant for the period from  January 29, 2003  through
January  29,  2005  for a total  of  $240,000,  thereby  significantly  reducing
Morristown's exposure to a damages judgment for lost rent. The landlord has also
amended its complaint to state a claim directly  against the assignee.  Hometown
does not  believe  that the  eventual  outcome  of the case will have a material
adverse  effect on  Hometown's  consolidated  financial  position  or results of
operations.

                                       10
<PAGE>

      On or about  February  7,  2001,  Salvatore  A.  Vergopia  and  Edward  A.
Vergopia,  former  directors  and  executive  officers  of  Hometown,  and Janet
Vergopia,  the wife of Salvatore A. Vergopia (the "Vergopias") filed a complaint
in the Superior  Court of New Jersey in Bergen  County,  against  Hometown,  its
officers and directors, certain holders of its Class B common stock, and certain
other unnamed persons,  alleging breach of two employment  agreements,  wrongful
termination of employment, breach of a stockholders' agreement and certain other
wrongful conduct, including age discrimination and breach of fiduciary duty. The
Vergopias  are seeking  back pay,  front pay,  compensatory,  consequential  and
punitive  damages,  for  an  unspecified  amount  as  well  as,   reinstatement,
injunctive  and other legal and  equitable  relief.  Salvatore  A.  Vergopia and
Edward A. Vergopia have also  commenced a second action for  defamation  against
Hometown and its Chief Executive  Officer,  which has been consolidated with the
action initially filed.

      Litigation  counsel has been  retained by our  insurers to represent us in
this  action.  A motion  has been  granted  such that only a single  shareholder
remains  as an  individual  shareholder  defendant.  Also,  Hometown  has  filed
counterclaims  to recover  damages  associated  with the  Vergopias  breaches of
certain agreements,  as well as breaches of their fiduciary duties. Discovery is
scheduled to close on May 30, 2004.

      Hometown  and its chief  executive  officer  have also been  served with a
third lawsuit brought by Edward and Salvatore  Vergopia claiming  defamation and
tortious  interference  with contract  arising out of a letter allegedly sent to
one of Hometown's automobile manufacturers. Litigation counsel has been retained
by our  insurers  to  represent  us in this  action as well.  The suit is in its
earliest  stages and  Hometown's  counsel has removed the third  action from New
Jersey state court to Federal court. Hometown presently believes that this third
action by the Vergopias involves damage claims that are similar to those already
made in the two pending  actions in the  Superior  Court of New Jersey in Bergen
County.

      We believe that the Vergopias  commenced  these actions in response to our
dismissal  of both  Salvatore  A.  Vergopia  and Edward A.  Vergopia  from their
officerships  and employment  positions with us. We believe we have  meritorious
defenses and are vigorously  defending these actions.  Hometown does not believe
that the  eventual  outcome of the case will have a material  adverse  effect on
Hometown's consolidated financial position or results of operations.

      Universal Underwriters Group ("Universal"), Hometown's insurance provider,
commenced a lawsuit  against The Chubb Group of Insurance  Companies  ("Chubb"),
Hometown's Director and Officer Liability Insurance provider,  Hometown, certain
officers,  directors and  shareholders  of Hometown and the Vergopias  seeking a
declaration of its coverage  obligations with respect to the suit brought by the
Vergopias  discussed above. The suit has been consolidated with the suit brought
by  the  Vergopias  for  discovery  and  case  management  purposes.   Universal
originally  acknowledged its obligation to defend and indemnify Hometown against
the Vergopias claims and engaged separate counsel to represent  Hometown and its
directors.  Universal  is  now  seeking  to  limit  its  obligations  under  the
comprehensive  insurance policy as well as require Chubb to share in defense and
indemnity   obligations.   Hometown  originally   commenced  an  action  seeking
affirmative  declaration  of its rights  under its policy  with  Universal,  but
allowed this action to be stayed  pending a resolution of the action  brought by
Universal.   Hometown  has  brought   counterclaims   against  Universal  and  a
cross-claim for declaratory judgment against Chubb.  Hometown maintains that the
insurers  are  obligated to defend and  indemnify  on all claims  brought by the
Vergopias.  Hometown's former counsel and assistant  secretary has been added to
the case as a defendant in the action and has made cross-claims against Hometown
demanding  indemnification  for claims made by the Vergopias  against him in the
underlying action. Discovery is ongoing on this matter. Hometown believes it has
meritorious  claims and is vigorously  defending this action and prosecuting its
counterclaims  and  cross-claims.  Hometown  does not believe  that the eventual
outcome  of  the  case  will  have  a  material  adverse  effect  on  Hometown's
consolidated financial position or results of operations.

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

                                       11
<PAGE>

      Guarantees

      One of  Hometown's  dealerships,  prior to fiscal  2000,  had entered into
various  arrangements  whereby Hometown guaranteed or partially guaranteed loans
advanced by financial  institutions to certain customers.  As of March 31, 2004,
one of  these  loans  remains  unpaid.  This is a  vehicle  loan,  granted  by a
financial institution, to a customer of the dealership with below average credit
that has been fully guaranteed by Hometown. The outstanding balance of this loan
at March 31,  2004,  is  approximately  $2,000.  No reserve is recorded for this
loan,  as it is not  currently  delinquent.  Should the loan become  delinquent,
Hometown  would  expect to realize  proceeds  from the sale of the vehicle  upon
repossession  of such vehicle.  The amount of proceeds,  if any, is undetermined
due to not knowing its condition.

      There is also one loan whose lien was not properly perfected totaling less
than $1,000 as of March 31, 2004. Hometown will be required to pay the remaining
loan balance should the customer default on their payments.  Hometown is working
to perfect this lien and has taken steps to prevent  this from  occurring in the
future. No reserve is recorded for this loan, as it is not currently delinquent.
Should the loan become  delinquent,  Hometown  would expect to realize  proceeds
from the sale of the vehicle upon  repossession  of such vehicle.  The amount of
proceeds, if any, is undetermined due to not knowing its condition.

      Hometown will continue to provide a reserve for potential  future  default
losses associated with the guarantees based on available historical information.
The  reserve  continues  to decrease as the loans are paid off and due to no new
loan  guarantees  being  provided by Hometown to  customers  with below  average
credit.

      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.  As of March 31, 2004 the mortgage debt
balance is $4.6 million.  Hometown makes annual lease payments of  approximately
$864,000 to the  landlord.  The annual  mortgage  payments  made by the landlord
total  approximately  $774,000.  The mortgage  matures March 2013. The lease was
recorded as a capital  lease.  The capital  lease  obligation is $4.1 million at
March 31, 2004.

      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.  At March 31, 2004 and December 31, 2003, Hometown has a
reserve of $198,000 and $175,000, respectively. The reserve is based on the last
three months of used vehicle units sold and the average cost of repairs over the
last twelve months.  While Hometown believes its estimated liability for product

                                       12
<PAGE>

warranties  is  adequate  and that the  judgment  applied  is  appropriate,  the
estimated  liability for product  warranties could differ materially from future
actual warranty costs.

<TABLE>
<CAPTION>
                                     Balance At  Additions To              Balance At
                                     Beginning    Costs and                  End of
    Reserve for Policy Work           of Year      Expenses   Deductions     Quarter
-----------------------------------  --------     ----------  ----------    --------
<S>                                  <C>           <C>        <C>           <C>
Three  Months  Ended March 31, 2004  $175,000      $205,000   $(182,000)    $198,000
</TABLE>

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

      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
March 31, 2004 and December 31, 2003,  Hometown had $1,242,000 and $1,225,000 of
related deferred revenue, respectively.  During the three months ended March 31,
2004, these  dealerships  generated  approximately  $132,000 of related warranty
service and  insurance  revenue,  which was  deferred.  During the same  period,
approximately $115,000 of deferred revenue was amortized to Other Revenues, net.
At March 31,  2004 and  December  31,  2003,  Hometown  also had other  deferred
revenue of $31,000 and $112,000, respectively.

      Franchise Agreements

      On March 8, 2004, Toyota Motor Sales,  U.S.A., Inc. notified Hometown that
the current Toyota Dealer Agreement was extended through June 18, 2004. Hometown
is currently  reviewing the proposed new Toyota Dealer Agreement and anticipates
executing  that  agreement  prior to the  expiration  of the current  agreement.
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,  including the
Vergopia's  as  discussed  above  in Note 7,  Commitments  and  Contingencies  -
Litigation  and in Managements  Discussion  and Analysis - Litigation.  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, 2003 had  combined  revenues of $105.1  million and pre-tax
income before  allocation of corporate costs of $2.3 million.  Hometown believes
that it has corrected the alleged net working capital  deficiency for the Toyota
dealerships,  that it has alleviated  the concerns  expressed by Toyota and that
Hometown will enter into a new dealer  agreement with Toyota Motor Sales,  U.S.A
prior to the expiration of the current dealer agreement.

                                       13
<PAGE>

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


      Management's discussion and analysis of financial condition and results of
operations  is based on the  historical  financial  statements  of Hometown Auto
Retailers,  Inc. and contains forward-looking  statements that involve risks and
uncertainties.  Hometown's  actual  results  may  differ  materially  from those
discussed in the  forward-looking  statements as a result of various factors, as
described  under "Risk Factors" as detailed on Hometown's  annual report on Form
10-K for the year ended December 31, 2003.

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 9 franchised dealerships,  1 stand-alone
used car facility 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.

THREE  MONTHS  ENDED MARCH 31, 2004  COMPARED  WITH THREE MONTHS ENDED MARCH 31,
2003.

      UNITS

      The units sold by category for  Hometown for the quarters  ended March 31,
2004 and 2003, are as follows:

                                For the three months
                                   ended March 31,
                                    2004      2003
                                --------  ---------
 New vehicle                       1,496     1,368
 Used vehicle - retail               915       936
 Used vehicle - wholesale            903       612
                                --------  ---------
 Total units sold                  3,314     2,916
                                ========  ========

      Hometown sold a Chrysler/Jeep new car franchise on June 3, 2003. The units
sold by category for Hometown on a same store basis (excluding the Chrysler/Jeep
new car franchise for all periods) for the three months ended March 31, 2004 and
2003, are as follows:

                                For the three months
                                   ended March 31,
                                    2004      2003
                                --------  ---------
 New vehicle                       1,496     1,305
 Used vehicle - retail               915       936
 Used vehicle - wholesale            903       612
                                --------  ---------
 Total units sold                  3,314     2,853
                                ========  ========

                                       14
<PAGE>

      REVENUE

      Total revenue  increased $5.6 million,  or 9.3% to $65.9 million for three
months ended March 31, 2004 from $60.3  million for three months ended March 31,
2003. Hometown sold a Chrysler/Jeep new car franchise on June 3, 2003. On a same
store basis  (excluding  the  Chrysler/Jeep  new car franchise for all periods),
revenues  increased  $7.5 million or 12.8% to $65.9 million for the three months
ended March 31, 2004 from $58.4  million  for the three  months  ended March 31,
2003.  This  increase was  primarily  due to increased  new vehicle  sales ($6.9
million);  increased  sales of used vehicles ($0.5 million) and increased  other
revenues ($0.1  million).  New vehicle sales were helped by the  continuation of
consumer  financing deals, such as zero percent  financing,  combined with heavy
rebating by manufacturers.

      Revenue from the sale of new vehicles increased $5.2 million,  or 14.5% to
$41.1  million for the three months ended March 31, 2004 from $35.9  million for
three  months ended March 31, 2003.  On a same store basis,  revenues  increased
$6.9  million,  or 20.2% to $41.1  million for the three  months ended March 31,
2004 from $34.2 million for the three months ended March 31, 2003.  The increase
is  attributable  to an additional 191 units sold in 2004 compared to 2003 ($5.0
million)  plus a 4.6%  increase in average  selling  price ($1.9  million).  The
increase in average  selling  price is primarily due to an increase in truck and
livery sales in 2004  compared to 2003.  All except for one Hometown  dealership
experienced increases in new vehicle revenues in 2004 compared to 2003. Sales of
all brands  increased  over the prior  year,  Lincoln  Mercury  ($3.4  million),
Chevrolet ($1.6 million),  Ford ($0.9  million),  Chrysler/Jeep  ($0.5 million),
Toyota  ($0.4  million)  and Mazda ($0.1  million).  The increase at the Lincoln
Mercury  dealerships  was  primarily due to an increase of 91 units sold in 2004
compared to 2003 ($3.2  million)  combined  with a 1.3%  increase in the average
selling price ($0.2 million).  The Lincoln Mercury increase includes an increase
in sales of 41 livery  units  ($1.6  million).  The  increase  at the  Chevrolet
dealership was primarily due to an increase of 57 units sold in 2004 compared to
2003 ($1.5 million),  combined with a 2.3% increase in the average selling price
($0.1  million).  The increase at the Ford  dealership  was  primarily due to an
increase  of 36 units sold in 2004  compared to 2003 ($1.0  million),  partially
offset by 2.0%  decrease  in the  average  selling  price  ($0.1  million).  The
Chrysler/Jeep  increase was  primarily  due to an additional 16 units sold ($0.4
million) in 2004 compared to 2003, combined with an 8.5% increase in the average
selling  price  ($0.1  million).  The  increase  at the Toyota  dealerships  was
primarily  due to a 4.7% increase in the average  selling price ($0.7  million),
partially  offset by a decrease of 12 units sold in 2004  compared to 2003 ($0.3
million).  Included in this was a decrease in fleet sales of $0.5 million due to
a decrease of 32 units sold.  Excluding  fleet  sales,  other Toyota new vehicle
sales  increased  $0.9  million  due to the sale of 20  additional  units  ($0.5
million), combined with a 3.0% increase in average selling price ($0.4 million).
The increase at the Mazda  dealership was primarily due to an additional 3 units
sold in 2004 compared to 2003 ($0.1 million).

      Revenue from the sale of used vehicles increased $0.5 million,  or 3.0% to
$16.9  million for the three months ended March 31, 2004 from $16.4  million for
three  months  ended March 31,  2003.  This was due to  increased  used  vehicle
revenues at retail ($0.3  million),  primarily due to a 4.9% increase in average
selling price ($0.6 million),  partially  offset by a decrease of 21 units ($0.3
million);  plus increased used vehicle sales at wholesale ($0.2 million), due to
an increased of 291 units ($1.5 million) partially offset by a 28.5% decrease in
average selling price ($1.3 million).  The decrease in wholesale average selling
price is a function of the vehicles  that were taken as trade-ins at the time of
new vehicle purchases. Although the average selling price on wholesale decreased
in 2004 from 2003, gross profit increased slightly.  See Gross Profit below. The
increased  revenues at retail were  primarily  due to increases at the Chevrolet
($0.7 million) and Lincoln Mercury  dealerships ($0.4 million).  The increase at
Chevrolet was primarily due to the sale of an additional 53 units ($0.7 million)
combined with a 2.5% increase in average selling price (less than $0.1 million).
The increase at the Lincoln  Mercury  dealerships  was due to a 9.5% increase in
average  selling  price ($0.4  million).  Ford  accounted for a decrease of $0.4
million  due to a  decrease  of 20 units  ($0.3  million)  combined  with a 5.0%
decrease  in average  selling  price  ($0.1  million).  The  Toyota  dealerships
accounted for a $0.2 million  decrease in used vehicle sales at retail primarily
due to a  decrease  of 47  units  ($0.6  million)  partially  offset  by a 13.9%
increase in average selling price ($0.4 million).  Chrysler/Jeep accounted for a
decrease of $0.1  million  due to a decrease  of 5 units and a 4.7%  decrease in
average selling price.  Also,  Hometown's used car outlet,  the site of the sold
Chrysler/Jeep franchise, accounted for a decrease of $0.1 million due to a 37.1%
decrease in average selling price ($0.2 million) partially offset by an increase

                                       15
<PAGE>

of 6 units ($0.1 million).  The 37.1 % decrease in average selling price in 2004
from 2003 at this  location was due to the mix of inventory  available for sale.
Although there was a decrease in average  selling  price,  gross profit on these
vehicles  actually  increased in 2004 from 2003. See Gross Profit below.  Toyota
($0.3  million),  Ford ($0.1  million) and  Chevrolet  (less than $0.1  million)
experienced  increases  in  wholesale,  while  there were  decreases  at Lincoln
Mercury  ($0.1  million) and  Hometown's  used car outlet ($0.1  million).  Used
vehicle inventory  available for sale at retail increased during the year due to
the increased  new vehicle sales  bringing in more vehicles as trade-ins at time
of new vehicle  purchase.  This combined with the decrease in used vehicle sales
at retail  caused more  vehicles to be sold at  wholesale to manage used vehicle
inventory levels.

      Parts and service revenue decreased $0.2 million, or 3.2%, to $6.0 million
for the three  months  ended  March 31,  2004,  from $6.2  million for the three
months ended March 31, 2003. As a result of the sale of a Chrysler/Jeep  new car
franchise,  that dealership's  parts and service business was closed.  Excluding
this business for all periods,  parts and service revenue remained consistent at
$6.0  million  for 2004 and  2003.  Increases  at the  Toyota  dealership  ($0.3
million)  were offset by decreases  at Lincoln  Mercury  ($0.2  million) and the
remaining Chrysler/Jeep dealership ($0.1 million).

      Other dealership  revenues increased $0.1 million, or 5.6% to $1.9 million
for the three months ended March 31, 2004 from $1.8 million for the three months
ended March 31, 2003.  On a same store basis,  the increase in other  dealership
revenues  remained at $0.1 million.  This increase is primarily  attributable to
increases  in other  dealership  revenues  of new  vehicles;  primarily  finance
income.

      GROSS PROFIT

      Total gross profit  increased  $0.5 million,  or 5.6%, to $9.5 million for
the three months  ended March 31,  2004,  from $9.0 million for the three months
ended March 31, 2003. Hometown sold a Chrysler/Jeep new car franchise on June 3,
2003. On a same store basis (excluding the  Chrysler/Jeep  new car franchise for
all periods),  gross profit increased $0.7 million,  or 8.0% to $9.5 million for
the three  months  ended March 31, 2004 from $8.8  million for the three  months
ended March 31, 2003.  This  increase was  primarily  attributable  to increased
gross profit on: (i) new vehicle sales ($0.5  million),  (ii) used vehicle sales
(0.1 million) and (iii) other dealership  revenues ($0.1 million).  Gross profit
percentage  for  Hometown  was 14.5% in 2004 and 15.0% in 2003.  Adjusting  both
periods for Toyota fleet sales,  gross profit  percentage  was 14.5% in 2004 and
15.1% in 2003.

      Gross profit on the sale of new vehicles increased $0.4 million, or 16.7%,
to $2.8 million for the three months ended March 31, 2004, from $2.4 million for
the three months ended March 31, 2003. On a same store basis gross profit on the
sale of new vehicles  increased $0.5 million,  or 21.7%, to $2.8 million for the
three months ended March 31, 2004,  from $2.3 million for the three months ended
March 31, 2003.  The increase in gross  profit is primarily  attributable  to an
increase of 191 units ($0.3  million)  combined  with a 6.4% increase in average
gross profit per vehicle ($0.2  million).  The unit increase is net of a 32 unit
decrease  attributable to Toyota fleet sales,  which had a minimal effect on the
increase in gross profit.  All brands experienced an increase in gross profit on
the sale of new vehicles in the 2004 period compared to 2003 as follows:  Toyota
- $0.1 million,  Chrysler/Jeep  - $0.1 million,  Lincoln Mercury - $0.1 million,
Chevrolet - $0.1 million,  Mazda and Ford - $0.1 million together.  Gross profit
percentage  for 2004 was 6.7% compared to 6.6% for 2003.  Adjusting both periods
for Toyota fleet sales, which generate low margins,  gross profit percentage for
new vehicles was 6.7% in 2004 and 2003.

      Gross profit on the sale of used vehicles increased $0.1 million, or 6.2%,
to $1.7 million for the three months ended March 31, 2004, from $1.6 million for
the three months ended March 31, 2003.  This increase is primarily due to a 7.4%
increase in average gross profit per vehicle ($0.1 million)  partially offset by
a decrease of 21 units (less than $0.1 million). Increases totaling $0.2 million
at Chevrolet,  Lincoln Mercury and Hometown's  used car outlet,  the site of the
sold  Chrysler/Jeep  franchise,  were partially offset by decreases at the Ford,
Toyota and Mazda  dealerships  ($0.1 million).  Gross profit on the sale of used
vehicles at  wholesale is minimal and was up slightly for the three months ended
March 31, 2004 compared to the 2003 period.  Gross profit percentage on the sale
of used vehicles was 9.9% in 2004 compared to 9.6% in 2003.

                                       16
<PAGE>

      Parts and service gross profit  decreased  $0.1 million,  or 3.0%, to $3.2
million for the three  months  ended March 31,  2004,  from $3.3 million for the
three months ended March 31,  2003.  As a result of the sale of a  Chrysler/Jeep
new car  franchise,  that  dealership's  parts and service  business was closed.
Excluding this business for all periods, parts and service gross profit remained
consistent  at $3.2  million for the three months ended March 31, 2004 and 2003.
Gross profit percentage was 53.7% in 2004 compared to 52.9% in 2003.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

      Selling,  general and administrative  expenses increased $0.2 million,  or
2.4%,  to $8.6  million  for the three  months  ended  March 31,  2004 from $8.4
million for the three  months  ended March 31,  2003.  The increase is primarily
attributable to an increase in advertising.

      INTEREST EXPENSE

      Interest  expense  stayed  consistent at $0.8 million for the three months
ended March 31, 2004 and 2003.

      PROVISION (BENEFIT) FOR INCOME TAX

      The  effective  income tax rate was 27.1% in the  quarter  ended March 31,
2004 and 35.3% in the same  period  of 2003.  The rates  were  based on  current
forecasts of income before taxes, and current forecasts of permanent differences
between tax and book  income.  The 2004 rate  reflects  the  expected  full year
effective  tax  rate  adjusted  for  a  reduction  in  the  valuation  allowance
associated  with the 2004  amortization  of goodwill for tax purposes.  Deferred
taxes, including valuation allowances, will be reviewed throughout fiscal 2004.

      NET INCOME (LOSS)

      Net income  increased  $0.2  million to $0.1  million for the three months
ended March 31, 2004 from a loss of $(0.1)  million for the three  months  ended
March 31, 2003. See above for explanation of the improvement.

      EARNINGS PER SHARE, BASIC AND DILUTED AND WEIGHTED AVERAGE SHARES

      "Basic  earnings  (loss) per share" is  computed  by  dividing  net income
(loss) by the weighted  average  common shares  outstanding.  "Diluted  earnings
(loss) per share" is  computed  by dividing  net income  (loss) by the  weighted
average  common  shares  outstanding  adjusted for the  incremental  dilution of
potentially dilutive securities.  Options and warrants to purchase approximately
1,063,000 and 1,428,000  shares of common stock were outstanding as of March 31,
2004 and 2003,  respectively.  The basic  weighted  average shares are 7,175,105
shares for both the 2004 and 2003 periods.  The diluted  weighted average shares
are 7,471,259 and 7,175,105 for the 2004 and 2003 periods, respectively. Options
whose  exercise price is less than the average market price of the common shares
during  the period are  included  in  weighted  average  shares as common  stock
equivalents.  Periods that do not include common stock equivalents  exclude them
due to the options and warrant  prices  being  greater  than the average  market
price  of the  common  shares  during  the  period  or due to the  effect  being
anti-dilutive. See Note 3 to the consolidated financial statements.

      The basic and diluted  income  (loss) per share for the three months ended
March 31, 2004 and 2003 is $0.01 and $(0.02), respectively.

CYCLICALITY

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

                                       17
<PAGE>

services, (ii) variable cost salary structure,  (iii) geographic regional focus,
and (iv) product diversity.

SEASONALITY

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

EFFECTS OF INFLATION

      Due to the relatively low levels of inflation  experienced in the 2004 and
2003  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 $5.6 million at March
31, 2004 and December 31, 2003, respectively.

      Cash Flow from Operations

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

                                                  Three months ended
                                                       March 31,

                                                    2004        2003
                                                  -------    -------
                                                    (in thousands)

      Net cash provided by operating              $  834     $2,877
      activities
      Net cash (used in) investing activities        (94)      (230)
      Net cash (used in) financing activities       (560)      (678)
                                                  -------    -------
      Net increase in cash and cash equivalents   $  180     $1,969
                                                  =======    =======

      For the  three  months  ended  March  31,  2004,  net cash  provided  from
operations of $0.8 million  primarily  consists of: (i) net income plus non-cash
items of $0.4  million;  (ii) the increase in floor plan  liability in excess of
the increase in inventory of $0.7 million; (iii) an increase in accounts payable
and  accrued  expenses  of $0.5  million;  partially  offset by the  increase in
accounts  receivable of $0.7 million.  Net cash used in investing  activities of
$0.1  million  is due to  capital  expenditures.  Net  cash  used  in  financing
activities  of $0.6 million is due to principal  payments of long-term  debt and
capital lease obligations.

      For the  three  months  ended  March  31,  2003,  net cash  provided  from
operations  of $2.9 million  primarily  consists of: (i) net loss plus  non-cash
items  of $0.2  million;  (ii) the  increase  in floor  plan  liability  of $2.2
million;  (iii) the decrease in inventory of $0.7 million;  and (iv) an increase
in accounts  payable and accrued  expenses of $0.7 million;  partially offset by
increased  accounts  receivable  of $0.8  million.  Net cash  used in  investing
activities  of $0.2 million is primarily due to capital  expenditures.  Net cash

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used in financing  activities  of $0.7  million is due to principal  payments of
long-term debt and capital lease obligations.

      Capital Expenditures

      Capital  expenditures  for fiscal 2004 are  expected  to be $2.2  million,
consisting  primarily of the  purchase of a building,  equipment  and  leasehold
improvements. The building is a Hometown dealership,  currently leased, that has
a purchase option.  The purchase is subject to obtaining  financing and board of
director's approval. The monthly financing payments are expected to be less than
the lease payments.

      Receivables

      Hometown  had $6.7  million  in  accounts  receivable  at March  31,  2004
compared to $6.1 million at December 31, 2003.  The increase in  receivables  is
due to the increase in sales that takes place in March compared to December. The
majority of those  receivables,  $3.3  million and $3.1  million as of March 31,
2004 and December 31, 2003,  respectively,  are due from finance  companies that
provide or secure  financing for customer  purchases,  and  primarily  represent
contracts-in-transit.  These amounts are typically received within seven days of
the  transaction.  The allowance for doubtful  accounts is $0.3 million at March
31, 2004 and December 31, 2003.

      Inventories

      Hometown had $44.5 million in inventories,  net at March 31, 2004 compared
to $37.8 million at December 31, 2003. The majority of inventory,  $35.0 million
and $28.4 million as of March 31, 2004 and December 31, 2003,  respectively,  is
new vehicle inventory.  New, used and demonstrator  vehicle values are stated at
the lower of cost or market,  determined  on a specific  unit  basis.  Parts and
accessories are stated at the lower of cost (determined on a first-in, first-out
basis)  or  market.  Hometown  assesses  the  lower  of cost or  market  reserve
requirement for vehicles, on an individual unit basis, taking into consideration
historical  loss rates,  the age and  composition  of the  inventory and current
market  conditions.  The lower of cost or market  reserves  were $0.7 million at
March 31, 2004 and December 31, 2003.

      Floor Plan Financing

      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.

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

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<PAGE>

statements  should,  therefore,  be  considered  in light of  various  important
factors, including those set forth herein and others set forth from time to time
in Hometown's reports and registration  statements filed with the Securities and
Exchange  Commission  (the  "Commission").  Hometown  disclaims  any  intent  or
obligation to update such forward-looking statements.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      We are  exposed  to market  risk from  changes  in  interest  rates on our
amounts  outstanding  under our floor plan  financing  arrangement,  which bears
interest at variable rates based on the prime or LIBOR borrowing rates. Based on
floor plan amounts  outstanding at March 31, 2004 of $45.2 million,  a 1% change
in the prime rate would  result in a $0.5  million  change to annual  floor plan
interest expense.

      At March 31, 2004, Hometown invested $2.9 million of excess cash, of which
$0.5  million was invested in money market  accounts  paying a weighted  average
interest  rate of 0.83% at March 31,  2004,  and $2.3  million was invested in a
Ford Motor Credit Company cash  management  account paying  interest of 5.00% at
March 31, 2004. The cash  management  account  interest rate is tied to the rate
charged on Hometown's floor plan financing arrangement.


ITEM 4.  CONTROLS AND PROCEDURES

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

      At March 31, 2004, management,  with the participation of the CEO and CFO,
evaluated  the  effectiveness  of the design  and  operation  of our  disclosure
controls  and  procedures.  Based  upon  that  evaluation  and  subject  to  the
foregoing,  our  management,  including  the CEO and  CFO,  concluded  that  our
disclosure   controls  and  procedures   were  effective  to  accomplish   their
objectives.

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

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<PAGE>

                           PART II. OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

See Note 7 - Commitments  and  Contingencies  - Litigation,  to the notes to the
unaudited consolidated financial statements.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      a.    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

      b.    Reports on Form 8-K

      On March 25,  2004,  Hometown  filed a report on Form 8-K with  respect to
      Items 7 and 12 on such report,  related to the  Company's  announcing  its
      2003 annual results.

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<PAGE>

                                   SIGNATURES

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

                                         Hometown Auto Retailers, Inc.


May 13, 2004                             By: /s/ Corey E.  Shaker
------------------------                 --------------------------------
Date                                     Corey E. Shaker
                                         President and Chief Executive Officer


May 13, 2004                             By: /s/ Charles F. Schwartz
------------------------                 --------------------------------
Date                                     Charles F. Schwartz
                                         Chief Financial Officer

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