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, 2003

                                       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. |_|

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

      The aggregate market value of the voting stock held by  non-affiliates  of
the registrant as of June 30, 2003 was approximately $1,172,000.  Non-affiliates
are  defined as  holders  of Class A Common  Stock that do not also hold Class B
Common Stock. Hometown used closing selling price in the calculation.

      The number of shares  outstanding of the registrant's  Class A and Class B
Common Stock, $.001 par value, as of March 3, 2004 was 7,175,105 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE

<PAGE>

                          HOMETOWN AUTO RETAILERS, INC.
                             FORM 10-K ANNUAL REPORT
                                TABLE OF CONTENTS

<TABLE>
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PART I
   Item 1.   Business..................................................................................   3
   Item 2.   Properties................................................................................  18
   Item 3.   Legal Proceedings.........................................................................  21
   Item 4.   Submission of Matters to a Vote of Security Holders.......................................  22

PART II
   Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters.....................  23
   Item 6.   Selected Financial Data...................................................................  24
   Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations.....  25
   Item 7A.  Quantitative and Qualitative Disclosures About Market Risk................................  45
   Item 8.   Financial Statements and Supplementary Data...............................................  45
   Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosures.....  45
   Item 9A.  Controls and Procedures ..................................................................  45

PART III
   Item 10.  Directors and Executive Officers of the Registrant........................................  46
   Item 11.  Executive Compensation....................................................................  49
   Item 12.  Security Ownership of Certain Beneficial Owners and Management. ..........................  54
   Item 13.  Certain Relationships and Related Transactions............................................  59
   Item 14.  Principal Accounting Fees and Services....................................................  59

PART IV
   Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................  61
</TABLE>

                      FORWARD LOOKING STATEMENT INFORMATION

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


                                       2
<PAGE>

                                     PART I

ITEM 1. BUSINESS

      Hometown  was founded by merger,  on June 27,  1997,  between  Dealer-Co.,
Inc., a New York  Corporation,  organized  on March 10, 1997 and  Hometown  Auto
Retailers,  Inc., a Delaware  corporation,  organized on June 6, 1997. Until the
closing of its initial public offering on July 31, 1998,  Hometown  conducted no
operations under its own name and all revenues were generated by its predecessor
companies.  On July 31,  1998,  Hometown  acquired  three  dealerships,  and the
predecessor companies,  which operate six dealerships, a collision repair center
and a factory  authorized  freestanding  service center. In 1999,  Hometown also
acquired  freestanding  Lincoln Mercury and Toyota  dealerships and added both a
Mazda and a Jeep dealership to existing locations.  In 2000, Hometown acquired a
high-end used car operation,  which was added to its Massachusetts  location. In
2001,  Hometown sold its Morristown,  NJ dealership,  Lincoln Mercury  franchise
back  to  Lincoln  Mercury.  In  2002,  the  high-end  used  car  operation  was
significantly  scaled down. In 2003,  Hometown sold the Chrysler/Jeep  Sales and
Service Franchise for its Waterbury CT store.

GENERAL

      Hometown  sells new and used cars and light trucks,  provides  maintenance
and repair services,  sells  replacement  parts and provides related  financing,
insurance and service contracts through 9 franchised  dealerships located in New
Jersey, New York, Connecticut, Massachusetts and Vermont. Hometown's dealerships
offer 10 American and Asian automotive brands,  including  Chevrolet,  Chrysler,
Dodge, Ford, Jeep, Lincoln,  Mazda, Mercury,  Oldsmobile,  and Toyota.  Hometown
also is active in a "niche" area of the automotive  market,  the sale of Lincoln
town cars and limousines to livery car and livery fleet operators.

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

OPERATING STRATEGY

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

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

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


                                       3
<PAGE>

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

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

o     Focus on Higher Margin Operations

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

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

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

o     Brand  Diversity.  Hometown's  dealerships  offer 10  American  and  Asian
      automotive  brands  including  Chevrolet,  Chrysler,  Dodge,  Ford,  Jeep,
      Lincoln,  Mazda, Mercury,  Oldsmobile,  and Toyota. Hometown believes that
      brand diversity helps to insulate it from changes in consumer preferences,
      short  supplies of  particular  automotive  models and negative  publicity
      concerning a particular Manufacturer or vehicle model.


                                       4
<PAGE>

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

Dealership Operations

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

      New Vehicle Sales.  Hometown's dealerships represent 10 American and Asian
brands of lower,  mid and higher  priced sport and family cars and light trucks,
including sport utility  vehicles.  Hometown believes that offering numerous new
vehicle  brands appeals to a variety of customers,  minimizes  dependence on any
one Manufacturer and reduces its exposure to supply problems and product cycles.

      The  following  table  sets forth for 2003 and 2002,  certain  information
relating to the brands of new vehicles sold at retail by Hometown:

                                            FOR THE YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                              2003                   2002
                                              ----                   ----
BRANDS                                 NUMBER  PERCENTAGE     NUMBER  PERCENTAGE
------                                 ------  ----------     ------  ----------

TOYOTA ...........................      3,227       46.7%      2,985       46.4%
LINCOLN/MERCURY ..................      1,398       20.2%      1,296       20.2%
CHEVROLET ........................        772       11.2%        517        8.0%
FORD .............................        703       10.2%        672       10.5%
MAZDA ............................        393        5.7%        277        4.3%
JEEP .............................        167        2.4%        318        4.9%
DODGE ............................        108        1.6%        124        1.9%
CHRYSLER .........................         89        1.3%        165        2.6%
OLDSMOBILE .......................         50        0.7%         41        0.6%
OTHER ............................          3        0.0%         37        0.6%
                                        -----      -----       -----      -----
Total ............................      6,910      100.0%      6,432      100.0%
                                        =====      =====       =====      =====


                                       5
<PAGE>

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

      Hometown  acquires  substantially  all of its new vehicle  inventory  from
Manufacturers  of the  vehicle  brands it sells.  The  Manufacturers  allocate a
limited inventory among their franchised dealers based primarily on sales volume
and input from  dealers.  Hometown  finances  its  inventory  purchases  through
revolving credit  arrangements  known in the industry as "floor plan" financing.
New  vehicle  sales  have  also  been  helped by the  continuation  of  consumer
financing  deals,  such as zero percent  financing and heavy rebating by certain
manufacturers.

      Used Vehicle Sales. Hometown sells used vehicles at each of its franchised
dealerships.  Used  vehicles  typically  generate  higher gross margins than new
vehicles  because of their  limited  comparability  and the somewhat  subjective
nature of their  valuation.  Hometown intends to emphasize used vehicle sales by
maintaining a high quality inventory, providing competitive prices and arranging
extended service  contracts for its used vehicles and continuing to promote used
vehicle  sales.  Hometown  will also certify  that its used cars meet  specified
testing and quality  standards.  Consumer demand for used vehicles has decreased
as an increase in consumer  financing deals,  such as zero percent financing and
heavy rebating by certain manufacturers has lured customers to new vehicles.

      The  following  table shows  actual  vehicle  sales by Hometown  from 1999
through 2003.

                                         NUMBER OF USED AND NEW VEHICLES SOLD
                                       -----------------------------------------
                                       2003     2002     2001     2000     1999
                                       ----     ----     ----     ----     ----

Used Vehicles - Retail ............    3,683    4,128    4,874    4,549    4,790
Used Vehicles - Wholesale .........    3,144    2,857    3,105    3,208    3,319
New Vehicles ......................    6,910    6,432    6,230    6,731    6,892
                                      ------   ------   ------   ------   ------
        Total Sales ...............   13,737   13,417   14,209   14,488   15,001

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

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

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


                                       6
<PAGE>

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

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

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

      The parts and service business is less cyclical than new vehicle sales and
provides  an  important  recurring  revenue  stream to  Hometown's  dealerships.
Hometown uses systems that track its customers'  maintenance  records and notify
owners of vehicles  purchased at the dealerships when their vehicles are due for
periodic services.  Hometown believes that this practice  encourages  preventive
maintenance rather than post-breakdown repairs.

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

      Finance,   Insurance  and  Other  Revenue.  Hometown  dealerships  arrange
financing for their customers' vehicle purchases, sell vehicle service contracts
and arrange  selected types of credit insurance in connection with the financing
of vehicle sales. The dealerships place heavy emphasis on F&I and offer advanced
F&I training to their F&I managers. During 2003, Hometown arranged financing for
approximately  58% of new and used  vehicles  sold at retail  to its  customers.
Typically,  the  dealerships  forward  proposed  financing  contracts to finance
companies  owned and  operated by the  Manufacturers  or to selected  commercial
banks or other financing parties. The dealerships receive a finance fee from the
lender for arranging  the financing and may be assessed a charge-back  against a
portion of the finance fee if the contract is terminated  prior to its scheduled
maturity for any reason,  including early repayment or default.  The time period
whereby  Hometown is subject to  chargebacks  is  generally  from 90 days to 180
days. For certain other  contracts  Hometown is subject to  chargebacks  for the
life of the  loan.  Hometown  pays for this in the  form of a  reduction  of the
finance fee.


                                       7
<PAGE>

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

      Hometown  also offers three types of insurance  to  customers:  (i) credit
life insurance pays off the remaining balance of the vehicle loan upon the death
of the insured,  (ii)  disability  insurance  makes the monthly loan payments on
behalf of the  insured  during a period of  disability  and (iii) gap  insurance
ensures that the loan is paid in full if the vehicle becomes totally  inoperable
due to an accident.  Hometown's  dealerships  typically  receive one-half of the
premiums as a commission for selling these products.  Insurance revenues for the
year ended December 31, 2003 were less than 2% of total  Finance,  Insurance and
Other Revenues.

COMPANY GUARANTEES

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

      One of  Hometown's  dealerships,  prior to fiscal  2000,  had entered into
various  arrangements  whereby Hometown guaranteed or partially guaranteed loans
advanced by financial institutions to certain customers as follows:

      (i)   Portfolio of 7 customer's  limousine  vehicle  loans granted by Ford
            Motor  Credit  Co.  As of  December  31,  2003,  Hometown  fully and
            partially    guaranteed    limousine   vehicle   loans   aggregating
            approximately $26,000.

      (ii)  Portfolio of 4 vehicle loans, granted by a financial institution, to
            various customers of the dealership with below average credit. As of
            December  31,  2003,   Hometown  fully   guaranteed   vehicle  loans
            associated with these customers aggregating approximately $7,000.

      The guarantees in (i) and (ii) above are related to loans whereby Hometown
is required to pay the remaining  loan balance upon default by the customer.  As
of December 31, 2003,  Hometown has  reserved  $11,000  against a total  maximum
payout of $33,000 for these loans. The reserve amount  represents loans that are
currently delinquent. Hometown would expect to realize proceeds from the sale of
these vehicles upon  repossession  of such vehicle.  The amount of proceeds,  if
any, is undetermined due to not knowing the condition of the vehicles.

      There are also 6 loans whose liens were not  properly  perfected  totaling
approximately  $71,000 as of December 31, 2003. Hometown will be required to pay
the remaining  loan balance  should the  customer's  default on their  payments.
Hometown is working to perfect  these liens and has taken steps to prevent  this
from occurring in the future. Hometown has reserved $13,000 for these loans. The
reserve amount  represents loans that are currently  delinquent.  Hometown would
expect to realize proceeds from the sale of these vehicles upon  repossession of
such  vehicle.  The  amount,  if any,  is  undetermined  due to not  knowing the
condition of the vehicle.


                                       8
<PAGE>

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

      In connection with the acquisition in 1999 of real estate used by Baystate
Lincoln Mercury, Hometown guaranteed the mortgage debt of Rellum Realty Company.
The 1999 guaranty was given in substitution for a February 1998 guaranty of that
debt by the Muller Group,  a subsidiary of Hometown.  In the event of default by
Rellum Realty Company,  Hometown is required to make the mortgage payments,  but
does not take  ownership of the  property.  As of December 31, 2003 the mortgage
debt balance is $4.7 million.  Hometown  makes annual lease payments of $756,000
to the landlord,  increasing to $864,000  effective  January 1, 2004. The annual
mortgage  payments  made  by the  landlord  total  approximately  $774,000.  The
mortgage  matures  March 2013.  The lease was recorded as a capital  lease.  The
capital lease obligation is $4.2 million at December 31, 2003. See Notes 7 and 8
to the consolidated financial statements.

COMPANY WARRANTIES

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

      Hometown  records a  reserve  referred  to as  "policy"  for used  vehicle
warranties  and the labor  portion  of  service  warranties  based on  available
historical information. At December 31, 2003 and 2002, Hometown has a reserve of
$175,000  and  $172,000,  respectively.  The  reserve is based on the last three
months of used vehicle  units sold and the average cost of repairs over the last
twelve  months.  While  Hometown  believes its  estimated  liability for product
warranties  is  adequate  and that the  judgment  applied  is  appropriate,  the
estimated  liability for product  warranties could differ materially from future
actual warranty costs.

      Other  revenues  generated by sales of extended  service  plans,  finance,
insurance  and other do not have any Hometown  warranties  attached to the sale,
except for certain  sales in  Connecticut  dealerships  discussed  in  "Finance,
Insurance and Service Contract Income Recognition" above.

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

SEASONALITY

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


                                       9
<PAGE>

FRANCHISE AGREEMENTS

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

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

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

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


                                       10
<PAGE>

      On March 8, 2004, Toyota Motor Sales,  U.S.A., Inc. notified Hometown that
the current Toyota Dealer Agreement was extended through June 18, 2004. Hometown
is currently  reviewing the proposed new Toyota Dealer Agreement and anticipates
executing  that  agreement  prior to the  expiration  of the current  agreement.
Previously  on March 13,  2003,  Hometown  was  notified by Toyota  Motor Sales,
U.S.A.,  that Hometown must correct  certain  operational  deficiencies  or make
substantial progress toward rectifying such deficiencies.  Toyota had previously
expressed  concerns that the financial  resources of the Toyota dealerships were
being used to finance the cash flow  deficits of  affiliated  companies and that
because  of  this  the  financial   health  of  the  Toyota   dealerships   were
detrimentally affected by a net working capital deficiency. Toyota requested and
Hometown  provided a written action plan and  consolidated  financial  forecast.
Toyota also expressed concerns about the impact of Ford Motor Credit's financing
terms upon the Toyota  dealerships  and the existing  litigation,  including the
Vergopia's  as  discussed  above  in  Item  3. -  Legal  Proceedings,  Item 7. -
Managements  Discussion  and  Analysis  -  Litigation  and  in  Note  14 to  the
consolidated  financial statements.  Hometown developed and implemented plans to
correct the operational  deficiencies that would bring Hometown into compliance.
Hometown has obtained written  confirmations  from Ford Motor Credit in response
to Toyota's  requests for  information  relating to financing  arrangements.  In
addition,  Hometown  has  improved  net  working  capital  through the sale of a
Chrysler/Jeep Sales and Service Franchise (Note 17 to the consolidated financial
statements)  and advances on warranty income from  Hometown's  Extended  Service
Plan  vendor.  Hometown  has been in regular  contact  with Toyota to review the
efforts of  Hometown  to resolve  the  deficiencies  alleged by Toyota.  The two
Toyota  dealerships  for the fiscal year ended  December  31, 2003 had  combined
revenues of $105.1  million and pre-tax  income  before  allocation of corporate
costs of $2.3 million.  Hometown  believes that it has corrected the alleged net
working capital  deficiency for the Toyota  dealerships,  that it has alleviated
the concerns  expressed by Toyota and that Hometown will enter into a new dealer
agreement with Toyota Motor Sales,  U.S.A prior to the expiration of the current
dealer agreement.

COMPETITION

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

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

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


                                       11
<PAGE>

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

GOVERNMENTAL REGULATIONS

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

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

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

      ENVIRONMENTAL MATTERS

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


                                       12
<PAGE>

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

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

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

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

EMPLOYEES

      As  of  December  31,  2003,   Hometown   employed  384  people,  of  whom
approximately  57 were  employed in  managerial  positions,  92 were employed in
non-managerial  sales positions,  188 were employed in non-managerial  parts and
service positions and 47 were employed in administrative support positions.

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


                                       13
<PAGE>

               CERTAIN FACTORS THAT MAY AFFECT GROWTH AND PROFITS

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

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

      Our business is significantly dependent upon the sale of new vehicles from
Toyota Motors, Ford Motors and Chevrolet. For the year ended December 31, 2003,
Toyota Motor, Ford Motor and Chevrolet accounted for 46.7%, 30.4% and 2% of
our new vehicle sales, respectively. New vehicle sales generate the majority of
our gross revenue and lead to sales of higher-margin products and services such
as used vehicle sales, finance and insurance products and repair and maintenance
services. In addition, the success of each of our franchises is also dependent
to a great extent on the success of the respective manufacturer, including its
financial condition, marketing, vehicle demand, production capabilities and
management. If one or more of these manufacturers were to suffer from labor
strikes, negative publicity, including safety recalls of a particular vehicle
model, or a decrease in consumer demand for its products, our results of
operations could be materially and adversely affected.

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

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

MANUFACTURERS' CONTROL OVER DEALERSHIPS

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

      On March 8, 2004 Toyota Motor Sales, U.S.A., Inc. notified Hometown that
the current Toyota Dealer Agreement was extended through June 18, 2004. Hometown
is currently reviewing the proposed new Toyota Dealer Agreement and anticipates
executing that agreement prior to the expiration of the current agreement.
Previously on March 13, 2003, Hometown was notified by Toyota Motor Sales,
U.S.A., that Hometown must correct certain operational deficiencies or make
substantial progress toward rectifying such deficiencies. Toyota had previously
expressed concerns that the financial resources of the Toyota dealerships were
being used to finance the cash flow deficits of affiliated companies and that
because of this the financial health of the Toyota dealerships were
detrimentally affected by a net working capital deficiency. Toyota requested and
Hometown provided a written action plan and consolidated financial forecast.
Toyota also expressed concerns about the impact of Ford Motor Credit's financing
terms upon the Toyota dealerships and the existing litigation, including the
Vergopia's as discussed above in Item 3. - Legal Proceedings, Item 7. -
Managements Discussion and Analysis - Litigation and in Note 14 to the
consolidated financial statements. Hometown developed and implemented plans to
correct the operational deficiencies that would bring Hometown into compliance.
Hometown has obtained written confirmations from Ford Motor Credit in response
to Toyota's requests for information relating to financing arrangements. In
addition, Hometown has improved net working capital through the sale of a
Chrysler/Jeep Sales and Service Franchise (Note 17 to the consolidated financial
statements) and advances on warranty income from Hometown's Extended Service
Plan vendor. Hometown has been in regular contact with Toyota to review the
efforts of Hometown to resolve the deficiencies alleged by Toyota. The two
Toyota dealerships for the fiscal year ended December 31, 2003 had combined
revenues of $105.1 million and pre-tax income before allocation of corporate
costs of $2.3 million. Hometown believes that it has corrected the alleged net
working capital deficiency for the Toyota dealerships, that it has alleviated
the concerns expressed by Toyota and that Hometown will enter into a new dealer
agreement with Toyota Motor Sales, U.S.A prior to the expiration of the current
dealer agreement.


                                       14
<PAGE>

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

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

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

      o     customer rebates on new vehicles;
      o     dealer incentives on new vehicles;
      o     special financing or leasing terms;
      o     warranties on new and used vehicles; and
      o     sponsorship of used vehicle sales by authorized new vehicle dealers.

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

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

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

FUTURE LOSSES MAY THREATEN THE VIABILITY OF OUR BUSINESS.

      Hometown had net income of $2.4 million for the year ended December 31,
2003 compared to a net loss of $22.9 million and $2.1 million for the years
ended December 31, 2002 and 2001, respectively. The 2003 period included $0.9
million associated with the gain on sale of a Chrysler/Jeep Sales and Service
Franchise. The 2002 net loss was due to recording the write-off of the carrying
value of goodwill of $23.7 million in accordance with the provisions of SFAS
142. Without the write-off of goodwill, Hometown showed an improvement of $2.9
million in 2002 when compared to the 2001 period. Although Hometown is currently
profitable, if Hometown sustains significant losses in the future, our business
could be materially and adversely affected and the value of our common stock
might decline.


                                       15
<PAGE>

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

      At December 31, 2003, our total cash and cash equivalents was
approximately $5.6 million and our working capital was approximately $6.0
million. If we were to incur net losses in 2004 or subsequent years, then we may
have insufficient working capital to maintain our current level of operations or
provide for unexpected contingencies. In such event, we will need to seek
additional capital from public or private equity or debt funding sources and we
may not be able to raise needed cash on terms acceptable to us or at all.
Financings may be on terms that are dilutive or potentially dilutive to our
stockholders. If sources of financing are required, but are insufficient or
unavailable, we will be required to modify our growth and operating plans to the
extent of available funding, which could have an adverse affect on our business.

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

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

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

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

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

      The holders of our Class B common stock are entitled to ten votes for each
share held, while holders of our Class A common stock, are entitled to one vote
per share held. Consequently, as of March 3, 2004, the holders of the Class B
common stock, who also own approximately 59% of our outstanding common stock of
all classes, will control approximately 87% of the aggregate number of votes
eligible to be cast by stockholders for the election of directors and certain
other stockholder actions, and will be in a position to control our policies and
operations. Also as of March 3, 2004, our executive officers and directors
control approximately 33% of the aggregate number of votes eligible to be cast
by stockholders for the election of directors and certain other stockholder
actions, and will be in a position to control our policies and operations.
Accordingly, absent a significant increase in the number of shares of Class A
common stock outstanding or conversion of Class B common stock into Class A
common stock, the holders of shares of Class B common stock will be entitled,
for the foreseeable future, to elect all members of the Board of Directors and
control all matters subject to stockholder approval.


                                       16
<PAGE>

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

      The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be an equity security that has a market price,
as defined, of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions, including an exception of an equity
security that is quoted on The Nasdaq Stock Market. Equity securities trading on
the NASD "OTC Bulletin Board" are subject to rules that impose additional sales
practice requirements on broker-dealers who sell our securities. For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchaser of such securities and have received
the purchaser's written consent to the transactions prior to the purchase.
Additionally, unless exempt, the rules require the delivery, prior to the
transaction, of a disclosure schedule prepared by the Securities and Exchange
Commission relating to the penny stock market. The broker-dealer also must
disclose the commissions payable to both the broker-dealer and the registered
underwriter, current quotations for the securities and, if the broker-dealer is
the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally among other
requirements, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Since February 2001 our Class A common stock has
been trading on the NASD OTC Bulletin Board, as a penny stock, and therefore is
subject to these additional rules. As such, these penny stock rules may restrict
the ability of stockholders to sell our Class A common stock. Consequently, the
liquidity of our Class A common stock could be impaired, not only in the number
of securities which could be bought and sold, but also through delays in the
timing of transactions, reduction in security analysts and new media coverage of
Hometown, and lower prices for our securities than might otherwise be obtained.


                                       17
<PAGE>

ITEM 2. PROPERTIES

      Set forth in the table below is certain information relating to the
properties that Hometown uses in its business. All annual costs reflect any
applicable CPI increases that go into effect January 1, 2004.

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

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

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

Shaker's Jeep      1311 South Main St.          New and used car sales;          Lease expires in 2013; $82,000 per
   Eagle           Waterbury, CT 06706          service; F & I                   year with CPI increase in 2009.

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

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

Muller Chevrolet,  Route 173 and                New and used car sales;          Lease expires in 2013; $452,000 per
Oldsmobile         Voorhees Rd.                 service; F & I                   per year with CPI increase in 2009.
                   Stewartsville, NJ                                             Hometown guarantees mortgage
                   08865                                                         debt associated with this lease.
                                                                                 The lease is treated as a capital lease.

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

Bay State Lincoln  571 Worcester Road           New and used car sales;          Owned facility. Mortgage balance of
   Mercury         Framingham, MA 01701         service; F & I                   $4,877,000 at 12/31/03. Matures
                                                                                 5/1/2014. Annual payments of $748,000.
</TABLE>


                                                             18
<PAGE>

<TABLE>
<CAPTION>
OCCUPANT/TRADENAME        LOCATION                     USE                             LEASE/OWN
------------------        --------                     ---                             ---------
<S>                <C>                          <C>                              <C>
Brattleboro        Route 5, Putney Rd. N.       New and used car sales;          Lease expires 7/31/08 at $270,000 per
Chrysler           Brattleboro, VT 05304        service; F & I                   year; option to purchase at fair
Plymouth Dodge                                                                   market value of not less than $1.5
Sales                                                                            million.

Morristown         115 Spring St.               New and used car sales;          Dealership sold in January, 2001.
   Auto Sales,     Morristown, NJ 07960         service; F & I                   Lease expires 6/30/05 at $180,000 per
   Inc.                                                                          year. Lease was assigned to a third
                                                                                 party in May, 2001. Assignee stopped
                                                                                 paying rent in June 2002. See Item 3.
                                                                                 - Legal Proceedings.

Hometown Auto      774 Straits Turnpike         Administrative and               Lease expires 11/30/04 at $60,000 per
   Retailers, Inc. Watertown, CT. 06795         Corporate offices                year; first five-year renewal option
                                                                                 at $70,000 per year and second
                                                                                 five-year renewal option at $80,000
                                                                                 per year.

Autos of           2934 Rte 9 W                 New and used car sales;          Owned facility. Mortgage balance of
   Newburgh, Inc.  New Windsor, NY 12553        service; F & I                   $2,995,000 at 12/31/03. Matures
   d/b/a Toyota                                                                  5/1/2014. Annual payments of $462,000.
   of Newburgh

Autos of           334 Route 9W                 New and used car sales; F & I    Lease expires 10/14/06 at $74,000 per
   Newburgh, Inc.  New Windsor, NY                                               year, increasing by a CPI adjustment
   d/b/a Toyota    12553                                                         in the final two years; one five-year
   of Newburgh                                                                   renewal option at the previous year
                                                                                 rent plus CPI adjustment for each year
                                                                                 of the extension.

Autos of           336 Route 9W                 Service and administrative       Month to month lease at $37,000 per
   Newburgh, Inc.  New Windsor, NY                                               year.
   d/b/a Toyota    12553
   of Newburgh
</TABLE>

LEASES

      Hometown has leased from various affiliates the premises occupied by
certain of its dealerships. Each of the governing leases became effective as of
the closing of the initial public offering, has a term expiring in 2013, is on a
triple net basis and provides for a consumer price index ("CPI") increase to the
base rent for the five-year periods commencing January 1, 2004 and 2009.
Hometown believes that each lease was at their fair market value at inception.
The annual base rentals reflect the CPI increase that is effective January 1,
2004.

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


                                       19
<PAGE>

Muller Group. Hometown leases, for an annual base rental of approximately
$411,000 and $452,000 respectively the premises occupied by its Toyota
("Toyota") dealership in Clinton, New Jersey and its Chevrolet/Oldsmobile
("Chevy") dealership in Stewartsville, New Jersey from Rellum Realty Company, a
New Jersey general partnership, one of whose two partners is William C. Muller
Jr. Mr. Muller is Regional Vice President - South Division, director and a
principal stockholder of Hometown. The Toyota and Chevy leases are treated as
capital leases. In connection with the acquisition in 1999 of real estate used
by Baystate Lincoln Mercury, Hometown guaranteed the mortgage debt of Rellum
Realty Company. The 1999 guaranty was given in substitution for a February 1998
guaranty of that debt by the Muller Group, a subsidiary of Hometown. As of
December 31, 2003 the mortgage debt balance is $4.7 million. Hometown makes
annual lease payments of $756,000, increasing to approximately $864,000
effective January 1, 2004, to the landlord. The annual mortgage payments made by
the landlord total approximately $774,000. The mortgage matures March 2013.

Westwood. Hometown leases, for an annual base rental of approximately $411,000
the premises occupied by its Lincoln Mercury dealership in Emerson, New Jersey
from Salvatore A. Vergopia and his wife. Mr. Vergopia is a principal stockholder
and former officer and director of Hometown.



                                       20
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

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

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

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

      Litigation counsel for Hometown has also been advised that the Vergopias
have filed a third action against Hometown and its Chief Executive Officer
claiming defamation and tortious interference with contract arising out of a
letter allegedly sent to one of Hometown's automobile manufacturers. As of March
11, 2004 neither Hometown nor its Chief Executive Officer have received service
of process in this third action. However, Hometown presently believes it
involves damage claims that are similar to those already made in the two pending
actions in the Superior Court of New Jersey in Bergen County.

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


                                       21
<PAGE>

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

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

      In July 2002, Hometown received notice of a complaint filed by the Trust
Company of New Jersey ("Trust Company") for payment under certain guaranty
agreements allegedly made by Hometown's wholly-owned subsidiary Westwood Lincoln
Mercury Sales, Inc. ("Westwood") in favor of Trust Company in connection with a
sale of vehicles in 1998. Trust Company was seeking approximately $390,000 plus
other costs totaling approximately $70,000. On January 27, 2004, without
admissions of liability by any party, Hometown and Trust Company reached a
settlement agreement whereby Hometown will pay Trust Company $162,500 in
installments, payable through January 2007. This liability is included in
Accounts Payable and Accrued Expenses in Hometown's Consolidated Balance Sheet
at December 31, 2003.

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

      None


                                       22
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      (a) MARKET INFORMATION

      Hometown'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,
Hometown'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 NASD OTC Bulletin Board. Such quotations reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not necessarily represent
actual transactions.

                                                                 BID PRICES
PRICE RANGE OF COMMON STOCK                                ---------------------

                                                            HIGH            LOW
YEAR ENDED 2002

First Quarter                                               $0.95          $0.52

Second Quarter                                              $0.74          $0.40

Third Quarter                                               $0.52          $0.18

Fourth Quarter                                              $0.90          $0.18

YEAR ENDED 2003

First Quarter                                               $0.55          $0.31

Second Quarter                                              $0.55          $0.28

Third Quarter                                               $0.88          $0.41

Fourth Quarter                                              $1.60          $0.67

      (b) HOLDERS

      As of March 3, 2004, the number of record holders of the Class A Common
Stock of Hometown was 48. Hometown believes it has more than 800 beneficial
holders.

      (c) DIVIDENDS

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

      (d) EQUITY COMPENSATION PLAN INFORMATION

      There are no new compensation plans in 2003.


                                       23
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

      The following selected financial data as of December 31, 2003, 2002, 2001,
2000 and 1999 have been derived from the audited consolidated financial
statements of Hometown.

<TABLE>
<CAPTION>
                                                          For the Years Ended December 31,
                                                    (in thousands, except share and per share data)
                                                 2003        2002        2001        2000        1999
                                               ---------   ---------   ---------   ---------   ---------
<S>                                            <C>         <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Revenues                                       $ 279,777   $ 269,739   $ 275,760   $ 279,382   $ 285,315
Gross profit                                      39,747      38,667      39,815      37,881      38,054
Amortization of goodwill                              --          --         704         661         600
Loss from operations of e-Commerce subsidiary         --          --          --          --         515
Selling, general and administrative expenses      34,840      34,152      35,114      37,946      31,499
Income (loss) from operations                      4,907       4,515       3,997        (726)      5,440
Interest expense                                  (3,037)     (3,205)     (4,225)     (5,069)     (4,116)
Net income (loss) before cumulative effect of
accounting change                                  2,378         776      (2,136)     (3,800)        641

Cumulative effect of accounting change                --     (23,708)         --          --          --
                                               ---------   ---------   ---------   ---------   ---------
Net income (loss)                              $   2,378   $ (22,932)  $  (2,136)  $  (3,800)  $     641
                                               =========   =========   =========   =========   =========
Earnings (loss) per share, basic
Before cumulative effect of accounting change  $    0.33   $    0.10   $    (.32)  $    (.63)  $     .11
Cumulative effect of accounting change                --       (3.30)         --          --          --
                                               ---------   ---------   ---------   ---------   ---------
Earnings (loss) per share, basic               $    0.33   $   (3.20)  $    (.32)  $    (.63)  $     .11
                                               =========   =========   =========   =========   =========
Earnings (loss) per share, diluted
Before cumulative effect of accounting change  $    0.33   $    0.10   $    (.32)  $    (.63)  $     .11
Cumulative effect of accounting change                --       (3.30)         --          --          --
                                               ---------   ---------   ---------   ---------   ---------
Earnings (loss) per share, diluted             $    0.33   $   (3.20)  $    (.32)  $    (.63)  $     .11
                                               =========   =========   =========   =========   =========
Weighted average shares,
Basic                                          7,175,105   7,175,105   6,592,436   5,995,996   5,875,342
Diluted                                        7,215,492   7,175,105   6,592,436   5,995,996   6,003,851
--------------------------------------------------------------------------------------------------------

                                                 2003        2002        2001        2000        1999
                                               ---------   ---------   ---------   ---------   ---------
BALANCE SHEET DATA:
Working capital                                $   6,039   $   4,085   $   4,029   $   1,663   $   3,870
Inventories                                       37,774      39,169      31,887      40,170      51,187
Total assets                                      65,264      63,816      81,842      91,572     102,562
Total debt                                        51,075      52,745      46,234      54,133      65,910
Stockholders' equity                           $   6,928   $   4,550   $  27,452   $  28,643   $  29,851
</TABLE>


                                       24
<PAGE>

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

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

            REVENUE

      Total revenue increased $10.1 million, or 3.7% to $279.8 million for the
year ended December 31, 2003 from $269.7 million for the year ended December 31,
2002. Hometown sold a Chrysler/Jeep new car franchise on June 3, 2003. On a same
store basis (excluding the Chrysler/Jeep new car franchise for all periods),
revenues increased $16.2 million or 6.2% to $276.8 million for the year ended
December 31, 2003 from $260.6 million for the year ended December 31, 2002. This
increase was primarily due to increased new vehicle sales ($21.5 million) and an
increase in parts and service revenue ($0.8 million) partially offset by
decreased sales of used vehicles ($6.0 million). New vehicle sales were helped
by the continuation of consumer financing deals, such as zero percent financing,
combined with heavy rebating by manufacturers, which in turn contributed to the
decrease in used vehicle sales.

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


                                       25
<PAGE>

      Revenue from the sale of used vehicles decreased $6.0 million, or 8.3%, to
$66.5 million for year ended December 31, 2003, from $72.5 million for the year
ended December 31, 2002. This was due to decreased used vehicle revenues at
retail ($4.7 million) due to a decrease of 445 units ($6.3 million), partially
offset by a 3.0% increase in average selling price ($1.6 million); plus reduced
used vehicle sales at wholesale ($1.3 million) due to lower average selling
price ($2.7 million) partially offset by an increase of 287 units ($1.4
million). A Lincoln Mercury/Mazda dealership accounted for $2.6 million of the
decrease in used vehicle sales at retail primarily due to a decrease of 181
units ($2.9 million) partially offset by a 4.3% increase in average selling
price ($0.3 million). The declines at the Lincoln Mercury/Mazda dealership was
primarily due to the dealership reducing its emphasis on the sale of high-end
used cars during the 2002 period, causing a decrease in retail and wholesale
sales of such vehicles subsequent to that time. The Toyota dealerships accounted
for a $1.9 million decrease in used vehicle sales at retail primarily due to a
decrease of 145 units ($2.0 million). Ford accounted for a decrease of $0.9
million due to a decrease of 88 units ($1.2 million) partially offset by a 5.9%
increase in average selling price ($0.3 million). Other Lincoln Mercury
dealerships had an increase of $0.8 million due to an increase of 8 units ($0.1
million) and a 5.8% increase in average selling price ($0.7 million). As
discussed above, new vehicle sales were helped by the continuation of consumer
financing deals, such as zero percent financing and heavy rebating by the
manufacturers, which in turn contributed to the decrease in used vehicle sales
at retail. The same Lincoln Mercury/Mazda dealership discussed above had a $2.9
million decrease in used vehicle sales at wholesale for the reasons discussed
above. Most other dealerships experienced increases in wholesale (Toyota - $0.7
million; Ford - $0.3 million; Chevrolet - $0.4 million; other Lincoln Mercury -
$0.7 million). Used vehicle inventory available for sale at retail increased
during the year due to the increased new vehicle sales bringing in more vehicles
as trade - ins at time of new vehicle purchase. This combined with the decrease
in used vehicle sales at retail caused more vehicles to be sold at wholesale to
manage used vehicle inventory levels.

      Parts and service revenue increased $0.3 million, or 1.2%, to $24.6
million for the year ended December 31, 2003, from $24.3 million for the year
ended December 31, 2002. As a result of the sale of a Chrysler/Jeep new car
franchise, that dealership's parts and service business was closed. Excluding
this business for all periods, parts and service revenue increased $0.8 million
or 3.4%, to $24.2 million for the year ended December 31, 2003, compared to
$23.4 million for the year ended December 31, 2002. The increase was primarily
generated from the Toyota dealerships ($0.8 million). Increases at the
Chevrolet, Mazda and remaining Jeep dealership ($0.3 million) were offset by
decreases at the Ford and Lincoln Mercury dealerships ($0.3 million).

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

      GROSS PROFIT

      Total gross profit increased $1.0 million, or 2.6%, to $39.7 million for
the year ended December 31, 2003 from $38.7 million for the year ended December
31, 2002. Hometown sold a Chrysler/Jeep new car franchise on June 3, 2003. On a
same store basis (excluding the Chrysler/Jeep new car franchise for all
periods), gross profit increased $1.8 million, or 4.8% to $39.3 million for the
year ended December 31, 2003 from $37.5 million for the year ended December 31,
2002. This increase was primarily attributable to an increase in new vehicle
gross profit of $2.0 million and an increase in gross profit on parts and
service sales of $0.3 million, partially offset by a $0.3 million decrease in
used vehicle gross profit and a $0.2 million decrease in gross profit on other
dealership revenues. Gross profit percentage for Hometown was 14.2% in 2003 and
14.4% in 2002. Adjusting both periods for Toyota and Chevrolet fleet sales,
gross profit percentage was 14.5% in 2003 and 14.8% in 2002.


                                       26
<PAGE>

      Gross profit on the sale of new vehicles increased $1.6 million, or 15.4%,
to $12.0 million for the year ended December 31, 2003, from $10.4 million for
the year ended December 31, 2002. On a same store basis gross profit on the sale
of new vehicles increased $2.0 million, or 20.2%, to $11.9 million for the year
ended December 31, 2003, from $9.9 million for the year ended December 31, 2002.
The increase in gross profit is primarily attributable to an increase of 694
units ($1.1 million) combined with a 7.5% increase in average gross profit per
vehicle ($0.9 million). Included in the unit increase are 24 units attributable
to an increase in Toyota and Chevrolet fleet sales, which had a minimal effect
on the increase in gross profit. All dealerships experienced an increase in
gross profit on the sale of new vehicles in the 2003 period compared to 2002 as
follows; Lincoln Mercury - $0.9 million, Toyota - $0.4 million, Chevrolet - $0.4
million, Mazda - $0.2 million and Ford - $0.1 million. Gross profit percentage
for 2003 was 6.7% compared to 6.3% for 2002. Adjusting both periods for Toyota
and Chevrolet fleet sales, which generate low margins, gross profit percentage
for new vehicles was 6.9% in 2003 and 6.6% in 2002. Included in the these
results is an increase in gross profit of $0.3 million (Lincoln Mercury - $0.2
million and Ford - $0.1 million) attributable to the implementation of EITF
Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" ("EITF Issue No. 02-16"). This issue
addressed the income statement classification of cash consideration received
from a vendor and the recognition criteria for performance-driven vendor rebates
or refunds. This consensus, which was effective for all arrangements entered
into after December 31, 2002, resulted in certain co-op advertising recoveries,
which would previously have been recorded as a reduction of SG&A, being recorded
as a reduction of Cost of Sales, buying and occupancy. We adopted EITF Issue No.
02-16 on January 1, 2003.

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

      Parts and service gross profit remained constant at $13.3 million for the
years ended December 31, 2003 and 2002. As a result of the sale of a
Chrysler/Jeep new car franchise, that dealerships parts and service business was
closed. Excluding this business for all periods, parts and service gross profit
increased $0.3 million, or 2.3%, to $13.1 million for the year ended December
31, 2003, from $12.8 million for the year ended December 31, 2002. The increase
was primarily attributable to the increase in revenues ($0.4 million) partially
offset by a decrease in gross profit percentage ($0.1 million). Gross profit
percentage was 54.1% in 2003 compared to 54.6% in 2002.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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


                                       27
<PAGE>

      INTEREST INCOME

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

      INTEREST EXPENSE

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

      OTHER INCOME

      Other income for 2003 primarily includes a gain of approximately $936,000
resulting from the sale of a Chrysler/Jeep Sales and Service Franchise in
Waterbury, CT in June 2003.

      OTHER EXPENSE

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

      PROVISION (BENEFIT) FOR INCOME TAX

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

      INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE

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

      CUMULATIVE EFFECT OF ACCOUNTING CHANGE

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


                                       28
<PAGE>

      NET INCOME (LOSS)

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

      EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED AND WEIGHTED AVERAGE SHARES

      "Basic earnings (loss) per share" is computed by dividing net income
(loss) by the weighted average common shares outstanding. "Diluted earnings
(loss) per share" is computed by dividing net income (loss) by the weighted
average common shares outstanding adjusted for the incremental dilution of
potentially dilutive securities. Options and warrants to purchase approximately
1,112,000 and 1,378,000 shares of common stock were outstanding as of December
31, 2003 and 2002, respectively. The basic weighted average shares are 7,175,105
shares for both the 2003 and 2002 periods. The diluted weighted average shares
are 7,215,492 and 7,175,105 for the 2003 and 2002 periods, respectively. Options
whose exercise price is less than the average market price of the common shares
during the period are included in weighted average shares as common stock
equivalents. Periods that do not include common stock equivalents is due to the
options and warrant prices being greater than the average market price of the
common shares during the period or due to the effect being anti-dilutive. See
Note 10 to the consolidated financial statements.

      The basic and diluted income per share for the year ended December 31,
2003 is $0.33. The basic and diluted (loss) per share for the year ended
December 31, 2002 is $(3.20), which includes basic and diluted income per share
before cumulative effect of accounting change of $0.10 and basic and diluted
(loss) per share for a cumulative effect of accounting change of $(3.30),
resulting from the goodwill impairment charge associated with the implementation
of SFAS 142. See Note 5 to the consolidated financial statements for the
recognition of an impairment of the carrying value of its goodwill in 2002, in
accordance with SFAS 142.

      YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

            REVENUE

      Total revenue decreased $6.1 million, or 2.2% to $269.7 million for the
year ended December 31, 2002 from $275.8 million for the year ended December 31,
2001. Adjusting for the sale of the Morristown Lincoln Mercury dealership ($0.2
million) in January 2001 to Lincoln Mercury, the decrease is $5.9 million. This
decrease was primarily due to decreased sales of used vehicles sold at retail
($13.2 million) primarily due to a decrease of 745 units, partially offset by
increased new vehicle sales ($6.0 million) primarily due to an increase of 206
units, and increased sales of used vehicles sold at wholesale ($1.8 million).
New vehicle sales were helped by the continuation of consumer financing deals,
such as zero percent financing, which in turn contributed to the decrease in
used vehicle sales.

      Revenue from the sale of new vehicles increased $5.9 million, or 3.7% to
$164.7 million for the year ended December 31, 2002 from $158.8 million for the
year ended December 31, 2001. Adjusting for the sale of the Morristown Lincoln
Mercury dealership ($0.1 million) in January 2001 to Lincoln Mercury, the
increase is $6.0 million. The increase is primarily due to increases at
Hometown's Toyota ($3.1 million), Chevy ($4.5 million) and Mazda ($2.7 million)
dealerships partially offset by decreases at Hometown's Lincoln Mercury
dealerships ($4.6 million). The Toyota increase was primarily due to an
additional 128 units sold in 2002 compared to 2001 of which 110 units were
attributable to fleet sales ($1.3 million). The remaining increase of $1.8
million was attributable to both an increase of 18 units ($0.4 million) and a
2.2% increase in the average selling price ($1.4 million). The increase in the
Chevy dealership was due to the sale of 189 additional units sold in 2002 ($4.7
million) compared to 2001, partially offset by a 1.3% decrease in average
selling price in 2002 ($0.2 million). The increase in the Mazda dealership was
due to the sale of 131 additional units sold in 2002 ($3.0 million) compared to
2001, partially offset by a decrease of 5.4% in average selling price in 2002
($0.3 million) compared to 2001. The decreases at the Lincoln Mercury
dealerships were primarily due to a decrease of 237 units sold in 2002 compared
to 2001. This was net of an increase of 99 livery units ($3.7 million).
Excluding livery units, the Lincoln Mercury dealerships had decreased revenue of
$8.3 million, primarily due to a decrease of 336 units. This represents a 24.9%
decrease in units from the 2001 period.


                                       29
<PAGE>

      Revenue from the sale of used vehicles decreased $11.4 million, or 13.6%
to $72.5 million for the year ended December 31, 2002 from $83.9 million for the
year ended December 31, 2001. The effect from the sale of the Morristown Lincoln
Mercury dealership in January 2001 to Lincoln Mercury was minimal. This decrease
was primarily attributable to a decrease of 990 units of which 745 were units
sold at retail. Most Hometown dealerships experienced decreases in this area. A
Lincoln Mercury / Mazda dealership accounted for $4.5 million of this decrease.
This was primarily due to the dealership reducing emphasis on its high-end used
car line during the second quarter of 2002, as Hometown experienced a
significant drop off in demand for its high-end used car line and increased
weakness on financing for these vehicles as the economy has weakened. Although
Hometown still sells high-end used cars, it is not expected to be a significant
portion of revenues from sales of used cars at retail. The Toyota dealerships
accounted for a $2.6 million decrease due to a decrease of 267 units ($3.7
million) sold at retail partially offset by a slight increase in average selling
price ($0.1 million) and in units sold at wholesale ($1.0 million). The Ford
dealership had a decrease of $1.8 million, primarily due to a decrease of 144
units ($2.0 million) sold at retail partially offset by a slight increase in
average selling price ($0.1 million) and in units sold at wholesale ($0.1
million). The Chevy dealership had a decrease of $0.9 million, comprised of a
decrease of 137 units ($1.4 million) sold at retail, partially offset by a 14.1%
increase in average selling price ($0.8 million). In addition, Chevy had a
decrease in units sold at wholesale ($0.3 million). The Jeep dealerships had a
decrease of $1.5 million, due to a decrease of 35 units ($0.5 million) sold at
retail partially and a decrease in average selling price ($0.5 million) and in
units sold at wholesale ($0.5 million).

      Parts and service sales revenue decreased $1.1 million, or 4.3% to $24.3
million for the year ended December 31, 2002 from $25.4 million for the year
ended December 31, 2001. Hometown's Toyota dealerships increased $0.5 million,
while all other dealerships decreased $1.6 million from the prior year. One of
these dealerships had undergone construction of a new showroom, which Hometown
believes negatively impacted the amount of traffic in the service department.
This dealership accounts for $0.7 million of the decrease. Another dealership
accounted for a decrease of $0.5 million. The effect from the sale of the
Morristown Lincoln Mercury dealership in January 2001 to Lincoln Mercury was
minimal.

      Other dealership revenues increased $0.7 million, or 9.2% to $8.3 million
for the year ended December 31, 2002 from $7.6 million for the year ended
December 31, 2001. This increase was attributable to other revenues generated
from new car sales such as finance, insurance and extended service contract
income partially offset by decreases in other dealership revenues for used
vehicles. The effect from the sale of the Morristown Lincoln Mercury dealership
in January 2001 to Lincoln Mercury was minimal.

      GROSS PROFIT

      Total gross profit decreased $1.1 million, or 2.8%, to $38.7 million for
the year ended December 31, 2002 from $39.8 million for the year ended December
31, 2001. This decrease was primarily attributable to a decrease in gross profit
on used vehicles of $1.0 million, a decrease in parts and service gross profit
of $0.6 million and a decrease in new vehicle gross profit of $0.1 million
partially offset by an increase in other dealership gross profit of $0.7 million
discussed above. The effect on all components of gross profit from the sale of
the Morristown Lincoln Mercury dealership in January 2001 to Lincoln Mercury was
minimal. Gross profit percentage for Hometown was 14.3% in 2002 compared to
14.4% in the 2001 period. Adjusting both periods for Toyota fleet sales,
discussed in new vehicles below and the sale of Morristown Lincoln Mercury,
gross profit percentage was 14.7% in the 2002 and 2001 periods. The discussions
that follow adjust for the sale of the Morristown Lincoln Mercury dealership.


                                       30
<PAGE>

      Gross profit on the sale of new vehicles decreased $0.1 million, or 1.0%,
to $10.4 million for the year ended December 31, 2002 from $10.5 million for the
year ended December 31, 2001. Gross profit percentage for 2002 was 6.3% compared
to 6.6% for 2001. Adjusting for Toyota fleet sales in both periods, gross profit
percentage was 6.6% and 6.9% in the 2002 and 2001 periods, respectively. The
Lincoln Mercury dealerships had a $0.3 million decrease in gross profit caused
by a decrease of 237 units partially offset by a 6.6% increase in gross profit
per unit. This decrease is net of an increase of 99 livery units, which
accounted for an increase of $0.2 million in gross profit at the Lincoln Mercury
dealerships. Offsetting this is increased volume (189 units) and a 6.6% increase
in gross profit per unit at the Chevy dealership generated an additional $0.3
million gross profit in 2002 compared to 2001. The remaining dealerships
combined for a net decrease in gross profit of $0.1 million generated from a
7.6% decrease in gross profit per unit ($0.5 million) partially offset by an
increase of 254 units ($0.4 million).

      Gross profit on the sale of used vehicles decreased $1.0 million, or
13.0%, to $6.7 million for the year ended December 31, 2002 from $7.7 million
for the year ended December 31, 2001. This decrease was primarily attributable
to a decrease of 990 units of which 745 were sold at retail. Gross profit
percentage was 9.2% for both periods. As discussed in revenues above, most
Hometown dealerships experienced decreases in this area. A Lincoln Mercury /
Mazda dealership accounted for $0.8 million of this decrease. This was primarily
due to the dealership reducing emphasis on its high-end used car line during the
second quarter of 2002, as Hometown experienced a significant drop off in demand
for its high-end used car line and increased weakness on financing for these
vehicles as the economy has weakened. Although Hometown still sells high-end
used cars, it is not expected to be a significant portion of revenues from sales
of used cars at retail. The Toyota and Ford dealerships accounted for a decrease
of $0.4 million primarily due to a decrease of revenues discussed above. The
Chevy dealership was down slightly due to a decrease of 389 units ($0.3
million), 137 unit decrease at retail and 252 unit decrease at wholesale, that
was offset by an increase in gross profit per unit ($0.3 million). The Jeep
dealerships generated an additional gross profit of $0.1 million due to
increased gross profit per unit partially offset by a decrease in units.

      Parts and service gross profit decreased $0.6 million or 4.3%, to $13.3
million for the year ended December 31, 2002 from $13.9 million for the year
ended December 31, 2001. The decrease was primarily attributable to decreased
revenues discussed above. Related gross profit margin was 54.7% and 54.8% for
the year ended December 31, 2002 and 2001, respectively.

      AMORTIZATION OF GOODWILL

      According to SFAS 142, the Company ceased recording goodwill amortization
on January 1, 2002. Goodwill amortization was $0.7 million for the year ended
December 31, 2001. See Note 5 to the consolidated financial statements.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

      Selling, general and administrative expenses decreased $0.9 million, or
2.6%, to $34.2 million for the year ended December 31, 2002 from $35.1 million
for the year ended December 31, 2001. The decrease is primarily due to higher
reserves of $0.8 million in the 2001 period compared to 2002. Other decreases in
costs in 2002 compared to 2001 are advertising and promotion costs of $0.2
million, salaries and related taxes of $0.2 million, and data processing costs
of $0.1 million. These decreases were partially offset by an increase in
employee benefits of $0.1 million and increased insurance costs of $0.2 million.


                                       31
<PAGE>

      INTEREST INCOME

      Interest income decreased to $43,000 for the year ended December 31, 2002
from $90,000 for the year ended December 31, 2001. The decrease is primarily the
result of higher interest rates in 2001 compared to 2002. Partially offsetting
this was the investing of excess cash in interest bearing accounts effective
with the implementation of the floor plan agreement with Ford Motor Credit Corp.
("FMCC") in March 2001. Hometown's previous credit agreement provided that
Hometown apply excess cash against the outstanding floor plan liability.

      INTEREST EXPENSE

      Interest expense decreased $1.0 million, or 23.8%, to $3.2 million for the
year ended December 31, 2002 from $4.2 million for the year ended December 31,
2001. The decrease is primarily attributable to a decrease in floor plan
interest expense, which decreased due to a reduction in interest rates from the
year ended December 31, 2001.

      OTHER INCOME

      Included in other income for the year ended December 31, 2002 is $40,000
received from insurance claims. Included in other income for the year ended
December 31, 2001 is a $254,000 gain on sale of the Morristown Lincoln Mercury
dealership to Lincoln Mercury in January 2001.

      OTHER EXPENSE

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

      VALUATION ADJUSTMENT FOR CARDAY, INC.

      On October 18, 2001, CarDay, Inc. ceased operations. Hometown owned
7,380,000 shares of CarDay, Inc. As a result of CarDay, Inc. ceasing operations,
Hometown now considers the investment to be permanently and totally impaired,
and it is not anticipated that any shareholders will receive any distributions
from the dissolution of CarDay, Inc. The entire investment in CarDay, Inc. of
$3,258,000 less an associated deferred tax liability of $1,175,000 was charged
against income in the quarter ended September 30, 2001. The charge has the
effect of reducing net income for the year ended December 31, 2001 by $2,083,000
and reducing Earnings per Share, fully diluted for the year by $0.32. Excluding
the charge, net loss for 2001 was $(53,000) or less than $(0.01) per share fully
diluted. The charge did not affect cash, cash flow from operations, or liquidity
and capital resources.

      PROVISION (BENEFIT) FOR INCOME TAX

      The effective income tax rate was 38% for the year ended December 31, 2002
and 32% for the year ended December 31, 2001. The primary difference in the
effective tax rates for the two periods is primarily non-deductible goodwill
amortization in the 2001 period. According to SFAS 142, Hometown ceased
recording goodwill amortization on January 1, 2002, and in 2002, recognized the
impairment of the carrying value of its goodwill. Hometown has a deferred tax
asset of $0.9 million, net of a valuation allowance, related to its net
operating losses. The net operating losses begin to expire in 2017. Hometown
believes this deferred tax asset will be realized within the next three years
based on current projections.

      INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE

      Income (loss) before cumulative effect of accounting change increased $2.9
million to income of $0.8 million for the year ended December 31, 2002 from a
loss of $(2.1) million for the year ended December 31, 2001. The increase is
primarily due to the valuation adjustment for Carday, Inc. in the 2001 period.
See other changes described above.


                                       32
<PAGE>

      CUMULATIVE EFFECT OF ACCOUNTING CHANGE

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

      NET INCOME (LOSS)

      Net loss increased $20.8 million to $(22.9) million for the year ended
December 31, 2002 from a loss of $(2.1) million for the year ended December 31,
2001. The increased loss is primarily due to the write-off of the carrying value
of goodwill in the 2002 period partially offset by the valuation adjustment for
Carday, Inc. in the 2001 period. See other changes described above.

      EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED AND WEIGHTED AVERAGE SHARES

      "Basic earnings (loss) per share" is computed by dividing net income
(loss) by the weighted average common shares outstanding. "Diluted earnings
(loss) per share" is computed by dividing net income (loss) by the weighted
average common shares outstanding adjusted for the incremental dilution of
potentially dilutive securities. Options and warrants to purchase approximately
1,378,000 and 1,283,000 shares of common stock were outstanding as of December
31, 2002 and 2001, respectively. The options and warrants were not included in
the computation of diluted earnings (loss) per share because the option and
warrant prices were greater than the average market price of the common shares
or the effect would have been anti-dilutive.

      The basic and diluted (loss) per share for the year ended December 31,
2002 is $(3.20), which includes basic and diluted income per share before
cumulative effect of accounting change of $0.10 and basic and diluted (loss) per
share for a cumulative effect of accounting change of $(3.30), resulting from
the goodwill impairment charge associated with the implementation of SFAS 142.
The basic and diluted (loss) per share for the year ended December 31, 2001 is
$(0.32). See Note 5 to the consolidated financial statements for the effect of
discontinuing the recording of goodwill amortization effective January 1, 2002
and recognition of an impairment of the carrying value of its goodwill in 2002,
in accordance with SFAS 142.

      The weighted average shares, basic and diluted, for the years ended
December 31, 2002 and 2001 are 7.2 million shares and 6.6 million shares,
respectively. The weighted average shares for the basic and diluted calculation
are the same due to Hometown incurring a net loss in both periods.

CYCLICALITY

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


                                       33
<PAGE>

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 2003
and 2002, inflation did not have a significant effect on the results of Hometown
during those periods.

LIQUIDITY AND CAPITAL RESOURCES

      Cash and Cash Equivalents

      Total cash and cash equivalents at December 31, 2003 and 2002, was $5.6
million and $3.6 million, respectively.

      Cash Flow from Operations

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

<TABLE>
<CAPTION>
                                                          For the years ended December 31,
                                                          --------------------------------
                                                             2003      2002      2001
                                                            -------   -------   -------
                                                                  (in thousands)
<S>                                                         <C>       <C>       <C>
Net cash provided by operating activities                   $ 4,273   $ 3,386   $ 3,278
Net cash provided by (used in) investing activities             132    (2,439)      350
Net cash provided by (used in) financing activities          (2,390)   (1,769)      232
                                                            -------   -------   -------
Net increase (decrease) in cash and cash equivalents        $ 2,015   $  (822)  $ 3,860
                                                            =======   =======   =======
</TABLE>

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

      For the year ended December 31, 2002, net cash provided from operations of
$3.4 million is primarily due to: (i) the net loss of $(22.9) million plus
non-cash items of $25.5 million, including cumulative effect of accounting
change of $23.7 million and (ii) the increase in floor plan liability in excess
of the increase in inventory of $0.7 million. Reductions in accounts receivable,
prepaid expenses and other assets were mostly offset by reductions in accounts
payable and accrued expenses. Net cash used in investing activities of $2.4
million is primarily due to capital expenditures associated with the
construction of a new showroom at our Framingham, Massachusetts dealership. Net
cash used in financing activities of $1.8 million is primarily due to principal
payments of long-term debt and capital lease obligations.


                                       34
<PAGE>

      Capital Expenditures

      Capital expenditures for 2004 are expected to be $0.4 million, consisting
of equipment purchases and building and leasehold improvements.

      Use of Estimates and Critical Accounting Policies

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

      Revenue Recognition

      Hometown adopted EITF 00-21, "Revenue Arrangements with Multiple
Deliverables," in the third quarter of fiscal 2003. The impact of adopting EITF
00-21 was not material to Hometown's results of operations.

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

      Finance, Insurance and Service Contract Income Recognition

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

      Connecticut dealerships operate under state laws, which make the dealers
responsible for providing warranty service and insurance in the event of default
by the insurance carriers. Accordingly, commissions on insurance and service
contract sales are required to be recognized over the life of the related
insurance product. For these dealerships, Hometown records the revenue as a
liability and amortizes the amount into revenue over a five-year period. At
December 31, 2003 and 2002, Hometown had $1,225,000 and $1,237,000 of related
deferred revenue, respectively. During 2003, these dealerships generated
approximately $501,000 of related warranty service and insurance revenue, which
was deferred. During the same period, approximately $513,000 of deferred revenue
was amortized to Other Revenues, net. At December 31, 2003, Hometown also had
other deferred revenue of $112,000.


                                       35
<PAGE>

      Hometown 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. For finance fees, if a customer were to
terminate their contract prior to the scheduled maturity, generally three to
five years, Hometown may be charged back for a portion of the finance fee
received. The time period whereby Hometown is subject to chargebacks is
generally from 90 days to 180 days. For certain other contracts Hometown is
subject to chargebacks for the life of the loan. Generally, if a customer makes
their first three to six payments and subsequently pays off the loan, Hometown
will not be charged back by the financing institution. Hometown pays for this in
the form of a reduction of the finance fee. In the case of insurance or service
contracts, Hometown is subject to chargebacks for the life of the related
insurance policy or service contract. In the case of early termination, the
vendor will bill us back a pro-rated portion of our commission. The reserves for
future charge backs are based on historical operating results and the
termination provisions of the applicable contracts. At the time of sale,
Hometown records finance, insurance and service contract income, net of
estimated chargebacks. This is included in other dealership revenue in the
accompanying consolidated financial statements.

      Receivables

      Hometown had $6.1 million in accounts receivable, net at December 31, 2003
compared to $4.9 million at December 31, 2002. The majority of those
receivables, $3.1 million and $2.8 million as of December 31, 2003 and 2002,
respectively, are due from finance companies that provide or secure financing
for customer purchases, and primarily represent contracts-in-transit. These
amounts are typically received within seven days of the transaction. Of the
remaining amount, $1.7 million and $1.3 million as of December 31, 2003 and
2002, respectively, represents amounts due from manufactures for such items as
warranty claims and incentive reimbursements. Additional amounts are parts,
service and other trade receivables. In assessing our allowance for doubtful
accounts, we consider historical losses as well as current performance with
respect to past due accounts. The allowance for doubtful accounts is $0.3
million and $0.2 million at December 31, 2003 and 2002, respectively.

      Inventories

      Hometown had $37.8 million in inventories, net at December 31, 2003
compared to $39.2 million at December 31, 2002. The majority of inventory, $28.4
million and $29.2 million as of December 31, 2003 and 2002, respectively, is new
vehicle inventory. New, used and demonstrator vehicle values are stated at the
lower of cost or market, determined on a specific unit basis. Parts and
accessories are stated at the lower of cost (determined on a first-in, first-out
basis) or market. Hometown assesses the lower of cost or market reserve
requirement for vehicles, on an individual unit basis, taking into consideration
historical loss rates, the age and composition of the inventory and current
market conditions. The lower of cost or market reserves were $0.7 million and
$0.6 million at December 31, 2003 and 2002, respectively.

PRIVATE EQUITY FINANCING

      On July 23, 2001, the Board of Directors voted in favor of raising up to
$1.5 million in a private equity financing through the sale of Units to
accredited investors at a price of $2.00 per Unit. Each Unit consists of two
shares of Class A Common Stock of Hometown plus a warrant to purchase one
additional share at an exercise price of $1.20 per share, exercisable within a
three-year period.

FLOOR PLAN FINANCING

      Since March 15, 2001, Hometown has a floor plan line of credit at each
dealership with Ford Motor Credit Corporation ("FMCC"). The FMCC floor plan
agreement provides financing for vehicle purchases and is secured by and
dependent upon new and used vehicle inventory levels. Maximum availability under
the FMCC agreement is a function of new and used car sales and is not a
pre-determined amount. As of December 31, 2003 Hometown's floor plan liability
with FMCC is $38.0 million. The FMCC agreement has no set maturity date and it
is the intention of Hometown to continue with this financing on an ongoing
basis.


                                       36
<PAGE>

      For the first year of the agreement, through May 2002, the FMCC floor plan
loans carried an interest rate of prime less 0.75% for new vehicles and prime
less 0.50% for used vehicles. From March 15, 2001 through December 31, 2001,
interest ranged from 4.00% to 7.25% for new vehicles and from 4.25% to 7.50% for
used vehicles. From January 1, 2002 through May 31, 2002, interest was
approximately 4.0% for new vehicles and 4.25% for used vehicles.

      In June 2002, Hometown renewed its floor plan agreement with FMCC and is
now subject to the FMCC standard financing agreement which provides for floor
plan loans for new and used vehicles that have variable interest rates that
increase or decrease based on movements in the prime or LIBOR borrowing rates
and FMCC financing volume. At December 31, 2003, interest rates were
approximately 3.75% for new vehicles and 5.75% for used vehicles. At December
31, 2002, interest rates were approximately 4.25 % for new vehicles and 6.0% to
6.5% for used vehicles. The average interest rate was approximately 4.25% for
2003 compared to 5.20% for 2002.

      Prior to March 15, 2001, Hometown had a revolving line of credit with GE
Capital Corporation ("GECC"). The GECC agreement provided financing for
Hometown's vehicle purchases as well as operating expenses. Interest rates on
the GECC floor plan arrangements ranged from 9.2% to 9.9% during 2001, through
its close in March 2001. The arrangement included a swing line that handled
daily loan activity. The balance of the swing line was swept into the floor plan
line once monthly. The interest rates on the swing line ranged from 9.1% to 9.6%
during 2001.

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

OTHER INDEBTEDNESS

      In addition to floor plan financing, Hometown has long-term debt and
capital lease obligations of $13.1 million, which is primarily attributable to
real estate mortgage notes payable of $7.9 million due in monthly installments
including interest at 10.0% that matures in May 2014, real estate capital lease
obligations of $4.2 million due in monthly installments including interest at
10.0% that matures in March 2013, and capital lease obligations on rental
vehicles of $0.8 million due in monthly installments including interest ranging
from 3.8% to 5.5% that matures through March 2008.

      As of December 31, 2003, Hometown has the following contractual
obligations:

<TABLE>
<CAPTION>
                                           (In thousands)
                           Total      2004      2005      2006      2007      2008   Thereafter
                          -------   -------   -------   -------   -------   -------  ----------
<S>                       <C>       <C>       <C>       <C>       <C>       <C>       <C>
 Floor Plan               $38,003   $38,003
 Long term debt and
 capital lease
 obligations              $13,072   $   996   $ 1,053   $ 1,066   $ 1,089   $ 1,045   $ 7,823
 Operating leases:
      Third parties       $ 3,203   $   996   $   800   $   548   $   486   $   373   $    --
        Related parties   $10,410   $ 1,041   $ 1,041   $ 1,041   $ 1,041   $ 1,041   $ 5,205
                          -------   -------   -------   -------   -------   -------   -------
 Total                    $64,688   $41,036   $ 2,894   $ 2,655   $ 2,616   $ 2,459   $13,028
                          =======   =======   =======   =======   =======   =======   =======
</TABLE>


                                       37
<PAGE>

COMPANY GUARANTEES

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

      One of Hometown's dealerships, prior to fiscal 2000, had entered into
various arrangements whereby Hometown guaranteed or partially guaranteed loans
advanced by financial institutions to certain customers as follows:

      (i)   Portfolio of 7 customer's limousine vehicle loans granted by Ford
            Motor Credit Co. As of December 31, 2003, Hometown fully and
            partially guaranteed limousine vehicle loans aggregating
            approximately $26,000.

      (ii)  Portfolio of 4 vehicle loans, granted by a financial institution, to
            various customers of the dealership with below average credit. As of
            December 31, 2003, Hometown fully guaranteed vehicle loans
            associated with these customers aggregating approximately $7,000.

      The guarantees in (i) and (ii) above are related to loans whereby Hometown
is required to pay the remaining loan balance upon default by the customer. As
of December 31, 2003, Hometown has reserved $11,000 against a total maximum
payout of $33,000 for these loans. The reserve amount represents loans that are
currently delinquent. Hometown would expect to realize proceeds from the sale of
these vehicles upon repossession of such vehicle. The amount of proceeds, if
any, is undetermined due to not knowing the condition of the vehicles.

      There are also 6 loans whose liens were not properly perfected totaling
approximately $71,000 as of December 31, 2003. Hometown will be required to pay
the remaining loan balance should the customers default on their payments.
Hometown is working to perfect these liens and has taken steps to prevent this
from occurring in the future. Hometown has reserved $13,000 for these loans. The
reserve amount represents loans that are currently delinquent. Hometown would
expect to realize proceeds from the sale of these vehicles upon repossession of
such vehicle. The amount, if any, is undetermined due to not knowing the
condition of the vehicle.

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

      In connection with the acquisition in 1999 of real estate used by Baystate
Lincoln Mercury, Hometown guaranteed the mortgage debt of Rellum Realty Company.
The 1999 guaranty was given in substitution for a February 1998 guaranty of that
debt by the Muller Group, a subsidiary of Hometown. In the event of default by
Rellum Realty Company, Hometown is required to make the mortgage payments, but
does not take ownership of the property. As of December 31, 2003 the mortgage
debt balance is $4.7 million. Hometown makes annual lease payments of $756,000
to the landlord, increasing to approximately $864,000 effective January 1, 2004.
The annual mortgage payments made by the landlord total approximately $774,000.
The mortgage matures March 2013. The lease was recorded as a capital lease. The
capital lease obligation is $4.2 million at December 31, 2003. See Notes 7 and 8
to the consolidated financial statements.

COMPANY WARRANTIES

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


                                       38
<PAGE>

      Hometown records a reserve referred to as "policy" for used vehicle
warranties and the labor portion of service warranties based on available
historical information. At December 31, 2003 and 2002, Hometown has a reserve of
$175,000 and $172,000, respectively. The reserve is based on the last three
months of used vehicle units sold and the average cost of repairs over the last
twelve months. While Hometown believes its estimated liability for product
warranties is adequate and that the judgment applied is appropriate, the
estimated liability for product warranties could differ materially from future
actual warranty costs.

<TABLE>
<CAPTION>
                                 Balance At        Additions To Costs                      Balance At
Reserve for Policy Work       Beginning of Year       and Expenses         Deductions     End of Year
---------------------------  ------------------     ----------------     -------------   --------------
<S>                               <C>                   <C>                <C>              <C>
  Year Ended 12/31/03             $172,000              $785,000           $(782,000)       $175,000
  Year Ended 12/31/02             $226,000              $800,000           $(854,000)       $172,000
  Year Ended 12/31/01             $158,000              $947,000           $(879,000)       $226,000
</TABLE>

      Other revenues generated by sales of extended service plans, finance,
insurance and other do not have any Hometown warranties attached to the sale,
except for certain sales in Connecticut dealerships discussed in "Finance,
Insurance and Service Contract Income Recognition" above.

FRANCHISE AGREEMENTS

      On March 8, 2004, Toyota Motor Sales, U.S.A., Inc. notified Hometown that
the current Toyota Dealer Agreement was extended through June 18, 2004. Hometown
is currently reviewing the proposed new Toyota Dealer Agreement and anticipates
executing that agreement prior to the expiration of the current agreement.
Previously on March 13, 2003, Hometown was notified by Toyota Motor Sales,
U.S.A., that Hometown must correct certain operational deficiencies or make
substantial progress toward rectifying such deficiencies. Toyota had previously
expressed concerns that the financial resources of the Toyota dealerships were
being used to finance the cash flow deficits of affiliated companies and that
because of this the financial health of the Toyota dealerships were
detrimentally affected by a net working capital deficiency. Toyota requested and
Hometown provided a written action plan and consolidated financial forecast.
Toyota also expressed concerns about the impact of Ford Motor Credit's financing
terms upon the Toyota dealerships and the existing litigation, including the
Vergopia's as discussed above in Item 3. - Legal Proceedings, and in Note 14 to
the consolidated financial statements. Hometown developed and implemented plans
to correct the operational deficiencies that would bring Hometown into
compliance. Hometown has obtained written confirmations from Ford Motor Credit
in response to Toyota's requests for information relating to financing
arrangements. In addition, Hometown has improved net working capital through the
sale of a Chrysler/Jeep Sales and Service Franchise (Note 17 to the consolidated
financial statements) and advances on warranty income from Hometown's Extended
Service Plan vendor. Hometown has been in regular contact with Toyota to review
the efforts of Hometown to resolve the deficiencies alleged by Toyota. The two
Toyota dealerships for the fiscal year ended December 31, 2003 had combined
revenues of $105.1 million and pre-tax income before allocation of corporate
costs of $2.3 million. Hometown believes that it has corrected the alleged net
working capital deficiency for the Toyota dealerships, that it has alleviated
the concerns expressed by Toyota and that Hometown will enter into a new dealer
agreement with Toyota Motor Sales, U.S.A prior to the expiration of the current
dealer agreement.


                                       39
<PAGE>

ACQUISITIONS AND DISPOSITIONS

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

      In January 2001, Hometown sold the franchise for its Morristown, NJ store
back to Lincoln Mercury for $0.7 million in cash. Hometown received the purchase
price plus $40,000 for parts returned, and paid out a broker's commission of
$35,000. The transaction resulted in Hometown recording a $254,000 gain on the
sale, which is included in Other Income.

      Hometown guaranteed the stock that was issued in connection with the
Toyota of Newburgh acquisition in 1999 would have a market value of at least
$1,000,000 by March 31, 2001. On June 28, 2001, an agreement was signed with the
former owners settling the guarantee whereby Hometown issued 200,000 shares of
Hometown stock and paid $240,000, paid in monthly installments through December
31, 2002 and a monthly profit sharing payment equal to 20% of Newburgh Toyota's
monthly pre-tax income over $57,142 for the period from April 1, 2001 to
December 31, 2002.

RELATED PARTY TRANSACTIONS

      Hometown has leased from various affiliates the premises occupied by
certain of its dealerships and guaranteed the related mortgage debt of certain
dealerships. Each of the governing leases became effective as of the closing of
the initial public offering, has a term expiring in 2013, is on a triple net
basis and provides for a consumer price index ("CPI") increase to the base rent
for the five-year periods commencing January 1, 2004 and 2009. Total expense for
operating leases and rental agreements with related parties was $0.9 million for
the year ended December 31, 2003 and future minimum payments under these lease
agreements as of December 31, 2003 is $10.4 million. Two of the leases are
treated as capital leases. Total payments for these leases were $0.8 million for
the year ended December 31, 2003. This practice is fairly common in the
automotive retail industry. See Item 13 - "Certain Relationships and Related
Transactions".

      At December 31, 2003, $77,000 is due from related parties, including a
non-interest bearing note receivable ($49,000) from a company owned by an
officer of Hometown. The note is being paid to Hometown at $3,000 per month.
Other related party receivables are being paid back at approximately $800 per
month. See Note 9 to the consolidated financial statements

LITIGATION

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


                                       40
<PAGE>

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

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

      Litigation counsel for Hometown has also been advised that the Vergopias
have filed a third action against Hometown and its Chief Executive Officer
claiming defamation and tortious interference with contract arising out of a
letter allegedly sent to one of Hometown's automobile manufacturers. As of March
11, 2004 neither Hometown nor its Chief Executive Officer have received service
of process in this third action. However, Hometown presently believes it
involves damage claims that are similar to those already made in the two pending
actions in the Superior Court of New Jersey in Bergen County.

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

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


                                       41
<PAGE>

      In July 2002, Hometown received notice of a complaint filed by the Trust
Company of New Jersey ("Trust Company") for payment under certain guaranty
agreements allegedly made by Hometown's wholly-owned subsidiary Westwood Lincoln
Mercury Sales, Inc. ("Westwood") in favor of Trust Company in connection with a
sale of vehicles in 1998. Trust Company was seeking approximately $390,000 plus
other costs totaling approximately $70,000. On January 27, 2004, without
admissions of liability by any party, Hometown and Trust Company reached a
settlement agreement whereby Hometown will pay Trust Company $162,500 in
installments, payable through January 2007. This liability is included in
Accounts Payable and Accrued Expenses in Hometown's Consolidated Balance Sheet
at December 31, 2003.

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      We are exposed to market risk from changes in interest rates on our
amounts outstanding under our floor plan financing arrangement, which bears
interest at variable rates based on the prime or LIBOR borrowing rates. Based on
floor plan amounts outstanding at December 31, 2003 of $38.0 million, a 1%
change in the borrowing rate would result in a $0.4 million change to annual
floor plan interest expense.

      At December 31, 2003, Hometown invested $4.1 million of excess cash, of
which $0.7 million was invested in money market accounts paying a weighted
average interest rate of 0.63% at December 31, 2003, and $3.4 million was
invested in a Ford Motor Credit Company cash management account paying interest
of 5.00% at December 31, 2003. The cash management account interest rate is tied
to the rate charged on Hometown's floor plan financing arrangement.

NEW ACCOUNTING PRONOUNCEMENTS

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


                                       42
<PAGE>

      In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure,
an amendment of SFAS 123. SFAS 148 amends SFAS 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. The three methods allowed are
the (i) prospective method, (ii) modified prospective method and (iii)
retroactive restatement method. The prospective method was previously the only
permitted transition method under SFAS 123. Under this method, the recognition
provisions apply to all employee awards granted, modified or settled after the
beginning of the fiscal year of adoption of SFAS 123. The company would continue
to use the Opinion 25 intrinsic value method to account for all prior awards.
Under the modified prospective method, SFAS 123 fair value based accounting is
applied to all awards granted, modified or settled in fiscal years beginning
after December 15, 1994, the effective date of SFAS 123, but only for measuring
compensation cost for the year of change and future years. No prior years are
restated. Under the retroactive restatement method, the company applies the fair
value method to all awards granted, modified, or settled in fiscal years
beginning after December 15, 1994. The company would be required to restate
compensation cost and net income for all income statements presented.
Restatement of periods prior to the presented is permitted but not required.

      In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement is effective for financial statements with fiscal years ending after
December 15, 2002. As allowed by SFAS 148, Hometown has elected not to use one
of the alternative methods of transition available for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.
Hometown accounts for this plan under the recognition and measurement principles
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", and related Interpretations. See Note 2 and Note 16 to the
consolidated financial statements for additional disclosure.

      In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of SFAS 5, 57 and 107
and rescission of FASB Interpretation No. 34. This Interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements in this Interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of FASB
Interpretation No. 45 did not have a material impact on Hometown's financial
statements.

      In July 2002, the FASB issued SFAS 146, Accounting for Restructuring
Costs. SFAS 146 applies to costs associated with an exit activity (including
restructuring) or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
contracts, and relocating plant facilities or personnel. Under SFAS 146, a
company will record a liability for a cost associated with an exit or disposal
activity when that liability is incurred and can be measured at fair value. SFAS
146 will require a company to disclose information about its exit and disposal
activities, the related costs, and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS
146, a company may not restate its previously issued financial statements and
the new Statement grandfathers the accounting for liabilities that a company had
previously recorded under Emerging Issues Task Force Issue 94-3. The adoption of
SFAS 146 did not have a material impact on Hometown's financial statements.


                                       43
<PAGE>

      In November 2002, the EITF reached a final consensus on EITF Issue No.
02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" ("EITF Issue No. 02-16"). This issue
addressed the income statement classification of cash consideration received
from a vendor and the recognition criteria for performance-driven vendor rebates
or refunds. This consensus, which was effective for all arrangements entered
into after December 31, 2002, resulted in certain co-op advertising recoveries,
which would previously have been recorded as a reduction of SG&A, being recorded
as a reduction of Cost of Sales, buying and occupancy. We adopted EITF Issue No.
02-16 on January 1, 2003. See Note 12 to the Consolidated Financial Statements
for additional disclosure.

      In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). This
statement amends and clarifies the accounting for derivative instruments and
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." We adopted SFAS No. 149 effective July 1, 2003. There
was no impact to the Company upon the adoption of SFAS No. 149.

      In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 requires certain financial instruments with
characteristics of both liabilities and equity to be classified as liabilities.
We adopted SFAS No. 150 effective July 1, 2003. We did not have any financial
instruments that were classified as equity prior to the adoption of SFAS No. 150
that were required to be reclassified to liabilities.

      In May 2003, the EITF reached a consensus on EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" ("EITF Issue No. 00-21"). This
new accounting rule addressed revenue recognition for revenues derived from a
single contract that contains multiple products or services. The rule provides
additional requirements to determine when such revenues may be recorded
separately for accounting purposes. This statement is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003.
Adoption of EITF Issue No. 00-21 did not have a material impact on Hometown's
financial position or results of operations.

FORWARD LOOKING STATEMENT

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


                                       44
<PAGE>

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

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

NONE

ITEM 9A. CONTROLS AND PROCEDURES

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

      At December 31, 2003, management, with the participation of the CEO and
CFO, evaluated the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon that evaluation and subject to the
foregoing, our management, including the CEO and CFO, concluded that our
disclosure controls and procedures were effective to accomplish their
objectives.

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


                                       45
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

      Information regarding directors and nominees for directors of Hometown is
included under the caption entitled "Election of Directors" in the 2004 Proxy
Statement and is incorporated herein by reference.

      The executive officers and directors of Hometown and their respective ages
as of March 19, 2004 are as follows:

<TABLE>
<CAPTION>
NAME                          AGE      POSITION                                           DIRECTOR SINCE
----                          ---      --------                                           --------------
<S>                           <C>      <C>                                                <C>
Corey Shaker                  46       President, Chief Operating Officer, Chief               1997
                                       Executive Officer and Director
William C. Muller Jr.         52       Regional Vice President - South Division and            1997
                                       Director
Steven Shaker                 35       Regional Vice President - North Division           Not a director
Joseph Shaker                 36       Regional Vice President - East Division and             1997
                                       Director
Charles F. Schwartz           48       Chief Financial Officer                            Not a director
Bernard J. Dzinski, Jr. *     40       Director                                                2003
Steven A. Fournier *          49       Director                                                2002
H. Dennis Lauzon              55       Director                                                2002
Timothy C. Moynahan *         64       Director                                                2002
</TABLE>

--------------
*     Member of Audit, Compensation and Nominating/Governance Committees

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

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

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

      William C. Muller Jr. has been Regional Vice President - South Division
since March 2000. Mr. Muller has been Vice President-New Jersey Operations since
October 1, 1997. In addition, from 1980 he was the President of Muller Toyota,
Inc. and of Muller Chevrolet, Oldsmobile, Isuzu, Inc (both of which are
currently known as Muller Automotive Group, Inc. and Muller Chevrolet, Isuzu,
Inc., respectively.) Under his management, Muller Toyota has been: (a) a 13-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
standards; (b) a 13-time recipient of Toyota Parts Excellence Award; (c) a
9-time winner of the 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.


                                       46
<PAGE>

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

      Joseph Shaker has been Regional Vice President - East Division since 2002.
Mr. Shaker served as President and Chief Executive Officer of CarDay, Inc., an
internet based used vehicle exchange company between 2000 and 2002. He was
President and Chief Operating Officer of Hometown from 1997 to 2000. In
addition, between 1991 and 1997 he served as the Chief Operating Officer of
Shaker's Lincoln Mercury, Shaker's Jeep Eagle and Lincoln Mercury Autocare in
Connecticut. Since 2002 he has served as a member of the Mazda Dealer Advisory
Counsel and was elected as Chairman of the Counsel for 2004. 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 is the brother of Steven Shaker, the Regional VP - North Division, and a
first cousin of Corey Shaker, the Chief Executive Officer and a director of
Hometown. He holds a B.S. (Management) degree from Bentley College.

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

      Bernard J. Dzinski Jr. has been a partner with Charles Heaven & Co., CPA's
since 2000 and was a manager since 1990. He currently serves on the Board of
Directors of the Waterbury Rotary Club and Holy Cross High School, located in
Waterbury, Connecticut. Mr. Dzinski received a Bachelor of Science in Accounting
from Providence College in 1985 and is a Certified Public Accountant. He is a
member of the American Institute of Certified Public Accountants and the
Connecticut Society of Certified Public Accountants.

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

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

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


                                       47
<PAGE>

COMMITTEES OF THE BOARD OF DIRECTORS

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

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

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

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

      Hometown undertakes to provide without charge to any person, upon written
or verbal request of such person, a copy of Hometown's Code of Business Conduct
and Ethics and Code of Ethics. Requests should be directed in writing to Chief
Financial Officer, Hometown Auto Retailers, Inc., 774 Straits Turnpike,
Watertown, CT 06795, or by telephone to (860) 945-6900.


                                       48
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION.

      The following table presents certain information concerning compensation
paid or accrued for services rendered to Hometown in all capacities during the
three years ended December 31, 2003, for the Chief Executive Officer and the
other executive officers of Hometown whose aggregate annual base salary exceeded
$100,000 (collectively, the "Named Executive Officers").

                            COMPENSATION TABLE
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                               ANNUAL COMPENSATION
                       ---------------------------------------------------------------------
NAME AND PRINCIPAL       FISCAL ANNUAL                                                OPTION
POSITION               YEAR COMPENSATION   $ SALARY       BONUS(1)        OTHER       GRANTS
------------------     -----------------   --------       --------       ------       -------
<S>                           <C>          <C>             <C>           <C>          <C>
Corey E. Shaker,              2003         250,000          66,923       16,073           --
President and Chief           2002         250,000              --        6,840       50,000
Executive Officer             2001         250,000(2)           --        7,000       50,000

William C. Muller, Jr         2003         215,000         155,319       17,384           --
Regional Vice                 2002         200,000         101,844        9,673           --
President-South Division      2001         200,000         130,372           --       30,000

Steven Shaker,                2003         125,000              --        3,542           --
Regional Vice                 2002         125,000           1,325        2,600           --
President-North Division      2001         118,600          10,000        2,600       30,000

Joseph Shaker,                2003         200,000          53,461       10,400           --
Regional Vice                 2002(3)      196,350              --        8,000           --
President-East Division

Charles F. Schwartz,          2003         180,000          39,385        5,402       50,000
Chief Financial Officer       2002(4)      160,000          20,000        1,749           --
</TABLE>

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

(2)   Includes amounts paid after year-end.

(3)   Named Regional Vice President-East Division in 2002. Includes compensation
      for entire year.

(4)   Has been Chief Financial Officer since January 2002.


                                       49
<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                       Potential Realizable
                          Number of      Percent of                                   Value At Assumed Annual
                            Shares     Total Options                                   Rates of Stock Price
                          Underlying     Granted to                                   Appreciation for Option
                           Options      Employees in    Exercise                               Term(2)
                          Granted(#)    Fiscal Year       Price                      -------------------------
         NAME                (1)            2003        ($/Share)   Expiration Date      5%             10%
         ----                ---            ----        ---------   ---------------      --             ---
<S>                         <C>             <C>           <C>               <C>        <C>           <C>
Charles F. Schwartz         50,000          100%          $0.34       March 2013       $10,691       $27,094
</TABLE>


(1)   The options vest with respect to one-third of the shares of Common Stock
      covered by the options on each of the first, second and third anniversary
      of the Option Grant Date, March 24, 2003.

(2)   Potential realizable values are net of exercise price but before taxes,
      and are based on the assumption that the Common Stock of Hometown
      appreciates at the annual rate shown (compounded annually) from the date
      of grant until the expiration date of the respective options. All the
      options issued in 2003 were issued at the market price at the date of
      issuance. These numbers are calculated based on Securities and Exchange
      Commission requirements and do not reflect Hometown's projection or
      estimate of future stock price growth. Actual gains, if any, on stock
      option exercises are dependent on the future financial performance of
      Hometown, overall market conditions and the option holder's continued
      employment through the vesting period. This table does not take into
      account any appreciation in the price of the Common Stock from the date of
      grant to the date of this Form 10-K.


                                       50
<PAGE>

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

      The following table summarizes options exercised during fiscal 2003 and
presents the value of unexercised options held by the Named Executive Officers
at fiscal year end:

<TABLE>
<CAPTION>
                                                        NUMBER OF SECURITIES
                                                             UNDERLYING          VALUE OF UNEXERCISED
                                                        UNEXERCISED OPTIONS AT   IN-THE-MONEY OPTIONS AT
                                                           FISCAL YEAR-END          FISCAL YEAR-END
                               ACQUIRED ON     VALUE       EXERCISABLE (E)          EXERCISABLE (E)
 NAME                           EXERCISE      REALIZED    UNEXERCISABLE (U)        UNEXERCISABLE (U)
 ---------------------------   -----------    --------  ----------------------   -----------------------
<S>                                 <C>           <C>            <C>                     <C>
Corey E. Shaker                     --            --             80,000E                 $12,000E
President and Chief                                              50,000U                 $24,000U
Executive Officer

William C. Muller, Jr               --            --             20,000E                 $     0E
Regional Vice President -                                        10,000U                 $     0U
South

Steven Shaker                       --            --             20,000E                 $     0E
Regional Vice President -                                        10,000U                 $     0U
North

Charles F. Schwartz,                --            --             33,333E                 $17,333E
Chief Financial Officer                                          66,667U                 $51,667U
and Secretary
</TABLE>

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

EMPLOYMENT CONTRACTS

      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 Corey E. Shaker, William C. Muller, Jr., Joseph Shaker and Steven Shaker.
While these agreements expired in July 2003, these employees continue to work
for Hometown while new agreements are being negotiated.


                                       51
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

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

1998 STOCK OPTION PLAN

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

EMPLOYEE BENEFIT PLAN

      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. Hometown made contributions of $24,000, $0 and $0 to the Plan for
the years ended December 31, 2003, 2002, and 2001, respectively.

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. In addition, each non-employee Director receives
options to purchase an additional 2,500 shares of Common Stock on the date of
Hometown's annual stockholders' meeting. Such options will have an exercise
price equal to the fair market value of the Common Stock on the date of grant
and will vest one-third upon grant and one-third on each of the first and second
anniversary of the date of grant.

LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION

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


                                       52
<PAGE>

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

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

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

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

                                        COMPENSATION COMMITTEE

                                        Steven Fournier
                                        Chairman


                                       53
<PAGE>

                        COMPARE CUMULATIVE TOTAL RETURN
                      AMONG HOMETOWN AUTO RETAILERS, INC.,
                     NASDAQ MARKET INDEX AND SIC CODE INDEX

                              [PERFORMANCE GRAPH]

<TABLE>
<CAPTION>
                                      1998       1999       2000        2001        2002      2003
                                     ------     ------     ------       -----      -----      -----
<S>                                  <C>         <C>        <C>         <C>         <C>       <C>
HOMETOWN AUTO RETAILERS, INC.        100.00      82.61      11.59       17.86       8.81      27.83
SIC CODE INDEX                       100.00      63.51      42.10      102.67      89.81     147.17
NASDAQ MARKET INDEX                  100.00     176.37     110.86       88.37      61.64      92.68
</TABLE>

                     ASSUMES $100 INVESTED ON DEC. 31, 1998
                          ASSUMES DIVIDEND REINVESTED
                        FISCAL YEAR ENDING DEC. 31, 2003

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

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

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information known to Hometown
regarding the beneficial ownership of Common Stock as of March 3, 2004 by (i)
each person known to Hometown to be the beneficial owner of more than 5% of its
outstanding shares of Common Stock, (ii) each Director of Hometown, (iii) each
Named Executive Officer and (iv) all Directors, and Executive Officers of
Hometown as a group. Except as otherwise indicated, the persons or entities
listed below have sole voting and investment power with respect to all shares of
Common Stock owned by them.

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


                                       54
<PAGE>

      o     As of March 3, 2004, the total number of shares outstanding is
            7,175,105, of which 3,655,853 shares are Class A common stock and
            3,519,252 shares are Class B common stock.

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

      o     As of March 3, 2004, the total number of votes outstanding is
            38,848,373, of which 3,655,853 votes are from Class A common stock
            outstanding and 35,192,520 votes are from Class B common stock
            outstanding;

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

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

<TABLE>
<CAPTION>
                                         Common Stock Beneficially        % of Outstanding Equity              % of
                                                   Owned                           Owned                     Aggregate
                                        ----------------------------    ---------------------------         voting Power
                                           Class          Class         Class        Class                    of all
Name of Beneficial Owner                     A              B             A            B         Total        Classes
------------------------                  -------      ------------------------------------------------     -----------
<S>                                       <C>          <C>              <C>          <C>           <C>         <C>
OFFICERS AND DIRECTORS
Corey E. Shaker                           216,881        265,080         5.73         7.53         6.60         7.36
William C. Muller, Jr                     326,750        453,034         8.65        12.87        10.69        12.46
Steven Shaker                             135,142        206,424         3.64         5.87         4.72         5.65
Joseph Shaker                             147,826        321,812         4.00         9.14         6.51         8.66
Charles F. Schwartz                        49,999             --         1.35           --           **           **
Bernard J. Dzinski Jr                      10,000             --           **           --           **           **
Steven A. Fournier                         32,501             --           **           --           **           **
H. Dennis Lauzon                           10,000             --           **           --           **           **
Timothy C. Moynahan                        32,501             --           **           --           **           **
All Directors, and Executive
Officers as a group (9 persons)           961,600      1,246,350        23.26        35.42         28.8        34.14

5% BENEFICIAL OWNERS
William C. Muller, Sr                     259,400        308,718         6.91         8.77         7.81         8.59
Salvatore Vergopia                             --        705,000           --        20.03         9.83        18.15
Edward Vergopia                                --        235,000           --         6.68         3.28         6.05
Janet Shaker                              107,142        227,668         2.90         6.47         4.64         6.13
Paul Shaker                                    --        218,268           --         6.20         3.04         5.62
Edward D. Shaker                          118,808        206,612         3.21         5.87         4.51         5.62
Steven N. Bronson                         252,317             --         6.90           --         3.52           **
Louis Meade                               200,000             --         5.47           --         2.79           **

**    OWNERSHIP IS LESS THAN 1%
</TABLE>

      Corey Shaker has an address at c/o Hometown Auto Retailers, Inc., 774
Straits Turnpike, Watertown, Connecticut 06795. His beneficial ownership of our
common stock includes:

      o     265,080 shares of Class B common stock, of which 15,980 shares are
            held by the Edward Shaker Family Trust of which he is the Trustee
            and a beneficiary;
      o     84,500 shares of Class A common stock, including 72 shares (24
            shares each for his children, Lindsay, Kristen and Edward) of which
            he is custodian;
      o     Options exercisable within the next 60 days to purchase shares of
            Class A common stock as follows:
            o     30,000 shares at $3.00 per share;
            o     16,667 shares at $2.25 per share;
            o     16,667 shares at $1.25 per share;
            o     33,333 shares at $0.48 per share;


                                       55
<PAGE>

      o     Warrants immediately exercisable to purchase 35,714 shares of Class
            A common stock at $1.20 per share.

      William Muller, Jr. has an address at c/o Muller Toyota Inc., Route 31, PO
Box J, Clinton, New Jersey 08809. His beneficial ownership of our common stock
includes:
      o     453,034 shares of Class B common stock;
      o     205,500 shares of Class A common stock;
      o     1,250 shares of Class A common stock owned by his wife, Michele;
      o     Options exercisable within the next 60 days to purchase shares of
            Class A common stock as follows:
            o     10,000 shares at $2.25 per share;
            o     10,000 shares at $1.25 per share;
      o     Warrants immediately exercisable to purchase 100,000 shares of Class
            A common stock at $1.20 per share.

      Steven Shaker has an address at c/o Family Ford, Inc., 1200 Wolcott
Street, Waterbury, Connecticut 06705. His beneficial ownership of our common
stock includes:
      o     206,424 shares of Class B common stock;
      o     79,428 shares of Class A common stock;
      o     Options exercisable within the next 60 days to purchase shares of
            Class A common stock as follows:
            o     10,000 shares at $2.25 per share;
            o     10,000 shares at $1.25 per share;
      o     Warrants immediately exercisable to purchase 35,714 shares of Class
            A common stock at $1.20 per share.

      Joseph Shaker has an address at c/o Baystate Lincoln Mercury, 571
Worcester Road, Framingham, Massachusetts 01701. His beneficial ownership of our
common stock includes:
      o     321,812 shares of Class B common stock of which 15,980 shares are
            held by the Richard Shaker Family Trust which Mr. Shaker is the
            Trustee and a beneficiary; and 40,000 shares are held by the Shaker
            Irrevocable Trust of which Mr. Shaker is Trustee;
      o     112,112 shares of Class A common stock;
      o     Warrants immediately exercisable to purchase 35,714 shares of Class
            A common stock at $1.20 per share.

      Charles F. Schwartz has an address at c/o Hometown Auto Retailers, Inc.,
774 Straits Turnpike, Watertown, Connecticut 06795. His beneficial ownership of
our common stock consists of options exercisable within the next 60 days to
purchase shares of Class A common stock as follows:
            o     33,333 shares at $0.68 per share;
            o     16,666 shares at $0.40 per share.

      Bernard J. Dzinski Jr. has an address at 207-231 Bank Street, Waterbury,
CT 06702. His beneficial ownership of our common stock consist of options
exercisable within the next 60 days to purchase shares of Class A common stock
as follows:
      o     10,000 shares at $0.42 per share.

      Steven A. Fournier has an address at 238 Water Street, Naugatuck,
Connecticut 06770. His beneficial ownership of our common stock consist of
options exercisable within the next 60 days to purchase shares of Class A common
stock as follows:
      o     30,000 shares at $0.58 per share;
      o     2,501 shares at $0.42 per share.


                                       56
<PAGE>

      H. Dennis Lauzon has an address at 854 Sunset Avenue, Haworth, New Jersey
07641. His beneficial ownership of our common stock consists of options
exercisable within the next 60 days to purchase shares of Class A common stock
as follows:
      o     5,000 shares at $0.65 per share;
      o     5,000 shares at $0.42 per share.

      Timothy C. Moynahan has an address at 141 East Main Street, Waterbury,
Connecticut 06722. His beneficial ownership of our common stock consist of
options exercisable within the next 60 days to purchase shares of Class A common
stock as follows:
      o     30,000 shares at $0.48 per share;
      o     2,501 shares at $0.42 per share;

      William Muller, Sr. has an address at c/o Muller Toyota Inc., Route 31, PO
Box J, Clinton, New Jersey 08809. His beneficial ownership of our common stock
includes:
      o     308,718 shares of Class B common stock;
      o     159,400 shares of Class A common stock; and
      o     Warrants immediately exercisable to purchase 100,000 shares of Class
            A common stock at $1.20 per share.

      All shares and warrants are owned by The William C. Muller Revocable
Living Trust of which William C. Muller Sr. is Trustee. William C. Muller Sr. is
neither an officer nor director.

      Salvatore Vergopia has an address at 20 Bayberry Drive, Saddle River, New
Jersey 07458. His beneficial ownership of our Class B common stock includes
225,600 shares owned by his wife, Janet. Mr. Vergopia is a former officer and
director of Hometown.

      Edward A. Vergopia has an address at 4912 Pine Street Drive, Miami Beach,
Florida 33140. Mr. Vergopia is a former officer and director of Hometown.

      Janet Shaker has an address at c/o Hometown Auto Retailers, Inc., 774
Straits Turnpike, Watertown, Connecticut 06795. Her beneficial ownership of our
common stock includes:
      o     227,668 shares of Class B common stock;
      o     71,428 shares of Class A common stock; and
      o     Warrants immediately exercisable to purchase 35,714 shares of
            Class A common stock at $1.20 per share.

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

      Edward D. Shaker has an address at c/o Shakers Lincoln Mercury, Inc. 831
Straits Turnpike, Watertown, Connecticut 06795. His beneficial ownership of our
common stock includes:
      o     206,612 shares of Class B common stock;
      o     71,428 shares of Class A common stock; and
      o     Options exercisable within the next 60 days to purchase shares of
            Class A common stock as follows:
            o     5,833 shares at $2.25 per share;
            o     5,833 shares at $1.25 per share;
      o     Warrants immediately exercisable to purchase 35,714 shares of Class
            A common stock at $1.20 per share.

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

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


                                       57
<PAGE>

                      EQUITY COMPENSATION PLAN INFORMATION

<TABLE>
<CAPTION>
        Plan category          Number of securities to       Weighted-average            Number of securities
                               be issued upon exercise       exercise price of         remaining available for
                               of outstanding options,     outstanding options,      future issuance under equity
                                 warrants and rights        warrants and rights     compensation plans (excluding
                                         (a)                                           securities reflected in
                                                                                             column (a))
<S>                                    <C>                         <C>                         <C>
 Equity compensation plans
 approved by security
 holders                               624,500                     $1.93                       205,500
 Equity compensation plans
 not approved by security
 holders                                None                       None                          None
                                   ---------------            ---------------              ---------------
 Total                                 624,500                     $1.93                       205,500
</TABLE>

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

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, William Muller, Jr., Bernard J. Dzinski Jr., Steven A.
Fournier, H. Dennis Lauzon and Timothy Moynahan were late in filing one (1)
Statement of Changes in Beneficial Ownership on Form 4 during 2003 but have
subsequently come into compliance. With respect to any former directors,
officers, and ten-percent shareholders of Hometown, Hometown does not have any
knowledge of any known failures to comply with the filing requirements of
Section 16(a).


                                       58
<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.
Hometown believes that each lease was at their fair market value at inception.
The annual base rentals reflect the CPI increase that is effective January 1,
2004.

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

MULLER GROUP. Hometown leases, for an annual base rental of approximately
$411,000 and $452,000 respectively the premises occupied by its Toyota
dealership in Clinton, New Jersey and its Chevrolet/Oldsmobile dealership in
Stewartsville, New Jersey from Rellum Realty Company, a New Jersey general
partnership, one of whose two partners is William C. Muller Jr. Mr. Muller is
Regional Vice President - South Division, director and a principal stockholder
of Hometown. The Toyota and Chevy leases are treated as capital leases. In
connection with the acquisition in 1999 of real estate used by Baystate Lincoln
Mercury, Hometown guaranteed the mortgage debt of Rellum Realty Company. The
1999 guaranty was given in substitution for a February 1998 guaranty of that
debt by the Muller Group, a subsidiary of Hometown. As of December 31, 2003, the
mortgage debt balance is $4.7 million. Hometown makes annual lease payments of
$756,000, increasing to approximately $864,000 effective January 1, 2004 to the
landlord. The annual mortgage payments made by the landlord total approximately
$774,000. The mortgage matures March 2013.

WESTWOOD. Hometown leases, for an annual base rental of approximately $411,000
the premises occupied by its Lincoln Mercury dealership in Emerson, New Jersey
from Salvatore A. Vergopia and his wife. Mr. Vergopia is a principal stockholder
and former officer and director of Hometown.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

AUDIT FEES

      The aggregate fees and expenses billed for the professional services
rendered by BDO Seidman, LLP for the audit of Hometown's annual financial
statements included in Hometown's Form 10-K filing for fiscal year 2003 and the
reviews of Hometown's quarterly financial statements included in Hometown's
First, Second and Third Quarter Form 10-Q filings for fiscal year 2003 totaled
approximately $140,000.

      The aggregate fees and expenses billed for the professional services
rendered by BDO Seidman, LLP for the audit of Hometown's annual financial
statements included in Hometown's Form 10-K filing for fiscal year 2002 and the
reviews of Hometown's quarterly financial statements included in Hometown's
Second and Third Quarter Form 10-Q filings for fiscal year 2002 totaled
approximately $113,000. The aggregate fees and expenses billed for the
professional services rendered by Arthur Andersen LLP for the review of
Hometown's quarterly financial statements included in Hometown's First Quarter
Form 10-Q filing for fiscal year 2002 totaled $20,000.


                                       59
<PAGE>

AUDIT RELATED FEES

      Hometown did not incur any audit related fees, other than those included
under the paragraph "Audit Fees", for professional services rendered by BDO
Seidman, LLP during the 2003 fiscal year. During the 2002 fiscal year Hometown
incurred $5,500 in audit related fees, other than those included under the
paragraph "Audit Fees", for professional services rendered by BDO Seidman, LLP.
These services were for review of work performed by a third party in relation to
Hometown adopting SFAS 142 in fiscal 2002 and review of Sarbanes Oxley
requirements.

TAX FEES

      Hometown did not incur any tax fees for professional services rendered by
BDO Seidman, LLP for tax compliance, tax advice and tax planning during the 2003
and 2002 fiscal years.

ALL OTHER FEES

      Hometown did not incur any other fees for professional services rendered
by BDO Seidman, LLP other than the services covered in the paragraphs above
titled "Audit Fees" and "Audit Related Fees" during the 2003 and 2002 fiscal
years.

AUDIT COMMITTEE PRE - APPROVAL POLICY

      Hometown's Audit Committee has authorized the Chief Financial Officer to
incur up to $5,000 per fiscal year on accounting research projects outside the
scope of normal audit services rendered by BDO Seidman, LLP for the audit of
Hometown's annual financial statements included in Hometown's Form 10-K filing
and the reviews of Hometown's quarterly financial statements included in
Hometown's Form 10-Q filings. Such amount is less than 5% of the annual fees
paid to BDO Seidman, LLP for its Form 10-K and Form 10-Q filings. No fees were
incurred in fiscal 2003 that were not approved by the Audit Committee pursuant
to this policy.

AUDIT COMMITTEE CONSIDERATION

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

WORK PERFORMED BY PRINCIPAL ACCOUNTANT'S FULL TIME PERMANENT EMPLOYEES

      BDO Seidman, LLP's services rendered in performing Hometown's audits for
fiscal year 2003 and 2002 were performed by full time, permanent employees and
partners of BDO Seidman, LLP.


                                       60
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

  EXHIBITS:                                         DESCRIPTION
     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 Hometown

4.1         Form of Class A Common Stock Certificate

4.2         Form of Class B Common Stock Certificate

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

4.4         Stock Option Plan of Hometown

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

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

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

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

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

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

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

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

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

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

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

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


                                       61
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

10.22       Form of Stock Option Agreement with schedule of optionees

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

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

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

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

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

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

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

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

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


                                       62
<PAGE>

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

14.2        Code of Business Conduct and Ethics

21.1        Subsidiaries of the Registrant

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

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

32.1        Chief Executive Officer Certification

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

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

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

(3)   Filed herewith.

REPORTS ON FORM 8-K:

On November 13, 2003, Hometown filed a report on Form 8-K with respect to Items
7 and 9 on such report, related to the Company's announcing its 2003 third
quarter results.

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,
2003, 2002, and 2001 is set forth hereafter beginning on page S-2.


                                       63
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d), the Securities Exchange Act
of 1934, the registrant has duly caused this Report to be signed on March 24,
2004 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                        President, Chief Executive Officer and
-----------------------------------     Director
Corey Shaker


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

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

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

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

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

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

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


                                       64
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                        Page
                                                                                        ----
<S>                                                                                     <C>
Reports of Independent Certified Public Accountants                                     F-2

Financial Statements:

     Consolidated Balance Sheets as of December 31, 2003 and 2002                       F-4

     Consolidated Statements of Operations for each of the three years in the
     period ended December 31, 2003                                                     F-5

     Consolidated Statements of Stockholders' Equity for each of the three years
     in the period ended December 31, 2003                                              F-6

     Consolidated Statements of Cash Flows for each of the three years in the
     period ended December 31, 2003                                                     F-7

     Notes to Consolidated Financial Statements                                         F-8


Reports of Independent Certified Public Accountants on Schedule                         S-1

     Schedule II - Valuation and Qualifying Accounts                                    S-3
</TABLE>



                                      F-1
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

      We have audited the accompanying consolidated balance sheets of Hometown
Auto Retailers, Inc. as of December 31, 2003 and 2002 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of
Hometown Auto Retailers, Inc.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2003 and 2002 and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.

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


New York, New York                                          /s/ BDO Seidman, LLP
March 11, 2004                                                  BDO Seidman, LLP



                                      F-2
<PAGE>

      THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP IN CONNECTION WITH HOMETOWN AUTO RETAILERS, INC.'S FILING ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY
ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K, AS ARTHUR
ANDERSEN LLP CEASED PROVIDING AUDIT SERVICES AS OF AUGUST 31, 2002. THE
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000 AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS, STOCKHOLDERS' EQUITY AND CASH FLOWS FOR
THE YEARS ENDED DECEMBER 31, 2000 AND 1999 REFERRED TO IN THIS REPORT HAVE NOT
BEEN INCLUDED IN THE ACCOMPANYING FINANCIAL STATEMENTS.

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Hometown Auto Retailers, Inc.:

      We have audited the accompanying consolidated balance sheets of Hometown
Auto Retailers, Inc. (a Delaware Corporation) as of December 31, 2001 and 2000,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2001.
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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

      As discussed in Note 2 to the consolidated financial statements, the
accompanying consolidated balance sheet as of December 31, 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 2000 and 1999 have been restated.

Stamford, Connecticut                                        ARTHUR ANDERSEN LLP
May 23, 2002


                                      F-3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                          ----------------------
                                    ASSETS
                                                                            2003          2002
<S>                                                                       <C>           <C>
Current Assets:                                                           --------      --------
   Cash and cash equivalents                                              $  5,639      $  3,624
   Accounts receivable, net                                                  6,058         4,883
   Inventories, net                                                         37,774        39,169
   Prepaid expenses and other current assets                                   625           510
   Deferred income taxes and taxes receivable                                1,349         1,245
                                                                          --------      --------
      Total current assets                                                  51,445        49,431
Property and equipment, net                                                 12,678        12,882
Other assets                                                                 1,141         1,503
                                                                          --------      --------
      Total assets                                                        $ 65,264      $ 63,816
                                                                          ========      ========

                   LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Floor plan notes payable                                               $ 38,003      $ 38,522
   Accounts payable and accrued expenses                                     5,798         5,072
   Current maturities of long-term debt and capital lease obligations          996         1,164
   Deferred revenue                                                            609           588
                                                                          --------      --------
      Total current liabilities                                             45,406        45,346

Long-term debt and capital lease obligations                                12,076        13,059
Long-term deferred income taxes                                                125           118
Other long-term liabilities and deferred revenue                               729           743
                                                                          --------      --------
       Total liabilities                                                    58,336        59,266

Commitments and Contingencies

Stockholders' Equity:
    Preferred stock, $.001 par value, 2,000,000 shares
    authorized, no shares issued and outstanding                                --            --
   Common stock, Class A, $.001 par value, 12,000,000 shares
   authorized, 3,655,853 and 3,563,605 issued and outstanding,
   respectively                                                                  4             3
   Common stock, Class B, $.001 par value, 3,760,000 shares
   authorized, 3,519,252 and 3,611,500 issued and
outstanding,
   respectively                                                                  3             4
   Additional paid-in capital                                               29,760        29,760
   Accumulated deficit                                                     (22,839)      (25,217)
                                                                          --------      --------
      Total stockholders' equity                                             6,928         4,550
                                                                          --------      --------
      Total liabilities and stockholders' equity                          $ 65,264      $ 63,816
                                                                          ========      ========
</TABLE>

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


                                      F-4
<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,
                                                           ---------------------------------------------
                                                               2003            2002             2001
                                                           -----------      -----------      -----------
<S>                                                        <C>              <C>              <C>
Revenues
   New vehicle sales                                       $   180,615      $   164,659      $   158,825
   Used vehicle sales                                           66,543           72,482           83,903
   Parts and service sales                                      24,621           24,330           25,402
   Other, net                                                    7,998            8,268            7,630
                                                           -----------      -----------      -----------
      Total revenues                                           279,777          269,739          275,760
                                                           -----------      -----------      -----------
Cost of sales
   New vehicle                                                 168,579          154,225          148,271
   Used vehicle                                                 60,152           65,821           76,189
   Parts and service                                            11,299           11,026           11,485
                                                           -----------      -----------      -----------
     Total Cost of sales                                       240,030          231,072          235,945
                                                           -----------      -----------      -----------
     Gross profit                                               39,747           38,667           39,815
Amortization of goodwill                                            --               --              704
Selling, general and administrative expenses                    34,840           34,152           35,114
                                                           -----------      -----------      -----------
     Income from operations                                      4,907            4,515            3,997
                                                           -----------      -----------      -----------
   Interest income                                                  82               43               90
   Interest (expense)                                           (3,037)          (3,205)          (4,225)
   Other income                                                    956               52              254
   Other (expense)                                                  (3)            (158)              (8)
   Valuation adjustment for CarDay.com                              --               --           (3,258)
                                                           -----------      -----------      -----------
      Income (loss) before taxes and cumulative effect
          of accounting change                                   2,905            1,247           (3,150)
      Provision (benefit) for income taxes                         527              471           (1,014)
                                                           -----------      -----------      -----------
      Income (loss) before cumulative effect of
          accounting change                                      2,378              776           (2,136)
      Cumulative effect of accounting change                        --          (23,708)              --
                                                           -----------      -----------      -----------
Net income (loss)                                          $     2,378      $   (22,932)     $    (2,136)
                                                           ===========      ===========      ===========

Earnings (loss) per share, basic
     Before cumulative effect of accounting change         $      0.33      $      0.10      $     (0.32)
     Cumulative effect of accounting change                         --            (3.30)              --
                                                           -----------      -----------      -----------
Earnings (loss) per share, basic                           $      0.33      $     (3.20)     $     (0.32)
                                                           ===========      ===========      ===========
Earnings (loss) per share, diluted
     Before cumulative effect of accounting change         $      0.33      $      0.10      $     (0.32)
     Cumulative effect of accounting change                         --            (3.30)              --
                                                           -----------      -----------      -----------
Earnings (loss) per share, diluted                         $      0.33      $     (3.20)     $     (0.32)
                                                           ===========      ===========      ===========

Weighted average shares outstanding, basic                   7,175,105        7,175,105        6,592,436
Weighted average shares outstanding, diluted                 7,215,492        7,175,105        6,592,436
</TABLE>

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


                                      F-5
<PAGE>

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

<TABLE>
<CAPTION>
                                     Class A                 Class B
                                  Common Stock             Common Stock           Additional                     Total
                             ---------------------     ----------------------       Paid-in    (Accumulated  Stockholders'
                              Shares       Amount       Shares        Amount        Capital      Deficit)       Equity
                             --------     --------     --------      --------      --------      --------      --------
<S>                             <C>       <C>             <C>        <C>           <C>           <C>           <C>
Balance at
December 31, 2000               2,301     $      2        3,699      $      4      $ 28,786      $   (149)     $ 28,643
Conversion of Class B
Common to Class A
Common                             86           --          (86)           --            --            --            --
Shares issued for
Newburgh purchase                 200           --           --            --            --            --            --
Capital infusion from
accredited investors              975            1           --            --           808            --           809
Warrants                           --           --           --            --           166            --           166
Subscription                       --           --           --            --           (30)           --           (30)
receivable
Net loss                           --           --           --            --            --        (2,136)       (2,136)
                             --------     --------     --------      --------      --------      --------      --------

Balance at
December 31, 2001               3,562     $      3        3,613      $      4      $ 29,730      $ (2,285)     $ 27,452
Conversion of Class B
Common to Class A
Common                              2           --           (2)           --            --            --            --
Paid subscription
receivable                         --           --           --            --            30            --            30
Net loss                           --           --           --            --            --       (22,932)      (22,932)
                             --------     --------     --------      --------      --------      --------      --------

Balance at
December 31, 2002               3,564     $      3        3,611      $      4      $ 29,760      $(25,217)     $  4,550

Conversion of Class B
Common to Class A
Common                             92            1          (92)           (1)           --            --            --
Net income                         --           --           --            --            --         2,378         2,378
                             --------     --------     --------      --------      --------      --------      --------

Balance at
December 31, 2003               3,656     $      4        3,519      $      3      $ 29,760      $(22,839)     $  6,928
                             ========     ========     ========      ========      ========      ========      ========
</TABLE>

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


                                      F-6
<PAGE>

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

<TABLE>
<CAPTION>
                                                                For the Years Ended December 31,
                                                              ------------------------------------
                                                                2003          2002          2001
                                                              --------      --------      --------
<S>                                                           <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                             $  2,378      $(22,932)     $ (2,136)
Adjustments to reconcile net income (loss) to net cash
    provided by operating activities -
   Cumulative effect of accounting change                           --        23,708            --
   Depreciation and amortization                                 1,328         1,330         1,739
   Impairment of assets                                             --           150            --
   Gain on sale of business unit and fixed assets                 (939)           --          (254)
   Loss on write-down of CarDay, Inc.                               --            --         3,258
   Deferred income taxes                                           167           309        (1,124)
   Changes in assets and liabilities:
     Accounts receivable, net                                   (1,127)          768           499
     Inventories, net                                            2,335        (5,330)        8,226
     Prepaid expenses and other current assets                    (133)          134           (59)
     Other assets                                                   43           172             7
     Floor plan notes payable                                     (519)        6,059        (7,458)
     Accounts payable and accrued expenses                         733        (1,038)          898
     Deferred revenue                                               21           112           (38)
     Other long term liabilities and deferred revenue              (14)          (56)         (280)
                                                              --------      --------      --------
   Net cash provided by operating activities                     4,273         3,386         3,278
                                                              --------      --------      --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment, net                        (810)       (2,439)         (369)
   Proceeds from sales of property and equipment                     6            --            14
   Net proceeds from sale of business unit                         936            --           705
                                                              --------      --------      --------
   Net cash provided by (used in) investing activities             132        (2,439)          350
                                                              --------      --------      --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from long-term borrowings                               74            61           125
   Principal payments of long-term debt and capital lease
        obligations                                             (2,464)       (1,860)         (838)
   Issuance of common stock and warrants                            --            30           945
                                                              --------      --------      --------
   Net cash provided by (used in) financing activities          (2,390)       (1,769)          232
                                                              --------      --------      --------

Net increase (decrease) in cash and cash equivalents             2,015          (822)        3,860
CASH AND CASH EQUIVALENTS, beginning of period                   3,624         4,446           586
                                                              --------      --------      --------
CASH AND CASH EQUIVALENTS, end of period                      $  5,639      $  3,624      $  4,446
                                                              ========      ========      ========

 Cash paid for - Interest                                     $  3,087      $  3,331      $  3,988
                                                              ========      ========      ========
 Cash paid for - Taxes                                        $    366      $    264      $    146
                                                              ========      ========      ========
 Purchases financed by capital lease obligations              $  1,239      $  1,386      $     --
                                                              ========      ========      ========
</TABLE>

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


                                      F-7
<PAGE>

                          HOMETOWN AUTO RETAILERS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION

      Business of Hometown Auto Retailers Inc.

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

      Basis of Presentation

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

      Principals of Consolidation

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Major Suppliers and Franchise Agreements

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

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


                                      F-8
<PAGE>

      Revenue Recognition

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

      Hometown adopted EITF 00-21, "Revenue Arrangements with Multiple
Deliverables," in the third quarter of fiscal 2003. The impact of adopting EITF
00-21 was not material to Hometown's results of operations.

      Finance, Insurance and Service Contract Income Recognition

      Hometown arranges financing for customers through various institutions and
receives financing fees equal to the difference between the loan rates charged
to customers and the predetermined financing rates set by the financing
institution. In addition, Hometown receives commissions from the sale of credit
life and disability insurance and extended service contracts to customers. The
revenues from financing fees and commissions are generally recorded at the time
of the sale of the vehicles. These revenues are recorded on a net basis.
Connecticut dealerships operate under state laws which make the dealers
responsible for providing warranty service and insurance in the event of default
by the insurance carriers. Accordingly, commissions on insurance and service
contract sales are required to be recognized over the life of the related
insurance product. At December 31, 2003 and 2002 Hometown had $1,225,000 and
$1,237,000 of related deferred revenue, respectively. At December 31, 2003 and
2002, Hometown also had other deferred revenue of $112,000 and $94,000,
respectively.

      Hometown 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 reserves for future charge backs are based
on historical operating results and the termination provisions of the applicable
contracts. Finance, insurance and service contract income, net of estimated
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,
marketable securities and liquid investments, such as money market accounts,
that have an original maturity of three months or less at the date of purchase.

      Contracts-in-Transit

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


                                      F-9
<PAGE>

      Inventories

      New, used and demonstrator vehicle values are stated at the lower of cost
or market, determined on a specific unit basis. Parts, accessories and other are
stated at the lower of cost (determined on a first-in, first-out basis) or
market. Hometown assesses the lower of cost or market reserve requirement for
vehicles, on an individual unit basis, taking into consideration historical loss
rates, the age and composition of the inventory and current market conditions.
The lower of cost or market reserves were $0.7 million and $0.6 million at
December 31, 2003 and 2002, respectively.

      Property and Equipment

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

      Capital Lease Obligations

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

      Company Guarantees

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

      Company Warranties

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

      Impairment of Long-lived Assets

      Hometown periodically reviews long-lived assets for impairment whenever
changes in the circumstances indicate that the carrying amount of the assets may
not be fully recoverable. Hometown considers relevant cash flow, management's
strategic plans, significant decreases in the market value of the asset and
other available information in assessing whether the carrying value of the
assets can be recovered. When such events occur, Hometown compares the carrying
amount of the assets to undiscounted expected future cash flows from the use and
eventual disposition of the asset. If this comparison indicates an impairment,
the carrying amount would then be compared to the fair value of the long-lived
asset. An impairment loss would be measured


                                      F-10
<PAGE>

as the amount by which the carrying value of the long-lived asset exceeds its
fair value. The difference would be recorded as an impairment of assets.
Hometown recorded an asset impairment charge for assets that are held for sale
of $150,000 and $50,000 for the years ended December 31, 2002 and 2001,
respectively. See Notes 3 and 4. Hometown does not believe any other impairment
exists based on this methodology.

      Income Taxes

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

      Interest Expense

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

      Fair Value of Financial Instruments

      Hometown's financial instruments consist primarily of cash and cash
equivalents, floor plan notes payable and long-term debt. The carrying amounts
of cash equivalents approximate fair value due to the short maturity of those
instruments. The carrying amounts of floor plan notes payable approximate fair
value due to their variable interest rates. The fair market value of long-term
debt approximated the carrying value at December 31, 2003. The fair value of
long-term debt is estimated based on the current rates offered for similar debt
instruments with the same remaining maturities.

      Advertising and Promotion

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

      Concentration of Credit Risk

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


                                      F-11
<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. See
Note 10.

      Stock-based Compensation

      At December 31, 2003, Hometown has one stock-based employee compensation
plan, the 1998 Stock Option Plan (the "Stock Option Plan") which is described
more fully in Note 16. As allowed by SFAS 148, Hometown has elected not to use
one of the alternative methods of transition available for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
Hometown accounts for this plan under the recognition and measurement principles
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the company had applied the
fair value recognition provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to stock-based employee compensation.

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                             2003          2002          2001
                                                           --------      --------      --------
      <S>                                                  <C>           <C>           <C>
      Net income (loss), as reported                       $  2,378      $(22,932)     $ (2,136)
      Deduct: Total stock-based employee compensation
      expense determined under fair value based method
      for all awards, net of related tax effects (1)
                                                                (35)          (28)          (73)
                                                           --------      --------      --------
      Pro forma net income (loss)                          $  2,343      $(22,960)     $ (2,209)
                                                           ========      ========      ========
      Earnings (loss) per share:
      Basic, as reported                                   $   0.33      $  (3.20)     $  (0.32)
      Basic, pro forma                                     $   0.33      $  (3.20)     $  (0.34)

      Diluted, as reported                                 $   0.33      $  (3.20)     $  (0.32)
      Diluted, pro forma                                   $   0.32      $  (3.20)     $  (0.34)
</TABLE>

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


                                      F-12
<PAGE>

      Use of Estimates

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

      Consolidated Statements of Cash Flows

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

      Reclassification

      Certain prior year amounts have been reclassified to conform to the 2003
presentation.

      Segments

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

      New Accounting Pronouncements

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


                                      F-13
<PAGE>

      In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure,
an amendment of SFAS 123. SFAS 148 amends SFAS 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. The three methods allowed are
the (i) prospective method, (ii) modified prospective method and (iii)
retroactive restatement method. The prospective method was previously the only
permitted transition method under SFAS 123. Under this method, the recognition
provisions apply to all employee awards granted, modified or settled after the
beginning of the fiscal year of adoption of SFAS 123. The company would continue
to use the Opinion 25 intrinsic value method to account for all prior awards.
Under the modified prospective method, SFAS 123 fair value based accounting is
applied to all awards granted, modified or settled in fiscal years beginning
after December 15, 1994, the effective date of SFAS 123, but only for measuring
compensation cost for the year of change and future years. No prior years are
restated. Under the retroactive restatement method, the company applies the fair
value method to all awards granted, modified, or settled in fiscal years
beginning after December 15, 1994. The company would be required to restate
compensation cost and net income for all income statements presented.
Restatement of periods prior to the presented is permitted but not required.

      In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement is effective for financial statements with fiscal years ending after
December 15, 2002. As allowed by SFAS 148, Hometown has elected not to use one
of the alternative methods of transition available for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.
Hometown accounts for this plan under the recognition and measurement principles
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", and related Interpretations. See Note 2, Stock-based
Compensation above and Note 16 for additional disclosure.

      In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of SFAS 5, 57 and 107
and rescission of FASB Interpretation No. 34. This Interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements in this Interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of FASB
Interpretation No. 45 did not have a material impact on Hometown's financial
statements.

      In July 2002, the FASB issued SFAS 146, Accounting for Restructuring
Costs. SFAS 146 applies to costs associated with an exit activity (including
restructuring) or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
contracts, and relocating plant facilities or personnel. Under SFAS 146, a
company will record a liability for a cost associated with an exit or disposal
activity when that liability is incurred and can be measured at fair value. SFAS
146 will require a company to disclose information about its exit and disposal
activities, the related costs, and changes in those


                                      F-14
<PAGE>

costs in the notes to the interim and annual financial statements that include
the period in which an exit activity is initiated and in any subsequent period
until the activity is completed. SFAS 146 is effective prospectively for exit or
disposal activities initiated after December 31, 2002, with earlier adoption
encouraged. Under SFAS 146, a company may not restate its previously issued
financial statements and the new Statement grandfathers the accounting for
liabilities that a company had previously recorded under Emerging Issues Task
Force Issue 94-3. The adoption of SFAS 146 did not have a material impact on
Hometown's financial statements.

      In November 2002, the EITF reached a final consensus on EITF Issue No.
02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" ("EITF Issue No. 02-16"). This issue
addressed the income statement classification of cash consideration received
from a vendor and the recognition criteria for performance-driven vendor rebates
or refunds. This consensus, which was effective for all arrangements entered
into after December 31, 2002, resulted in certain co-op advertising recoveries,
which would previously have been recorded as a reduction of SG&A, being recorded
as a reduction of Cost of sales, buying and occupancy. We adopted EITF Issue No.
02-16 on January 1, 2003. See Note 12.

      In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). This
statement amends and clarifies the accounting for derivative instruments and
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." We adopted SFAS No. 149 effective July 1, 2003. There
was no impact to the Company upon the adoption of SFAS No. 149.

      In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 requires certain financial instruments with
characteristics of both liabilities and equity to be classified as liabilities.
We adopted SFAS No. 150 effective July 1, 2003. We did not have any financial
instruments that were classified as equity prior to the adoption of SFAS No. 150
that were required to be reclassified to liabilities.

      In May 2003, the EITF reached a consensus on EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" ("EITF Issue No. 00-21"). This
new accounting rule addressed revenue recognition for revenues derived from a
single contract that contains multiple products or services. The rule provides
additional requirements to determine when such revenues may be recorded
separately for accounting purposes. This statement is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003.
Adoption of EITF Issue No. 00-21 did not have a material impact on Hometown's
financial position or results of operations.


                                      F-15
<PAGE>

3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

      Accounts receivable, net consist of the following:

                                                     12/31/03           12/31/02
                                                      ------             ------
                                                         (in thousands)
      Due from manufacturers                          $1,741             $1,279
      Due from finance companies                       3,090              2,758
      Parts and service receivables                      738                618
      Other                                              489                228
                                                      ------             ------
         Total receivables, net                       $6,058             $4,883
                                                      ======             ======

      The allowance for doubtful accounts was $0.3 million and $0.2 million as
of December 31, 2003 and 2002, respectively. In assessing the allowance for
doubtful accounts, Hometown considers historical losses as well as current
performance with respect to past due accounts.

      Inventories, net consist of the following:

                                                    12/31/03            12/31/02
                                                    -------             -------
                                                        (in thousands)
      New Vehicles                                  $28,420             $29,236
      Used Vehicles                                   7,255               7,264
      Parts, accessories and other                    2,099               2,669
                                                    -------             -------
         Total Inventories                          $37,774             $39,169
                                                    =======             =======

      New, used and demonstrator vehicle values are stated at the lower of cost
or market, determined on a specific unit basis. Parts and accessories are stated
at the lower of cost (determined on a first-in, first-out basis) or market.
Hometown assesses the lower of cost or market reserve requirement for vehicles,
on an individual unit basis, taking into consideration historical loss rates,
the age and composition of the inventory and current market conditions. The
lower of cost or market reserves were $0.7 million and $0.6 million at December
31, 2003 and 2002, respectively.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

      Assets Held For Sale

      Included in Prepaid Expenses and Other Current Assets as of December 31,
2003 and 2002 is land held for sale of $300,000. This is net of an impairment
charge of $150,000 that was recorded at December 31, 2002 to write-down the
asset to fair value. The impairment charge is included in Other Expense in
Hometown's Consolidated Statements of Operations for the year ended December 31,
2002. See Note 17. The land held for sale is not being used in Hometown's
business. Prior to December 31, 2003, Hometown decided to sell the property and
has been


                                      F-16
<PAGE>

actively marketing the property. Hometown had entered into an agreement to sell
the property at its carrying value. In February 2004, state environmental
regulations were passed concerning development of properties located near
certain streams or its tributaries. The contract purchaser of the property has
cancelled the sale due to these new regulations. Hometown is currently
evaluating the impact of the new regulations on the potential development of the
property and the sale agreement.

OTHER ASSETS

      CarDay, Inc.

      CarDay, Inc. began operations in 1999 as an 82% owned subsidiary of
Hometown. For the year ended December 31, 1999, the assets, liabilities and
results of operations of CarDay, Inc. were included in Hometown's financial
statements. In January 2000, CarDay, Inc. obtained $25 million in financing from
a group of venture capital providers. The result of this financing was to reduce
Hometown's ownership from 82% to 10.7%, and to increase the carrying value of
its investment to $3,258,000. Subsequent to this dilution of ownership, Hometown
no longer reflected the assets, liabilities and results of operations of CarDay,
Inc. in its financial statements because ownership had been reduced to an amount
below 20%. Hometown recorded the increase in value of the investment, net of a
deferred tax liability, as an increase in additional paid-in capital.

      As a result of CarDay, Inc. ceasing operations on October 18, 2001,
Hometown deemed the investment to be permanently and totally impaired. The
entire investment in CarDay, Inc. of $3,258,000 less an associated deferred tax
liability of $1,175,000 was charged against income in the quarter ended
September 30, 2001. The charge had the effect of reducing net income for the
2001 year by $2,083,000 and reducing Earnings per share, fully diluted, for the
year by $0.32. Excluding the charge, the net loss for 2001 was $(53,000) or less
than $(0.01) per share fully diluted. The charge did not affect cash, cash flow
from operations, or liquidity and capital resources.

      Accounts payable and accrued expenses consist of the following:

                                                        12/31/03        12/31/02
                                                         ------           ------
                                                            (in thousands)
      Accounts payable, trade                            $2,030           $1,785
      Accrued compensation costs                            717              696
      Sales and use tax                                     768              524
      Customer payoffs                                      259              265
      Reserve for finance, insurance and service
        contract chargebacks                                510              293
      Reserve for policy work expenses                      175              172
      Accrued legal and professional fees                   434              270
      Accrued interest                                      238              288
      Other accrued expenses                                667              779
                                                         ------           ------
      Total                                              $5,798           $5,072
                                                         ======           ======


                                      F-17
<PAGE>

      Other long-term liabilities and deferred revenue

      Hometown receives commissions from the sale of insurance products and
extended service contracts to customers. These revenues are recorded on a net
basis. Connecticut dealerships operate under state laws which make the dealers
responsible for providing warranty service and insurance in the event of default
by the insurance carriers. Accordingly, commissions on insurance and service
contract sales are required to be recognized over the life of the related
insurance product. For these dealerships, Hometown records the revenue as a
liability and amortizes the amount over a five-year period. At December 31, 2003
Hometown had $1,337,000 of deferred revenue of which $609,000 was current and
$728,000 was long-term. Included in this amount is other deferred revenue of
$112,000. At December 31, 2002 Hometown had $1,331,000 of deferred revenue of
which $588,000 was current and $743,000 was long-term. Included in this amount
is other deferred revenue of $94,000.

4. PROPERTY AND EQUIPMENT, NET

      Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                       Estimated Useful
                                                        Lives in Years   12/31/03      12/31/02
                                                       ----------------  --------      --------
<S>                                                       <C>            <C>            <C>
                                                                              (in thousands)
      Land                                                        --     $  4,246      $  4,246
      Land improvements                                    15 to 20            84            84
      Buildings and leasehold improvements                7 to 31.5        10,262         9,859
      Machinery, equipment, furniture and fixtures          3 to 7          3,272         3,091
      Vehicles                                              3 to 5            184           198
      Construction in progress                                                128            --
                                                                         --------      --------
         Sub-total                                                         18,176        17,478
      Less - accumulated depreciation and amortization                     (5,498)       (4,596)
                                                                         --------      --------
         Total                                                           $ 12,678      $ 12,882
                                                                         ========      ========
</TABLE>

      Included in buildings and leasehold improvements are capital leases for
two dealerships totaling $5,180,000 for the years ended December 31, 2003 and
2002 which are leased from related parties. See Notes 8, 9 and 13. Hometown
begins depreciating assets once the asset is placed in service. Depreciation and
amortization expense for property and equipment for the years ended December 31,
2003, 2002 and 2001 was $944,000, $943,000 and $909,000 respectively.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

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


                                      F-18
<PAGE>

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

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

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

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

      A summary of changes in Hometown's goodwill during the year ended December
31, 2002, is as follows:

Reporting Unit           Balance at          Impairments          Balance at
                      December 31, 2001    (in thousands)     December 31, 2002
--------------        -----------------    --------------     -----------------
Total Company            $ 23,708             $ 23,708             $     --
                         ========             ========             ========


                                      F-19
<PAGE>

      The 2001 full year results do not reflect the provisions of SFAS 142. Had
Hometown adopted SFAS 142 on January 1, 2001, historical net income (loss) and
basic and diluted net income (loss) per common share would have been changed to
the adjusted amounts indicated below.

<TABLE>
<CAPTION>
                                                         For the Years Ended December 31,
                                                    ----------------------------------------
                                                       2003          2002            2001
                                                                (in thousands)
                                                    ----------    ----------      ----------
<S>                                                 <C>           <C>             <C>
Reported net income (loss)                          $    2,378    $  (22,932)     $   (2,136)
Add: Goodwill amortization (a)                              --            --             585
Add: Cumulative effect of accounting change (b)             --        23,708              --
                                                    ----------    ----------      ----------
Adjusted net income (loss)                          $    2,378    $      776      $   (1,551)
                                                    ==========    ==========      ==========

Earnings (loss) per share, Basic
     Reported net income (loss)                     $     0.33    $    (3.20)     $    (0.32)
     Goodwill amortization (a)                              --            --            0.08
     Cumulative effect of accounting change (b)             --          3.30              --
                                                    ----------    ----------      ----------
     Adjusted net income (loss)                     $     0.33    $     0.10      $    (0.24)
                                                    ==========    ==========      ==========

Earnings (loss) per share, Diluted
     Reported net income (loss)                     $     0.33    $    (3.20)     $    (0.32)
     Goodwill amortization (a)                              --            --            0.08
     Cumulative effect of accounting change (b)             --          3.30              --
                                                    ----------    ----------      ----------
     Adjusted net income (loss)                     $     0.33    $     0.10      $    (0.24)
                                                    ==========    ==========      ==========
</TABLE>

      (a)   Goodwill amortization reflects the effect of income tax. The
            majority of goodwill amortization is non-deductible for tax
            purposes.

      (b)   Approximately $9.6 million of this charge is tax deductible,
            resulting in a deferred tax benefit of approximately $3.8 million
            against which a full valuation allowance was recorded. Hometown is
            reducing its valuation allowance as goodwill is being amortized for
            tax purposes.


                                      F-20
<PAGE>

      As of December 31, 2003 and 2002, the Company's intangible assets
consisted of the following:

                                 12/31/03         12/31/02
                                 --------         --------
                                     (in thousands)
Deferred finance charges         $    267         $    267
Accumulated amortization              (98)             (78)
Non-compete agreement                 381              381
Accumulated amortization             (270)            (206)
Franchise fee                          10               --
Accumulated amortization               (1)              --
                                 --------         --------
   Net intangible assets (a)     $    289         $    364
                                 ========         ========

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

      Aggregate Amortization Expense of Intangible Assets for the years ended
December 2003, 2002 and 2001 is $85,000, $85,000 and $126,000, respectively.

Estimated Amortization Expense of Intangible Assets, in thousands:

For the year ended 12/31/04          $87
For the year ended 12/31/05          $71
For the year ended 12/31/06          $23
For the year ended 12/31/07          $18
For the year ended 12/31/08          $15


6. FLOOR PLAN NOTES PAYABLE AND INTEREST EXPENSE

                                      12/31/03    12/31/02    12/31/01
                                      -------     -------     -------
                                              (in thousands)
      Floor plan notes payable        $38,003     $38,522     $32,463
                                      =======     =======     =======
      Floor plan interest expense     $ 1,632     $ 1,713     $ 2,548
                                      =======     =======     =======

      Since March 15, 2001, Hometown has a floor plan line of credit at each
dealership with Ford Motor Credit Corporation ("FMCC"). The FMCC floor plan
agreement provides financing for vehicle purchases and is secured by and
dependent upon new and used vehicle inventory levels. Maximum availability under
the FMCC agreement is a function of new and used car sales and is not a
pre-determined amount. As of December 31, 2003 Hometown's floor plan liability
with FMCC is $38.0 million. The FMCC agreement has no set maturity date and it
is the intention of Hometown to continue with this financing on an ongoing
basis.


                                      F-21
<PAGE>

      For the first year of the agreement, through May 2002, the FMCC floor plan
loans carried an interest rate of prime less 0.75% for new vehicles and prime
less 0.50% for used vehicles. From March 15, 2001 through December 31, 2001,
interest ranged from 4.00% to 7.25% for new vehicles and from 4.25% to 7.50% for
used vehicles. From January 1, 2002 through May 31, 2002, interest was
approximately 4.0% for new vehicles and 4.25% for used vehicles.

      In June 2002, Hometown renewed its floor plan agreement with FMCC and is
now subject to the FMCC standard financing agreement which provides for floor
plan loans for new and used vehicles that have variable interest rates that
increase or decrease based on movements in the prime or LIBOR borrowing rates
and FMCC financing volume. At December 31, 2003, interest rates were
approximately 3.75% for new vehicles and 5.75% for used vehicles. At December
31, 2002, interest rates were approximately 4.25 % for new vehicles and 6.0% to
6.5% for used vehicles. The average interest rate was approximately 4.25% for
2003 compared to 5.20% for 2002.

      Prior to March 15, 2001, Hometown had a revolving line of credit with GE
Capital Corporation ("GECC"). The GECC agreement provided financing for
Hometown's vehicle purchases as well as operating expenses. Interest rates on
the GECC floor plan arrangements ranged from 9.2% to 9.9% during 2001, through
its close in March 2001. The arrangement included a swing line that handled
daily loan activity. The balance of the swing line was swept into the floor plan
line once monthly. The interest rates on the swing line ranged from 9.1% to 9.6%
during 2001.

      Automobile manufacturers periodically provide floor plan interest
assistance, or subsidies, which reduce the dealer's cost of financing. The
accompanying consolidated financial statements reflect interest expense gross.
Floor plan interest assistance was $1.6 million, $1.7 million and $1.6 million
for the years ended December 31, 2003, 2002 and 2001, respectively, and is
recorded as a reduction of cost of sales when the vehicle is sold. Of these
amounts, $0.3 million, $0.3 million and $0.2 million was recorded as a reduction
of inventory at December 31, 2003, 2002 and 2001, respectively.


                                      F-22
<PAGE>

7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

<TABLE>
<CAPTION>
                                                                                 12/31/03     12/31/02
                                                                                  -------     -------
                                                                                    (in thousands)
<S>                                                                               <C>         <C>
Real estate  mortgage note  payable,  due in monthly  installments including
interest at 10.0%, maturing May 1, 2014                                           $ 7,872     $ 8,258
Real estate capital lease obligations,  due in monthly installments including
interest at 10.0%, maturing in December 2013. See Note 8                            4,163       4,394
Capital lease  obligations on rental  vehicles,  due in monthly  installments
including  interest  ranging  from 3.8% to 5.5%,  maturing  on various  dates
through April 2008                                                                    811       1,153
Notes  payable  on rental  vehicles,  due in monthly  installments including
interest of 6.5%, maturing on December 2005                                            96         158
Note payable to the former owner of one of the  Acquisitions,  due in monthly
installments  including  interest  at 10.0%,  paid July, 2003, related to a
non-compete agreement                                                                  --          68
Mortgage  note payable,  due in monthly  installments  including  interest at
10.5%, paid in July 2003, relating to assets held for sale                             --          58
Various due in monthly  installments  including interest ranging from 5.3% to
15.6%, maturing on various dates through October 2008                                 130         134
                                                                                  -------     -------
                                                                                   13,072      14,223
Less: Current portion                                                                 996       1,164
                                                                                  -------     -------
Total Long Term Debt and Capital Lease Obligations    (a)                         $12,076     $13,059
                                                                                  =======     =======
</TABLE>

      (a) Hometown is subject to certain financial covenants related to its real
estate mortgages.

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

                                Year ending                  Aggregate
                                December 31,                Obligation
                              ----------------             -------------
                                                           (in thousands)
                                    2004                        $996
                                    2005                       1,053
                                    2006                       1,066
                                    2007                       1,089
                                    2008                       1,045
                                 Thereafter                    7,823

      The real estate capital lease obligations are subject to CPI adjustments
effective January 1, 2004 and January 1, 2009, which are not reflected in the
amounts above. The CPI adjustments will be reflected as interest expense in
Hometown's consolidated statements of operations in future periods. The CPI
adjustment effective January 1, 2004 will result in an increase in interest
expense of approximately $108,000, $108,000, $108,000, $108,000, $108,000 and
$539,000, for the years ending December 31, 2004, 2005, 2006, 2007, 2008 and
thereafter, respectively.


                                      F-23
<PAGE>

8. CAPITAL LEASES

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

<TABLE>
<CAPTION>
                                                              Asset Balances at December 31,
                                                                    2003        2002
                                                                  -------      -------
                                                                     (in thousands)
<S>                                                               <C>          <C>
Rental and loaner vehicles                                        $   928      $ 1,361
Less:  Accumulated Amortization                                      (117)        (208)
                                                                  -------      -------
     Net rental and loaner vehicles (included in Inventories)     $   811      $ 1,153
                                                                  =======      =======

Buildings                                                         $ 5,180      $ 5,180
Less:  Accumulated Amortization                                    (1,820)      (1,484)
                                                                  -------      -------
     Net Buildings (included in Property & Equipment)             $ 3,360      $ 3,696
                                                                  =======      =======
</TABLE>

         The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net minimum lease
payments as of December 31, 2003:

<TABLE>
<CAPTION>
                              Year ending                                      Minimum Lease
                              December 31,                                       Payments
                            ----------------                                  --------------
                                                                              (in thousands)
<S>                            <C>                                                  <C>
                                  2004                                              $ 1,154
                                  2005                                                1,154
                                  2006                                                1,154
                                  2007                                                1,072
                                  2008                                                  896
                               Thereafter                                             4,319
                                                                                    -------
Total minimum lease payments                                                          9,749
Less:  Amount representing estimated executory costs, included in total
minimum lease payments                                                                (185)
                                                                                    -------
Net minimum lease payments                                                            9,564
Less:  Amount representing interest                                                 (4,590)
                                                                                    -------
Present value of net minimum lease payments *                                       $ 4,974
                                                                                    =======
</TABLE>

* Reflected in the balance sheet as current and non-current obligations under
capital leases of $467 and $4,507, respectively.


                                      F-24
<PAGE>

9. RELATED PARTY TRANSACTIONS

      Leases

      Certain officers of Hometown lease to the dealerships the premises under
various leases, two of which are classified as capital leases. See Notes 4, 8
and 13. In connection with the acquisition in 1999 of real estate used by
Baystate Lincoln Mercury, Hometown guaranteed the mortgage debt of Rellum Realty
Company. The 1999 guaranty was given in substitution for a February 1998
guaranty of that debt by the Muller Group, a subsidiary of Hometown. As of
December 31, 2003 the mortgage debt balance is $4.7 million and the capital
lease obligation recorded by Hometown is $4.2 million. Hometown makes annual
lease payments of $756,000, increasing to approximately $864,000 effective
January 1, 2004, to the landlord. The annual mortgage payments made by the
landlord total approximately $774,000. The mortgage matures March 2013.

Due from related parties, included in Other Assets, are as follows:

<TABLE>
<CAPTION>
                                                                             12/31/03       12/31/02
                                                                             --------       --------
                                                                                  (in thousands)
<S>                                                                          <C>            <C>
Note  receivable  from  a  company  owned  by an  officer  of  Hometown,
non-interest bearing with payment due monthly of $3,000                      $     49       $     85
Other, net                                                                         28             37
                                                                             --------       --------
    Total                                                                    $     77       $    122
                                                                             ========       ========
</TABLE>

10. CAPITAL STRUCTURE AND PER SHARE DATA

      Preferred Stock

      Hometown's Certificate of Incorporation provides that its Board of
Directors has the authority, without further action by the holders of the
outstanding Common Stock, to issue up to two million shares of Preferred Stock
from time to time in one or more classes or series, to fix the number of shares
constituting any class or series and the stated value thereof, if different from
the 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, 2003 and 2002, Hometown does not have any Preferred Stock
outstanding. The designations, rights and preferences of any Preferred Stock
would be set forth in a Certificate of Designation which would be filed with the
Secretary of the State of Delaware.

Common Stock - Class A and Class B

      The Class A Common Stock and the Class B Common Stock each have a par
value of $.001 per share and are identical in all respects, except voting rights
and the convertibility of the Class B Common Stock. Subject to any special
voting rights of any series of Preferred Stock that


                                      F-25
<PAGE>

may be issued in the future, the holders of Class A Common Stock are entitled to
one vote per share and the holders of Class B Common Stock are entitled to ten
votes per share. Except as otherwise required by law, both Class A Common Stock
and Class B Common Stock vote together as one class on all matters to be voted
on by stockholders of Hometown, including the election of directors. Class A
Common Stock is not convertible. The Class B Common Stock is convertible into
Class A Common Stock on a share for share basis, at any time at the election of
the holder and is automatically converted into Class A Common Stock upon any
transfer to a person who is not then an officer or director of Hometown or of a
subsidiary of Hometown. All of the outstanding shares of Class B Common Stock
represent approximately 91% of the aggregate voting power of Hometown. Executive
officers and directors control approximately 33% of the aggregate voting power
of Hometown. Neither class of Common Stock has redemption, preemptive or sinking
fund rights. Holders of both classes of Common Stock are entitled to dividends
as and when declared by the Board of Directors from funds legally available
therefore and, upon liquidation, dissolution or winding up of Hometown, to
participate ratably in all assets remaining after payment of all liabilities.
All shares of Common Stock issued and outstanding are fully-paid and
non-assessable.

      In the fourth quarter of 2002, Hometown's Board of directors authorized a
stock buy-back program to acquire up to 350,000 shares of outstanding common
stock. The program has since lapsed and no shares were acquired under the
program.

      Warrants

      In connection with a Private Equity Financing in July 2001, Hometown
issued warrants that entitled the holders to purchase up to 487,498 shares of
Class A Common Shares at a purchase price of $1.20 per share, exercisable over a
three-year period.

      Per Share Data

      "Basic earnings (loss) per share" is computed by dividing net income
(loss) by the weighted average common shares outstanding. "Diluted earnings
(loss) per share" is computed by dividing net income (loss) by the weighted
average common shares outstanding adjusted for the incremental dilution of
potentially dilutive securities. Options and warrants to purchase approximately
1,112,000, 1,378,000 and 1,283,000 shares of common stock were outstanding
during 2003, 2002 and 2001, respectively. Basic and diluted weighted average
shares for the years ended December 31, 2003, 2002 and 2001 are as follows:

                                            Year Ended December 31,
                                        2003          2002          2001
                                     ---------     ---------     ---------
Basic, Weighted Average Shares
                                     7,175,105     7,175,105     6,592,436
                                     =========     =========     =========

Common Stock Equivalents                40,387            --            --
                                     ---------     ---------     ---------
Diluted, Weighted Average Shares
                                     7,215,492     7,175,105     6,592,436
                                     =========     =========     =========


                                      F-26
<PAGE>

      The common stock equivalents are options whose exercise price is less than
the average market price of the common shares during the period. In 2003,
options and warrants to purchase 842,000 shares of Hometown common stock were
excluded from the calculation of diluted income per share due to the options and
warrant prices being greater than the average market price of the common shares
during the period. In 2002 and 2001, options and warrants to purchase 1,378,000
and 1,283,000 shares, respectively, of Hometown common stock were excluded from
the calculation of diluted (loss) per share due to the effect being
anti-dilutive.

      The basic and diluted income per share for the year ended December 31,
2003 is $0.33. The basic and diluted (loss) per share for the year ended
December 31, 2002 is $(3.20), which includes basic and diluted income per share
before cumulative effect of accounting change of $0.10 and basic and diluted
(loss) per share for a cumulative effect of accounting change of $(3.30),
resulting from the goodwill impairment charge associated with the implementation
of SFAS 142. The basic and diluted (loss) per share for the year ended December
31, 2001 is $(0.32). See Note 5 to the consolidated financial statements for the
effect of recognition of an impairment of the carrying value of its goodwill in
2002, in accordance with SFAS 142.

11. INCOME TAXES

                                12/31/03     12/31/02    12/31/01
                                -------      -------     -------
                                        (in thousands)
      Federal:
          Current               $    60      $    --     $  (377)
          Deferred                  205          428        (485)
      State:
          Current                   347           19         (20)
          Deferred                  (85)          24        (132)
                                -------      -------     -------
         Total Income Taxes     $   527      $   471     $(1,014)
                                =======      =======     =======

         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>
                                                     12/31/03     12/31/02    12/31/01
                                                     -------      -------     -------
<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                            6.0%         2.3%       (3.1%)
         Change in valuation allowance (a)             (15.5%)         --          --
         Non-deductible goodwill                          --           --         4.9%
         Adjustment for prior year over accruals        (6.3%)         --          --
         Other                                          (0.1%)        1.5%         --
                                                     -------      -------     -------
      Effective tax rate                                18.1%        37.8%      (32.2%)
                                                     =======      =======     =======
</TABLE>


                                      F-27
<PAGE>

      (a) The change in valuation allowance is primarily due to goodwill that
was deducted related with the sale of the Chrysler/Jeep Sales and Service
Franchise as well as amortization of goodwill for tax purposes.

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

<TABLE>
<CAPTION>
                                                                12/31/03     12/31/02
                                                                -------      -------
                                                                      (in thousands)
<S>                                                             <C>          <C>
      DEFERRED INCOME TAXES AND TAXES RECEIVABLE - SHORT-TERM:
      Current net operating loss carryforward                   $   162      $   478
      Reserves and accruals not deductible until paid               887          459
      Tax on current portion of deferred revenue                    244          205
      Tax prepayments and prior year overpayments                    56          103
                                                                -------      -------
                              Total                             $ 1,349      $ 1,245
                                                                =======      =======

      DEFERRED TAX ASSETS - LONG-TERM (a):
      Tax assets related to goodwill                            $ 2,643      $ 3,169
      Net operating loss carryforward                               999        1,323
      Tax on long term portion of deferred revenue                  291          290
      Deferred tax on capital  leases  treated as operating
      leases for tax purposes                                       321          284
      Other                                                          98           --
      Valuation allowance (b)                                    (3,642)      (4,092)
                              Total                             $   710      $   974
                                                                =======      =======

      DEFERRED TAX LIABILITIES - LONG-TERM:
      Depreciation                                              $  (125)     $   (73)
      Other                                                          --          (45)
                                                                -------      -------
                                        Total                   $  (125)     $  (118)
                                                                =======      =======

      Net deferred tax  assets - short term                     $ 1,293      $ 1,142
      Net deferred tax  assets - long term                        4,227        4,948
      Valuation allowance on long-term assets                    (3,642)      (4,092)
                                                                -------      -------
      Net deferred tax asset                                    $ 1,878      $ 1,998
                                                                =======      =======
</TABLE>


                                      F-28
<PAGE>

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

      (b) Hometown has provided a full valuation allowance on the deferred tax
asset related to tax deductible unamortized goodwill and a partial valuation
allowance on its net operating losses because the realization of these assets
are not assured. The deferred tax asset related to goodwill was recorded in
connection with the adoption of SFAS 142 in 2002, discussed in Note 5. Hometown
reduced its valuation allowance in 2003 due to income earned in that year and
projected income for 2004.

12. ADVERTISING AND PROMOTION

      Hometown expenses advertising and promotion as incurred. Advertising and
promotion expenses included in Selling, General and Administrative Expenses, net
certain of manufacturers' rebates and assistance, were approximately $ 3.5
million, $2.9 million and $3.1 million for the years ended December 31, 2003,
2002 and 2001, respectively. Manufacturers advertising rebates and assistance
recorded as a reduction of advertising expense was approximately $0.7 million,
$0.6 million and $0.4 million for the years ended December 31, 2003, 2002 and
2001, respectively.

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

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


                                      F-29
<PAGE>

13. OPERATING LEASES

      Hometown has executed leases for the premises occupied by its dealerships.
Certain of the leases are with related parties. Hometown also has operating
leases relating to its data processing equipment. The minimum rental commitments
required under these operating leases after December 31, 2003 are as follows:

<TABLE>
<CAPTION>
Year ending December 31,      Total Obligation       Related Parties      Other
------------------------    ------------------      ----------------     ---------
                                                   (in thousands)
<C>                                    <C>                    <C>            <C>
2004                                   $ 2,037                $1,041         $ 996
2005                                     1,841                 1,041           800
2006                                     1,589                 1,041           548
2007                                     1,527                 1,041           486
2008                                     1,414                 1,041           373
Thereafter                               5,205                 5,205             -
                                      --------              --------       -------
Total (1)                             $ 13,613              $ 10,410       $ 3,203
                                      ========              ========       =======
</TABLE>

      (1) Minimum rental commitments have not been reduced by minimum sub-lease
      rentals of $180,000 per year, expiring June 30, 2005. The sub-tenant
      stopped paying this rent June 30, 2002. See Note 15. Minimum rental
      commitments have not been reduced by minimum sub-lease rentals for a
      second location of $20,000 per year, expiring November 2005.

      Total expense for operating leases and rental agreements was $1,851,000,
$1,938,000 and $2,085,000 for the years ending December 31, 2003, 2002 and 2001,
respectively. Rental expense for the years ending December 31, 2003, 2002 and
2001, does not include sub-lease income received of $3,000, $93,000 and
$120,000, respectively.

      Total expense for operating leases and rental agreements with related
parties was $912,000, $912,000 and $912,000 for the years ending December 31,
2003, 2002 and 2001, respectively.

14. COMMITMENTS AND CONTINGENCIES

      Litigation

      In May 2001, Hometown's wholly-owned subsidiary Morristown Auto Sales,
Inc. ("Morristown") assigned the lease for the premises, where it was operating
its Lincoln Mercury dealership in Morristown, New Jersey to Crestmont MM, L.P.
(the "Assignee"). On or about July 12, 2002, Morristown received notice from the
landlord that the Assignee had not paid the required monthly rent, maintained
the premises in accordance with the lease, nor provided the required insurance
for the premises. In September 2002, Hometown received notice of a complaint
filed by the landlord against Hometown, Morristown and certain former officers
seeking payment of rent and other obligations through June 2005. In October
2002, Morristown filed a complaint against the Assignee to recover any potential
damages from the Assignee as


                                      F-30
<PAGE>

provided under the lease assignment. The Assignee has made a claim against
Hometown for breach of the assignment agreement and misrepresentation of the use
of the subject property. The Assignee has also brought a claim against
Morristown's president, Hometown's Chief Executive Officer, for
misrepresentation. Total anticipated costs for the remainder of the lease term,
through June 2005, is $540,000 for rent plus certain other costs. Hometown
believes it has meritorious defenses to the claim and cross-claim and intends to
vigorously defend this action. In addition, the landlord has leased the premises
to another tenant for the period from January 29, 2003 through January 29, 2005
for a total of $240,000, thereby significantly reducing Morristown's exposure to
a damages judgment for lost rent. The landlord has also amended its complaint to
state a claim directly against the assignee. Hometown does not believe that the
eventual outcome of the case will have a material adverse effect on Hometown's
consolidated financial position or results of operations.

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

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

      Litigation counsel for Hometown has also been advised that the Vergopias
have filed a third action against Hometown and its Chief Executive Officer
claiming defamation and tortious interference with contract arising out of a
letter allegedly sent to one of Hometown's automobile manufacturers. As of March
11, 2004 neither Hometown nor its Chief Executive Officer have received service
of process in this third action. However, Hometown presently believes it
involves damage claims that are similar to those already made in the two pending
actions in the Superior Court of New Jersey in Bergen County.

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

      Universal Underwriters Group ("Universal"), Hometown's insurance provider,
commenced a lawsuit against The Chubb Group of Insurance Companies ("Chubb"),
Hometown's Director and Officer Liability Insurance provider, Hometown, certain
officers,


                                      F-31

<PAGE>

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

      In July 2002, Hometown received notice of a complaint filed by the Trust
Company of New Jersey ("Trust Company") for payment under certain guaranty
agreements allegedly made by Hometown's wholly-owned subsidiary Westwood Lincoln
Mercury Sales, Inc. ("Westwood") in favor of Trust Company in connection with a
sale of vehicles in 1998. Trust Company was seeking approximately $390,000 plus
other costs totaling approximately $70,000. On January 27, 2004, without
admissions of liability by any party, Hometown and Trust Company reached a
settlement agreement whereby Hometown will pay Trust Company $162,500 in
installments, payable through January 2007. This liability is included in
Accounts Payable and Accrued Expenses in Hometown's Consolidated Balance Sheet
at December 31, 2003.

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

      Guarantees

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

      One of Hometown's dealerships, prior to fiscal 2000, had entered into
various arrangements whereby Hometown guaranteed or partially guaranteed loans
advanced by financial institutions to certain customers as follows:

      (i)   Portfolio of 7 customer's limousine vehicle loans granted by Ford
            Motor Credit Co. As of December 31, 2003, Hometown fully and
            partially guaranteed limousine vehicle loans aggregating
            approximately $26,000.


                                      F-32
<PAGE>

      (ii)  Portfolio of 4 vehicle loans, granted by a financial institution, to
            various customers of the dealership with below average credit. As of
            December 31, 2003, Hometown fully guaranteed vehicle loans
            associated with these customers aggregating approximately $7,000.

      The guarantees in (i) and (ii) above are related to loans whereby Hometown
is required to pay the remaining loan balance upon default by the customer. As
of December 31, 2003, Hometown has reserved $11,000 against a total maximum
payout of $33,000 for these loans. The reserve amount represents loans that are
currently delinquent. Hometown would expect to realize proceeds from the sale of
these vehicles upon repossession of such vehicle. The amount of proceeds, if
any, is undetermined due to not knowing the condition of the vehicles.

      There are also 6 loans whose liens were not properly perfected totaling
approximately $71,000 as of December 31, 2003. Hometown will be required to pay
the remaining loan balance should the customers default on their payments.
Hometown is working to perfect these liens and has taken steps to prevent this
from occurring in the future. Hometown has reserved $13,000 for these loans. The
reserve amount represents loans that are currently delinquent. Hometown would
expect to realize proceeds from the sale of these vehicles upon repossession of
such vehicle. The amount, if any, is undetermined due to not knowing the
condition of the vehicle.

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

      In connection with the acquisition in 1999 of real estate used by Baystate
Lincoln Mercury, Hometown guaranteed the mortgage debt of Rellum Realty Company.
The 1999 guaranty was given in substitution for a February 1998 guaranty of that
debt by the Muller Group, a subsidiary of Hometown. In the event of default by
Rellum Realty Company, Hometown is required to make the mortgage payments, but
does not take ownership of the property. As of December 31, 2003 the mortgage
debt balance is $4.7 million. Hometown makes annual lease payments of $756,000
to the landlord, increasing to approximately $864,000 effective January 1, 2004.
The annual mortgage payments made by the landlord total approximately $774,000.
The mortgage matures March 2013. The lease was recorded as a capital lease. The
capital lease obligation is $4.2 million at December 31, 2003. See Notes 7 and 8
to the consolidated financial statements.

      Warranties

      Hometown's new vehicle sales and certain used vehicle sales have
manufacturer warranties that specify coverage and period. In these instances,
Hometown is reimbursed by the manufacturer for the cost of parts and service on
the vehicle covered by these warranties, as specified by the manufacturer.
Hometown also provides a limited warranty on used vehicles sold at retail. The
warranty period is as agreed upon by the customer and may be subject to a
minimum period as mandated by the state. The typical warranty period ranges up
to three months. Hometown also sells parts and service. Manufacturer parts are
covered by limited warranties, as specified by the manufacturer. Service also
has a limited warranty; whereby the part and certain labor costs are covered
under the limited manufacturer warranty. Also, certain Hometown


                                      F-33
<PAGE>

dealerships provide a three or five year 100,000-mile limited warranty on new
and/or used vehicles. The cost of this warranty is charged to the cost of sale
of the vehicle. The warranty covers certain parts and service for three or five
years or until the vehicle reaches an odometer reading of 100,000 miles,
whichever comes sooner. The warranty is insured, making the cost of the warranty
fixed for Hometown. The insurance company pays costs associated with the
warranty work to Hometown. An insurance company that is wholly owned by Ford
Motor Company reinsures the insurance policy. If the insurance company were to
fail, Hometown would be responsible for the costs of the service. Hometown has
not recorded any additional reserve for this warranty program.

Hometown records a reserve referred to as "policy" for used vehicle warranties
and the labor portion of service warranties based on available historical
information. At December 31, 2003 and 2002, Hometown has a reserve of $175,000
and $172,000, respectively. The reserve is based on the last three months of
used vehicle units sold and the average cost of repairs over the last twelve
months. While Hometown believes its estimated liability for product warranties
is adequate and that the judgment applied is appropriate, the estimated
liability for product warranties could differ materially from future actual
warranty costs.

<TABLE>
<CAPTION>
                                     Balance At           Additions To
                                    Beginning of           Costs and                           Balance At
    Reserve for Policy Work             Year                Expenses          Deductions      End of Year
 ------------------------------  ------------------     ----------------     -------------   --------------
<S>                                   <C>                   <C>                <C>              <C>
      Year Ended 12/31/03             $172,000              $785,000           $(782,000)       $175,000
      Year Ended 12/31/02             $226,000              $800,000           $(854,000)       $172,000
      Year Ended 12/31/01             $158,000              $947,000           $(879,000)       $226,000
</TABLE>

      Other revenues generated by sales of extended service plans, finance,
insurance and other do not have any Hometown warranties attached to the sale,
except for certain sales in Connecticut dealerships discussed in "Finance,
Insurance and Service Contract Income Recognition" above.

      Franchise Agreements

      On March 8, 2004, Toyota Motor Sales, U.S.A., Inc. notified Hometown that
the current Toyota Dealer Agreement was extended through June 18, 2004. Hometown
is currently reviewing the proposed new Toyota Dealer Agreement and anticipates
executing that agreement prior to the expiration of the current agreement.
Previously on March 13, 2003, Hometown was notified by Toyota Motor Sales,
U.S.A., that Hometown must correct certain operational deficiencies or make
substantial progress toward rectifying such deficiencies. Toyota had previously
expressed concerns that the financial resources of the Toyota dealerships were
being used to finance the cash flow deficits of affiliated companies and that
because of this the financial health of the Toyota dealerships were
detrimentally affected by a net working capital deficiency. Toyota requested and
Hometown provided a written action plan and consolidated financial forecast.
Toyota also expressed concerns about the impact of Ford Motor Credit's financing
terms upon the Toyota dealerships and the existing litigation, including the
Vergopia's as discussed above in Item 3. - Legal Proceedings, Item 7. -
Managements Discussion and Analysis - Litigation and in Note 14 to the
consolidated financial statements. Hometown developed and implemented plans to
correct the operational deficiencies that would bring Hometown into compliance.
Hometown has obtained written confirmations from Ford Motor Credit in response


                                      F-34
<PAGE>

to Toyota's requests for information relating to financing arrangements. In
addition, Hometown has improved net working capital through the sale of a
Chrysler/Jeep Sales and Service Franchise (Note 17 to the consolidated financial
statements) and advances on warranty income from Hometown's Extended Service
Plan vendor. Hometown has been in regular contact with Toyota to review the
efforts of Hometown to resolve the deficiencies alleged by Toyota. The two
Toyota dealerships for the fiscal year ended December 31, 2003 had combined
revenues of $105.1 million and pre-tax income before allocation of corporate
costs of $2.3 million. Hometown believes that it has corrected the alleged net
working capital deficiency for the Toyota dealerships, that it has alleviated
the concerns expressed by Toyota and that Hometown will enter into a new dealer
agreement with Toyota Motor Sales, U.S.A prior to the expiration of the current
dealer agreement.

15. EMPLOYEE BENEFIT PLANS

      Hometown maintains the Hometown Auto Retailers, Inc. 401(k) Plan (the
"Plan") for the benefit of eligible employees, as defined. Participants may make
voluntary contributions of up to 15% of their compensation, subject to certain
IRS limitation. Hometown may make annual matching contributions to the Plan at
its discretion. Hometown made contributions of $24,000, $0 and $0 for the years
ended December 31, 2003, 2002 and 2001.

16. STOCK OPTION PLAN

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


                                      F-35
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                       Weighted
                                              Number of        Weighted Average      Average Fair
                                               Shares          Price per Share           Value
                                           ---------------  ---------------------   ---------------
<S>                                            <C>                  <C>                 <C>
Balance at December 31, 2000                   302,000              $ 7.24
Options Granted                                368,000                1.69              $ 0.33
Canceled                                       (54,250)               4.42
                                              --------              ------
Balance at December 31, 2001                   615,750              $ 4.17
Options Granted                                120,000                 .51              $ 0.33
Canceled                                       (25,000)               2.97
                                              --------              ------
Balance at December 31, 2002                   710,750              $ 3.60
Options Granted                                100,000                0.38              $ 0.27
Canceled                                      (186,250)               7.47
                                              --------              ------
Balance at December 31, 2003                   624,500              $ 1.93
                                              ========              ======
Exercisable at December 31, 2001               283,668              $ 7.18
                                              ========              ======
Exercisable at December 31, 2002               414,914              $ 5.26
                                              ========              ======
Exercisable at December 31, 2003               413,000              $ 2.45
                                              ========              ======
</TABLE>

<TABLE>
<CAPTION>
                   Number of
  Range of          Options         Weighted      Weighted Average       Options
  Exercise      Outstanding at      Average        Exercise Price      Exercisable      Weighted Avg.
   Prices          12/31/03      Remaining Life      Per Share         at 12/31/03      Exercise Price
 -----------   ----------------   ------------  --------------------- ---------------  ----------------
<C>                 <C>               <C>              <C>                <C>               <C>
$0.34      to
$0.65               220,000           4.98             $ 0.45             100,001           $ 0.50
$0.68      to
$1.50               202,250           3.66             $ 1.10            148,166            $ 1.11
$2.25      to
$3.00               142,250           2.13             $ 2.41            104,833            $ 2.46
$9.00                60,000           0.25             $ 9.00             60,000            $ 9.00
                    -------           ----             ------            -------            ------
                    624,500           3.45             $ 1.93            413,000            $ 2.45
                    =======           ====             ======            =======            ======
</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 2003, the dividend yield was assumed to be 0%, the risk-free interest
rate ranged from 3.0% to 3.2%, the expected option life was 5 to 10 years and
the expected volatility was 75%. In 2002, the dividend yield was assumed to be
0%, the risk-free interest rate ranged from 3.4% to


                                      F-36
<PAGE>

4.4%, the expected option life was 5 years and the expected volatility was 75%.
In 2001, the dividend yield was assumed to be 0%, the risk-free interest rate
ranged from 4.0% to 4.98%, the expected option life was 5 years and the expected
volatility was 75%.

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

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

      The significant components of Other Income and Other Expense are:

                                                12/31/03  12/31/02    12/31/01
                                                -------    -------    -------
                                                       (in thousands)
OTHER INCOME:
Gain on sale of Sales and Service Franchise     $   936    $    --    $    --
Gain on sale of Morristown Franchise                 --         --        254
Insurance claim proceeds                              8         40         --
Other                                                12         12         --
                                                -------    -------    -------
Total Other Income                              $   956    $    52    $   254
                                                =======    =======    =======
OTHER EXPENSE:
Impairment of Assets                            $    --    $  (150)   $    --
Miscellaneous                                        (3)        (8)        (8)
                                                -------    -------    -------
Total Other Expense                             $    (3)   $  (158)   $    (8)
                                                =======    =======    =======

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

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

      In January 2001, Hometown sold the franchise for its Morristown, NJ store
back to Lincoln Mercury for $0.7 million in cash. Hometown received the purchase
price plus $40,000 for parts returned, and paid out a broker's commission of
$35,000. The transaction resulted in Hometown recording a $254,000 gain on the
sale, which is included in Other Income in Hometown's Consolidated Statements of
Operations for the year ended December 31, 2001.


                                      F-37
<PAGE>

18. ACQUISITIONS

      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.
See Note 5.

      Hometown guaranteed that stock issued in connection with this acquisition
will have a market value of at least $1,000,000 by March 31, 2001. Such amount
was included in the original purchase accounting. On June 28, 2001, an agreement
was signed with the former owners settling the guarantee whereby Hometown issued
200,000 shares of Hometown stock and paid $240,000, paid in monthly installments
through December 31, 2002 and a monthly profit sharing payment equal to 20% of
Newburgh Toyota's monthly pre-tax income over $57,142 for the period from April
1, 2001 to December 31, 2002. In accordance with APB No. 16, the issuance of the
200,000 shares and the cash settlement did not result in a change in purchase
accounting as the original purchase accounting contemplated the guaranteed stock
price and because the settlement is outside the allocation period. The cash
settlement is being accounted for as a period expense. At December 31, 2002 all
amounts related to the guaranty have been paid.

                                      F-38
<PAGE>


                            QUARTERLY FINANCIAL DATA
                 For the years ended December 31, 2003 and 2002
                      (in thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                      2003


                                        1ST QTR.        2ND QTR.       3RD QTR.     4TH QTR.       TOTAL YEAR
<S>                                    <C>             <C>            <C>            <C>            <C>
Net Sales                              $  60,320       $  78,103      $  78,180      $  63,174      $ 279,777
Gross profit                               8,960          10,699         10,835          9,253         39,747
Income (loss) before taxes                  (187)          1,816          1,053            223          2,905
                                       ---------       ---------      ---------      ---------      ---------
Net income (loss)                      $    (121)      $   1,083      $     832      $     584      $   2,378
                                       ---------       ---------      ---------      ---------      ---------

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

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

<TABLE>
<CAPTION>
                                      2002

                                               1ST QTR.        2ND QTR.       3RD QTR.      4TH QTR.        TOTAL YEAR
                                             (Restated)*
<S>                                           <C>             <C>            <C>            <C>             <C>
Net Sales                                     $  65,093       $  73,002      $  74,348      $  57,296       $ 269,739
Gross profit                                      9,607          10,101         10,462          8,497          38,667
Income (loss) before taxes and
   cumulative effect of accounting change           405             509            879           (546)          1,247
                                              ---------       ---------      ---------      ---------       ---------
Income (loss) before cumulative effect
   of accounting change                             235             309            558           (326)            776
                                              ---------       ---------      ---------      ---------       ---------
Cumulative effect of accounting change          (23,708)             --             --             --         (23,708)
                                              ---------       ---------      ---------      ---------       ---------
Net income (loss)                             $ (23,473)      $     309      $     558      $    (326)      $ (22,932)
                                              ---------       ---------      ---------      ---------       ---------

Per share information:
Earnings (loss) per share, basic
   Before cumulative effect of accounting
        change                                $    0.03       $    0.04      $    0.07      $   (0.05)      $    0.10
  Cumulative effect of accounting change          (3.30)             --             --             --           (3.30)
                                              ---------       ---------      ---------      ---------       ---------
Earnings (loss) per share, basic              $   (3.27)      $    0.04      $    0.07      $   (0.05)      $   (3.20)
                                              ---------       ---------      ---------      ---------       ---------

Earnings (loss) per share, diluted
   Before cumulative effect of accounting
        change                                $    0.03       $    0.04      $    0.07      $   (0.05)      $    0.10
  Cumulative effect of accounting change          (3.30)             --             --             --           (3.30)
                                              ---------       ---------      ---------      ---------       ---------
Earnings (loss) per share, diluted            $   (3.27)      $    0.04      $    0.07      $   (0.05)      $   (3.20)
                                              ---------       ---------      ---------      ---------       ---------

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

*- Restated to reflect the adoption of SFAS 142.


                                      F-39
<PAGE>

              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE


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

      The audits referred to in our report dated March 11, 2004 relating to the
consolidated financial statements of Hometown Auto Retailers, Inc., which is
contained in Item 8 of this Form 10-K included the audits of the financial
statement schedules for the years ended December 31, 2003 and 2002 listed in the
accompanying index. These financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statement schedules based upon our audits.

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


New York, New York                                          /s/ BDO Seidman, LLP
March 11, 2004                                                  BDO Seidman, LLP


                                      S-1
<PAGE>

      THIS IS A COPY OF THE AUDIT REPORT ON SCHEDULE PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP IN CONNECTION WITH HOMETOWN AUTO RETAILERS, INC.'S FILING ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K, AS
ARTHUR ANDERSEN LLP CEASED PROVIDING AUDIT SERVICES AS OF AUGUST 31, 2002. THE
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000 AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS, STOCKHOLDERS' EQUITY AND CASH FLOWS FOR
THE YEARS ENDED DECEMBER 31, 2000 AND 1999 REFERRED TO IN THIS REPORT HAVE NOT
BEEN INCLUDED IN THE ACCOMPANYING FINANCIAL STATEMENTS.

              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 April 12, 2002. 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.

      As discussed in Note 2 to the consolidated financial statements, the
accompanying consolidated balance sheet as of December 31, 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 2000 and 1999 have been restated.


Stamford, Connecticut                                        ARTHUR ANDERSEN LLP
May 23, 2002


                                      S-2
<PAGE>

                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
              For the years ended December 31, 2003, 2002 and 2001

<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 contract
charge-backs
    Year ended December 31, 2003     $  162,000   $  277,000     $ (249,000)    $       --   $  190,000
                                     ==========   ==========     ==========     ==========   ==========
    Year ended December 31, 2002     $  113,000   $  367,000     $ (318,000)    $       --   $  162,000
                                     ==========   ==========     ==========     ==========   ==========
    Year ended December 31, 2001     $   96,000   $  277,000     $ (260,000)    $       --   $  113,000
                                     ==========   ==========     ==========     ==========   ==========

Reserve for insurance contract
charge-backs
    Year ended December 31, 2003     $   35,000   $   14,000     $  (14,000)    $       --   $   35,000
                                     ==========   ==========     ==========     ==========   ==========
    Year ended December 31, 2002     $   23,000   $   37,000     $  (25,000)    $       --   $   35,000
                                     ==========   ==========     ==========     ==========   ==========
    Year ended December 31, 2001     $    3,000   $   39,000     $  (19,000)    $       --   $   23,000
                                     ==========   ==========     ==========     ==========   ==========

Reserve for service contract
charge-backs
    Year ended December 31, 2003     $   96,000   $  369,000     $ (180,000)    $       --   $  285,000
                                     ==========   ==========     ==========     ==========   ==========
    Year ended December 31, 2002     $  134,000   $   47,000     $  (85,000)    $       --   $   96,000
                                     ==========   ==========     ==========     ==========   ==========
    Year ended December 31, 2001     $   43,000   $  203,000     $ (112,000)    $       --   $  134,000
                                     ==========   ==========     ==========     ==========   ==========
</TABLE>


                                      S-3
<PAGE>

                                   SCHEDULE II
                  VALUATION AND QUALIFYING ACCOUNTS - CONTINUED
              For the years ended December 31, 2003, 2002 and 2001

<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 guarantees on finance
    Contracts
    Year ended December 31, 2003      $   78,000     $  (21,000)     $  (33,000)     $       --    $   24,000
                                      ==========     ==========      ==========      ==========    ==========
    Year ended December 31, 2002      $  377,000     $  (99,000)     $ (200,000)     $       --    $   78,000
                                      ==========     ==========      ==========      ==========    ==========
    Year ended December 31, 2001      $1,205,000     $  312,000      $ (789,000)     $ (351,000)   $  377,000
                                      ==========     ==========      ==========      ==========    ==========

Reserve for policy work expenses
    Year ended December 31, 2003      $  172,000     $  785,000      $ (782,000)     $       --    $  175,000
                                      ==========     ==========      ==========      ==========    ==========
    Year ended December 31, 2002      $  226,000     $  800,000      $ (854,000)     $       --    $  172,000
                                      ==========     ==========      ==========      ==========    ==========
    Year ended December 31, 2001      $  158,000     $  947,000      $ (879,000)     $       --    $  226,000
                                      ==========     ==========      ==========      ==========    ==========

Allowance for doubtful accounts
    Year ended December 31, 2003      $  207,000     $  122,000      $  (29,000)     $       --    $  300,000
                                      ==========     ==========      ==========      ==========    ==========
    Year ended December 31, 2002      $  250,000     $   76,000      $ (119,000)     $       --    $  207,000
                                      ==========     ==========      ==========      ==========    ==========
    Year ended December 31, 2001      $  904,000     $  109,000      $ (763,000)     $       --    $  250,000
                                      ==========     ==========      ==========      ==========    ==========
</TABLE>

      (1)   The adjustment of $351,000 to the Reserve for guarantees on finance
            contracts for the year ended December 31, 2001 represents a transfer
            to accounts payable for a portion of the liability that became
            fixed.


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