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, 2000

                                       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.)

                              774 Straits Turnpike
                               Watertown, CT 06795
                    (Address of Principal Executive Offices)

Registrant's telephone number, including area code: (860) 945-6900

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. |_|

      The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 30, 2001 was approximately $2,812,551.

      The number of shares outstanding of the registrant's Class A and Class B
Common Stock, $.001 par value, as of March 30, 2001 was 6,000,109 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......................................................18
   Item 3.  Legal Proceedings...............................................20
   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.........................................23
   Item 7.  Management's Discussion and Analysis of Financial
              Condition and Results of Operations...........................24
   Item 7A. Quantitative and Qualitative Disclosures About Market Risk......31
   Item 8.  Financial Statements and Supplementary Data.....................31
   Item 9.  Changes in and Disagreements With Accountants on Accounting
              and Financial Disclosures.....................................31

PART III
   Item 10. Directors and Executive Officers of the Registrant..............32
   Item 11. Executive Compensation..........................................35
   Item 12. Security Ownership of Certain Beneficial Owners and Management..41
   Item 13. Certain Relationships and Related Transactions..................43

PART IV
   Item 14. Exhibits, Financial Statement Schedules, and Reports
              on Form 8-K...................................................44

                      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 the Company 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. The Company'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 the Company. Although the
Company 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 included herein particularly in view
of the Company's limited history of operating multiple dealerships in a combined
entity, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company 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."


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<PAGE>

                                     PART I

ITEM 1. BUSINESS

      Until the closing of its initial public offering on July 31, 1998.
Hometown Auto Retailers, Inc. conducted no operations under its own name and all
revenues were generated by its predecessor companies. On July 31, 1998, four
corporations (the "Core Operating Companies") operating six dealerships, a
collision repair center and a factory authorized free standing service center
were acquired in Exchange for 3,760,000 shares of Class B Common Stock (the
"Exchange") and three additional dealerships were acquired for cash. In 1999,
the Company also acquired free standing Lincoln Mercury and Toyota dealerships
and added a Mazda dealership to its Massachusetts store. In 2000, the Company
acquired a Jeep dealership which was added to its Vermont location. References
herein to the "Company" or "Hometown" mean Hometown Auto Retailers, Inc., its
predecessor companies and subsidiaries after giving effect to the foregoing
transactions. Unless otherwise indicated, all share, per share and financial
information set forth herein has been adjusted retroactively to give effect to
(i) a 12,000-for-1 stock split In July 1998 and, (ii) the issuance of 3,760,000
shares of Class B Common Stock in the Exchange.

General

      The Company 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 11 franchised dealerships located in New
Jersey, New York, Connecticut, Massachusetts and Vermont. The Company's
dealerships offer 13 American and Asian automotive brands, including Chevrolet,
Chrysler, Dodge, Ford, Isuzu, Jeep, Lincoln, Mercury, Oldsmobile, Plymouth,
Mazda, Daewoo, and Toyota. The Company also is active in two "niche" areas of
the automotive market, the sale of Lincoln town cars and limousines to livery
car and livery fleet operators and the maintenance and repair of cars and trucks
at a Ford and Lincoln Mercury factory authorized free-standing service center.
The Company believes that it is one of the five largest automotive dealers in
New England.

      The Company believes that it has a significant market position as a seller
of Lincoln town cars and limousines to livery car and livery fleet operators.
The Company has achieved its market position in livery car sales through
innovative sales, financing and maintenance programs creating a high level of
repeat business under which livery car operators trade in their vehicles for new
models every 18 to 24 months.

      The Company'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 services 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 the Company'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 cyclicality of new car sales.


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<PAGE>

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

      o     Strong Regional Focus. The Company's eleven franchised dealerships
            are located in New Jersey, Connecticut, Massachusetts and Vermont.
            The Company 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. The Company believes that its existing
            dealerships have good local reputations and have strong local name
            recognition. Through "owner-loyalty" and similar programs, the
            Company believes it has established a customer base that looks to
            its existing "Hometown" dealership as its first choice in buying
            replacement vehicles.

      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
            of the Company have over 130 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.
            The Company 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 "Management-Directors and Officers" for additional information
            as to the numerous Manufacturer awards and citations earned by
            Hometown's senior management and dealerships in recent years.

      o     Presence In Higher Profit Margin Businesses

            o     Livery Sales and Service. The Company's Westwood subsidiary is
                  a major seller of Lincoln Town Cars and limousines to livery
                  car and livery fleet operators. The sale of livery vehicles
                  also tends 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     Maintenance and Repair. The Company's Shaker subsidiary's
                  "Lincoln Mercury Autocare" facility was the pilot for Ford's
                  authorized free-standing neighborhood service centers for the
                  maintenance and light repair of cars and trucks. Free-standing
                  service centers are an innovative attempt by the automotive
                  retail industry to recapture repair and maintenance business
                  which has been lost in recent decades to chain and independent
                  service businesses. The service center encourages customers to
                  deal directly with service personnel and permits customers to
                  watch the progress of work on their cars by entering the shop
                  on railed walkways. The service center also operates during
                  extended hours, provides comfortable customer waiting areas
                  and quickly services vehicles without prior appointment.


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<PAGE>

      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.

            o     Used Car Sales. The sale of used vehicles is emphasized at
                  each of the Company's dealerships. Typically, used vehicle
                  sales generate higher gross margins than new vehicle sales.
                  The Company 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. The Company 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. The Company
            believes that auction buying activities will be 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.

      o     Brand Diversity. Hometown's dealerships offer 13 American and Asian
            automotive brands including Chevrolet, Chrysler, Dodge, Ford, Isuzu,
            Jeep, Lincoln, Mercury, Oldsmobile, Plymouth, Mazda, Daewoo, and
            Toyota. The Company 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     Centralized Financing and Administrative Functions. The Company
            believes that it has been able to generate cost savings by centrally
            financing its new and used car inventories through Ford Motor Credit
            on March 16th 2001. Additional cost savings have been achieved by
            consolidating the Connecticut office operations from three
            dealerships to one location. Hometown will continue to this
            consolidation process for all dealerships.

      o     Quality Personnel. The Company 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. The Company 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. The Company believes that the
            application of its professional management practices provides it
            with an ability to achieve levels of profitability superior to
            industry averages.

Dealership Operations

      The Company'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 general managers and members of the
Company's operating committee, consisting of its four senior executive


                                       5
<PAGE>

officers, each of whom is, or has been, the chief operating officer of a
franchised dealership. Each of the Company's dealerships will use a management
structure, currently used by the Core Operating Companies, that promotes and
rewards the achievement of benchmarks set by senior management and the
Operations Committee. 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 the Company'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 13 American and Asian
brands of lower, mid and higher priced sport and family cars and light trucks,
including sport utility vehicles. The Company believes that offering numerous
new vehicle brands appeals to a variety of customers, minimizes dependence on
any one Manufacturer and reduces its exposure to supply problems and product
cycles. The following table sets forth for 1999 and 2000, certain information
relating to the brands of new vehicles sold at retail by the Company:

                         For the Year Ended December 31,
                                 1999 and 2000

                                        1999                     2000
                                        ----                     ----

BRANDS                           Number     Percentage    Number      Percentage
------                           ------     ----------    ------      ----------

LINCOLN/MERCURY ..........        2,812         40.8%      2,404         35.7%
TOYOTA ...................        2,188         31.8%      2,476         36.8%
FORD .....................          767         11.1%        626          9.3%
DODGE ....................          325          4.7%        251          3.7%
JEEP .....................          283          4.1%        273          4.1%
CHEVROLET ................          213          3.1%        245          3.6%
OLDSMOBILE ...............           65          1.0%         36          0.5%
PLYMOUTH .................           36          0.5%         35          0.5%
CHRYSLER .................           92          1.3%        112          1.7%
ISUZU ....................           57          0.8%         40          0.6%
MAZDA ....................            0          0.0%        117          1.7%
DAEWOO ...................           34          0.5%        105          1.6%
OTHER ....................           20          0.3%         11          0.2%
                                  -----        -----       -----        -----
Total ....................        6,892        100.0%      6,731        100.0%
                                  =====        =====       =====        =====

      The Company's new vehicle unit sales include lease transactions. New
vehicle leases generally have short terms which tend to bring the consumer back
to the market sooner than if the purchase were debt financed. In addition,
leases provide a steady source of late-model, off-lease vehicles for used


                                       6
<PAGE>

vehicle inventory. Leased vehicles generally remain under factory warranty for
the term of the lease which allows the dealerships to provide repair service to
the lessee throughout the lease term.

      The Company 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. For example, the Company intends to implement
the strategy of the Core Operating Companies by: (i) engaging in extensive
follow-up after a sale in order to develop long-term relationships with its
customers; (ii) training its sales staffs 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. The Company believes that its ability to share "best practices" among
its dealerships gives it an advantage over smaller dealerships.

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

      Used Vehicle Sales. The Company sells used vehicles at each of its
franchised dealerships. Sales of used vehicles have become an increasingly
significant source of profit for dealerships. Consumer demand for used vehicles
has increased as prices of new vehicles have risen and as more high quality used
vehicles have become available. Furthermore, used vehicles typically generate
higher gross margins than new vehicles because of their limited comparability
and the somewhat subjective nature of their valuation. The Company intends to
emphasize used vehicle sales by maintaining a high quality inventory, providing
competitive prices and extended service contracts for its used vehicles and
continuing to promote used vehicle sales. The Company will also certify that its
used cars meet specified testing and quality standards.

      The following table shows the growth of used vehicle sales by the Company
from 1996 through 2000 and the pro forma combined used vehicle sales by the
Company in those years prior to the offering:

<TABLE>
<CAPTION>
                                                   Number of Used and New Vehicles Sold
                                                   ------------------------------------
                                            1996       1997       1998       1999       2000
                                            ----       ----       ----       ----       ----
<S>                                        <C>        <C>        <C>        <C>        <C>
Used Vehicles - Retail ...............      5,107      4,725      3,995      4,790      4,549
Used Vehicles - Wholesale ............      3,867      4,154      3,794      3,319      3,208
New Vehicles .........................      5,450      5,431      5,150      6,892      6,731
                                           ------     ------     ------     ------     ------
          Total Sales ................     14,424     14,310     12,939     15,001     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, the
Company acquires used vehicles from trade-ins and a variety of sources
nationwide, including direct purchases and manufacturers' and independent
auctions.


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<PAGE>

      The Company 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 10 weeks are sold
to another dealer or sold at auction. Pursuant to this strategy the Company
generally maintains only a 30 to 45 day supply of used vehicles. 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.

      The Company 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. The Company 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 web site "htauto.com". Customers can see digital images of most of
Hometown's pre-owned inventory 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. The Company 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 11 locations, one factory authorized
neighborhood service center and one collision repair center, using approximately
110 service bays. Hometown provides both warranty and non-warranty service work.

      The Company implemented an "owner loyalty program" similar to programs
used by the Core Operating Companies 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, 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 recent trend for increasing
percentages 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 the Company'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 the Company's dealerships. The
Company will use systems, already in place at the Core Operating Companies, that
track its customers' maintenance records and notify owners of


                                       8
<PAGE>

vehicles purchased at the dealerships when their vehicles are due for periodic
services. The Company 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 have begun to 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 2000, Hometown arranged financing for
approximately 65.4% 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. However, under
existing agreements no charge-backs are permitted after 90, or in some cases
120, days except for certain sales to livery car operations. In addition,
Hometown has guaranteed certain automobile financing loans made by financial
institutions to its livery customers for the purchase of new and used
limousines. At December 31, 2000 contingent liability on these guarantees to
Ford Motor Credit Co. and another financial institution aggregated $7,259,000.
The collectability of such loans to customers in the livery business can be
adversely affected by a decline in economic conditions. The Company has
established reserves for potential liability arising from such guarantees, based
on available historical information.

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

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. In addition, a franchise
agreement may impose requirements on the dealer concerning such matters as
showrooms, facilities and equipment for servicing vehicles, maintenance of
inventories of vehicles and parts, maintenance of minimum net working capital
and training of personnel. Compliance with each of these requirements is closely
monitored by the Manufacturer. In addition, Manufacturers require each
dealership to submit a financial statement of operations on a monthly and annual
basis. The franchise agreement also grants the dealer the non-exclusive right to
use and display the Manufacturer's trademarks, service marks and design in the
form and manner approved by the Manufacturer.

      Each franchise agreement sets forth the name of the person approved by the
Manufacturer to exercise full managerial authority over the dealership's
operations and the names and ownership percentages of the approved owners of the
dealership and contains provisions requiring the


                                       9
<PAGE>

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. In connection with approving the Exchange, the
Manufacturers will require Hometown to execute new franchise agreements, which
may contain different provisions from the current agreements. For a description
of these and other restrictions and other material terms imposed by the
Manufacturers in the franchise agreements, see "Certain Factors that may Affect
Growth and Profits -Manufacturers' Control Over Dealerships" and "Certain
Factors that may Affect Growth and Profits - Dependence on Acquisitions for
Growth; Manufacturers' Restrictions on Acquisitions."

      Most franchise agreements expire within one to five years. The Company
expects to renew any expiring agreements in the ordinary course of business with
the exception of Morristown Lincoln Mercury which has been sold back to the
manufacturer. The typical franchise agreement provides for early termination or
non-renewal by the Manufacturer under certain circumstance 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.

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. The Company 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. The Company 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


                                       10
<PAGE>

Manufacturer rebates and other special offers) and warranties. The Company
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. The Company 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.

      The Company 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. The Company competes with other automobile dealers,
service stores and automotive parts retailers in its parts operations. The
Company 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, the Company competes
with publicly and privately owned dealership groups for the acquisition of other
dealerships. The Company believes that it is currently the only dealer group
with public ownership located in the Northeast. 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 the Company's current and targeted market areas
including Republic Industries, Inc. and United Auto Group, Inc. which have,
respectively, purchased a dealer group in southern New Jersey, eastern
Massachusetts, and a limited number of dealerships in New Jersey and the
Danbury, Connecticut and Nyack, New York areas. The Company expects increased
future competition for dealerships in its markets.

Governmental Regulations

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

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

      The Company's financing activities are subject to federal
truth-in-lending, 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. 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. The
Company 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 the Company's capital expenditures, earnings, or
competitive position.


                                       11
<PAGE>

Environmental Matters

      The Company 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, the Company'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 the Company
must comply.

      Hometown's business also involves the use of aboveground and underground
storage tanks. Under applicable laws and regulations, the Company 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, the Company 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 the Company to remediate any soils or groundwater
resulting from such releases.

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

      Further, the Federal Water Pollution Control Act, also known as the Clean
Water Act, and comparable state statutes prohibit discharges of pollutants into
regulated waters without authorized National Pollution Discharge Elimination
System (NPDES) and similar state permits, require containment of potential
discharges of oil or hazardous substances, and require preparation of spill
contingency plans. The Company 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, the Company, 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 the
Company does not anticipate that any material environmental liabilities will be
incurred in the future. Although the Company is in the process of establishing
an environmental management program that is intended to reduce the risk of
noncompliance with environmental laws and regulations,


                                       12
<PAGE>

environmental laws and regulations and their interpretation and enforcement are
changed frequently and the Company 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 the Company or that such expenditures would not be
material. See "Certain Factors that may Affect Growth and Profits - Governmental
Regulations and Environmental Matters."

Employees

      As of December 31, 2000, the Company employed 386 people, of whom
approximately 81 were employed in managerial positions, 82 were employed in
non-managerial sales positions, 170 were employed in non-managerial parts and
service positions and 53 were employed in administrative support positions.

      Hometown believes that its relationships with its employees are favorable.
None of the employees are represented by a labor union. Because of its
dependence on the Manufacturers, the Company 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 the Company and
should be considered by any prospective purchaser of the Company's securities:

Absence of Combined Operating History

      Until July 31, 1998 the Company conducted no combined or coordinated
operations other than in connection with the Exchange, the Acquisitions and its
initial public offering. The Core Operating Companies have been operated and
managed as separate independent entities and the Company's future operating
results will depend, in part, on its ability to integrate operations and manage
the combined enterprise. The management group that will lead the Company has
been formed only recently and there can be no assurance that it will be able to
effectively and profitably integrate the Core Operating Companies, the
Acquisitions and any future acquisitions, or to effectively manage the combined
entity. The inability of the Company to do so could have a material adverse
effect on its business, financial condition and results of operations.

Dependence on Automobile Manufacturers

      The Company is significantly dependent upon its relationships with, and
the success of, certain Manufacturers. For the year ended December 31, 2000,
Ford Motor, Toyota Motor and Chrysler accounted for 45.0 %, 36.8%, and 10.0% of
the new vehicle sales of the Company, respectively. The Company may become
dependent on additional manufacturers in the future as a result of its
acquisition strategy and changes in the Company's sales mix.

      The Company also is dependent upon its Manufacturers to provide it with an
inventory of new vehicles. The most popular vehicles tend to provide the Company
with the highest profit margins and are frequently the most difficult to obtain
from the Manufacturers. In order to obtain sufficient numbers of these vehicles,
the Company may be required to purchase a larger number of less marketable makes
and models than it would otherwise purchase. Sales of less desirable makes and
models may result in lower profit margins than sales of the more popular
vehicles. If the Company were to be unable to obtain sufficient quantities of
the most popular makes and models, its profitability could be adversely
affected.


                                       13
<PAGE>

      The success of each of the Company's 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. Events such as labor strikes or negative publicity concerning a
particular Manufacturer, including safety recalls of a particular vehicle model,
could adversely affect the Company. The Company has attempted to lessen its
dependence on any one Manufacturer by obtaining agreements with a number of
different domestic and foreign automobile manufacturers.

Lack of Exclusive Market Area

      The Company's franchise and dealership agreements with its Manufacturers
do not give the Company the exclusive right to sell any Manufacturer's product
within any given geographical area. Accordingly, a Manufacturer could grant a
franchise to another dealer to start a new dealership in proximity to one or
more of the Company's locations or an existing dealer could move its dealership
to a location which would be directly competitive with the Company. Although
under Connecticut and New Jersey law a manufacturer is prohibited from
establishing a new dealership, or authorizing the relocation of an existing
dealership, to a location within 14 miles (8 miles in New Jersey under certain
circumstances) of a pre-existing dealership holding a franchise to sell the same
brand, depending upon the dealership involved, such an event could have a
material adverse effect on the Company and its operations.

Manufacturers' Control over Dealerships

      The dealerships operated by the Company sell cars and light trucks
pursuant to franchise or dealership agreements with Ford Motor, GM, Toyota
Motor, Chrysler, Mazda and American Isuzu. Through the terms and conditions of
these agreements, such Manufacturers exert considerable influence over the
operations of the Company'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.

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

Risks Relating to Failure to Meet Manufacturer CSI Scores

      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. The dealerships operated by the Core
Operating Companies have historically exceeded their Manufacturers' CSI
standards. However, there can be no assurance that either the Company
dealerships operated by members of the Core Operating Companies or other
subsequently acquired dealerships will continue to meet such standards.
Moreover, 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
make it more difficult for key Company dealerships to meet such standards.


                                       14
<PAGE>

Reliance on Key Personnel

The Company depends to a large extent upon the abilities and continued efforts
of its senior executive officers including Corey Shaker, William C. Muller, Jr.
and James Christ. Further, the Company may be dependent on the senior management
of the dealerships it acquires. If any of these persons becomes unavailable to
continue in such capacity, or if the Company were unable to attract and retain
other qualified employees, its business or prospects could be adversely
affected. During 2000, the Company dismissed its Chairman and Chief Executive
Officer and a Vice President (see the Legal Proceedings section of this
document).

Substantial Competition

      The automotive retailing industry is highly competitive with respect to
price, service, location and assortment. The Company competes with automobile
dealerships (including public franchised dealership consolidators), private
market buyers and sellers of used vehicles, used vehicle dealerships, service
center chains, independent service and repair shops and financing and insurance
("F&I") operations. In the sale of new vehicles, the Company competes with other
franchised dealers. The Company does not have any cost advantage in purchasing
new vehicles from the Manufacturers, and typically will rely on advertising,
merchandising, sales expertise, service reputation and location of its
dealerships to sell new vehicles. In recent years, the Company has also faced
competition from non-traditional sources such as companies that sell automobiles
on the Internet, automobile rental agencies, independent leasing companies,
used-car "superstores" and price clubs associated with established consumer
agencies such as the American Automobile Association, some of which use
non-traditional sales techniques such as one-price shopping. In addition, Ford
Motor has announced that it is exploring the possibility of going into business
with some of its dealers to create automotive superstores in selected markets.
In furtherance of this plan, Ford Motor announced in mid-1998, a proposed joint
venture with Republic Industries under which Ford Motor would acquire a 51%
interest and Republic Industries a 49% interest in a joint venture entity that
will acquire one Lincoln Mercury and eight Ford dealerships in the Rochester,
New York area to create a retail network. The dealerships would be operated by
Republic Industries. Some of these recent market entrants may have greater
financial, marketing and personnel resources and/or lower overhead or sales
costs than the Company. In the parts and service area, the Company also competes
with a number of regional or national chains, which offer selected parts and
services at prices that may be lower than the Company's prices. In addition,
there can be no assurance that the Company's strategy will be more effective
than the strategies of its competitors.

Goodwill

      The Company's balance sheet at December 31, 2000 includes an amount
designated as "goodwill" that represents 28.5% of assets and 82.6% of
stockholders' equity.

      Goodwill arises when an acquirer pays more for a business than the fair
value of the tangible and separately measurable intangible net assets.
Accounting principles generally accepted in the United States require that this
and all other intangible assets be amortized over the period benefited.
Management has determined that period to be no less than 40 years.

      If management were not to separately recognize a material intangible asset
having a benefit period less than 40 years, or were not to give effect to
shorter benefit periods of factors giving rise to a material portion of the
goodwill, earnings reported in periods immediately following an acquisition
would be overstated. In later years, the Company would be burdened by a
continuing charge against earnings without the associated benefit to income
valued by management in arriving at the consideration paid for


                                       15
<PAGE>

the business. Earnings in later years could be significantly affected if
management determined then that the remaining balance of goodwill was impaired.

      Management has reviewed all of the factors and related future cash flows
which it considered in arriving at the amount incurred to acquire each of the
founding companies. Management concluded that the anticipated future cash flows
associated with intangible assets recognized in the acquisitions will continue
indefinitely, and there is no persuasive evidence that any material portion will
dissipate over a period shorter than 40 years.

Mature Industry

      The United States automobile dealership industry generally is considered a
mature industry in which minimal growth is expected in unit sales of new
vehicles. As a consequence, growth in the Company's revenues and earnings are
likely to be significantly affected by the Company's success in acquiring and
integrating dealerships and the pace and size of such acquisitions.

Cyclical Nature of Automobile Sales

      Sales of motor vehicles, particularly new vehicles, historically have been
subject to substantial cyclical variation characterized by oversupply and weak
demand. The Company believes 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 effect on the Company. The Company
believes that new vehicle sales in North America will be at levels slightly less
than 2000 in the year 2001. The Company does not believe that future expected
sales levels through 2002 will have a negative impact on its business. During
the past five years the Company's sales of new and used vehicles have not been
materially affected by overall industry levels of vehicle sales but have been
more significantly affected by the timing of introduction of new models by
particular Manufacturers and changes in consumer preferences for particular
brands or models.

Seasonality; Variability of Quarterly Operating Results

      The automobile industry is subject to seasonal variations in revenues.
Demand for cars and light trucks is generally lower during the winter months
than in other seasons, particularly in regions of the United States where the
Company is located which are associated with harsh winters. Accordingly, the
Company expects its revenues and operating results to be generally lower in its
first and fourth quarters than in its second and third quarters. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Imported Products

      A significant portion of the Company's new vehicle business will involve
the sale of vehicles, parts or vehicles composed of parts that are manufactured
outside the United States. As a result, the Company's 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 the Company's 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 the Company's operations and its ability to purchase imported
vehicles and/or parts.


                                       16
<PAGE>

Government Regulations and Environmental Matters

      The Company is subject to a wide range of federal, state and local laws
and regulations which are administered by various federal, state and local
regulatory agencies, such as local licensing requirements, consumer protection
laws and environmental requirements governing, among other things, discharges to
the air and water, the storage of petroleum substances and chemicals, the
handling and disposal of wastes, and the remediation of contamination arising
from spills and releases. The violation of these laws and regulations could
result in civil and criminal penalties being levied against the Company or in a
cease and desist order against operations that are not in compliance. Future
acquisitions by the Company may also be subject to governmental regulation,
including antitrust reviews. The Company believes that the Core Operating
Companies substantially comply with all applicable laws and regulations relating
to its business, but future laws and regulations may be more stringent and
require the Company to incur significant additional costs. The failure to
satisfy current or future regulatory requirements could have a material adverse
effect on the operations and financial condition of the Company. See "Business
-Governmental Regulations" and "Business - Environmental Matters."

Concentration of Voting Power; Anti-Takeover Provisions

      The former stockholders of the Core Operating Companies and their donees
own all of the Class B Common Stock, which entitles them to ten votes for each
share held, while holders of Class A Common Stock, are entitled to one vote per
share held. Consequently, such holders of the Class B Common Stock, who own
61.6% of the Company's outstanding Common Stock of all classes, will control
94.1% 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 the policies and operations of the Company. In addition,
the holders of the Class B Common Stock have entered into a stockholders'
agreement obligating them, for a five-year period, to vote for Salvatore A.
Vergopia, Joseph Shaker, William C. Muller Jr., Corey Shaker, Edward A. Vergopia
and James Christ as members of the Company's Board of Directors. The executive
officers and directors of the Company control 56.5% 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 the
policies and operations of the Company. 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.

      The Delaware General Corporation Law requires super-majority-voting
thresholds to approve certain "business combinations" between interested
stockholders and the Company, which may render more difficult or tend to
discourage attempts to acquire the Company. In addition, the Company's Board of
Directors has the authority to issue shares of preferred stock ("Preferred
Stock"), of which 2,000,000 are currently authorized, in one or more series and
to fix the rights and preferences of the shares of any such series without
stockholder approval. Any series of Preferred Stock is likely to be senior to
all classes of Common Stock of the Company with respect to dividends,
liquidation rights and, possibly, voting rights. The ability to issue Preferred
Stock could also have the effect of discouraging unsolicited acquisition
proposals, thus affecting the market price of the Common Stock and preventing
stockholders from obtaining any premium which might otherwise be offered by a
potential buyer. In addition, certain of the Company's dealer agreements will
prohibit the acquisition of more than a specified percentage of the Common Stock
without the consent of the relevant Manufacturers. See "Management - Executive
Officers and Directors," "Principal Stockholders" and "Description of Capital
Stock."


                                       17
<PAGE>

Possible Volatility of Price

      The market price of the Class A Common Stock could be subject to wide
fluctuations in response to a number of factors, including quarterly variations
of operating results, investor perceptions of the Company and automotive
retailing industry and general economic and other conditions.

Risk Related to Low Price Securities

      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. As of February, 2001 our
common stock has been trading in the over the counter market in the NASD's "OTC
Bulletin Board" and may become 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, for any transaction involving a penny stock, 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. As such, the "penny stock"
rules may restrict the ability of stockholders to sell our common stock and
warrants in the secondary market."

ITEM 2. PROPERTIES

      Set forth in the table below is certain information relating to the
properties that the Company uses in its business.

<TABLE>
<CAPTION>
Occupant/Trade
Name                     Location                      Use                               Lease/Own
----                     --------                      ---                               ---------
<S>                      <C>                           <C>                               <C>
Shaker's                 831 Straits                   New and used car sales;           Lease expires in 2013;
   Lincoln               Turnpike Watertown, CT        service; F & I                    $240,000 per year with CPI
   Mercury               06795                                                           increases in 2004 and 2009

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

Family Ford              1200 Wolcott Street           New and used car sales;           Lease expires in 2013;
                         Waterbury, CT                 service; F & I                    $240,000 per year with CPI
                         06705                                                           increases in 2004 and 2009


Shaker's Jeep            1311 South Main St.           New and used car sales;           Lease expires in 2013;
   Eagle                 Waterbury, CT                 service; F & I                    $72,000 per year with CPI
                         06706                                                           increases in 2004 and 2009

Westwood                 55 Kinderkamack Rd.           New and used car sales;           Lease expires in 2013;
   Lincoln               Emerson, NJ                   service; F & I; livery            $360,000 per year with CPI
   Mercury               07630                         sales                             increases in 2004 and 2009
</TABLE>


                                                         18
<PAGE>

<TABLE>
<S>                      <C>                           <C>                               <C>
Muller Toyota            Route 31 and Van              New and used car sales;           Lease expires in 2013;
                         Sickles Rd.                   service; F & I                    $360,000 per year with CPI
                         Clinton, NJ                                                     increases in 2004 and 2009
                         08809

Muller                   Route 173 and                 New and used car sales;           Lease expires in 2013;
   Chevrolet,            Voorhees Rd.                  service; F & I                    $396,000 per year with CPI
   Oldsmobile,           Stewartsville, NJ                                               increases in 2004 and 2009
   Isuzu                 08865

Wellesley                965 Worcester Road            New and used car sales;           Lease expires 12/22/08 at
   Lincoln               Wellesley, MA                 service; F&I                      $216,000 per year, one five
   Mercury               02181                                                           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                571 Worcester Road            New and used car sales;           Owned facility
   Lincoln               Framingham, MA                service; F & I
   Mercury               01701

Brattleboro              Route 5, Putney Rd.           New and used car sales;           Lease expires in 2003 at
   Chrysler              N. Brattleboro, VT            service; F & I                    $240,000 per year; one
   Plymouth              05304                                                           five-year renewal option at
   Dodge Sales                                                                           the same rent and option to
                                                                                         purchase at fair market value
                                                                                         of not less than $1.5 million.

Morristown               115 Spring St.                New and used car sales;           Dealership sold in January,
   Auto Sales,           Morristown, NJ                service; F & I                    2001. Lease will be assumed
   Inc.                  07960                                                           by third party in April, 2001.

Autos of                 2934 Rte 9 W                  New and used car sales;           Owned facility
   Newburgh,             New Windsor, NY               service; F & I
   Inc. d/b/a            12553
   Toyota of
   Newburgh
</TABLE>

Leases

      The Company 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 for the five-year periods commencing January 1, 2004 and 2009.

Shaker Group. The Company leases, for an initial annual base rental of $240,000,
the premises occupied by its Lincoln Mercury dealership in Watertown,
Connecticut, and for an initial base rental of $240,000 and $72,000
respectively, the premises occupied by the Family Ford and Shaker Jeep/Eagle
dealerships in Waterbury, Connecticut from Shaker Enterprises, a Connecticut
general partnership whose seven partners include Joseph Shaker, Corey Shaker,
Steven Shaker and Janet Shaker. Corey Shaker is President and a principal
stockholder of the Company. Steven Shaker is Regional Vice President-North
Division and a principal stockholder of the Company. Joseph Shaker is a
consultant to and a principal stockholder of the Company. Janet Shaker is a
principal stockholder of the Company.


                                       19
<PAGE>

Muller Group. The Company leases, for an initial annual base rental of $360,000
and $396,000 respectively the premises occupied by its Toyota dealership in
Clinton, New Jersey and its Chevrolet/Oldsmobile/Isuzu 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 and, prior to the Offering, was a 9.42%
stockholder of Hometown.

Westwood. The Company leases, for an initial annual base rental of $360,000 the
premises occupied by its Lincoln Mercury dealership in Emerson, New Jersey from
Salvatore A. Vergopia and his wife. Mr. Vergopia, prior to the Offering and
including shares owned by his wife, was a 17.63% stockholder of Hometown.

ITEM 3. LEGAL PROCEEDINGS

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

      We have retained litigation counsel to represent us in this action. As of
date of the filing of this Annual Report, we have not filed a response to the
complaint nor engaged in any pre-trial discovery.

      We believe that the Vergopias commenced this action in response to our
dismissal of both Salvatore A. Vergopia and Edward A. Vergopia from their
officerships and employment positions with us. We believe we have meritorious
defenses and intend to vigorously defend this action and assert various
counterclaims, and do not believe that the eventual outcome of the case will
have a material adverse effect on the Company'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 REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      (a) Market Information

      The Company's Class A Common Stock had been traded on The NASDAQ National
Market under the symbols "HCAR" since July 31, 1998. On February 12, 2001, the
Company's stock was delisted by NASDAQ for failing to meet minimum share price
and market capitalization requirements. The stock now 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 NASDAQ National Market since the commencement of trading and the NASD
Bulletin Board as of February 12, 2001. 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 1999

First Quarter                                        $ 5.875             $ 3.875

Second Quarter                                       $  4.75             $3.0625

Third Quarter                                        $ 4.375             $3.4375

Fourth Quarter                                       $  4.00             $2.6875

Year Ended 2000

First Quarter                                        $ 9.625             $3.5625

Second Quarter                                       $8.0625             $2.0625

Third Quarter                                        $2.9062             $  1.00

Fourth Quarter                                       $  1.50             $0.3125

1st Quarter of Year 2001

January 1 to February 9                              $ 1.00              $ 0.375

*February 12 to April 11                             $0.875              $0.4062

--------------------------------------------------------------------------------
*Commenced trading on Bulletin Board

      (b) Holders

      As of March 30, 2001, the number of record holders of the Class A Common
Stock of the Company was 35.

      (c) Dividends


                                       21
<PAGE>

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


                                       22
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

      The Company acquired the Core Operating Companies and the Acquisitions
simultaneously with the closing of the Offering on July 31, 1998, which
transactions have been accounted for using the purchase method of accounting.
E.R.R. Enterprises, Inc. ("Shaker"), the parent of one of the Core Operating
Companies, has been identified as the acquirer for financial statement
presentation purposes. The following selected financial data as of December 31,
2000, 1999 and 1998 have been derived from the audited consolidated financial
statements of the Company. The following selected historical financial data for
as of December 31, 1997 and 1996 have been derived from the audited financial
statements of Shaker.

<TABLE>
<CAPTION>
                                                                         For the Years Ended December 31,
                                                                 (in thousands, except share and per share data)
                                                     2000             1999            1998             1997              1996
                                                 -----------      -----------      -----------      -----------      -----------
<S>                                              <C>              <C>              <C>              <C>              <C>
Statement of Operations Data:
Revenues                                         $   279,841      $   285,493      $   121,516      $    59,496      $    62,222
Cost of sales                                        243,950          248,615          104,898           51,226           53,076
                                                 -----------      -----------      -----------      -----------      -----------
      Gross profit                                    35,891           36,878           16,618            8,270            9,146
Amortization of goodwill                                 661              600              212               --               --
Loss from operations of e-Commerce subsidiary             --              515               --               --               --
Selling, general and administrative expenses          38,452           32,045           17,510            7,715            8,049
                                                 -----------      -----------      -----------      -----------      -----------
      Income (loss) from operations                   (3,222)           3,718           (1,104)             555            1,097
Other income (expense)
      Interest (expense), net                         (2,135)          (1,988)            (443)            (189)            (384)

   Other income (expense), net                          (127)             (95)              46              116                1
                                                 -----------      -----------      -----------      -----------      -----------
      Income (loss) before taxes                      (5,484)           1,635           (1,501)             482              714
Provision (benefit) for income taxes                  (1,902)             850             (502)             166              321
                                                 -----------      -----------      -----------      -----------      -----------
      Net income (loss)                          $    (3,582)     $       785      $      (999)     $       316      $       393
                                                 ===========      ===========      ===========      ===========      ===========
Earnings (loss) per share, basic and diluted     $      (.60)     $       .13      $      (.28)     $       .17      $       .21
Weighted average shares, basic                     5,996,146        5,875,342        3,513,333        1,880,000        1,880,000
Diluted                                            6,728,183        6,003,851
--------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
                                                     2000             1999            1998             1997              1996
<S>                                              <C>              <C>              <C>              <C>              <C>
Balance Sheet Data:
Working capital                                  $     3,142      $     5,128      $     5,760      $     4,347      $     4,138
Inventories                                           40,964           51,455           30,554            7,609            8,504
Total assets                                          85,799           97,307           66,411           13,878           14,798
Total debt                                            49,339           60,945           32,145            7,231            8,201
Stockholders' equity                                  30,025           31,015           29,230            5,098            4,782
</TABLE>


                                       23
<PAGE>

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

      Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

      Revenues

      New vehicle sales remained flat at $173 million, with a decrease of 161
units being offset entirely by higher average unit revenues. A majority of the
decrease in units, 408, was from the Company's Lincoln Mercury dealerships,
offset in part by strong unit sales at the Toyota, Mazda and Daewoo dealerships
which had unit increases of 288, 117 and 71, respectively. The increase in
Toyota and Mazda units were due in part to the Company reporting a full years
results of 1999 acquisitions. Lincoln Mercury dealerships represented 5 of
Hometown's 12 locations, management believes that the decrease in units at
Lincoln Mercury dealerships was a result of a loss of popularity of the Lincoln
Mercury product line during 2000. Lincoln Mercury has introduced a new
Mountaineer sport utility and new leasing programs on its existing car and truck
lines aimed at getting back market share lost in 2000. The increase in average
unit revenues was due primarily to increased sales of some higher priced
vehicles such as the Lincoln LS and Navigator and certain Toyota models.

      Used vehicle sales decreased by $6.6 million, or 8.0%, from $82.3 million
for the year ended December 31, 1999, to $75.7 million for the year ended
December 31, 2000. That decrease consisted of 241 fewer retail units sold and
111 fewer wholesale units sold. The decrease in used units sold in 2000 was due
to management discontinuing the sale of fully guaranteed used cars at Westwood
in order to eliminate contingent liability on recourse paper, slower demand for
pre-owned Lincoln Mercury product, as well as strong factory incentives on New
cars particularly with regard to low interest rates and heavy rebates not
available on pre owned cars and trucks, and was coupled with lower revenue per
unit at wholesale due to excess used car supplies in our marketplace.

      Parts and service revenues increased by $1.1 million, or 4.8%, from $22.8
million at December 31, 1999 to $23.9 million for the year ended December 31,
2000. Virtually all of the increase in parts and service revenue was due to the
Company's 1999 acquisitions reporting a full year of operations in 2000.

      Other dealership revenues increased by $0.2 million, or 2.9%, from $6.9
million for the year ended December 31, 1999, to $7.1 million for the year ended
December 31, 2000. The increase was due to the Company's 1999 acquisitions
reporting a full year of operations in 2000.

      Gross Profit

      Gross profit for the year ended December 31, 2000 was $35.9 million, a
decrease of $1.0 million or 2.7%, compared with $36.9 million for the year ended
December 31, 1999.

      Gross profit on sales of new vehicles decreased $1.1 million, or 11.3%,
from $10.1 million for the year ended December 31, 1999 to $9.0 million for the
year ended December 31, 2000. Lower unit sales of 161 units accounts for a
majority of the decrease combined with a less than 1% decrease in gross profit
margin due to a change in the mix of vehicle brands sold.

      Gross profit on sales of used vehicles was $6.7 million for the year ended
December 31, 2000, down $0.2 million or 2.9%, from $6.9 million in the prior
year. The decrease in gross profit on used vehicles was almost completely
attributable to lower sales volume of 352 units and also larger than normal
wholesale losses due to the demand for used cars and trucks not keeping up with
supply. As a result of this, cars and trucks that aged were sold at auction for
losses.


                                       24
<PAGE>

Parts and service sales yielded gross profit of $13.2 million in the year ended
December 31, 2000, an increase of $0.2 million or 1.5%, from $13.0 million for
the prior year. Virtually all of the increase in parts and service revenue was
due to the Company's 1999 acquisitions reporting a full year of operations in
2000, offset by an approximate 2% decrease in gross profit margin caused by a
change in the mix of services.

      Selling, General and Administrative Expense

Selling, general and administrative expenses increased by $6.5 million, or
20.0%, from $32.0 million for the year ended December 31, 1999, to $38.5
million, for the year ended December 31, 2000. A majority of the increase was
due to several non-recurring events in 2000. The 2000 non-recurring events
included the write-off of a receivable from Autotech Leasing as the company
filed for bankruptcy protection, legal fees of relating to attempts to recover
the vehicles associated with the Autotech receivable, default of certain livery
vehicle loans which the Company had guaranteed, the write-off of certain
receivables from specialty financing companies due to a modification of the
Company's strategy in working with customers with poor credit history,
particularly the discontinuance of recourse transactions to reduce risk to the
company, legal fees and a reserve for future expenses associated with the
dismissal of the former Chairman and CEO and Vice President, costs associated
with the transition from outsourcing our main accounting office and reporting
functions with an independent contractor to an in-house system, and costs and
expenses associated with the closing of Morristown Lincoln Mercury.

      Interest Expense, net

Net interest expense was $2.1 million for the year ended December 31, 2000, an
increase of $0.1 million, or 5.0%, from $2.0 million for the year ended December
31, 1999. The increase was due primarily to increased floor plan interest
resulting from the assumption of additional floor plan debt associated with the
Combinations, excess inventory during the early part of the year and increases
in floor plan interest rates and fees from GE Capital.

      Net Income (loss)

Net Income decreased from $.8 million for the year ended December 31, 1999, to a
loss of $3.6 million for the year ended December 31, 2000, a decrease of $4.4
million or 550%. This is the result of a combination of the aforementioned under
performing stores and brands, non-recurring charges and higher SG&A expenses in
2000.


                                       25
<PAGE>

      Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

      Revenues

      Revenues increased by $163 million, or 134%, from $122 million for the
year ended December 31, 1998, to $285 million for the year ended December 31,
1999. Revenue increases in Shaker accounted for $10.9 million while the
Combinations accounted for the remaining $154 million.

      New vehicle sales increased by $103 million, or 147%, from $70.1 million
for the year ended December 31, 1998, to $173 million for the year ended
December 31, 1999. Of that increase, $4.8 million resulted from an increase of
206 new vehicle units sold and $1.0 resulted from an increase of $647 in the
average revenue received per unit sold at the Shaker dealerships. The remaining
$97.6 million increase was due to accounting for the Combinations.

      Used vehicle sales increased by $45.2 million, or 122%, from $37.1 million
for the year ended December 31, 1998, to $82.3 million for the year ended
December 31, 1999. That increase consisted of a $40.8 million increase due to
the Combinations combined with an increase of $4.4 million at the Shaker
dealerships. The Shaker dealerships sold 170 more used vehicles and the average
revenue received per vehicle increased by $1,100. A portion of the increase in
used vehicle sales at the Shaker dealerships resulted from a conscious decision
in 1998 to reduce activity in used vehicle purchases at auction in reaction to
increases in auction prices.

      Parts and service revenue increased by $11.7 million, or 105%, from $11.1
million for the year ended December 31, 1998, to $22.8 million for the year
ended December 31, 1999. Virtually all of the increase in parts and service
revenue is attributable to the Combinations.

      Other dealership revenues increased by $3.6 million, or 109%, from $3.3
million for the year ended December 31, 1998, to $6.9 million for the year ended
December 31, 1999. Other dealership revenues at the Shaker dealerships increased
$0.8 million, the balance of the increase resulted from the accounting for the
Combinations.

      Gross Profit

      Gross profit for the year ended December 31, 1999 was $36.9 million, an
increase of $20.3 million or 122%, compared with $16.6 million for the year
ended December 31, 1998. Gross profit at the Shaker dealerships increased by
10.3% or $0.9 million, with the balance of $19.4 million resulting from the
Combinations.

      Gross profit on sales of new vehicles increased $5.8 million, or 135%,
from $4.3 million for the year ended December 31, 1998 to $10.1 million for the
year ended December 31, 1999. Of that increase, only $0.3 million occurred at
the Shaker dealerships with the remaining $6.6 million due to the Combinations.

      Gross profit on sales of used vehicles was $6.9 million for the year ended
December 31, 1999, up $3.6 million or 109%, from $3.3 million in the prior year.
The increase in gross profit on used vehicles was almost completely attributable
to the Combinations.

      Parts and service sales yielded gross profit of $13.0 million in the year
ended December 31, 1999, an increase of $7.2 million, or 124%, from $5.8 million
for the prior year. The vast majority of this increase was due to the
Combinations, as the Shaker dealerships experienced an increase of $0.4 million.


                                       26
<PAGE>

      Selling, General and Administrative Expense

Selling, general and administrative expenses increased by $14.5 million, or
83.0%, from $17.5 million for the year ended December 31, 1998, to $32.0
million, for the year ended December 31, 1999. The increases consist of $14.6
million for accounting for the Combinations, increases in corporation expenses
of $2.0 million, and increases in ongoing expenses at the Shaker dealerships of
$0.5 million. That increase was partially offset by a one time bonus paid to the
owner employees of Shaker in 1998 of $2.5 million.

      Interest Expenses, net

Net interest expense was $2.0 million for the year ended December 31, 1999, an
increase of $1.6 million, or 400%, from $0.4 million, for the year ended
December 31, 1998. The increase was due primarily to increased floor plan
interest resulting from the assumption of additional floor plan debt associated
with the Combinations.

      Net Income (loss)

Net Income increased from a loss of $1.0 million for the year ended December 31,
1998, to a profit of $0.8 million for the year ended December 31, 1999, an
increase of $1.8 million. Of the $1.8 million increase, Shaker's net income
increased by $0.1 million after giving effect to the one time bonuses. Shaker's
core operation added $0.8 million to net income for 1999, with $1.2 million net
income from the Combinations offset by a net loss of $1.2 million from corporate
expenses, goodwill amortization and CarDay.com organization and development
expenses.

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 the 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 1999
and 2000, inflation did not have a significant effect on the results of Shaker
or Hometown during those periods.

Earnings (Loss) Per Share, Basic and Diluted


                                       27
<PAGE>

      On a consolidated basis, the earnings (loss) per share for the year ended
December 31, 2000 and 1999, are($.60) and $.13, respectively. As of December 31,
2000 and 1999, the Company has potentially dilutive securities which are
described in Footnote 10 to the Consolidated Financial Statements.

Weighted Average Shares

      On a consolidated basis, the weighted average shares, basic and diluted,
for the years ended December 31, 2000 and 1999 are approximately 6.0 and 6.7
million shares and 5.9 and 6.0 million shares, respectively

Liquidity and Capital Resources

      Cash and Cash Equivalents

      Total cash and cash equivalents at December 31, 2000 and 1999, were $0.6
million and $1.6 million, respectively. The net decrease of $1.0 million in cash
and cash equivalents from December 31, 1999 to 2000 was due in part to the
lending arrangement with GE Capital whereby excess cash receipts are
automatically used to pay down the existing debt, and the sale of 31 livery
vehicles to Autotech Leasing that defaulted on payment. In addition Morristown
Lincoln Mercury had negative cash flow, which has been remedied by the sale of
that dealership. In addition Westwood Lincoln Mercury carried a consistently
high level of inventory causing the company to pay additional interest charges.
This has been remedied by the removal of the previous management team. Also GE
Capital assessed $160,000 in fees associated with the amendments or waivers of
covenants mostly if not entirely associated with the GE acquisition line that
was never used by Hometown Auto Retailers subsequent to year-end. Ford Credit
has replaced GE Capital as the floor plan lender without these covenant issues.


                                       28
<PAGE>

      Cash Flow from Operations

      For the year ended December 31, 2000, the Company provided $0.3 million in
cash from operating activities.

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

<TABLE>
<CAPTION>
                                                                 For the years ended December 31,
                                                              ------------------------------------
                                                                2000          1999          1998
                                                              --------      --------      --------
                                                                        (in thousands)
      <S>                                                     <C>           <C>           <C>
      Net Cash Provided by (used in) Operating Activities     $    310      $  1,125      $ (2,458)
      Net Cash Used in Investing Activities                     (1,148)      (11,226)       (6,919)
      Net Cash (Used in) provided by Financing Activities         (211)        6,222        11,352
                                                              --------      --------      --------
      Net (Decrease) increase in Cash and Cash Equivalents    $ (1,049)     $ (3,879)      $ 1,975
                                                              ========      ========      ========
</TABLE>

      Floor Plan Financing

      Until March 16, 2001, the Company obtained floor plan financing for its
vehicle inventory from GE Capital. As of December 31, 2000, the Company had
$40.1 million of floor plan financing outstanding, bearing interest at 9.40375%.
Interest expense on floor plan notes payable, before manufacturer's interest
assistance, totaled approximately $2.9 million, $2.6 million, and $1.4 million
for the years ended December 31, 2000, 1999, and 1998, respectively.
Manufacturer interest assistance, which is recorded as a reduction of interest
expense, totaled approximately $1.9 million, $1.5 million, and $0.8 million for
the years ended December 31, 2000, 1999, and 1998, respectively.

      On March 16, 2001, the Company completed the refinancing of its floor plan
lines of credit from GE Capital Corporation to Ford Motor Credit Corporation.

Acquisitions

      Shortly after the close of the public offering in July 1998, the Company
had acquired four dealerships located in Connecticut, Massachusetts and Vermont
for an aggregate price of $7.2 million in cash plus the assumption of floor plan
liabilities of $5.2 million. These four acquisitions added $57.8 million and
$2.1 million, respectively, to the Company's annualized revenues and income
before income taxes for the year ended December 31, 1998.

      During 1999, two additional dealerships were acquired, Toyota of Newburgh
located in New York and Morristown Lincoln Mercury located in New Jersey, for an
aggregate price of $3.2 million and $1.0 million in shares of Hometown stock
plus the assumption of floor plan liabilities of $3.2 million. These two
acquisitions added $52.4 million to the Company's 1999


                                       29
<PAGE>

revenues and $0.7 million to the Company's income before income taxes for the
year ended December 31, 1999.

      In addition, on November 3, 1999, Hometown purchased a Mazda franchise,
special parts, signage and new car inventory for $0.7 million. This franchise
was tucked into the Company's Framingham, Massachusetts dealership and will
co-exist with the Lincoln/Mercury's until showroom space can be added for the
Mazda new cars.

New Accounting Pronouncements

      In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25. FIN 44 was effective July 1,
2000, and the application of FIN 44 did not have a material impact on the
Company's consolidated financial statements.

      During 2000, the Company adopted the Securities and Exchange Commission
("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements". SAB No. 101 expresses the view of the SEC staff in
applying generally accepted accounting principles to certain revenue recognition
issues. The adoption of this SAB did not have a material impact on the Company's
consolidated financial statements.

      In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the effective date of FASB Statement No. 133." This statement defers for one
year the effective date of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" issued in June 1998. The statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability and be measured at
its fair value. Additionally, any changes in the derivative's fair value are to
be recognized currently in earnings, unless specific hedge accounting criteria
are met. This statement is effective for fiscal years beginning after June 15,
2000. As of January 1, 2001 the Company adopted the pronouncement, which did not
have a material impact on its 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 the Company's future plans of operations, business strategy, results
of operations and financial condition. The Company 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 the Company 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 the Company's reports and registration statements filed with the
Securities and Exchange Commission (the "Commission"). The Company disclaims any
intent or obligation to update such forward-looking statements.


                                       30
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The financial statements of the Company 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

      Not applicable.


                                       31
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

      The executive officers and directors of the Company and their respective
ages as of March 31, 2001 are as follows:

<TABLE>
<CAPTION>
Name                        Age       Position                                                Director Since
----                        ---       --------                                                --------------
<S>                         <C>       <C>                                                     <C>
Corey Shaker                43        President, Chief Executive Officer and Director              1997
William C. Muller Jr.       49        Regional Vice President - South Division and Director        1997
Steven Shaker               31        Regional Vice President - North Division                Not a director
James Christ                44        General Manager - Muller Toyota and Director                 1997
John J. Stavola             44        Acting Chief Financial Officer                          Not a director
Joseph Shaker               33        Director                                                     1997
Salvatore A. Vergopia       61        Director                                                     1997
Edward A. Vergopia          31        Director                                                     1997
Dominic Colasacco *         52        Director                                                     1997
Louis I. Margolis *         56        Director                                                     1997
</TABLE>

----------
*Member of Audit and Compensation 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 the Company:

      Corey 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 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 both Steven and Joseph Shaker,
respectively, each a director of the Company. 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 Good Day Chevrolet,
Oldsmobile, Isuzu, Inc., respectively.) Under his management, Muller Toyota has
been: (a) a 9-time recipient of Toyota's Prestigious President's Award, given to
those dealers with superior levels of customer satisfaction who also exceed
capital standards and have high market penetration and facilities that meet or
exceed Toyota


                                       32
<PAGE>

standards; (b) a 13-time recipient of Toyota Parts Excellence Award; (c) a
9-time winner of Toyota Service Excellence Award; and (d) a 3-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 a director of the Company. He
holds a B.A. degree from Salve Regina College.

      James Christ has been General Manager of the Muller Toyota division of the
Company since October 1, 1997. In addition, from 1995 he was General Manager of
Muller Toyota in Clinton, New Jersey. From March 1986 to November 1994, he was
Vice President and General Manager of Liberty Toyota, Inc. in Burlington, New
Jersey and from August 1989 to November 1994, he was Vice President of
Richardson Imports, Inc. a Lexus dealership, in Cherry Hill, New Jersey. Prior
thereto he had more than 5 years experience in managerial capacities at Toyota.
He holds a B.S. in Business Administration from West Chester University.

      Joseph Shaker was President and Chief Operating Officer from October 1,
1997 to February 7, 2000, and was in charge of the Company's dealer acquisition
program, including the implementation of such programs as may be necessary to
assimilate new dealers into Hometown's operational model. In addition, from 1991
he was the Chief Operating Officer of Shaker's Lincoln Mercury, Shaker's Jeep
Eagle and Lincoln Mercury Autocare in Connecticut. In 1992, at the request of
Ford Motor Company, he developed the pilot free-standing neighborhood Autocare
Center which has become the model for free-standing neighborhood auto
maintenance centers established by Ford Motor with certain of its other dealers.
He also started Shaker's Lincoln Mercury limousine department in 1992 and has
been responsible for its growth and implementation. He is a Member of the
Executive Committee of the NADA 20 Group. He is the brother of Steven Shaker and
a first cousin of Corey Shaker, each respectively a director of the Company. He
holds a B.S. (Management) degree from Bentley College.

      Salvatore A. Vergopia was formerly Chairman of the Board and Chief
Executive Officer of the company. In addition, from 1992 until December, 2000,
he was President and for over 20 years prior thereto, Vice President of Westwood
Lincoln Mercury Sales Inc. Under his management, Westwood has been a winner of
numerous awards, including: (a) Lincoln-Mercury 100 Champions Leadership
Conference award in each of the past 25 years; (b) North American Customer
Excellence Award; and (c) Ford Motor Credit Company's Partners in Quality Award.
In addition to his responsibilities as a dealer, he has served on the Customer
Dispute Settlement Board for New Jersey and Connecticut and is a member and past
Chairman of the Ford Lincoln-Mercury NADA 20 Group. He is also the father of
Edward Vergopia, director. He holds a B.S. degree from Northern Arizona
University.

      Edward A. Vergopia was formerly Vice President - Fleet Operations. In
addition, from 1988 until December, 2000, he was Executive Vice President of
Westwood where, among other responsibilities, he managed the Lincoln Mercury
Division of Spoilers Plus (custom cars) and Westwood Lincoln Mercury Limousine
Department. During those periods, he also worked in the Leasing, Financing and
Parts and Service Departments of Westwood Lincoln Mercury. He is also the son of
Salvatore Vergopia, director. He holds a B.B.A. from the University of Miami.

      John J. Stavola has been Acting Chief Financial Officer since February 2,
2001. Prior to joining Hometown as Corporate Controller in July, 2000, he served
in various accounting capacities for 15 years at Heublein, Inc., a manufacturer
and distributor of distilled spirits and wines. Mr. Stavola is licensed as a


                                       33
<PAGE>

C.P.A. in the State of Connecticut. He earned his Bachelor's Degree in
Accounting from the University of Notre Dame.

      Domenic Colasacco is Chairman of the Board and President of United States
Trust Company (USTC), a Boston based firm specializing in trust and investment
management services for institutional and personal clients. Mr. Colasacco has
been serving as the Chief Investment Officer of USTC since 1980. From 1990 to
March 1998, he was also a director of UST Corp., the holding company for USTC
and USTrust, a commercial and retail bank in Greater Boston. He holds both a
bachelors degree and an M.B.A. from Babson College and is a Chartered Financial
Analyst.

      Louis I. Margolis has been a General Partner of Pine Street Associates,
L.P., a private investment partnership that invests in other private limited
partnerships since January 1994. In January 1997, Mr. Margolis formed and is the
President and sole shareholder of Chapel Hill Capital Corp., a financial
services company. From 1991 through 1993, he was a Member of the Management
Committee of Nomura Securities International. From 1993 through 1995, he was
Chairman of Classic Capital Inc., a registered investment advisor. Mr. Margolis
has been a director of Milestone Scientific, Inc., a manufacturer of dental
devices, since 1997. Mr. Margolis has been a member of the Financial Products
Advisory Committee of the Commodity Futures Trading Commission since its
formation in 1986, a Trustee of the Futures Industry Institute since 1991 and a
Trustee of Saint Barnabas Hospital in Livingston, New Jersey since 1994.

Committees of the Board of Directors

      The Company's Board of Directors has established compensation and audit
committees, whose members are Messrs. Colasacco and Margolis. The Compensation
Committee reviews and recommends to the Board of Directors the compensation and
benefits of all officers of the Company, reviews general policy matters relating
to compensation and benefits of employees of the Company and administers the
issuance of stock options and discretionary cash bonuses to the Company's
officers, employees, directors and consultants. The Audit Committee meets with
management and the Company's independent public accountants to determine the
adequacy of internal controls and other financial reporting matters. It is the
intention of the Company to appoint only independent directors to the Audit and
Compensation Committees.


                                       34
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation.

      The following table presents certain information concerning compensation
paid or accrued for services rendered to the Company in all capacities during
the year ended December 31, 2000, for the Chief Executive Officer and the other
six executive officers of the Company whose aggregate annual base salary
exceeded $100,000 (collectively, the "Named Executive Officers").

                               COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                 Annual Compensation
                                ---------------------------------------------------

                                Fiscal Annual
                                    Year
Name and Principal Position     Compensation        $ Salary    Bonus (1)     Other
---------------------------     ------------        --------    ---------     -----
<S>                                 <C>              <C>         <C>          <C>
Salvatore A. Vergopia               2000             250,000          --      28,000
Chairman                            1999(3)          250,000          --      75,000
                                    1998             318,000          --          --

Corey E. Shaker                     2000             200,000          --       7,000
President and Chief                 1999(3)          200,000          --          --
Executive Officer                   1998(3)(4)       163,000     336,000          --

William C. Muller, Jr.              2000             200,000          --          --
Regional Vice                       1999(3)          200,000          --       3,000
President-South Division            1998(3)          258,000          --          --

Steven Shaker                       2000             110,000          --       3,000
Regional Vice                       1999             100,000          --          --
President-North Division            1998             100,000     319,000          --

Michael Shonborn                    2000             135,000          --       7,000
Chief Financial                     1999              23,000          --          --
Officer and Secretary(2)            1998                  --          --          --
</TABLE>

----------
(1)   The amount shown are cash bonuses earned in the specified year and paid in
      the first quarter of the following year.
(2)   In February 2001, resigned from his positions as Chief Financial Officer
      and Secretary.
(3)   Includes compensation paid by predecessor companies with respect to 1998.
(4)   Reflects bonuses paid by predecessor companies for services rendered prior
      to Hometown's initial public offering.

                     OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

      No options were granted to the Named Executive Officers during 2000.


                                       35
<PAGE>

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

      The following table summarizes options and SARs exercised during fiscal
2000 and presents the value of unexercised options and SARs held by the Named
Executive Officers at fiscal year end:

<TABLE>
<CAPTION>
                                                                Number of
                                                                Securities           Value of
                                                                Underlying         Unexercised
                                                                Unexercised         In-the-Money
                                                              Options/SARs at     Options/SARs at
                                                              Fiscal Year-End     Fiscal Year-End
                              Acquired                        Exercisable (E)     Exercisable (E)
                                 on             Value          Unexercisable       Unexercisable
Name                          Exercise        Realized              (U)                 (U)
----                          --------        --------        ---------------     ----------------
<S>                              <C>             <C>              <C>                   <C>
Corey E. Shaker                  --               --              34,332 E               --
President and Chief                                               32,168 U
Executive Officer

William C. Muller, Jr.           --               --              13,332 E               --
Regional Vice                                                      6,668 U
President

Salvatore A. Vergopia            --               --               2,000 E               --
Chairman                                                           1,000 U

Steven Shaker                    --               --               6,668 E               --
Vice President-South                                               3,332 U
Division

Michael Shonborn                 --               --               3,334 E               --
Chief Financial                                                    6,666 U
Officer and Secretary
</TABLE>

      All shares vest ratably through 2001, except for 30,000 options of Corey
      E. Shaker and 10,000 options of Michael Shonborn, which vest ratably
      through 2002. 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


                                       36
<PAGE>

      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

      In April 1998, Hometown entered into five-year employment agreements,
effective as of the closing of Hometown's initial public offering in July, 1998,
with all of the Named Executive Officers with the exception of Michael Shonborn.
Each of their agreements provides for an annual base salary of $200,000, except
that the agreement for Steven Shaker provides for an annual base salary of
$100,000, increased to $125,000 in 2001.

      In October 1999, Hometown entered into a four-year employment agreement
with Michael Shonborn at an annual base salary of $90,000, increased to $145,000
when he became Hometown's Chief Financial Officer and Secretary. Mr. Shonborn's
employment agreement was terminated upon his resignation, effective February 2,
2001.

      Each agreement also provides for participation by the employee in all
executive benefit plans and, if employment is terminated without cause (as
defined in the agreement), payment of an amount equal to the salary which would
have been payable over the unexpired term of his employment agreement.

Compensation Committee Interlocks and Insider Participation in Compensation
Decisions

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

1998 Stock Option Plan

      In February 1998, in order to attract and retain persons necessary for the
success of the Company, Hometown adopted its 1998 Stock Option Plan (the "Stock
Option Plan") covering up to 480,000 shares of Class A Common Stock. Pursuant to
the Stock Option Plan officers, directors and key employees of the Company and
consultants to the Company 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/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES."

Employee Benefit Plan

      In October 1999, Hometown amended and restated the E.R.R. Enterprises,
Inc. Profit Sharing/401(k) Plan, (the "Amended Plan") into the HOMETOWN AUTO
RETAILERS, INC. 401K Plan (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. No Contributions were


                                       37
<PAGE>

made by Hometown to the Plan for the year ended December 31, 2000. Contributions
under the Plan were $48,000, $33,000 in 1999 and 1998, respectively. Corey E.
Shaker and Joseph Shaker are the Trustees of the Plan.

Compensation of Directors

      Each non-employee Director receives a fee of $1,000, for each meeting
attended in person and $250 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 $125 for each committee meeting
attended telephonically. Additionally, pursuant to the Plan, each non-employee
Director, will receive options to purchase 5,000 shares of Common Stock
exercisable at the fair market value on the date of grant. These options will
vest one-third on the date of grant and one-third at the end of each subsequent
year of service on the Board. In addition, each non-employee Director receives
options to purchase an additional 2,500 shares of Common Stock on the date of
the Company'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. The Company's Certificate of Incorporation limits the liability of
Directors of the Company to the Company or its shareholders to the fullest
extent permitted by Delaware law.

      The Company's Certificate of Incorporation provides mandatory
indemnification rights to any officer or Director of the Company who, by reason
of the fact that he or she is an officer or Director of the Company, 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
the Company, the Company 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.

      There is no pending litigation or proceeding involving a Director,
officer, employee or agent of the Company in which indemnification by the
Company will be required or permitted. The Company is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.


                                       38
<PAGE>

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.

      Due to the existence of five year employment agreements between Hometown
and its key officers, which do not expire until July 2003, the scope of the
Compensation Committee's duties has been limited.

                                                   COMPENSATION COMMITTEE

                                                   Domenic Colasacco
                                                   Louis I. Margolis


                                       39
<PAGE>

                               COMPANY PERFORMANCE
         AND COMPARISON OF 3 YEAR CUMULATIVE TOTAL RETURN AMONG HOMETOWN
                 AUTO RETAILERS, INC., THE NASDAQ MARKET INDEX,
                                AND A PEER GROUP

      The following graph shows a three year comparison of cumulative total
returns for Hometown, the NASDAQ Market Index, and a Peer Group.

                              [LINE GRAPH OMITTED]

  [The following table was depicted as a line graph in the printed material.]

                                     7/29/98    12/31/98    12/31/99    12/31/00
--------------------------------------------------------------------------------
HOMETOWN AUTO RETAILERS, INC          100.00       49.29       40.71        5.71
SIC CODE INDEX                        100.00      102.76       65.26       43.26
NASDAQ MARKET INDEX                   100.00      118.38      208.79      131.23

      (1) The Peer Group Index includes the following companies: AutoNation
Inc., Circuit City/CarMax, Group, Group 1 Automotive, Inc., Lithia Motors Inc.,
Rush Enterprises, Inc., Sonic Automotive Inc., United Auto Group, Inc.,Nostalgia
Motorcars, and Autocorp Equities Inc.


                                       40
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth certain information known to the Company
regarding the beneficial ownership of Common Stock as of March 31, 2001 by (i)
each person known to the Company to be the beneficial owner of more than 5% of
its outstanding shares of Common Stock, (ii) each Director of the Company, (iii)
each Named Executive Officer and (iv) all Directors, and Executive Officers of
the Company 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.

<TABLE>
<CAPTION>
                                                                                              % of
                                                     Common Stock               % of         Aggregate
                                                  Beneficially Owned(2)      Outstanding      voting
                                               -------------------------        Equity       Power of
Name of Beneficial Owner(1)                    Class A           Class B       Owned(3)     all Classes
---------------------------                    -------           -------     ------------   -----------
<S>                                             <C>              <C>             <C>           <C>
Salvatore Vergopia (4)                              --           705,000        11.44         17.87
Corey E. Shaker (5)                             47,332           265,080         5.07          6.84
William C. Muller, Jr. (6)                      17,582           453,034         7.64         11.53
Edward Vergopia                                     --           235,000         3.81          5.96
James Christ (7)                                13,332            90,248         1.68          2.32
*William C. Muller, Sr. (9)                         --           308,786         5.01          7.83
Steven Shaker (8)                               14,668           206,424         3.59          5.27
Joseph Shaker (10)                              28,516           262,592         4.72          6.73
Dominic Colasacco (11)                             833                --           **            **
Louis I. Margolis (11)                             833                --           **            **
All Directors, and Executive Officers
as a group (9 persons)                         123,096         2,217,378        37.98         56.57
</TABLE>

*     William C. Muller, Sr. is not an Officer or Director of Hometown

**    Ownership is less than 1%

--------------------------------------------------------------------------------

(1)   The respective addresses of the beneficial owners are: Salvatore A.
      Vergopia and Edward A. Vergopia, c/o Westwood Lincoln Mercury, 55
      Kinderkamack Road, Emerson, New Jersey 07630; Corey Shaker, 774 Straits
      Turnpike, Watertown Connecticut 06795; William C. Muller Jr., James Christ
      and William C. Muller Sr. c/o Muller Toyota Inc., Route 31, PO Box J,
      Clinton, New Jersey, 08809; Steven Shaker, c/o Family Ford, Inc., 1200
      Wolcott Street, Waterbury, Connecticut 06705; Joseph Shaker, c/o CarDay
      Inc., 245 Fifth Avenue, New York, New York 10016; Dominic Colasacco, 40
      Court Street, Boston Massachusetts 02108; and Louis I. Margolis, 717 Fifth
      Avenue, New York, New York, 10022.

(2)   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 report upon
      the exercise of options and warrants or conversion of convertible
      securities. Each beneficial owner's percentage ownership is determined by
      assuming that options, warrants and convertible securities that are held
      by such person (but not held by any other person) and that are exercisable
      or convertible within 60 days from the filing of this report have been
      exercise or converted. Except as otherwise indicated, and subject to
      applicable community property and similar laws, each of the persons named
      has sole voting and investment power with respect to the shares shown as
      beneficially owned. All

                                       41
<PAGE>

      percentages of beneficial ownership are calculated based the number of
      shares outstanding as of March 31, 2001, 6,163,105, which includes
      2,468,105 shares of Class A Common Stock (162,996 are shares that can be
      acquired upon exercise of options) and 3,695,000 shares of Class B common
      stock. Unless otherwise specified herein, shares of common stock shall be
      shares of Class B common stock of the Company.

(3)   Percentages based on number of shares of all classes.

(4)   Includes 225,600 shares owned by his wife Janet.

(5)   Includes (i) 15,980 shares held by the Edward Shaker Family Trust of which
      he is the Trustee and a beneficiary, (ii) 13,000 shares of Class A common
      stock, (iii) an option to purchase 24,332 shares of Class A common stock,
      exercisable within the next 60 days at $9.00 per share and (iv) an option
      to purchase 10,000 shares of Class A common stock, exercisable within the
      next 60 days at $3.00 per share.

(6)   Includes 4,250 shares of Class A common stock and an option to purchase
      13,332 shares of Class A common stock, exercisable within the next 60 days
      at $9.00 per share.

(7)   Includes an option to purchase 13,332 shares of Class A common stock,
      exercisable within the next 60 days at $9.00 per share.

(8)   Includes 8,000 shares of Class A common stock and an option to purchase
      6,668 shares of Class A common stock, exercisable within the next 60 days
      at $9.00 per share.

(9)   All shares are owned by The William C. Muller Revocable Living Trust of
      which the William C. Muller Sr. is Trustee. William C. Muller Sr. is
      neither an officer nor director.

(10)  Includes (i) 15,980 shares held by the Richard Shaker Family Trust of
      which Mr. Shaker is the Trustee and a beneficiary, (ii) 40,000 share held
      by the Shaker Irrevocable Trust of which Mr. Shaker is Trustee, (iii)
      4,184 shares of Class A common stock, and (iv) an option to purchase
      24,332 shares of Class A common stock, exercisable within the next 60 days
      at $9.00 per share.

(11)  Includes options to purchase 833 shares of Class A common stock,
      exercisable within the next 60 days at $1.4375 per share.

Section 16(a) Beneficial Ownership Reporting Compliance

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

      To the best of Hometown's knowledge, based solely on review of the copies
of such forms furnished to Hometown, or written representations that no other
forms were required, Hometown believes that all Section 16(a) filing
requirements applicable with respect to all its current officers, directors and
ten percent shareholders have been complied with as of the filing date of this
Annual Report. However, Michael Shonborn was late in filing his Initial
Statement of Beneficial Ownership of Securities on Form 3 and one (1) Statement
of Changes in Beneficial Ownership on Form 4 during 2000 but has subsequently
come into compliance. With respect to any former directors, officers, and ten
percent shareholders of the Hometown, the Hometown does not have any knowledge
of any known failures to comply with the filing requirements of Section 16(a).


                                       42
<PAGE>

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 for the five-year periods commencing January 1, 2004 and 2009.

Shaker Group. The Company leases, for an initial annual base rental of $240,000,
the premises occupied by its Lincoln Mercury dealership in Watertown,
Connecticut, and for an initial base rental of $240,000 and $72,000
respectively, the premises occupied by the Family Ford and Shaker Jeep/Eagle
dealerships in Waterbury, Connecticut from Shaker Enterprises, a Connecticut
general partnership whose seven partners include Joseph Shaker, Corey Shaker,
Steven Shaker and Janet Shaker. Corey Shaker is President and a principal
stockholder of the Company. Steven Shaker is Regional Vice President-North
Division and a principal stockholder of the Company. Joseph Shaker is a
consultant to and a principal stockholder of the Company. Janet Shaker is a
principal stockholder of the Company.

Muller Group. Hometown leases, for an initial annual base rental of $360,000 and
$396,000 respectively the premises occupied by its Toyota dealership in Clinton,
New Jersey and its Chevrolet/Oldsmobile/Isuzu 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 a director and the
Regional Vice President - South Division and a principal stockholder of
Hometown.

Westwood. Hometown leases, for an initial annual base rental of $360,000 the
premises occupied by its Lincoln Mercury dealership in Emerson, New Jersey from
Salvatore A. Vergopia and his wife. Mr. Vergopia is a director and a principal
stockholder of Hometown.


                                       43
<PAGE>

                                     PART IV

ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Exhibit

Exhibit                            Description                              Page
-------                            -----------                              ----
  No.

    3.1    Certificate of Incorporation of Dealer-Co., Inc.
           (NY-3/10/97)
    3.2    Certificate of Incorporation of Hometown Auto Retailers,
           Inc. (Del-6/5/97)
    3.3    Certificate of Ownership and Merger of Dealer-Co., Inc.
           into Hometown Auto Retailers, Inc. (Del-6/27/97)
    3.4    Certificate of Merger of Dealer-Co., Inc. and Hometown Auto
           Retailers, Inc. into Hometown Auto Retailers, Inc. (the "Company")
           (NY-9/11/97)
    3.5    Certificate of Amendment of the Certificate of
           Incorporation filed February 19, 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 the Company
    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 the Company and Paulson
           Investment Company and related Warrant
    4.4    Stock Option Plan of the Company
    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
    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


                                       44
<PAGE>

    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  Form of Security Agreement entered into March, 2001 amoung the
           registrant, certain subsidiaries of the registrant, and Ford Motor
           Credit Company.
 (1)10.30  Form of Security Agreement entered into in March, 2001 among certain
           subsidiaries of the registrant, and Ford Motor Credit Company.
 (1)10.31  Form of Cross-Default Agreement entered into in March, 2001 among the
           registrant, certain subsidiaries of the registrant, and Ford Motor
           Credit Company.
 (1)10.32  Form of Guaranty entered into in March, 2001 among the registrant,
           certain subsidiaries of the registrant, and Ford Motor Credit
           Company.
 (1)10.33  Form of Guaranty entered into in March, 2001 among certain
           subsidiaries of the registrant, and Ford Motor Credit Company.
     21.1  Subsidiaries of the Registrant


                                       45
<PAGE>

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

Reports on Form 8-K:

            The Registrant did not file any reports on Form 8-K during the
Quarter ended December 31, 2000.

Financial Statement Schedules:

      See below, beginning on page F-1.

Supplemental Schedules:

Report of Independent Public Accountants on Schedule is set forth on page S-1.

Schedule II-Valuation and Qualifying Accounts for the years ended December 31,
2000, 1999 and 1998 is set forth on page S-2.


                                       46
<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 April , 2001 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/ John J. Stavola
-----------------------------
John J. Stavola                      Acting Chief Financial Officer

/s/ William C. Muller,
-----------------------------
William C. Muller                    Regional Vice President--South Division
                                     and Director

/s/ Steven Shaker
-----------------------------
Steven Shaker                        Regional Vice President--North Division

/s/James Christ
-----------------------------
James Christ                         General Manager--Muller Toyota and Director

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

/s/Domenic Colasacco
-----------------------------
Domenic Colasacco                    Director

/s/Louis I. Margolis
-----------------------------
Louis I. Margolis                    Director


                                       47
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----

Report of Independent Accountants                                            F-2

Financial Statements:

     Balance Sheets as of December 31, 2000 and 1999                         F-3

     Consolidated Statements of Operations for each of the three
     years in the period ended December 31, 2000                             F-4

     Consolidated Statements of Stockholders' Equity for
     each of the three years in the period ended December 31, 2000           F-5

     Consolidated Statements of Cash Flows for each of the three
     years in the period ended December 31, 2000                             F-6

     Notes to Financial Statements                                           F-7

Report of Independent Accountants on Schedule                                S-1


                                      F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Hometown Auto Retailers, Inc.:

      We have audited the accompanying consolidated balance sheet of Hometown
Auto Retailers, Inc. (a Delaware Corporation) as of December 31, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2000
(see Note 1). These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally
accepted in the 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 examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.


New York, New York                                           ARTHUR ANDERSEN LLP
March 30, 2001


                                      F-2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                               --------------------
                           ASSETS                                                2000        1999
                                                                               --------    --------
<S>                                                                            <C>         <C>
Current Assets:                                                                     --          --
   Cash and cash equivalents                                                   $   586     $ 1,635
   Accounts receivable, net                                                      6,149       6,101
   Inventories                                                                  40,964      51,455
   Prepaid expenses and other current assets                                       826       2,095
   Deferred income taxes and taxes receivable                                      750         523
                                                                               -------     -------
      Total current assets                                                      49,275      61,809
Property and equipment,net                                                       7,594       8,415
Goodwill, net                                                                   24,793      24,578
Other assets                                                                     4,137       2,505
                                                                               -------     -------
      Total assets                                                             $85,799     $97,307
                                                                               =======     =======

                LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Floor plan notes payable                                                    $40,123     $48,986
   Accounts payable and accrued expenses                                         5,579       4,787
   Current maturities of long-term debt                                            431         708
   Other current bank borrowings                                                    --       2,200
                                                                               -------     -------
      Total current liabilities                                                 46,133      56,681
Long-term debt                                                                   8,785       9,051
Long-term deferred income taxes                                                    399         200
Other long-term liabilities                                                        457         360
                                                                               -------     -------
       Total liabilities                                                        55,774      66,292

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 and 24,000,000 shares
   authorized, respectively,2,301,109 and 2,147,000 issued and outstanding,
      respectively                                                                   2           2
   Common stock,Class B, $.001 par value, 3,760,000 shares
   authorized, 3,699,000 and 3,753,000 issued and outstanding,respectively           4           4
   Additional paid-in capital                                                   28,786      26,194
   Retained earnings                                                             1,233       4,815
                                                                               -------     -------
      Total stockholders' equity                                                30,025      31,015
                                                                               -------     -------
      Total liabilities and stockholders' equity                               $85,799     $97,307
                                                                               =======     =======
</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,
                                                  ---------------------------------------------
                                                      2000            1999              1998
                                                  -----------      -----------      -----------
<S>                                               <C>              <C>              <C>
Revenues
   New vehicle sales                              $   173,128      $   173,481      $    70,068
   Used vehicle sales                                  75,704           82,272           37,053
   Parts and service sales                             23,905           22,823           11,130
   Other, net                                           7,104            6,917            3,265
                                                  -----------      -----------      -----------
      Total revenues                                  279,841          285,493          121,516
Cost of sales
   New vehicle sales                                  164,202          163,416           65,790
   Used vehicle sales                                  69,039           75,385           33,749
   Parts and service sales                             10,709            9,814            5,359
                                                  -----------      -----------      -----------
      Total cost of sales                             243,950          248,615          104,898
                                                  -----------      -----------      -----------

      Gross profit                                     35,891           36,878           16,618
Amortization of goodwill                                  661              600              212
Loss from operations of e-Commerce subsidiary              --              515               --
Selling,general and administrative expenses            38,452           32,045           17,510
                                                  -----------      -----------      -----------
      Income (loss) from operations                    (3,222)           3,718           (1,104)

Interest expense, net                                  (2,135)          (1,988)            (443)
Other income (expense), net                              (127)             (95)              46
                                                  -----------      -----------      -----------
      Income (loss) before taxes                       (5,484)           1,635           (1,501)
Provision (benefit) for income taxes                   (1,902)             850             (502)
                                                  -----------      -----------      -----------
      Net income (loss)                           $    (3,582)     $       785      $      (999)
                                                  ===========      ===========      ===========
Earnings (loss) per share, basic                  $      (.60)     $       .13      $      (.28)
Earnings (loss) per share, diluted                $      (.60)     $       .13      $      (.28)
                                                  ===========      ===========      ===========
Weighted average shares outstanding, basic          5,996,146        5,875,342        3,513,333
Weighted average shares outstanding, diluted        6,728,183        6,003,851        3,513,333
</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
              For the years ended December 31, 2000, 1999 and 1998
                                 (in thousands)

<TABLE>
<CAPTION>
                                                Class A                  Class B             Additional                    Total
                                             Common Stock              Common Stock           Paid-in      Retained    Stockholders'
                                          Shares      Amount        Shares       Amount       Capital      Earnings       Equity
                                         --------     --------     --------      --------    ----------    --------    ------------
<S>                                         <C>       <C>             <C>        <C>          <C>          <C>           <C>
Balance at
December 31, 1997                              --           --           --            --           69        5,029         5,098
Issuance of Class B Common Stock
 in exchange                                   --           --        3,760             4           --           --             4
Stock split at offering                       240           --           --            --           --           --            --
Public offering of Common Stock, net
of offering expenses                        1,800            2           --            --       25,125           --        25,127
Net loss                                       --           --           --            --           --         (999)         (999)
                                         --------     --------     --------      --------     --------     --------      --------
Balance at
December 31, 1998                           2,040            2        3,760             4       25,194        4,030        29,230
Conversion of Class B Common to
 Class A Common                                 7           --           (7)           --           --           --            --
Issuance of Class A Common to
  acquire Toyota of Newburgh                  100           --           --            --        1,000           --         1,000
Net income                                     --           --           --            --           --          785           785
                                         --------     --------     --------      --------     --------     --------      --------
Balance at
December 31, 1999                           2,147            2        3,753             4       26,194        4,815        31,015
Conversion of Class B Common to
  Class A Common                               54           --          (54)           --           --           --            --
Issuance of Class A Common                    100           --           --            --          332           --           332
Valuation adjustment to
  e-Commerce subsidiary                        --           --           --            --        2,260           --         2,260
Net loss                                       --           --           --            --           --       (3,582)       (3,582)
                                         --------     --------     --------      --------     --------     --------      --------
Balance at
December 31, 2000                           2,301     $      2        3,699      $      4     $ 28,786     $  1,233      $ 30,025
                                         ========     ========     ========      ========     ========     ========      ========
</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,
                                                                  ------------------------------------
                                                                    2000          1999          1998
                                                                  --------      --------      --------
<S>                                                                 <C>           <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:                                   --            --            --
Net income (loss)                                                   (3,582)          785      $   (999)
Adjustments to reconcile net income (loss)
   to net cash provided by (used in) operating activities -
   Depreciation and amortization                                     1,216         1,130           451
   Gain (loss) on sale of assets                                        --            12           (43)
   Deferred income taxes                                            (1,568)          178          (755)
   Changes in assets and liabilities:
      Accounts receivable, net                                         (48)          133        (1,390)
      Inventories                                                   10,491       (13,629)       (4,404)
      Prepaid expenses and other current assets                        997          (913)         (139)
      Other assets                                                     375          (752)          199
      Floor plan notes payable                                      (8,863)       15,320         4,687
      Accounts payable and accrued expenses                          1,195        (1,139)          (65)
      Other long term liabilities                                       97            --            --
                                                                  --------      --------      --------
   Net cash provided by (used  in) operating activities                310         1,125        (2,458)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                                 (421)       (6,187)         (398)
   Proceeds from sales of property and equipment                       149            44           278
   Investment in website for development                                --        (1,251)           --
   Acquisitions, net of cash acquired                                 (876)       (3,832)       (6,799)
                                                                  --------      --------      --------
   Net cash used in investing activities                            (1,148)      (11,226)       (6,919)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from long-term borrowings                                   --         9,406           105
   Principal payments of long-term debt                               (543)       (1,495)         (111)
   Excess cash used to pay down floor plan notes                        --        (2,538)           --
   Other current bank borrowings, net of repayments                     --           500           (85)
   Due from/to related parties                                          --           349        (1,269)
   Issuance of common stock                                            332            --        12,712
                                                                  --------      --------      --------
   Net cash provided by (used in) financing activities                (211)        6,222        11,352
Net increase (decrease) in cash and cash equivalents                (1,049)       (3,879)        1,975

CASH AND CASH EQUIVALENTS, beginning of period                       1,635         5,514         3,539
                                                                  --------      --------      --------
CASH AND CASH EQUIVALENTS, end of period                          $    586      $  1,635      $  5,514
                                                                  ========      ========      ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 Cash paid for - Interest                                         $  2,135      $  3,513      $    886
                                                                  ========      ========      ========
 Cash paid for - Taxes                                                 204      $  1,048      $    227
                                                                  ========      ========      ========
</TABLE>

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


                                      F-6
<PAGE>

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.

      During 1999, the Company invested in an internet e-Commerce subsidiary,
CarDay.com. CarDay is an internet site that offers a buying experience that
offers many of the features generally not available outside the traditional
dealership environment. In January 2000, CarDay obtained $25 million in
financing from a group of venture capital firms. As a result of that financing,
Hometowns ownership interest in CarDay was reduced from 82% to 10.7%. The
company treated the resulting increase in value of the investment as an increase
in additional paid-in-capital. The investment in CarDay.com is accounted for on
the cost basis. The company believes that any similar future transactions are
unlikely. At December 31, 1999, organizational and website development costs of
CarDay of $515,000 are included in the consolidated financial statements of the
Company. Subsequent to January 20, 2000, the operating results of CarDay are not
reflected in Hometown's financial statements as Hometown's ownership interest
has fallen below 20%.

      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.

      The accompanying consolidated balance sheets as of December 31, 2000 and
1999, and the consolidated statements of operations, stockholders' equity and
cash flows for the three years ended December 31, 2000 , present the
consolidated operations of: (i) Shaker for all periods; and (ii) the remaining
Core Operating Companies and the Acquisitions, effective with the respective
acquisition dates.

      The Company'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 the
Company 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

      The Company purchases substantially all of its new vehicles at the
prevailing prices charged by the applicable Manufacturers to all franchised
dealers. The Company'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.


                                      F-7
<PAGE>

      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.

      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.

      Finance, Insurance and Service Contract Income Recognition

      The Company 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, the Company receives commissions from the sale of
credit life and disability insurance and extended service contracts to
customers.

      The Company may be charged back ("chargebacks") for unearned financing
fees, insurance or service contract commissions in the event of early
termination of the contracts by the customers. The revenues from financing fees
and commissions are recorded at the time of the sale of the vehicles. The
reserves for future chargebacks are based on historical operating results and
the termination provisions of the applicable contracts. Finance, insurance and
service contract income, net of estimated chargebacks, 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, cash
invested in applicable Manufacturers' cash management accounts, 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.

      Inventories

      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.

      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.

      Company Guarantees

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

      Goodwill


                                      F-8
<PAGE>

      Goodwill represents the excess of purchase price over the estimated fair
value of the net assets acquired and is being amortized over a 40 year period.

      Long-lived Assets

      The Company reviews long-lived assets and certain related intangibles for
impairment whenever changes in the circumstances indicate that the carrying
amount of the assets may not be fully recoverable. As of December 31, 2000, the
Company does not believe any impairment exists.

      Income Taxes

      The Company 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.

      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 net of
floor plan interest assistance.

      Fair Value of Financial Instruments

      The Company's financial instruments consist primarily of cash and cash
equivalents; floor plan notes payable, current bank borrowings and long-term
debt. The carrying amounts approximate fair value due to the short maturity of
those instruments.

      Long Term Debt

      The fair value of long-term debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered for debt
of the same remaining maturities.

      Advertising and Promotion

      The Company expenses advertising and promotion as incurred.

      Concentration of Credit Risk

      Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of cash, cash equivalents,
contracts in transit and accounts receivable. The Company maintains cash
balances at financial institutions that may, at times, be in excess of federally
insured levels. Also, the Company 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. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains an allowance for doubtful accounts at
a level which management believes is sufficient to provide for potential credit
losses.


                                      F-9
<PAGE>

      Earnings (loss) per Share

      "Basic earnings (loss) per share" represents net income (loss) divided by
the weighted 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. As of
December 31, 2000 and 1999, the Company had potentially dilutive securities
related to a stock guarantee issued in connection with an acquisition. As of
December 31, 1998 the Company did not have any potentially dilutive securities.

      "Earnings (loss) per share" and "Weighted average shares", for the year
ended December 31, 1998, represents the weighted average of the outstanding
equivalent Hometown shares of Shaker for seven months and outstanding shares of
Hometown since the Offering.

      Stock-based Compensation

      The Company accounts for stock-based compensation issued to employees in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees". The Company, as permitted, elected not to adopt
the financial reporting requirements of SFAS No. 123, "Accounting for Stock
Based Compensation" for stock based compensation granted to employees.
Accordingly, the Company has disclosed in the notes to the consolidated
financial statements, the proforma net loss for the periods presented as if the
fair value based method was used in accordance with SFAS No. 123.

      Use of Estimates

      The preparation of consolidated financial statements in conformity with
generally accepted accounting principles 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.

      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 1999 amounts have been reclassified to conform to the 2000
presentation.

      Segments

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


                                      F-10
<PAGE>

      New Accounting Pronouncements

      In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25. FIN 44 was effective July 1,
2000, and the application of FIN 44 did not have a material impact on the
Company's consolidated financial statements.

      During 2000, the Company adopted the Securities and Exchange Commission
("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements". SAB No. 101 expresses the view of the SEC staff in
applying generally accepted accounting principles to certain revenue recognition
issues. The adoption of this SAB did not have a material impact on the Company's
consolidated financial statements.

      In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the effective date of FASB Statement No. 133." This statement defers for one
year the effective date of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" issued in June 1998. The statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability and be measured at
its fair value. Additionally, any changes in the derivative's fair value are to
be recognized currently in earnings, unless specific hedge accounting criteria
are met. This statement is effective for fiscal years beginning after June 15,
2000. As of January 1, 2001 the Company adopted the pronouncement, which did not
have a material impact on its consolidated financial statements.

3.    ACCOUNTS RECEIVABLE:

      One company representing approximately $800,000 of receivables ceased
payment on its obligation to Hometown during 2000. During the second quarter of
2000, the Company recorded a reserve of $345,000 and continued to pursue
recovery of the receivable. In the fourth quarter of 2000, after exhausting all
of its possible remedies, the Company determined that the remaining balance
would not be collectable and, as such, fully reserved the remaining balance.

4.    DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

      Accounts receivable, net consist of the following:

                                             12/31/00   12/31/99
                                             --------   --------
                                              (in thousands)

      Due from manufacturers                  $1,239     $1,852
      Due from finance companies               3,593      3,175
      Parts and service receivables            1,175        588
      Other                                      142        486
                                              ------     ------
         Total receivables, net               $6,149     $6,101
                                              ======     ======


                                      F-11
<PAGE>

      Inventories consist of the following:

                                           12/31/00    12/31/99
                                           --------    --------
                                              (in thousands)

      New Vehicles                          $31,002     $39,760
      Used Vehicles                           8,038      10,566
      Parts, accessories and other            1,924       1,129
                                            -------     -------
         Total Inventories                  $40,964     $51,455
                                            =======     =======

Other Assets

      Receivable from Finance Companies

      The Company uses, at certain dealerships, specialty financing companies
that provide credit to customers with poor credit history. The Company is
advanced approximately 70% of the financed amount and is paid the balance from
the finance company when the loans are satisfied. The Company's receivable
balance of $331,000 as of December 31, 1999 net of reserves for uncollectible
amounts, is included in other assets in the consolidated balance sheet as of
December 31, 1999. During 2000 the Company made a decision to modify its
arrangements with the financing companies beginning in 2001, in connection with
that decision the Company concluded that it was more likely than not that
remaining receivables would not be collectable and as such fully reserved the
remaining balances.

      CarDay.com

      In connection with formation of CarDay.com, the Company capitalized $1.3
million of costs related to the development of the internal-use software to be
used by this subsidiary's Internet website. These cost are included in other
assets in the Company's consolidated balance sheet at December 31, 1999.

      Due to the reduction in ownership below 20%, CarDay.com assets are not
consolidated in the Company's financial statements at December 31, 2000.
However, other assets contains $3,258 representing the value of the Company's
investment in CarDay.com.

      Assets held for sale

      In connection with the combination of one of the Core Operating Companies,
the Company acquired a parcel of property that is currently unimproved and not
being used. The Company has committed to a plan to sell this property as soon as
practical.

      The land is recorded at its carrying value of $500,000 which management
believes is lower than the fair value less cost to sell, and is included in
other current assets in the consolidated balance sheet as of December 31, 2000
and 1999.


                                      F-12
<PAGE>

Accounts payable and accrued expenses consist of the following:

                                               12/31/00      12/31/99
                                               --------      --------
                                                    (in thousands)
      Accounts payable, trade                   $1,010        $1,673
      Accrued compensation costs                   273           382
      Customer deposits                             20           194
      Sales use tax                                618           322
      Customer Payoffs                             338           331
      Reserve for finance insurance
         and service contract chargebacks          142           265
      Reserve for uncollectible
         long-term finance contracts                --           443
      Reserve for guarantees
         on finance contracts                    1,205           380
      Reserve for policy work
         expenses                                  158           180
      Reserve for wholesale
         vehicle losses                            312           213
      Other accrued expenses                     1,503           404
                                                ------        ------
         Total                                  $5,579        $4,787
                                                ======        ======

Other long-term liabilities

      During 1999, the Company entered into a non-compete agreement with the
previous owner of one of the Acquisitions. The payments under this agreement are
due in equal installments over 46 months. The liability for the remaining
obligation under the agreement, included in other long-term liabilities at
December 31, 2000 and 1999, was $272,000 and $360,000 respectively, representing
the present value of the future payments to be made. The related asset is
included in the other assets on the accompanying consolidated financial
statements and is being amortized over 10 years, representing the life of the
non-compete agreement.

5.    PROPERTY AND EQUIPMENT, NET

      Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                    Estimated Useful
                                                    Lives in Years  12/31/00       12/31/99
                                                    --------------  --------       --------
                                                                 (in thousands)
      <S>                                              <C>           <C>           <C>
      Land and land improvements                       15 to 20      $  3,793      $  3,809
      Buildings and leasehold improvements             7 to 31.5        3,126         3,013
      Machinery, equipment, furniture and fixtures       3 to 7         2,672         3,051
      Vehicles                                             5              118           174
                                                                     --------      --------
         Sub-total                                                      9,709        10,047
      Less - accumulated depreciation                                  (2,115)       (1,632)
                                                                     --------      --------
         Total                                                       $  7,594      $  8,415
                                                                     ========      ========
</TABLE>

Depreciation expense for the years ended December 31, 2000, 1999 and 1998 was
$555,000, $530,000 and $239,000 respectively.


                                      F-13
<PAGE>

6.    FLOOR PLAN NOTES PAYABLE AND INTEREST EXPENSE

                                            12/31/00    12/31/99      12/31/98
                                            --------    --------      --------
                                                      (in thousands)
      FLOOR PLAN INTEREST:
      Interest expense                      $ 2,873      $ 2,605      $ 1,439
      Interest assistance and subsidies      (1,851)      (1,486)        (816)
                                            -------      -------      -------
                  Net interest expense      $ 1,022      $ 1,119      $   623
                                            =======      =======      =======

      The floor plan arrangements permit the Company to finance its vehicle
purchases and operating expenses. Such credit is secured by and, therefore,
dependent upon new and used vehicle inventory levels. Maximum availability under
the various lines was $41,145,000 and $50,422,000 as of December 31, 2000 and
1999, respectively. Current availability at December 31, 2000 and 1999 was
$1,022,000 and $1,436,000 respectively . The Company's credit facility is a
revolving line of credit not specifically lent to purchase individual vehicles.
Therefore, the loan balance cannot be allocated to vehicle categories.

      Interest rates on the floor plan arrangements ranged from 7.4% to 9.4%
during 2000 and 6.5% to 8.1% during 1999. The arrangement includes a swing line
that handles daily loan activity. The balance of the swing line is swept into
the floor plan line once monthly. The interest rates on the swing line ranged
from 8.6% to 9.6% during 2000. Automobile manufacturers periodically provide
floor plan interest assistance, or subsidies, which reduce the Company's cost of
financing. The accompanying consolidated financial statements reflect interest
expense net of floor plan assistance.

7.    OTHER CURRENT BANK BORROWINGS

      Between August 26, 1999 and December 23, 1999, CarDay.com obtained several
bridge loans (the "Bridge Loans") from several major financial institutions. The
aggregate amount of these loans at December 31, 1999 was $2.2 million These
loans were obtained without recourse against Hometown Auto Retailers, Inc. In
January 2000, concurrent with CarDay.com's equity financing arrangement the
Bridge Loans were paid in full.


                                      F-14
<PAGE>

8.    LONG TERM DEBT

<TABLE>
<CAPTION>
                                                                                 12/31/00    12/31/99
                                                                                 --------    --------
                                                                                    (in thousands)
      <S>                                                                          <C>        <C>
      Real estate mortgage note payable, due in monthly installments
      including interest at 10%, maturing May 1, 2014                              $8,899     $9,183

      Mortgage note payable, due in monthly installments including interest at
      10.5%, maturing in October 2006, relating to assets held for sale               283        358

      Notes payable for computer equipment, due in monthly installments
      including interest at rates ranging from 7.2% to 12.3                            --        179

      Other                                                                            34         39
                                                                                   ------     ------
                                                                                    9,216      9,759
      Less: Current portion                                                           431        708
                                                                                   ------     ------
      Total Long Term Debt                                                         $8,785     $9,051
                                                                                   ======     ======
</TABLE>

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

                   Year ending               Aggregate
                   December 31,             Obligation
                   ------------             ----------
                                          (in thousands)
                       2001                   $  431
                       2002                      463
                       2003                      481
                       2004                      428
                       2005                      476
                    Thereafter                 6,937
                                              ------
                                              $9,216
                                              ======

9.    RELATED PARTY TRANSACTIONS

      Operating Leases with Stockholder

      Certain officers of the Company lease to the dealerships the premises
under various operating leases (See Note 13).


                                      F-15
<PAGE>

      Due from related parties, included in other assets on the consolidated
balance sheet, are as follows:

<TABLE>
<CAPTION>
                                                                           12/31/00     12/31/99
                                                                           --------     --------
                                                                              (in thousands)
      <S>                                                                    <C>         <C>
      Note receivable from a company owned by an officer of the Company,
      non-interest bearing with payment due monthly of $2,000                $ 156       $ 193

      Other, net                                                                10         (11)
                                                                             -----       -----

          Total                                                              $ 166       $ 182
                                                                             =====       =====

</TABLE>

      Other:

      One of the dealerships purchased certain used vehicles from a company in
which an officer of the Company is a shareholder. Vehicles purchased from such
company for the years ended December 31,1998 aggregated approximately $356,000;
there are no such purchases in 1999 or 2000.

10.   CAPITAL STRUCTURE, PUBLIC OFFERING AND PER SHARE DATA

      General

      At the Company's Annual Meeting on August 29, 2000, shareholders voted to
approve a reduction in the number of authorized shares of Class A Common Stock
from 24,000,000 to 12,000,000. Following this change, the authorized capital
stock of the Company consists of 17,760,000 shares of which 12,000,000 are
shares of Class A Common Stock, par value $.001 per share, 3,760,000 are shares
of Class B Common Stock, par value $.001 per share, collectively (the "Common
Stock") and 2,000,000 are shares of Preferred Stock, par value $.001 per share,
issuable in series. As of December 31, 2000, none of the Preferred Stock were
outstanding, 3,699,000 shares of Class B Common were outstanding and 2,301,109
shares of Class A Common Stock were outstanding.

      Preferred Stock

      The Company'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 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, 2000, the Company 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


                                      F-16
<PAGE>

      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 the
Company, 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 the Company or of a subsidiary of the
Company. All of the outstanding shares of Class B Common Stock, representing
approximately 94% of the aggregate voting power of the Company, are beneficially
owned by the principals of the Core Operating Companies, including a majority of
the Board of Directors 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 the Company, 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.

      Public Offering of Common Stock

      The Company completed an initial public offering (the "Offering") of 1.8
million shares of its Class A Common Stock on July 31, 1998 at a price of $9 per
share. Net proceeds of the Offering of $12.9 million were used to finance the
Acquisitions, to fund the working capital requirements, to fund corporation
expenses and to fund additional acquisitions.

      Warrants

      In connection with this Offering, the Company granted to the Paulson
Securities (the "Representative"), Representative's Warrants, entitling the
holders thereof to purchase up to 180,000 shares of Class A Common Stock at a
purchase price of $10.80 per share over a four year period commencing one year
from the effective date of the Offering.

      Per Share Data

      As of December 31, 2000, no shares have been included in diluted shares
outstanding for the exercise of outstanding stock options and warrants as their
effect would be anti-dilutive. The Company guaranteed that stock issued in
connection with the acquisition of Toyota of Newburgh will have a market value
of at least $1,000,000 by March 31, 2001. The Company is currently in
negotiations with the former owners relating to the guarantee. As of December
31, 2000, a total of 1,900,000 additional shares would need to be issued to
comply with that guarantee.


                                      F-17
<PAGE>

      This following represents reconciliation from basic earnings per share to
diluted earnings per share.

<TABLE>
<CAPTION>
                                                                    Year Ended December 31;
                                                        --------------------------------------------
                                                           2000            1999             1998
                                                        ----------      ----------     -------------
                                                                       (in thousands)
      <S>                                               <C>             <C>            <C>
      Determination of Share:
      Weighted average shares outstanding, basic         5,996,146       5,875,342         3,513,333
      Potentially dilutive common shares                   732,037         128,509                --
                                                        ----------      ----------     -------------
      Weighted average shares outstanding, diluted       6,728,183       6,003,851         3,513,333
                                                        ==========      ==========     =============
      Earnings (loss) per share, basic                  $     (.60)     $      .13     $        (.28)
      Earnings (loss) per share, diluted                $     (.60)     $      .13     $        (.28)
                                                        ==========      ==========     =============
</TABLE>

11.   INCOME TAXES

      Federal and state income taxes (benefits) are as follows:

<TABLE>
<CAPTION>
                                              12/31/00     12/31/99     12/31/98
                                              --------     --------     --------
                                                        (in thousands)
      <S>                                      <C>          <C>         <C>
      Federal:
          Current                              $(1,275)     $   431     $  (611)
          Deferred                                (371)         176          50
      State:
          Current                                 (191)         241          46
          Deferred                                 (65)           2          13
                                               -------      -------     -------
         Total  Income Taxes                   $(1,902)     $   850     $  (502)
                                               =======      =======     =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                   12/31/00   12/31/99  12/31/98
                                                   --------   --------  --------
      <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                       (3.1%)      9.0%     (4.0%)
             Non-deductible goodwill                  2.2%       7.0%      3.3%
          Other                                       0.2%       2.0%      1.3%
                                                    ------      ----     ------
      Effective tax rate                            (34.7%)     52.0%    (33.4%)
                                                    ======      ====     ======
</TABLE>

      Deferred income taxes are included in other current assets and other
assets on the consolidated balance sheets and 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:

                                      F-18
<PAGE>

<TABLE>
<CAPTION>
                                                              12/31/00      12/31/99
                                                              --------      --------
                                                                 (in thousands)
      <S>                                                      <C>          <C>
      Deferred tax assets:
           Reserves and accruals not deductible until paid          --      $   311
           Net operating loss carry forward                      1,265           --
                                                               -------      -------
           Total assets                                          1,265          311

      Deferred tax liabilities:
          LIFO recapture                                           (53)        (234)
          Amortization of goodwill                                (283)        (141)
          Depreciation                                             (75)          (2)
           e-Commerce subsidiary gain                           (1,175)          --
      Other                                                        (78)        (134)
                                                               -------      -------
      Total liabilities                                         (1,664)        (511)
                                                               -------      -------
      Net deferred tax liability                               $  (399)     $  (200)
                                                               =======      =======
</TABLE>

      Certain of the dealerships acquired changed their method of accounting for
inventories of new vehicles from LIFO to FIFO, which resulted in an additional
income tax liability. The liability is payable over a four year period beginning
in 1999.

12.   ADVERTISING AND PROMOTION

      The Company expenses advertising and promotion as incurred. Advertising
and promotion expenses, net of manufacturers' rebates and assistance, were
approximately $2,971,000, $2,864,000, and $1,202,000 for the years ended
December 31, 2000, 1999 and 1998 respectively.


                                      F-19
<PAGE>

13.   OPERATING LEASES

      The Company has executed leases for the premises occupied by its
dealerships as well as for computer equipment and software. Certain of the
leases are with related parties. The minimum rental commitments required under
these operating leases after December 31, 2000 are as follows:

           Year ending                    Total       Related
           December 31,                 Obligation    Parties      Other
           ------------                 ----------    -------      -----
                                                 (in thousands)
           2001                          $ 2,438       1,668         770
           2002                            2,393       1,668         725
           2003                            2,293       1,668         625
           2004                            2,141       1,668         473
           2005                            1,939       1,668         271
           Thereafter                     13,297      12,649         648
                                         -------     -------      ------
           Total                         $24,501     $20,989      $ 3512
                                         =======     =======      ======

      Total expense for operating leases and rental agreements was $2,748,000,
$2,815,000 and $1,239,000 for the years ending December 31, 2000, 1999 and 1998
respectively.

      Total expense for operating leases and rental agreements with related
parties was $1,668,000, $1,848,000 and $1,060,000 for the years ending December
31, 2000, 1999 and 1998 respectively.

14.   COMMITMENTS AND CONTINGENCIES

      Litigation

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

      We have retained litigation counsel to represent us in this action. As of
date of the filing of this Annual Report, we have not filed a response to the
complaint nor engaged in any pre-trial discovery.

      We believe that the Vergopias commenced this action in response to our
dismissal of both Salvatore A. Vergopia and Edward A. Vergopia from their
officerships and employment positions with us. We believe we have meritorious
defenses and intend to vigorously defend this action and assert various
counterclaims, and do not believe that the eventual outcome of the case will
have a material adverse effect on the Company's consolidated financial position
or results of operations.


                                      F-20
<PAGE>

      The Company 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 the Company's consolidated
financial position or results of operations.

      Insurance

      The Company carries a standard range of insurance coverage, including
general and business auto liability, commercial property, workers' compensation
and excess liability coverage.

      Guaranties

      One of the Company's dealerships enters into various arrangements whereby
the Company guarantees or partially guarantees loans advanced by financial
institutions to certain customers as follows:

      (i)   Portfolio of customer's limousine vehicle loans granted by Ford
            Motor Credit Co. As of December 31, 2000, the Company fully
            guaranteed limousine vehicle loans aggregating approximately
            $6,497,000.

      (ii)  Portfolio of vehicle loans, granted by a financial institution, to
            various customers of the dealership with below average credit. As of
            December 31, 2000, the Company fully guaranteed vehicle loans
            associated with these customers aggregating approximately $761,000.

      During 2000, the Company repossessed 25 vehicles relating to
non-performing loans. As a result, the Company incurred losses related to payoff
of such vehicles.

      The Company has provided a reserve for potential future default losses
associated with the guarantees based on available historical information.

15.   EMPLOYEE BENEFIT PLANS

      The Company 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. The Company may make annual matching contributions to the Plan
at its discretion. No contributions are to be made by the Company to the Plan
for the year ended December 31, 2000. Contributions to the Plan were $48,000 and
$33,000 in 1999 and 1998 respectively.

16.   STOCK OPTION PLAN

      In February 1998, in order to attract and retain persons necessary for the
success of the Company, Hometown adopted its 1998 Stock Option Plan (the "Stock
Option Plan") covering up to 480,000 shares of Class A Common Stock. Pursuant to
the Stock Option Plan, officers, directors, key employees of the Company and
consultants to the Company 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-21
<PAGE>

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

<TABLE>
<CAPTION>
                                                      Weighted Average  Weighted Average
                                   Number of Shares   Price per Share     Fair Value
                                   ----------------   ---------------   ----------------
<S>                                     <C>                <C>              <C>
Balance at December 31, 1998            297,555            $8.90

Options Granted                          51,200             4.31            $1.03
Canceled                                (74,555)            9.00
                                        -------            -----
Balance at December 31, 1999            274,200             8.01

Options Granted                          50,000             1.24            $0.65
Canceled                                (22,200)            7.30
                                        -------            -----
Balance at December 31, 2000            302,000            $7.24
                                        =======            =====
Exercisable at December 31, 2000        161,333            $8.63
                                        =======            =====
</TABLE>

<TABLE>
<CAPTION>
                                                                  Weighted Average      Options
Range of               Number of Options       Weighted Average    Exercise Price     Exercisable    Weighted Avg.
Exercise Prices     Outstanding at 12/31/00     Remaining Life       Per Share        at 12/31/00    Exercise Price
---------------     -----------------------    ----------------   ----------------    -----------    --------------
<S>                         <C>                      <C>              <C>                <C>              <C>
$1.9 to $9                  302,000                  6.66             $7.24              161,333          $8.63
</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 2000, the dividend yield was assumed to be 0%, the risk-free interest
rate was 6.00%, the expected option life was 3 years and the expected volatility
was 73.58%. In 1999, the dividend yield was assumed to be 0%, the risk-free
interest rate was 6.48%, the expected option life was 3 years and the expected
volatility was 40.0%.


                                      F-22
<PAGE>

      As permitted by SFAS 123, the Company has chosen to continue accounting
for stock options at their intrinsic value under Accounting Principles Board
("APB") Opinion No, 25. Accordingly, no compensation expense has been recognized
for its stock option plans. Had the fair value method of accounting been applied
to the Company's stock option plans, the tax-effected impact would be as
follows:

      (in thousands, except per share amounts)               2000         1999
                                                            -------     -------

      Net Income as reported                                $(3,582)    $   785
      Estimated fair value of option grants, net of tax        (178)        (19)
                                                            -------     -------
      Net Loss (adjusted)                                   $(3,760)    $   766
                                                            =======     =======
      Adjusted earnings per share, basic                    $  (.62)    $   .13
      Adjusted earnings per share, diluted                  $  (.62)    $   .13

17.   ACQUISITIONS

      On January 1, 1999, Hometown closed its acquisition of Morristown Lincoln
Mercury from a related party for $.5 million as a stock purchase. This
acquisition has been accounted for using the purchase method of accounting
resulting in goodwill of approximately $0.4 million.

      On February 12, 1999, Hometown exercised its option to purchase the real
estate used by Bay State Lincoln Mercury dealership pursuant to the Supplemental
Agreement dated August 14, 1998 between Hometown and LM-1 LLC. The purchase
price was $4.0 million. The purchase price and the planned improvement and
ongoing expansion of the facility was financed by a $5.8 million capital loan
from Falcon Financial, LLP.

      On April 1, 1999, Hometown acquired Newburgh Toyota. The purchase price
was $2.9 million in cash, 100,000 shares of Hometown Class A Common Stock and
the assumption of floor plan and various other debt for the fully capitalized
operation. The acquisition resulted in goodwill of approximately $2.7 million.

      On November 3, 1999, Hometown purchased a Mazda franchise, special parts,
signage and new car inventory for $0.8 million. This franchise was tucked into
the Company's Framingham, Massachusetts dealership and will co-exist with the
Lincoln/Mercury's until showroom space can be added for the Mazda new cars. This
acquisition has been accounted for using the purchase method of accounting
resulting in goodwill of approximately $0.7 million .

      On January 12, 2000, Hometown completed the acquisition of a Jeep
franchise in Brattleboro, Vermont for $0.6 million. As part of this acquisition,
the Company also purchased the new vehicle inventory totaling $0.3 million. The
operations of this franchise have been included as part of Hometowns existing
Brattleboro Chrysler/Plymouth/Dodge dealership. This acquisition has been
accounted for using the purchase method of accounting, resulting in goodwill of
approximately $0.8 million.

      All goodwill is being amortized over a 40 year period. The cumulative
amount of goodwill amortization through December 31, 2000 and 1999 is $1,473,000
and $812,000, respectively.


                                      F-23
<PAGE>

18.   SUBSEQUENT EVENT

      On March 16, 2001, the Company completed a refinancing of its revolving
line of credit with GE Capital Corporation to a traditional floor plan line of
credit at each dealership with Ford Motor Credit Corporation.


                                      F-24
<PAGE>

                            QUARTERLY FINANCIAL DATA
                 For the years ended December 31, 2000 and 1999

                                      2000

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                                                   Total
                                   1st             2nd            3rd            4th                Year
-----------------------------------------------------------------------------------------------------------
<S>                            <C>             <C>             <C>             <C>              <C>
Net Sales                      $    74,026     $    74,769     $    69,843     $    61,203      $   279,841
-----------------------------------------------------------------------------------------------------------
Cost of goods sold                  64,813          65,151          60,420          53,566          243,950
-----------------------------------------------------------------------------------------------------------
Income before taxes                     68            (183)           (147)         (5,222)          (5,484)
-----------------------------------------------------------------------------------------------------------
Net income                              38             (97)           (184)         (3,339)          (3,582)
-----------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------
Per share information:
-----------------------------------------------------------------------------------------------------------
  Basic earnings per share     $      0.01     $     (0.02)    $     (0.03)    $     (0.56)     $     (0.60)
-----------------------------------------------------------------------------------------------------------
  Weighted average shares        5,988,861       5,997,016       5,998,529       6,000,109        5,996,146
-----------------------------------------------------------------------------------------------------------
</TABLE>

                                      1999

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                                                   Total
                                   1st             2nd            3rd            4th                Year
-----------------------------------------------------------------------------------------------------------
<S>                            <C>             <C>             <C>             <C>              <C>
Net Sales                      $    58,630     $    77,160     $    80,154     $    69,549      $   285,493
-----------------------------------------------------------------------------------------------------------
Cost of goods sold                  51,024          66,936          69,980          60,675          248,615
-----------------------------------------------------------------------------------------------------------
Income before taxes                    251           1,207             883            (706)           1,635
-----------------------------------------------------------------------------------------------------------
Net income                             151             688             507            (561)             785
-----------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------
Per share information:
-----------------------------------------------------------------------------------------------------------
  Basic earnings per share     $      0.03     $      0.12     $      0.09     $     (0.10)     $      0.13
-----------------------------------------------------------------------------------------------------------
  Weighted average shares        5,800,000       5,900,000       5,900,000       5,900,000        5,875,342
-----------------------------------------------------------------------------------------------------------
</TABLE>


                                      F-25
<PAGE>

              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To Hometown Auto Retailers, Inc:

We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Hometown Auto Retailers,
Inc included in this annual report on Form 10K and have issued our report
thereon dated March 30, 2001. Our audits were made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. This
schedule is presented for purposes of complying with the Securities and Exchange
Commissions rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.


                                                             ARTHUR ANDERSEN LLP

New York, New York
March 30,2001


                                       S-1
<PAGE>

                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
              For the years ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                                       Additions
                                         Balance at    charged to    Deductions,      Other       Balance at
                                         Beginning     Costs and       net of      Adjustments       End
Account Description                       of Year       Expenses     Write-offs        (1)         of Year
                                         ----------    ----------    ----------     ----------    ----------
<S>                                      <C>           <C>           <C>            <C>           <C>
Reserve for finance, insurance and
    service contract charge-backs
    Year ended December 31, 2000         $  265,000    $       --    $ (123,000)    $       --    $  142,000
                                         ==========    ==========    ==========     ==========    ==========
    Year ended December 31, 1999         $  707,000    $  (86,000)   $ (206,000)    $ (150,000)   $  265,000
                                         ==========    ==========    ==========     ==========    ==========
    Year ended December 31, 1998         $   40,000    $  102,000    $ (233,000)    $  798,000    $  707,000
                                         ==========    ==========    ==========     ==========    ==========

Reserve for uncollectible long-term
    finance contracts
    Year ended December 31,2000          $  443,000    $       --    $ (443,000)    $       --    $       --
                                         ==========    ==========    ==========     ==========    ==========
    Year ended December 31, 1999         $   60,000    $  383,000    $       --     $       --    $  443,000
                                         ==========    ==========    ==========     ==========    ==========
    Year ended December 31, 1998         $       --    $   60,000    $       --     $       --    $   60,000
                                         ==========    ==========    ==========     ==========    ==========
Reserve for guarantees on finance
    contracts
    Year ended December 31, 2000         $  380,000    $  825,000    $       --     $       --    $1,205,000
                                         ==========    ==========    ==========     ==========    ==========
    Year ended December 31, 1999         $  217,000    $   13,000    $       --     $  150,000    $  380,000
                                         ==========    ==========    ==========     ==========    ==========
    Year ended December 31, 1998         $       --    $   35,000    $       --     $  182,000    $  217,000
                                         ==========    ==========    ==========     ==========    ==========

Reserve for policy work expenses

    Year ended December 31,2000          $  180,000    $       --    $  (22,000)    $       --    $  158,000
                                         ==========    ==========    ==========     ==========    ==========
    Year ended December 31, 1999         $  185,000    $   (5,000)   $       --     $       --    $  180,000
                                         ==========    ==========    ==========     ==========    ==========
    Year ended December 31, 1998         $       --    $       --    $       --     $  185,000    $  185,000
                                         ==========    ==========    ==========     ==========    ==========

Reserve for wholesale vehicle losses
    Year ended December 31, 2000         $  213,000    $   99,000    $       --     $       --    $  312,000
                                         ==========    ==========    ==========     ==========    ==========
    Year ended December 31, 1999         $  100,000    $  113,000    $       --     $       --    $  213,000
                                         ==========    ==========    ==========     ==========    ==========
    Year ended December 31, 1998         $       --    $       --    $       --     $  100,000    $  100,000
                                         ==========    ==========    ==========     ==========    ==========
</TABLE>

      (1)   Primarily purchase accounting adjustments


                                       S-2