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

                   For the fiscal year ended December 31, 2002

                                       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 28, 2002 was approximately $1,041,000. 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, 2003 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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<S>                                                                                                   <C>
PART I
   Item 1.  Business ...............................................................................    3
   Item 2.  Properties .............................................................................   18
   Item 3.  Legal Proceedings ......................................................................   20
   Item 4.  Submission of Matters to a Vote of Security Holders ....................................   21

PART II
   Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters ..................   22
   Item 6.  Selected Financial Data ................................................................   23
   Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations ..   24
   Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............................   43
   Item 8.  Financial Statements and Supplementary Data ............................................   43
   Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosures ..   43

PART III
   Item 10. Directors and Executive Officers of the Registrant .....................................   44
   Item 11. Executive Compensation .................................................................   47
   Item 12. Security Ownership of Certain Beneficial Owners and Management .........................   53
   Item 13. Certain Relationships and Related Transactions .........................................   57

PART IV
   Item 14. Controls and Procedures ................................................................   58
   Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................   58
</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."


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<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.

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 10 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, Mercury, Oldsmobile, Mazda, and Toyota. Hometown
also is active in two "niche" areas of the automotive market, the sale of
Lincoln town cars and limousines to livery car and livery fleet operators and
the maintenance and light repair of cars and trucks at a Ford and Lincoln
Mercury factory authorized free-standing service center.

      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 ten 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


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<PAGE>

            livery vehicles and cost savings from coordinated auction
            purchasing, car transport and other activities.

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

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

      o     Focus on Higher Margin Operations

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

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

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

      o     Brand Diversity. Hometown's dealerships offer 10 American and Asian
            automotive brands including Chevrolet, Chrysler, Dodge, Ford, Jeep,
            Lincoln, Mercury, Oldsmobile, Mazda, 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.


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<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. Hometown believes that the
            application of its professional management practices provides it
            with an ability to achieve levels of profitability superior to
            industry averages.

Dealership Operations

      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.


                                       5
<PAGE>

The following table sets forth for 2002 and 2001, certain information relating
to the brands of new vehicles sold at retail by Hometown:

<TABLE>
<CAPTION>
                                                        For the Years Ended December 31,
                                                        --------------------------------
                                                           2002                   2001
                                                           ----                   ----
              BRANDS                               Number    Percentage    Number   Percentage
              ------                               ------    ----------    ------   ----------
<S>                                                 <C>         <C>        <C>         <C>
              TOYOTA ...........................    2,985       46.4%      2,857       45.9%
              LINCOLN/MERCURY ..................    1,296       20.2%      1,517       24.3%
              FORD .............................      672       10.5%        671       10.8%
              CHEVROLET ........................      517        8.0%        337        5.4%
              JEEP .............................      318        4.9%        289        4.6%
              MAZDA ............................      277        4.3%        146        2.3%
              CHRYSLER .........................      165        2.6%        156        2.5%
              DODGE ............................      124        1.9%        142        2.3%
              OLDSMOBILE .......................       41        0.6%         36        0.6%
              OTHER ............................       37        0.6%         79        1.3%
                                                    -----      -----       -----      -----
              Total ............................    6,432      100.0%      6,230      100.0%
                                                    =====      =====       =====      =====
</TABLE>

      Hometown's new vehicle unit sales include lease transactions. New vehicle
leases generally have short terms, which tend to bring the consumer back to the
market sooner than if the purchase were debt financed. In addition, leases
provide a steady source of late-model, off-lease vehicles for used vehicle
inventory. Leased vehicles generally remain under factory warranty for the term
of the lease, which allows the dealerships to provide repair service to the
lessee throughout the lease term.

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

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

      Used Vehicle Sales. Hometown sells used vehicles at each of its franchised
dealerships. Sales of used vehicles have become an increasingly significant
source of profit for dealerships. Consumer demand for used vehicles has
increased as prices of new vehicles have risen and as more high quality used
vehicles have become available. Furthermore, used vehicles typically generate
higher gross margins than new vehicles because of their limited comparability
and the somewhat subjective nature of their valuation. 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.


                                       6
<PAGE>

      The following table shows actual vehicle sales by Hometown from 1998
through 2002.

                                         Number of Used and New Vehicles Sold
                                         ------------------------------------
                                       2002     2001     2000     1999     1998
                                      ------   ------   ------   ------   ------

Used Vehicles - Retail ............    4,128    4,874    4,549    4,790    3,995
Used Vehicles - Wholesale .........    2,857    3,105    3,208    3,319    3,794
New Vehicles ......................    6,432    6,230    6,731    6,892    5,150
                                      ------   ------   ------   ------   ------
          Total Sales .............   13,417   14,209   14,488   15,001   12,939

      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.

      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 10 locations, one factory authorized
neighborhood service center and one collision repair center (included in one of
the 10 dealerships), using approximately 100 service bays. Hometown provides
both warranty and non-warranty service work.


                                       7
<PAGE>

      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 2002, Hometown arranged financing for
approximately 59% of new and used vehicles sold at retail to its customers.
Typically, the dealerships forward proposed financing contracts to finance
companies owned and operated by the Manufacturers or to selected commercial
banks or other financing parties. The dealerships receive a finance fee from the
lender for arranging the financing and may be assessed a charge-back against a
portion of the finance fee if the contract is terminated prior to its scheduled
maturity for any reason, including early repayment or default. However, under
existing agreements no charge-backs are generally permitted after 90, or in some
cases 120 days. Hometown pays for this in the form of a reduction of the finance
fee.

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

      Hometown also offers three types of insurance to customers: (i) credit
life insurance pays off the remaining balance of the vehicle loan upon the death
of the insured, (ii) disability insurance makes the monthly loan payments on
behalf of the insured during a period of disability and (iii) gap insurance
ensures that the loan is paid in full if the vehicle becomes totally inoperable
due to an accident. Hometown's dealerships typically receive one-half of the
premiums as a commission for selling these products. Insurance revenues for the
year ended December 31, 2002 were less than 2% of total Finance, Insurance and
Other Revenues.


                                       8
<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 13 customer's limousine vehicle loans granted by Ford
            Motor Credit Co. As of December 31, 2002, Hometown fully and
            partially guaranteed limousine vehicle loans aggregating
            approximately $103,000.

      (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, 2002, Hometown fully guaranteed vehicle loans
            associated with these customers aggregating approximately $33,000.

      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, 2002, Hometown has reserved $70,000 against a total maximum
payout of $136,000 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 vehicles. The amount of proceeds, if
any, is undetermined due to not knowing the condition of the vehicles.

      The same dealership during fiscal 2000 and 2001 partially guaranteed 52
loans totaling approximately $600,000 advanced by Ford Motor Credit Co. to a
certain limousine customer. As of December 31, 2002, Hometown has reserved $0
against a total maximum payout of $600,000 for these loans. Hometown has not
reserved for these loans due to the expected fair value of the vehicles
approximating or exceeding the unamortized portion of the loan balance.

      There are also 17 loans whose liens were not properly perfected totaling
approximately $126,000 as of December 31, 2002. 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 $8,000 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 vehicles. The amount, if any, is undetermined due to not knowing the
condition of the vehicles.

      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, 2002 the mortgage
debt balance is $4.9 million. Hometown makes annual lease payments of $756,000
to the landlord. The annual mortgage payments made by the landlord total
approximately $774,000. The mortgage matures March 2013. The lease was recorded
as a capital lease. The capital lease obligation is $4.4 million at December 31,
2002. See Notes 7 and 8 to the consolidated financial statements.


                                       9
<PAGE>

Company Warranties

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

      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, 2002 and 2001, Hometown has a reserve of
$172,000 and $226,000, 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.

Seasonality

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

Franchise Agreements

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

      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.


                                       10
<PAGE>

      Most franchise agreements 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.

      On March 13, 2003, Hometown was notified by Toyota Motor Sales, U.S.A.,
Inc. that Hometown must correct certain operational deficiencies or make
substantial progress toward rectifying such deficiencies during the next six
months. Toyota has expressed concerns that the financial resources of the Toyota
dealerships are being used to finance the cash flow deficits of affiliated
companies and that because of this the Toyota dealerships do not meet their net
working capital requirements by approximately $1.0 million. Toyota has also
requested that Hometown provide a written action plan and consolidated financial
forecast. Toyota has 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 in Item. 3, Management's
Discussion and Analysis - Litigation and in Note 15 to the consolidated
financial statements. Hometown is developing plans to correct the operational
deficiencies that would bring Hometown into compliance. These plans include
various alternatives such as; obtaining an outside line of credit, private
equity financing, sale of real property, sale of a dealership, and advances on
warranty income from Hometown's Extended Service Plan vendor. In addition,
Hometown will be in monthly contact with Toyota to review the efforts of
Hometown to resolve the deficiencies alleged by Toyota. The two Toyota
dealerships at December 31, 2002 had combined revenues of $100.6 million and
pre-tax income before allocation of corporate costs of $2.5 million. Hometown
believes that it will be able to alleviate the concerns expressed by Toyota;
however, Toyota has reserved the right to terminate the Toyota Dealership
Agreements if sufficient progress is not made to correct the alleged
deficiencies. Should Hometown be notified by Toyota that they intend to
terminate the Toyota Dealership Agreements, Hometown believes it would have a
reasonable amount of time to cure the default.

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


                                       11
<PAGE>

expertise, reputation and customer goodwill, the quality of its service and
location of its dealerships to sell new vehicles. In recent years, automobile
dealers have also faced increased competition in the sale or lease of new
vehicles from independent leasing companies, on-line purchasing services and
warehouse clubs. Hometown believes that the principal competitive factors in new
vehicle sales are the marketing campaigns conducted by Manufacturers, the
ability of dealerships to offer a wide selection of the most popular vehicles,
the location of dealerships and the quality of customer service. Other
competitive factors include customer preference for particular brands of
automobiles, pricing (including Manufacturer rebates and other special offers)
and warranties. Hometown believes that its dealerships are competitive in all of
these areas.

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

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

      In addition to competition for the sale of vehicles, Hometown competes
with publicly and privately owned dealership groups for the acquisition of other
dealerships. It currently faces only limited competition in this region from
other purchasers of dealerships. Publicly owned dealerships with significantly
greater capital resources have acquired a limited number of dealerships in
Hometown's current and targeted market areas including Group 1 Automotive, Inc.
and United Auto Group, Inc. which have purchased dealerships in the Greater New
England area. Hometown expects increased future competition for dealerships in
its markets.

Governmental Regulations

      A number of regulations affect Hometown's business of marketing, selling,
financing and servicing automobiles. 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. Other states may have similar requirements.

      Hometown's financing activities are subject to federal truth-in-lending,
consumer leasing and equal credit opportunity regulations, as well as state and
local motor vehicle finance laws, installment finance laws, insurance laws,
usury laws and other installment sales laws. Some states regulate finance fees
that may be paid as a result of vehicle sales. Penalties for violation of any of
these laws or regulations may include revocation of certain licenses, assessment
of criminal and civil fines and penalties and, in certain instances, may create
a private cause of action for individuals. 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.


                                       12
<PAGE>

Environmental Matters

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

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

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

      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. Although Hometown is in the process of establishing an environmental
management program that is intended to reduce the risk of noncompliance with
environmental laws and regulations, environmental laws and regulations and their
interpretation and enforcement are changed frequently and Hometown believes that
the trend towards broader and stricter environmental legislation and regulations
is likely to


                                       13
<PAGE>

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, 2002, Hometown employed 417 people, of whom
approximately 64 were employed in managerial positions, 96 were employed in
non-managerial sales positions, 200 were employed in non-managerial parts and
service positions and 57 were employed in administrative support positions.

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

               CERTAIN FACTORS THAT MAY AFFECT GROWTH AND PROFITS

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

A Decrease In Consumer Demand For Our New Vehicle Lines Or The Failure Of Its
Manufacturer Could Adversely Affect The Results Of Our Operations.

      Our business is significantly dependent upon the sale of new vehicles from
Ford Motors, Toyota Motors and Daimler Chrysler. For the year ended December 31,
2002, Toyota Motor, Ford Motor and Daimler Chrysler accounted for 46.4%, 30.6%
and 9.4% 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


                                       14
<PAGE>

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 13, 2003, Hometown was notified by Toyota Motor Sales, U.S.A.,
Inc. that Hometown must correct certain operational deficiencies or make
substantial progress toward rectifying such deficiencies during the next six
months. Toyota has expressed concerns that the financial resources of the Toyota
dealerships are being used to finance the cash flow deficits of affiliated
companies and that because of this the Toyota dealerships do not meet their net
working capital requirements by approximately $1.0 million. Toyota has also
requested that Hometown provide a written action plan and consolidated financial
forecast. Toyota has 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 in Item. 3, Management's
Discussion and Analysis - Litigation and in Note 15 to the consolidated
financial statements. Hometown is developing plans to correct the operational
deficiencies that would bring Hometown into compliance. These plans include
various alternatives such as; obtaining an outside line of credit, private
equity financing, sale of real property, sale of a dealership, and advances on
warranty income from Hometown's Extended Service Plan vendor. In addition,
Hometown will be in monthly contact with Toyota to review the efforts of
Hometown to resolve the deficiencies alleged by Toyota. The two Toyota
dealerships at December 31, 2002 had combined revenues of $100.6 million and
pre-tax income before allocation of corporate costs of $2.5 million. Hometown
believes that it will be able to alleviate the concerns expressed by Toyota;
however, Toyota has reserved the right to terminate the Toyota Dealership
Agreements if sufficient progress is not made to correct the alleged
deficiencies. Should Hometown be notified by Toyota that they intend to
terminate the Toyota Dealership Agreements, Hometown believes it would have a
reasonable amount of time to cure the default.

      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


                                       15
<PAGE>

Hometown were unable to attract and retain other qualified employees, its
business or prospects could be adversely affected.

Continued Losses May Threaten The Viability Of Our Business.

      Hometown had a net loss of $22.9 million for the year ended December 31,
2002 compared to a net loss of $2.1 million for the year ended December 31,
2001. 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 the write-off was a
non-cash transaction, if Hometown continues to sustain significant losses in the
future, our business could be materially and adversely affected and the value of
our common stock will likely decline or become worthless.

Our Limited Cash And Working Capital Could Have An Adverse Affect On Our
Business.

      At December 31, 2002, our total cash and cash equivalents was
approximately $3.6 million and our working capital was approximately $4.1
million. If we sustain net losses in 2003 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, the holders of the Class B common stock, who also
own approximately 64% of our outstanding common stock of all classes, will
control approximately 93% 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


                                       16
<PAGE>

control our policies and operations. In addition, the holders of the Class B
common stock have entered into a stockholders' agreement obligating them, for a
five-year period which expires July 2003, to vote for two designees of each of
the three founding dealership groups, as directors on Hometown's Board of
Directors. Those designees are now, Salvatore A. Vergopia, Joseph Shaker,
William C. Muller Jr., Corey Shaker, Edward A. Vergopia and H. Dennis Lauzon.
Our executive officers and directors control approximately 56% of the aggregate
number of votes eligible to be cast by stockholders for the election of
directors and certain other stockholder actions, and will be in a position to
control our policies and operations. Accordingly, absent a significant increase
in the number of shares of Class A common stock outstanding or conversion of
Class B common stock into Class A common stock, the holders of shares of Class B
common stock will be entitled, for the foreseeable future, to elect all members
of the Board of Directors and control all matters subject to stockholder
approval.

Regulations Affecting Low Price Securities Could Impair The Liquidity Of Our
Class A Common Stock.

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

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

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

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

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

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

Muller Toyota          Route 31 and Van              New and used car sales;           Lease expires in 2013; $360,000 per year
                       Sickles Rd. Clinton,          service; F & I                    with CPI increases in 2004 and 2009.
                       NJ 08809                                                        Hometown guarantees mortgage debt associated
                                                                                       with this lease. The lease is treated as a
                                                                                       capital lease.

Muller                 Route 173 and                 New and used car sales;           Lease expires in 2013; $396,000 per year
    Chevrolet,         Voorhees Rd.                  service; F & I                    with CPI increases in 2004 and 2009.
    Oldsmobile         Stewartsville, NJ                                               Hometown guarantees mortgage debt associated
                       08865                                                           with this lease. The lease is treated as a
                                                                                       capital lease.

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

Bay State              571 Worcester Road            New and used car sales;           Owned facility. Mortgage balance of
    Lincoln            Framingham, MA                service; F & I                    $5,117,000 at 12/31/02. Matures 5/1/2014.
    Mercury            01701                                                           Annual payments of $748,000.
</TABLE>


                                       18
<PAGE>

<TABLE>
<S>                    <C>                           <C>                               <C>
Brattleboro            Route 5, Putney Rd.           New and used car sales;           Lease expires 7/31/03 at $240,000 per year;
Chrysler               N. Brattleboro, VT            service; F & I                    one five-year renewal option, exercised
Plymouth               05304                                                           1/28/03, at the same rent plus CPI
Dodge Sales;                                                                           adjustment, and option to purchase at fair
                                                                                       market value of not less than $1.5 million.

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

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

Autos of               2934 Rte 9 W                  New and used car sales;           Owned facility. Mortgage balance of
   Newburgh,           New Windsor, NY               service; F & I                    $3,141,000 at 12/31/02. Matures 5/1/2014.
    Inc. d/b/a         12553                                                           Annual payments of $462,000.
    Toyota of
    Newburgh

Autos of               334 Route 9W                  New and used car sales;           Lease expires 10/14/06 at $73,800 per year,
   Newburgh,           New Windsor, NY               F & I                             increasing by a CPI adjustment in the final
    Inc. d/b/a         12553                                                           two years; one five-year renewal option at
    Toyota of                                                                          the previous year rent plus CPI adjustment
    Newburgh                                                                           for each year of the extension.

Autos of               336 Route 9W                  Service and                       Lease expires 12/31/03 at $36,636 per year;
   Newburgh,           New Windsor, NY               administrative                    one five-year renewal option at the previous
    Inc. d/b/a         12553                                                           year rent plus CPI adjustment for each year
    Toyota of                                                                          of the extension.
    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.

Shaker Group. Hometown leases, for an initial annual base rental of $240,000,
the premises occupied by its Lincoln Mercury dealership in Watertown,
Connecticut, and for an initial base rental of $240,000 and $72,000
respectively, the premises occupied by the Family Ford and Shaker Jeep/Eagle
dealerships in Waterbury, CT from Shaker Enterprises, a Connecticut general
partnership whose seven partners include


                                       19
<PAGE>

Joseph Shaker, Corey Shaker, Steven 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 initial annual base rental of $360,000 and
$396,000 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, 2002 the
mortgage debt balance is $4.9 million. Hometown makes annual lease payments of
$756,000 to the landlord. The annual mortgage payments made by the landlord
total approximately $774,000. The mortgage matures March 2013.

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

ITEM 3. LEGAL PROCEEDINGS

      In May 2001, Hometown's wholly-owned subsidiary Morristown Auto Sales,
Inc. ("Morristown") assigned to Crestmont MM, L.P. (the "Assignee") the lease
for the premises, where it was operating its Lincoln Mercury dealership in
Morristown, New Jersey. 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 counterclaim and intends to vigorously defend 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.

      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 is seeking approximately $390,000 plus
other costs. Hometown does not believe that Westwood has any obligations under
the guaranty agreements due to certain actions taken by Trust Company in
relation to the underlying debt, the debtor and other guarantors. Hometown
believes it has meritorious defenses and intends to vigorously defend 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.

      On or about February 7, 2001, Salvatore A. Vergopia and Edward A.
Vergopia, directors and formerly executive officers of Hometown, and Janet
Vergopia, the wife of Salvatore A. Vergopia (the "Vergopias") filed a complaint
in the Superior Court of New Jersey in Bergen County, against


                                       20
<PAGE>

Hometown, its officers and directors, certain holders of its Class B common
stock, and certain other unnamed persons, alleging breach of two employment
agreements, wrongful termination of employment, breach of a stockholders'
agreement and certain other wrongful conduct, including age discrimination and
breach of fiduciary duty. The Vergopias are seeking back pay, front pay,
compensatory, consequential and punitive damages, in an unspecified amount as
well as, reinstatement, injunctive and other legal and equitable relief.
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.

      We have retained litigation counsel 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 Vergopia's breaches of certain agreements,
as well as breaches of their fiduciary duties. Discovery is proceeding in this
action.

      We believe that the Vergopias commenced this action in response to our
dismissal of both Salvatore A. Vergopia and Edward A. Vergopia from their
officerships and employment positions with us. We believe we have meritorious
defenses and 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"), Hometowns 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 Vergopia's for discovery and case management purposes. Universal
originally acknowledged its obligation to defend and indemnify Hometown against
the Vergopia's 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. 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.

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

      None


                                       21
<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 NASDAQ National Market through February 11, 2001 and the NASD OTC Bulletin
Board for periods thereafter. Such quotations reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not necessarily represent
actual transactions.

Price Range of Common Stock                                        Bid Prices
---------------------------                                     ----------------
                                                                High        Low
Year Ended 2001

First Quarter                                                   $1.00      $0.38

Second Quarter                                                  $1.25      $0.35

Third Quarter                                                   $1.15      $0.60

Fourth Quarter                                                  $1.00      $0.51

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

      (b) Holders

      As of March 3, 2003, the number of record holders of the Class A Common
Stock of Hometown was 51 . 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 2002.


                                       22
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

      The following selected financial data as of December 31, 2002, 2001, 2000,
1999 and 1998 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)
                                                      2002             2001             2000             1999             1998
                                                  -----------      -----------      -----------      -----------      -----------
<S>                                               <C>              <C>              <C>              <C>              <C>
Statement of Operations Data:
Revenues                                          $   269,739      $   275,760      $   279,382      $   285,315      $   121,435
Gross profit                                           38,667           39,815           37,881           38,054           17,287
Amortization of goodwill                                   --              704              661              600              212
Loss from operations of e-Commerce subsidiary              --               --               --              515               --
Selling, general and administrative expenses           33,978           35,114           37,946           31,499           17,267
Income (loss) from operations                           4,689            3,997             (726)           5,440             (192)
Interest expense                                       (3,379)          (4,225)          (5,069)          (4,116)          (1,514)
Net income (loss) before cumulative effect of
accounting change                                         776           (2,136)          (3,800)             641           (1,094)
Cumulative effect of accounting change                (23,708)              --               --               --               --
                                                  -----------      -----------      -----------      -----------      -----------
Net income (loss)                                 $   (22,932)     $    (2,136)     $    (3,800)     $       641      $    (1,094)
                                                  ===========      ===========      ===========      ===========      ===========
Earnings (loss) per share, basic
Before cumulative effect of accounting change     $      0.10      $      (.32)     $      (.63)     $       .11      $      (.31)
Cumulative effect of accounting change                  (3.30)              --               --               --               --
                                                  -----------      -----------      -----------      -----------      -----------
Earnings (loss) per share, basic                  $     (3.20)     $      (.32)     $      (.63)     $       .11      $      (.31)
                                                  ===========      ===========      ===========      ===========      ===========
Earnings (loss) per share, diluted
Before cumulative effect of accounting change     $      0.10      $      (.32)     $      (.63)     $       .11      $      (.31)
Cumulative effect of accounting change                  (3.30)              --               --               --               --
                                                  -----------      -----------      -----------      -----------      -----------
Earnings (loss) per share, diluted                $     (3.20)     $      (.32)     $      (.63)     $       .11      $      (.31)
                                                  ===========      ===========      ===========      ===========      ===========
Weighted average shares,
Basic                                               7,175,102        6,592,436        5,995,996        5,875,342        3,513,333
Diluted                                             7,175,102        6,592,436        5,995,996        6,003,851        3,513,333
---------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
                                                      2002             2001             2000             1999             1998
                                                  -----------      -----------      -----------      -----------      -----------
<S>                                               <C>              <C>              <C>              <C>              <C>
Balance Sheet Data:
Working capital                                   $     4,085      $     4,029      $     1,663      $     3,870      $     4,649
Inventories                                            39,169           31,887           40,170           51,187           30,418
Total assets                                           63,816           81,842           91,572          102,562           71,977
Total debt                                             52,745           46,234           54,133           65,910           37,265
Stockholders' equity                              $     4,550      $    27,452      $    28,643      $    29,851      $    28,210
</TABLE>


                                       23
<PAGE>

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

Cumulative Effect of Accounting Change

      Effective January 1, 2002, Hometown adopted FASB Statement No. 142,
"Goodwill and Other Intangible Assets". At that time, the Company 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. See Note 5 to the consolidated financial
statements for additional disclosure.

      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 the Company is a single
reporting unit.

      During 2002, Hometown completed its goodwill impairment testing in
connection with the adoption of SFAS 142, which resulted in Hometown recording a
one-time, non-cash charge of approximately $23.7 million to recognize an
impairment of 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.
Hometown has recorded the $23.7 million charge in 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.

      The effect of the charge on the restated first quarter financial
statements and second quarter financial statements is as follows:

<TABLE>
<CAPTION>
                                                       Three Months          Three Months            Six Months
                                                           Ended                 Ended                  Ended
                                                      March 31, 2002         June 30, 2002          June 30, 2002
                                                      (in thousands)        (in thousands)         (in thousands)
                                                        (restated)                                   (restated)
<S>                                                     <C>                    <C>                   <C>
Reported net income                                     $      235             $      309            $      544
Less: Cumulative effect of accounting change               (23,708)                    --               (23,708)
                                                        ----------             ----------            ----------
Adjusted net income (loss)                              $  (23,473)            $      309            $  (23,164)
                                                        ==========             ==========            ==========

Earnings (loss) per share, Basic
     Reported net income                                $     0.03             $     0.04            $     0.07
     Cumulative effect of accounting change                  (3.30)                    --                 (3.30)
                                                        ----------             ----------            ----------
     Adjusted net income (loss)                         $    (3.27)            $     0.04            $    (3.23)
                                                        ==========             ==========            ==========

Earnings (loss) per share, Diluted
     Reported net income                                $     0.03             $     0.04            $     0.07
     Cumulative effect of accounting change                  (3.30)                    --                 (3.30)
                                                        ----------             ----------            ----------
     Adjusted net income (loss)                         $    (3.27)            $     0.04            $    (3.23)
                                                        ==========             ==========            ==========
</TABLE>


                                       24
<PAGE>

      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.

      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


                                       25
<PAGE>

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.

      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.


                                       26
<PAGE>

      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 $1.1 million, or
3.1%, to $34.0 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 $0.1 million.

      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 $0.8 million, or 19.0%, to $3.4 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


                                       27
<PAGE>

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.

      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


                                       28
<PAGE>

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 Hometown incurring a net loss in both periods.

      Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

      Revenues

      New vehicle sales decreased $14.0 million or 8.1% to $158.8 million for
the year ended December 31, 2001 from $172.8 million for the year ended December
31, 2000. Approximately $5.5 million of the decrease was due to the sale of our
Morristown Lincoln Mercury location in January, 2001 to Lincoln Mercury. The
remaining $8.5 million decrease is primarily due to decreases at Hometown's
remaining Lincoln Mercury dealerships ($22.7 million decrease) partially offset
by increases at Hometown's Toyota ($9.3 million increase) and Ford ($3.1 million
increase) locations. The decreases at the Lincoln Mercury locations were due to
a decrease of 753 units sold in 2001 compared to 2000. Included in this decrease
was a 51.4% reduction in livery sales of $7.8 million or 202 units. The decrease
in volume was reflected in all of Lincoln Mercury, which reported a 14.7%
decrease in sales nationally in 2001 compared to 2000. This compares to the
25.4% decrease in Lincoln Mercury sales for the Company excluding livery sales.
One of Hometown's Lincoln Mercury dealerships, located in the New York
Metropolitan area, was particularly affected by the downturn in the economy over
the previous year, which accounts for the decrease beyond the national average.
The Toyota increase was primarily due to an additional 379 units sold in 2001
compared to 2000. Toyota now has the highest unit sales per retail outlet in the
country. The increase in the Ford location was due to the sale of 102 additional
light trucks in 2001 over 2000 partially offset by a decrease of 57 cars. The
additional trucks also had a higher average selling price due to increased sales
of the Expedition and sales of new vehicles such as the Excursion.

      Used vehicle sales increased by $8.3 million or 11.0% to $83.9 million for
the year ended December 31, 2001, from $75.6 million for the year ended December
31, 2000. Adjusting for the sale of the Morristown Lincoln Mercury dealership
($2.4 million), the increase is $10.7 million. The increase is primarily due to
having a full year of results of a high-end used car business that was purchased
in the fourth quarter of 2000. The dealership that acquired this business
accounted for an increase of 424 retail units or $8.3 million over the prior
year. The increase was primarily due to the increased volume. All other
dealerships accounted for an increase in revenues of $0.7 million which was
generated by an 1.9% increase in average selling price ($1.1 million) offset by
a slight decrease of 28 units ($0.4 million). The remaining $1.7 million
increase was associated with 14.7% increase in average revenue per wholesale
unit.

      Parts and service sales increased by $1.5 million or 6.3%, to $25.4
million for the year ended December 31, 2001 from $23.9 million at December 31,
2000. Adjusting for the sale of the Morristown Lincoln Mercury dealership ($0.9
million), the increase is $2.4 million. The increase in parts and service is due
to: (i) the acquisition of a high-end used car dealership at the end of 2000
that enabled the dealership to generate an additional $0.7 million of parts and
service revenues in 2001 and (ii) the hiring of new service managers in certain
dealerships as well as increased focus of the dealerships toward generating
higher parts and service revenues ($1.7 million).

      Other dealership revenues increased by $0.5 million or 7.0%, to $7.6
million for the year ended December 31, 2001 from $7.1 million for the year
ended December 31, 2000. Adjusting for the sale of


                                       29
<PAGE>

the Morristown Lincoln Mercury dealership ($0.1 million), the increase is $0.6
million. This increase is primarily due to both increased sales of extended
service contracts associated with increased used car sales, and additional
income associated with the decrease in deferred revenue ($0.1 million) from the
change in accounting for insurance and service contracts for the Connecticut
dealerships.

      Gross Profit

      Gross profit for the year ended December 31, 2001 was $39.8 million, an
increase of $1.9 million or 5.0%, compared with $37.9 million for the year ended
December 31, 2000.

      Gross profit on sales of new vehicles decreased $0.4 million or 3.6%, from
$11.0 million for the year ended December 31, 2000 to $10.6 million for the year
ended December 31, 2001. Gross profit on same store new vehicle sales decreased
by $0.1 million or 0.9% from the prior year primarily due to a decrease of 314
units, primarily Lincoln Mercury (753 units) partially offset by Toyota (379
units) and Ford (45 units) discussed in new vehicle revenues above, partially
offset by an increase in gross profit margin of 4.1% compared to the prior year.

      Gross profit on sales of used vehicles was $7.7 million for the year ended
December 31, 2001, an increase of $1.1 million or 16.6%, from $6.6 million in
the prior year. Excluding the sale of the Morristown Lincoln Mercury dealership,
the increase is $1.0 million. This increase was attributable to: (i) having a
full year of results of a high-end used car business that was purchased in the
fourth quarter of 2000 (as discussed in revenues above). The dealership that
acquired this business accounted for additional gross profit of $1.0 million of
which $0.7 million was from an increase of 424 retail units and $0.3 million was
from a 22.8% increase in gross profit per unit. (ii) All other dealerships
decreased $0.3 million primarily due to a 3.1% decrease in average gross profit
per unit. (iii) A $0.3 million decrease in wholesale losses in 2001 compared to
2000. Larger than normal wholesale losses due to the demand for used cars and
trucks not keeping up with supply were reflected in the year ended December 31,
2000.

      Parts and service sales yielded gross profit of $13.9 million in the year
ended December 31, 2001, an increase of $0.8 million or 6.1%, from $13.1 million
for the prior year. Adjusting for the sale of the Morristown Lincoln Mercury
dealership the increase is $1.3 million. The increase is primarily due to the
aforementioned increase in related revenues.

      Selling, General and Administrative Expense

      Selling, general and administrative expenses decreased $2.8 million or
7.4%, from $37.9 million for the year ended December 31, 2000, to $35.1 million
for the year ended December 31, 2001. The decrease is primarily attributable to
several non-recurring events in 2000 totaling approximately $3.5 million
partially offset by an increase in salaries and employee benefits of
approximately $0.6 million. The increase in salaries was primarily due to
increases associated with the inclusion of a full year of results of a high-end
used car dealership that was purchased in the fourth quarter of 2000 ($0.5
million) combined with increases at the Toyota and Ford dealerships ($0.8
million). This was partially offset by the sale of the Morristown dealership
($0.5 million) and decreases at other Lincoln Mercury locations ($0.4 million).
The 2000 non-recurring events include: (1) The write-off of a receivable and
associated legal fees of approximately $800,000 from Autotech Leasing
("Autotech") as Autotech filed for bankruptcy protection. Autotech was a leasing
company that provided alternative financing for primarily one of Hometowns
dealerships. Hometown no longer has this type of relationship with a leasing
company. (2) Default of certain livery vehicle loans which Hometown had
guaranteed in the amount of approximately $825,000. The vehicles were sold to
high-risk customers and the transaction was guaranteed by Hometown. Hometown no
longer enters into this type of arrangement. (3) The write-off of certain
receivables totaling approximately $700,000 from specialty financing companies
due to a modification of Hometown's strategy in working with customers with poor
credit history. Hometown has discontinued the practice of entering into recourse
transactions. (4) Approximately $400,000 of bank/legal fees associated with a
discontinued bank facility. (5) A reserve for future expenses associated with
the


                                       30
<PAGE>

dismissal of the former Chairman and CEO and Vice President. Although the
litigation with the former Chairman / CEO and Vice President is ongoing,
Hometown believes that its legal reserves are adequate. See "Management
Discussion & Analysis- Litigation".

      Interest Income

      Interest income increased to $90,000 for the year ended December 31, 2001
from $1,000 for the year ended December 31, 2000. The increase is the result of
the new floor plan agreement with Ford Motor Credit Corp., which began March
2001 and allows us to invest excess cash in interest bearing accounts. Our
previous credit agreement provided that we apply excess cash against the
outstanding floor plan liability.

      Interest Expense

      Interest expense decreased $0.9 million to $4.2 million for the year ended
December 31, 2001 from $5.1 million for the same period in 2000. The decrease is
primarily due to a decrease in the average floor plan liability for the year
caused by better management of inventory levels as well as a decrease in
interest rates from the year ended December 31, 2000.

      Other Income

      Included in other income is a $254,000 gain on sale of the Morristown
Lincoln Mercury dealership to Lincoln Mercury in January 2001.

      Valuation Adjustment for CarDay.com

      On October 18, 2001, CarDay, Inc. ceased operations. Hometown owns
7,380,000 shares of CarDay, Inc. It is not anticipated that any shareholders
will receive any distributions from the dissolution of 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 consolidated 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, Hometown now considers 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 has been charged against income in the quarter ended September 30,
2001. The charge has the effect of reducing net income for the year by
$2,083,000 and reducing Earnings per Share, fully diluted, for the year by
$0.32. Excluding the charge net loss was ($53,000) or less than ($0.01) per
share fully diluted for the year ended December 31, 2001. The charge does not
affect cash, cash flow from operations, or liquidity and capital resources.

      Net Income (loss)

      Net loss decreased from a loss of $3.8 million for the year ended December
31, 2000 to $2.1 million for the year ended December 31, 2001, a decrease of
$1.7 million or 44.7%. As described above this is due to improvements in gross
profit, the absence of the non-recurring charges included in prior year


                                       31
<PAGE>

Selling, General and Administrative Expenses and decreased interest expense,
partially offset by the write-off of CarDay, Inc.

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
1,283,000 and 482,000 shares of common stock were outstanding as of December 31,
2001 and 2000, 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 Company had potentially dilutive
securities related to a stock guarantee issued in connection with an acquisition
of approximately 1,900,000 common shares as of December 31, 2000 that was not
included in the computation of diluted earnings (loss) per share because the
effect would have been anti-dilutive.

      The basic and diluted earnings (loss) per share for the years ended
December 31, 2001 and 2000, are ($.32) and ($.63), respectively.

      The weighted average shares, basic and diluted, for the years ended
December 31, 2001 and 2000 are 6.6 million shares and 6.0 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.

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 2001
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, 2002 and 2001, was $3.6
million and $4.4 million, respectively.


                                       32
<PAGE>

      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,
                                                             --------------------------------
                                                                2002       2001       2000
                                                              -------     ------    -------
                                                                      (in thousands)
<S>                                                           <C>         <C>       <C>
      Net cash provided by operating activities               $ 3,386     $3,278    $   481
      Net cash provided by (used in) investing activities      (2,439)       350     (1,148)
      Net cash provided by (used in) financing activities      (1,769)       232       (382)
                                                              -------     ------    -------
      Net increase (decrease) in cash and cash equivalents    $  (822)    $3,860    $(1,049)
                                                              =======     ======    =======
</TABLE>

      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.

      Capital Expenditures

      Capital expenditures for 2003 are expected to be $0.4 million, consisting
of equipment purchases ($0.3 million) and the remaining costs associated with
the construction of the building of a new showroom at our Framingham,
Massachusetts dealership ($0.1 million).

      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

      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.

      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


                                       33
<PAGE>

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, 2002 and 2001, Hometown had $1,237,000 and $1,264,000 of related
deferred revenue, respectively. During 2002, these dealerships generated
approximately $498,000 of related warranty service and insurance revenue, which
was deferred. During the same period, approximately $525,000 of deferred revenue
was amortized to Other Revenues, net. At December 31, 2002, Hometown also had
other deferred revenue of $94,000.

      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 90 days or in some cases 120 days. For certain other contracts
Hometown is subject to chargebacks for the life of the loan. Generally, if a
customer makes their first three 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 $4.9 million in accounts receivable, net at December 31, 2002
compared to $5.7 million at December 31, 2001. The majority of those
receivables, $2.8 million and $3.2 million as of December 31, 2002 and 2001,
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, $1.3 million and $1.4 million as of December 31, 2002 and
2001, 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 $0.2
million and $0.3 million at December 31, 2002 and 2001, respectively.

      Inventories

      Hometown had $39.2 million in inventories, net at December 31, 2002
compared to $31.9 million at December 31, 2001. The majority of inventory, $29.2
million and $21.7 million as of December 31, 2002 and 2001, respectively, is new
vehicle inventory. The increase in new vehicle inventory is primarily


                                       34
<PAGE>

due to the fourth quarter of 2001 being benefited by zero percent financing on
many new vehicles which caused a surge in new vehicle sales during that period
resulting in a decrease of new vehicle inventory at December 31, 2001. The 2002
period did not have any such surge in sales, resulting in increased inventory
compared to the 2001 period. 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 $0.6
million at both December 31, 2002 and 2001.

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. On July 19, 2001, agreements were signed with 10 accredited
investors and a total of 974,996 Class A Common shares were issued, as follows:

      Investor                    # of Units Purchased  # of Shares Issued/
                                                            Total Proceeds
      Corey Shaker                        35,714                    71,428
      Steven Shaker                       35,714                    71,428
      Janet Shaker                        35,714                    71,428
      Richard Shaker                      35,714                    71,428
      Joseph Shaker                       35,714                    71,428
      Edward Shaker                       35,714                    71,428
      Edward D. Shaker                    35,714                    71,428
      William C. Muller Trust            100,000                   200,000
      William Muller, Jr.                100,000                   200,000
      Paul Yamin                          37,500                    75,000
                                         -------                   -------

      Total                              487,498                   974,996
                                         -------                   -------

      Corey Shaker, Steven Shaker and William Muller, Jr. are officers of
Hometown. Joseph Shaker was a Director of Hometown in July 2001 and became an
officer of Hometown in August 2002.

      The above was recorded as an increase in additional paid in capital in
July 2001. At December 31, 2001, William Muller, Jr. owed Hometown $30,000. This
is recorded in subscriptions receivable which is a reduction to additional paid
in capital at December 31, 2001. This was subsequently paid to Hometown during
the second quarter of 2002 and was recorded as a paid subscription receivable
which is an addition to paid in capital.

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, 2002, Hometown's floor plan liability
with FMCC is $38.5 million. The FMCC agreement has no set maturity date and it
is the intention of Hometown to continue with this financing on an ongoing
basis.


                                       35
<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. Interest rates for the remainder of 2002 were
approximately 4.25% for new vehicles and 6.5% 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.

      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, and 7.4% to 9.4% during 2000. 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 and from 8.6% to 9.6% during 2000.

      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 $14.2 million, which is primarily attributable to
real estate mortgage notes payable of $8.3 million due in monthly installments
including interest at 10.0% that matures in May 2014, real estate capital lease
obligations of $4.4 million due in monthly installments including interest at
10.0% that matures in March 2013, and capital lease obligations on rental
vehicles of $1.2 million due in monthly installments including interest ranging
from 6.0% to 10.0% that matures in March 2013 .

      As of December 31, 2002, Hometown has the following contractual
obligations:

<TABLE>
<CAPTION>
                                                      (In thousands)
                           Total      2003       2004      2005      2006      2007    Thereafter
                          -------    -------    ------    ------    ------    ------   ----------
<S>                       <C>        <C>        <C>       <C>       <C>       <C>       <C>
Floor Plan                $38,522    $38,522
Long term debt
and capital lease
obligations               $14,223    $ 1,164    $1,077    $1,129    $1,043    $  968    $ 8,842
Operating leases:
      Third parties       $13,617    $ 1,884    $1,862    $1,613    $1,442    $1,368    $ 5,448
      Related parties     $ 9,652    $   912    $  912    $  912    $  912    $  912    $ 5,092
                          -------    -------    ------    ------    ------    ------    -------
Total                     $76,014    $42,482    $3,851    $3,654    $3,397    $3,248    $19,382
                          =======    =======    ======    ======    ======    ======    =======
</TABLE>


                                       36
<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 13 customer's limousine vehicle loans granted by Ford
            Motor Credit Co. As of December 31, 2002, Hometown fully and
            partially guaranteed limousine vehicle loans aggregating
            approximately $103,000.

      (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, 2002, Hometown fully guaranteed vehicle loans
            associated with these customers aggregating approximately $33,000.

      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, 2002, Hometown has reserved $70,000 against a total maximum
payout of $136,000 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.

      The same dealership during fiscal 2000 and 2001 partially guaranteed 52
loans totaling approximately $600,000 advanced by Ford Motor Credit Co. to a
certain limousine customer. As of December 31, 2002, Hometown has reserved $0
against a total maximum payout of $600,000 for these loans. Hometown has not
reserved for these loans due to the expected fair value of the vehicles
approximating or exceeding the unamortized portion of the loan balance.

      There are also 17 loans whose liens were not properly perfected totaling
approximately $126,000 as of December 31, 2002. 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 $8,000 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, 2002 the mortgage
debt balance is $4.9 million. Hometown makes annual lease payments of $756,000
to the landlord. The annual mortgage payments made by the landlord total
approximately $774,000. The mortgage matures March 2013. The lease was recorded
as a capital lease. The capital lease obligation is $4.4 million at December 31,
2002. See Notes 7 and 8 to the consolidated financial statements.


                                       37
<PAGE>

Company Warranties

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

      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, 2002 and 2001, Hometown has a reserve of
$172,000 and $226,000, 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 12/31/02         $226,000            $800,000         $(854,000)         $172,000
  Year Ended 12/31/01         $158,000            $947,000         $(879,000)         $226,000
  Year Ended 12/31/00         $180,000            $775,000         $(797,000)         $158,000
</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 13, 2003, Hometown was notified by Toyota Motor Sales, U.S.A.,
Inc. that Hometown must correct certain operational deficiencies or make
substantial progress toward rectifying such deficiencies during the next six
months. Toyota has expressed concerns that the financial resources of the Toyota
dealerships are being used to finance the cash flow deficits of affiliated
companies and that because of this the Toyota dealerships do not meet their net
working capital requirements by approximately $1.0 million. Toyota has also
requested that Hometown provide a written action plan and consolidated financial
forecast. Toyota has also expressed concerns about the impact of Ford Motor
Credits financing terms upon the Toyota dealerships and the existing litigation,
including the Vergopia's as discussed in Item. 3, Management's Discussion and
Analysis - Litigation and in Note 15 to the consolidated financial statements.
Hometown is developing plans to correct the operational deficiencies that would
bring Hometown into compliance. These plans include various alternatives such
as; obtaining an outside line of credit, private equity financing, sale of real
property, sale of a dealership, and advances on warranty income from Hometown's
Extended Service Plan vendor. In addition, Hometown will be in monthly contact
with Toyota to review the efforts of Hometown to resolve the deficiencies
alleged by Toyota. The two Toyota dealerships at December 31, 2002 had combined
revenues of $100.6 million and pre-tax income before allocation of corporate
costs of $2.5 million. Hometown believes that it will be able to alleviate the
concerns expressed by Toyota; however, Toyota has reserved the right to
terminate the Toyota Dealership Agreements if sufficient progress is not made to
correct the alleged deficiencies. Should Hometown be notified by Toyota that
they intend to terminate the Toyota Dealership Agreements, Hometown believes it
would have a reasonable amount of time to cure the default.


                                       38
<PAGE>

Acquisitions and Dispositions

      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 ending December 31, 2002 and future minimum payments under these lease
agreements as of December 31, 2002 is $9.7 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, 2002. This practice is fairly common in the
automotive retail industry. See Item 13 - "Certain Relationships and Related
Transactions".

      At December 31, 2002, $122,000 is due from related parties, including a
non-interest bearing note receivable ($85,000) 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 $900 per
month.

Litigation

      In May 2001, Hometown's wholly-owned subsidiary Morristown Auto Sales,
Inc. ("Morristown") assigned to Crestmont MM, L.P. (the "Assignee") the lease
for the premises, where it was operating its Lincoln Mercury dealership in
Morristown, New Jersey. 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 counterclaim and intends to vigorously defend 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.

      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


                                       39
<PAGE>

Trust Company in connection with a sale of vehicles in 1998. Trust Company is
seeking approximately $390,000 plus other costs. Hometown does not believe that
Westwood has any obligations under the guaranty agreements due to certain
actions taken by Trust Company in relation to the underlying debt, the debtor
and other guarantors. Hometown believes it has meritorious defenses and intends
to vigorously defend 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.

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

      We have retained litigation counsel 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 Vergopia's breaches of certain agreements,
as well as breaches of their fiduciary duties. Discovery is proceeding in this
action.

      We believe that the Vergopias commenced this action in response to our
dismissal of both Salvatore A. Vergopia and Edward A. Vergopia from their
officerships and employment positions with us. We believe we have meritorious
defenses and 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"), Hometowns 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 Vergopia's for discovery and case management purposes. Universal
originally acknowledged its obligation to defend and indemnify Hometown against
the Vergopia's 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. 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.

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, 2002 of $38.5 million, a 1%
change in the borrowing rate would result in a $0.4 million change to annual
floor plan interest expense.


                                       40
<PAGE>

      Hometown invests excess cash, $2.4 million at December 31, 2002, in a
money market account that was paying interest of 1.03% at December 31, 2002.

New Accounting Pronouncements

      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 Notes 2 and Note 17 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. Hometown is currently
evaluating the impact of the adoption of FASB Interpretation No. 45 on
Hometown's financial statements.

      In July 2002, the Financial Accounting Standards Board (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


                                       41
<PAGE>

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 is not expected to have a material
impact on Hometown's financial statements.

      In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" which supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of" and the accounting and
reporting provisions of Accounting Principles Board Opinion (APB) 30, "Reporting
the Results of Operations - Reporting the Effects of the Disposal of a Segment
Business and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions". SFAS 144 addresses financial accounting and reporting for the
impairment and disposal of long-lived assets. Discontinued operations accounting
will be used for a component of an entity and future operating losses of
discontinued operations will no longer be accrued. Additionally, assets acquired
and held for disposal are recorded based on fair value less cost to sell at the
acquisition date. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. Hometown adopted SFAS 144 at January 1, 2002 and it did not
have a material impact on Hometown's financial statements.

      In June 2001, the FASB approved SFAS Nos. 141 and 142 "Business
Combinations" and "Goodwill and Other Intangible Assets", respectively. SFAS
141, among other things, eliminates the "Pooling of Interests" method of
accounting for business acquisitions entered into after June 30, 2001. SFAS 142,
among other things, eliminates the need to amortize goodwill and requires
companies to use a fair-value approach to determine whether there is an
impairment of existing and future goodwill.

      Additionally, an acquired intangible asset should be separately recognized
if the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented or exchanged, regardless of the acquirer's intent to do so. Intangible
assets with definitive lives will need to be amortized over their useful lives.
These statements are effective for Hometown beginning January 1, 2002.

      Hometown adopted this statement effective January 1, 2002, and at such
time ceased recording goodwill amortization. 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. See Note 5 to the consolidated
financial statements for additional disclosure.

Forward Looking Statement

      When used in the Annual Report on Form 10K, the words "may", "will",
"should", "expect", "believe", "anticipate", "continue", "estimate", "project",
"intend" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act regarding events, conditions and financial trends that
may affect the 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.


                                       42
<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

      On July 11, 2002, Hometown filed a report on Form 8-K announcing that
Hometown engaged BDO Seidman LLP ("BDO") as its auditors, replacing Arthur
Andersen LLP ("Andersen") with whom Hometown had no disagreement. Previously, on
June 25, 2002 and July 3, 2002, Hometown filed a report on Form 8-K and Form
8-K/A, respectively, announcing the dismissal of Andersen.


                                       43
<PAGE>

                                    PART III

          ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

      The executive officers and directors of Hometown and their respective ages
as of March 19, 2003 are as follows:

<TABLE>
<CAPTION>
Name                         Age       Position                                       Director Since
----                         ---       --------                                       --------------
<S>                          <C>       <C>                                            <C>
Corey Shaker                 45        President, Chief Operating Officer, Chief           1997
                                       Executive Officer and Director
William C. Muller Jr.        51        Regional Vice President - South Division            1997
                                       and Director
Steven Shaker                34        Regional Vice President - North Division       Not a director
Joseph Shaker                35        Regional Vice President - East Division             1997
                                       and Director
Charles F. Schwartz          47        Chief Financial Officer                        Not a director
Salvatore A. Vergopia        63        Director                                            1997
Edward A. Vergopia           33        Director                                            1997
H. Dennis Lauzon             54        Director                                            2002
Timothy C. Moynahan *        63        Director                                            2002
Steven A. Fournier *         48        Director                                            2002
</TABLE>

----------
*Member of Audit and Compensation Committees

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

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

      Corey Shaker was named President and Chief Operating Officer on February
7, 2000, and added the title of Chief Executive Officer on August 29, 2000. In
addition, he was Vice President-Connecticut Operations since October 1, 1997 and
was in charge of Hometown's Company-wide sales training efforts. Prior to that,
from 1989 he was Chief Operating Officer and General Manager of Family Ford Inc.
where he was responsible for all aspects of its operations. He is a 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. Mr. Shaker serves on the board of directors of AdStar Inc., a
provider of classified ad placement services on the Internet and other
electronic delivery channels. 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 Good Day Chevrolet,
Oldsmobile, 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


                                       44
<PAGE>

Service Excellence Award; and (d) a 3-time winner of Toyota's Sales Excellence
Award. He holds a B.A. degree from Fairleigh Dickinson University.

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

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

      Salvatore A. Vergopia had been Chairman of the Board from October 1997 to
December 2000, and Chief Executive Officer from October 1997 to August 2000, of
Hometown. In addition, from 1992 until December, 2000, he was President and for
over 20 years prior thereto, Vice President of Westwood Lincoln Mercury Sales
Inc. He is also the father of Edward Vergopia, director. He holds a B.S. degree
from Northern Arizona University.

      Edward A. Vergopia was formerly Vice President - Fleet Operations from
October 1997 to December 2000. In addition, from 1988 until December, 2000, he
was Executive Vice President of Westwood where, among other responsibilities, he
managed the Lincoln Mercury Division of Spoilers Plus (custom cars) and Westwood
Lincoln Mercury Limousine Department. During those periods, he also worked in
the Leasing, Financing and Parts and Service Departments of Westwood Lincoln
Mercury. He is also the son of Salvatore Vergopia, director. He holds a B.B.A.
from the University of Miami.

      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


                                       45
<PAGE>

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.

      Steven A. Fournier has been the President and Chief Executive Officer of
Gar-Kenyon Technologies, LLC, 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
currently serves 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.

Committees of the Board of Directors

      Hometown's Board of Directors has established compensation and audit
committees, whose members are Messrs. Moynahan and Fournier. 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 Audit Committee meets with management
and Hometown's independent public accountants to determine the adequacy of
internal controls and other financial reporting matters. It is the intention of
Hometown to appoint only independent directors to the Audit and Compensation
Committees.


                                       46
<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
years ended December 31, 2002, for the Chief Executive Officer and the other
executive officers of Hometown whose aggregate annual base salary exceeded
$100,000 (collectively, the "Named Executive Officers").

<TABLE>
<CAPTION>
                                            COMPENSATION TABLE
--------------------------------------------------------------------------------------------------------

                                                            Annual Compensation
                             ---------------------------------------------------------------------------
                             Fiscal Annual
Name and Principal               Year                                Bonus                        Option
Position                     Compensation       $ Salary              (1)           Other         Grants
------------------------     -------------      --------             ------         -----         ------
<S>                              <C>             <C>                <C>             <C>           <C>
Corey E. Shaker,                 2002            250,000                 --         6,840         50,000
President and Chief              2001            250,000(2)              --         7,000         50,000
Executive Officer                2000            200,000                 --         7,000             --

William C. Muller, Jr.           2002            200,000            101,844         9,673             --
Regional Vice                    2001            200,000            130,372            --         30,000
President-South Division         2000            200,000                 --            --             --

Steven Shaker,                   2002            125,000              1,325         2,600             --
Regional Vice                    2001            118,600             10,000         2,600         30,000
President-North Division         2000            110,000                 --         3,000             --

Joseph Shaker,                   2002(3)         196,350                 --         8,000             --
Regional Vice
President-East Division

Charles F. Schwartz,             2002(4)         160,000             20,000         1,749             --
Chief Financial Officer
</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.


                                       47
<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                      Number of                                                Potential Realizable
                        Shares       Percent of                                  Value At Assumed
                      Underlying   Total Options                               Annual Rates of Stock
                       Options       Granted to     Exercise                  Price Appreciation for
                      Granted(#)    Employees in      Price      Expiration           Option
          Name           (1)         Fiscal Year    ($/Share)       Date              Term(2)
          ----           ---         -----------    ---------       ----              -------
                                        2002                                       5%         10%
                                        ----                                       --         ---
<S>                     <C>             <C>           <C>        <C>            <C>         <C>
      Corey Shaker      50,000          100%          $0.48      April 2007     $6,631      $14,652
</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, April 29, 2002.

(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 2002 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.


                                       48
<PAGE>

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

      The following table summarizes options exercised during fiscal 2002 and
presents the value of unexercised options held by the Named Executive Officers
at fiscal year end:

<TABLE>
<CAPTION>
                                                Number of Securities   Value of Unexercised
                                                     Underlying            In-the-Money
                                               Unexercised Options at    Options at Fiscal
                         Acquired                  Fiscal Year-End           Year-End
                            on        Value        Exercisable (E)        Exercisable (E)
Name                     Exercise    Realized     Unexercisable (U)      Unexercisable (U)
----------------------   --------    --------  ----------------------  -------------------
<S>                         <C>         <C>           <C>                       <C>
Corey E. Shaker             --          --            83,166 E                  --
President and Chief                                   83,334 U
Executive Officer

William C. Muller, Jr.      --          --            30,000 E                  --
Regional Vice                                         20,000 U
President - South

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

Joseph Shaker,              --          --            36,500 E                  --
Regional Vice
President-East

Charles F. Schwartz,        --          --            16,666 E                  --
Chief Financial                                       33,334 U
Officer
</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.


                                       49
<PAGE>

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. and Steven Shaker. The agreement
for Corey E. Shaker provides for an annual base salary of $200,000, which
increased to $250,000 in 2001. The agreement for William C. Muller and Joseph
Shaker provides for an annual base salary of $200,000 and the agreement for
Steven Shaker provides for an annual base salary of $100,000, which increased to
$125,000 in 2001.

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

Compensation Committee Interlocks and Insider Participation in Compensation
Decisions

      None of the directors serving on the Compensation Committee are employees
or officers of 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. No Contributions were made by Hometown to the Plan for the years
ended December 31, 2002, 2001 and 2000. Corey E. Shaker and Joseph Shaker are
the Trustees of the Plan.

Compensation of Directors

      Each non-employee Director receives a fee of $1,000, for each meeting
attended in person and $250 for each meeting attended telephonically and
reimbursement for travel costs and other out-of-pocket expenses incurred in
attending each Directors' meeting. In addition, committee members receive $500
for each committee meeting attended in person, other than meeting directly
following or preceding Board


                                       50
<PAGE>

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.

      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.

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

                                        COMPENSATION COMMITTEE

                                        Steven Fournier
                                        Chairman


                                       51
<PAGE>

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

                              [LINE CHART OMITTED]

                     ASSUMES $100 INVESTED ON JULY 29, 1998
                          ASSUMES DIVIDEND REINVESTED
                        FISCAL YEAR ENDING DEC.31, 2002

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.


                                       52
<PAGE>

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

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

      o     As of March 3, 2003, the total number of shares outstanding is
            7,175,105, of which 3,564,605 shares are Class A common stock and
            3,610,500 shares are Class B common stock.

      The total number of votes are 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, 2003, the total number of votes outstanding is
            39,669,605, of which 3,564,605 votes are from Class A common stock
            outstanding and 36,105,000 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           % of Outstanding Equity       % of
Name of Beneficial Owner              Beneficially Owned                 Owned              Aggregate
                                     ---------------------     -------------------------      voting
                                      Class        Class       Class     Class               Power of
                                        A            B           A         B       Total   all Classes
--------------------------------     -------     ---------     -----     -----     -----   -----------
<S>                                  <C>         <C>           <C>       <C>       <C>       <C>
Officers and Directors
Salvatore Vergopia                        --       705,000        --     19.53      9.83     17.77
Corey E. Shaker                      236,714       265,080      6.37      7.34      6.85      7.25
William C. Muller, Jr                346,250       453,034      9.35     12.55     10.93     12.25
Edward Vergopia                           --       235,000        --      6.51      3.28      5.92
Steven Shaker                        145,142       206,424      4.00      5.72      4.86      5.56
Joseph Shaker                        184,326       321,812      5.07      8.91      6.98      8.56
Charles Schwartz                      16,666            --        **        --        **        **
H. Dennis Lauzon                       3,333            --        **        --        **        **
Timothy Moynahan                      30,834            --        **        --        **        **
Steven Fournier                       30,834            --        **        --        **        **
All Directors, and Executive
Officers as a group (10 persons)     994,099     2,186,350     24.39     60.56     41.37     56.89

5% Beneficial Owners
William C. Muller, Sr                286,000       308,718      7.80      8.55      8.17      8.48
</TABLE>

**    Ownership is less than 1%
--------------------------------------------------------------------------------


                                       53
<PAGE>

      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.

      Edward A. Vergopia has an address at 4912 Pine Street Drive, Miami Beach,
Florida 33140.

      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     36,500 shares at $9.00 per share;

                  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     16,666 shares at $0.48 per share;

      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     205,250 shares of Class A common stock;

      o     1,000 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     20,000 shares at $9.00 per share;

                  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 $9.00 per share;

                  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;


                                       54
<PAGE>

      o     an option to purchase 36,500 shares of Class A common stock,
            exercisable within the next 60 days at $9.00 per share; and

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

      Charles Schwartz has an address at c/o Hometown Auto Retailers, Inc., 774
Straits Turnpike, Watertown Connecticut 06795. His beneficial ownership of our
common stock consist of an option to purchase 16,666 shares of Class A common
stock, exercisable within the next 60 days at $0.68 per share.

      H. Dennis Lauzon has an address at 854 Sunset Avenue, Haworth, New Jersey
07641. His beneficial ownership of our common stock consist of an option to
purchase 3,333 shares of Class A common stock, exercisable within the next 60
days at $0.65 per share.

      Timothy 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     834 shares at $0.42 per share;

      Steven Fournier has an address at 446 Blake Street, New Haven, Connecticut
06510. 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     834 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     186,000 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.


                                       55
<PAGE>

                     Equity Compensation Plan Information

<TABLE>
<CAPTION>
    Plan category         Number of securities          Weighted-average             Number of securities
                           to be issued upon           exercise price of           remaining available for
                              exercise of             outstanding options,          future issuance under
                          outstanding options,        warrants and rights            equity compensation
                          warrants and rights                                          plans (excluding
                                                                                   securities reflected in
                                   (a)                                                    column (a))
<S>                           <C>                         <C>                             <C>
Equity compensation
plans approved by             180,000 (i)                 $10.85 (i)                           -- (i)
security holders              710,750 (ii)                 $3.60 (ii)                     119,250 (ii)
Equity compensation
plans not approved by            None                       None                             None
security holders

Total                         890,750                     $ 5.05                          119,250
</TABLE>

      (i) Hometown granted to Paulson Securities (the "Representative"),
Representative's Warrants, entitling the holders thereof to purchase up to
180,000 shares of Class A Common Stock at a purchase price of $10.80 per share
over a four-year period commencing one year from the effective date of the
Offering, July 1998. See Note 10 to the consolidated financial statements for
additional disclosure. These warrants were issued in connection with the Initial
Public Offering ("IPO") as additional compensation for Representatives services,
as approved by Hometown and each of the three dealership groups ("Core Operating
Companies") that were combining to complete the IPO of Hometown Auto Retailers,
Inc. Without the completion of the IPO, the warrants would not have been issued.
Upon completion of the IPO, the Core Operating Companies controlled
approximately 95% of the aggregate number of votes eligible to be cast by
stockholders.

      (ii) 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 17 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, Corey E. Shaker, William Muller, Jr., Steven A. Fournier
and Timothy Moynahan were late in filing one (1) Statement of Changes in
Beneficial Ownership on Form 4 during 2002 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).


                                       56
<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.

Shaker Group. Hometown leases, for an initial annual base rental of $240,000,
the premises occupied by its Lincoln/Mercury dealership in Watertown,
Connecticut and for an initial base rental of $240,000 and $72,000 respectively,
the premises occupied by the Family ford and Shaker Jeep/Eagle dealership in
Waterbury, CT from Shaker Enterprises, a Connecticut general partnership whose
seven partners include Joseph Shaker, Corey Shaker, Steven 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 initial annual base rental of $360,000 and
$396,000 respectively the premises occupied by its Toyota dealership in Clinton,
New Jersey and its Chevrolet/Oldsmobile 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, 2002, the mortgage debt balance is
$4.9 million. Hometown makes annual lease payments of $756,000 to the landlord.
The annual mortgage payments made by the landlord total approximately $774,000.
The mortgage matures March 2013.

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


                                       57
<PAGE>

                                     PART IV

ITEM 14. CONTROLS AND PROCEDURES

Controls and Procedures

      (a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and its Chief Financial Officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date
within 90 days of the filing date of this annual report on Form 10-K (the
"Evaluation Date")), have concluded that as of the Evaluation Date, the
Company's disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within those entities,
particularly during the period in which this annual report on Form 10-K was
being prepared.

      (b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's disclosure controls and procedures subsequent to the Evaluation
Date, nor any significant deficiencies or material weaknesses in such disclosure
controls and procedures requiring corrective actions. As a result, no corrective
actions were taken.

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


                                       58
<PAGE>

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

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

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

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

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

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

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

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

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

      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


                                       59
<PAGE>

                  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.

      21.1        Subsidiaries of the Registrant

   (3)99.1        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

   (3)99.2        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

   (3)99.3        Chief Executive Officer Certification

   (4)99.4        Chief Financial Officer Certification
----------
*     Unless otherwise indicated all exhibits were previously filed as an
      exhibit to Hometown's Registration Statement on Form (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 27, 2002, Hometown filed a report on Form 8-K with respect to Items
5 and 7 on such report, announcing Hometown's authorizing a stock buy-back
program to acquire up to 350,000 shares of Hometown's outstanding common stock.

Financial Statement Schedules:

See below, beginning on page F-1.

Supplemental Schedules:

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

Schedule II-Valuation and Qualifying Accounts for the years ended December 31,
2002, 2001 and 2000 is set forth hereafter beginning on page.


                                       60
<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, 2003 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
Corey Shaker                            and Director


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


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


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


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



-------------------------------
Salvatore A. Vergopia                   Director



-------------------------------
Edward A. Vergopia                      Director


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


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


                                       61
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----

Reports of Independent Public Accountants                                    F-2

Financial Statements:

   Consolidated Balance Sheets as of December 31, 2001 and 2002              F-4

   Consolidated Statements of Operations for each of the three years
   in the period ended December 31, 2002                                     F-5

   Consolidated Statements of Stockholders' Equity for each of the three
   years in the period ended December 31, 2002                               F-6

   Consolidated Statements of Cash Flows for each of the three years in
   the period ended December 31, 2002                                        F-7

   Notes to Consolidated Financial Statements                                F-8

Reports of Independent Public Accountants on Schedule                        S-1

   Schedule II - Valuation and Qualifying Accounts                           S-2


                                      F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

      We have audited the accompanying consolidated balance sheet of Hometown
Auto Retailers, Inc. (a Delaware Corporation) as of December 31, 2002 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year 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 audit.

      We conducted our audit 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 audit provides 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, 2002 and the results of their operations
and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.

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


Valhalla, New York                      BDO Seidman, LLP
March 7, 2003


                                      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 sheet as of December 31, 2000 and the consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 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                                2002          2001
                                                                             --------      --------
<S>                                                                          <C>           <C>
Current Assets:
   Cash and cash equivalents                                                 $  3,624      $  4,446
   Accounts receivable, net                                                     4,883         5,656
   Inventories, net                                                            39,169        31,887
   Prepaid expenses and other current assets                                      510           344
   Deferred income taxes and taxes receivable                                   1,245         1,681
                                                                             --------      --------
      Total current assets                                                     49,431        44,014
Property and equipment, net                                                    12,882        11,889
Goodwill, net                                                                      --        23,708
Other assets                                                                    1,503         2,231
                                                                             --------      --------
      Total assets                                                           $ 63,816      $ 81,842
                                                                             ========      ========

                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Floor plan notes payable                                                  $ 38,522      $ 32,463
   Accounts payable and accrued expenses                                        5,072         6,160
   Current maturities of long-term debt and capital lease obligations           1,164           886
   Deferred revenue                                                               588           476
                                                                             --------      --------
      Total current liabilities                                                45,346        39,985
Long-term debt and capital lease obligations                                   13,059        12,885
Long-term deferred income taxes                                                   118           721
Other long-term liabilities and deferred revenue                                  743           799
                                                                             --------      --------
       Total liabilities                                                       59,266        54,390
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,
   3,563,605 and 3,561,605 issued and outstanding,
   respectively                                                                     3             3
   Common stock, Class B, $.001 par value, 3,760,000 shares
   authorized, 3,611,500 and 3,613,500 issued and outstanding
   respectively                                                                     4             4
   Additional paid-in capital                                                  29,760        29,730
   Accumulated deficit                                                        (25,217)       (2,285)
                                                                             --------      --------
      Total stockholders' equity                                                4,550        27,452
                                                                             --------      --------
      Total liabilities and stockholders' equity                             $ 63,816      $ 81,842
                                                                             ========      ========
</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,
                                                           ---------------------------------------------
                                                              2002             2001             2000
                                                           -----------      -----------      -----------
<S>                                                        <C>              <C>              <C>
Revenues
   New vehicle sales                                       $   164,659      $   158,825      $   172,759
   Used vehicle sales                                           72,482           83,903           75,623
   Parts and service sales                                      24,330           25,402           23,869
   Other, net                                                    8,268            7,630            7,131
                                                           -----------      -----------      -----------
      Total revenues                                           269,739          275,760          279,382
Cost of sales
   New vehicle                                                 154,225          148,271          161,752
   Used vehicle                                                 65,821           76,189           68,981
   Parts and service                                            11,026           11,485           10,768
                                                           -----------      -----------      -----------
     Total Cost of sales                                       231,072          235,945          241,501
                                                           -----------      -----------      -----------
     Gross profit                                               38,667           39,815           37,881
Amortization of goodwill                                            --              704              661
Selling, general and administrative expenses                    33,978           35,114           37,946
                                                           -----------      -----------      -----------
     Income (loss) from operations                               4,689            3,997             (726)

   Interest income                                                  43               90                1
   Interest (expense)                                           (3,379)          (4,225)          (5,069)
   Other income                                                     52              254               --
   Other (expense)                                                (158)              (8)             (23)
   Valuation adjustment for CarDay.com                              --           (3,258)              --
                                                           -----------      -----------      -----------
      Income (loss) before taxes and cumulative effect
          of accounting change                                   1,247           (3,150)          (5,817)
      Provision (benefit) for income taxes                         471           (1,014)          (2,017)
                                                           -----------      -----------      -----------
      Income (loss) before and cumulative effect
          of accounting change                                     776           (2,136)          (3,800)
      Cumulative effect of accounting change                   (23,708)              --               --
                                                           -----------      -----------      -----------
Net loss                                                   $   (22,932)     $    (2,136)     $    (3,800)
                                                           ===========      ===========      ===========

Earnings (loss) per share, basic
     Before cumulative effect of accounting change         $      0.10      $     (0.32)     $     (0.63)
     Cumulative effect of accounting change                      (3.30)              --               --
                                                           -----------      -----------      -----------
Earnings (loss) per share, basic                           $     (3.20)     $     (0.32)     $     (0.63)
                                                           ===========      ===========      ===========
Earnings (loss) per share, diluted
     Before cumulative effect of accounting change         $      0.10      $     (0.32)     $     (0.63)
     Cumulative effect of accounting change                      (3.30)              --               --
                                                           -----------      -----------      -----------
Earnings (loss) per share, diluted                         $     (3.20)     $     (0.32)     $     (0.63)
                                                           ===========      ===========      ===========

Weighted average shares outstanding, basic                   7,175,105        6,592,436        5,995,996
Weighted average shares outstanding, diluted                 7,175,105        6,592,436        5,995,996
</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, 1999       2,147      $ 2        3,753       $ 4       $ 26,194        $  3,651        $ 29,851

Conversion of Class B Common
to Class A Common                     54       --          (54)       --             --              --              --
Issuance of Class A common           100       --           --        --            332              --             332
Valuation adjustment for
CarDay, Inc.                          --       --           --        --          2,260              --           2,260
Net loss                              --       --           --        --             --          (3,800)         (3,800)
                                   -----      ---       ------       ---       --------        --------        --------
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 receivable               --       --           --        --            (30)             --             (30)
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
                                   =====      ===       ======       ===       ========        ========        ========
</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,
                                                             ---------------------------------
                                                               2002         2001        2000
                                                             --------     -------     --------
<S>                                                          <C>          <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                     $(22,932)    $(2,136)    $ (3,800)
Adjustments to reconcile net loss
         to net cash provided by operating activities -
   Cumulative effect of accounting change                      23,708          --           --
   Depreciation and amortization                                1,330       1,739        1,720
   Impairment of assets                                           150          --           --
   Gain on disposal of business unit                               --        (254)          --
   Loss on write-down of CarDay, Inc.                              --       3,258           --
   Deferred income taxes                                          309      (1,124)      (1,683)
   Changes in assets and liabilities:
     Accounts receivable, net                                     768         499          (48)
     Inventories, net                                          (5,330)      8,226       11,017
     Prepaid expenses and other current assets                    134         (59)         914
     Other assets                                                 172           7          290
     Floor plan notes payable                                   6,059      (7,458)      (8,863)
     Accounts payable and accrued expenses                     (1,038)        898          883
     Deferred revenue                                             112         (38)         (17)
     Other long term liabilities and deferred revenue             (56)       (280)          68
                                                             --------     -------     --------
   Net cash provided by operating activities                    3,386       3,278          481
                                                             --------     -------     --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment, net                     (2,439)       (369)        (421)
   Proceeds from sales of property and equipment                   --          14          149
   Acquisitions, net of cash acquired                              --          --         (876)
   Disposal of business unit                                       --         705           --
                                                             --------     -------     --------
   Net cash provided by (used in) investing activities         (2,439)        350       (1,148)
                                                             --------     -------     --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from long-term borrowings                              61         125           --
   Principal payments of long-term debt and capital lease
        obligations                                            (1,860)       (838)        (714)
   Issuance of common stock and warrants                           30         945          332
                                                             --------     -------     --------
   Net cash provided by (used in) financing activities         (1,769)        232         (382)
                                                             --------     -------     --------

Net increase (decrease) in cash and cash equivalents             (822)      3,860       (1,049)
CASH AND CASH EQUIVALENTS, beginning of period                  4,446         586        1,635
                                                             --------     -------     --------
CASH AND CASH EQUIVALENTS, end of period                     $  3,624     $ 4,446     $    586
                                                             ========     =======     ========

 Cash paid for - Interest                                    $  3,331     $ 3,988     $  4,571
                                                             ========     =======     ========
 Cash paid for - Taxes                                       $    264     $   146     $    204
                                                             ========     =======     ========
 Purchases financed by capital lease obligations             $  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.

      During 1999, the Company invested in an internet-commerce subsidiary,
CarDay, Inc. (CarDay). CarDay is an Internet auction site that offers a buying
experience that offers many of the features generally not available outside the
traditional dealership environment. In January 2000, CarDay obtained $25 million
in financing from a group of venture capital firms. As a result of that
financing, Hometown's ownership interest in CarDay was reduced from 82% to 10.7%
and to increase the carrying value of its investment to $3,258,000. Since CarDay
is a "Development Stage Company", the Company treated the resulting increase in
value of the investment as an increase in additional paid-in-capital. This is in
accordance with the Securities and Exchange Commissions Staff Accounting
Bulletin 51. The investment in CarDay is accounted for on the cost basis. The
Company believes that any similar future transactions are unlikely. Subsequent
to January 20, 2000, the operating results of CarDay are not reflected in
Hometown's financial statements as Hometown's ownership interest has fallen
below 20%. In the fourth quarter of fiscal 2001, CarDay ceased operations,
accordingly the Company considers the investment to be permanently and totally
impaired. See Note 4.

      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 transaction 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.


                                      F-8
<PAGE>

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 15 for
additional disclosure.

      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.

      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, 2002 and 2001 Hometown had $1,237,000 and
$1,264,000 of related deferred revenue, respectively. At December 31, 2002,
Hometown also had other deferred revenue of $94,000.

      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.


                                      F-9
<PAGE>

      Contracts-in-Transit

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

      Inventories

      New, used and demonstrator vehicle values are stated at the lower of cost
or market, 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 $0.6 million and $0.6 million at
December 31, 2002 and 2001, 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.

      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


                                      F-10
<PAGE>

amount of the assets to undiscounted expected future cash flows from the use and
eventual disposition of the asset. If this comparison indicates an impairment,
the carrying amount would then be compared to the fair value of the long-lived
asset. An impairment loss would be measured as the amount by which the carrying
value of the long-lived asset exceeds its fair value. The difference would be
recorded as an impairment of assets. Hometown recorded an asset impairment
charge for assets that 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.

      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, 2002. 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, which
is recorded as a reduction the dealer's advertising expense.

      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.


                                      F-11
<PAGE>

      Hometown performs ongoing credit evaluations of its customers and
generally does not require collateral. Hometown maintains an allowance for
doubtful accounts at a level which management believes is sufficient to provide
for potential credit losses.

      Earnings (loss) per Share

      "Basic earnings (loss) per share" represents net income (loss) divided by
the weighted 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, 2002, Hometown has one stock-based employee compensation
plan, the 1998 Stock Option Plan (the "Stock Option Plan") which is described
more fully in Note 17. 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,
                                                        2002           2001           2000
                                                     ----------     ----------     ----------
<S>                                                  <C>            <C>            <C>
      Net loss, as reported                          $  (22,932)    $   (2,136)    $   (3,800)
      Deduct: Total stock-based employee
      compensation expense determined under
      fair value based method for all awards, net
      of related tax effects (1)                            (28)           (73)           (19)
                                                     ----------     ----------     ----------
      Pro forma net loss                             $  (22,960)    $   (2,209)    $   (3,819)
                                                     ==========     ==========     ==========
      Earnings (loss) per share:
      Basic, as reported                             $    (3.20)    $    (0.32)    $    (0.63)
      Basic, pro forma                               $    (3.20)    $    (0.34)    $    (0.64)

      Diluted, as reported                           $    (3.20)    $    (0.32)    $    (0.63)
      Diluted, pro forma                             $    (3.20)    $    (0.34)    $    (0.64)
</TABLE>

(1)   All awards refers 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 2002
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 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


                                      F-13
<PAGE>

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 17 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. Hometown is currently
evaluating the impact of the adoption of FASB Interpretation No. 45 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 is not expected to have a material impact on Hometown's financial
statements.

      In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" which supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of" and the accounting and
reporting provisions of Accounting Principles Board Opinion (APB) 30, "Reporting
the Results of Operations - Reporting the Effects of the Disposal of a Segment
Business and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions". SFAS 144 addresses financial accounting and reporting for the
impairment and disposal of long-lived assets. Discontinued operations accounting
will be used for a component of an entity and future operating losses of
discontinued operations will no longer be accrued. Additionally, assets acquired
and held for disposal are recorded based on fair value less cost to sell at the
acquisition date. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. Hometown adopted SFAS 144 at January 1, 2002 and it did not
have a material impact on Hometown's financial statements.

      In June 2001, the FASB approved SFAS Nos. 141 and 142 "Business
Combinations" and


                                      F-14
<PAGE>

"Goodwill and Other Intangible Assets", respectively. SFAS 141, among other
things, eliminates the "Pooling of Interests" method of accounting for business
acquisitions entered into after June 30, 2001. SFAS 142, among other things,
eliminates the need to amortize goodwill and requires companies to use a
fair-value approach to determine whether there is an impairment of existing and
future goodwill.

      Additionally, an acquired intangible asset should be separately recognized
if the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented or exchanged, regardless of the acquirer's intent to do so. Intangible
assets with definitive lives will need to be amortized over their useful lives.
These statements are effective for Hometown beginning January 1, 2002.

      Hometown adopted this statement effective January 1, 2002, and at such
time ceased recording goodwill amortization. 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. See Note 5 for additional
disclosure.

3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

      Accounts receivable, net consist of the following:

                                                     12/31/02      12/31/01
                                                     --------      --------
                                                          (in thousands)
      Due from manufacturers                          $1,279        $1,416
      Due from finance companies                       2,758         3,170
      Parts and service receivables                      618           481
      Other                                              228           589
                                                      ------        ------
         Total receivables, net                       $4,883        $5,656
                                                      ======        ======

      The allowance for doubtful accounts was $0.2 million and $0.3 million as
of December 31, 2002 and 2001, 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:

                                                   12/31/02       12/31/01
                                                   --------       --------
                                                        (in thousands)
      New Vehicles                                  $29,236        $21,722
      Used Vehicles                                   7,264          8,559
      Parts, accessories and other                    2,669          1,606
                                                    -------        -------
         Total Inventories                          $39,169        $31,887
                                                    =======        =======


                                      F-15
<PAGE>

Prepaid Expenses and Other Current Assets

      Assets Held For Sale

      Included in Prepaid Expenses and Other Current Assets as of December 31,
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 18. The land held for sale is not being used in Hometown's business. Prior
to December 31, 2002, Hometown decided to sell the property and has been
actively marketing the property. It is anticipated that the sale will close in
the next six months for its carrying value. At December 31, 2001, this was
included in Land and Land Improvements in Property and Equipment for $500,000.
See Note 4. An impairment reserve of $50,000 was included in Accrued Expenses at
December 31, 2001.

Other Assets

      CarDay, Inc.

      On October 18, 2001, CarDay, Inc. ceased operations. Hometown owns
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.

      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, Hometown now considers 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 has been charged against income in the quarter ended September 30,
2001. The charge has the effect of reducing net income for the year 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 does not affect cash, cash flow from
operations, or liquidity and capital resources.


                                      F-16
<PAGE>

      Summarized financial data for CarDay, Inc. for the periods owned for which
it was not part of the Company's consolidated financial results is as follows:

      Statement of Operations Data              Year Ended December 31, 2000
                                                           (000's)
                                                ----------------------------
      Revenues                                            $    272
      Gross profit                                        $    225
      Loss from operations                                $(14,910)
      Net loss                                            $(14,353)

      Accounts payable and accrued expenses consist of the following:

                                                        12/31/02   12/31/01
                                                        --------   --------
      Accounts payable, trade                            $1,785     $2,139
      Accrued compensation costs                            696        655
      Sales and use tax                                     524        619
      Customer payoffs                                      265        368
      Reserve for finance, insurance and
        service contract chargebacks                        293        270
      Reserve for guarantees on finance contracts            78        377
      Reserve for policy work expenses                      172        226
      Accrued interest                                      288        240
      Other accrued expenses                                971      1,266
                                                         ------     ------
      Total                                              $5,072     $6,160
                                                         ======     ======

      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, 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. At December 31, 2001 Hometown had $1,264,000 of deferred revenue of
which $476,000 was current and $788,000 was long-term.

      During 1999, the Company entered into a non-compete agreement with the
previous owner of one of the Acquisitions. The payments under this agreement are
due in equal installments over 46 months. The liability for the remaining
obligation under the agreement,


                                      F-17
<PAGE>

included in current and long-term debt at December 31, 2002 and 2001, was
$68,000 and $173,000 respectively. The related asset is included in the other
assets on the accompanying consolidated financial statements and is being
amortized over 10 years, representing the life of the non-compete agreement.

4. PROPERTY AND EQUIPMENT, NET

      Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                 Estimated Useful  12/31/02      12/31/01
                                                  Lives in Years
                                                 ----------------  --------      --------
<S>                                                  <C>           <C>           <C>
Land and land improvements                           15 to 20      $  4,330      $  4,830
Buildings and leasehold improvements                 7 to 31.5        9,859         7,832
Machinery, equipment, furniture and fixtures          3 to 7          3,091         2,803
Vehicles                                              3 to 5            198           111
Construction in progress                                                 --            97
                                                                   --------      --------
   Sub-total                                                         17,478        15,673
Less - accumulated depreciation and amortization                     (4,596)       (3,784)
                                                                   --------      --------
   Total                                                           $ 12,882      $ 11,889
                                                                   ========      ========
</TABLE>

      Included in buildings and leasehold improvements are capital leases for
two dealerships totaling $5,180,000 for the years ended December 31, 2002 and
2001 which are leased from related parties. See Notes 8, 9 and 14. Hometown
begins depreciating assets once the asset is placed in service. Depreciation and
amortization expense for the years ended December 31, 2002, 2001 and 2000 was
$943,000, $909,000 and $891,000 respectively. Included in land and land
improvements at December 31, 2001, is land held for sale of $500,000. At
December 31, 2002, this is included in Prepaid Expenses and Other Current
Assets. See Note 3.

5. GOODWILL

      As discussed in Note 2, effective January 1, 2002, Hometown adopted SFAS
142. At that time, Hometown ceased recording goodwill amortization. SFAS 142
requires the completion of a transitional impairment test in the year of
adoption, with any impairment identified upon initial implementation treated as
a cumulative effect of a change in accounting principle.

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

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


                                      F-18
<PAGE>

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 company's within Hometown's Standard
Industrial Classification (SIC) code. These methodologies differs 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.

      The effect of the charge on the restated first quarter financial
statements and second quarter financial statements is as follows:

<TABLE>
<CAPTION>
                                                    Three Months        Three Months         Six Months
                                                       Ended               Ended                Ended
                                                   March 31, 2002      June 30, 2002       June 30, 2002
                                                   (in thousands)      (in thousands)      (in thousands)
                                                     (restated)                              (restated)
<S>                                                  <C>                 <C>                 <C>
Reported net income                                  $      235          $      309          $      544
Less: Cumulative effect of accounting change
                                                        (23,708)                 --             (23,708)
                                                     ----------          ----------          ----------
Adjusted net income (loss)                           $  (23,473)         $      309          $  (23,164)
                                                     ==========          ==========          ==========

Earnings (loss) per share, Basic
     Reported net income                             $     0.03          $     0.04          $     0.07
     Cumulative effect of accounting
     change                                               (3.30)                 --               (3.30)
                                                     ----------          ----------          ----------
     Adjusted net income (loss)                      $    (3.27)         $     0.04          $    (3.23)
                                                     ==========          ==========          ==========

Earnings (loss) per share, Diluted
     Reported net income                             $     0.03          $     0.04          $     0.07
     Cumulative effect of accounting
     change                                               (3.30)                 --               (3.30)
                                                     ----------          ----------          ----------
     Adjusted net income (loss)                      $    (3.27)         $     0.04          $    (3.23)
                                                     ==========          ==========          ==========
</TABLE>


                                      F-19
<PAGE>

      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                        December 31, 2002
--------------       -----------------      -----------       -----------------
                                          (in thousands)

Total Company             $ 23,708            $ 23,708             $     --
                          ========            ========             ========

      Goodwill amortization expense is as follows:

                                               For the Years Ended December 31,
                                                 2002         2001        2000
                                               --------     -------     -------
Goodwill amortization (a)                      $     --     $   585     $   545
Deferred finance charges amortization (b)            13          43          68
Non-compete agreement amortization (b)               40          43          42
Cumulative effect of accounting change (a)     $ 23,708     $    --     $    --
                                               ========     =======     =======

Reported net (loss)                            $(22,932)    $(2,136)    $(3,800)
                                               ========     =======     =======

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

      (b)   Amortization of deferred finance charges and non-compete agreement
            costs reflect the effect of income tax.


                                      F-20
<PAGE>

      The 2001 and 2000 full year results do not reflect the provisions of SFAS
142. Had Hometown adopted SFAS 142 on January 1, 1999, 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,
                                                  2002           2001           2000
                                               ----------     ----------     ----------
                                                            (in thousands)
<S>                                            <C>            <C>            <C>
Reported net income (loss)                     $  (22,932)    $   (2,136)    $   (3,800)
Add: Goodwill amortization (a)                         --            585            545
Add: Cumulative effect of accounting change        23,708             --             --
                                               ----------     ----------     ----------
Adjusted net income (loss)                     $      776     $   (1,551)    $   (3,255)
                                               ==========     ==========     ==========

Earnings (loss) per share, Basic
     Reported net income (loss)                $    (3.20)    $    (0.32)    $    (0.63)
     Goodwill amortization (a)                         --           0.08           0.09
     Cumulative effect of accounting change          3.30             --             --
                                               ----------     ----------     ----------
     Adjusted net income (loss)                $     0.10     $    (0.24)    $    (0.54)
                                               ==========     ==========     ==========

Earnings (loss) per share, Diluted
     Reported net income (loss)                $    (3.20)    $    (0.32)    $    (0.63)
     Goodwill amortization (a)                         --           0.08           0.09
     Cumulative effect of accounting change          3.30             --             --
                                               ----------     ----------     ----------
     Adjusted net income (loss)                $     0.10     $    (0.24)    $    (0.54)
                                               ==========     ==========     ==========
</TABLE>

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

      As of December 31, 2002 and 2001, the Company's intangible assets
consisted of the following:

                                                      12/31/02          12/31/01
                                                      --------          --------
                                                           (in thousands)
Deferred finance charges                               $ 267             $ 267
Accumulated amortization                                 (78)              (57)
Non-compete agreement                                    381               381
Accumulated amortization                                (206)             (143)
                                                       -----             -----
   Net intangible assets (a)                           $ 364             $ 448
                                                       =====             =====

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


                                      F-21
<PAGE>

Aggregate Amortization Expense of Intangible Assets for the year ended 12/31/02
is $85,000.

Estimated Amortization Expense of Intangible Assets (000's):

For the year ended 12/31/03               $85
For the year ended 12/31/04               $85
For the year ended 12/31/05               $69
For the year ended 12/31/06               $21
For the year ended 12/31/07               $16

6. FLOOR PLAN NOTES PAYABLE AND INTEREST EXPENSE

                                       12/31/02      12/31/01      12/31/00
                                       --------      --------      --------
                                                   (in thousands)
      Floor plan notes payable          $38,522       $32,463       $40,123
                                        =======       =======       =======
      Floor plan interest expense       $ 1,887       $ 2,548       $ 3,370
                                        =======       =======       =======

      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, 2002 Hometown's floor plan liability
with FMCC is $38.5 million. The FMCC agreement has no set maturity date and it
is the intention of Hometown to continue with this financing on an ongoing
basis.

      For the first year of the agreement, through May 2002, the FMCC floor plan
loans carried an interest rate of prime less 0.75% for new vehicles and prime
less 0.50% for used vehicles. From 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, 2002, interest rates were
approximately 4.25 % for new vehicles and 6.0% to 6.5% for used vehicles.

      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, and 7.4% to 9.4% during 2000. 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 and from 8.6% to 9.6% during 2000.


                                      F-22
<PAGE>

      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 $1.7 million, $1.6 million and $2.3 million
for the years ended December 31, 2002, 2001 and 2000, respectively, and is
recorded as a reduction of cost of sales when the vehicle is sold. Of these
amounts, $0.3 million, $0.2 million and $0.5 million was recorded as a reduction
of inventory at December 31, 2002, 2001 and 2000, respectively.

7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

<TABLE>
<CAPTION>
                                                                               12/31/02    12/31/01
                                                                               --------    --------
                                                                                  (in thousands)
<S>                                                                             <C>         <C>
Real estate mortgage note payable, due in monthly installments
including interest at 10.0%, maturing May 1, 2014                               $ 8,258     $ 8,607
Real estate capital lease obligations, due in monthly installments
including interest at 10.0%, maturing in March 2013. See Note 9                   4,394       4,604
Capital lease obligations on rental vehicles, due in monthly installments
including interest ranging from 6.0% to 9.0%, maturing
on various dates through July, 2007                                               1,153          90
Notes payable on rental vehicles, due in monthly installments
including interest of 6.5%, maturing on December 2005                               158          --
Note payable to the former owner of one of the Acquisitions, due in monthly
installments including interest at 10.0%, maturing July,
2003, related to a non-compete agreement                                             68         175
Mortgage note payable, due in monthly installments including
interest at 10.5%, maturing in July 2003, relating to assets held for
sale                                                                                 58         158
Various due in monthly installments including interest ranging from
7.2% to 14.6%, maturing on various dates through October 2006                       134         137
                                                                                -------     -------
                                                                                 14,223      13,771
Less: Current portion                                                             1,164         886
                                                                                -------     -------
Total Long Term Debt and Capital Lease Obligations (a)                          $13,059     $12,885
                                                                                =======     =======
</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)
                       2003                          $1,164
                       2004                           1,077
                       2005                           1,129
                       2006                           1,043
                       2007                             968
                    Thereafter                        8,842


                                      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,
                                                                        2002         2001
                                                                      -------      -------
                                                                         (in thousands)
<S>                                                                   <C>          <C>
Rental and loaner vehicles                                            $ 1,361      $   113
Less: Accumulated Amortization                                           (208)         (23)
                                                                      -------      -------
     Net rental and loaner vehicles (included in Inventories)         $ 1,153      $    90
                                                                      =======      =======

Buildings                                                             $ 5,180      $ 5,180
Less: Accumulated Amortization                                         (1,484)      (1,148)
                                                                      -------      -------
     Net Buildings (included in Property & Equipment)                 $ 3,696      $ 4,032
                                                                      =======      =======
</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, 2002:

                      Year ending                                Minimum Lease
                      December 31,                                  Payments
                      ------------                               -------------
                                                                (in thousands)
                         2003                                       $ 1,159
                         2004                                         1,159
                         2005                                         1,154
                         2006                                         1,015
                         2007                                           809
                      Thereafter                                      4,536
                                                                    -------
Total minimum lease payments                                          9,832
Less: Amount representing estimated executory costs,
included in total minimum lease payments                               (208)
                                                                    -------
Net minimum lease payments                                            9,624
Less: Amount representing interest                                   (4,077)
                                                                    -------
Present value of net minimum lease payments *                       $ 5,547
                                                                    =======

*     Reflected in the balance sheet as current and non-current obligations
      under capital leases of $535 and $5,012, 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 14. 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, 2002 the mortgage debt balance is $4.9 million and the capital
lease obligation recorded by Hometown is $4.4 million. Hometown makes annual
lease payments of $756,000 to the landlord. The annual mortgage payments made by
the landlord total approximately $774,000. The mortgage matures March 2013.

Due from related parties are as follows:

                                                              12/31/02  12/31/01
                                                              --------  --------
                                                                (in thousands)
Note receivable from a company owned by an officer of
Hometown, non-interest bearing with payment due monthly
of $3,000                                                       $ 85      $121
Other, net                                                        37        40
                                                                ----      ----
    Total                                                       $122      $161
                                                                ====      ====

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, 2002 and 2001, 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


                                      F-25
<PAGE>

Class B Common Stock. Subject to any special voting rights of any series of
Preferred Stock that may be issued in the future, the holders of Class A Common
Stock are entitled to one vote per share and the holders of Class B Common Stock
are entitled to ten votes per share. Except as otherwise required by law, both
Class A Common Stock and Class B Common Stock vote together as one class on all
matters to be voted on by stockholders of Hometown, including the election of
directors. Class A Common Stock is not convertible. The Class B Common Stock is
convertible into Class A Common Stock on a share for share basis, at any time at
the election of the holder and is automatically converted into Class A Common
Stock upon any transfer to a person who is not then an officer or director of
Hometown or of a subsidiary of Hometown. All of the outstanding shares of Class
B Common Stock, representing approximately 91% of the aggregate voting power of
Hometown, are beneficially owned by the principals of the Core Operating
Companies, including a majority of the Board of Directors of Hometown. Neither
class of Common Stock has redemption, preemptive or sinking fund rights. Holders
of both classes of Common Stock are entitled to dividends as and when declared
by the Board of Directors from funds legally available therefore and, upon
liquidation, dissolution or winding up of 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 Hometown's outstanding
common stock. As of December 31, 2002, no shares have been acquired.

      Warrants

      In connection with the "Private Equity Financing", see Note 11, Hometown
issued warrants that entitled the holders to purchase up to 487,498 shares of
Class A Common Shares at a purchase price of $1.20 per share, exercisable over a
three-year period.

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

      Per Share Data

      "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, 1,283,000 and 482,000 shares of common stock were outstanding during
2002, 2001 and 2000, respectively. The options and warrants were not included in
the computation of diluted earnings (loss) per share because either the option
and warrant prices were greater than the average market price of the common
shares, or the effect would be anti-dilutive. The Company had potentially
dilutive securities related to a stock guarantee issued in connection with an
acquisition of approximately 1,900,000 common shares as of December 31, 2000
that was not included in the computation of diluted earnings (loss) per share
because the effect would have been anti-dilutive.


                                      F-26
<PAGE>

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.

11. 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. On July 19, 2001, agreements were signed with 10 accredited
investors and a total of 974,996 Class A Common shares were issued, as follows:

      Investor                          # of Units Purchased  # of Shares Issued

      Corey Shaker                              35,714               71,428
      Steven Shaker                             35,714               71,428
      Janet Shaker                              35,714               71,428
      Richard Shaker                            35,714               71,428
      Joseph Shaker                             35,714               71,428
      Edward Shaker                             35,714               71,428
      Edward D. Shaker                          35,714               71,428
      William C. Muller Trust                  100,000              200,000
      William Muller, Jr                       100,000              200,000
      Paul Yamin                                37,500               75,000
                                               -------              -------

      Total                                    487,498              974,996
                                               -------              -------

      Corey Shaker, Steven Shaker and William Muller, Jr. are officers of the
Hometown. Joseph Shaker was a Director of Hometown in July 2001 and became an
officer of Hometown in August 2002.

      This was recorded as an increase in additional paid in capital in July
2001. At December 31, 2001, William Muller, Jr. owed Hometown $30,000. This is
recorded in subscriptions receivable which is a reduction to additional paid in
capital at December 31, 2001. This was subsequently paid to Hometown during the
second quarter of 2002 and was recorded as a paid subscription receivable which
is an addition to paid in capital.


                                      F-27
<PAGE>

12. INCOME TAXES

                                      12/31/02     12/31/01       12/31/00
                                      --------     --------       --------
                                                (in thousands)
      Federal:
          Current                       $ --       $  (377)       $(1,275)
          Deferred                       428          (485)          (479)
      State:
          Current                         19           (20)          (191)
          Deferred                        24          (132)           (72)
                                        ----       -------        -------
         Total Income Taxes             $471       $(1,014)       $(2,017)
                                        ====       =======        =======

      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>
                                                  12/31/02   12/31/01    12/31/00
                                                  --------   --------    --------
<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                       2.3%      (3.1%)      (3.1%)
          Non-deductible goodwill                     --        4.9%        2.2%
          Other                                      1.5%        --         0.2%
                                                    ----      -----       -----
      Effective tax rate                            37.8%     (32.2%)     (34.7%)
                                                    ====      =====       =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                                   12/31/02      12/31/01
                                                                   --------      --------
                                                                       (in thousands)
<S>                                                                 <C>           <C>
      Deferred income taxes and taxes receivable - short-term:
      Current net operating loss carryforward                       $   478       $ 1,276
      Reserves and accruals not deductible until paid                   459           117
      Tax on current portion of deferred revenue                        205           191
      Tax prepayments and prior year overpayments                       103            97
                                                                    -------       -------
                   Total                                            $ 1,245       $ 1,681
                                                                    =======       =======
</TABLE>


                                      F-28
<PAGE>

<TABLE>
<CAPTION>
                                                                   12/31/02      12/31/01
                                                                   --------      --------
                                                                       (in thousands)
<S>                                                                 <C>           <C>
      Deferred tax assets - long-term (a):
      Tax assets related to goodwill                                $ 3,169       $    --
      Long term net operating loss carryforward                       1,323         1,143
      Tax on long term portion of deferred revenue                      290           315
      Deferred tax on capital leases treated as
      operating leases for tax purposes                                 284           228
      Valuation allowance (b)                                        (4,092)         (242)
                                                                    -------       -------
                   Total                                            $   974       $ 1,444
                                                                    =======       =======

      Deferred tax liabilities - long-term:
      Amortization of goodwill                                      $    --       $  (424)
      Depreciation                                                      (73)         (111)
      Other                                                             (45)         (186)
                                                                    -------       -------
                   Total                                            $  (118)      $  (721)
                                                                    =======       =======

      Net deferred tax assets - short term                          $ 1,142       $ 1,584
      Net deferred tax assets - long term                             4,948           965
      Valuation allowance on long-term assets (c)                    (4,092)         (242)
                                                                    -------       -------
      Net deferred tax asset                                        $ 1,998       $ 2,307
                                                                    =======       =======
</TABLE>

      (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 goodwill and a partial valuation allowance on its net operating
losses because the realization of these assets are not assured.

      (c) In connection with the adoption of SFAS 142, discussed in Note 5,
Hometown recorded a deferred tax benefit of approximately $3.8 million against
which a full valuation allowance was recorded.

13. ADVERTISING AND PROMOTION

      Hometown expenses advertising and promotion as incurred. Advertising and
promotion expenses included in Selling, General and Administrative Expenses, net
of manufacturers' rebates and assistance, were approximately $2.9 million, $3.1
million, and $2.8 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Manufacturers advertising rebates and


                                      F-29
<PAGE>

assistance was approximately $0.6 million, $0.4 million and $0.5 million for the
years ended December 31, 2002, 2001 and 2000, respectively. Certain
manufacturers will charge Hometown for national and regional advertising. 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. This accounting is
consistent with industry practice.

14. 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, 2002 are as follows:

      Year ending December 31,   Total Obligation  Related Parties      Other
      ------------------------   ----------------  ---------------      -----
                                                   (in thousands)
      2003                            $ 1,884          $  912          $  972
      2004                              1,862             912             950
      2005                              1,613             912             701
      2006                              1,442             912             530
      2007                              1,368             912             456
      Thereafter                        5,448           5,092             356
                                      -------          ------          ------
      Total (1)                       $13,617          $9,652          $3,965
                                      =======          ======          ======

      (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.

      Total expense for operating leases and rental agreements was $1,938,000,
$2,085,000 and $2,095,000 for the years ending December 31, 2002, 2001 and 2000,
respectively. Rental expense for the years ending December 31, 2002 and 2001,
does not include sub-lease income received of $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,
2002, 2001 and 2000 respectively.

15. COMMITMENTS AND CONTINGENCIES

      Litigation

      In May 2001, Hometown's wholly-owned subsidiary Morristown Auto Sales,
Inc. ("Morristown") assigned to Crestmont MM, L.P. (the "Assignee") the lease
for the premises, where it was operating its Lincoln Mercury dealership in
Morristown, New Jersey. 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


                                      F-30
<PAGE>

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 counterclaim and intends to vigorously defend 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.

      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 is seeking approximately $390,000 plus
other costs. Hometown does not believe that Westwood has any obligations under
the guaranty agreements due to certain actions taken by Trust Company in
relation to the underlying debt, the debtor and other guarantors. Hometown
believes it has meritorious defenses and intends to vigorously defend 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.

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

      We have retained litigation counsel 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 Vergopia's breaches of certain agreements,
as well as breaches of their fiduciary duties. Discovery is proceeding in this
action.

      We believe that the Vergopias commenced this action in response to our
dismissal of both Salvatore A. Vergopia and Edward A. Vergopia from their
officerships and employment positions with us. We believe we have meritorious
defenses and 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.


                                      F-31
<PAGE>

Universal Underwriters Group ("Universal"), Hometowns 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 Vergopia's for discovery and case management purposes. Universal
originally acknowledged its obligation to defend and indemnify Hometown against
the Vergopia's 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. 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.

      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 13 customer's limousine vehicle loans granted by Ford
            Motor Credit Co. As of December 31, 2002, Hometown fully and
            partially guaranteed limousine vehicle loans aggregating
            approximately $103,000.

      (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, 2002, Hometown fully guaranteed vehicle loans
            associated with these customers aggregating approximately $33,000.

      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, 2002, Hometown has reserved $70,000 against a total maximum
payout of $136,000 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.


                                      F-32
<PAGE>

      The same dealership during fiscal 2000 and 2001 partially guaranteed 52
loans totaling approximately $600,000 advanced by Ford Motor Credit Co. to a
certain limousine customer. As of December 31, 2002, Hometown has reserved $0
against a total maximum payout of $600,000 for these loans. Hometown has not
reserved for these loans due to the expected fair value of the vehicles
approximating or exceeding the unamortized portion of the loan balance.

      There are also 17 loans whose liens were not properly perfected totaling
approximately $126,000 as of December 31, 2002. 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 $8,000 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, 2002 the mortgage
debt balance is $4.9 million. Hometown makes annual lease payments of $756,000
to the landlord. The annual mortgage payments made by the landlord total
approximately $774,000. The mortgage matures March 2013. The lease was recorded
as a capital lease. The capital lease obligation is $4.4 million at December 31,
2002. See Notes 7 and 8 to the consolidated financial statements.

      Warranties

      Hometowns 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.

      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, 2002 and 2001, Hometown has a reserve of
$172,000 and $226,000, 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.


                                      F-33
<PAGE>

<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 12/31/02           $226,000           $800,000         $(854,000)         $172,000
  Year Ended 12/31/01           $158,000           $947,000         $(879,000)         $226,000
  Year Ended 12/31/00          $180,000           $775,000         $(797,000)         $158,000
</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 13, 2003, Hometown was notified by Toyota Motor Sales, U.S.A.,
Inc. that Hometown must correct certain operational deficiencies or make
substantial progress toward rectifying such deficiencies during the next six
months. Toyota has expressed concerns that the financial resources of the Toyota
dealerships are being used to finance the cash flow deficits of affiliated
companies and that because of this the Toyota dealerships do not meet their net
working capital requirements by approximately $1.0 million. Toyota has also
requested that Hometown provide a written action plan and consolidated financial
forecast. Toyota has also expressed concerns about the impact of Ford Motor
Credits financing terms upon the Toyota dealerships and the existing litigation,
including the Vergopia's as discussed in Item. 3, Management's Discussion and
Analysis - Litigation and in Note 15 to the consolidated financial statements.
Hometown is developing plans to correct the operational deficiencies that would
bring Hometown into compliance. These plans include various alternatives such
as; obtaining an outside line of credit, private equity financing, sale of real
property, sale of a dealership, and advances on warranty income from Hometown's
Extended Service Plan vendor. In addition, Hometown will be in monthly contact
with Toyota to review the efforts of Hometown to resolve the deficiencies
alleged by Toyota. The two Toyota dealerships at December 31, 2002 had combined
revenues of $100.6 million and pre-tax income before allocation of corporate
costs of $2.5 million. Hometown believes that it will be able to alleviate the
concerns expressed by Toyota; however, Toyota has reserved the right to
terminate the Toyota Dealership Agreements if sufficient progress is not made to
correct the alleged deficiencies. Should Hometown be notified by Toyota that
they intend to terminate the Toyota Dealership Agreements, Hometown believes it
would have a reasonable amount of time to cure the default.

16. 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. No contributions are to be made by Hometown to the Plan for the
years ended December 31, 2002, 2001 and 2000.


                                      F-34
<PAGE>

17. 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.

      The following tables summarize 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, 1999             274,200             $ 8.01
Options Granted                           50,000               1.24            $ 0.65
Canceled                                 (22,200)              7.30
                                         -------             ------
Balance at December 31, 2000             302,000             $ 7.24
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
                                         =======             ======
Exercisable at December 31, 2000         161,333             $ 8.63
                                         =======             ======
Exercisable at December 31, 2001         283,668             $ 7.18
                                         =======             ======
Exercisable at December 31, 2002         414,914             $ 5.26
                                         =======             ======
</TABLE>


                                      F-35
<PAGE>

<TABLE>
<CAPTION>
                       Number of          Weighted              Weighted
    Range of            Options            Average          Average Exercise           Options
    Exercise         Outstanding at       Remaining              Price               Exercisable         Weighted Avg.
     Prices             12/31/02            Life               Per Share             at 12/31/02        Exercise Price
    --------         --------------       ---------         ----------------         -----------        --------------
<S>                     <C>                 <C>                  <C>                    <C>                 <C>
$0.42 to $0.65          120,000             4.34                 $ 0.51                 33,334              $ 0.53
$0.68 to $1.50          221,875             4.56                 $ 1.11                100,623              $ 1.13
$2.25 to $3.00          161,875             3.18                 $ 2.39                 73,957              $ 2.55
$9.00                   207,000             0.70                 $ 9.00                207,000              $ 9.00
                        -------             ----                 ------                -------              ------
                        710,750             3.09                 $ 3.60                414,914              $ 5.26
                        =======             ====                 ======                =======              ======
</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 2002, the dividend yield was assumed to be 0%, the risk-free interest
rate ranged from 3.4% to 4.4%, the expected option life was 5 years and the
expected volatility was 75%. 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%. In 2000, the dividend yield was
assumed to be 0%, the risk-free interest rate was 6.00%, the expected option
life was 3 years and the expected volatility was 73.58%.

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

18. OTHER INCOME / OTHER EXPENSE

      The significant components of Other Income and Other Expense are:

                                              12/31/02     12/31/01     12/31/00
                                              --------     --------     --------
                                                         (in thousands)
Other Income:
Gain on sale of Morristown franchise            $  --        $ 254          --
Insurance claim proceeds                           40           --          --
Other                                              12           --          --
                                                -----        -----        ----
Total Other Income                              $  52        $ 254          --
                                                =====        =====        ====
Other Expense:
Impairment of Assets                            $(150)       $  --        $ --
Miscellaneous                                      (8)          (8)        (23)
                                                -----        -----        ----
Total Other Expense                             $(158)       $  (8)       $(23)
                                                =====        =====        ====


                                      F-36
<PAGE>

      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.

19. 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.

      On January 12, 2000, Hometown completed the acquisition of a Jeep
franchise in Brattleboro, Vermont for $0.6 million. As part of this acquisition,
Hometown also purchased the new vehicle inventory totaling $0.3 million. The
operations of this franchise have been included as part of Hometowns existing
Brattleboro Chrysler/Plymouth/Dodge dealership. This acquisition has been
accounted for using the purchase method of accounting, resulting in goodwill of
approximately $0.8 million. See Note 5.


                                      F-37
<PAGE>

                            QUARTERLY FINANCIAL DATA
                 For the years ended December 31, 2002 and 2001
                      (in thousands, except per share data)
                                   (unaudited)

                                      2002

<TABLE>
<CAPTION>
                                                 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
Cost of sales                                       55,486            62,901           63,886            48,799           231,072
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.

                                      2001

<TABLE>
<CAPTION>
                                                 1st Qtr.          2nd Qtr.         3rd Qtr.          4th Qtr.        Total Year
                                               -----------       -----------      -----------       -----------       -----------
                                               (Restated)*
<S>                                            <C>               <C>              <C>               <C>               <C>
Net Sales                                      $    60,647       $    74,454      $    71,517       $    69,142       $   275,760
Cost of sales                                       51,457            63,311           61,277            59,900           235,945
Income (loss) before taxes                             464               900           (2,676)           (1,838)           (3,150)
                                               ----------------------------------------------------------------------------------
Net income (loss)                              $       197       $       609      $    (1,746)      $    (1,196)      $    (2,136)
                                               ----------------------------------------------------------------------------------

Per share information:
Earnings (loss) per share, basic               $      0.03       $      0.10      $     (0.24)      $     (0.17)      $     (0.32)
Earnings (loss) per share, diluted             $      0.02       $      0.10      $     (0.24)      $     (0.17)      $     (0.32)

Weighted average shares, basic                     6,000.1           6,000.1          7,175.1           7,175.1           6,592.4
Weighted average shares, diluted                   8,032.3           6,200.1          7,175.1           7,175.1           6,592.4
</TABLE>


                                      F-38
<PAGE>

              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

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

      The audit referred to in our report dated March 7, 2003 relating to the
consolidated financial statements of Hometown Auto Retailers, Inc., which is
contained in Item 8 of this Form 10-K included the audit of the financial
statement schedules 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
audit.

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


Valhalla, New York                      BDO Seidman, LLP
March 7, 2003


                                      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 sheet as of December 31, 2000 and the consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 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.


                                        ARTHUR ANDERSEN LLP
Stamford, Connecticut
May 23, 2002


                                      S-2
<PAGE>

                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
              For the years ended December 31, 2002, 2001 and 2000

<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, 2002                 $ 113,000      $ 367,000      $(318,000)      $      --      $162,000
                                                 =========      =========      =========       =========      ========
    Year ended December 31, 2001                 $  96,000      $ 277,000      $(260,000)      $      --      $113,000
                                                 =========      =========      =========       =========      ========
    Year ended December 31, 2000                 $ 187,000      $ 242,000      $(333,000)      $      --      $ 96,000
                                                 =========      =========      =========       =========      ========

Reserve for insurance contract charge-backs
    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
                                                 =========      =========      =========       =========      ========
    Year ended December 31, 2000                 $   5,000      $  13,000      $ (15,000)      $      --      $  3,000
                                                 =========      =========      =========       =========      ========

Reserve for service contract charge-backs
     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
                                                 =========      =========      =========       =========      ========
    Year ended December 31, 2000                 $  73,000      $  48,000      $ (78,000)      $      --      $ 43,000
                                                 =========      =========      =========       =========      ========

Reserve for uncollectible long-term
    finance contracts
    Year ended December 31, 2002                 $      --      $      --      $      --       $      --      $     --
                                                 =========      =========      =========       =========      ========
    Year ended December 31, 2001                 $      --      $      --      $      --       $      --      $     --
                                                 =========      =========      =========       =========      ========
    Year ended December 31, 2000                 $ 443,000      $      --      $(443,000)      $      --      $     --
                                                 =========      =========      =========       =========      ========
</TABLE>


                                      S-3
<PAGE>

                                  SCHEDULE II
                 VALUATION AND QUALIFYING ACCOUNTS - Continued
              For the years ended December 31, 2002, 2001 and 2000

<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, 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
                                                 =========      =========      =========       =========      ==========
    Year ended December 31, 2000                 $ 380,000      $ 825,000      $      --       $      --      $1,205,000
                                                 =========      =========      =========       =========      ==========

Reserve for policy work expenses
    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
                                                 =========      =========      =========       =========      ==========
    Year ended December 31, 2000                 $ 180,000      $ 775,000      $(797,000)      $      --      $  158,000
                                                 =========      =========      =========       =========      ==========

Allowance for doubtful accounts
    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
                                                 =========      =========      =========       =========      ==========
    Year ended December 31, 2000                 $ 100,000      $ 804,000      $      --       $      --      $  904,000
                                                 =========      =========      =========       =========      ==========
</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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