UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


                        FOR ANNUAL AND TRANSITION REPORT
                    PURSUANT TO SECTIONS 13 OR 15 (D) OF THE
                       SECURITIES AND EXCHANGE ACT OF 1934

                                   (MARK ONE)
  |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                   For the fiscal year ended December 31, 2004

                                       OR

     |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  For the transition period from _____ to _____

                        Commission file number: 000-24669

                          HOMETOWN AUTO RETAILERS, INC.
             (Exact Name of Registrant as Specified in Its Charter)

           DELAWARE                                             06-1501703
(State or Other Jurisdiction of                               (IRS Employer
Incorporation or Organization)                             Identification No.)

                             1309 SOUTH MAIN STREET
                               WATERBURY, CT 06706
                    (Address of Principal Executive Offices)

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

Securities registered pursuant To Section 12(B) of the Act: None

Securities registered pursuant to Section 12(G) of the Act:

                 CLASS A COMMON STOCK, PAR VALUE $.001 PER SHARE
                                (Title of class)

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

      Indicate by check mark whether the registrant is an accelerated  filer (as
defined in Rule 12b-2 of the Act). YES |_| NO |X|

      The aggregate market value of the voting stock held by  non-affiliates  of
the registrant as of June 30, 2004 was approximately $3,108,000.  Non-affiliates
are  defined as  holders  of Class A Common  Stock that do not also hold Class B
Common Stock. Hometown used closing selling price in the calculation.

      The number of shares  outstanding of the registrant's  Class A and Class B
Common Stock, $.001 par value, as of March 22, 2005 was 6,449,389 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE

<PAGE>

                          HOMETOWN AUTO RETAILERS, INC.
                             FORM 10-K ANNUAL REPORT
                                TABLE OF CONTENTS
                                                                      Page
                                                                      ----
PART I
   Item 1.   Business............................................       3
   Item 2.   Properties..........................................      17
   Item 3.   Legal Proceedings...................................      19
   Item 4.   Submission of Matters to a Vote of Security Holders.      20

PART II
   Item 5.   Market for Registrant's Common Equity and Related
               Stockholder Matters...............................      21
   Item 6.   Selected Financial Data.............................      22
   Item 7.   Management's Discussion and Analysis of Financial
               Condition and Results of Operations...............      23
   Item 7A.  Quantitative and Qualitative Disclosures About
               Market Risk.......................................      37
   Item 8.   Financial Statements and Supplementary Data.........      37
   Item 9.   Change in and Disagreements With Accountants on
               Accounting and Financial Disclosure...............      37
   Item 9A.  Controls and Procedures ............................      37
   Item 9B.  Other Information ..................................      37

PART III
   Item 10.  Directors and Executive Officers of the Registrant..      38
   Item 11.  Executive Compensation..............................      41
   Item 12.  Security Ownership of Certain Beneficial Owners
               and Management....................................      45
   Item 13.  Certain Relationships and Related Transactions......      49
   Item 14.  Principal Accountant Fees and Services..............      50

PART IV
   Item 15.  Exhibits and Financial Statement Schedules..........      51

                      FORWARD LOOKING STATEMENT INFORMATION

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


                                       2
<PAGE>

                                     PART I

ITEM 1. BUSINESS

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

GENERAL

      Hometown  sells new and used cars and light trucks,  provides  maintenance
and repair services,  sells  replacement  parts and provides related  financing,
insurance and service contracts through 9 franchised  dealerships located in New
Jersey, New York, Connecticut, Massachusetts and Vermont. Hometown's dealerships
offer 9 American and Asian automotive  brands,  including  Chevrolet,  Chrysler,
Dodge, Ford, Jeep, Lincoln,  Mazda, Mercury, and Toyota. Hometown also is active
in a "niche" area of the  automotive  market,  the sale of Lincoln town cars and
limousines to livery car and livery fleet operators.

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

OPERATING STRATEGY

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

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

                                       3
<PAGE>

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

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

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

      o     Focus on Higher Margin Operations

            o     Parts and Service.  Hometown's  dealerships emphasize sales of
                  parts and service, which typically have a higher profit margin
                  than  vehicle  sales.  As  part  of  their  emphasis  Hometown
                  operates    "Lincoln   Mercury    Autocare"   a   freestanding
                  neighborhood  service  center  for the  maintenance  and light
                  repair of cars and  trucks,  which  operates  during  extended
                  hours, provides comfortable customer waiting areas and quickly
                  services  vehicles  without  prior  appointment.  It is  also,
                  through its  Westwood  subsidiary,  a major  seller of Lincoln
                  Town  Cars and  limousines  to  livery  car and  livery  fleet
                  operators.   These   sales   tend  to   generate   significant
                  maintenance  and repair  business since the primary concern of
                  livery  operators is keeping their cars in use and on the road
                  for a maximum number of hours per day.

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

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


                                       4
<PAGE>


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

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

DEALERSHIP OPERATIONS

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

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

                                       5
<PAGE>


      The  following  table  sets forth for 2004 and 2003,  certain  information
relating to the brands of new vehicles sold at retail by Hometown:

                              FOR THE YEARS ENDED DECEMBER 31,
                              --------------------------------
                               2004                     2003
                               -----                    ----
BRANDS                NUMBER       PERCENTAGE    NUMBER      PERCENTAGE
------                ------       ----------    ------      ----------

TOYOTA ........        2,851         45.9%        3,227         46.7%
LINCOLN/MERCURY        1,373         22.1%        1,398         20.2%
CHEVROLET .....          759         12.2%          772         11.2%
FORD ..........          601          9.7%          703         10.2%
MAZDA .........          351          5.6%          393          5.7%
DODGE .........          105          1.7%          108          1.6%
JEEP ..........           97          1.6%          167          2.4%
CHRYSLER ......           71          1.1%           89          1.3%
OLDSMOBILE ....            7          0.1%           50          0.7%
OTHER .........            0          0.0%            3          0.0%
                       -----        -----         -----        -----
Total .........        6,215        100.0%        6,910        100.0%
                       =====        =====         =====        =====

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

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

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

      The  following  table shows  actual  vehicle  sales by Hometown  from 2000
through 2004.

<TABLE>
<CAPTION>
                                             NUMBER OF USED AND NEW VEHICLES SOLD
                                             ------------------------------------
                                  2004          2003          2002          2001          2000
                                 ------        ------        ------        ------        ------
<S>                               <C>           <C>           <C>           <C>           <C>
Used Vehicles - Retail ..         3,329         3,683         4,128         4,874         4,549
Used Vehicles - Wholesale         3,576         3,144         2,857         3,105         3,208
New Vehicles ............         6,215         6,910         6,432         6,230         6,731
                                 ------        ------        ------        ------        ------
        Total Sales .....        13,120        13,737        13,417        14,209        14,488
</TABLE>

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


                                       6
<PAGE>


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

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

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

      Parts and Service.  Hometown  regards service and repair  activities as an
integral  part  of its  overall  approach  to  customer  service,  providing  an
opportunity  to foster  ongoing  relationships  with its  customers  and  deepen
customer loyalty.  Hometown provides parts and service at each of its franchised
dealerships  for the vehicle brands sold by these  dealerships.  Maintenance and
repair services are provided at 9 dealership  locations,  one factory authorized
neighborhood  service center and one collision repair center (included in one of
the 9 dealerships).

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

      The parts and service business is less cyclical than new vehicle sales and
provides  an  important  recurring  revenue  stream to  Hometown's  dealerships.
Hometown uses systems that track its customers'  maintenance  records and notify
owners of vehicles  purchased at the dealerships when their vehicles are due for


                                       7
<PAGE>


periodic services.  Hometown believes that this practice  encourages  preventive
maintenance rather than post-breakdown repairs.

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

      Finance,   Insurance  and  Other  Revenue.  Hometown  dealerships  arrange
financing for their customers' vehicle purchases, sell vehicle service contracts
and arrange  selected types of credit insurance in connection with the financing
of vehicle sales. The dealerships place heavy emphasis on F&I and offer advanced
F&I training to their F&I managers. During 2004, Hometown arranged financing for
approximately  62% of new and used  vehicles  sold at retail  to its  customers.
Typically,  the  dealerships  forward  proposed  financing  contracts to finance
companies  owned and  operated by the  Manufacturers  or to selected  commercial
banks or other financing parties. The dealerships receive a finance fee from the
lender for arranging  the financing and may be assessed a charge-back  against a
portion of the finance fee if the contract is terminated  prior to its scheduled
maturity for any reason,  including early repayment or default.  The time period
whereby  Hometown is subject to  charge-backs  is generally  from 90 days to 180
days. For certain other contracts  Hometown is subject to  charge-backs  for the
life of the  loan.  Hometown  pays for this in the  form of a  reduction  of the
finance fee.

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

      Hometown  also offers three types of insurance  to  customers:  (i) credit
life insurance pays off the remaining balance of the vehicle loan upon the death
of the insured,  (ii)  disability  insurance  makes the monthly loan payments on
behalf of the  insured  during a period of  disability  and (iii) gap  insurance
ensures that the loan is paid in full if the vehicle becomes totally  inoperable
due to an accident.  Hometown's  dealerships  typically  receive one-half of the
premiums as a commission for selling these products.  Insurance revenues for the
year ended December 31, 2004 were less than 2% of total  Finance,  Insurance and
Other Revenues.

COMPANY GUARANTEES

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

      In connection with the acquisition in 1999 of real estate used by Baystate
Lincoln Mercury, Hometown guaranteed the mortgage debt of Rellum Realty Company.
The 1999 guaranty was given in substitution for a February 1998 guaranty of that
debt by the Muller Group,  a subsidiary of Hometown.  In the event of default by
Rellum Realty Company,  Hometown is required to make the mortgage payments,  but
does not take  ownership  of the  property.  Hometown  recorded  the  lease as a
capital  lease.  As of  December  31,  2004 the  mortgage  debt  balance is $4.3
million, which equals 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. See
Notes 7 and 8 to the consolidated financial statements.


                                       8
<PAGE>


COMPANY WARRANTIES

      Hometown's   new  vehicle  sales  and  certain  used  vehicle  sales  have
manufacturer  warranties that specify  coverage and period.  In these instances,
Hometown is reimbursed by the  manufacturer for the cost of parts and service on
the vehicle  covered by these  warranties,  as  specified  by the  manufacturer.
Hometown also provides a limited  warranty on used vehicles sold at retail.  The
warranty  period is as  agreed  upon by the  customer  and may be  subject  to a
minimum period as mandated by the state.  The typical  warranty period ranges up
to three months.  Hometown also sells parts and service.  Manufacturer parts are
covered by limited  warranties,  as specified by the manufacturer.  Service also
has a limited  warranty;  whereby the part and  certain  labor costs are covered
under the limited  manufacturer  warranty.  Also,  certain Hometown  dealerships
provide a three, four 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,  four 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 December 31, 2004 and 2003, Hometown has a reserve of
$208,000  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
warranties  is  adequate  and that the  judgment  applied  is  appropriate,  the
estimated  liability for product  warranties could differ materially from future
actual warranty costs.

      Other  revenues  generated by sales of extended  service  plans,  finance,
insurance  and other do not have any Hometown  warranties  attached to the sale,
except for certain sales in Connecticut  dealerships  discussed in "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Finance, Insurance and Service Contract Income Recognition".

SEASONALITY

      See  "Management's  Discussion  and  Analysis of Financial  Condition  and
Results of Operations."

FRANCHISE AGREEMENTS

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


                                       9
<PAGE>


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

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

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

      Toyota Motor Sales,  U.S.A.,  Inc. has extended  Hometown's current Toyota
Dealer Agreement through April 18, 2005.  Previously on March 13, 2003, Hometown
was notified by Toyota Motor Sales,  U.S.A.,  that Hometown must correct certain
operational  deficiencies or make  substantial  progress toward  rectifying such
deficiencies.  Toyota  had  previously  expressed  concerns  that the  financial
resources  of the Toyota  dealerships  were being used to finance  the cash flow
deficits of other  Hometown  dealerships  and that because of this the financial
health of the Toyota  dealerships were  detrimentally  affected by a net working
capital deficiency. Toyota requested and Hometown provided a written action plan
and consolidated  financial  forecast.  Toyota also expressed concerns about the
impact of Ford Motor Credit's  financing  terms upon the Toyota  dealerships and
the existing litigation, which has now been settled, including the Vergopia's as
discussed  in  Item 3. - Legal  Proceedings  and in Note 14 to the  consolidated
financial  statements.  Hometown  developed and implemented plans to correct the
operational deficiencies that would bring Hometown into compliance. Hometown has
obtained  written  confirmations  from Ford Motor Credit in response to Toyota's
requests  for  information  relating to  financing  arrangements.  In  addition,
Hometown has improved net working  capital  through the sale of a  Chrysler/Jeep
sales and  service  franchise  in the  second  quarter of 2003 and  advances  on
warranty income from Hometown's Extended Service Plan vendor.  Hometown has been
in regular  contact with Toyota to review the efforts of Hometown to resolve the
deficiencies  alleged by Toyota.  The two Toyota dealerships for the fiscal year
ended  December  31, 2004 had  combined  revenues  of $98.1  million and pre-tax
income before  allocation of corporate costs of $2.2 million.  Hometown believes


                                       10
<PAGE>


that it has corrected the alleged net working capital  deficiency for the Toyota
dealerships,  that it has alleviated  the concerns  expressed by Toyota and that
Hometown will enter into a new dealer agreement with Toyota Motor Sales, U.S.A.;
however,  Toyota has  reserved  the right to  terminate  the  Toyota  Dealership
Agreements  if   sufficient   progress  is  not  made  to  correct  the  alleged
deficiencies.  Should  Hometown  be  notified  by  Toyota  that  they  intend to
terminate the Toyota  Dealership  Agreements,  Hometown believes it would have a
reasonable amount of time to cure the defaults.

COMPETITION

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

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

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

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

GOVERNMENTAL REGULATIONS

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

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


                                       11
<PAGE>


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

ENVIRONMENTAL MATTERS

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

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

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


                                       12
<PAGE>


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

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

EMPLOYEES

      As  of  December  31,  2004,   Hometown   employed  371  people,  of  whom
approximately  56 were  employed in  managerial  positions,  80 were employed in
non-managerial  sales positions,  183 were employed in non-managerial  parts and
service positions and 52 were employed in administrative support positions.

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

               CERTAIN FACTORS THAT MAY AFFECT GROWTH AND PROFITS

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

A DECREASE  IN CONSUMER  DEMAND FOR OUR NEW VEHICLE  LINES OR THE FAILURE OF ITS
MANUFACTURER COULD ADVERSELY AFFECT THE RESULTS OF OUR OPERATIONS.

      Our business is significantly dependent upon the sale of new vehicles from
Toyota Motors, Ford Motors and Chevrolet.  For the year ended December 31, 2004,
Toyota Motor, Ford Motor and Chevrolet  accounted for 45.9%,  31.8% and 12.2% of
our new vehicle sales, respectively.  New vehicle sales generate the majority of
our gross revenue and lead to sales of higher-margin  products and services such
as used vehicle sales, finance and insurance products and repair and maintenance
services.  In addition,  the success of each of our franchises is also dependent
to a great extent on the success of the respective  manufacturer,  including its
financial  condition,  marketing,  vehicle demand,  production  capabilities and
management.  If one or more of these  manufacturers  were to suffer  from  labor
strikes,  negative  publicity,  including safety recalls of a particular vehicle
model,  or a decrease  in  consumer  demand  for its  products,  our  results of
operations could be materially and adversely affected.


                                       13
<PAGE>


THE FAILURE TO MEET  MANUFACTURERS'  CUSTOMER  SATISFACTION  REQUIREMENTS  COULD
LIMIT  OUR  ABILITY  TO  ACQUIRE  ADDITIONAL   DEALERSHIPS  AND  PARTICIPATE  IN
MANUFACTURERS' INCENTIVE PROGRAMS.

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

MANUFACTURERS' CONTROL OVER DEALERSHIPS

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

      Toyota Motor Sales,  U.S.A.,  Inc. has extended  Hometown's current Toyota
Dealer Agreement through April 18, 2005.  Previously on March 13, 2003, Hometown
was notified by Toyota Motor Sales,  U.S.A.,  that Hometown must correct certain
operational  deficiencies or make  substantial  progress toward  rectifying such
deficiencies.  Toyota  had  previously  expressed  concerns  that the  financial
resources  of the Toyota  dealerships  were being used to finance  the cash flow
deficits of other  Hometown  dealerships  and that because of this the financial
health of the Toyota  dealerships were  detrimentally  affected by a net working
capital deficiency. Toyota requested and Hometown provided a written action plan
and consolidated  financial  forecast.  Toyota also expressed concerns about the
impact of Ford Motor Credit's  financing  terms upon the Toyota  dealerships and
the existing litigation, which has now been settled, including the Vergopia's as
discussed  in  Item 3. - Legal  Proceedings  and in Note 14 to the  consolidated
financial  statements.  Hometown  developed and implemented plans to correct the
operational deficiencies that would bring Hometown into compliance. Hometown has
obtained  written  confirmations  from Ford Motor Credit in response to Toyota's
requests  for  information  relating to  financing  arrangements.  In  addition,
Hometown has improved net working  capital  through the sale of a  Chrysler/Jeep
sales and  service  franchise  in the  second  quarter of 2003 and  advances  on
warranty income from Hometown's Extended Service Plan vendor.  Hometown has been
in regular  contact with Toyota to review the efforts of Hometown to resolve the
deficiencies  alleged by Toyota.  The two Toyota dealerships for the fiscal year
ended  December  31, 2004 had  combined  revenues  of $98.1  million and pre-tax
income before  allocation of corporate costs of $2.2 million.  Hometown believes
that it has corrected the alleged net working capital  deficiency for the Toyota
dealerships,  that it has alleviated  the concerns  expressed by Toyota and that
Hometown will enter into a new dealer agreement with Toyota Motor Sales, U.S.A.;
however,  Toyota has  reserved  the right to  terminate  the  Toyota  Dealership
Agreements  if   sufficient   progress  is  not  made  to  correct  the  alleged
deficiencies.  Should  Hometown  be  notified  by  Toyota  that  they  intend to
terminate the Toyota  Dealership  Agreements,  Hometown believes it would have a
reasonable amount of time to cure the defaults.

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


                                       14
<PAGE>


IF AUTOMOBILE MANUFACTURERS  DISCONTINUE INCENTIVE PROGRAMS, OUR SALES VOLUME OR
PROFIT MARGIN COULD BE MATERIALLY AND ADVERSELY AFFECTED.

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

      o     customer rebates on new vehicles;

      o     dealer incentives on new vehicles;

      o     special financing or leasing terms;

      o     warranties on new and used vehicles; and

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

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

WE MAY NOT BE ABLE TO RETAIN  KEY  EXISTING  EMPLOYEES  OR  ATTRACT  AND  RETAIN
QUALIFIED EMPLOYEES.

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

FUTURE LOSSES MAY THREATEN THE VIABILITY OF OUR BUSINESS.

      Hometown  had net income of $3.7  million for the year ended  December 31,
2004  compared to net income of $2.4 million and a net loss of $22.9 million for
the years  ended  December  31,  2003 and 2002,  respectively.  The 2004  period
includes a $2.8 million tax benefit  primarily  associated with a reduction of a
tax valuation allowance.  See Note 11 to the consolidated  financial statements.
The 2003 period  included  $0.9  million  associated  with the gain on sale of a
Chrysler/Jeep Sales and Service Franchise and $0.6 million associated with a tax
benefit  recorded  primarily due to the reduction of a tax valuation  allowance.
The 2002 net loss was due to recording  the  write-off of the carrying  value of
goodwill of $23.7  million in  accordance  with the  provisions of SFAS 142. See
Note 5 to the consolidated financial statements.  Although Hometown is currently
profitable,  if Hometown sustains significant losses in the future, our business
could be  materially  and  adversely  affected and the value of our common stock
might decline.

OUR LIMITED CASH AND WORKING CAPITAL COULD HAVE AN ADVERSE AFFECT ON OUR
BUSINESS.

      At  December  31,  2004,   our  total  cash  and  cash   equivalents   was
approximately  $6.1  million and our  working  capital  was  approximately  $2.9
million. If we were to incur net losses in 2005 or subsequent years, then we may
have insufficient working capital to maintain our current level of operations or
provide  for  unexpected  contingencies.  In such  event,  we will  need to seek
additional  capital from public or private equity or debt funding sources and we
may not be able to  raise  needed  cash  on  terms  acceptable  to us or at all.
Financings  may be on terms that are  dilutive  or  potentially  dilutive to our
stockholders.  If sources of financing are  required,  but are  insufficient  or
unavailable, we will be required to modify our growth and operating plans to the
extent of available funding, which could have an adverse affect on our business.


                                       15
<PAGE>


THE CYCLICAL NATURE OF AUTOMOBILE SALES MAY ADVERSELY AFFECT OUR PROFITABILITY.

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

GOVERNMENTAL  RESTRICTIONS ON IMPORTED PRODUCTS COULD IMPAIR OUR ABILITY TO SELL
FOREIGN VEHICLES PROFITABLY.

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

THE CONCENTRATION OF VOTING POWER COULD PREVENT OUR CLASS A COMMON  STOCKHOLDERS
FROM HAVING ANY VOICE IN OUR CORPORATE AFFAIRS.

      The holders of our Class B common stock are entitled to ten votes for each
share held,  while holders of our Class A common stock, are entitled to one vote
per share held.  Consequently,  as of March 22, 2005, the holders of the Class B
common stock, who also own approximately 58% of our outstanding  common stock of
all classes,  will control  approximately  91% of the aggregate  number of votes
eligible to be cast by  stockholders  for the election of directors  and certain
other stockholder actions, and will be in a position to control our policies and
operations.  Also as of March 22, 2005,  our  executive  officers and  directors
control  approximately  55% of the aggregate number of votes eligible to be cast
by  stockholders  for the election of directors  and certain  other  stockholder
actions,  and will be in a position  to control  our  policies  and  operations.
Accordingly,  absent a  significant  increase in the number of shares of Class A
common  stock  outstanding  or  conversion  of Class B common stock into Class A
common  stock,  the holders of shares of Class B common  stock will be entitled,
for the foreseeable  future,  to elect all members of the Board of Directors and
control all matters subject to stockholder approval.

REGULATIONS  AFFECTING  LOW PRICE  SECURITIES  COULD IMPAIR THE LIQUIDITY OF OUR
CLASS A COMMON STOCK.

      The  Securities  and Exchange  Commission  has adopted  regulations  which
generally define "penny stock" to be an equity security that has a market price,
as defined, of less than $5.00 per share or an exercise price of less than $5.00
per share,  subject to certain  exceptions,  including an exception of an equity
security that is quoted on the Nasdaq Stock Market. Equity securities trading on
the NASD "OTC Bulletin Board" are subject to rules that impose  additional sales
practice   requirements  on   broker-dealers   who  sell  our  securities.   For
transactions  covered  by these  rules,  the  broker-dealer  must make a special
suitability determination for the purchaser of such securities and have received
the  purchaser's  written  consent to the  transactions  prior to the  purchase.
Additionally,  unless  exempt,  the rules  require  the  delivery,  prior to the
transaction,  of a disclosure  schedule  prepared by the Securities and Exchange
Commission  relating  to the penny stock  market.  The  broker-dealer  also must
disclose the commissions  payable to both the  broker-dealer  and the registered
underwriter,  current quotations for the securities and, if the broker-dealer is
the  sole  market-maker,  the  broker-dealer  must  disclose  this  fact and the
broker-dealer's   presumed   control  over  the  market.   Finally  among  other
requirements,   monthly   statements  must  be  sent  disclosing   recent  price
information  for the penny  stock held in the  account  and  information  on the
limited market in penny stocks. Since February 2001 our Class A common stock has


                                       16
<PAGE>


been trading on the NASD OTC Bulletin Board, as a penny stock,  and therefore is
subject to these additional rules. As such, these penny stock rules may restrict
the ability of stockholders to sell our Class A common stock. Consequently,  the
liquidity of our Class A common stock could be impaired,  not only in the number
of  securities  which could be bought and sold,  but also through  delays in the
timing of transactions, reduction in security analysts and new media coverage of
Hometown, and lower prices for our securities than might otherwise be obtained.


ITEM 2. PROPERTIES

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

<TABLE>
<CAPTION>
OCCUPANT/
TRADE NAME          LOCATION                 USE                          LEASE/OWN
----------          --------                 ---                          ---------

<S>                 <C>                      <C>                          <C>
Shaker's Lincoln    831 Straits Turnpike     New and used car sales;      Lease expires in 2013; $274,000 per
   Mercury          Watertown, CT 06795      service; F & I               year with CPI increase in 2009.

Lincoln Mercury     1189 New Haven Rd.       Service                      Owned by dealership.
   Autocare         Naugatuck, CT 06770

Family Ford         1200 Wolcott Street      New and used car sales;      Lease expires in 2013; $274,000 per
                    Waterbury, CT 06705      service; F & I               year with CPI increase in 2009.

Hometown Auto       1309 South Main St.      Administrative and           Lease expires in 2013; $82,000 per year
   Retailers, Inc.  Waterbury, CT 06706      Corporate offices            with CPI increase in 2009.

Hometown Auto       774 Straits Turnpike     Administrative and           Month to month lease expired 1/31/05.
   Retailers, Inc.  Watertown, CT. 06795     Corporate offices            Moved to 1309 South Main St. Waterbury,
                                                                          CT 06706, described above.

Westwood Lincoln    55 Kinderkamack Rd.      New and used car sales;      Lease expires in 2013; $411,000 per
   Mercury          Emerson, NJ 07630        service; F & I; livery       year with CPI increase in 2009. See
                                             sales                        Item 3. Legal Proceedings.

Muller Toyota       Route 31 and Van         New and used car sales;      Lease expires in 2013; $411,000 per
                    Syckles Rd. Clinton, NJ  service; F & I               year with CPI increase in 2009.
                    08809                                                 Hometown guarantees mortgage debt
                                                                          associated with this lease. The lease
                                                                          is treated as a capital lease.

Muller Chevrolet    Route 173 and Voorhees   New and used car sales;      Lease expires in 2013; $452,000 per
                    Rd. Stewartsville, NJ    service; F & I               year with CPI increase in 2009.
                    08886                                                 Hometown guarantees mortgage debt
                                                                          associated with this lease. The lease
                                                                          is treated as a capital lease.


                                       17
<PAGE>


Wellesley Mazda     965 Worcester Road       New and Used car sales;      Lease expires 12/22/08 at $216,000 per
                    Wellesley, MA 02181      service; F&I                 year, one five year renewal option at
                                                                          the same rent; and option to purchase
                                                                          at the end of term or end of extension
                                                                          term at the then fair market value.

Bay State Lincoln   571 Worcester Road       New and used car sales;      Owned facility. Mortgage balance of
   Mercury          Framingham, MA 01701     service; F & I               $4,613,000 at 12/31/04. Matures May
                                                                          2014. Annual payments of $748,000. See
                                                                          Note 7.

Brattleboro         Route 5, Putney Rd. N.   New and used car sales;      Owned facility. Mortgage balance of
   Chrysler         Brattleboro, VT 05304    service; F & I               $1,025,000 at 12/31/04. Matures May
   Dodge Sales                                                            2019. Annual payments of $113,000.
                                                                          Second mortgage balance of $241,000 at
                                                                          12/31/04. Matures April 2007. Annual
                                                                          payments of $117,000.

Autos of            2934 Rte 9 W             New and used car sales;      Owned facility. Mortgage balance of
   Newburgh, Inc.   New Windsor, NY 12553    service; F & I               $2,834,000 at 12/31/04. Matures
   d/b/a Toyota of                                                        5/1/2014. Annual payments of $462,000.
   Newburgh

Autos of            334 Route 9W             New and used car sales;      Lease expires 10/14/06 at $78,000 per
   Newburgh, Inc.   New Windsor, NY          F & I                        year, increasing by a CPI adjustment in
   d/b/a Toyota of  12553                                                 the final two years; one five-year
   Newburgh                                                               renewal option at the previous year
                                                                          rent plus CPI adjustment for each year
                                                                          of the extension.
</TABLE>

LEASES

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

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


                                       18
<PAGE>


principal stockholder of Hometown.  Joseph Shaker is the Regional Vice President
- East Division,  Director and a principal  stockholder  of Hometown.  Edward D.
Shaker and Janet Shaker are principal stockholders of Hometown.

      Muller Group.  Hometown leases, for an annual base rental of approximately
$411,000  and  $452,000   respectively  the  premises  occupied  by  its  Toyota
("Toyota")  dealership  in  Clinton,  New  Jersey  and its  Chevrolet  ("Chevy")
dealership in Stewartsville, New Jersey from Rellum Realty Company, a New Jersey
general  partnership,  one of whose two  partners  is William C.  Muller Jr. Mr.
Muller is Regional  Vice  President - South  Division,  director and a principal
stockholder  of  Hometown.  The Toyota and Chevy  leases are  treated as capital
leases.  In  connection  with the  acquisition  in 1999 of real  estate  used by
Baystate Lincoln Mercury, Hometown guaranteed the mortgage debt of Rellum Realty
Company.  The 1999  guaranty  was  given in  substitution  for a  February  1998
guaranty of that debt by the Muller Group,  a subsidiary  of Hometown.  Hometown
recorded the lease as a capital lease. As of December 31, 2004 the mortgage debt
balance  is $4.3  million,  which  agrees  with the  capital  lease  obligation.
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.

      Westwood.  Hometown  leases,  for an annual base  rental of  approximately
$411,000 the premises occupied by its Lincoln Mercury dealership in Emerson, New
Jersey from Salvatore A. Vergopia and his wife.  Mr.  Vergopia and his wife will
cease to be principal  stockholders and this lease will be terminated as part of
the settlement of the litigation  between Hometown and the Vergopia's.  See Item
3. Legal Proceedings.


ITEM 3. LEGAL PROCEEDINGS

      During the fourth quarter of 2004, Hometown announced that it had resolved
in principle  to settle the  litigation  matters  described in Footnote 9 in the
Notes to Unaudited  Consolidated Financial Statements as contained in Hometown's
most recent Form 10-Q as filed with the  Securities  and Exchange  Commission on
November 12, 2004.  On March 3, 2005 the  execution and delivery of a settlement
agreement and  applicable  releases of claims from all parties to the litigation
was completed.  The settlement agreement settles all claims made by Salvatore A.
Vergopia and Edward A. Vergopia,  former directors and executive officers of the
Corporation,  and  Janet  Vergopia,  the  wife of  Salvatore  A.  Vergopia  (the
"Vergopias").  The  settlement  also  finally  resolved  the  related  insurance
coverage  litigation  with Universal  Underwriters  Group and The Chubb Group of
Insurance  Companies.  The gross  payment to the  Vergopias by all parties is $4
million of which  $600,000  is  payable  by  Hometown.  The  settlement  will be
completed when all the material terms have been satisfied  including  Hometown's
payment of its share of the gross settlement  proceeds.  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.  The  settlement  also  provides for the
transfer to the  Vergopias  of certain  Westwood  Lincoln  Mercury  Sales,  Inc.
assets,  including  its  Lincoln  Mercury  franchise,  subject  to  manufacturer
approval which is pending,  the termination of Hometown's  Westwood,  New Jersey
lease,  and the  receipt by  Hometown  of all of the  940,000  shares of Class B
Common  Stock  owned  by  the  Vergopias.  The  Settlement  Agreement  does  not
constitute an admission of liability or wrongdoing by any party. The $600,000 is
included in Accounts  Payable and Accrued  Expenses in  Hometown's  Consolidated
Balance Sheet as of December 31, 2004.

      The receipt of the Hometown stock will be recorded at fair market value on
March 3, 2005, the date of the executed settlement agreement,  and will be shown
as a  reduction  of  Stockholders'  Equity.  The  assets and  liabilities  being
transferred  to the Vergopias  will be recorded as a reduction of those accounts
at book value.  If the fair market value of Hometown  stock exceeds the net book
value of the assets being transferred,  a gain will result from the transaction.
Hometown wrote off the goodwill associated with this franchise in 2002. See Note
5.


                                       19
<PAGE>


      Also,  during the fourth  quarter of 2004,  Hometown  fully  resolved  the
litigation concerning the lease for property in Morristown,  New Jersey formerly
used by Hometown's  subsidiary Morristown Auto Sales, Inc., including all claims
among the landlord,  Morristown  and Crestmont  M.M.,  L.P., the assignee of the
lease  agreement.  The  cost  to  Hometown  is  $150,000  with  $75,000  payable
immediately, that has already been paid as of December 31, 2004, and the balance
in six equal monthly installments  commencing January 1, 2005. This liability is
included in Accounts  Payable and Accrued  Expenses in  Hometown's  Consolidated
Balance Sheet as of December 31, 2004.

      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 itemized  documentary  costs and governmental  costs; (c)
charged grossly excessive  documentary fees not reasonably related to costs; and
(d) failed to disclose that the defendants  are not required to perform  certain
documentary  services.  It  appears  from the  complaint  that  plaintiffs  have
attempted to name as defendants all franchised  automobile  dealers in the State
of New Jersey,  as well as a large  assortment  of other  persons and  entities.
There are no  allegations  that Hometown ever  performed any services for any of
the plaintiffs. The complaint makes certain class action allegations and alleges
violations  of the New  Jersey  Consumer  Fraud Act as well as common law fraud.
Hometown  does not believe  that the  eventual  outcome of this case will have a
material  adverse  effect upon  Hometown's  consolidated  financial  position or
results of operations.

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


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

      None



                                       20
<PAGE>


                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      (A) MARKET INFORMATION

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

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

PRICE RANGE OF COMMON STOCK       BID  PRICES
---------------------------  ---------------------
                             HIGH              LOW
                             ----              ---
YEAR ENDED 2003
First Quarter .            $   0.55         $   0.31
Second Quarter             $   0.55         $   0.28
Third Quarter .            $   0.88         $   0.41
Fourth Quarter             $   1.60         $   0.67

YEAR ENDED 2004
First Quarter .            $   2.00         $   1.05
Second Quarter             $   1.40         $   0.95
Third Quarter .            $   1.25         $   0.71
Fourth Quarter             $   0.87         $   0.68


      (B) HOLDERS

      As of March 22, 2005,  the number of record  holders of the Class A Common
Stock of Hometown  was 50.  Hometown  believes  it has more than 700  beneficial
holders.

      (C) DIVIDENDS

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

      (D) EQUITY COMPENSATION PLAN INFORMATION

      There are no new compensation plans in 2004.


                                       21
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

      The following selected financial data as of December 31, 2004, 2003, 2002,
2001  and  2000  have  been  derived  from the  audited  consolidated  financial
statements of Hometown.

<TABLE>
<CAPTION>
                                                                     For the Years Ended December 31,
                                                              (in thousands, except share and per share data)
                                                    2004           2003           2002           2001           2000
                                                -----------    -----------    -----------    -----------    -----------

<S>                                             <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
Revenues                                        $   265,281    $   279,777    $   269,739    $   275,760    $   279,382
Gross profit                                         37,974         39,747         38,667         39,815         37,881
Amortization of goodwill                                 --             --             --            704            661
Selling, general and administrative expenses         33,371         34,840         34,152         35,114         37,946
Income (loss) from operations                         4,711          4,907          4,515          3,997           (726)
Interest expense                                     (3,281)        (3,037)        (3,205)        (4,225)        (5,069)
Net income (loss) before cumulative effect of
   accounting change                                  3,748          2,378            776         (2,136)        (3,800)

Cumulative effect of accounting change                   --             --        (23,708)            --             --
                                                -----------    -----------    -----------    -----------    -----------
Net income (loss)                               $     3,748    $     2,378    $   (22,932)   $    (2,136)   $    (3,800)
                                                ===========    ===========    ===========    ===========    ===========

Earnings (loss) per share, basic
Before cumulative effect of accounting change          0.51    $      0.33    $      0.10    $      (.32)   $      (.63)
Cumulative effect of accounting change                   --             --          (3.30)            --             --
                                                -----------    -----------    -----------    -----------    -----------
Earnings (loss) per share, basic                $      0.51    $      0.33    $     (3.20)   $      (.32)   $      (.63)
                                                ===========    ===========    ===========    ===========    ===========

Earnings (loss) per share, diluted
Before cumulative effect of accounting change   $      0.50    $      0.33    $      0.10    $      (.32)   $      (.63)
Cumulative effect of accounting change                   --             --          (3.30)            --             --
                                                -----------    -----------    -----------    -----------    -----------
Earnings (loss) per share, diluted              $      0.50    $      0.33    $     (3.20)   $      (.32)   $      (.63)
                                                ===========    ===========    ===========    ===========    ===========
Weighted average shares,
Basic                                             7,286,931      7,175,105      7,175,105      6,592,436      5,995,996
Diluted                                           7,439,024      7,215,492      7,175,105      6,592,436      5,995,996
                                                                                                            -----------
-----------------------------------------------------------------------------------------------------------------------
                                                   2004            2003           2002           2001           2000
                                                -----------    -----------    -----------    -----------    -----------
BALANCE SHEET DATA:
Working capital                                 $     2,900    $     6,039    $     4,085    $     4,029    $     1,663
Inventories                                          43,440         37,774         39,169         31,887         40,170
Total assets                                         74,223         65,264         63,816         81,842         91,572
Total debt                                           56,600         51,075         52,745         46,234         54,133
Stockholders' equity                            $    10,933    $     6,928    $     4,550    $    27,452    $    28,643
</TABLE>


                                       22
<PAGE>


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

      YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003

      REVENUE

      Total revenue  decreased $14.5 million,  or 5.2% to $265.3 million for the
year ended December 31, 2004 from $279.8 million for the year ended December 31,
2003. Hometown sold a Chrysler/Jeep sales and service franchise on June 3, 2003.
At that time, sales of new vehicles along with parts and service stopped at that
location  while sales of used  vehicles  continued  until August 2004. On a same
store basis  (excluding the  Chrysler/Jeep  revenues for all periods),  revenues
decreased  $10.4 million or 3.8% to $264.2  million for the year ended  December
31, 2004 from $274.6 million for the year ended December 31, 2003. This decrease
was primarily due to decreased sales of new vehicles ($10.2 million).

      Revenue from the sale of new vehicles decreased $12.7 million, or 7.0%, to
$167.9 million for the year ended December 31, 2004, from $180.6 million for the
year ended December 31, 2003. On a same store basis,  revenues  decreased  $10.2
million,  or 5.7% to $167.9 million for the year ended  December 31, 2004,  from
$178.1   million  for  the  year  ended  December  31,  2003.  The  decrease  is
attributable  to a reduction  of 601 units sold in 2004  compared to 2003 ($15.7
million),  partially  offset by a 3.4%  increase in average  selling price ($5.5
million). The decrease is primarily from Hometown's Toyota ($6.0 million),  Ford
($2.4  million),  Lincoln  Mercury  ($1.0  million),  Mazda ($0.9  million)  and
Chevrolet  ($0.3  million)   dealerships,   partially  offset  by  increases  at
Chrysler/Jeep  ($0.4  million).  The  decrease  at the  Toyota  dealerships  was
primarily  due a decrease in fleet sales of $3.9  million,  due to a decrease of
268 units sold in 2004 compared to 2003.  Excluding the decrease in fleet sales,
other Toyota sales  decreased $2.1 million,  due to a decrease of 108 units sold
in 2004 compared to 2003 ($2.6 million),  partially offset by a 0.7% increase in
the average  selling price ($0.4  million).  The decrease at the Ford dealership
was primarily due to a decrease of 102 units sold in 2004 compared to 2003 ($2.7
million),  partially  offset by a 2.1%  increase in average  selling price ($0.3
million). The decrease at the Lincoln Mercury dealerships was primarily due to a
decrease of 176 non-livery  units sold in 2004 compared to 2003 ($6.2  million),
combined  with a 2.3% decrease in their  average  selling price ($0.8  million),
partially  offset by an increase in livery sales in 2004  compared to 2003 ($6.0
million), primarily due to an additional 151 units sold in 2004 compared to 2003
($5.6  million).  The decrease at the Mazda  dealership  was  primarily due to a
decrease  of 42  units  sold in 2004  compared  to  2003.  The  decrease  at the
Chevrolet  dealership  was  primarily  due to a decrease  in fleet sales of $0.8
million,  due to a decrease of 42 units sold in 2004 compared to 2003. Excluding
the decrease in fleet sales,  other Chevrolet sales increased $0.5 million,  due
to a 4.7% increase in the average selling price ($0.9 million), partially offset
by a decrease  of 17 units sold in 2004  compared  to 2003 ($0.4  million).  The
Chrysler/Jeep  increase  was  primarily  due to a 5.1%  increase  in the average
selling price in 2004 compared to 2003.

      Revenue from the sale of used vehicles decreased $1.2 million, or 1.8%, to
$65.3 million for year ended December 31, 2004,  from $66.5 million for the year
ended December 31, 2003. On a same store basis,  revenues decreased $0.1 million
or 0.2% to $64.3  million for year ended  December 31, 2004,  from $64.4 million
for the year  ended  December  31,  2003.  This was due to: (i)  decreased  used
vehicle revenues at retail ($1.5 million),  due to a decrease of 307 units ($4.5
million),  partially  offset by a 6.4%  increase in average  selling price ($3.0
million),  (ii)  partially  offset by increased  used vehicle sales at wholesale
($1.4  million),  due to an increase of 416 units sold in 2004  compared to 2003
($1.7  million),  partially  offset by a 2.5% decrease in average  selling price
($0.3 million). The decrease in wholesale average selling price is a function of
the vehicles that were taken as trade-ins at the time of new vehicle  purchases.
Although the average  selling  price on  wholesale  decreased in 2004 from 2003,
average gross profit per unit increased  slightly.  The decrease in used vehicle
sales at retail  caused  more  vehicles to be sold at  wholesale  to manage used
vehicle inventory levels. The decreased revenues at retail were primarily due to
decreases at the Toyota ($2.3  million),  Ford ($0.9  million),  Lincoln Mercury
($0.5  million),  and Mazda  ($0.3  million)  dealerships,  partially  offset by
increases at the  Chevrolet  ($2.1  million) and  Chrysler/Jeep  ($0.4  million)


                                       23
<PAGE>


dealerships. The decrease at Toyota was primarily due to a decrease of 221 units
($3.1  million),  partially  offset by a 6.7% increase in average  selling price
($0.8  million).  The  decrease  at Ford was  primarily  due to a decrease of 57
units.  The decrease at the Lincoln  Mercury  dealerships was primarily due to a
decrease of 129 units ($2.1  million),  partially  offset by a 10.4% increase in
average selling price ($1.6 million). The decrease at Mazda was primarily due to
a decrease of 27 units ($0.4  million),  partially  offset by a 6.5% increase in
average  selling price ($0.1  million).  The increase at Chevrolet was primarily
due to the sale of an additional 114 units ($1.5 million),  combined with a 6.8%
increase in average selling price ($0.6 million).  The increase at Chrysler/Jeep
was primarily due to the sale of an additional 13 units ($0.2 million), combined
with a 4.8% increase in average selling price ($0.2 million).  Increases in used
vehicle  revenues at wholesale were primarily due to the Toyota ($0.7  million),
Lincoln Mercury ($0.3 million), Ford ($0.2 million) and Chevrolet ($0.1 million)
dealerships.

      Parts and service revenue decreased $0.4 million, or 1.6% to $24.2 million
for the year ended  December  31,  2004,  from $24.6  million for the year ended
December 31, 2003.  On a same store basis,  parts and service  revenue  remained
constant  at $24.2  million  for the years  ended  December  31,  2004 and 2003.
Decreases at the Lincoln Mercury ($0.6 million) and Chrysler/Jeep ($0.1 million)
dealerships  were  partially  offset by increases at the Toyota ($0.5  million),
Chevrolet ($0.1 million) and Ford ($0.1 million) dealerships.

      Other dealership  revenues decreased $0.2 million, or 2.5% to $7.8 million
for the year ended  December  31,  2004,  from $8.0  million  for the year ended
December 31, 2003. On a same store basis,  other dealership  revenues  decreased
$0.1 million, or 1.3% to $7.8 million for the year ended December 31, 2004, from
$7.9 million for the year ended December 31, 2003. Decreases in other dealership
revenues of used vehicles ($0.3 million),  was partially  offset by increases in
other  dealership  revenues of new vehicles  ($0.2  million).  Other  dealership
revenues  are  comprised  of  extended  service  plan  income,  finance  income,
insurance income and other income.

      GROSS PROFIT

      Total gross profit  decreased $1.7 million,  or 4.3%, to $38.0 million for
the year ended  December 31, 2004 from $39.7 million for the year ended December
31, 2003.  Hometown sold a Chrysler/Jeep  sales and service franchise on June 3,
2003. At that time,  sales of new vehicles along with parts and service  stopped
at that location while sales of used vehicles  continued until August 2004. On a
same store basis  (excluding  the  Chrysler/Jeep  gross profit for all periods),
gross profit decreased $1.2 million, or 3.1% to $37.8 million for the year ended
December 31, 2004 from $39.0 million for the year ended December 31, 2003.  This
decrease was  primarily  attributable  to decreased  gross profit on new vehicle
sales ($1.2  million).  Gross profit  percentage  for Hometown was 14.3% for the
year ended  December 31, 2004 compared to 14.2% for the year ended  December 31,
2003.  Fleet sales generate low margins.  Excluding  Toyota and Chevrolet  fleet
sales from both periods,  gross profit  percentage  was 14.4% for the year ended
December 31, 2004 compared to 14.5% for the year ended December 31, 2003.

      Gross profit on the sale of new vehicles decreased $1.3 million, or 10.8%,
to $10.7 million for the year ended December 31, 2004 from $12.0 million for the
year ended  December 31, 2003. On a same store basis gross profit on the sale of
new vehicles  decreased  $1.2 million,  or 10.5%,  to $10.7 million for the year
ended December 31, 2004 from $11.9 million for the year ended December 31, 2003.
The  decrease in gross  profit is  primarily  attributable  to a decrease of 601
units ($1.1 million),  combined with a 0.9% decrease in average gross profit per
vehicle  ($0.1  million).   The  unit  decrease  includes  a  310-unit  decrease
attributable  to Toyota (268 units) and Chevrolet (42 units) fleet sales,  which
had a minimal  effect on gross profit  ($39,000).  Excluding  fleet  sales,  the
following  brands  experienced  decreases  in  gross  profit  on the sale of new
vehicles in 2004 compared to 2003:  Lincoln Mercury ($0.9  million),  Ford ($0.2
million),  Chevrolet  ($0.2  million)  and Toyota  ($0.1  million).  The Lincoln
Mercury  decrease  is net of an  increase  of  $0.1  million  attributable  to a
151-unit  increase in livery sales.  Non-livery sales decreased $1.0 million due
to a decrease  of 176 units ($0.5  million)  combined  with a 15.5%  decrease in
gross profit per unit ($0.5 million).  The decrease at Ford was primarily due to

                                       24

<PAGE>


a 102-unit  decrease.  The decrease at Chevrolet  was  primarily due to an 11.3%
decrease in gross profit per unit. The decrease at Toyota was primarily due to a
108-unit  decrease.  Partially  offsetting  this were  increases at: Mazda ($0.2
million) and Chrysler/Jeep ($0.1 million). These increases were primarily due to
increased gross profit per unit.  Gross profit  percentage was 6.4% for the 2004
period and 6.7% for the 2003 period.  Excluding Toyota and Chevrolet fleet sales
from both periods, gross profit percentage for new vehicles was 6.5% in 2004 and
6.9% in 2003.

      Gross profit on the sale of used vehicles decreased $0.1 million, or 1.6%,
to $6.3  million for the year ended  December 31, 2004 from $6.4 million for the
year ended December 31, 2003. On a same store basis, gross profit decreased $0.1
million, or 1.6%, to $6.1 million for the year ended December 31, 2004 from $6.2
million for the year ended December 31, 2003.  This decrease is primarily due to
a  307-unit  decrease  at  retail  ($0.5  million),  partially  offset by a 7.2%
increase in average  gross profit per retail unit ($0.4  million).  Decreases at
retail for the Toyota ($0.2 million),  Lincoln Mercury ($0.2 million),  and Ford
($0.1 million)  dealerships  were partially offset by increases at the Chevrolet
($0.3 million) and  Chrysler/Jeep  ($0.1 million)  dealerships.  The decrease at
Toyota was  primarily due to a decrease of 221 units ($0.4  million),  partially
offset by an 11.4% increase in average gross profit per unit ($0.2 million). The
decrease  at Lincoln  Mercury  and Ford was  primarily  due to a decrease of 129
units and 57 units, respectively. The increase at Chevrolet was primarily due to
an  increase  of 114 units  ($0.2  million),  combined  with a 4.5%  increase in
average gross profit per unit ($0.1 million).  The increase at Chrysler/Jeep was
primarily  due to an increase of 13 units,  combined  with an 11.2%  increase in
average  gross profit per unit.  Gross profit on  wholesale  increased  slightly
(less than $0.1 million) due to an additional 416 units sold in 2004 compared to
2003.  Gross  profit  percentage  on the sale of used  vehicles was 9.5% in 2004
compared to 9.6% in 2003.

      Parts and service gross profit  decreased $0.1 million,  or 0.8%, to $13.2
million for the year ended  December  31,  2004 from $13.3  million for the year
ended  December 31, 2003.  On a same store basis,  gross profit  increased  $0.1
million,  or 0.8%,  to $13.2  million for the year ended  December 31, 2004 from
$13.1 million for the year ended  December 31, 2003.  The increase was primarily
attributable to the increase in gross profit percentage. Gross profit percentage
was 54.4% in 2004  compared  to 54.1% in 2003.  Increases  at the  Toyota  ($0.3
million)  and  Mazda,  Ford  and  Chevrolet  (together  totaling  $0.2  million)
dealerships,  were  partially  offset by decreases at the Lincoln  Mercury ($0.3
million) and Chrysler/Jeep ($0.1 million) dealerships.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

      Selling,  general and administrative  expenses decreased $1.4 million,  or
4.0%, to $33.4 million for the year ended December 31, 2004,  from $34.8 million
for the year ended  December  31,  2003.  Decreases  in  salaries  and  employee
benefits ($1.4 million),  legal and other  professional  fees ($0.5 million) and
reserves for charge-backs  ($0.3 million),  were partially offset by an increase
in advertising costs ($0.6 million) and other costs ($0.2 million).  The sale of
a  Chrysler/Jeep  new car franchise and  subsequent  closing of the used car lot
accounted for $0.3 million of the reduction in salaries and employee benefits.

      INTEREST INCOME

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


                                       25
<PAGE>


      INTEREST EXPENSE

      Interest expense increased $0.4 million, or 13.3%, to $3.4 million for the
year ended  December 31, 2004 from $3.0 million for the year ended  December 31,
2003.  The  increase  is  primarily  attributable  to an  increase in floor plan
interest expense resulting form higher average borrowings.

      OTHER INCOME

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

PROVISION (BENEFIT) FOR INCOME TAX

      The effective  income tax rate was (127)% for the year ended  December 31,
2004 and 18% for the year  ended  December  31,  2003.  The rates  were based on
current  forecasts of income  before taxes,  and current  forecasts of permanent
differences  between tax and book income. The difference in rates for both years
from the expected  effective tax rate of approximately 40% is primarily due to a
reduction in the valuation  allowance for both periods.  The 2004  difference is
primarily due to the  reduction of the  valuation  allowance on the deferred tax
asset due to the ability to project  sufficient  income to recover the  deferred
tax asset.  The 2003 difference is primarily due to the reduction of a valuation
allowance  related to goodwill  that was  deducted  related with the sale of the
Chrysler/Jeep  Sales and Service  Franchise as well as  amortization of goodwill
for tax  purposes.  At December 31,  2004,  Hometown has a deferred tax asset of
$0.6 million, net of a valuation allowance, related to its net operating losses.
The  state  net  operating  losses  begin to expire  in 2005.  The  federal  net
operating  losses begin to expire in 2021.  Hometown  believes this net deferred
tax  asset  will be  realized  within  the next  three  years  based on  current
projections. See Note 11 to the consolidated financial statements.

      NET INCOME

      Net income  improved $1.3 million,  to income of $3.7 million for the year
ended December 31, 2004, from $2.4 million for the year ended December 31, 2003.
See changes described above.

      EARNINGS PER SHARE, BASIC AND DILUTED AND WEIGHTED AVERAGE SHARES

      "Basic  earnings  per share" is  computed  by  dividing  net income by the
weighted  average  common shares  outstanding.  "Diluted  earnings per share" is
computed  by  dividing  net  income  by  the  weighted   average  common  shares
outstanding  adjusted  for the  incremental  dilution  of  potentially  dilutive
securities. See Note 10 to the consolidated financial statements.

      The basic and  diluted  income per share for the year ended  December  31,
2004 is $0.51 and $0.50,  respectively,  including $0.38 and $0.37 respectively,
resulting  from a tax  benefit  recorded  primarily  due to the  reduction  of a
valuation  allowance  on the  deferred  tax  asset  related  to  tax  deductible
unamortized  goodwill and net operating losses. The basic and diluted income per
share for the year ended December 31, 2003 is $0.33  including  $0.09  resulting
from a tax  benefit  recorded  primarily  due to the  reduction  of a  valuation
allowance  on the  deferred  tax asset  related  to tax  deductible  unamortized
goodwill and $0.08  resulting from a gain on the sale of a  Chrysler/Jeep  Sales
and Service Franchise in June 2003.


                                       26
<PAGE>


      YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

      REVENUE

      Total revenue  increased $10.1 million,  or 3.7% to $279.8 million for the
year ended December 31, 2003 from $269.7 million for the year ended December 31,
2002. 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  $16.2 million or 6.2% to $276.8  million for the year ended
December 31, 2003 from $260.6 million for the year ended December 31, 2002. This
increase was primarily due to increased new vehicle sales ($21.5 million) and an
increase  in parts  and  service  revenue  ($0.8  million)  partially  offset by
decreased sales of used vehicles ($6.0  million).  New vehicle sales were helped
by the continuation of consumer financing deals, such as zero percent financing,
combined with heavy rebating by manufacturers,  which in turn contributed to the
decrease in used vehicle sales.

      Revenue from the sale of new vehicles increased $15.9 million, or 9.7%, to
$180.6 million for the year ended December 31, 2003, from $164.7 million for the
year ended December 31, 2002. On a same store basis,  revenues  increased  $21.5
million,  or 13.7% to $178.1 million for the year ended December 31, 2003,  from
$156.6   million  for  the  year  ended  December  31,  2002.  The  increase  is
attributable  to an  additional  694 units sold in 2003  compared to 2002 ($17.8
million)  plus a 2.1%  increase in average  selling  price ($3.7  million).  All
except for one Hometown dealership experienced increases in new vehicle revenues
in 2003  compared  to  2002.  Increases  at  Hometown's  Lincoln  Mercury  ($6.7
million), Chevrolet ($5.9 million), Toyota ($5.1 million), Mazda ($2.5 million),
and Ford ($1.5  million)  dealerships  were  partially  offset by a decrease  at
Hometown's remaining  Chrysler/Jeep  dealership ($0.2 million).  The increase at
the Lincoln  Mercury  dealerships  was  primarily  due to a 7.8% increase in the
average selling price ($3.6 million),  plus an increase of 93 units sold in 2003
compared  to 2002 ($3.1  million).  The  Lincoln  Mercury  increase  is net of a
decrease  in sales of 25  livery  units  ($1.2  million).  The  increase  at the
Chevrolet  dealership was primarily due to an increase of 239 units sold in 2003
compared to 2002 ($5.8 million),  combined with a slight increase in the average
selling price ($0.1 million). Included in this was an increase in fleet sales of
42 units ($0.8  million).  Excluding  fleet sales,  other  Chevrolet new vehicle
sales  increased  $5.1  million  due to the sale of 197  additional  units ($4.8
million), combined with a 1.6% increase in average selling price ($0.3 million).
The increase at the Toyota  dealerships  was primarily due to an increase of 242
units sold in 2003 compared to 2002 ($5.5 million),  partially offset by a small
decrease in the average  selling  price ($0.4  million).  Included in this was a
decrease  in fleet  sales of $0.5  million  due to a decrease  of 18 units ($0.3
million)  combined with a 3.4% decrease in average selling price ($0.2 million).
Excluding fleet sales, other Toyota new vehicle sales increased $5.6 million due
to the sale of 260 additional  units ($6.3 million)  partially  offset by a 1.0%
decrease in average  selling  price ($0.7  million).  The  increase at the Mazda
dealership was primarily due to an additional 116 units sold in 2003 compared to
2002 ($2.5 million). The increase at the Ford dealership was primarily due to an
increase of 31 units sold in 2003 compared to 2002 ($0.8 million), combined with
a 4.0% increase in the average selling price ($0.7 million).  The  Chrysler/Jeep
decrease was primarily due to a decrease of 27 units sold ($0.7  million) in the
2003 period compared to the 2002 period,  partially offset by a 6.9% increase in
the average selling price ($0.5 million).

      Revenue from the sale of used vehicles decreased $6.0 million, or 8.3%, to
$66.5 million for year ended December 31, 2003,  from $72.5 million for the year
ended  December 31, 2002.  This was due to  decreased  used vehicle  revenues at
retail ($4.7 million) due to a decrease of 445 units ($6.3  million),  partially
offset by a 3.0% increase in average selling price ($1.6 million);  plus reduced
used vehicle  sales at wholesale  ($1.3  million) due to lower  average  selling
price  ($2.7  million)  partially  offset  by an  increase  of 287  units  ($1.4
million). A Lincoln  Mercury/Mazda  dealership accounted for $2.6 million of the
decrease  in used  vehicle  sales at retail  primarily  due to a decrease of 181
units ($2.9  million)  partially  offset by a 4.3%  increase in average  selling
price ($0.3 million).  The declines at the Lincoln Mercury/Mazda  dealership was
primarily  due to the  dealership  reducing its emphasis on the sale of high-end
used cars during the 2002  period,  causing a decrease  in retail and  wholesale
sales of such vehicles subsequent to that time. The Toyota dealerships accounted
for a $1.9 million  decrease in used vehicle sales at retail  primarily due to a


                                       27
<PAGE>


decrease  of 145 units ($2.0  million).  Ford  accounted  for a decrease of $0.9
million due to a decrease of 88 units ($1.2 million)  partially offset by a 5.9%
increase  in  average  selling  price  ($0.3  million).  Other  Lincoln  Mercury
dealerships  had an increase of $0.8 million due to an increase of 8 units ($0.1
million)  and a 5.8%  increase  in average  selling  price  ($0.7  million).  As
discussed  above,  new vehicle sales were helped by the continuation of consumer
financing  deals,  such as zero  percent  financing  and heavy  rebating  by the
manufacturers,  which in turn  contributed to the decrease in used vehicle sales
at retail. The same Lincoln Mercury/Mazda  dealership discussed above had a $2.9
million  decrease in used vehicle sales at wholesale  for the reasons  discussed
above. Most other dealerships  experienced increases in wholesale (Toyota - $0.7
million; Ford - $0.3 million;  Chevrolet - $0.4 million; other Lincoln Mercury -
$0.7 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  increased  $0.3  million,  or 1.2%,  to $24.6
million for the year ended  December 31, 2003,  from $24.3  million for the year
ended  December 31,  2002.  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 increased $0.8 million
or 3.4%,  to $24.2  million for the year ended  December 31,  2003,  compared to
$23.4 million for the year ended  December 31, 2002.  The increase was primarily
generated  from  the  Toyota  dealerships  ($0.8  million).   Increases  at  the
Chevrolet,  Mazda and remaining  Jeep  dealership  ($0.3 million) were offset by
decreases at the Ford and Lincoln Mercury dealerships ($0.3 million).

      Other dealership  revenues decreased $0.3 million, or 3.6% to $8.0 million
for the year ended  December  31,  2003,  from $8.3  million  for the year ended
December 31, 2002. On a same store basis,  other dealership  revenues  decreased
$0.2 million, or 2.4% to $8.0 million for the year ended December 31, 2003, from
$8.2 million for the year ended  December 31, 2002.  This  decrease is primarily
attributable to decreases in other dealership  revenues  (extended  service plan
income, finance income and other income) of used vehicles.

      GROSS PROFIT

      Total gross profit  increased $1.0 million,  or 2.6%, to $39.7 million for
the year ended  December 31, 2003 from $38.7 million for the year ended December
31, 2002.  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 $1.8 million, or 4.8% to $39.3 million for the
year ended  December 31, 2003 from $37.5 million for the year ended December 31,
2002.  This  increase was primarily  attributable  to an increase in new vehicle
gross  profit  of $2.0  million  and an  increase  in gross  profit on parts and
service sales of $0.3 million,  partially  offset by a $0.3 million  decrease in
used vehicle  gross profit and a $0.2 million  decrease in gross profit on other
dealership revenues.  Gross profit percentage for Hometown was 14.2% in 2003 and
14.4% in 2002.  Adjusting  both  periods for Toyota and  Chevrolet  fleet sales,
gross profit percentage was 14.5% in 2003 and 14.8% in 2002.

      Gross profit on the sale of new vehicles increased $1.6 million, or 15.4%,
to $12.0  million for the year ended  December 31, 2003,  from $10.4 million for
the year ended December 31, 2002. On a same store basis gross profit on the sale
of new vehicles increased $2.0 million,  or 20.2%, to $11.9 million for the year
ended December 31, 2003, from $9.9 million for the year ended December 31, 2002.
The  increase in gross profit is  primarily  attributable  to an increase of 694
units ($1.1  million)  combined with a 7.5% increase in average gross profit per
vehicle ($0.9 million).  Included in the unit increase are 24 units attributable
to an increase in Toyota and Chevrolet  fleet sales,  which had a minimal effect
on the increase in gross  profit.  All  dealerships  experienced  an increase in
gross profit on the sale of new vehicles in the 2003 period  compared to 2002 as
follows: Lincoln Mercury - $0.9 million, Toyota - $0.4 million, Chevrolet - $0.4
million,  Mazda - $0.2 million and Ford - $0.1 million.  Gross profit percentage
for 2003 was 6.7% compared to 6.3% for 2002.  Adjusting  both periods for Toyota
and Chevrolet fleet sales,  which generate low margins,  gross profit percentage


                                       28
<PAGE>


for new  vehicles  was  6.9% in 2003 and 6.6% in  2002.  Included  in the  these
results is an increase in gross profit of $0.3 million  (Lincoln  Mercury - $0.2
million and Ford - $0.1  million)  attributable  to the  implementation  of EITF
Issue No. 02-16,  "Accounting  by a Customer  (Including a Reseller) for Certain
Consideration  Received  from a Vendor"  ("EITF  Issue No.  02-16").  This issue
addressed the income statement  classification  of cash  consideration  received
from a vendor and the recognition criteria for performance-driven vendor rebates
or refunds.  This consensus,  which was effective for all  arrangements  entered
into after December 31, 2002, resulted in certain co-op advertising  recoveries,
which would previously have been recorded as a reduction of SG&A, being recorded
as a reduction of Cost of Sales, buying and occupancy. We adopted EITF Issue No.
02-16 on January 1, 2003.

      Gross profit on the sale of used vehicles decreased $0.3 million, or 4.5%,
to $6.4 million for the year ended December 31, 2003,  from $6.7 million for the
year ended December 31, 2002. Due to most dealerships experiencing a decrease in
used  vehicle  sales at retail in 2003  compared to 2002,  they had to wholesale
more vehicles  that would have been  received as trade-ins  that would have been
sold at retail in prior  years;  however,  gross  profit is minimal on wholesale
sales.  The  decrease  in gross  profit on used  vehicle  sales was due to a net
decrease of 158 units ($0.2  million)  combined  with a 1.9% decrease in average
gross profit per vehicle ($0.1  million).  The decrease of 158 units is net of a
445  decrease  in retail  units,  partially  offset by a  287-unit  increase  in
wholesale  units. The Toyota  dealerships  accounted for a $0.2 million decrease
primarily  due a decrease of 145 units sold at retail.  A Lincoln  Mercury/Mazda
dealership,  discussed in revenues above, accounted for a $0.1 million decrease.
Ford  accounted  for a $0.1 million  decrease  primarily due to a decrease of 88
units sold at retail.  Other Lincoln Mercury  dealerships  partially offset this
with a $0.1 million increase due to an increase of 45 units (8 at retail) and an
increase in average selling price.  Gross profit  percentage on the sale of used
vehicles was 9.6% in 2003 compared to 9.2% in 2002.

      Parts and service gross profit remained  constant at $13.3 million for the
years  ended  December  31,  2003  and  2002.  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  increased  $0.3  million,  or 2.3%,  to $13.1 million for the year ended
December 31, 2003,  from $12.8 million for the year ended December 31, 2002. The
increase was primarily  attributable  to the increase in revenues ($0.4 million)
partially offset by a decrease in gross profit percentage ($0.1 million).  Gross
profit percentage was 54.1% in 2003 compared to 54.6% in 2002.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

      Selling,  general and administrative  expenses increased $0.6 million,  or
1.8%, to $34.8 million for the year ended December 31, 2003,  from $34.2 million
for the year ended December 31, 2002.  Increases in advertising  ($0.6 million),
reserves for  charge-backs  ($0.3 million),  legal and other  professional  fees
($0.3 million) and various other costs ($0.1 million),  were partially offset by
a reduction in salaries and employee  benefits ($0.5 million) and the ceasing of
certain contractual payments at the end of 2002 ($0.2 million).  Included in the
increase in advertising costs is $0.3 million attributable to the implementation
of EITF Issue No. 02-16,  "Accounting  by a Customer  (Including a Reseller) for
Certain  Consideration  Received from a Vendor" ("EITF Issue No.  02-16").  This
issue  addressed  the  income  statement  classification  of cash  consideration
received  from a vendor  and the  recognition  criteria  for  performance-driven
vendor  rebates  or  refunds.  This  consensus,  which  was  effective  for  all
arrangements  entered into after  December 31, 2002,  resulted in certain  co-op
advertising recoveries, which would previously have been recorded as a reduction
of SG&A,  being recorded as a reduction of Cost of Sales.  We adopted EITF Issue
No.  02-16 on January 1, 2003.  The sale of a  Chrysler/Jeep  new car  franchise
accounted for $0.4 million of the reduction in salaries and employee benefits.


                                       29
<PAGE>


      INTEREST INCOME

      Interest income  increased to $82,000 for the year ended December 31, 2003
from $43,000 for the year ended December 31, 2002. The increase is primarily the
result of investing  excess cash in a Ford Motor Credit Company cash  management
account  paying  interest of 5.00% at December  31,  2003.  The cash  management
account  interest  rate is tied to the rate  charged  on  Hometown's  floor plan
financing arrangement.

      INTEREST EXPENSE

      Interest expense decreased $0.2 million,  or 6.3%, to $3.0 million for the
year ended  December 31, 2003 from $3.2 million for the year ended  December 31,
2002.  The  decrease  is  primarily  attributable  to a  decrease  in floor plan
interest expense ($0.1 million),  which decreased due to a reduction in interest
rates from the year ended December 31, 2002.

      OTHER INCOME

      Other  income for 2003  primarily  includes a gain of  approximately  $0.9
million  resulting from the sale of a Chrysler/Jeep  Sales and Service Franchise
in Waterbury, CT in June 2003.

      OTHER EXPENSE

      Included in other expense for the year ended December 31, 2002 is an asset
impairment  charge  of  $150,000  related  to a  property  held  for  sale.  The
impairment  charge was recorded to write-down the asset to fair value. See Notes
2 and 3 to the consolidated financial statements.

      PROVISION (BENEFIT) FOR INCOME TAX

      The effective income tax rate was 18% for the year ended December 31, 2003
and 38% for the year ended  December 31,  2002.  The rates were based on current
forecasts of income before taxes, and current forecasts of permanent differences
between tax and book income.  The  difference  in rates between 2003 and 2002 is
primarily due to the change in valuation  allowance  from 2002 to 2003.  This is
primarily  due to  goodwill  that  was  deducted  related  with  the sale of the
Chrysler/Jeep  Sales and Service  Franchise as well as  amortization of goodwill
for tax  purposes.  At December 31,  2003,  Hometown has a deferred tax asset of
$0.2 million, net of a valuation allowance, related to its net operating losses.
The  state  net  operating  losses  begin to expire  in 2005.  The  federal  net
operating  losses begin to expire in 2021.  Hometown  believes this net deferred
tax  asset  will be  realized  within  the next  three  years  based on  current
projections.

      INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE

      Income  before  cumulative  effect of  accounting  change  increased  $1.6
million to $2.4  million for the year ended  December 31, 2003 from $0.8 million
for the year ended  December 31, 2002. The increase is primarily due to the gain
on sale of the  Chrysler/Jeep  Sales and  Service  Franchise  recorded  in Other
Income. See other changes described above.

      CUMULATIVE EFFECT OF ACCOUNTING CHANGE

      In accordance with SFAS 142,  Hometown  completed its goodwill  impairment
testing during 2002, which resulted in Hometown  recording a one-time,  non-cash
charge of  approximately  $23.7  million  to  write-off  the  carrying  value of
goodwill.  This  charge is  non-operational  in  nature  and is  reflected  as a
cumulative  effect of an  accounting  change in the  accompanying  statement  of
operations for the year ended December 31, 2002.  Approximately  $9.6 million of
this  charge  is  tax  deductible,  resulting  in  a  deferred  tax  benefit  of
approximately  $3.8  million  against  which  a  full  valuation  allowance  was
recorded.  Hometown is reducing  its  valuation  allowance  as goodwill is being
amortized for tax purposes. See Note 5 to the consolidated financial statements.


                                       30
<PAGE>


      NET INCOME (LOSS)

      Net income (loss)  improved $25.3  million,  to income of $2.4 million for
the year ended  December 31, 2003,  from a loss of $(22.9)  million for the year
ended December 31, 2002. The 2002 loss was primarily due to the write-off of the
carrying  value of  goodwill in the 2002  period.  See other  changes  described
above.

      EARNINGS (LOSS) 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 10 to the  consolidated  financial
statements.

      The basic and  diluted  income per share for the year ended  December  31,
2003 is $0.33 including $0.09  resulting from a tax benefit  recorded  primarily
due to the reduction of a valuation  allowance on the deferred tax asset related
to tax deductible  unamortized  goodwill and $0.08  resulting from a gain on the
sale of a Chrysler/Jeep  Sales and Service Franchise in June 2003. The basic and
diluted (loss) per share for the year ended December 31, 2002 is $(3.20),  which
includes  basic  and  diluted  income  per  share  before  cumulative  effect of
accounting  change  of $0.10  and  basic  and  diluted  (loss)  per  share for a
cumulative effect of accounting  change of $(3.30),  resulting from the goodwill
impairment charge associated with the  implementation of SFAS 142. See Note 5 to
the  consolidated  financial  statements for the recognition of an impairment of
the carrying value of its goodwill in 2002, in accordance with SFAS 142.

CYCLICALITY

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

SEASONALITY

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

EFFECTS OF INFLATION

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


                                       31
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

      Cash and Cash Equivalents

      Total cash and cash  equivalents  at December 31, 2004 and 2003,  was $6.1
million and $5.6 million, respectively.

      Cash Flow from Operations

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

<TABLE>
<CAPTION>
                                                              For the years ended December 31,
                                                        --------------------------------------------
                                                            2004              2003            2002
                                                        ----------        ----------       ----------
                                                                        (in thousands)
<S>                                                         <C>             <C>             <C>
Net cash provided by operating activities                   $ 3,129         $ 4,273         $ 3,386
Net cash provided by (used in) investing activities          (2,121)            132          (2,439)
Net cash (used in) financing activities                        (546)         (2,390)         (1,769)
                                                            -------         -------         -------
Net increase (decrease) in cash and cash equivalents        $   462         $ 2,015         $  (822)
                                                            =======         =======         =======
</TABLE>

      For the year ended December 31, 2004, net cash provided from operations of
$3.1 million is  primarily  due to: (i) net income plus  non-cash  items of $2.7
million, and (ii) a decreases in accounts receivable of $1.0 million.  Partially
offsetting this were increases in accounts  payable and accrued expenses of $0.7
million.  An  increase  in  inventory  of $4.5  million  was offset by a similar
increase in floor plan notes payable of $4.5 million.  New vehicle inventory was
purchased  with  the  expectation  of  higher  sales  in  2004,  which  did  not
materialize. Sales of new vehicles actually decreased $12.7 million in 2004 from
the 2003 period,  resulting in an increase in new vehicle  inventory at December
31,  2004  due to the  higher  purchasing  level.  Net  cash  used in  investing
activities of $2.1 million is due to capital expenditures of $2.1 million and is
primarily due to the  Brattleboro,  VT building  purchased in June 2004 for $1.5
million.  Net  cash  used in  financing  activities  of $0.5  million  is due to
principal  payments of  long-term  debt and capital  lease  obligations  of $2.2
million;  partially offset by proceeds from long-term borrowings of $1.4 million
and exercise of warrants of $0.26 million. The long-term borrowings were used to
acquire the Brattleboro, VT building discussed above.

      For the year ended December 31, 2003, net cash provided from operations of
$4.3 million is  primarily  due to: (i) net income plus  non-cash  items of $2.9
million,  (ii) the decrease in inventory in excess of the decrease in floor plan
liability  of $1.8 million and (iii)  increases in accounts  payable and accrued
expenses of $0.7 million.  Partially  offsetting this were increases in accounts
receivable  of $1.1 million.  Net cash provided by investing  activities of $0.1
million is primarily due the proceeds from the sale of a Chrysler/Jeep Sales and
Service Franchise of $0.9 million,  partially offset by capital  expenditures of
$0.8 million. Net cash used in financing activities of $2.4 million is primarily
due to principal payments of long-term debt and capital lease obligations.

      Capital Expenditures

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


                                       32
<PAGE>


      Use of Estimates and Critical Accounting Policies

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

      Revenue Recognition

      Revenues for vehicle and parts sales are  recognized  upon  delivery to or
acceptance by the customer. Revenues for vehicle service are recognized when the
service has been  completed.  Sales  discounts and service coupons are accounted
for as a  reduction  to the  sales  price at the  point  of  sale.  Manufacturer
incentives  and rebates  are not  recognized  until  earned in  accordance  with
respective  manufacturers  incentive  programs.  See Note 12 to the consolidated
financial  statements  for  effect  of  EITF  02-16  "Accounting  by a  Customer
(Including a Reseller) for Certain Consideration Received from a Vendor".

      Finance, Insurance and Service Contract Income Recognition

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

      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
December 31, 2004 and 2003,  Hometown had  $1,140,000  and $1,225,000 of related
deferred  revenue,  respectively.   During  2003,  these  dealerships  generated
approximately  $403,000 of related warranty service and insurance revenue, which
was deferred. During the same period, approximately $488,000 of deferred revenue
was amortized to Other  Revenues,  net. At December 31, 2004,  Hometown also had
other deferred  revenue of $319,000,  which represents the balance of a $500,000
advance on warranty income from Hometown's Extended Service Plan vendor received
June 2004.  It is  estimated  that this  advance will be earned over the next 12
months. There were no fees or other costs associated with the advance.

      Hometown may be charged back ("charge-backs") for unearned financing fees,
insurance or service contract  commissions in the event of early  termination of
the  contracts  by the  customers.  For  finance  fees,  if a  customer  were to
terminate  their contract prior to the scheduled  maturity,  generally  three to
five  years,  Hometown  may be  charged  back for a portion of the  finance  fee
received.  The time  period  whereby  Hometown  is  subject to  charge-backs  is
generally  from 90 days to 180 days.  For certain  other  contracts  Hometown is
subject to charge-backs for the life of the loan. Generally, if a customer makes
their first three to six payments and subsequently  pays off the loan,  Hometown
will not be charged back by the financing institution. Hometown pays for this in


                                       33
<PAGE>


the form of a reduction  of the finance fee. In the case of insurance or service
contracts,  Hometown  is subject  to  charge-backs  for the life of the  related
insurance  policy or service  contract.  In the case of early  termination,  the
vendor will bill us back a pro-rated portion of our commission. The reserves for
future  charge  backs  are  based  on  historical   operating  results  and  the
termination  provisions  of the  applicable  contracts.  At the  time  of  sale,
Hometown  records  finance,  insurance  and  service  contract  income,  net  of
estimated  charge-backs.  This is  included in other  dealership  revenue in the
accompanying consolidated financial statements.

      Receivables

      Hometown had $5.1 million in accounts receivable, net at December 31, 2004
compared  to  $6.1  million  at  December  31,  2003.   The  majority  of  those
receivables,  $2.4  million and $3.1  million as of December  31, 2004 and 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.  Of the
remaining  amount,  $1.6  million and $1.7  million as of December  31, 2004 and
2003,  respectively,  represents amounts due from manufactures for such items as
warranty  claims and  incentive  reimbursements.  Additional  amounts are parts,
service and other trade  receivables.  In assessing  our  allowance for doubtful
accounts,  we consider  historical  losses as well as current  performance  with
respect to past due  accounts.  The  allowance  for  doubtful  accounts  is $0.3
million at December 31, 2004 and 2003.

      Inventories

      Hometown  had $43.4  million in  inventories,  net at  December  31,  2004
compared to $37.8 million at December 31, 2003. The majority of inventory, $33.6
million and $28.4 million as of December 31, 2004 and 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  adjustment was $0.7 million at
December 31, 2004 and 2003.

EXERCISE OF WARRANTS / COMMON STOCK

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

FLOOR PLAN FINANCING

      See Note 6 to the consolidated financial statements.

OTHER INDEBTEDNESS

      In addition  to floor plan  financing,  Hometown  has  long-term  debt and
capital lease obligations of $13.7 million,  which is primarily  attributable to
real estate  mortgage notes payable of $7.4 million due in monthly  installments
including  interest at 10.0% that matures in May 2014, real estate capital lease
obligations of $4.3 million due in monthly  installments  including  interest at
10.0% that matures in December 2013,  real estate  mortgage note payable of $1.0
million  including  interest at 7.0% through May 2009 at which time the terms of
the loan will be renegotiated,  and capital lease obligations on rental vehicles
of $0.9 million due in monthly installments including interest ranging from 3.8%
to  5.5%  that  matures  through  April  2012.  See  Notes  7,  8 and  13 to the
consolidated financial statements.


                                       34
<PAGE>


      Hometown  is subject to certain  financial  covenants  related to its real
estate  mortgages.  At December  31,  2004,  Hometown was in default of its loan
agreement  for Baystate  Lincoln  Mercury for failure to comply with a financial
covenant. Accordingly, Hometown has reclassified $4,319,000 of related long-term
debt to current at December 31, 2004.  Total debt for this  mortgage at December
31, 2004 is $4,613,000.  On March 16, 2005, the lender notified Hometown that it
is not  declaring  an event of default  in  connection  with the loan,  however,
reserving  all rights to  declare  an event of default in the future  should the
financial covenant default not be cured. If an event of default was declared and
only at the lenders  option,  Hometown could be required to pay all  outstanding
debt plus a defeasance  penalty and  transaction  costs  totaling  approximately
$1,400,000. Although Hometown does not believe the lender will call the loan, in
the event it is called,  Hometown  believes it would be able to secure alternate
financing.  Hometown  believes the market value of the property is approximately
$6,200,000.  Hometown  believes it would be able to borrow up 100% of the market
value of the  property.  Assuming  borrowing  $6,000,000  at a current  variable
interest rate of approximately  7.46% for a 15-year  mortgage,  monthly payments
would be approximately $6,800 lower than the current monthly payments being made
on the property.

      As  of  December  31,  2004,   Hometown  has  the  following   contractual
obligations:

<TABLE>
<CAPTION>
                                           Less than                             More than
                                Total       1 year      1-3 years    3-5 years    5 years
                               -------      -------      -------      -------      -------
                                                     (In thousands)
<S>                            <C>          <C>          <C>          <C>          <C>
Floor Plan                     $42,474      $42,474           --           --           --
Long term debt and
  capital lease obligations    $14,126      $ 5,505      $ 1,810      $ 1,634      $ 5,177
Operating leases:
      Third parties            $ 1,172      $   452      $   504      $   216      $    --
          Related parties      $ 5,851      $   831      $ 1,250      $ 1,250      $ 2,520
Interest                       $10,827      $ 5,663      $ 1,781      $ 1,489      $ 1,894
                               -------      -------      -------      -------      -------
Total                          $74,450      $54,925      $ 5,345      $ 4,589      $ 9,591
                               =======      =======      =======      =======      =======
</TABLE>

COMPANY GUARANTEES

      See Note 14 to the consolidated financial statements.

COMPANY WARRANTIES

      See Note 14 to the consolidated financial statements.

FRANCHISE AGREEMENTS

      See Note 14 to the consolidated financial statements.

ACQUISITIONS AND DISPOSITIONS

      See Note 17 to the consolidated financial statements.


                                       35
<PAGE>


RELATED PARTY TRANSACTIONS

      Hometown  has leased from  various  affiliates  the  premises  occupied by
certain of its dealerships  and guaranteed the related  mortgage debt of certain
dealerships.  Each of the governing leases became effective as of the closing of
the initial  public  offering,  has a term  expiring in 2013, is on a triple net
basis and provides for a consumer price index ("CPI")  increase to the base rent
on January 1, 2009.  Total  expense for operating  leases and rental  agreements
with related  parties was $1.0 million for the year ended  December 31, 2004 and
future minimum  payments under these lease agreements as of December 31, 2004 is
$5.9 million.  Two of the leases are treated as capital  leases.  Total payments
for these  leases were $0.9 million for the year ended  December 31, 2003.  This
practice  is fairly  common in the  automotive  retail  industry.  See Item 13 -
"Certain Relationships and Related Transactions".

LITIGATION

      See Item 3. - Legal Proceedings and Note 14 to the consolidated  financial
statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      We are  exposed  to market  risk from  changes  in  interest  rates on our
amounts  outstanding  under our floor plan  financing  arrangement,  which bears
interest at variable rates based on the prime or LIBOR borrowing rates. Based on
floor plan  amounts  outstanding  at December  31, 2004 of $42.5  million,  a 1%
change in the  borrowing  rate would result in a $0.4  million  change to annual
floor plan interest expense.

      At December 31, 2004,  Hometown  invested  $4.8 million of excess cash, of
which $0.8  million was  invested  in money  market  accounts  paying a weighted
average  interest  rate of 1.70% at  December  31,  2004,  and $4.0  million was
invested in a Ford Motor Credit Company cash management  account paying interest
of 6.25% at December 31, 2004. The cash management account interest rate is tied
to the rate charged on Hometown's floor plan financing arrangement.

NEW ACCOUNTING PRONOUNCEMENTS

      See Note 2 to the consolidated financial statements.

FORWARD LOOKING STATEMENT

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


                                       36
<PAGE>


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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


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

None


ITEM 9A. CONTROLS AND PROCEDURES

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

      At December 31, 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.

ITEM 9B. OTHER INFORMATION

None


                                       37
<PAGE>


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

      Information  regarding directors and nominees for directors of Hometown is
included  under the caption  entitled  "Election of Directors" in the 2005 Proxy
Statement and is incorporated herein by reference.

      The executive officers and directors of Hometown and their respective ages
as of March 22, 2005 are as follows:

<TABLE>
<CAPTION>
NAME                       AGE      POSITION                                           DIRECTOR SINCE
----                       ---      --------                                           --------------
<S>                        <C>      <C>                                                <C>
Corey Shaker               47       President, Chief Operating Officer, Chief               1997
                                    Executive Officer and Director
William C. Muller Jr.      53       Regional Vice  President - South Division and           1997
                                    Director
Steven Shaker              36       Regional Vice President - North Division           Not a director
Joseph Shaker              37       Regional Vice President - East Division and             1997
                                    Director
Charles F. Schwartz        49       Chief Financial Officer                            Not a director
Bernard J. Dzinski, Jr. *  41       Director                                                2003
Steven A. Fournier *       50       Director                                                2002
H. Dennis Lauzon           56       Director                                                2002
Timothy C. Moynahan *      65       Director                                                2002
</TABLE>
--------------
* Member of Audit, Compensation and Nominating/Governance Committees

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

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

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

      William C. Muller Jr. has been  Regional Vice  President - South  Division
since March 2000. Mr. Muller has been Vice President-New Jersey Operations since
October 1, 1997. In addition,  from 1980 he was the President of Muller  Toyota,
Inc.  and of  Muller  Chevrolet,  Oldsmobile,  Isuzu,  Inc  (both of  which  are
currently  known as Muller  Automotive  Group,  Inc. and Muller  Chevrolet Inc.,
respectively.)  Under his  management,  Muller  Toyota  has been:  (a) a 14-time
recipient of Toyota's Prestigious President's Award, given to those dealers with
superior levels of customer  satisfaction who also exceed capital  standards and


                                       38
<PAGE>


have  high  market  penetration  and  facilities  that  meet  or  exceed  Toyota
standards;  (b) a 14-time  recipient of Toyota  Parts  Excellence  Award;  (c) a
10-time winner of the Toyota Service  Excellence  Award; and (d) a 4-time winner
of Toyota's  Sales  Excellence  Award.  He holds a B.A.  degree  from  Fairleigh
Dickinson University.

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

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

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

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

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

      H. Dennis Lauzon has been the President and owner of Parkway  Toyota since
1978.  Mr.  Lauzon is on the  Toyota  Dealers  Advertising  Board as well as the
Dealer  Council.  He is also on the board of Trustees for Hackensack  University
Medical Center. Mr. Lauzon attended Fairleigh Dickinson University.


                                       39
<PAGE>


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

COMMITTEES OF THE BOARD OF DIRECTORS

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

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

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

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


                                       40
<PAGE>


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

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

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION.

      The following table presents certain information  concerning  compensation
paid or accrued for services  rendered to Hometown in all capacities  during the
three years ended  December 31, 2004,  for the Chief  Executive  Officer and the
other executive officers of Hometown whose aggregate annual base salary exceeded
$100,000 (collectively, the "Named Executive Officers").

<TABLE>
<CAPTION>
                                                  COMPENSATION TABLE
--------------------------------------------------------------------------------------------------------------------
                                                                 ANNUAL COMPENSATION
                                   ---------------------------------------------------------------------------------
                                 FISCAL ANNUAL                                                 OTHER             OPTION
NAME AND PRINCIPAL POSITION    YEAR COMPENSATION   $ SALARY               BONUS (1)             (2)              GRANTS
---------------------------    ----------------    --------               ---------          -------            -------
<S>                                 <C>             <C>                    <C>                <C>                <C>
Corey E. Shaker,                    2004            257,500                35,168             18,202                 --
President and Chief                 2003            250,000                66,923             16,073                 --
Executive Officer                   2002            250,000                    --              6,840             50,000

William C. Muller, Jr               2004            215,000               134,346             20,046                 --
Regional Vice                       2003            215,000               155,319             17,384                 --
President-South Division            2002            200,000               101,844              9,673                 --


Steven Shaker,                      2004            150,000(3)                 --              5,745                 --
Regional Vice                       2003            125,000                    --              3,542                 --
President-North Division            2002            125,000                 1,325              2,600                 --


Joseph Shaker,                      2004            200,000                    --             10,600                 --
Regional Vice                       2003            200,000                53,461             10,400                 --
President-East Division             2002            196,350                    --              8,000                 --

Charles F. Schwartz,                2004            195,000                33,034              5,970                 --
Chief Financial Officer             2003            180,000                39,385              5,402             50,000
  and Secretary                     2002            160,000                20,000              1,749                 --
</TABLE>

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

(2)   Primarily use of vehicles.

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


                                       41
<PAGE>


OPTION GRANTS IN LAST FISCAL YEAR

NONE

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

      The following table  summarizes  options  exercised during fiscal 2004 and
presents the value of unexercised  options held by the Named Executive  Officers
at fiscal year end:

<TABLE>
<CAPTION>
                                                                       NUMBER OF SECURITIES
                                                                            UNDERLYING                 VALUE OF UNEXERCISED
                                                                      UNEXERCISED OPTIONS AT          IN-THE-MONEY OPTIONS AT
                                                                          FISCAL YEAR-END                 FISCAL YEAR-END
                                 ACQUIRED ON         VALUE                EXERCISABLE (E)                 EXERCISABLE (E)
NAME                              EXERCISE          REALIZED             UNEXERCISABLE (U)               UNEXERCISABLE (U)
----------------------------    --------------    -------------    ------------------------------    --------------------------

<S>                                  <C>               <C>                   <C>                              <C>
Corey E. Shaker                      --                --                    83,333 E                         $11,000 E
President and Chief                                                          16,667 U                         $ 5,500 U
Executive Officer

William C. Muller, Jr                --                --                    30,000 E                             $ 0 E
Regional Vice President -                                                        -- U                             $ 0 U
South

Steven Shaker                        --                --                    30,000 E                             $ 0 E
Regional Vice President -                                                        -- U                             $ 0 U
North

Charles F. Schwartz,                 --                --                    66,666 E                         $14,333 E
Chief Financial Officer                                                      33,334 U                         $15,667 U
and Secretary
</TABLE>


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

EMPLOYMENT CONTRACTS

      None of the officers of Hometown have employment agreements.


                                       42
<PAGE>


COMPENSATION  COMMITTEE  INTERLOCKS AND INSIDER  PARTICIPATION  IN  COMPENSATION
DECISIONS

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

1998 STOCK OPTION PLAN

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

EMPLOYEE BENEFIT PLAN

      Hometown  maintains  the Hometown  Auto  Retailers,  Inc.  401(k) Plan, as
amended,  (the "Plan")  effective  October 1, 1999,  for the benefit of eligible
employees,  as defined.  Participants may make voluntary  contributions of up to
15% of their compensation, subject to certain IRS limitations. Hometown may make
annual  matching  contributions  to the Plan at its  discretion.  Hometown  made
contributions  of  $18,000,  $24,000  and $0 to the  Plan  for the  years  ended
December 31, 2004, 2003, and 2002, respectively.

COMPENSATION OF DIRECTORS

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

LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION

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


                                       43
<PAGE>


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

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

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

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


                                                      COMPENSATION COMMITTEE

                                                      Steven Fournier
                                                      Chairman







                                       44
<PAGE>


                               [GRAPHIC OMITTED]

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

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


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The  following  table sets forth  certain  information  known to  Hometown
regarding the  beneficial  ownership of Common Stock as of March 22, 2005 by (i)
each person known to Hometown to be the beneficial  owner of more than 5% of its
outstanding  shares of Common Stock, (ii) each Director of Hometown,  (iii) each
Named  Executive  Officer  and (iv) all  Directors,  and  Executive  Officers of
Hometown  as a group.  Except as  otherwise  indicated,  the persons or entities
listed below have sole voting and investment power with respect to all shares of
Common Stock owned by them.

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

      o     As of March 22,  2005,  the total  number of shares  outstanding  is
            6,449,389,  of which  3,870,137  shares are Class A common stock and
            2,579,252 shares are Class B common stock.

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

      o     As of March 22,  2005,  the total  number  of votes  outstanding  is
            29,662,657,  of which  3,870,137 votes are from Class A common stock
            outstanding  and  25,792,520  votes  are from  Class B common  stock
            outstanding;


                                       45
<PAGE>


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

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


<TABLE>
<CAPTION>
                                               Common Stock                      % of Outstanding                % of
                                            Beneficially Owned                     Equity Owned               Aggregate
                                         -----------------------         -------------------------------    voting Power
                                          Class            Class         Class        Class                    of all
Name of Beneficial Owner                    A                B             A            B          Total       Classes
------------------------                 -------          -------         ----        -----         ----         ----
<S>                                      <C>              <C>             <C>         <C>           <C>          <C>
OFFICERS AND DIRECTORS
Corey E. Shaker                          220,214          265,080         5.55        10.28         7.41         9.65
William C. Muller, Jr                    392,000          761,752        10.05        29.53        17.81        26.97
Steven Shaker                            145,142          206,424         3.72         8.00         5.43         7.44
Joseph Shaker                            147,826          321,812         3.82        12.48         7.28        11.35
Charles F. Schwartz                       83,333               --         2.11           --         1.28           **
Bernard J. Dzinski Jr                     20,834               --           **           --           **           **
Steven A. Fournier                        35,001               --           **           --           **           **
H. Dennis Lauzon                          15,834               --           **           --           **           **
Timothy C. Moynahan                       35,001               --           **           --           **           **
All Directors, and Executive
   Officers as a group (9 persons)     1,095,185        1,555,068        25.95        60.29        38.98        55.46

5% BENEFICIAL OWNERS
Janet Shaker                              71,428          227,668         1.85         8.83         4.64         7.92
Paul Shaker                                   --          218,268           --         8.46         3.38         7.36
Edward D. Shaker                         124,642          206,612         3.21         8.01         5.12         7.38
Edward Shaker                            125,842          175,404         3.25         6.80         4.67         6.34
Richard Shaker                           131,642          175,404         3.39         6.80         4.75         6.35
Steven N. Bronson                        361,817               --         9.35           --         5.61         1.22
Louis Meade                              200,000               --         5.17           --         3.10           **
</TABLE>

**    OWNERSHIP IS LESS THAN 1%

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

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

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

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

            o     25,000 shares at $2.25 per share;

            o     25,000 shares at $1.25 per share;

            o     50,000 shares at $0.48 per share;

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

      o     761,752 shares of Class B common stock;

      o     360,750 shares of Class A common stock;

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

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

            o     15,000 shares at $2.25 per share;

            o     15,000 shares at $1.25 per share;


                                       46
<PAGE>


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

      o     206,424 shares of Class B common stock;

      o     115,142 shares of Class A common stock;

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

            o     15,000 shares at $2.25 per share;

            o     15,000 shares at $1.25 per share;

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

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

      o     147,826 shares of Class A common stock;

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

      o     50,000 shares at $0.68 per share;

      o     33,333 shares at $0.34 per share.

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

      o     834 shares at $1.05 per share;

      o     20,000 shares at $0.42 per share.

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

      o     834 shares at $1.05 per share;

      o     30,000 shares at $0.58 per share;

      o     4,167 shares at $0.42 per share.

      H. Dennis Lauzon has an address at 854 Sunset Avenue,  Haworth, New Jersey
07641.  His  beneficial  ownership  of our  common  stock  consists  of  options
exercisable  within the next 60 days to purchase  shares of Class A common stock
as follows:

      o     834 shares at $1.05 per share;

      o     5,000 shares at $0.65 per share;

      o     10,000 shares at $0.42 per share.

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

      o     834 shares at $1.05 per share;

      o     30,000 shares at $0.48 per share;

      o     4,167 shares at $0.42 per share;

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

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


                                       47
<PAGE>


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

      o     206,612 shares of Class B common stock;

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

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

            o     8,750 shares at $2.25 per share;

            o     8,750 shares at $1.25 per share;

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

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

      o     175,404 shares of Class B common stock;

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

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

            o     8,750 shares at $2.25 per share;

            o     8,750 shares at $1.25 per share;

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

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

<TABLE>
<CAPTION>
                                                 EQUITY COMPENSATION PLAN INFORMATION

        Plan category          Number of securities to       Weighted-average            Number of securities
                               be issued upon exercise       exercise price of         remaining available for
                               of outstanding options,     outstanding options,      future issuance under equity
                                 warrants and rights        warrants and rights     compensation plans (excluding
                                         (a)                                           securities reflected in
                                                                                             column (a))
<S>                                    <C>                         <C>                         <C>
 Equity compensation plans
   approved by security
   holders                             517,500                     $1.04                       312,500
 Equity compensation plans
   not approved by security
   holders                              None                       None                          None
                                   ---------------            ---------------              ---------------
 Total                                 517,500                     $1.04                       312,500
</TABLE>

      In February  1998, as further  amended in August 2002, in order to attract
and retain persons  necessary for the success of Hometown,  Hometown adopted its
1998 Stock Option Plan  covering up to 830,000  shares of Class A Common  Stock.
See Note 16 to the consolidated financial statements.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Section 16(a) of the Securities  Exchange Act of 1934 requires  Hometown's
officers  and  directors,  and  persons  who  own  more  than  ten-percent  of a
registered class of Hometown's equity  securities,  to file reports of ownership
and changes in ownership with the Securities  and Exchange  Commission  ("SEC").


                                       48
<PAGE>


Officers,  directors and greater than  ten-percent  stockholders are required by
SEC  regulation to furnish  Hometown with copies of all Section 16(a) forms they
file.

      To the best of Hometown's knowledge,  based solely on review of the copies
of such forms furnished to Hometown,  or written  representations  that no other
forms  were   required,   Hometown   believes  that  all  Section  16(a)  filing
requirements applicable with respect to all its current officers,  directors and
ten percent  shareholders  have been complied with as of the filing date of this
Annual Report. With respect to any former directors,  officers,  and ten-percent
shareholders  of  Hometown,  Hometown  does not have any  knowledge of any known
failures to comply with the filing requirements of Section 16(a).


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

LEASES

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

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

      MULLER GROUP.  Hometown leases, for an annual base rental of approximately
$411,000  and  $452,000   respectively  the  premises  occupied  by  its  Toyota
("Toyota")  dealership  in  Clinton,  New  Jersey  and its  Chevrolet  ("Chevy")
dealership in Stewartsville, New Jersey from Rellum Realty Company, a New Jersey
general  partnership,  one of whose two  partners  is William C.  Muller Jr. Mr.
Muller is Regional  Vice  President - South  Division,  director and a principal
stockholder  of  Hometown.  The Toyota and Chevy  leases are  treated as capital
leases.  In  connection  with the  acquisition  in 1999 of real  estate  used by
Baystate Lincoln Mercury, Hometown guaranteed the mortgage debt of Rellum Realty
Company.  The 1999  guaranty  was  given in  substitution  for a  February  1998
guaranty of that debt by the Muller Group,  a subsidiary  of Hometown.  Hometown
recorded the lease as a capital lease. As of December 31, 2004 the mortgage debt
balance  is $4.3  million,  which  agrees  with the  capital  lease  obligation.
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.

      WESTWOOD.  Hometown  leases,  for an annual base  rental of  approximately
$411,000 the premises occupied by its Lincoln Mercury dealership in Emerson, New
Jersey from Salvatore A. Vergopia and his wife.  Mr.  Vergopia and his wife will
cease to be principal  stockholders and this lease will be terminated as part of
the settlement of the litigation  between Hometown and the Vergopia's.  See Item
3. Legal Proceedings.


                                       49
<PAGE>


ITEM 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

      The  aggregate  fees and  expenses  billed for the  professional  services
rendered  by BDO  Seidman,  LLP for the  audit of  Hometown's  annual  financial
statements included in Hometown's Form 10-K filing for fiscal year 2004 and 2003
and the  reviews  of  Hometown's  quarterly  financial  statements  included  in
Hometown's  First,  Second and Third  Quarter  Form 10-Q filings for fiscal year
2004 and 2003 totaled approximately $144,000 and $137,000, respectively.

AUDIT RELATED FEES

      Hometown did not incur any audit related fees,  other than those  included
under the paragraph  "Audit Fees",  for  professional  services  rendered by BDO
Seidman, LLP during the 2004 and 2003 fiscal year.

TAX FEES

      Hometown   incurred  tax  fees  of   approximately   $16,000  and  $0  for
professional  services  rendered by BDO  Seidman,  LLP for tax  compliance,  tax
advice and tax planning during the 2004 and 2003 fiscal years, respectively. The
2004 services were comprised of research discussions  regarding tax treatment of
a litigation settlement.

ALL OTHER FEES

      Hometown did not incur any other fees for professional  services  rendered
by BDO Seidman,  LLP other than the  services  covered in the  paragraphs  above
titled  "Audit  Fees" and "Audit  Related  Fees" during the 2004 and 2003 fiscal
years.

AUDIT COMMITTEE PRE-APPROVAL POLICY

      Hometown's  Audit Committee has authorized the Chief Financial  Officer to
incur up to $5,000 per fiscal year on accounting  research  projects outside the
scope of normal audit  services  rendered by BDO  Seidman,  LLP for the audit of
Hometown's annual financial  statements  included in Hometown's Form 10-K filing
and the  reviews  of  Hometown's  quarterly  financial  statements  included  in
Hometown's  Form 10-Q  filings.  Such  amount is less than 5% of the annual fees
paid to BDO Seidman,  LLP for its Form 10-K and Form 10-Q filings.  No fees were
incurred in fiscal 2004 that were not approved by the Audit  Committee  pursuant
to this policy.

AUDIT COMMITTEE CONSIDERATION

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

WORK PERFORMED BY PRINCIPAL ACCOUNTANT'S FULL TIME PERMANENT EMPLOYEES

      BDO Seidman,  LLP's services rendered in performing  Hometown's audits for
fiscal year 2004 and 2003 were performed by full time,  permanent  employees and
partners of BDO Seidman, LLP.


                                       50
<PAGE>


                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

EXHIBITS:
No:       DESCRIPTION
-------   ----------------------------------------------------------------------
    3.1   Certificate of Incorporation of Dealer-Co., Inc. (NY-3/10/97)

    3.2   Certificate  of  Incorporation   of  Hometown  Auto  Retailers,   Inc.
          (Del-6/5/97)

    3.3   Certificate of Ownership and Merger of Dealer-Co.,  Inc. into Hometown
          Auto Retailers, Inc. (Del-6/27/97)

    3.4   Certificate of Merger of Dealer-Co., Inc. and Hometown Auto Retailers,
          Inc. into Hometown Auto Retailers, Inc. (the "Company") (NY-9/11/97)

    3.5   Certificate  of Amendment of the  Certificate of  Incorporation  filed
          February 19, 1998

    3.6   Certificate  of Amendment of the  Certificate of  Incorporation  filed
          June 8, 1998

(1) 3.7   Certificate  of Amendment of the  Certificate of  Incorporation  filed
          December 7, 2000

    3.8   By-Laws of Hometown

    4.1   Form of Class A Common Stock Certificate

    4.2   Form of Class B Common Stock Certificate

    4.3   Form of Warrant  Agreement  between  Hometown  and Paulson  Investment
          Company and related Warrant

    4.4   Stock Option Plan of Hometown

(2) 4.5   Form of 3-year  warrant  issued in the Private  Placement  of units on
          July 25, 2001

(2) 4.6   Copy of the $240,000  Non-negotiable  Promissory Note made by Hometown
          to Autos of Newburgh, Inc.

(2) 4.7   Copy  of the  Settlement  Agreement,  dated  June  28,  2001,  between
          Hometown and Autos of Newburgh, Inc.

   10.1   Exchange  Agreement,  dated as of the 1st day of July, 1997, among the
          Registrant  and the members of the Shaker Group,  the Muller Group and
          the Westwood Group

   10.2   Agreement,  dated July 2, 1997, between the Registrant and Brattleboro
          Chrysler  Plymouth Dodge, Inc. and Amendments dated November 11, 1997,
          April 14, 1998 and July 8, 1998

   10.3   Agreement,   dated  August  14,  1997,   between  the  Registrant  and
          Leominster  Lincoln  Mercury,  Inc., dba Bay State Lincoln Mercury and
          Amendments dated October 31, 1997 and April 14, 1998, respectively

   10.4   Stockholders  Agreement,  dated as of the 16th day of  February  1998,
          among  the  Shaker  Stockholders,  the  Muller  Stockholders  and  the
          Westwood Stockholders

   10.5   Employment Agreement, dated as of the 20th day of April, 1998, between
          the Registrant and Salvatore A. Vergopia

   10.6   Employment Agreement, dated as of the 20th day of April, 1998, between
          the Registrant and William C. Muller Jr.

   10.7   Employment Agreement, dated as of the 20th day of April, 1998, between
          the Registrant and Corey Shaker

   10.8   Employment Agreement, dated as of the 20th day of April, 1998, between
          the Registrant and Edward A. Vergopia


                                       51
<PAGE>


     10.9 Employment Agreement, dated as of the 20th day of April, 1998, between
          the Registrant and James Christ

    10.10 Employment Agreement, dated as of the 20th day of April, 1998, between
          the Registrant and Steven Shaker

    10.11 Lease,  dated as of April 20, 1998,  between  Shaker  Enterprises,  as
          landlord, and Hometown (Lincoln/Mercury dealership in Watertown, CT.)

    10.12 Lease,  dated as of April  20,  1998,  between  Joseph  Shaker  Realty
          Company, as landlord, and Hometown (Ford dealership in Waterbury, CT.)

    10.13 Lease,  dated as of April  20,  1998,  between  Joseph  Shaker  Realty
          Company, as landlord,  and Hometown (Jeep/Eagle  dealership Waterbury,
          CT.)

    10.14 Lease, dated as of April 20, 1998,  between Rellum Realty Company,  as
          landlord, and Hometown (Toyota dealership in Clinton, NJ)

    10.15 Lease, dated as of April 20, 1998,  between Rellum Realty Company,  as
          landlord,  and  Hometown  (Chevrolet/Oldsmobile/Isuzu   dealership  In
          Stewartville, NJ)

    10.16 Lease,  dated as of April 20, 1998,  between Salvatore A. Vergopia and
          Janet Vergopia, as landlord,  and Hometown (Lincoln Mercury dealership
          in Emerson, NJ)

    10.17 Inventory  Loan and  Security  Agreement  between  Toyota Motor Credit
          Corporation  and Muller Toyota,  Inc.;  Commercial  Promissory  Notes;
          Dealer Floor Plan Agreement

    10.18 Ford Motor Company Automotive Wholesale  Installment Sale and Security
          Agreement  with  Shakers,   Inc.;  Power  of  Attorney  for  Wholesale
          Installment Sale Contract; and Automotive Installment Sale Contract

    10.19 Ford Motor Company Automotive Wholesale  Installment Sale and Security
          Agreement with Family Ford, Inc. and Power of Attorney for Wholesale

    10.20 Chrysler Financial Security Agreement and Master Credit Agreement with
          Shaker's Inc.

    10.21 Lease, dated as of April 20, 1998, between Thomas E. Cosenzi optionees
          as  landlord,  and  Hometown  (Chrysler  Plymouth  dealerships  in  N.
          Brattleboro, VT.)

    10.22 Form of Stock Option Agreement with schedule of optionees

    10.23 Agreement  dated May 28, 1998,  between the  Registrant and Pride Auto
          Center, Inc. (an Acquisition)

    10.24 Supplemental Agreement to Dealer Sales and Service Agreement (Publicly
          Traded   Company)  dated  April  27,  1998  among  Muller   Chevrolet,
          Oldsmobile,  Isuzu, Inc.,  Hometown Auto Retailers,  Inc. and American
          Isuzu Motors, Inc.

    10.25 Letter consent for ownership  change and initial public  offering from
          Toyota Motor Sales, USA, Inc. dated July 24, 1998

    10.26 Supplemental  Agreement to General Motors Corporation Dealer Sales and
          Service  Agreement  between Hometown Auto Retailers,  Inc. and General
          Motors, dated July 20, 1998.

    10.27 Letter  consent from Ford Motor  Company to Hometown  Auto  Retailers,
          Inc.  relating to the Ford Division and Lincoln Mercury Division dated
          July 24, 1998.

    10.28 Credit Agreement dated January 6, 1999 among the registrant, specified
          subsidiaries,   General  Electric  Capital   Corporation,   and  other
          specified lenders. All Annexes A through I.

(1) 10.29 Credit   Agreement   dated  March  14,  2001  among  the   registrant,
          subsidiaries of the registrant, and Ford Motor Credit Company.

(2) 10.30 Guarantee  Agreement  dated January 5, 1999 among the  registrant  and
          Falcon Financial, LLC.


                                       52
<PAGE>


 (2)10.31 Modification  Agreement  dated  January 6, 1999 among the  registrant,
          subsidiaries of the registrant and Falcon Financial, LLC.

 (3) 14.1 Code of Ethics for Chief Executive  Officer,  Chief Financial  Officer
          and Chief Accounting Officer

 (3) 14.2 Code of Business Conduct and Ethics

     21.1 Subsidiaries of the Registrant

 (4) 31.1 Chief Executive Officer  Certification  pursuant to 18 U.S.C.  Section
          1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of
          2002

 (4) 31.2 Chief Financial Officer  Certification  pursuant to 18 U.S.C.  Section
          1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of
          2002

 (4) 32.1 Chief Executive Officer Certification

 (4) 32.2 Chief Financial Officer Certification


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

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

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

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

(4)   Filed herewith.

FINANCIAL STATEMENT SCHEDULES:

See below, beginning on page F-1.

SUPPLEMENTAL SCHEDULES:

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

Schedule II - Valuation and Qualifying Accounts for the years ended December 31,
2004, 2003, and 2002 is set forth hereafter on page S-2.







                                       53
<PAGE>


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d), the Securities Exchange Act
of 1934,  the  registrant  has duly caused this Report to be signed on March 22,
2005 on its behalf by the undersigned, thereunto duly authorized.

                               Hometown Auto Retailers, Inc.

                               By: /s/ Corey Shaker
                                  ----------------------------------------------
                                     Corey Shaker, President and Chief
                                     Executive Officer

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

/s/ Corey Shaker
-----------------------------------------
Corey Shaker                                President, Chief Executive Officer
                                            and Director

/s/ Charles F. Schwartz
-----------------------------------------
Charles F. Schwartz                         Chief Financial Officer

/s/ Bernard J. Dzinski, Jr.
-----------------------------------------
Bernard J. Dzinski, Jr.                     Director

/s/ Steven A. Fournier
-----------------------------------------
Steven A. Fournier                          Director

/s/ H. Dennis Lauzon
-----------------------------------------
H. Dennis Lauzon                            Director

/s/ Timothy C. Moynahan
-----------------------------------------
Timothy C. Moynahan                         Director

/s/ William C. Muller, Jr.
-----------------------------------------
William C. Muller, Jr.                      Director

/s/ Joseph Shaker
-----------------------------------------
Joseph Shaker                               Director


                                       54
<PAGE>



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            Page

Reports of Independent Registered Public Accounting Firm                     F-2

Financial Statements:

   Consolidated Balance Sheets as of December 31, 2004 and 2003              F-3

   Consolidated Statements of Operations for each of the three
   years in the period ended December 31, 2004                               F-4

   Consolidated Statements of Stockholders' Equity for each of the
   three years in the period ended December 31, 2004                         F-5

   Consolidated Statements of Cash Flows for each of the three
   years in the period ended December 31, 2004                               F-6

   Notes to Consolidated Financial Statements                                F-7


Reports of Independent Registered Public Accounting Firm on Schedule         S-1

   Schedule II - Valuation and Qualifying Accounts                           S-2



                                      F-1
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

      We have audited the accompanying  consolidated  balance sheets of Hometown
Auto  Retailers,  Inc.  as of  December  31,  2004  and  2003  and  the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
each of the three years in the period then ended. These financial statements are
the  responsibility  of  Hometown  Auto  Retailers,   Inc.'s   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

      In our opinion,  the consolidated  financial  statements referred to above
present fairly,  in all material  respects,  the financial  position of Hometown
Auto  Retailers,  Inc. as of December 31, 2004 and 2003,  and the results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 2004, in conformity with accounting  principles  generally accepted
in the Unites States.

      As discussed in Note 5 to the consolidated financial statements, effective
January 1, 2002, the Company adopted FASB Statement No. 142,  Goodwill and Other
Intangible Assets.



New York, New York                                       /s/ BDO Seidman, LLP
March 9, 2005                                                BDO Seidman, LLP


                                      F-2
<PAGE>


                          HOMETOWN AUTO RETAILERS, INC.
                           CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)



<TABLE>
<CAPTION>
                                                                             December 31,
                                                                       --------------------
                           ASSETS                                        2004        2003
                                                                       --------    --------
<S>                                                                     <C>         <C>
Current Assets:
   Cash and cash equivalents                                            $  6,101    $  5,639
   Accounts receivable, net                                                5,081       6,058
   Inventories, net                                                       43,440      37,774
   Prepaid expenses and other current assets                                 634         625
   Deferred and prepaid income taxes                                       1,464       1,349
                                                                        --------    --------
      Total current assets                                                56,720      51,445

Property and equipment, net                                               13,854      12,678
Other assets                                                               3,649       1,141
                                                                        --------    --------
      Total assets                                                      $ 74,223    $ 65,264
                                                                        ========    ========

                   LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Floor plan notes payable                                             $ 42,474    $ 38,003
   Accounts payable and accrued expenses                                   5,106       5,798
   Current maturities of long-term debt and capital lease obligations      5,505         996
   Deferred revenue                                                          735         609
                                                                        --------    --------
      Total current liabilities                                           53,820      45,406

Long-term debt and capital lease obligations                               8,621      12,076
Long-term deferred income taxes                                              123         125
Other long-term liabilities and deferred revenue                             726         729
                                                                        --------    --------
       Total liabilities                                                  63,290      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, 3,870,137 and 3,655,853 shares issued and outstanding,
    respectively                                                               4           4
   Common stock, Class B, $.001 par value, 3,760,000 shares
    authorized, 3,519,252 shares issued and
    outstanding, respectively                                                  3           3
   Additional paid-in capital                                             30,017      29,760
   Accumulated deficit                                                   (19,091)    (22,839)
                                                                        --------    --------
      Total stockholders' equity                                          10,933       6,928
                                                                        --------    --------
      Total liabilities and stockholders' equity                        $ 74,223    $ 65,264
                                                                        ========    ========
</TABLE>

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


                                      F-3
<PAGE>


                          HOMETOWN AUTO RETAILERS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                          For the Years Ended December 31,
                                                     -----------------------------------------
                                                        2004           2003           2002
                                                     -----------    -----------    -----------
<S>                                                  <C>            <C>            <C>
Revenues
   New vehicle sales                                 $   167,932    $   180,615    $   164,659
   Used vehicle sales                                     65,326         66,543         72,482
   Parts and service sales                                24,219         24,621         24,330
   Other, net                                              7,804          7,998          8,268
                                                     -----------    -----------    -----------
      Total revenues                                     265,281        279,777        269,739
                                                     -----------    -----------    -----------
Cost of sales
   New vehicle                                           157,211        168,579        154,225
   Used vehicle                                           59,053         60,152         65,821
   Parts and service                                      11,043         11,299         11,026
                                                     -----------    -----------    -----------
     Total Cost of sales                                 227,307        240,030        231,072
                                                     -----------    -----------    -----------
     Gross profit                                         37,974         39,747         38,667

Selling, general and administrative expenses              33,371         34,840         34,152
                                                     -----------    -----------    -----------
     Income from operations                                4,603          4,907          4,515
                                                     -----------    -----------    -----------
   Interest income                                           204             82             43
   Interest (expense)                                     (3,281)        (3,037)        (3,205)
   Other income                                              135            956             52
   Other (expense)                                            (9)            (3)          (158)
                                                     -----------    -----------    -----------
      Income before taxes and cumulative effect
          of accounting change                             1,652          2,905          1,247
      Provision (benefit) for income taxes                (2,096)           527            471
                                                     -----------    -----------    -----------
      Income before cumulative effect of
          accounting change                                3,748          2,378            776
      Cumulative effect of accounting change                  --             --        (23,708)
                                                     -----------    -----------    -----------
Net income (loss)                                    $     3,748    $     2,378    $   (22,932)
                                                     ===========    ===========    ===========

Earnings (loss) per share, basic
     Before cumulative effect of accounting change   $      0.51    $      0.33    $      0.10
     Cumulative effect of accounting change                   --             --          (3.30)
                                                     -----------    -----------    -----------
Earnings (loss) per share, basic                     $      0.51    $      0.33    $     (3.20)
                                                     ===========    ===========    ===========
Earnings (loss) per share, diluted
     Before cumulative effect of accounting change   $      0.50    $      0.33    $      0.10
     Cumulative effect of accounting change                   --             --          (3.30)
                                                     -----------    -----------    -----------
Earnings (loss) per share, diluted                   $      0.50    $      0.33    $     (3.20)
                                                     ===========    ===========    ===========

Weighted average shares outstanding, basic             7,286,931      7,175,105      7,175,105
Weighted average shares outstanding, diluted           7,439,024      7,215,492      7,175,105
</TABLE>


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


                                      F-4
<PAGE>


                          HOMETOWN AUTO RETAILERS, INC.
                 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, 2001             3,562   $      3      3,613    $      4    $ 29,730     $ (2,285)    $ 27,452



Conversion of Class B
  Common to Class A Common            2         --         (2)         --          --           --           --
Paid subscription receivable         --         --         --          --          30           --           30
Net loss                             --         --         --          --          --      (22,932)     (22,932)
                               --------   --------   --------    --------    --------     --------     --------
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           92          1        (92)         (1)         --           --           --
Net income                           --         --         --          --          --        2,378        2,378
                               --------   --------   --------    --------    --------     --------     --------
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                           --         --         --          --          --        3,748        3,748
                               --------   --------   --------    --------    --------     --------     --------
Balance at
  December 31, 2004               3,870   $      4      3,519    $      3    $ 30,017     $(19,091)    $ 10,933
                               ========   ========   ========    ========    ========     ========     ========
</TABLE>


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


                                      F-5
<PAGE>



                          HOMETOWN AUTO RETAILERS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               For the Years Ended December 31,
                                                               2004          2003          2002
                                                             --------      --------      --------
<S>                                                           <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                             $  3,748      $  2,378      $(22,932)
Adjustments to reconcile net income (loss) to net cash
 provided by operating activities -
   Cumulative effect of accounting change                           --            --        23,708
   Depreciation and amortization                                 1,269         1,328         1,330
   Impairment of assets                                             --            --           150
   (Gain) loss on sale/disposal of sales and service and
     property and equipment                                          8          (939)           --
   Deferred income taxes                                        (2,288)          120           315
   Changes in assets and liabilities:
     Accounts receivable, net                                      977        (1,127)          768
     Inventories, net                                           (4,481)        2,335        (5,330)
     Prepaid expenses and other current assets                      (9)         (133)          134
     Prepaid taxes                                                 (41)           47            (6)
     Other assets                                                   44            43           172
     Floor plan notes payable                                    4,471          (519)        6,059
     Accounts payable and accrued expenses                        (692)          733        (1,038)
     Deferred revenue - current                                    126            21           112
     Other long term liabilities and deferred revenue               (3)          (14)          (56)
                                                              --------      --------      --------
   Net cash provided by operating activities                     3,129         4,273         3,386
                                                              --------      --------      --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment, net                      (2,121)         (810)       (2,439)
   Proceeds from sale of sales and service franchise and
     property and equipment                                         --           942            --
                                                              --------      --------      --------
   Net cash provided by (used in) investing activities          (2,121)          132        (2,439)
                                                              --------      --------      --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from long-term borrowings                            1,418            74            61
   Principal payments of long-term debt and capital lease
     obligations                                                (2,221)       (2,464)       (1,860)
   Exercise of warrants                                            257            --            --
   Issuance of common stock and warrants                            --            --            30
                                                              --------      --------      --------
   Net cash (used in) financing activities                        (546)       (2,390)       (1,769)
Net increase (decrease) in cash and cash equivalents               462         2,015          (822)

CASH AND CASH EQUIVALENTS, beginning of period                   5,639         3,624         4,446
                                                              --------      --------      --------
CASH AND CASH EQUIVALENTS, end of period                      $  6,101      $  5,639      $  3,624
                                                              ========      ========      ========
Cash paid for - Interest                                      $  3,233      $  3,087      $  3,331
                                                              ========      ========      ========
Cash paid for - Taxes                                         $    259      $    366      $    264
                                                              ========      ========      ========
Purchases financed by capital lease obligations               $  1,430      $  1,239      $  1,386
                                                              ========      ========      ========
</TABLE>

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


                                      F-6
<PAGE>

                          HOMETOWN AUTO RETAILERS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION

      Business of Hometown Auto Retailers Inc.

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

      Basis of Presentation

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

      Principals of Consolidation

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Major Suppliers and Franchise Agreements

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

      Each  Manufacturers  franchise  agreement  contains  provisions  which may
limit, without the consent of the applicable manufacturer, changes in dealership
management and ownership,  place certain restrictions on the dealership (such as
minimum  working  capital  requirements)  and  provide  for  termination  of the
franchise agreement by the manufacturer in certain instances. See Note 14.


                                      F-7
<PAGE>


      Revenue Recognition

      Revenues for vehicle and parts sales are  recognized  upon  delivery to or
acceptance by the customer. Revenues for vehicle service are recognized when the
service has been  completed.  Sales  discounts and service coupons are accounted
for as a  reduction  to the  sales  price at the  point  of  sale.  Manufacturer
incentives  and rebates  are not  recognized  until  earned in  accordance  with
respective  manufacturers  incentive  programs.  See Note 12 for  effect of EITF
02-16 "Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor".

      Finance, Insurance and Service Contract Income Recognition

      Hometown arranges financing for customers through various institutions and
receives  financing fees equal to the difference  between the loan rates charged
to  customers  and  the  predetermined  financing  rates  set by  the  financing
institution.  In addition, Hometown receives commissions from the sale of credit
life and disability  insurance and extended service contracts to customers.  The
revenues from financing fees and commissions are generally  recorded at the time
of the  sale of the  vehicles.  These  revenues  are  recorded  on a net  basis.
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.  At December 31, 2004 and 2003 Hometown had  $1,140,000  and
$1,225,000 of related deferred revenue,  respectively.  At December 31, 2004 and
2003,  Hometown  also had other  deferred  revenue  of  $319,000  and  $112,000,
respectively.  The December 31, 2004 amount represents the balance of a $500,000
advance on warranty income from Hometown's Extended Service Plan vendor received
June 2004.  It is  estimated  that this  advance will be earned over the next 12
months. There were no fees or other costs associated with the advance.

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

      Cash and Cash Equivalents

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

      Contracts-in-Transit

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

      Inventories

      New, used and demonstrator  vehicle values are stated at the lower of cost
or market,


                                      F-8
<PAGE>


determined on a specific unit basis. Parts,  accessories and other are stated at
the  lower of cost  (determined  on a  first-in,  first-out  basis)  or  market.
Hometown assesses the lower of cost or market reserve  requirement for vehicles,
on an individual unit basis,  taking into  consideration  historical loss rates,
the age and  composition  of the inventory and current  market  conditions.  The
lower of cost or market  reserves  were $0.7  million at  December  31, 2004 and
2003.

      Property and Equipment

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

      Capital Lease Obligations

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

      Company Guarantees

      Hometown may guaranty or partially  guaranty  loans  advanced by financial
institutions to certain  customers.  It is Hometown's policy to provide reserves
for potential future default losses based on available  historical  information.
Hometown guarantees certain mortgage debt obligations of the lessor,  related to
two dealership leases. See Notes 7, 8 and 14.

      Company Warranties

      Hometown's   new  vehicle  sales  and  certain  used  vehicle  sales  have
manufacturer  warranties.  Hometown also provides limited  warranties on certain
used  vehicles   sold  at  retail.   Hometown  also  sells  parts  and  service.
Manufacturer  parts  and  service  are  covered  by  limited  warranties.  It is
Hometown's  policy to provide  reserves  for  warranty  costs based on available
historical  information.  Certain  Hometown  dealerships also provide a three or
five year 100,000  mile-limited  warranty on certain vehicles.  The cost of this
warranty is included in the cost of sale of the vehicle.

      Impairment of Long-lived Assets

      Hometown  periodically  reviews long-lived assets for impairment  whenever
changes in the circumstances indicate that the carrying amount of the assets may
not be fully recoverable.  Hometown  considers relevant cash flow,  management's
strategic  plans,  significant  decreases  in the market  value of the asset and
other  available  information  in assessing  whether the  carrying  value of the
assets can be recovered.  When such events occur, Hometown compares the carrying
amount of the assets to undiscounted expected future cash flows from the use and
eventual  disposition of the asset. If this comparison  indicates an impairment,
the carrying  amount would then be compared to the fair value of the  long-lived
asset.  An impairment loss would be measured as the amount by which the carrying
value of the long-lived  asset exceeds its fair value.  The difference  would be
recorded as an  impairment  of assets.  Hometown  recorded  an asset  impairment
charge  for  assets  that  were  held for sale of  $150,000  for the year  ended
December  31,  2002.  See Notes 3 and 4.  Hometown  does not  believe  any other
impairment exists based on this methodology.


                                      F-9
<PAGE>


      Income Taxes

      Hometown  accounts  for  income  taxes in  accordance  with SFAS No.  109,
"Accounting  for Income  Taxes."  Under this method,  deferred  income taxes are
recorded based upon differences between the financial reporting and tax bases of
assets and  liabilities  and are  measured  using the enacted tax rates and laws
that will be in effect when the  underlying  assets are realized or  liabilities
are settled.  A valuation  allowance reduces deferred tax assets when it is more
likely  than  not  that  some or all of the  deferred  tax  assets  will  not be
realized. See Note 11.

      Interest Expense

      Automobile   manufacturers   periodically   provide  floor  plan  interest
assistance,  or  subsidies,  which reduce the dealer's  cost of  financing.  The
accompanying  consolidated  financial statements reflect interest expense gross.
Floor plan interest  assistance is recorded as a reduction of cost of sales when
the vehicle is sold. See Note 6.

      Fair Value of Financial Instruments

      Hometown's  financial  instruments  consist  primarily  of cash  and  cash
equivalents,  floor plan notes payable and long-term debt. The carrying  amounts
of cash  equivalents  approximate  fair value due to the short maturity of those
instruments.  The carrying amounts of floor plan notes payable  approximate fair
value due to their variable  interest rates.  The fair market value of long-term
debt  approximated  the carrying  value at December 31, 2004.  The fair value of
long-term debt is estimated  based on the current rates offered for similar debt
instruments with the same remaining maturities.

      Advertising and Promotion

      Hometown  expenses  advertising  and  promotion  as  incurred.  Automobile
Manufacturers  periodically  provide advertising  assistance,  or subsidies.  In
accordance  with EITF Issue No.  02-16,  this is recorded as a reduction  of the
dealer's   advertising  expense  if  directly  related  to  the  performance  of
advertising in accordance with manufacturer guidelines or as a reduction of cost
of sales upon sale of the vehicle. See Note 12.

      Concentration of Credit Risk

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

      Earnings (loss) per Share

      "Basic earnings (loss) per share"  represents net income (loss) divided by
the weighted


                                      F-10
<PAGE>


average shares  outstanding.  "Diluted earnings (loss) per share" represents net
income (loss) divided by weighted  average shares  outstanding  adjusted for the
incremental dilution of potentially dilutive securities. See Note 10.

      Stock-based Compensation

      At December 31, 2004, Hometown has one stock-based  employee  compensation
plan,  the 1998 Stock  Option Plan (the "Stock  Option  Plan") that is described
more fully in Note 16. 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>
                                                                     Year Ended December 31,
                                                               2004            2003           2002
                                                                          (in thousands)
                                                             ----------     ----------     ----------
        <S>                                                  <C>            <C>            <C>
        Net income (loss), as reported                       $    3,748     $    2,378     $  (22,932)
        Deduct: Total stock-based employee compensation
          expense determined under fair value based method
          for all awards, net of related tax effects (1)            (23)           (35)           (28)
                                                             ----------     ----------     ----------
        Pro forma net income (loss)                          $    3,725     $    2,343     $  (22,960)
                                                             ==========     ==========     ==========
        Earnings (loss) per share:
        Basic, as reported                                   $     0.51     $     0.33     $    (3.20)
        Basic, pro forma                                     $     0.51     $     0.33     $    (3.20)

        Diluted, as reported                                 $     0.50     $     0.33     $    (3.20)
        Diluted, pro forma                                   $     0.50     $     0.32     $    (3.20)
</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.

      Use of Estimates

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


                                      F-11
<PAGE>

      Consolidated Statements of Cash Flows

      The net change in floor plan financing of inventory,  which is a customary
financing  technique in the industry,  is reflected as an operating  activity in
the accompanying consolidated statements of cash flows.

      Reclassification

      Certain prior year amounts have been  reclassified  to conform to the 2004
presentation.

      Segments

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

      New Accounting Pronouncements

      In  January  2003,  the  FASB  issued  Interpretation  No.  46  (FIN  46),
Consolidation of Variable  Interest  Entities,  an  Interpretation of Accounting
Research  Bulletin No. 51. The  objective of this  interpretation  is to provide
guidance on how to identify a variable  interest entity ("VIE") and requires the
VIE to be consolidated by its primary  beneficiary.  The primary  beneficiary is
the party that absorbs a majority of the VIE's expected losses and/or receives a
majority of the entity's expected  residual returns,  if they occur. In December
2003,  the FASB  issued  FIN  46(R)  ("Revised  Interpretations")  delaying  the
effective date for certain  entities  created before February 1, 2003 and making
other  amendments to clarify the  application  of the guidance.  In adopting FIN
46(R)  Hometown has evaluated its variable  interests to determine  whether they
are in fact VIE's and whether  Hometown was the primary  beneficiary of the VIE.
This evaluation  resulted in determining  that Hometown has a VIE with a related
party, whereby Hometown guarantees the mortgage debt of the company. See Notes 9
and 14. The adoption of this  interpretation  did not have a material  effect on
Hometown's financial statements.

      SFAS No. 123 (Revised  2004),  "Share-Based  Payment,"  issued in December
2004,  is  a  revision  of  FASB  Statement  123,  "Accounting  for  Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees,"  and its related  implementation  guidance.  The  Statement  focuses
primarily on accounting for  transactions  in which an entity  obtains  employee
services  in  share-based  payment  transactions.  SFAS No. 123  (Revised  2004)
requires a public  entity to measure the cost of employee  services  received in
exchange for an award of equity  instruments  based on the grant-date fair value
of the award (with limited  exceptions).  That cost will be recognized  over the
period  during which an employee is required to provide  service in exchange for
the award.  This statement is effective as of the beginning of the first interim
or annual  reporting period that begins after June 15, 2005 and the Company will
adopt the  standard  in the third  quarter of fiscal  2005.  The Company has not
determined the impact, if any, that this statement will have on its consolidated
financial position or results of operations.


                                      F-12
<PAGE>


3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

      Accounts receivable, net consist of the following:

                                       12/31/04   12/31/03
                                          (in thousands)
                                        ------     ------
      Due from manufacturers            $1,584     $1,741
      Due from finance companies         2,378      3,090
      Parts and service receivables        637        738
      Other                                482        489
                                        ------     ------
         Total receivables, net         $5,081     $6,058
                                        ======     ======


      The  allowance  for doubtful  accounts was $0.3 million as of December 31,
2004 and 2003.  In  assessing  the  allowance  for doubtful  accounts,  Hometown
considers  historical losses as well as current performance with respect to past
due accounts.

      Inventories, net consist of the following:

                                      12/31/04    12/31/03
                                         (in thousands)
                                       -------     -------
      New Vehicles                     $33,616     $28,420
      Used Vehicles                      7,761       7,255
      Parts, accessories and other       2,063       2,099
                                       -------     -------
         Total Inventories             $43,440     $37,774
                                       =======     =======

      New, used and demonstrator  vehicle values are stated at the lower of cost
or market, determined on a specific unit basis. Parts and accessories are stated
at the lower of cost  (determined  on a  first-in,  first-out  basis) or market.
Hometown assesses the lower of cost or market reserve  requirement for vehicles,
on an individual unit basis,  taking into  consideration  historical loss rates,
the age and  composition  of the inventory and current  market  conditions.  The
lower of cost or market  adjustment  was $0.7  million at December  31, 2004 and
2003.

      Prepaid Expenses and Other Current Assets - Assets Held For Sale

      Included in Prepaid  Expenses and Other Current  Assets as of December 31,
2004 and 2003 is land held for sale of  $300,000.  This is net of an  impairment
charge of $150,000  that was  recorded at December  31, 2002 to  write-down  the
asset to fair value.  The  impairment  charge is  included  in Other  Expense in
Hometown's Consolidated Statements of Operations for the year ended December 31,
2002.  See Note 17.  The land  held  for sale is not  being  used in  Hometown's
business.  Prior to December 31, 2003, Hometown decided to sell the property and
has  been  marketing  the  property,  but has been  hampered  by  certain  state
environmental  regulations which were passed in 2004. Hometown is evaluating the
impact of the new  regulations on the potential  development of the property and
the sale agreement.


                                      F-13
<PAGE>

      Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                                          12/31/04   12/31/03
                                                                            (in thousands)
                                                                           ------     ------
      <S>                                                                  <C>        <C>
      Accounts payable, trade                                              $2,320     $2,030
      Accrued compensation costs                                              684        717
      Sales and use tax                                                       464        768
      Reserve for finance, insurance and service contract charge-backs        415        510
      Accrued legal and professional fees                                     315        434
      Accrued interest                                                        286        238
      Reserve for policy work expenses                                        208        175
      Customer payoffs                                                        135        259
      Other accrued expenses                                                  279        667
                                                                           ------     ------
      Total                                                                $5,106     $5,798
                                                                           ======     ======
</TABLE>

      Other long-term liabilities and deferred revenue

      Hometown  receives  commissions  from the sale of  insurance  products and
extended  service  contracts to customers.  These revenues are recorded on a net
basis.  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 over a five-year period. At December 31, 2004
Hometown had  $1,459,000 of deferred  revenue of which  $735,000 was current and
$724,000 was  long-term.  Included in this amount is other  deferred  revenue of
$319,000,  which represents the balance of a $500,000 advance on warranty income
from Hometown's Extended Service Plan vendor received June 2004. It is estimated
that this advance will be earned over the next 12 months.  There were no fees or
other costs  associated  with the  advance.  At December  31, 2003  Hometown had
$1,337,000  of deferred  revenue of which  $609,000 was current and $728,000 was
long-term. Included in this amount is other deferred revenue of $112,000.



                                      F-14
<PAGE>


4. PROPERTY AND EQUIPMENT, NET

      Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                         12/31/04      12/31/03
                                                     Lives in Years          (in thousands)
                                                     ------------------  --------      --------
      <S>                                                  <C>           <C>           <C>
      Land                                                    --         $  4,246      $  4,246
      Land improvements                                    15 to 21            84            84
      Buildings and leasehold improvements (1)              7 to 31.5       12,101        10,262
      Machinery, equipment, furniture and fixtures          3 to 10         3,321         3,272
      Vehicles                                              2 to 3            171           184
      Construction in progress                                                224           128
                                                                         --------      --------
         Sub-total                                                         20,147        18,176
      Less - accumulated depreciation and amortization                     (6,293)       (5,498)
                                                                         --------      --------
         Total                                                           $ 13,854      $ 12,678
                                                                         ========      ========
</TABLE>

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

      Included in buildings and leasehold  improvements  are capital  leases for
two  dealerships  totaling  $5,180,000 for the years ended December 31, 2004 and
2003 which are leased  from  related  parties.  See Notes 8, 9 and 13.  Hometown
begins depreciating assets once the asset is placed in service. Depreciation and
amortization expense for property and equipment for the years ended December 31,
2004, 2003 and 2002 was $932,000, $944,000 and $943,000 respectively.

      In June 2004,  Hometown  exercised an option to buy the building leased by
its Brattleboro, VT dealership. The purchase price was $1.5 million plus closing
costs.  The  purchase was financed by a bank loan and a note held by the seller.
See Note 7.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

      Effective  January 1, 2002,  Hometown adopted SFAS 142 "Goodwill and Other
Intangible   Assets".   Upon  adoption,   Hometown  ceased  recording   goodwill
amortization. SFAS 142 requires the completion of a transitional impairment test
in  the  year  of  adoption,   with  any  impairment   identified  upon  initial
implementation  treated  as a  cumulative  effect  of  a  change  in  accounting
principle.

      Under  SFAS 142,  goodwill  impairment  is deemed to exist if the net book
value of a reporting  unit exceeds its  estimated  fair value.  According to the
criteria  under  SFAS 142,  it has been  determined  that  Hometown  is a single
reporting unit.

      During 2002,  Hometown  completed  its goodwill  impairment  testing which
resulted in Hometown  recording a  one-time,  non-cash  charge of  approximately
$23.7  million to  write-off  the  carrying  value of  goodwill.  This charge is
non-operational in nature and is reflected as a


                                      F-15
<PAGE>

cumulative  effect of an  accounting  change in the  accompanying  statement  of
operations for the year ended December 31, 2002.  Approximately  $9.6 million of
this  charge  is  tax  deductible,  resulting  in  a  deferred  tax  benefit  of
approximately  $3.8  million  against  which  a  full  valuation  allowance  was
recorded.  Hometown has subsequently reduced its valuation  allowance.  See Note
11.

      In calculating the impairment charge, the fair value of the reporting unit
was  estimated  using both the  discounted  cash flow  method and the  guideline
company method.  The discounted  cash flow method used  Hometown's  estimates of
future cash flows  discounted  to present  value using an  appropriate  discount
rate. The guideline  company method selects  certain value measures of guideline
companies and calculates  appropriate  market multiples based on the fundamental
value  measures of the guideline  companies  and compares same to Hometown.  The
guideline   companies   chosen  were  other  publicly  traded  companies  within
Hometown's  Standard Industrial  Classification  (SIC) code. These methodologies
differ from  Hometown's  previous  policy,  as permitted  under SFAS 121,  using
undiscounted cash flows to determine if goodwill is recoverable.

      The goodwill  impairment  is  associated  with goodwill that resulted from
acquisitions  since the  formation  of  Hometown.  The amount of the  impairment
reflects  the  effect of the change in  methodology  in  determining  impairment
charges as discussed above.

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

                                     12/31/04    12/31/03
                                        (in thousands)
                                       -----      -----
      Deferred finance charges         $ 272      $ 267
      Accumulated amortization          (121)       (98)
      Non-compete agreement              381        381
      Accumulated amortization          (333)      (270)
      Franchise fee                       10         10
      Accumulated amortization            (3)        (1)
                                       -----      -----
         Net intangible assets (a)     $ 206      $ 289
                                       =====      =====

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

      Aggregate  Amortization  Expense of Intangible  Assets for the years ended
December 2004, 2003 and 2002 is $87,000, $85,000 and $85,000, respectively.

Estimated Amortization Expense of Intangible Assets, in thousands:

For the year ended 12/31/05                 $71
For the year ended 12/31/06                 $23
For the year ended 12/31/07                 $18
For the year ended 12/31/08                 $15
For the year ended 12/31/09                 $14


                                      F-16
<PAGE>


6. FLOOR PLAN NOTES PAYABLE AND INTEREST EXPENSE

                                     12/31/04    12/31/03    12/31/02
                                              (in thousands)
                                      -------     -------     -------
      Floor plan notes payable        $42,474     $38,003     $38,522
                                      =======     =======     =======
      Floor plan interest expense     $ 1,877     $ 1,632     $ 1,713
                                      =======     =======     =======

      Since  March 15,  2001,  Hometown  has a floor plan line of credit at each
dealership  with Ford Motor  Credit  Corporation  ("FMCC").  The FMCC floor plan
agreement  provides  financing  for  vehicle  purchases  and is  secured  by and
dependent upon new and used vehicle inventory levels. Maximum availability under
the  FMCC  agreement  is a  function  of new and  used  car  sales  and is not a
pre-determined  amount.  As of December 31, 2004 Hometown's floor plan liability
with FMCC is $42.5  million.  The FMCC agreement has no set maturity date and it
is the  intention  of  Hometown to continue  with this  financing  on an ongoing
basis.

      For the first year of the agreement, through May 2002, the FMCC floor plan
loans  carried an interest  rate of prime less 0.75% for new  vehicles and prime
less  0.50% for used  vehicles.  From  January  1, 2002  through  May 31,  2002,
interest was approximately 4.0% for new vehicles and 4.25% for used vehicles.

      In June 2002,  Hometown  renewed its floor plan agreement with FMCC and is
now subject to the FMCC standard  financing  agreement  which provides for floor
plan loans for new and used  vehicles  that have  variable  interest  rates that
increase or decrease  based on movements in the prime or LIBOR  borrowing  rates
and  FMCC  financing  volume.   At  December  31,  2004,   interest  rates  were
approximately  4.94% for new vehicles and 7.00% for used  vehicles.  At December
31, 2003, interest rates were approximately 3.75% for new vehicles and 5.75% for
used vehicles.  The average  interest rate was  approximately  4.42%,  4.25% and
5.20% for 2004, 2003 and 2002, respectively.

      Automobile   manufacturers   periodically   provide  floor  plan  interest
assistance,  or  subsidies,  which reduce the dealer's  cost of  financing.  The
accompanying  consolidated  financial statements reflect interest expense gross.
Floor plan interest  assistance was $1.5 million,  $1.6 million and $1.7 million
for the years ended  December  31,  2004,  2003 and 2002,  respectively,  and is
recorded  as a  reduction  of cost of sales when the  vehicle is sold.  Of these
amounts,  $0.3 million was recorded as a reduction of inventory  for each of the
years ending December 31, 2004, 2003 and 2002.


                                      F-17
<PAGE>


7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

<TABLE>
<CAPTION>
                                                                                         12/31/04     12/31/03
                                                                                             (in thousands)
                                                                                          -------      -------
      <S>                                                                                <C>          <C>
      Real estate mortgage notes payable, due in monthly installments including
        interest at 10.0%, maturing May 2014                                             $ 7,447      $ 7,872
      Real estate capital lease obligations, due in monthly installments including
        interest at 10.0%, maturing December 2013. See Note 8                              4,335        4,163
      Real estate mortgage note payable.(b)                                                1,025           --
      Capital lease obligations on rental vehicles, due in monthly installments
        including interest ranging  from 3.8% to 5.5%, maturing on various dates
        through April 2012. See Note 8                                                       892          811
      Real estate mortgage note payable, due in monthly installments including
        interest at 10.5%, maturing April 2007. Note partially finances the
      Brattleboro building purchase. See Note 4                                              241           --
      Notes  payable on rental vehicles, due in monthly installments including
        interest of 6.5%, maturing December 2005                                              48           96
      Various due in monthly installments including interest ranging from 5.3% to
        15.6%, maturing on various dates through October 2009                                138          130
                                                                                         -------      -------
                                                                                          14,126       13,072
      Less: Current portion                                                                5,505          996
                                                                                         -------      -------
      Total Long Term Debt and Capital Lease Obligations (a)                             $ 8,621      $12,076
                                                                                         =======      =======
</TABLE>

(a)  Hometown  is  subject to certain  financial  covenants  related to its real
estate  mortgages.  At December  31,  2004,  Hometown was in default of its loan
agreement  for Baystate  Lincoln  Mercury for failure to comply with a financial
covenant. Accordingly, Hometown has reclassified $4,319,000 of related long-term
debt to current at December 31, 2004.  Total debt for this  mortgage at December
31, 2004 is $4,613,000.  On March 16, 2005, the lender notified Hometown that it
is not  declaring  an event of default  in  connection  with the loan,  however,
reserving  all rights to  declare  an event of default in the future  should the
financial covenant default not be cured. If an event of default was declared and
only at the lenders  option,  Hometown could be required to pay all  outstanding
debt plus a defeasance  penalty and  transaction  costs  totaling  approximately
$1,400,000. Although Hometown does not believe the lender will call the loan, in
the event it is called,  Hometown  believes it would be able to secure alternate
financing.  Hometown  believes the market value of the property is approximately
$6,200,000.  Hometown  believes it would be able to borrow up 100% of the market
value of the  property.  Assuming  borrowing  $6,000,000  at a current  variable
interest rate of approximately  7.46% for a 15-year  mortgage,  monthly payments
would be approximately $6,800 lower than the current monthly payments being made
on the property.

(b) Mortgage partially financing the Brattleboro  building purchase (See Note 4)
has an interest  rate of 7.0% through May 2009 and is variable  thereafter.  The
monthly  payments are  sufficient  to amortize  the loan over a 15-year  period.
After 10 years, May 2014, the terms of the bank loan will be renegotiated.


                                      F-18
<PAGE>


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

                                           Aggregate
         Year ending                      Obligation
         December 31,                    (in thousands)
      ----------------                   -------------
            2005                           $ 5,505
            2006                               905
            2007                               905
            2008                               851
            2009                               783
         Thereafter                          5,177
                                            ------
                                           $14,126
                                           =======
8. CAPITAL LEASES

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

<TABLE>
<CAPTION>
                                                                      Asset Balances at December 31,
                                                                          2004           2003
                                                                             (in thousands)
                                                                         -------       -------
      <S>                                                                <C>           <C>
      Rental and loaner vehicles                                         $   981       $   928
      Less:  Accumulated amortization                                        (89)         (117)
                                                                         -------       -------
           Net rental and loaner vehicles (included in Inventories)      $   892       $   811
                                                                         =======       =======

      Buildings                                                          $ 5,180       $ 5,180
      Less:  Accumulated amortization                                     (2,156)       (1,820)
                                                                         -------       -------
           Net Buildings (included in Property & Equipment)              $ 3,024       $ 3,360
                                                                         =======       =======
</TABLE>


                                      F-19
<PAGE>


      The  following  is a schedule by years of future  minimum  lease  payments
under  capital  leases  together with the present value of the net minimum lease
payments as of December 31, 2004:

                                                               Minimum Lease
                                    Year ending                  Payments
                                    December 31,              (in thousands)
                                  ----------------            --------------
                                        2005                        $ 1,155
                                        2006                          1,155
                                        2007                          1,155
                                        2008                          1,085
                                        2009                            910
                                     Thereafter                       3,990
                                                              -------------
      Total minimum lease payments                                    9,450
      Less:  Amount representing estimated executory costs,
        included in total minimum lease payments                      (226)
                                                              -------------
      Net minimum lease payments                                      9,224
      Less:  Amount representing interest                           (3,997)
                                                              -------------
      Present value of net minimum lease payments *                 $ 5,227
                                                                   ========

      *     Reflected   in  the  balance   sheet  as  current  and   non-current
            obligations under capital leases of $491 and $4,736, respectively.

9. RELATED PARTY TRANSACTIONS

      Leases

      Certain  officers of Hometown lease to the  dealerships the premises under
various leases,  two of which are classified as capital  leases.  See Notes 4, 8
and 13.  In  connection  with the  acquisition  in 1999 of real  estate  used by
Baystate Lincoln Mercury, Hometown guaranteed the mortgage debt of Rellum Realty
Company.  The 1999  guaranty  was  given in  substitution  for a  February  1998
guaranty of that debt by the Muller Group,  a subsidiary  of Hometown.  Hometown
recorded the lease as a capital lease. As of December 31, 2004 the mortgage debt
balance is $4.3  million,  which equals 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.

10. CAPITAL STRUCTURE AND PER SHARE DATA

      Preferred Stock

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


                                      F-20
<PAGE>


par value, and to fix the terms of any such series or class,  including dividend
rights, dividend rates, conversion or exchange rights, voting rights, rights and
terms of redemption  (including  sinking fund provisions),  the redemption price
and the liquidation  preference of such class or series. As of December 31, 2004
and  2003,  Hometown  does  not  have  any  Preferred  Stock  outstanding.   The
designations,  rights and  preferences of any Preferred Stock would be set forth
in a Certificate of  Designation  which would be filed with the Secretary of the
State of Delaware.

Common Stock - Class A and Class B

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

      Warrants

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

      Per Share Data

      "Basic  earnings  (loss) per share" is  computed  by  dividing  net income
(loss) by the weighted  average  common shares  outstanding.  "Diluted  earnings
(loss) per share" is  computed  by dividing  net income  (loss) by the  weighted
average  common  shares  outstanding  adjusted for the  incremental  dilution of
potentially  dilutive  securities.  Options to  purchase  approximately  518,000
shares of common stock were  outstanding  during  2004.  Options and warrants to
purchase  approximately  1,112,000  and  1,378,000  shares of common  stock were
outstanding  during  2003 and 2002,  respectively.  Basic and  diluted  weighted
average  shares for the years  ended  December  31,  2004,  2003 and 2002 are as
follows:


                                      F-21
<PAGE>


<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                              2004           2003           2002
                                            ---------      ---------      ---------
      <S>                                   <C>            <C>            <C>
      Basic, Weighted Average Shares        7,286,931      7,175,105      7,175,105
                                            =========      =========      =========

      Common Stock Equivalents                152,093         40,387             --
                                            ---------      ---------      ---------
      Diluted, Weighted Average Shares      7,439,024      7,215,492      7,175,105
                                            =========      =========      =========
</TABLE>

      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 and
2003, options and warrants to purchase 248,000 and 842,000 shares, respectively,
of Hometown  common stock were excluded from the  calculation  of diluted income
per share due to the options and warrant  prices being  greater than the average
market  price of the common  shares  during the  period.  In 2002,  options  and
warrants to purchase  1,378,000  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 per share for the year ended  December  31,
2004 is $0.51 and $0.50,  respectively,  including $0.38 and $0.37 respectively,
resulting  from a tax  benefit  recorded  primarily  due to the  reduction  of a
valuation  allowance  on the  deferred  tax  asset  related  to  tax  deductible
unamortized  goodwill  and net  operating  losses.  See Note 11.  The  basic and
diluted income per share for the year ended December 31, 2003 is $0.33 including
$0.09 resulting from a tax benefit recorded  primarily due to the reduction of a
valuation  allowance  on the  deferred  tax  asset  related  to  tax  deductible
unamortized  goodwill  and  $0.08  resulting  from  a  gain  on  the  sale  of a
Chrysler/Jeep  Sales and Service  Franchise in June 2003.  The basic and diluted
(loss) per share for the year ended December 31, 2002 is $(3.20), which includes
basic and diluted income per share before cumulative effect of accounting change
of $0.10 and basic  and  diluted  (loss)  per share for a  cumulative  effect of
accounting  change of $(3.30),  resulting  from the goodwill  impairment  charge
associated with the  implementation  of SFAS 142. See Note 5 to the consolidated
financial  statements  for the effect of  recognition  of an  impairment  of the
carrying value of its goodwill in 2002, in accordance with SFAS 142.

11. INCOME TAXES

<TABLE>
<CAPTION>
                                               12/31/04      12/31/03      12/31/02
                                                          (in thousands)
                                               --------      --------      --------
      <S>                                       <C>           <C>           <C>
      Federal:
          Current                               $   (31)      $    60       $    --
          Deferred                               (1,977)          205           428
      State:
          Current                                   223           347            19
          Deferred                                 (311)          (85)           24
                                                -------       -------       -------
      Provision (Benefit) for Income Taxes      $(2,096)      $   527       $   471
                                                =======       =======       =======
</TABLE>


                                      F-22
<PAGE>

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

<TABLE>
<CAPTION>
                                                     12/31/04     12/31/03    12/31/02
                                                     --------     --------    --------
      <S>                                              <C>          <C>         <C>
      Provision at the statutory rate                  34.0%        34.0%       34.0%
      Increase (decrease) resulting from:
         State income tax, net of benefit for
            Federal deduction                          (3.5%)        6.0%        2.3%
         Change in valuation allowance (a)           (150.7%)      (15.5%)        --
         Adjustment for prior year over accruals       (6.8%)       (6.3%)        --
         Other                                          0.1%        (0.1%)       1.5%
                                                      -----        -----       -----
      Effective tax rate                             (126.9%)       18.1%       37.8%
                                                      =====        =====       =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                                  12/31/04     12/31/03
                                                                  --------     --------
                                                                     (in thousands)
      <S>                                                        <C>           <C>
      DEFERRED INCOME TAXES AND TAXES RECEIVABLE -
        SHORT-TERM:
      Tax assets related to goodwill                             $   181       $    --
      Current net operating loss carryforward(c)                     354           162
      Reserves and accruals not deductible until paid                538           887
      Tax on current portion of deferred revenue                     294           244
      Tax prepayments and prior year overpayments                     97            56
                                                                 -------       -------
                              Total                              $ 1,464       $ 1,349
                                                                 =======       =======

      DEFERRED TAX ASSETS - LONG-TERM:(b)
      Tax assets related to goodwill                             $ 2,199       $ 2,643
      Net operating loss carryforward(c)                           1,159           999
      Tax on long term portion of deferred revenue                   290           291
      Deferred tax on capital  leases  treated as operating
        leases for tax purposes                                      353           321
      Other                                                           74            98
      Valuation allowance(a)                                      (1,153)       (3,642)
                                                                 -------       -------
                              Total                              $ 2,922       $   710
                                                                 =======       =======
</TABLE>


                                      F-23
<PAGE>

                                                   12/31/04     12/31/03
                                                      (in thousands)
                                                   -------       -------
      DEFERRED TAX LIABILITIES - LONG-TERM:
      Depreciation                                 $  (123)      $  (125)
                                                   -------       -------
                              Total                $  (123)      $  (125)
                                                   =======       =======

      Net deferred tax assets - short term         $ 1,367       $ 1,293
      Net deferred tax assets - long term            3,952         4,227
      Valuation allowance on long-term assets       (1,153)       (3,642)
                                                   -------       -------
      Net deferred tax asset                       $ 4,166       $ 1,878
                                                   =======       =======

      (a) In 2004,  the  deferred  tax asset  valuation  allowance  decreased by
$2,489,000.  This decrease is primarily the result of Hometown's analysis of the
likelihood  of realizing  the future tax benefit of tax loss  carryforwards  and
additional temporary differences. Realization of the net deferred tax asset (net
of recorded  valuation  allowance) is dependent upon  profitable  operations and
future reversals of existing taxable temporary differences. Although realization
is not  assured,  Hometown  believes  it is more  likely  than  not that the net
recorded  benefits  will be realized  through the  reduction  of future  taxable
income.  The  amount  of the net  deferred  tax  assets  considered  realizable,
however,  could be reduced in the near term if actual future  taxable  income is
lower than  estimated,  or if there are  differences  in the timing or amount of
future reversals of existing taxable temporary differences.

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

      (c) Federal  NOL's of $1,570,000  begin to expire in 2021.  State NOL's of
$10,547,000 begin to expire in 2005. See (a) above.

12. ADVERTISING AND PROMOTION

      Hometown expenses  advertising and promotion as incurred.  Advertising and
promotion expenses included in Selling, General and Administrative Expenses, net
certain of  manufacturers'  rebates  and  assistance,  were  approximately  $4.0
million,  $3.5 million and $2.9  million for the years ended  December 31, 2004,
2003 and 2002,  respectively.  Manufacturers  advertising rebates and assistance
recorded as a reduction of advertising  expense was approximately  $0.4 million,
$0.7  million and $0.6 million for the years ended  December 31, 2004,  2003 and
2002, respectively.

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


                                      F-24
<PAGE>

      Certain  manufacturers  will  reimburse the  dealerships  for a portion of
these  advertising  costs  upon  providing  the  manufacturer  documentation  of
advertising   performed  by  the  dealership   according  to  the  manufacturers
advertising and marketing  program  guidelines.  These rebates were $0.4 million
and $0.7  million  in 2004  and  2003,  respectively,  and  were  recorded  as a
reduction of advertising expense.  Other manufacturers  reimburse  dealerships a
flat amount of the advertising  charged without any advertising  required by the
dealerships.  In 2004 and 2003, in accordance  with EITF Issue No. 02-16,  these
amounts are reflected as a reduction of the inventory  amount and as a reduction
of cost of sales upon sale of the vehicle.  Approximately  $0.3 million has been
reflected as a reduction of cost of sales in both 2004 and 2003.  In prior years
these amounts were reflected as a reduction of advertising  expense. In November
2002, the EITF reached a final  consensus on EITF Issue No. 02-16,  resulting in
certain co-op advertising recoveries,  which would previously have been recorded
as a reduction of SG&A,  being recorded as a reduction of cost of sales,  buying
and occupancy.

13. OPERATING LEASES

      Hometown has executed leases for the premises occupied by its dealerships.
Certain of the leases are with  related  parties.  Hometown  also has  operating
leases relating to its data processing equipment. The minimum rental commitments
required under these operating leases after December 31, 2004 are as follows:

<TABLE>
<CAPTION>
                                                                  Related Parties
    Year ending December 31,               Total Obligation       (in thousands)              Other
    -------------------------             ------------------      ----------------         ------------
    <S>                                        <C>                   <C>                     <C>
    2005                                       $1,391                $ 939                   $ 452
    2006                                        1,021                  733                     288
    2007                                          949                  733                     216
    2008                                          949                  733                     216
    2009                                          733                  733                       -
    Thereafter                                  2,952                2,952                       -
                                              -------              -------                  ------
    Total (1)                                  $7,995               $6,823                  $1,172
                                              =======              =======                  ======
</TABLE>

      (1)   Minimum  rental   commitments  have  not  been  reduced  by  minimum
            sub-lease rentals of $20,000 per year, expiring November 2005.

      Total expense for operating leases and rental  agreements was $1, 859,000,
$1,851,000 and $1,938,000 for the years ended December 31, 2004,  2003 and 2002,
respectively.  Rental  expense for the years ended  December 31, 2004,  2003 and
2002, does not include sub-lease income received of $20,000, $3,000 and $93,000,
respectively.

      Total  expense for  operating  leases and rental  agreements  with related
parties was $1,149,000,  $912,000 and $912,000 for the years ending December 31,
2004, 2003 and 2002, respectively.


                                      F-25
<PAGE>


14. COMMITMENTS AND CONTINGENCIES

      Litigation

      During the fourth quarter of 2004, Hometown announced that it had resolved
in principle  to settle the  litigation  matters  described in Footnote 9 in the
Notes to Unaudited  Consolidated Financial Statements as contained in Hometown's
most recent Form 10-Q as filed with the  Securities  and Exchange  Commission on
November 12, 2004.  On March 3, 2005 the  execution and delivery of a settlement
agreement and  applicable  releases of claims from all parties to the litigation
was completed.  The settlement agreement settles all claims made by Salvatore A.
Vergopia and Edward A. Vergopia,  former directors and executive officers of the
Corporation,  and  Janet  Vergopia,  the  wife of  Salvatore  A.  Vergopia  (the
"Vergopias").  The  settlement  also  finally  resolved  the  related  insurance
coverage  litigation  with Universal  Underwriters  Group and The Chubb Group of
Insurance  Companies.  The gross  payment to the  Vergopias by all parties is $4
million of which  $600,000  is  payable  by  Hometown.  The  settlement  will be
completed when all the material terms have been satisfied  including  Hometown's
payment of its share of the gross settlement  proceeds.  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.  The  settlement  also  provides for the
transfer to the  Vergopias  of certain  Westwood  Lincoln  Mercury  Sales,  Inc.
assets,  including  its  Lincoln  Mercury  franchise,  subject  to  manufacturer
approval which is pending,  the termination of Hometown's  Westwood,  New Jersey
lease,  and the  receipt by  Hometown  of all of the  940,000  shares of Class B
Common  Stock  owned  by  the  Vergopias.  The  Settlement  Agreement  does  not
constitute an admission of liability or wrongdoing by any party. The $600,000 is
included in Accounts  Payable and Accrued  Expenses in  Hometown's  Consolidated
Balance Sheet as of December 31, 2004.

      The receipt of the Hometown stock will be recorded at fair market value on
March 3, 2005, the date of the executed settlement agreement,  and will be shown
as a  reduction  of  Stockholders'  Equity.  The  assets and  liabilities  being
transferred  to the Vergopias  will be recorded as a reduction of those accounts
at book value.  If the fair market value of Hometown  stock exceeds the net book
value of the assets being transferred,  a gain will result from the transaction.
Hometown wrote off the goodwill associated with this franchise in 2002. See Note
5.

      Also,  during the fourth  quarter of 2004,  Hometown  fully  resolved  the
litigation concerning the lease for property in Morristown,  New Jersey formerly
used by Hometown's  subsidiary Morristown Auto Sales, Inc., including all claims
among the landlord,  Morristown  and Crestmont  M.M.,  L.P., the assignee of the
lease  agreement.  The  cost  to  Hometown  is  $150,000  with  $75,000  payable
immediately, that has already been paid as of December 31, 2004, and the balance
in six equal monthly installments  commencing January 1, 2005. This liability is
included in Accounts  Payable and Accrued  Expenses in  Hometown's  Consolidated
Balance Sheet as of December 31, 2004.

      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.


                                      F-26
<PAGE>


Plaintiffs  contend that the defendants (a) overcharged for registration  and/or
title fees; (b) failed to properly  itemized  documentary costs and governmental
costs; (c) charged grossly excessive  documentary fees not reasonably related to
costs;  and (d) failed to  disclose  that the  defendants  are not  required  to
perform  certain  documentary  services.  It  appears  from the  complaint  that
plaintiffs  have  attempted  to name as  defendants  all  franchised  automobile
dealers  in the  State of New  Jersey,  as well as a large  assortment  of other
persons and entities.  There are no allegations that Hometown ever performed any
services for any of the  plaintiffs.  The  complaint  makes certain class action
allegations and alleges  violations of the New Jersey Consumer Fraud Act as well
as common law fraud. Hometown does not believe that the eventual outcome of this
case will have a material adverse effect upon Hometown's  consolidated financial
position or results of operations.

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

      Guarantees

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

      In connection with the acquisition in 1999 of real estate used by Baystate
Lincoln Mercury, Hometown guaranteed the mortgage debt of Rellum Realty Company.
The 1999 guaranty was given in substitution for a February 1998 guaranty of that
debt by the Muller Group,  a subsidiary of Hometown.  In the event of default by
Rellum Realty Company,  Hometown is required to make the mortgage payments,  but
does not take  ownership  of the  property.  Hometown  recorded  the  lease as a
capital  lease.  As of  December  31,  2004 the  mortgage  debt  balance is $4.3
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. See
Notes 7 and 8 to the consolidated financial statements.

      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


                                      F-27
<PAGE>


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 December 31, 2004 and 2003, Hometown has a reserve of
$208,000  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
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 Costs                      Balance At
    Reserve for Policy Work       Beginning of Year       and Expenses        Deductions      End of Year
 ------------------------------  ------------------     ----------------     -------------   --------------
      <S>                             <C>                   <C>                <C>              <C>
      Year Ended 12/31/04             $175,000              $955,000           $(922,000)       $208,000
      Year Ended 12/31/03             $172,000              $785,000           $(782,000)       $175,000
      Year Ended 12/31/02             $226,000              $800,000           $(854,000)       $172,000
</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  discussed  in Note 2 -
Finance, Insurance and Service Contract Income Recognition .

      Franchise Agreements

      Toyota Motor Sales,  U.S.A.,  Inc. has extended  Hometown's current Toyota
Dealer Agreement through April 18, 2005.  Previously on March 13, 2003, Hometown
was notified by Toyota Motor Sales,  U.S.A.,  that Hometown must correct certain
operational  deficiencies or make  substantial  progress toward  rectifying such
deficiencies.  Toyota  had  previously  expressed  concerns  that the  financial
resources  of the Toyota  dealerships  were being used to finance  the cash flow
deficits of other  Hometown  dealerships  and that because of this the financial
health of the Toyota  dealerships were  detrimentally  affected by a net working
capital deficiency. Toyota requested and Hometown provided a written action plan
and consolidated  financial  forecast.  Toyota also expressed concerns about the
impact of Ford Motor Credit's  financing  terms upon the Toyota  dealerships and
the existing litigation, which has now been settled, including the Vergopia's as
discussed  above.  Hometown  developed  and  implemented  plans to  correct  the
operational deficiencies that would bring Hometown into compliance. Hometown has
obtained  written  confirmations  from Ford Motor Credit in response to Toyota's
requests  for  information  relating to  financing  arrangements.  In  addition,
Hometown has improved net working  capital  through the sale of a  Chrysler/Jeep
sales and  service  franchise  in the  second  quarter of 2003 and  advances  on
warranty income from Hometown's Extended Service Plan vendor.  Hometown has been
in regular  contact with Toyota to review the efforts of Hometown to resolve the
deficiencies  alleged by Toyota.  The two Toyota dealerships for the fiscal year
ended  December  31, 2004 had  combined  revenues  of $98.1  million and pre-tax
income before allocation of corporate costs of


                                      F-28
<PAGE>


$2.2  million.  Hometown  believes that it has corrected the alleged net working
capital  deficiency  for the  Toyota  dealerships,  that it has  alleviated  the
concerns  expressed  by Toyota  and that  Hometown  will enter into a new dealer
agreement  with Toyota Motor  Sales,  U.S.A.;  however,  Toyota has reserved the
right to terminate the Toyota  Dealership  Agreements if sufficient  progress is
not made to correct the  alleged  deficiencies.  Should  Hometown be notified by
Toyota that they intend to terminate the Toyota Dealership Agreements,  Hometown
believes it would have a reasonable amount of time to cure the defaults.

15. EMPLOYEE BENEFIT PLANS

      Hometown  maintains the Hometown  Auto  Retailers,  Inc.  401(k) Plan (the
"Plan") for the benefit of eligible employees, as defined. Participants may make
voluntary  contributions of up to 15% of their compensation,  subject to certain
IRS limitation.  Hometown may make annual matching  contributions to the Plan at
its discretion.  Hometown made contributions of $18,000,  $24,000 and $0 for the
years ended December 31, 2004, 2003 and 2002, respectively.

16. STOCK OPTION PLAN

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


                                      F-29
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                          Weighted
                                                 Number of        Weighted Average      Average Fair
                                                  Shares          Price per Share           Value
                                              ---------------  ---------------------   ---------------

   <S>                                            <C>                     <C>              <C>
   Balance at December 31, 2001                   615,750              $ 4.17
   Options Granted                                120,000                 .51              $ 0.33
   Canceled                                       (25,000)               2.97
                                                  -------              ------
   Balance at December 31, 2002                   710,750              $ 3.60
   Options Granted                                100,000                0.38              $ 0.27
   Canceled                                      (186,250)               7.47
                                                  -------              ------
   Balance at December 31, 2003                   624,500              $ 1.93
   Options Granted                                 10,000                1.05              $ 0.67
   Canceled                                      (117,000)               5.79
                                                  -------              ------
   Balance at December 31, 2004                   517,500              $ 1.04
                                                  =======              ======

   Exercisable at December 31, 2002               414,914              $ 5.26
                                                  =======              ======
   Exercisable at December 31, 2003               413,000              $ 2.45
                                                  =======              ======
   Exercisable at December 31, 2004               444,169              $ 1.13
                                                  =======              ======

<CAPTION>
                      Number of
     Range of          Options         Weighted      Weighted Average       Options
     Exercise      Outstanding at      Average        Exercise Price      Exercisable      Weighted Avg.
      Prices          12/31/04       Remaining Life     Per Share         at 12/31/04      Exercise Price
    -----------   ----------------   ------------  --------------------- ---------------  ----------------
   <S>                 <C>               <C>              <C>                <C>               <C>
   $0.34 to
     $0.65             220,000           3.96             $ 0.45             153,333           $ 0.47
   $0.68 to
     $1.50             198,750           2.80             $ 1.08             192,086           $ 1.09
   $2.25                98,750           1.38             $ 2.25              98,750           $ 2.25
                       -------           ----             ------             -------           ------
                       517,500           3.02             $ 1.04             444,169           $ 1.13
                       =======           ====             ======             =======           ======
</TABLE>

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

      In 2004, the dividend  yield was assumed to be 0%, the risk-free  interest
rate was 3.93%, the expected option life was 5 years and the expected volatility
was 75%.  In 2003,  the  dividend  yield was  assumed  to be 0%,  the  risk-free
interest  rate ranged from 3.0% to 3.2%,  the  expected  option life was 5 to 10
years and the  expected  volatility  was 75%. In 2002,  the  dividend  yield was
assumed to be 0%, the  risk-free  interest  rate ranged  from 3.4% to 4.4%,  the
expected option life was 5 years and the expected volatility was 75%.


                                      F-30
<PAGE>


      See Note 2 for impact of accounting for stock options using the fair value
method of accounting according to SFAS 123.

17.  OTHER  INCOME / OTHER  EXPENSE - SALE OF  CHRYSLER/JEEP  SALES AND  SERVICE
FRANCHISE

      The significant components of Other Income and Other Expense are:

<TABLE>
<CAPTION>
                                                       12/31/04      12/31/03       12/31/02
                                                                   (in thousands)
                                                       --------      --------       --------
      <S>                                                <C>           <C>           <C>
      OTHER INCOME:
      Oldsmobile termination payment                     $ 127         $  --         $  --
      Gain on sale of Sales and Service Franchise           --           936            --
      Insurance claim proceeds                              --             8            40
      Other                                                  8            12            12
                                                         -----         -----         -----
      Total Other Income                                 $ 135         $ 956         $  52
                                                         =====         =====         =====
      OTHER EXPENSE:
      Impairment of Assets                               $  --         $  --         $(150)
      Miscellaneous                                         (9)           (3)           (8)
                                                         -----         -----         -----
      Total Other Expense                                $  (9)        $  (3)        $(158)
                                                         =====         =====         =====
</TABLE>

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

      On  June 3,  2003  Hometown  sold  the  Chrysler/Jeep  Sales  and  Service
Franchise  for its  Waterbury,  CT store for $950,000 in cash.  The  transaction
resulted  in Hometown  recording a $936,000  gain on the sale and is included in
Other Income in Hometown's  Consolidated  Statement of  Operations  for the year
ended  December 31,  2003.  Hometown  relocated  its  corporate  offices to this
location in January 2005. The lease for the property  expires in 2013.  Hometown
wrote off the goodwill associated with this franchise in 2002. See Note 5.

      As of December 31, 2002,  Hometown  recorded a $150,000  asset  impairment
charge to write-down  the asset to fair value for assets that are held for sale.
See  Notes 2 and 3. The  impairment  charge  is  included  in Other  Expense  in
Hometown's Consolidated Statements of Operations for the year ended December 31,
2002.


                                      F-31
<PAGE>


18. UNAUDITED QUARTERLY FINANCIAL DATA

                      FOR THE YEAR ENDED DECEMBER 31, 2004
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                       1ST QTR.       2ND QTR.        3RD QTR.     4TH QTR.(*)     TOTAL YEAR
                                      -----------    -----------    -----------    -----------    -----------
<S>                                   <C>            <C>            <C>            <C>            <C>
Net Sales                             $    65,878    $    68,722    $    69,282    $    61,399    $   265,281
 Gross profit                               9,520          9,631          9,752          9,071         37,974
 Income before taxes                          140            319            781            412          1,652
                                      -----------    -----------    -----------    -----------    -----------
 Net income                           $       102    $       233    $       570    $     2,843    $     3,748
                                      -----------    -----------    -----------    -----------    -----------

 Per share information:
 Earnings per share, basic            $      0.01    $      0.03    $      0.08    $      0.38    $      0.51
 Earnings per share, diluted          $      0.01    $      0.03    $      0.08    $      0.38    $      0.50

 Weighted average shares, basic           7,175.1        7,191.6        7,389.4        7,389.4        7,286.9
 Weighted average shares, diluted         7,471.3        7,324.5        7,493.2        7,466.2        7,439.0
</TABLE>

(*)   The fourth  quarter of 2004  contains a tax  valuation  adjustment of $2.5
      million. See Note 11.


                      FOR THE YEAR ENDED DECEMBER 31, 2003
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                         1ST QTR.        2ND QTR.       3RD QTR.       4TH QTR.     TOTAL YEAR
                                       -----------     -----------    -----------    -----------    -----------
<S>                                    <C>             <C>            <C>            <C>            <C>
Net Sales                              $    60,320     $    78,103    $    78,180    $    63,174    $   279,777
Gross profit                                 9,020          10,779         10,915          9,033         39,747
Income (loss) before taxes                    (187)          1,816          1,053            223          2,905
                                       -----------     -----------    -----------    -----------    -----------
Net income (loss)                      $      (121)    $     1,083    $       832    $       584    $     2,378
                                       -----------     -----------    -----------    -----------    -----------

Per share information:
Earnings (loss) per share, basic       $     (0.02)    $      0.15    $      0.12    $      0.08    $      0.33
Earnings (loss) per share, diluted     $     (0.02)    $      0.15    $      0.12    $      0.08    $      0.33

Weighted average shares, basic             7,175.1         7,175.1        7,175.1        7,175.1        7,175.1
Weighted average shares, diluted           7,175.1         7,175.1        7,212.1        7,299.7        7,215.5
</TABLE>


                                      F-32
<PAGE>


       REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE


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

      The audits  referred to in our report dated March 9, 2005  relating to the
consolidated  financial  statements of Hometown Auto Retailers,  Inc.,  which is
contained  in Item 8 of this  Form 10-K  included  the  audits of the  financial
statement  schedules for the years ended December 31, 2004, 2003 and 2002 listed
in  the  accompanying   index.  These  financial  statement  schedules  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statement schedules based upon our audits.

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


New York, New York                                        /s/ BDO Seidman, LLP
March 9, 2005                                                 BDO Seidman, LLP



                                      S-1
<PAGE>

                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
              For the years ended December 31, 2004, 2003 and 2002

<TABLE>
<CAPTION>
                                                   Additions
                                    Balance at     charged to    Deductions,                   Balance at
                                     Beginning     Costs and        net of        Other            End
Account Description                   of Year       Expenses      Write-offs    Adjustments     of Year
                                    -----------   ------------   ------------  ------------   -----------
<S>                                  <C>           <C>            <C>               <C>        <C>
Reserves for:
Finance contract charge-backs
    Year ended December 31, 2004     $ 190,000     $ 317,000      $(327,000)        $--        $ 180,000
                                     =========     =========      =========         ===        =========
    Year ended December 31, 2003     $ 162,000     $ 277,000      $(249,000)        $--        $ 190,000
                                     =========     =========      =========         ===        =========
    Year ended December 31, 2002     $ 113,000     $ 367,000      $(318,000)        $--        $ 162,000
                                     =========     =========      =========         ===        =========

Insurance contract charge-backs
    Year ended December 31, 2004     $  35,000     $  34,000      $ (24,000)        $--        $  45,000
                                     =========     =========      =========         ===        =========
    Year ended December 31, 2003     $  35,000     $  14,000      $ (14,000)        $--        $  35,000
                                     =========     =========      =========         ===        =========
    Year ended December 31, 2002     $  23,000     $  37,000      $ (25,000)        $--        $  35,000
                                     =========     =========      =========         ===        =========

Service contract charge-backs
    Year ended December 31, 2004     $ 285,000     $  12,000      $(107,000)        $--        $ 190,000
                                     =========     =========      =========         ===        =========
    Year ended December 31, 2003     $  96,000     $ 369,000      $(180,000)        $--        $ 285,000
                                     =========     =========      =========         ===        =========
    Year ended December 31, 2002     $ 134,000     $  47,000      $ (85,000)        $--        $  96,000
                                     =========     =========      =========         ===        =========

Guarantees on finance contracts
    Year ended December 31, 2004     $  24,000     $ (21,000)     $  (3,000)        $--        $      --
                                     =========     =========      =========         ===        =========
    Year ended December 31, 2003     $  78,000     $ (21,000)     $ (33,000)        $--        $  24,000
                                     =========     =========      =========         ===        =========
    Year ended December 31, 2002     $ 377,000     $ (99,000)     $(200,000)        $--        $  78,000
                                     =========     =========      =========         ===        =========

Policy work expenses
    Year ended December 31, 2004     $ 175,000     $ 955,000      $(922,000)        $--        $ 208,000
                                     =========     =========      =========         ===        =========
    Year ended December 31, 2003     $ 172,000     $ 785,000      $(782,000)        $--        $ 175,000
                                     =========     =========      =========         ===        =========
    Year ended December 31, 2002     $ 226,000     $ 800,000      $(854,000)        $--        $ 172,000
                                     =========     =========      =========         ===        =========

Allowance for doubtful accounts
    Year ended December 31, 2004     $ 300,000     $  98,000      $(128,000)        $--        $ 270,000
                                     =========     =========      =========         ===        =========
    Year ended December 31, 2003     $ 207,000     $ 122,000      $ (29,000)        $--        $ 300,000
                                     =========     =========      =========         ===        =========
    Year ended December 31, 2002     $ 250,000     $  76,000      $(119,000)        $--        $ 207,000
                                     =========     =========      =========         ===        =========
</TABLE>


                                      S-2