<PAGE>   1
                                   EXHIBIT 13

             The Registrant's 1997 Annual Report to Shareholders, which report,
              except for those portions thereof which are expressly incorporated
              by reference in this filing, is furnished for the information of
              the Commission and is not to be deemed to be filed as part of this
              filing.






                                         99
<PAGE>   2
                             [Hudson General Logo]





                          DEDICATED TO QUALITY SERVICE






                               1997 ANNUAL REPORT




                                         100
<PAGE>   3
CONTENTS

Letter to Shareholders..........................1
Aviation Services...............................3
Land Development................................8
Management's Discussion and Analysis of
  Financial Condition and Results
  of Operations.................................9
Selected Consolidated Financial Data...........13
Consolidated Financial Statements..............14
Notes to Consolidated Financial Statements.....18
Independent Auditors' Report...................24
Corporate Information...........Inside Back Cover



                                      101
<PAGE>   4
FELLOW SHAREHOLDERS:

The theme of this year's Annual Report to Shareholders is "Dedicated to Quality
Service."

Quality service to its customers has been Hudson General's guiding principle
since it was founded in 1961, and adherence to this philosophy has enabled
Hudson General to grow into one of the foremost aviation service companies in
North America. As we continue to build on our expertise and experience, fiscal
1997 saw Hudson General further expand its presence at many of the major
airports in the United States and Canada.

The year concluded on a high note, as a partnership formed by four of the
world's premier international airlines, Air France, Japan Airlines, Korean
Airlines and Lufthansa German Airlines, stated its intent to award Hudson
General what is expected to be our largest single contract. This partnership is
building a new international terminal (Terminal One) at JFK International
Airport in New York, which is expected to open in the Spring of 1998. The
ultimate success of this state-of-the-art facility depends on its ability to
attract other airlines to use it for their JFK operations. The airlines in the
Terminal One partnership recognize that providing high quality ground handling
services is essential to realize this goal, and have approved Hudson General
to be the exclusive provider of these services at Terminal One.

Fiscal 1997 was the first full year that our aviation services business has
been conducted by Hudson General LLC. Hudson General Corporation holds a 74%
interest in Hudson General LLC and accounts for this interest using the equity
method of accounting rather than on a consolidated basis. As a result, all
aviation services revenues are reported at the Hudson General LLC level, and
our financial statements show very low revenues and costs at the Hudson General
Corporation level. Page 9 of this report contains a summary table of operating
results of the aviation services business.

A review of the summary table reveals a significant reduction in operating
income in fiscal 1997 compared with fiscal 1996. The primary reason for the
lower income was the much milder winter in the Northeast in 1997, which reduced
demand for our snow removal and de-icing services. Our year-round businesses
remained strong despite the scaling back of the initial flood of flights
between the United States and Canada that airlines had scheduled when the Open
Skies Agreement between those two countries was signed two years ago.
Overcapacity led to a reduction in flights, and this negatively impacted our
results in Canada.

Our core business continues to grow, and our customers continue to recognize
Hudson General's dedication to quality service. Thus, in fiscal 1997, we were
successful in expanding our intoplane fueling and cargo handling activities at
several locations. In addition, we were successful in our bid to continue to
operate the shuttle bus service for the City of Los Angeles at Los Angeles
International Airport for an additional five year term. We are proud to have
provided that service since 1978.

                                         102
<PAGE>   5
The news from Hawaii is not encouraging. Included in Hudson General
Corporation's earnings for the fiscal year ended June 30, 1997 is a pre-tax
charge of $8,500,000 relating to our 50% interest in the Kohala Joint Venture
real estate development project in Hawaii. This charge is a result of the
continuing periodic evaluation of the carrying value of the Joint Venture's real
estate assets. The Joint Venture partners concluded, as a result of their most
recent in-depth analysis of an updated independent appraisal of such assets and
the consideration of other factors affecting the development of the property,
that the carrying value of the real estate assets should be reduced. Factors
considered by the Joint Venture partners included the partners' plans to
reevaluate Phase IV of the project which has to date only had limited
development, the current condition of the Hawaiian real estate market and
general economic conditions.

During fiscal 1997, the Board of Directors authorized the repurchase of up to a
total of 400,000 shares of the Corporation's common stock from time to time in
either open market or privately negotiated transactions. This authorization was
in addition to previous repurchase authorizations by the Board. During fiscal
1997, the Corporation repurchased 243,000 of its shares in the open market for
an aggregate purchase price of $9,152,000. Authorization to repurchase 193,000
additional shares remains. The Board continues to believe that this repurchase
program will enhance shareholder value and is an excellent use of a portion of
the Corporation's available cash.

Fiscal 1997 saw Hudson General reach a new level of financial strength, brought
about by a combination of solid earnings from our aviation services business,
the prepayment by Lufthansa Airport and Ground Services GmbH of the deferred
portion of the purchase price for its 26% interest in Hudson General LLC, and
the conversion to common stock of the large majority of our previously
outstanding 7% Convertible Subordinated Debentures.

We believe that our "Dedication to Quality Service" will continue to prompt
many airline and airport authority customers to afford us the opportunity to
provide additional services to them. We will simultaneously continue to
aggressively pursue promising opportunities. Each and every one of our
employees is to be thanked for helping to provide the quality service which
enables Hudson General to take its credo and translate it into profitable
growth.

Sincerely,

/s/ Jay B. Langner
------------------
Jay B. Langner
Chairman of the Board and Chief Executive Officer


/s/ Michael Rubin
------------------
Michael Rubin
President

/s/ Paul R. Pollack
-------------------
Paul R. Pollack
Executive Vice President and Chief Operating Officer

                                         103
<PAGE>   6
AVIATION SERVICES

[PHOTO]

Hudson General Corporation (the Corporation) through its 74% ownership interest
in Hudson General LLC (Hudson LLC) provides a broad and diverse range of
services to the aviation industry at twenty-four (24) airports throughout the
United States and Canada. These services include aircraft ground handling;
aircraft fueling; fuel management; ground transportation; snow removal; cargo
warehousing; and sale, leasing and maintenance of airline ground support
equipment. 

Aircraft ground handling services are provided to both domestic and
international airlines, and include: aircraft marshaling; loading and
off-loading of baggage, freight and commissary items; passenger ticketing;
porter and wheelchair services; aircraft cleaning; ramp sweeping and scrubbing;
aircraft de-icing and glycol recovery; water and lavatory services; maintenance
and service checks; weight and balance; cargo and mail handling; aircraft
pushbacks; as well 


                                         104
<PAGE>   7
                                QUALITY SERVICE



[Photo of airplane, truck] QUALITY SERVICE TO ITS CUSTOMERS HAS BEEN
                           HUDSON GENERAL'S GUIDING PRINCIPLE SINCE IT
                           WAS FOUNDED IN 1961.



as ancillary services such as ground power and air conditioning.

Aircraft fueling services are offered through contract fueling, fuel management 
and retail sales of fuel. Contract fueling services are provided to airlines
and fuel suppliers by delivery of fuel from airport storage facilities into
commercial aircraft. Fuel management services consist of functioning as the
out-sourced fuel procurement department responsible for managing the sourcing,
negotiation, purchase, payment, supply and distribution of fuel both
domestically and internationally for scheduled and charter passenger and cargo
airlines. 



                                                                [Photo of Bus]

Ground transportation services are provided for airline passengers and airport
employees through Hudson LLC operated airport shuttle bus systems. These
operations also include operation and maintenance of passenger boarding bridges
and specialized airfield passenger transport vehicles. In addition to its
airport-related transportation services, Hudson LLC provides transportation
management services for various governmental agencies and authorities.






                                    105
<PAGE>   8
                               
                                OUR CORE BUSINESS CONTINUES TO GROW,
[PHOTO]                         AND OUR CUSTOMERS CONTINUE TO RECOGNIZE
                                HUDSON GENERAL'S DEDICATION TO
                                QUALITY SERVICE.


                           [PHOTO]

Snow removal services are performed at airports in the northeastern and
midwestern United States under contracts with airport operators as well as
airlines and other business entities serving these airports. Snow removal
services are also performed at east coast seaport facilities.

Hudson LLC also operates one of the newest and most technologically advanced
airport perishables centers in the United States for cargo requiring a
climate-controlled environment.

Maintenance services are provided for ground support, cargo handling, ground
transportation and other airport related equipment. In 



                                         106
<PAGE>   9
OUR COMMITMENT TO SERVICE

WE BELIEVE THAT OUR "DEDICATION TO QUALITY SERVICE" WILL CONTINUE TO PROMPT
MANY AIRLINE AND AIRPORT AUTHORITY CUSTOMERS TO AFFORD US THE OPPORTUNITY TO
PROVIDE ADDITIONAL SERVICES TO THEM.


[PHOTO]


addition, building maintenance services are provided at both terminal and
hangar facilities. In Salt Lake City, hangar facilities and tie-down services
are offered to the general aviation community comprised of corporate and
private aircraft owners.

For thirty-six years, the Corporation has been in the forefront of the aviation
services industry. Its knowledgeable, experienced employees, wide-range of
capabilities, attention to detail and dedication to customer satisfaction
continue to make it the company of choice for airlines and airports seeking
quality services in the ever-changing, competitive aviation environment.

[PHOTO]


                                         107
<PAGE>   10
                          HUDSON GENERAL AIRPORT LOCATIONS

UNITED STATES LOCATIONS

 1  Baltimore-Washington International Airport

 2  Fort Lauderdale/Hollywood International Airport

 3  Ellington Field (Houston)

 4  William P. Hobby Airport (Houston)

 5  JFK International Airport

 6  LaGuardia Airport

 7  Logan International Airport

 8  Los Angeles International Airport

 9  Miami International Airport

10  Newark International Airport

11  O'Hare International Airport

12  Orlando International Airport

13  Salt Lake City International Airport

14  Washington National Airport

15  Calgary International Airport

16  Edmonton International Airport

17  Halifax International Airport

18  Montreal International Airport (Dorval)

19  Montreal International Airport (Mirabel)

20  Ottawa International Airport

21  St. John's International Airport

22  Toronto International Airport

23  Vancouver International Airport

24  Winnipeg International Airport

[MAP OF UNITED STATES AND CANADA WITH CIRCLED NUMBERS SHOWING AIRPORT LOCATIONS]



                                         108
<PAGE>   11


                               GROWING WITH OUR CUSTOMERS


THE PARTNERSHIP OF FOUR OF THE WORLD'S PREMIER INTERNATIONAL
AIRLINES, AIR FRANCE, JAPAN AIRLINES,                   [PHOTO]
KOREAN AIRLINES AND LUFTHANSA GERMAN
AIRLINES, HAS STATED ITS INTENT THAT 
HUDSON GENERAL BE THE EXCLUSIVE PROVIDER 
OF GROUND HANDLING SERVICES AT JFK 
INTERNATIONAL AIRPORT'S TERMINAL ONE.



LAND DEVELOPMENT

The Corporation is a 50% partner in a joint venture to develop approximately
4,000 contiguous acres of land situated in the North Kohala District on the
Island of Hawaii. The Project is being developed in four successive phases.
Substantially all of the parcels in Phases I and II, which comprise
approximately 2,100 acres of the Project, have been sold. Phase III consists of
100 five acre parcels, with 85 parcels remaining available for sale.

During fiscal 1992, the County of Hawaii passed an ordinance pursuant to which,
after the obtaining of subdivision approvals, Phase IV could be developed into
1,490 units. The validity of this ordinance has been challenged in a lawsuit
brought by two local residents of Hawaii, and development of Phase IV must
await the ultimate outcome of this litigation. The joint venture partners are
reevaluating plans for Phase IV which has to date only had limited development.


                                      109


<PAGE>   12

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                   Hudson General Corporation and Subsidiaries


RESULTS OF OPERATIONS

FISCAL 1997 COMPARED WITH FISCAL 1996

Effective June 1, 1996, the Corporation consummated a transaction (the
Transaction) in which a third party, Lufthansa Airport and Ground Services GmbH
(LAGS), acquired a 26% interest in the Corporation's aviation services business
(the Aviation Business). As part of the Transaction, the Corporation transferred
substantially all of the assets and liabilities of the Aviation Business to
Hudson General LLC (Hudson LLC), a newly formed limited liability company (see
Notes 1 and 2). Effective June 1, 1996, the Corporation has accounted for its
interest in Hudson LLC under the equity method of accounting. As a result, the
fiscal 1997 consolidated statements of earnings of the Corporation contain the
operating results of the Aviation Business under the equity method of
accounting. The fiscal 1996 consolidated statements of earnings of the
Corporation contain the operating results of the Aviation Business on a
consolidated basis for eleven months and under the equity method of accounting
for one month. (For an analysis of the results of the Aviation Business, see the
table and related management's discussion which appear below.)

  The Corporation's revenues of $5.1 million for fiscal 1997 reflect overhead
fees and equipment rentals billed by the Corporation to Hudson LLC. Depreciation
and amortization of $.8 million for fiscal 1997 primarily represent depreciation
related to operating equipment leased to Hudson LLC by the Corporation. Selling,
general and administrative expenses for fiscal 1997 of $8.0 million principally
reflect administrative and related costs of the Corporation.

  The Corporation's 74% share of earnings from Hudson LLC for fiscal 1997 was
$12.0 million. The Corporation's 50% share of losses from its real estate joint
venture in Hawaii (the Venture) increased from $3.0 to $11.3 million, an
increase of $8.3 million. The increase in the Venture's loss is due to the
Venture recording a charge of $17.0 million in the Corporation's fourth fiscal
quarter to write-down its real estate assets to their estimated fair values. The
charge is a result of the continuing periodic evaluation of the carrying value
of the Venture's real estate assets. The Corporation and its partner in the
Venture, Oxford Kohala, Inc. (the Partners) concluded, as a result of their most
recent in-depth analysis of an updated independent appraisal of such assets and
the consideration of other factors affecting the development of the property,
that the carrying value of the real estate assets should be reduced. Factors
considered by the Partners included the Partners' plans to reevaluate the fourth
phase of the Project which has to date only had limited development, the current
condition of the Hawaiian real estate market and general economic conditions. As
is usual for companies with land development operations, the contribution to
future results from such operations will fluctuate depending upon land sales
closed in each reported period.

  Interest income increased $1.7 million, or 78.1%. The increase primarily
reflects interest income associated with: (i) the subordinated note receivable
from Hudson LLC related to conversion of the 7% convertible subordinated
debentures (the Debentures) into shares of the Corporation's common stock (see
Note 9); (ii) advances made by the Corporation to Hudson LLC; and (iii) higher
invested cash balances. Interest expense for fiscal 1996 was attributable to the
Debentures.

  The Corporation's provision for income taxes decreased $6.8 million which
primarily reflects: (i) lower pre-tax earnings in the U.S.; and (ii) the absence
in fiscal 1997 of a provision for foreign income taxes. As a result of the
Transaction, the Corporation is no longer required to provide for or reflect
foreign income taxes in its consolidated financial statements.

  The following table and related management's discussion are intended to
provide a presentation and analysis of results of the Aviation Business for
fiscal 1997 and 1996 on a comparable basis.
<TABLE>
<CAPTION>
                                              1997             1996
                                            --------         --------
                                                  (in thousands)
<S>                                         <C>              <C>
Revenues ..........................         $167,729         $168,811
                                            --------         --------
Costs and expenses:
  Operating .......................          128,749          123,003
  Depreciation and amortization ...            7,510            7,693
  Selling, general & administrative           13,625           13,052
                                            --------         --------
Total costs and expenses ..........          149,884          143,748
                                            --------         --------
Operating income ..................         $ 17,845         $ 25,063
                                            ========         ========
</TABLE>

  Revenues decreased from $168.8 to $167.7 million, a decrease of $1.1 million,
or .6%. The decrease reflects lower: (i) snow removal revenues of $8.9 million
due mainly to the mild winter weather in the northeastern United States during
fiscal 1997; and (ii) ground transportation revenues of $.6 million due
primarily to the loss of contracts to operate information kiosks and airfield
passenger transport vehicles. Partially offsetting the revenue decrease were
higher: (i) ground handling service revenues (net of lower sales of de-icing
fluid in the U.S.) of $8.1 million due primarily to expanded services to new and
existing customers; and (ii) domestic aircraft fueling revenues of $.5 million
resulting primarily from expanded intoplane fueling services.

  Costs and expenses increased from $143.7 to $149.9 million, an increase of
$6.1 million, or 4.3%. Operating costs increased from $123.0 to $128.7 million,
an increase of $5.7 million, or 4.7%. The increase was attributable to higher
labor and related costs associated with expanded ground handling operations and
schedule changes by airline customers, and higher equipment rental costs due
primarily to expanded intoplane fueling services. Partially offsetting the
increases were lower costs related to: (i) snow removal operations; (ii)
workers' compensation insurance as a result of the positive trend of related
claims; and (iii) the loss of ground transportation contracts to operate
information kiosks and airfield passenger transport vehicles.

  Depreciation and amortization expenses decreased from $7.7 to $7.5 million, a
decrease of $.2 million, or 2.4%. The decrease was due primarily to the
elimination of depreciation relating to equipment that became fully depreciated.

  Selling, general and administrative expenses increased from $13.1 to $13.6
million, an increase of $.6 million, or 4.4%. The increases primarily reflect
higher administrative and related costs.

                                      110
<PAGE>   13
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)

                   Hudson General Corporation and Subsidiaries


  Operating income decreased from $25.1 to $17.8 million, a decrease of $7.2
million, due primarily to decreased results associated with: (i) reduced snow
removal operations; (ii) lower sales of de-icing fluid in the U.S.; and (iii)
higher selling, general and administrative expenses as described above. In
addition, reduced ground handling margins in Canada caused mainly by increased
labor costs associated with schedule changes by airline customers also
contributed to the decrease in operating results. Partially offsetting the
decreases were improved results from domestic ground handling operations and
lower workers' compensation insurance costs.

  Snow removal and aircraft de-icing services are seasonal in nature. The
majority of the results of these operations are normally reflected in the second
and third quarters of the fiscal year, and fluctuate depending upon the severity
of the winter season.

  Results of aircraft ground handling operations fluctuate depending upon the
flight activity and schedules of customers and the ability to deploy equipment
and manpower in the most efficient manner to service such customers.

  The state of the North American aviation industry has resulted in increased
competitive pressures on the pricing of aviation services and in the exploration
of alliances between major commercial airline carriers. While these factors may
have an adverse effect on the Corporation, several airlines have been
outsourcing services to independent aviation service companies. This trend has
provided additional opportunities for Hudson LLC. The Corporation is unable, at
this time, to evaluate the future impact of these factors.

  The compliance with federal, state and local provisions which have been
enacted or adopted regulating the discharge of materials into the environment
did not have a material effect upon the Corporation's or Hudson LLC's capital
expenditures or results of operations for fiscal 1997 and 1996, or competitive
position. However, the federal government and many state and local governments
have enacted or proposed legislation and regulations with respect to storage
facilities for fuel, petroleum-based products and chemicals, the disposal of
hazardous waste materials, storm water discharges, and financial responsibility
for possible liability exposures relating to fuel storage facilities. Compliance
with such legislation and regulations has resulted in expenditures by the
Corporation and Hudson LLC, including expenditures for the testing,
decommissioning and/or replacement of certain of its fuel and de-icing fluid
storage facilities, and the cleanup of fuel spills. The Corporation was and
Hudson LLC is presently engaged in several such decommissioning and cleanup
projects, and it is anticipated that additional such expenditures, the amount of
which is presently not expected to be material, will be required.

  In addition, airport authorities are coming under increasing pressure to clean
up previous contamination at their facilities, and are seeking financial
contributions from airport tenants and companies which operate at their
airports. The Corporation cannot predict at this time, the amount, if any, that
it or Hudson LLC may be required to pay in connection with such airport
authority initiatives.

  In the second quarter of fiscal 1998, the Corporation is required to adopt
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". This statement establishes standards for computing and presenting
earnings per share (EPS), replacing the presentation of currently required
Primary EPS with a presentation of Basic EPS. For entities with complex capital
structures, the statement requires the dual presentation of both Basic EPS and
Diluted EPS on the face of the statement of operations. When SFAS No. 128 is
adopted, the Corporation will be required to restate its EPS data for all prior
periods presented. The Corporation does not expect the impact of the adoption of
this statement to be material to previously reported EPS amounts.

FISCAL 1996 COMPARED WITH FISCAL 1995

The table below summarizes the combined revenues, costs and expenses and
operating results for fiscal 1996 (including the Aviation Business for June
1996) in order to compare them with fiscal 1995 amounts. The table and related
management's discussion are intended to provide a presentation and analysis of
fiscal 1996 and 1995 results on a comparable basis.
<TABLE>
<CAPTION>
                            Hudson
                            General          Hudson
                          Corporation          LLC           Combined
                             Fiscal           June            Fiscal           Fiscal
                              1996            1996             1996             1995
                            --------         -------         --------         --------
                                                 (in thousands)
<S>                         <C>              <C>             <C>              <C> 
Revenues ..........         $157,100         $12,096         $169,196         $134,862
                            --------         -------         --------         --------
Costs and expenses:
 Operating ........          113,744           9,259          123,003          106,070
 Depreciation and
  amortization ....            7,165             673            7,838            7,528
 Selling, general &
  administrative ..           16,755           1,317           18,072           14,306
                            --------         -------         --------         --------
Total costs and
 expenses .........          137,664          11,249          148,913          127,904
                            --------         -------         --------         --------
Operating income ..         $ 19,436         $   847         $ 20,283         $  6,958
                            ========         =======         ========         ========
</TABLE>

  Revenues increased from $134.9 to $169.2 million, an increase of $34.3
million, or 25.5%. The increase reflected higher: (i) snow removal revenues of
$14.0 million as a result of record snowfalls in the northeast; (ii) ground
handling service revenues of $18.2 million due primarily to expanded services to
new and existing customers and to higher sales of de-icing fluid; (iii) domestic
aircraft fueling revenues of $4.3 million resulting primarily from expanded
intoplane fueling services and retail sales of fuel at existing locations; and
(iv) revenues due to the effect of fluctuation in the average rates of exchange
used in translating Canadian revenues to their U.S. dollar equivalent. Partially
offsetting the revenue increases were lower: (i) aircraft fueling and hangar
rental revenues in Canada of $2.3 million as a result of the cessation of
operations of the Corporation's Canadian fixed based operations (FBO's) on
October 31, 1994; and (ii) ground transportation revenues of $1.0 million due
primarily to the loss of contracts to operate information kiosks and specialized
airfield passenger transport vehicles.

                                      111
<PAGE>   14
  Costs and expenses increased from $127.9 to $148.9 million, an increase of
$21.0 million, or 16.4%. Operating costs increased $16.9 million, or 16.0%. The
increase was attributable to higher: (i) snow removal costs; (ii) labor and
related costs associated with expanded ground handling operations and domestic
aircraft fueling services; (iii) cost of sales of de-icing fluid; (iv) fuel
costs associated with higher volumes of retail fuel sales and internal fuel
usage in the U.S.; and (v) the effect of fluctuation in the average rates of
exchange used in translating Canadian costs to their U.S. dollar equivalent.
Partially offsetting the increases were lower costs as a result of: (i) the loss
of contracts to operate ground transportation information kiosks and specialized
airfield passenger transport vehicles; (ii) the positive trending of workers'
compensation insurance claims; and (iii) the cessation of operations of the
Corporation's Canadian FBO's.

  Depreciation and amortization expenses increased from $7.5 to $7.8 million, an
increase of $.3 million, or 4.1%. The increase was due to additional
depreciation in fiscal 1996 due mainly to purchases of ground handling
equipment. Partially offsetting the increase was the absence in fiscal 1996 of
accelerated amortization of the remaining carrying value of leasehold
improvements made to a hangar facility at a domestic airport location in the
prior year (the Accelerated Amortization) (see Note 5).

  Selling, general and administrative expenses increased from $14.3 to $18.1
million, an increase of $3.8 million, or 26.3%, due primarily to the recording
of higher provisions relating to the Corporation's bonus and retirement plans
and to stock appreciation rights as a result of increases in the market price of
the Corporation's common stock.

  Operating income increased from $7.0 to $20.3 million, an increase of $13.3
million, due primarily to improved results from snow removal, ground handling
(including higher sales of de-icing fluid) and domestic aircraft fueling
operations. Adding to the increase was the absence of the Accelerated
Amortization, a decrease in workers' compensation insurance costs and the
elimination of operating losses associated with the Corporation's Canadian
FBO's. Partially offsetting the increases were higher selling, general and
administrative expenses as described above.

  The Corporation's 50% share of losses from the Venture increased from $2.7 to
$3.0 million, an increase of $.3 million, or 10.0%. The increase in the
Venture's loss is due mainly to higher interest expense -- net due mainly to
higher balances of partner advances payable. In addition, the Venture's interest
income decreased as a result of the reduction in mortgage receivables.

  The Corporation's provision (benefit) for income taxes increased from a
benefit of $.4 million to a provision of $7.2 million, an increase of $7.5
million. The increase primarily reflects: (i) increased pre-tax earnings in the
U.S. and Canada; (ii) the Corporation's recognition of a provision of $.8
million for income taxes associated with the anticipated repatriation of
Canadian earnings; and (iii) a decrease of $.3 million in fiscal 1996 compared
with fiscal 1995 of the recognition of deferred tax assets resulting from a
reevaluation of the operating results of the Corporation's Canadian subsidiary.


LIQUIDITY, CAPITAL EXPENDITURES AND COMMITMENTS

The Corporation's recurring sources of liquidity are funds provided from Hudson
LLC and bank lines of credit. As a result of the Transaction, Hudson LLC pays to
the Corporation an overhead fee equal to the sum of 3% of Hudson LLC's
consolidated domestic revenues and 1% of Hudson LLC's consolidated Canadian
revenues. (The Corporation and LAGS USA Inc., a wholly-owned subsidiary of LAGS
and a party to the Limited Liability Company Agreement of Hudson LLC, agreed to
raise these overhead fees for fiscal 1998 to 3 1/2% and 1 1/4%, respectively.)
It is anticipated that approximately $3.0 million of the Corporation's overhead
will not be allocated to Hudson LLC on an annual basis. In addition, the
Corporation is expected to receive distributions from Hudson LLC annually in an
amount at least equal to 50% of domestic net income and 10% of Canadian pre-tax
earnings for the fiscal year from the Aviation Business, as defined, multiplied
by the Corporation's equity interest in Hudson LLC (presently 74%). Such
distributions, the Corporation's share of which totals approximately $6.8
million for fiscal 1997 and the month of June 1996, are expected to be made
during the first half of fiscal 1998. Furthermore, as a result of the conversion
of Debentures into shares of the Corporation's common stock, Hudson LLC is, on a
subordinated basis (as defined), indebted to the Corporation. During fiscal
1997, Hudson LLC repaid $21.3 million of such debt to the Corporation. Hudson
LLC is obligated to repay the remaining balance of $5.1 million to the
Corporation as follows: (i) $.5 million on July 15, 1997 (which was paid in July
1997); and (ii) $1.5 million on each July 15th thereafter until the entire
principal balance is satisfied.

  Pursuant to a Revolving Credit Agreement (the Credit Agreement) with a group
of banks dated June 1, 1996, the Corporation may borrow funds (including
outstanding letters of credit) up to a limit of $6.0 million until June 30, 1999
at which time the Credit Agreement terminates. There were no direct borrowings
or letters of credit outstanding at June 30, 1997.

  In fiscal 1997, net cash used by operating activities was $3.5 million due
mainly to equity in earnings of Hudson LLC which were not distributed to the
Corporation, while in fiscal 1996 and 1995, net cash provided by operating
activities was $25.5 and $19.7 million, respectively. Net cash provided by
investing activities in fiscal 1997 was $19.5 million due mainly to Hudson LLC's
partial repayment of the outstanding balance of its subordinated debt to the
Corporation. Capital expenditures net of proceeds from the sale of property and
equipment were $.2, $12.9 and $9.9 million in fiscal 1997, 1996 and 1995,
respectively. The majority of capital expenditures were made in respect of the
Aviation Business and as such are now made by Hudson LLC. In June 1996,
primarily as a result of the Corporation retaining certain trade receivables,
the Corporation made net advances of $7.2 million on behalf of Hudson LLC. Such
balance was repaid to the Corporation by Hudson LLC during fiscal 1997. Net cash
advanced to the Venture was $.8 and $1.7 million in fiscal 1996 and 1995,
respectively. Net cash used by financing activities was $10.3 (primarily due to
increased repurchases of the Corporation's common stock as discussed below), $.6
and $2.2 million for fiscal 1997, 1996 and 1995, respectively. Cash and cash
equivalents were $18.4, $12.7 and $12.6 million at June 30, 1997, 1996 and 1995,
respectively.


                                      112
<PAGE>   15
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (continued)

                   Hudson General Corporation and Subsidiaries

  In fiscal 1997, the Board of Directors authorized the repurchase of up to
400,000 shares of the Corporation's common stock, which purchases could be made
from time to time in either open market or privately negotiated transactions.
Prior to the fiscal 1997 authorizations, the Corporation still had authority to
repurchase up to 35,700 shares from a previous authorization. During fiscal
1997, the Corporation repurchased 243,000 shares in the open market for an
aggregate purchase price of $9.2 million.

  During fiscal 1992, the County of Hawaii passed an ordinance pursuant to which
the Venture, after subdivision approvals are obtained, would be able to develop
Phase IV of the project into 1,490 units. Pursuant to such ordinance, the
Venture is required to expend approximately $2.3 million for public
infrastructural improvements and in lieu payments. Shortly after passage of the
ordinance, a lawsuit against the County of Hawaii was filed in the Circuit Court
of Hawaii by two local residents of Hawaii (Plaintiffs) seeking to invalidate
such ordinance on various grounds, including that the ordinance was adopted
without following State of Hawaii procedure relating to the preparation of an
Environmental Impact Statement. During fiscal 1993, the Judge in this action
granted Plaintiffs' motion for partial summary judgment without indicating any
effect on Phase IV zoning. The County and the Venture appealed this ruling. The
appeal was heard before the Hawaii Supreme Court in March 1994, and on May 6,
1997, the Supreme Court vacated the summary judgment which was previously
granted and remanded certain related issues to the Circuit Court for that Court
to decide. The Venture cannot, at this time, determine the impact of the Supreme
Court's ruling and the Circuit Court's proceedings on the timing of development
of Phase IV or the expenditures related thereto.

  The Joint Venture Agreement provides that the Corporation and its partner in
the Venture, Oxford Kohala, Inc. (the Partner), are obligated to make equal
advances of any of the Venture's required fundings. It is anticipated that the
Venture's capital commitments will be funded by cash flow from its operations
and advances from the Corporation and the Partner and that any advances which
the Corporation may be required to make to the Venture will be provided from the
Corporation's cash flow and lines of credit. Pursuant to the Credit Agreement
the Corporation may advance up to $2.0 million to the Venture in any fiscal year
or up to $5.0 million during the term of the Credit Agreement, net of any
distributions received from the Venture by the Corporation during such periods.
Since the inception of the Credit Agreement, the Corporation has not increased
its net advances to the Venture. At present, it is anticipated that the advances
required to meet the obligations of the Venture will not exceed the limits set
forth in the Credit Agreement. During fiscal 1997, the Corporation advanced $.3
million to the Venture. Such advances were repaid by the Venture to the
Corporation on June 30, 1997.

  At June 30, 1997, the Venture had commitments (in addition to the commitments
noted above) aggregating $2.6 million for project expenditures. Included in this
amount is $1.7 million for the construction of water well equipment and a
reservoir by June 30, 1999. It is currently expected that funds for most of the
Venture's other commitments will be expended subsequent to fiscal 1998.

  The Partner is a subsidiary of Oxford First Corporation (Oxford First). On
October 13, 1994, Oxford First filed for reorganization under Chapter 11 of the
Bankruptcy Code. Pursuant to an order of the Bankruptcy Court, Oxford First
(through its subsidiary, The Oxford Finance Companies, Inc.) was permitted to
transfer certain amounts to the Partner. The amounts so authorized were not
sufficient to allow the Partner to make its full share of required advances. The
Corporation opted to make additional advances (the Additional Advances) to cover
the Partner's funding deficiency. During November 1995, the Partner resumed
making advances, and in January 1996, the Partner repaid to the Corporation the
entire amount of the Additional Advances of $.7 million together with interest
thereon. The Corporation has been informed by the Partner, that
Oxford First has substantially met all its financial obligations under its
confirmed plan of reorganization and is no longer restricted in the amount of
required advances it may make to the Venture.

  The extent to which advances to the Venture will be required in the future, as
well as the timing of the return to the Corporation of the advances made by it,
will depend upon the amount of sales generated by the Venture, the terms upon
which parcels are sold and expenses incurred in the planning and development of
future phases of the Project.

  It is expected that the sources of the Corporation's liquidity, as noted
above, will provide sufficient funding to allow the Corporation to meet its
liquidity requirements.


                                      113
<PAGE>   16
                      SELECTED CONSOLIDATED FINANCIAL DATA

                   Hudson General Corporation and Subsidiaries

<TABLE>
<CAPTION>
                                                                            Fiscal Years Ended June 30,
                                                    ---------------------------------------------------------------------------
                                                     1997(a)            1996(a)        1995           1994            1993
                                                    ---------------------------------------------------------------------------
                                                                     (in thousands, except per share amounts)
<S>                                                  <C>              <C>            <C>            <C>            <C>      
Revenues .....................................       $ 5,064          $157,100       $134,862       $141,784       $ 131,917
Earnings (loss) before extraordinary items and
  cumulative effect of change in the method of
  accounting for income taxes ................           475(b)         10,466          4,593          7,310          (2,045)(c)
Earnings (loss) per share before extraordinary
  items and cumulative effect of change in the
  method of accounting for income taxes:
    Primary ..................................           .26              8.87           3.69           5.86           (1.65)
    Fully diluted ............................           .26              5.56           2.67           3.96           (1.65)
Net earnings (loss) ..........................           475(b)         10,466          4,593          7,760          (2,180)(c)
Net earnings (loss) per share:
    Primary ..................................           .26              8.87           3.69           6.22           (1.75)
    Fully diluted ............................           .26              5.56           2.67           4.17           (1.75)
Total assets .................................        68,188            48,776         87,568         77,889          72,414
Long-term obligations less current maturities           --                --           29,000         29,000          32,700
Stockholders' equity .........................        65,384            43,895         21,616         19,223          12,141
Capital expenditures .........................           326            13,158         10,806          9,815           5,786
Cash dividends per common share ..............           .75               .50            .50           --              --
                                                    ============================================================================
</TABLE>


(a)      As a result of a transaction with Lufthansa Airport and Ground Services
         GmbH (see Note 2), effective June 1, 1996 the Corporation's interest in
         its aviation services business is accounted for under the equity
         method.

(b)      Includes a pre-tax charge of $8,500 related to the Corporation's
         investment in and advances to the Kohala Joint Venture (see Note 3).

(c)      Includes $4,287 of accelerated amortization of leasehold rights related
         to the Corporation's Canadian Fixed Base Operations, which the
         Corporation ceased operating during fiscal 1995.
<TABLE>
<CAPTION>
                        Fiscal 1997           Fiscal 1996
Market Price Range*
                      High         Low       High         Low
                      ----         ---       ----         ---
<S>                  <C>          <C>       <C>          <C>
First Quarter ......     40       32 3/4        24           20
Second Quarter ..... 39 1/2       34        34 1/4       23 5/8
Third Quarter ...... 41 3/8       36        43 3/8           33
Fourth Quarter ..... 40 3/8       35 5/8    43 3/8       34 3/8
</TABLE>

* The range of per share closing prices of the Corporation's common stock
  on the American Stock Exchange in each fiscal quarter from July 1, 1995
  through June 30, 1997.

At June 30, 1997, there were 197 record holders of the Corporation's common
stock.


                                      114
<PAGE>   17
                       CONSOLIDATED STATEMENTS OF EARNINGS

                   Hudson General Corporation and Subsidiaries
<TABLE>
<CAPTION>
                                                                              Year Ended June 30,
                                                                   ------------------------------------------
                                                                     1997             1996            1995
                                                                   --------        ---------        ---------
                                                                    (in thousands, except per share amounts)
<S>                                                                <C>             <C>              <C>      
Revenues ...................................................       $  5,064        $ 157,100        $ 134,862
                                                                   --------        ---------        ---------
Costs and expenses:
  Operating ................................................           --            113,744          106,070
  Depreciation and amortization ............................            772            7,165            7,528
  Selling, general & administrative ........................          8,047           16,755           14,306
                                                                   --------        ---------        ---------
    Total costs and expenses ...............................          8,819          137,664          127,904
                                                                   --------        ---------        ---------

Operating income (loss) ....................................         (3,755)          19,436            6,958
Equity in earnings of Hudson General LLC ...................         11,955              855             --
Equity in loss of Kohala Joint Venture .....................        (11,292)          (3,021)          (2,747)
Interest income ............................................          3,958            2,222            2,062
Interest expense ...........................................           --             (1,843)          (2,030)
                                                                   --------        ---------        ---------
Earnings before provision (benefit) for income taxes .......            866           17,649            4,243
Provision (benefit) for income taxes .......................            391            7,183             (350)
                                                                   --------        ---------        ---------
Net earnings ...............................................       $    475        $  10,466        $   4,593
                                                                   ========        =========        =========

Earnings per share, primary ................................       $    .26        $    8.87        $    3.69
                                                                   ========        =========        =========
Earnings per share, fully diluted ..........................       $    .26        $    5.56        $    2.67
                                                                   ========        =========        =========
</TABLE>

See accompanying notes to consolidated financial statements 


                                      115
<PAGE>   18
                           CONSOLIDATED BALANCE SHEETS

                   Hudson General Corporation and Subsidiaries
<TABLE>
<CAPTION>
                                                                                          June 30,
                                                                                     ------------------
                                                                                      1997        1996
                                                                                     ------------------
                                                                                       (in thousands)
<S>                                                                                  <C>        <C>    
ASSETS
Current assets:
  Cash and cash equivalents......................................................    $18,425    $12,701
  Investment securities available for sale.......................................      8,792        --
  Receivables....................................................................        540        238
  Advances to Hudson General LLC -- net..........................................        361      7,233
  Prepaid expenses and other assets..............................................        250        302
                                                                                     ------------------
    Total current assets.........................................................     28,368     20,474
Property and equipment at cost, less accumulated
  depreciation and amortization..................................................      2,902      3,428
Investment in Hudson General LLC.................................................     26,395      8,738
Investment in Kohala Joint Venture -- net........................................      5,893     15,420
Note receivable from Hudson General LLC..........................................      4,630        --
Other assets -- net..............................................................        --         716
                                                                                     ------------------
                                                                                     $68,188    $48,776
                                                                                     ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable...............................................................    $   161    $   471
  Accrued expenses and other liabilities.........................................      2,536      3,648
                                                                                     ------------------
    Total current liabilities....................................................      2,697      4,119
                                                                                     ------------------
Deferred income taxes............................................................        107        762
                                                                                     ------------------
Stockholders' Equity:
  Serial preferred stock (authorized 100,000 shares of $1 par value)
     -- none outstanding.........................................................        --         --
  Common stock (authorized 7,000,000 shares of $1 par value)
     -- issued 2,092,160 and 1,277,401 shares....................................      2,092      1,277
  Paid in capital................................................................     48,732     18,033
  Retained earnings..............................................................     25,722     26,595
  Treasury stock, at cost, 357,311 and 114,300 shares............................    (11,162)    (2,010)
                                                                                     ------------------
    Total stockholders' equity...................................................     65,384     43,895
                                                                                     ------------------
                                                                                     $68,188    $48,776
                                                                                     ==================
</TABLE>



See accompanying notes to consolidated financial statements.



                                       116
<PAGE>   19
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


                   Hudson General Corporation and Subsidiaries



<TABLE>
<CAPTION>
                                                                            Years Ended June 30, 1997, 1996 and 1995
                                                            -----------------------------------------------------------------------
                                                                                                    Equity
                                                                                                  Adjustments
                                                                                                 From Foreign              Total
                                                           Common Stock Issued  Paid in Retained   Currency   Treasury Stockholders'
                                                             Shares    Amounts  Capital Earnings  Translation   Stock     Equity
                                                            -----------------------------------------------------------------------
                                                                             (in thousands, except share amounts)

<S>                                                        <C>         <C>      <C>      <C>       <C>       <C>         <C>    
Balance, June 30, 1994....................................  1,250,802  $1,251   $ 6,717  $12,716   $(1,461)  $     --    $19,223
  Common stock issued in connection with exercise of
    stock options.........................................      3,000       3        42       --        --         --         45
  Dividends ($.50 per share)..............................         --      --        --     (602)       --         --       (602)
  Equity adjustment from foreign currency translation              --      --        --       --       (22)        --        (22)
  Purchase of treasury stock..............................         --      --        --       --        --     (1,621)    (1,621)
  Net earnings............................................         --      --        --    4,593        --         --      4,593
                                                            --------------------------------------------------------------------
Balance, June 30, 1995....................................  1,253,802   1,254     6,759   16,707    (1,483)    (1,621)    21,616
  Common stock issued in connection with exercise of
    stock options.........................................     16,000      16       249       --        --         --        265
  Dividends ($.50 per share)..............................         --      --        --     (578)       --         --       (578)
  Equity adjustment from foreign currency translation              --      --        --       --        13         --         13
  Effect of equity infusion in Hudson General LLC -- net           --      --    10,783       --     1,470         --     12,253
  Purchase of treasury stock..............................         --      --        --       --        --       (389)      (389)
  Conversion of convertible subordinated debentures             7,599       7       242       --        --         --        249
  Net earnings............................................         --      --        --   10,466        --         --     10,466
                                                            --------------------------------------------------------------------
Balance, June 30, 1996....................................  1,277,401   1,277    18,033   26,595        --     (2,010)    43,895
  Common stock issued in connection with exercise of
    stock options.........................................     10,500      11       154       --        --         --        165
  Dividends ($.75 per share)..............................         --      --        --   (1,348)       --         --     (1,348)
  Equity adjustment from foreign currency translation              --      --      (101)      --        --         --       (101)
  Effect of equity infusion in Hudson General LLC -- net           --      --     5,805       --        --         --      5,805
  Purchase of treasury stock..............................         --      --        --       --        --     (9,152)    (9,152)
  Conversion of convertible subordinated debentures           804,259     804    24,841       --        --         --     25,645
  Net earnings............................................         --      --        --      475        --         --        475
                                                            --------------------------------------------------------------------
BALANCE, JUNE 30, 1997....................................  2,092,160  $2,092   $48,732  $25,722    $   --   $(11,162)   $65,384
                                                            ====================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


                                       117
<PAGE>   20
                                          
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                   Hudson General Corporation and Subsidiaries

<TABLE>
<CAPTION>
                                                                                                          Year Ended June 30,
                                                                                                ----------------------------------
                                                                                                    1997        1996        1995
                                                                                                ----------------------------------
                                                                                                            (in thousands)

<S>                                                                                             <C>          <C>          <C> 
Cash flows from operating activities:
  Net earnings .............................................................................    $    475     $ 10,466     $  4,593
  Adjustments to reconcile net earnings to net cash (used) provided by operating activities:
    Depreciation and amortization ..........................................................         772        7,165        7,528
    Provision for losses on accounts receivable -- net .....................................          --          362          178
    Increase (decrease) in deferred income taxes ...........................................        (655)      (1,090)         149
    Equity in earnings of Hudson General LLC ...............................................     (11,955)        (855)          --
    Equity in loss of Kohala Joint Venture .................................................      11,292        3,021        2,747
    Accrual of interest income on Kohala Joint Venture advances ............................      (1,765)      (1,604)      (1,471)
    Gain on sale of equipment ..............................................................          --         (139)        (454)
    Change in other current assets and liabilities:
      Accounts and notes receivables .......................................................        (302)       2,845            5
      Inventory ............................................................................          --         (135)         (31)
      Prepaid expenses and other assets ....................................................          52         (369)         215
      Deferred income taxes ................................................................          --        2,342       (1,656)
      Accounts payable .....................................................................        (310)         892        3,650
      Income taxes payable .................................................................          --          165          333
      Accrued expenses and other liabilities ...............................................      (1,112)       1,785        3,136
    Decrease in other assets ...............................................................          23           54           92
    Decrease in long-term receivables -- net ...............................................          --          522          553
    Other -- net ...........................................................................          --           37          127
                                                                                                ----------------------------------
      Net cash (used) provided by operating activities .....................................      (3,485)      25,464       19,694
                                                                                                ----------------------------------
Cash flows from investing activities:
  Purchases of investment securities available for sale ....................................      (8,792)          --           --
  Purchases of property, equipment and leasehold rights ....................................        (326)     (13,158)     (10,806)
  Proceeds from sale of property and equipment .............................................          80          244          935
  Repayments from (advances to) Hudson General LLC .........................................       7,302       (7,233)          --
  Collections of note receivable from Hudson General LLC ...................................      21,283           --           --
  Advances to Kohala Joint Venture -- net ..................................................          --         (772)      (1,720)
  Net cash transferred to Hudson General LLC upon formation ................................          --       (3,002)          --
  Fees related to transfer of assets to Hudson General LLC .................................          --         (825)          --
                                                                                                ----------------------------------
      Net cash provided (used) by investing activities .....................................      19,547      (24,746)     (11,591)
                                                                                                ----------------------------------
Cash flows from financing activities:
  Proceeds from issuance of common stock ...................................................         162          335           45
  Cash dividends paid ......................................................................      (1,348)        (578)        (602)
  Purchase of treasury stock ...............................................................      (9,152)        (389)      (1,621)
                                                                                                ----------------------------------
      Net cash used by financing activities ................................................     (10,338)        (632)      (2,178)
                                                                                                ----------------------------------
Effect of exchange rate changes on cash ....................................................          --            2          (39)
                                                                                                ----------------------------------
Net increase in cash and cash equivalents ..................................................       5,724           88        5,886
                                                                                                ----------------------------------
Cash and cash equivalents at beginning of year .............................................      12,701       12,613        6,727
                                                                                                ----------------------------------
Cash and cash equivalents at end of year ...................................................    $ 18,425     $ 12,701     $ 12,613
                                                                                                ==================================
</TABLE>


See accompanying notes to consolidated financial statements.



                                      118
<PAGE>   21
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                   Hudson General Corporation and Subsidiaries


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Hudson General Corporation and the subsidiaries for which it
exercises effective control (the Corporation). All material intercompany
accounts and transactions have been eliminated in consolidation. Kohala Joint
Venture, a land development venture in Hawaii in which the Corporation has a 50%
interest (the Venture), is accounted for under the equity method of accounting
(see Note 3). Effective June 1, 1996, the Corporation consummated a transaction
(the Transaction) in which a third party, Lufthansa Airport and Ground Services
GmbH (LAGS), an indirect wholly-owned subsidiary of Deutsche Lufthansa AG,
acquired a 26% interest in the Corporation's aviation services business (the
Aviation Business). As part of the Transaction, the Corporation transferred
substantially all of the assets and liabilities of the Aviation Business to
Hudson General LLC (Hudson LLC), a newly-formed limited liability company (see
Note 2). LAGS received a 26% interest in Hudson LLC. At the same time, the
Corporation, Hudson LLC and LAGS USA Inc., a wholly-owned subsidiary of LAGS
(LAGS USA), entered into a Limited Liability Company Agreement effective June 1,
1996 (the LLC Agreement). Due to the provisions in the LLC Agreement, as
amended, effective June 1, 1996, the Corporation has accounted for its interest
in Hudson LLC under the equity method of accounting. As a result, the fiscal
1997 consolidated statement of earnings of the Corporation contains the
operating results of the Aviation Business under the equity method of
accounting. The fiscal 1996 consolidated statement of earnings of the
Corporation contains the operating results of the Aviation Business on a
consolidated basis for eleven months and under the equity method of accounting
for one month. As a result of the Corporation's transfer of substantially all of
the Aviation Business assets and liabilities to Hudson LLC, such assets and
liabilities are not reflected in the Corporation's accompanying consolidated
balance sheets. The Corporation's stockholders' equity was increased by
$5,704,000 and $12,253,000 in fiscal 1997 and the month of June 1996,
respectively, as a result of the Corporation's equity interest in Hudson LLC's
capital transactions.

DESCRIPTION OF BUSINESS: The Corporation, through its 74% ownership interest in
Hudson LLC, provides a broad and diverse range of services to the aviation
industry at twenty-four (24) airports throughout the United States and Canada.
These services include aircraft ground handling; aircraft fueling; fuel
management; ground transportation; snow removal; cargo warehousing; and sale,
leasing and maintenance of airline ground support equipment.

DEPRECIATION AND AMORTIZATION: Depreciation of property and equipment is
provided on the straight-line method over their estimated useful lives.

INCOME TAXES: Effective July 1, 1993, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes",
which requires the use of the liability method of accounting for deferred 
income taxes.

FINANCIAL INSTRUMENTS: The Corporation believes that the book values of its
monetary assets and liabilities approximate fair values as a result of the
short-term nature of such assets and liabilities.

FOREIGN CURRENCY TRANSLATION: The financial position and results of operations
of the Corporation's Canadian operations were measured using local currency as
the functional currency. Assets and liabilities were translated into U.S.
dollars at year-end rates of exchange, and revenues and expenses were translated
at the average rates of exchange for the year. Gains or losses resulting from
translating foreign currency financial statements were accumulated as a separate
component of stockholders' equity.

STATEMENTS OF CASH FLOWS: For purposes of the consolidated statements of cash
flows, the Corporation considers all securities with an original maturity of
three months or less at the date of acquisition to be cash equivalents. The
changes in specified asset and liability accounts in the accompanying
consolidated statements of cash flows for fiscal 1996 are exclusive of the
effect of the transfer of specified assets and liabilities of the Aviation
Business to Hudson LLC. In fiscal 1997, 1996 and 1995 income taxes (net of
refunds) of $963,000, $5,064,000 and $362,000, respectively, were paid. During
fiscal 1997, there was no interest paid. Interest of $2,030,000 was paid in both
fiscal 1996 and 1995.

USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

EARNINGS PER SHARE: Primary earnings per common and common equivalent share have
been computed based upon the weighted average number of shares of common stock
outstanding and dilutive common stock equivalents assumed outstanding during the
respective years. The weighted average number of shares used in computing
primary earnings per common and common equivalent share was 1,844,048, 1,179,841
and 1,245,122 in fiscal 1997, 1996 and 1995, respectively. Fully diluted
earnings per common and common equivalent share have been computed based upon
the assumption that the Corporation's 7% convertible subordinated debentures
(the Debentures) were converted into common shares at the beginning of each
period in which their effect was dilutive (the Debentures were dilutive only as
to fiscal 1996 and 1995 results) and that the related interest expense, net of
applicable taxes, that would not have been incurred had conversion taken place
was added back to net earnings. The weighted average number of common and common
equivalent shares used in computing fully diluted earnings per share in fiscal
1996 and 1995 was 2,069,617 and 2,145,175, respectively. The Debentures were
called for redemption in fiscal 1997 and as a result $26,343,000 of Debentures
were converted into 804,259 shares of the Corporation's common stock.

LONG-LIVED ASSETS: Effective July 1, 1996, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires
that long-lived assets and certain identifiable intangibles to be held and used
or disposed of by an entity be reviewed for possible impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The adoption of SFAS No. 121 did not have any impact on the
Corporation's consolidated financial position or results of operations.

STOCK-BASED COMPENSATION: Effective July 1, 1996, the Corporation adopted SFAS
No. 123, "Accounting for Stock-Based Compensation", which encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair 



                                      119
<PAGE>   22
value. The Corporation has chosen to continue to account for stock-based
compensation under the existing accounting rules contained in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations, but will provide pro forma disclosures of any future
stock-based compensation expense determined under the fair-value provisions of
SFAS No. 123, if material. As of June 30, 1995, no further grants were available
under any of the Corporation's stock-based employee compensation plans.

MARKETABLE SECURITIES: The Corporation has invested $8,792,000 at June 30, 1997
in commercial paper and municipal bonds. The maturities of such investments are
generally less than one year. The book values of the investments approximate
their respective market values as a result of the short-term nature of the
securities and the low level of risk in these types of investments.

RECLASSIFICATIONS: Certain items previously reported in specific financial
statement captions have been reclassified to conform with the fiscal 1997
presentation.

2. INVESTMENT IN HUDSON GENERAL LLC

Effective June 1, 1996 pursuant to the terms of the Unit Purchase and Option
Agreement dated February 27, 1996 (the Purchase Agreement) between the
Corporation and LAGS, the Corporation transferred substantially all of the
assets and liabilities of the Aviation Business to Hudson LLC. In exchange for
the transfer of such assets and liabilities and the assumption by Hudson LLC, as
co-obligor with the Corporation, of all of the Corporation's 7% convertible
subordinated debentures (see Note 7), the Corporation received a 74% interest in
Hudson LLC. In addition, Hudson LLC sold LAGS a 26% interest in Hudson LLC, for
a purchase price of $23,686,000 in cash (after certain adjustments), of which
$15,848,000 was paid at the closing, and deferred payments (the Deferred
Payments) of $2,650,000 and $5,188,000 plus interest thereon were made,
respectively, in September 1996 and December 1996. The Corporation's investment
in Hudson LLC and paid in capital were increased by its 74% interest in the
Deferred Payments. The Purchase Agreement also provided for the grant to LAGS of
an option (the LAGS Option), exercisable on October 1 of each year from 1996
through 2000, effective as of the preceding July 1, pursuant to which LAGS may
increase its equity ownership in Hudson LLC from 26% to a maximum of 49%, for a
price based on a formula related to the average earnings of the Aviation
Business over the four fiscal years preceding the exercise of the option,
subject to certain minimum and maximum amounts. Effective December 1996, the
Purchase Agreement was amended so that the LAGS Option now expires on October 1,
1999.

  The LLC Agreement, as amended, stipulates that the Corporation and LAGS USA
will share profits and losses in the same proportion as their respective equity
interests in Hudson LLC, except that the Corporation is entitled to all interest
earned on the Deferred Payments. In addition, LAGS USA will not share in any
pre-tax earnings, as defined, of the Aviation Business in excess of $14,690,000
and $15,863,000 in fiscal 1997 and 1998, respectively, unless the aggregate of
the pre-tax earnings of the Aviation Business for fiscal 1997 and 1998 exceeds
$30,553,000. In addition, 100% of Hudson LLC's net earnings in June 1996 were
allocated to the Corporation.

  In June 1996, primarily as a result of the Corporation retaining certain trade
receivables, the Corporation made net advances of $7,233,000 on behalf of Hudson
LLC. Such balance was repaid to the Corporation by Hudson LLC (together with
accrued interest at the Corporation's incremental borrowing rate) during fiscal
1997. As of June 30, 1997, the Corporation's net advances to Hudson LLC were
$361,000.


  Pursuant to the LLC Agreement, as amended: (i) the Corporation will continue
to manage the Aviation Business and will be entitled to charge Hudson LLC an
overhead fee equal to the sum of 3% of Hudson LLC's consolidated domestic
revenues and 1% of Hudson LLC's consolidated Canadian revenues (the Corporation
and LAGS USA agreed to raise these overhead fees for fiscal 1998 to 3 1/2% and
1 1/4%, respectively); and (ii) there will be a Member Board on which the
Corporation has three votes and LAGS USA has two votes. The LLC Agreement, as
amended, allows either Member to veto certain major transactions and to veto any
reduction in distributions stipulated in the LLC Agreement, as amended. The LLC
Agreement, as amended, provides that distributions will be paid annually in an
amount at least equal to 50% of domestic net income and 10% of Canadian pre-tax
earnings, as defined, from the Aviation Business. Such distributions, totaling
approximately $8,300,000 for fiscal 1997 and the month of June 1996, are
expected to be made during the first half of fiscal 1998.

  The summary consolidated balance sheets for Hudson LLC as of June 30, 1997 and
1996 are as follows:

<TABLE>
<CAPTION>
                                              1997       1996
                                            ------------------
                                              (in thousands)

<S>                                         <C>        <C>    
Cash and cash equivalents ..............    $12,324    $19,269
Accounts and notes receivable -- net ...     15,289     18,055
Other current assets ...................      2,711      2,317
                                            ------------------
    Total current assets ...............     30,324     39,641
Property, equipment and leasehold rights
  at cost, less accumulated depreciation
  and amortization .....................     44,948     37,442
Other assets -- net ....................      2,248      3,641
                                            ------------------
                                            $77,520    $80,724
                                            ==================

Accounts payable .......................    $18,528    $15,104
Accrued expenses and other liabilities .     18,791     18,085
Advances from Hudson General
  Corporation -- net ...................        361      7,233
                                            ------------------
    Total current liabilities ..........     37,680     40,422
Long-term debt, subordinated ...........         --     28,751
Note payable to Hudson General
  Corporation ..........................      4,630         --
Members' equity ........................     35,210     11,551
                                            ------------------
                                            $77,520    $80,724
                                            ==================
</TABLE>


  Summary results of operations for Hudson LLC for fiscal 1997 and the month of
June 1996 are as follows:

<TABLE>
<CAPTION>
                                               1997        1996
                                              --------------------
                                                 (in thousands)

<S>                                           <C>         <C>     
Revenues .................................    $167,729    $ 12,096
                                              --------------------
Operating costs ..........................     128,749       9,259
Depreciation and amortization ............       7,510         673
Selling, general & administrative costs ..      13,625       1,317
                                              --------------------
  Total costs and expenses ...............     149,884      11,249
                                              --------------------
Operating income .........................      17,845         847
Interest income -- net ...................         179          49
                                              --------------------
Earnings before provision for income taxes      18,024         896
Provision for income taxes ...............       2,085          41
                                              --------------------
  Net earnings ...........................    $ 15,939    $    855
                                              ====================
</TABLE>

  The Corporation's share of Hudson LLC's results is shown as "Equity in
earnings of Hudson General LLC" in the accompanying consolidated statements of
earnings.

3. INVESTMENT IN KOHALA JOINT VENTURE

The Venture was formed to acquire, develop and sell approximately 4,000
contiguous acres of land in Hawaii (the Project). The Project is 



                                      120
<PAGE>   23
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


                   Hudson General Corporation and Subsidiaries





being developed in four successive phases. The first two phases, containing
approximately 2,100 acres, have been developed and substantially sold. The third
phase, containing approximately 550 acres, has also been developed and has 85
parcels available for sale. The fourth phase has yet to be developed, except to
the extent common improvements (main road, water wells, etc.) have been
completed. During fiscal 1992, the County of Hawaii passed an ordinance pursuant
to which the Venture, after subdivision approvals are obtained, would be able to
develop Phase IV into 1,490 units. Shortly after passage of the ordinance, a
lawsuit against the County of Hawaii was filed in the Circuit Court of Hawaii by
two local residents of Hawaii (Plaintiffs) seeking to invalidate such ordinance
on various grounds including that the ordinance was adopted without following
State of Hawaii procedure relating to the preparation of an Environmental Impact
Statement. During fiscal 1993, the Judge in this action granted Plaintiffs'
motion for partial summary judgment without indicating any effect on Phase IV
zoning. The County and the Venture appealed this ruling. The appeal was heard
before the Hawaii Supreme Court in March 1994, and on May 6, 1997, the Supreme
Court vacated the summary judgment which was previously granted and remanded
certain related issues to the Circuit Court for that Court to decide. The
Venture cannot, at this time, determine the impact of the Supreme Court's ruling
and the Circuit Court's proceedings on the timing of development of Phase IV or
the expenditures related thereto. The joint venture partners are reevaluating
plans for Phase IV which has to date only had limited development.

  The Corporation's partner in the Venture is Oxford Kohala, Inc. (the Partner),
a wholly-owned subsidiary of Oxford First Corporation (Oxford First). Under the
Restated Joint Venture Agreement dated April 29, 1981, as amended (the
Agreement), the partners have agreed to make equal advances to the Venture for
all costs necessary for the orderly development of the land and to share profits
equally. During fiscal 1997, the Corporation advanced $300,000 to the Venture.
Such advances were repaid by the Venture to the Corporation on June 30, 1997.

  On October 13, 1994, Oxford First filed for reorganization under Chapter 11 of
the Bankruptcy Code. Pursuant to an order of the Bankruptcy Court, Oxford First
(through its subsidiary, The Oxford Finance Companies, Inc.) was permitted to
transfer certain amounts to the Partner. The amounts so authorized were not
sufficient to allow the Partner to make its full share of required advances. The
Corporation opted to make additional advances (the Additional Advances) to cover
the Partner's funding deficiency. During November 1995, the Partner resumed
making advances, and in January 1996, the Partner repaid to the Corporation the
entire amount of the Additional Advances of $702,000 together with $37,000 of
interest thereon. The Corporation has been informed by the Partner, that Oxford
First has met all its financial obligations under its confirmed plan of
reorganization and is no longer restricted in the amount of required advances it
may make to the Venture.

  The Corporation accrues interest income on its advances to the Venture at the
rate agreed to by the Partners (currently 1% below prime). The Corporation
defers recognition of such interest income to the extent that such interest rate
exceeds the Corporation's weighted average cost of funds. At June 30, 1997 and
1996, the amount of deferred interest income was $2,159,000 and $2,028,000,
respectively. The Corporation will recognize deferred interest income when
additional distributions or payments related to the Venture, if any, are made to
the Corporation. Interest income accrued by the Corporation for fiscal 1997 and
1996 was $1,765,000 and $1,604,000, respectively.

  The summary consolidated balance sheets for the Venture as of June 30, 1997
and 1996 are as follows:

<TABLE>
<CAPTION>
                                                     1997        1996
                                                  ---------------------
                                                     (in thousands)

<S>                                               <C>          <C>     
Cash and equivalents .........................    $    730     $    267
Land and development costs (including capital-
  ized interest of $6,591,000 and $6,680,000)        9,264       26,710
Mortgages, accounts and notes receivable .....       2,779        5,212
Foreclosed real estate -- net ................       2,854        2,200
Other assets -- net ..........................       1,590        2,325
                                                  ---------------------
                                                  $ 17,217     $ 36,714
                                                  =====================

Note payable .................................    $     --     $    576
Partner advances and accrued interest payable       54,013       50,220
Accounts payable and accrued expenses ........       1,162        1,292

Partners' deficit ............................     (37,958)     (15,374)
                                                  ---------------------
                                                  $ 17,217     $ 36,714
                                                  =====================
</TABLE>

  In the fourth quarter of fiscal 1997, the Venture recorded a charge of
$17,000,000 to write-down its real estate assets to their estimated fair values.
The charge is the result of the continuing periodic evaluation of the carrying
value of the Venture's real estate assets. The Partners concluded, as a result
of their most recent in-depth analysis of an updated independent appraisal of
such assets and the consideration of other factors affecting the development of
the property, that the carrying value of the real estate assets should be
reduced. Factors considered by the Partners included the Partners' plans to
reevaluate the fourth phase of the Project which has to date only had limited
development, the current condition of the Hawaiian real estate market and
general economic conditions. In connection with the Venture's reduction of the
carrying value of its real estate assets as discussed above, the Corporation
reduced the carrying value of a portion of its advances to the Venture in the
amount of $8,500,000. The Corporation's total advances (including accrued
interest) at June 30, 1997 (after such reduction) and 1996 were $18,506,000 and
$25,110,000, respectively.

  Summary results of operations for the Venture for the fiscal years ended June
30, 1997, 1996 and 1995 are as follows:
 
<TABLE>
<CAPTION>
                                       1997         1996        1995
                                    ----------------------------------
                                             (in thousands)

<S>                                 <C>          <C>          <C>     
Net sales ......................    $  1,455     $    677     $    504
                                    ----------------------------------
Cost of sales ..................       1,106          365          191
Write-down of real estate assets      17,000           --           --
Selling, general and
  administrative costs .........       2,340        2,953        2,852
Interest -- net ................       3,593        3,401        2,956
                                    ----------------------------------
Net loss .......................    $(22,584)    $ (6,042)    $ (5,495)
                                    ==================================
</TABLE>


  As a partnership, the Venture is not subject to federal or state income taxes.
The Corporation's share of the Venture's results is shown as "Equity in loss of
Kohala Joint Venture" in the accompanying consolidated statements of earnings.




                                      121
<PAGE>   24
4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

  Accrued expenses and other liabilities at June 30, 1997 and 1996 consisted of
the following: 

<TABLE>
<CAPTION>
                                             1997          1996
                                            --------------------
                                                (in thousands)

<S>                                         <C>           <C>   
Salaries and wages......................    $ 1,940       $2,172
Interest................................        --           767
Retirement plan costs...................        319          333
Other...................................        277          376
                                            --------------------
                                            $ 2,536       $3,648
                                            ====================
</TABLE>


  Maintenance and repair expenses were $7,536,000 and $7,400,000 for fiscal 1996
and 1995, respectively. Bad debt expenses were $362,000 and $178,000 for fiscal
1996 and 1995, respectively.

5. PROPERTY AND EQUIPMENT

The number of years over which major classes of assets are being depreciated and
amortized, and the costs and related accumulated depreciation and amortization
as of June 30, 1997 and 1996 are set forth below:

<TABLE>
<CAPTION>
                               Estimated
                             Useful Lives    1997       1996
                             -------------------------------
                                          (in thousands)

<S>                            <C>       <C>        <C>    
Operating equipment             2 - 12   $ 7,640    $ 8,318
Office furnishings and
  equipment...............      5 - 10       821        669
Leasehold improvements          6 -  9       239        216
                                         ------------------
                                           8,700      9,203
Accumulated depreciation
  and amortization                        (5,798)    (5,775)
                                         ------------------
                                         $ 2,902    $ 3,428
                                         ==================
</TABLE>

  At June 30, 1997 and 1996, the Corporation leased operating equipment to
Hudson LLC with a net book value of $2,394,000 and $3,099,000, respectively.

  Due to an early lease termination in fiscal 1995, the Corporation accelerated
the amortization of the remaining carrying value of leasehold improvements made
to a hangar facility at a domestic airport location in the amount of $744,000.
Such amount is included in "Depreciation and amortization" in the accompanying
consolidated statements of earnings.

6. CANADIAN OPERATIONS

The consolidated financial statements include: assets of $12,301,000 and net
assets of $7,655,000 at the end of fiscal 1995; and revenues of $38,005,000 and
$34,099,000; and earnings of $3,166,000 and $3,352,000 in fiscal 1996 and 1995,
respectively, related to the Corporation's Canadian operations.

7. LONG-TERM DEBT

Pursuant to a Revolving Credit Agreement with a group of banks dated June 1,
1996 (the Credit Agreement), the Corporation may borrow funds (including
outstanding letters of credit) up to a limit of $6,000,000 until June 30, 1999
at which time the Credit Agreement terminates. There were no direct borrowings
or letters of credit outstanding under the Credit Agreement at June 30, 1997 and
1996. The Credit Agreement provides the Corporation with the option of selecting
a rate of interest at either the base rate or 1 3/8% above the LIBO rate, as
defined.

  The Credit Agreement requires that the Corporation meet certain financial
covenants and allows the Corporation to pay dividends or purchase, redeem or
retire its stock so long as such financial covenants are met. Pursuant to the
Credit Agreement, the Corporation may advance up to $2,000,000 to the Venture in
any fiscal year or up to $5,000,000 during the term of the Credit Agreement, net
of any distributions received from the Venture by the Corporation during such
periods. Since the inception of the Credit Agreement, the Corporation has not
increased its net advances to the Venture. The Corporation has granted the banks
a security interest in all of its membership units of Hudson LLC and certain
other assets.

  In July 1986 the Corporation issued $30,000,000 of 7% convertible subordinated
debentures due 2011 (the Debentures). In connection with the Transaction,
effective June 1, 1996, Hudson LLC assumed the obligations of the Debentures and
the Corporation remained as a co-obligor. The Debentures were convertible at any
time prior to maturity into shares of the Corporation's common stock at a
conversion price of $32.75 per share.

  At June 1, 1996 there was $28,821,000 principal balance of the Debentures
outstanding. During June and August 1996, the Debentures were called for
redemption and as a result, $2,408,000 principal balance of the Debentures were
redeemed during fiscal 1997. In addition, during fiscal 1997 and the month of
June 1996, $26,343,000 and $70,000, respectively, of the Debentures were
converted into shares of the Corporation's common stock and to such extent
Hudson LLC became indebted, on a subordinated basis, to the Corporation (the
Corporate Subordinated Debt). At September 5, 1996, no Debentures remained
outstanding.

  During fiscal 1997, Hudson LLC utilized the proceeds from the Deferred
Payments together with a portion of the proceeds received at the closing of the
Transaction to repay $21,283,000 of the outstanding balance of the Corporate
Subordinated Debt. At June 30, 1997, the balance of the Corporate Subordinated
Debt was $5,130,000. The noncurrent portion of such debt in the amount of
$4,630,000 is shown as "Note receivable from Hudson General LLC" in the
accompanying consolidated balance sheets. Hudson LLC is obligated to repay
$500,000 of such debt to the Corporation on July 15, 1997 and $1,500,000 on each
July 15th thereafter until the entire principal balance is satisfied. The
current portion of this debt at June 30, 1997, in the amount of $500,000 (which
was paid in July 1997), is included in "Advances to Hudson General LLC -- net"
in the accompanying consolidated balance sheets. Interest on the Corporate
Subordinated Debt is payable semi-annually in January and July at the rate of 7%
per annum.

8. INCOME TAXES

Provision (benefit) for income taxes consisted of the following for the years
ended June 30, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                     1997     1996      1995
                                     -------------------------
                                          (in thousands)

<S>                                 <C>      <C>      <C> 
Federal:
  Current.........................   $  97   $3,415   $    847
  Deferred........................    (456)   1,485       (137)
Foreign:
  Current.........................     --       324         --
  Deferred........................     --       449     (1,300)
State:
  Current.........................     687      789        313
  Deferred........................      63      721        (73)
                                     -------------------------
                                     $ 391   $7,183    $  (350)
                                     =========================
</TABLE>



                                      122
<PAGE>   25
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                   Hudson General Corporation and Subsidiaries



  A reconciliation of the provision (benefit) for income taxes to the amount
computed by applying the statutory federal income tax rate to earnings before
provision (benefit) for income taxes for the years ended June 30, 1997, 1996 and
1995 follows:

<TABLE>
<CAPTION>
                                            1997        1996        1995
                                          -------------------------------
                                                   (in thousands)

<S>                                       <C>         <C>         <C>    
Tax at federal statutory rate ........    $   295     $ 6,001     $ 1,442
Increase (decrease) in income taxes
  resulting from:
  Reevaluation of valuation allowance          --        (960)     (1,300)
  Utilization of foreign net operating
    loss carryforwards and
    depreciation differences .........         --          --        (804)
  Foreign tax differential ...........         --         395         204
  Effect of foreign income,
    previously taxed .................       (449)         --          --
  State income taxes, net of
    Federal income tax effect ........        495         997         158
  Provision for future repatriation
    of Canadian earnings .............         --         750          --
  Other -- net .......................         50          --         (50)
                                          -------------------------------
Provision (benefit) for income taxes .    $   391     $ 7,183     $  (350)
                                          ===============================
</TABLE>


  Deferred tax assets (liabilities) are comprised of the following as of June
30, 1997 and 1996:

<TABLE>
<CAPTION>
                                                 1997       1996
                                                ----------------
                                                 (in thousands)

<S>                                               <C>       <C> 
Deferred tax assets:
  Reserves for doubtful accounts, claims, etc     $  319    $  264
  Retirement plans ...........................       108        --
  Alternative minimum tax ....................       285        --
                                                  ----------------
    Current deferred tax assets ............         712       264
                                                  ----------------
  State income taxes .........................       510        --
  Difference between book and tax
    carrying value of Hudson LLC .............       193       137
  Difference in the Venture's book and
    tax year-end .............................       525       554
                                                  ----------------
    Noncurrent deferred tax assets .........       1,228       691
                                                  ----------------
    Net deferred tax assets ................      $1,940    $  955
                                                  ----------------
Deferred tax liabilities:
  Difference between book and tax
    carrying value of Hudson LLC                  $   --    $  (65)
  Property, equipment and leasehold
    rights, principally depreciation -- domestic    (857)     (407)
  Provision for future repatriation of
    Canadian earnings...................            (750)     (750)
  Interest capitalized on financial statements      (440)     (495)
                                                  ----------------
      Noncurrent deferred tax liabilities         (2,047)   (1,717)
                                                  ----------------
      Net deferred tax liabilities                $ (107)   $ (762)
                                                  ================
</TABLE>


  Under SFAS No. 109, a valuation allowance is provided when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. At July 1, 1993, the Corporation provided a 100% valuation allowance
for the net operating loss carryforwards and depreciation differences relating
to its Canadian operations since realization of the related deferred tax assets
was uncertain at that time. The net change in the valuation allowance for fiscal
1996 and 1995 was a decrease of $960,000 and $2,104,000, respectively. The
decrease reflects: (i) the tax effect resulting from utilization of a portion of
the Corporation's Canadian depreciation differences to offset its provision for
foreign income taxes in the amount of $804,000 for fiscal 1995; and (ii) the
recognition of $960,000 and $1,300,000 for fiscal 1996 and 1995, respectively,
of deferred tax assets resulting from a review of prior Canadian operating
results and anticipation of future Canadian earnings, which together with
cessation of operations of the Corporation's Canadian fixed base operations,
made the realization of additional Canadian depreciation differences more likely
than not.

  As a result of the Transaction, $852,000 of deferred tax assets related to the
Corporation's Canadian subsidiary were transferred to Hudson LLC on June 1, 1996
and the Corporation will no longer be required to provide for or reflect foreign
taxes in its consolidated financial statements. In addition, beginning June 30,
1996, the Corporation's deferred tax assets and liabilities relating to Hudson
LLC appear as a separate item within deferred taxes. Due to anticipation by the
Corporation of the future repatriation of Canadian earnings, the Corporation
provided in fiscal 1996 for U.S. income taxes of $750,000.

  In April 1997, Hudson LLC's Canadian subsidiary was notified by Canadian
taxation authorities of their intention to disallow loss and depreciation
deductions and carryforwards related to an internal recapitalization in fiscal
1990 by the Corporation of such Canadian subsidiary. If the position of the
Canadian taxation authorities (as currently proposed) is sustained, a foreign
income tax liability of approximately $3,900,000, plus interest, would result.
The Corporation has agreed to indemnify and hold harmless Hudson LLC, LAGS and
each affiliate of LAGS against any liability resulting from this matter. The
Corporation's management disagrees with the position of the Canadian taxation
authorities and intends to vigorously contest any potential assessments made by
them. Accordingly, no provision has been made in the accompanying consolidated
financial statements for foreign income taxes related to this matter.

  For tax purposes, the Corporation will receive a pass-through of its share of
taxable income or loss from Hudson LLC and will provide for and pay federal and
state taxes on its share of the income or loss of Hudson LLC.

9. COMMON STOCK

(a) The Corporation's 1981 Non-Qualified Stock Option and Stock Appreciation
Rights Plan (the Plan) provided for the issuance of non-qualified stock options
(Options) to key employees. In connection with these Options, the Board of
Directors' Stock Option and Appreciation Rights Committee (the Committee) could
also grant stock appreciation rights (Rights) exercisable in lieu of the
Options, and/or limited rights (Limited Rights) exercisable under certain
circumstances in lieu of the Options. No further Options or Rights may be
granted under the Plan. The exercise price of outstanding Options under the Plan
is the fair market value (as defined in the Plan) of the shares of the
Corporation's common stock on the date of grant.

  Activity in Options during fiscal 1997 and 1996 was as follows:

<TABLE>
<S>                                                    <C>   
Outstanding June 30, 1995...........................      61,500
Exercised ($14.79 per share)........................     (10,000)
Exercised ($19.07 per share)........................      (1,900)
Canceled ($19.07 per share).........................        (200)
                                                       ---------
Outstanding June 30, 1996...........................      49,400
Exercised ($14.79 per share)........................      (8,500)
Exercised ($19.07 per share)........................        (700)
                                                       ---------
Outstanding June 30, 1997...........................      40,200
                                                       =========
</TABLE>


                                      123
<PAGE>   26
  Limited Rights were also granted in conjunction with Options granted in May
1990 and June 1991 of which 36,500 ($14.79 per share) and 3,700 ($19.07 per
share) were outstanding at June 30, 1997. At June 30, 1997 the aggregate Option
price and quoted market value of Corporation stock subject to outstanding
Options were $610,000 and $1,528,000, respectively. All outstanding Options and
Rights were granted with a term of ten years and are currently exercisable.

  The Committee was also authorized to grant additional separate stock
appreciation rights (Independent Rights), which are not connected with any
Option.

  Activity in Independent Rights during fiscal 1996 was as follows:

<TABLE>
<S>                                                    <C>   
Outstanding June 30, 1995..........................       18,000
Exercised ($17.32 per share).......................      (18,000)
                                                       ---------
Outstanding June 30, 1996..........................           --
                                                       =========
</TABLE>


(b) The Corporation's 1981 Incentive Stock Option (ISO) and Stock Appreciation
Rights Plan (the Plan) provided for the issuance of ISO's to key employees. The
fair market value, as defined, at the date of grant, for which an individual may
have been awarded ISO's, was limited to $100,000 per calendar year. No further
ISO's may be granted under the Plan. The exercise price of all ISO's outstanding
under the Plan is one hundred percent (100%) of the fair market value (as
defined in the Plan) of the shares of the Corporation's common stock on the date
of grant.

  The Committee was also authorized to grant Rights and/or Limited Rights in
conjunction with ISO's granted under the Plan. In all material respects, Rights
and Limited Rights granted under the ISO Plan operate in a manner identical to
Rights and Limited Rights granted under the 1981 Non-Qualified Stock Option and
Stock Appreciation Rights Plan.

  Activity in ISO's (and Rights) during fiscal 1997 and 1996 was as follows:

<TABLE>
<S>                                                    <C>   
Outstanding June 30, 1995..........................       48,800
Exercised ($17.00 per share).......................      (36,000)
Exercised ($19.88 per share).......................       (4,100)
Canceled ($19.88 per share)........................         (400)
                                                       ---------
Outstanding June 30, 1996..........................        8,300
Exercised ($19.88 per share).......................       (1,300)
                                                       ---------
Outstanding June 30, 1997..........................        7,000
                                                       =========
</TABLE>



  Limited Rights were also granted in conjunction with ISO's granted in June
1991 of which 7,000 ($19.88 per share) were outstanding at June 30, 1997. At
June 30, 1997 the aggregate ISO price and quoted market value of Corporation
stock subject to outstanding ISO's were $139,000 and $266,000, respectively. All
outstanding ISO's were granted with a term of ten years and are currently
exercisable.

(c) Common Stock Reserved: Common shares were reserved for issuance at June
30, 1997 as follows:

<TABLE>
<S>                                                               <C>  
Exercise of incentive stock options -- 1981 Plan............          7,000
Exercise of non-qualified stock options -- 1981 Plan........         40,200
                                                                  ---------
  Total.....................................................         47,200
                                                                  =========
</TABLE>


(d) In fiscal 1997, the Board of Directors authorized the repurchase of up to
400,000 shares of the Corporation's common stock, which purchases could be made
from time to time in either open market or privately negotiated transactions.
Prior to the fiscal 1997 authorizations, the Corporation still had authority to
repurchase up to 35,700 shares from a previous authorization. During fiscal
1997, the Corporation repurchased 243,000 shares in the open market for an
aggregate purchase price of $9,152,000.

(e) In connection with the conversion of the Debentures, during fiscal 1997, the
Corporation issued 804,259 shares of its common stock. As a result,
"Stockholders' Equity" as shown in the accompanying consolidated balance sheets
increased by $25,645,000.

10. RETIREMENT PLANS

The Corporation maintains a 401(k) Profit Sharing Plan (the Plan) covering
substantially all of its domestic employees not subject to collective bargaining
agreements. Pursuant to the Plan, the Corporation makes a matching contribution
equal to 25% of the Compensation (as defined in the Plan) that each participant
elects to defer (up to 5% of the participant's Compensation) and contribute to
the Plan. In addition, the Corporation may make a discretionary annual
contribution. As of January 1, 1997, Hudson LLC established a 401(k) Profit
Sharing Plan covering substantially all of its domestic employees not subject to
collective bargaining agreements which contains terms and conditions similar to
those of the Plan. Prior to this date, such employees were covered under the
Plan. During fiscal 1997, 1996 and 1995, the Corporation contributed $219,000,
$798,000 and $845,000, respectively, to the Plan representing employer matching
and discretionary contributions.

  During fiscal 1995, the Corporation's Canadian subsidiary (which effective
June 1, 1996 became a direct subsidiary of Hudson LLC) established a Group
Registered Retirement Savings Plan (RRSP) covering substantially all of its
employees not subject to collective bargaining agreements. Under the RRSP such
subsidiary may make a discretionary annual contribution. During fiscal 1996 and
1995, such subsidiary contributed $79,000 and $61,000, respectively, to the
RRSP.

  Net expense related to the Corporation's retirement plans, including the RRSP,
was $238,000, $877,000 and $701,000 for fiscal 1997, 1996 and 1995,
respectively.

11. COMMITMENTS AND CONTINGENCIES

(a) LEASES

Minimum rental payments for future fiscal years under non-cancelable operating
leases are: $460,000 in 1998; $471,000 in 1999; $482,000 in 2000; $492,000 in
2001; $503,000 in 2002; and $282,000 thereafter.

  Total rental expense incurred amounted to $346,000, $5,740,000 and $6,592,000
for fiscal 1997, 1996 and 1995 (excluding sublease income amounting to $517,000
and $1,337,000 in fiscal 1996 and 1995), respectively.

(b) LITIGATION

In 1988, Texaco Canada Inc. (Texaco) (now known as McColl-Frontenac Inc.)
instituted a lawsuit (the Texaco Lawsuit) in the Supreme Court of Ontario,
Canada against the Corporation, the Corporation's Canadian subsidiary (now owned
by Hudson LLC) and Petro-Canada Inc. (the corporation which supplied aviation
fuel for the Corporation's Canadian fixed base operations). The Texaco Lawsuit's
allegations, as amended, are that the defendants interfered with contractual and
fiduciary relations, conspired to injure, and induced the breach of a fuel
supply agreement between Texaco and Innotech Aviation Limited (Innotech) in
connection with the purchase by the Corporation from Innotech in 1984 of certain
assets of Innotech's airport ground services business. The Texaco Lawsuit seeks
compensatory and punitive damages totaling $110,000,000 (Canadian)
(approximately $80,000,000 (U.S.)) plus all profits earned by the defendants
subsequent to the alleged breach. The trial, which began in May 1996, concluded
after several adjournments on May 7, 1997, at which time the trial judge
indicated that he intended to issue his decision on or about June 30, 1997.
However, to date the judge has not yet rendered his decision.


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<PAGE>   27
  Innotech (which due to a name change is now called Aerospace Realties (1986)
Limited (Aerospace)) had agreed to defend and indemnify the Corporation against
claims of whatever nature asserted in connection with, arising out of or
resulting from the fuel supply agreement with Texaco. By a letter dated February
15, 1996, the Corporation was notified by Aerospace that Aerospace had entered
into a liquidation phase and could no longer defray the cost of defending the
Texaco Lawsuit or pay for any damages resulting therefrom.

  The Corporation has agreed to indemnify and hold harmless Hudson LLC, LAGS and
each affiliate of LAGS against all losses related to the Texaco Lawsuit. The
Corporation's management believes, and counsel for the Corporation has advised
based on the facts as disclosed at trial, that the Corporation will successfully
defend this action.

12. RELATED PARTY TRANSACTION

Since February 1988, the Corporation has engaged an investment banking firm of
which a director of the Corporation is affiliated to render certain investment
banking services. In connection with the Transaction, such investment banking
firm was paid $517,000 for services rendered in fiscal 1996 and if the LAGS
Option is exercised, would be entitled to a fee of 2% of the option price.

13. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table sets forth unaudited quarterly financial information for
fiscal 1997 and 1996:

<TABLE>
<CAPTION>
                           First    Second       Third     Fourth
                          Quarter   Quarter     Quarter    Quarter
-------------------------------------------------------------------
                        (in thousands, except per share amounts)

<S>                    <C>         <C>         <C>         <C>    
1997(a)
REVENUES ..........    $  1,150    $  1,154    $  1,426    $  1,334
GROSS PROFIT ......         982         988       1,267       1,175
NET EARNINGS ......         686       1,660       1,901      (3,772)(b)
EARNINGS PER SHARE,
  PRIMARY:
    NET EARNINGS ..    $    .39    $    .84    $   1.03    $  (2.11)
EARNINGS PER SHARE,
  FULLY DILUTED:
    NET EARNINGS ..    $    .37    $    .84    $   1.03    $  (2.11)
===================================================================
1996(a)
Revenues ..........    $ 34,193    $ 41,052    $ 56,510    $ 25,963
Gross profit ......       5,515       8,675      16,361       6,633
Net earnings ......         480       2,395       6,059       1,532
Earnings per share,
  primary:
    Net earnings ..    $    .41    $   2.04    $   5.10    $   1.28
Earnings per share,
  fully diluted:
    Net earnings ..    $    .37    $   1.30    $   3.06    $    .83
===================================================================
</TABLE>




(a) As a result of the Transaction (see Note 2), effective June 1, 1996 the
Corporation's interest in the Aviation Business is accounted for under the
equity method.

(b) Includes a pre-tax charge of $8,500 related to the Corporation's investment
in and advances to the Kohala Joint Venture (see Note 3).



                          INDEPENDENT AUDITORS' REPORT


The Stockholders and Board of Directors
Hudson General Corporation

We have audited the accompanying consolidated balance sheets of Hudson General
Corporation and subsidiaries as of June 30, 1997 and 1996 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three year period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Corporation'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 generally accepted auditing
standards. 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 Hudson
General Corporation and subsidiaries at June 30, 1997 and 1996 and the results
of their operations and their cash flows for each of the years in the three year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.

                                                        KPMG Peat Marwick LLP
Jericho, New York
August 15, 1997



                                      125
<PAGE>   28
                                CORPORATE INFORMATION

<TABLE>
<CAPTION>
DIRECTORS                                CORPORATE OFFICERS                              DIVISIONAL OFFICERS
<S>                                      <C>                                             <C>
Jay B. Langner                            Jay B. Langner                                  UNITED STATES
Chairman                                 Chairman of the Board
                                         and Chief Executive Officer                     Salvatore J. Altizio, Jr.
Milton H. Dresner                                                                        Vice President--Operations Administration
Developer, Builder and Private Investor  Michael Rubin
                                         President                                       Glenn J. Bassett
Paul R. Pollack                                                                          Regional Vice President
Executive Vice President                 Paul R. Pollack
                                         Executive Vice President and                    David L. Finch
Edward J. Rosenthal                      Chief Operating Officer;                        Vice President--Contract Services
Vice Chairman                            President, Hudson General LLC
Cramer Rosenthal McGlynn, Inc.                                                           D. Ross Jacobs
                                         Fernando DiBenedetto                            Vice President--Marketing
Michael Rubin                            Senior Vice President--Operations
President                                                                                Frederick C. Knapp, Jr.
                                         Raymond J. Rieder                               Vice President--Fuel Services and Planning
Hans H. Sammer                           Senior Vice President
Consultant, Retired Director,            and Chief Marketing Officer;                    Bert J. Smith
Investment Banking Group                 Executive Vice President,                       Vice President--Airport Operations
Prudential Securities Incorporated       Hudson General LLC
                                                                                         Gary D. Watson
Richard D. Segal                         Rocco Daloia                                    Regional Vice President
Chairman and Chief Executive Officer     Vice President--Maintenance and Facilities
Seavest Inc.                                                                             David M. Ziolkowski
                                         Barry I. Regenstein                             Regional Vice President
Stanley S. Shuman                        Vice President and Chief Financial Officer
Executive Vice President                                                                 CANADA
and Managing Director                    Noah E. Rockowitz
Allen & Company Incorporated             Vice President, General Counsel                 Thomas D. Culp
                                         and Secretary                                   Vice President--Marketing

                                         Henry A. Satinskas                              Audrey J. Laurin
                                         Vice President--Transportation Services         Vice President and Controller

                                                                                         Denis A. A. Lawn
                                                                                         Vice President--Operations

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

<CAPTION>
TRANSFER AGENT AND REGISTRAR             INDEPENDENT AUDITORS                            CORPORATE HEADQUARTERS
<S>                                      <C>                                             <C>
BankBoston, N.A.                         KPMG Peat Marwick LLP                           111 Great Neck Road
c/o Boston EquiServe,                    One Jericho Plaza                               Great Neck, New York 11021
Limited Partnership                      Jericho, New York 11753                         (516) 487-8610
P.O. Box 8040
Boston, Massachusetts 02266-8040         10-K AVAILABLE                                  CANADIAN ADMINISTRATIVE OFFICES

SHARES LISTED                            The Annual Report, on Form 10-K, as             100 Alexis Nihon, Suite 400
Common--                                 filed with the Securities and Exchange          Ville St. Laurent, Quebec
American Stock Exchange                  Commission, is available to shareholders        H4M 2N9
(Symbol: HGC)                            without charge upon written request to:         (514) 748-2277

                                         Secretary
                                         Hudson General Corporation
                                         111 Great Neck Road
                                         Great Neck, New York 11021
</TABLE>


                                         126
<PAGE>   29

HUDSON GENERAL CORPORATION
111 Great Neck Road
P.O. Box 355
Great Neck, New York  11022


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