<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                -----------------
   
                                 AMENDMENT NO. 2
                                       TO
                                  FORM 10-KSB/A
    
                       AMENDMENT TO APPLICATION OR REPORT
                 FILED PURSUANT TO SECTION 12, 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                            HUDSON HOTELS CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

   
                                 AMENDMENT NO. 2
    
            The undersigned registrant hereby amends the following items, 
financial statements, exhibits or other portions of its Annual Report for the
fiscal year ended December 31, 1997 on Form 10-KSB as set forth in the pages 
attached hereto:

   
    
            Item 3.  Legal Proceedings

            Item 7.  Financial Statements
   
    
            Item 12. Certain Relationships and Related Transactions

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                  FORM 10-KSB/A

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

       For the Year Ended                               Commission File
       December 31, 1997                                Number 0-17838

                            HUDSON HOTELS CORPORATION
             (Exact name of registrant as specified in its charter)

    A New York Corporation                         IRS Employer Identification
                                                           No. 16-1312167

          ADDRESS                                        TELEPHONE NUMBER
          -------                                        ----------------

  One Airport Way, Suite 200                              (716) 436-6000
  Rochester, New York 14624

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

                                                          NAME OF EXCHANGE ON
  TITLE OF EACH CLASS                                      WHICH REGISTERED
  -------------------                                     -------------------
          None                                                   None 

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

                          COMMON STOCK $.001 PAR VALUE
                          ----------------------------
                              (Title of the Class)

Indicate, by check mark, whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                    Yes   X                         No 
                        -----                           -----

The Registrant's revenues for the year ended December 31, 1997:  $38,731,097.

The aggregate market value of the Common Stock held by non-affiliates of the
Registrant (computed by reference to the average of the bid and asked prices as
reported by the National Quotation Bureau, Inc. as of the close of business on
March 11, 1998) was $15,914,516 (3,978,629 shares at $4.00 per share).

The number of shares outstanding of each of the Registrant's classes of common
stock as of February 20, 1998, is as follows:

                        5,155,162 Shares of Common Stock
                            Par Value $.001 per share

Parts of the Proxy Statement for the Registrant's Annual Meeting of Stockholders
to be held May 29, 1998, are incorporated by reference to Part III of the Form
10-KSB Report.


<PAGE>


                           Item 3. Legal Proceedings

   
On October 26, 1990, a complaint was filed in Palm Beach County Circuit 
Court, Florida, by Seagate Beach Quarters, Inc., a Florida corporation 
(Bearing Case #90-12358-AB), seeking an unspecified amount of damages plus 
interest and costs, against Rochester Community Savings Bank, ("RCSB"), a New 
York based bank, Shore Holdings, Inc. ("SHORE"), a subsidiary of RCSB and 
naming Hudson as a co-defendant. On December 6, 1990, Delray Beach Hotel 
Properties Limited, a Florida limited partnership controlled by Hudson 
Hotels, purchased the Seagate Hotel and Beach Club from RCSB's subsidiary, 
SHORE. The purchase contract included an indemnification of Hudson Hotels 
against any action resulting from previously negotiated contracts between 
RCSB's subsidiaries and third-parties. Case #90-12358-AB contained 
allegations that RCSB's subsidiary, SHORE, defaulted in its obligations under 
a Contract for Purchase and Sale, dated August 16, 1990, and failed to go 
forward with the transaction due to alleged tortious negotiations between 
RCSB and Hudson. On March 17, 1994, the Court granted Summary Judgment in 
favor of RCSB and Hudson Hotels which judgment was appealed by Seagate. The 
Fourth District Court of Appeal in Florida affirmed the summary judgment on 
RCSB and reversed the summary judgment granted in favor of Hudson, remanding 
the action to Circuit Court for further consideration. On August 15, 1994, 
Seagate proceeded to trial against SHORE in case #90-12358-AB. During the 
course of the trial, Seagate took a voluntary dismissal of their action 
against SHORE. On September 8,1994, Seagate refiled its lawsuit against SHORE 
and joined Delray Beach Hotel Properties Limited, through its general 
partner, Delray Beach Hotel Corp. (bearing Case #94-6961-AF). The new case 
against SHORE was brought essentially on the same facts as stated above. The 
claim against Delray Beach Hotel Properties Limited was identical to the 
conspiracy and tortious interference with a business relationship claim 
currently existing against Hudson Hotels. On January 27, 1995, the Court 
issued an Order dismissing the Amended Complaint as to Delray Beach Hotel 
Properties Limited. The Circuit Court has consolidated the case against 
Hudson Hotels (Case #90-12358-AB) and the case against SHORE (Case 
#94-6961-AF) and it is anticipated those suits will go to trial in April 1999.
    

   
On February 11, 1993, a complaint was filed in the Western District of New 
York, United States District Court, by John Miranda, Susan Miranda and 
Christopher Miranda, seeking monetary damages and costs in the aggregate 
amount of $20,000,000 against Quality Inn International, Choice Hotels 
International, and naming Hudson as a co-defendant. The requested relief in 
this case, John Miranda and Susan Miranda and Christopher Miranda vs. Quality 
Inns International Inc., Choice Hotels International Inc., Ridge Road Hotel 
Properties, Ridge Road Hotel Properties d/b/a Comfort Inn, a/k/a Comfort Inn 
West, Hudson Hotels Corp., and Jennifer L. Ansley, as Executrix of the Estate 
of Loren G. Ansley, was based on allegations that John Miranda, while staying 
at the Comfort Inn, stepped on a needle, and claims negligence and lack of 
due care on the part of the defendants. This case is being diligently 
defended by the insurance carrier of Ridge Road Hotel Properties and Hudson 
and is expected to go to trial in May 1999. The Company believes that it has 
adequate insurance for any potential loss.
    

   
On June 20, 1995, Ladenburg, Thalmann & Co., Inc., the Company's former 
investment bankers, filed a complaint in New York State Supreme Court against 
the Company alleging breach of contract and damages of $906,250 relating to 
the Company's rescission of a warrant granted to them in connection with the 
investment advisory agreement. In February 1994, the Board of Directors of 
the Company determined that Ladenburg had been otherwise adequately 
compensated for such services as were actually performed, and rescinded the 
warrant. On September 30, 1998, the Company reached settlement with 
Ladenburg, Thalmann & Co. The Company funded a total of $100,000 in cash and 
200,000 shares of Common Stock valued at $375,000 in settlement of the 
litigation.
    

   
US Franchise Systems, Inc. ("USFS") has informed Hudson Hotels Corporation 
that USFS will claim indemnity under the Joint Venture Agreement for any 
liability to USFS arising out of the following suit: Plaintiff Larry Owens, a 
guest in the process of registering at the Birmingham Microtel Inn, seeks 
monetary damages in the amount of $500,000 plus $2,000,000 in punitive damages 
for injury arising out of a gun shot wound to the buttocks,  which occurred 
during a robbery of the hotel. This case was commenced in Alabama State Court 
on December 13, 1996. This lawsuit was settled in April 1998 without payment 
by the Company.
    
                                       1
<PAGE>

   
On January 16, 1998, the Company was served with a complaint filed in the 
United States District Court for the Western District of New York alleging 
discrimination based upon the gender of the plaintiff and sexual harassment. 
The complaint sought an unspecified amount of damages including back pay and 
benefits, front pay and benefits, compensatory damages, punitive damages, 
litigation costs, and further sought to require the Company to implement an 
affirmative action program with respect to promoting and retraining the 
plaintiff. The plaintiff is a former employee of S&W Restaurant, Inc., the 
company which operates the restaurant in the Brookwood Inn in Pittsford, New 
York. This lawsuit has been settled without material cost to the Company.
    

After taking into consideration legal Counsel's evaluation of all such actions,
management is of the opinion that the outcome of each such proceeding or claim
which is pending, or known to be threatened (as described above), will not have
a material adverse effect on the Company's financial statements.



                                       2
<PAGE>


ITEM 7.  FINANCIAL STATEMENTS

The information required by this item is incorporated in the Consolidated
Financial Statements and Notes, which is located after Item 13.


ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   
On August 28, 1996, the Company completed the acquisition of the remaining 
partnership interests in five hotel partnerships in which the Company was the 
owner of varying minority general and limited partnership equity interests 
for 1,170,103 shares of the Company's common stock. Wilson Enterprises, L.P., 
a limited partnership which E. Anthony Wilson and Ralph L. Peek are the 
general partners, was a limited partner in several of the acquired 
partnerships and received 102,007 shares in exchange for its partnership 
interests. In addition, Mr. Lockwood was a limited partner in two of the 
limited partnerships and received 8,233 shares in exchange for his partnership 
interests.
    

   
Wilson Enterprises, L.P., a partnership the general partners of which are E. 
Anthony Wilson and Ralph L. Peek, shares office space with the Company and 
reimburses the Company for the direct costs that are associated therewith. 
During 1997, Wilson Enterprises, L.P. reimbursed the Company $4,829 for such 
costs.
    

   
In May 1998, Hudson Hotels Trust, a newly-formed Maryland real estate 
investment trust, borrowed $2,000,000 in seed capital financing from 
M,L,R and R, a New York partnership of which Richard Sands is a partner, to 
finance its start-up operations through its anticipated initial public 
offering. The Company intended to enter into a strategic alliance with this 
real estate investment trust which was anticipated to have significant 
benefits for the future operations of the Company. In order to induce the 
partnership to loan the seed capital money to the trust, the Company issued 
to the partnership warrants to purchase 250,000 shares of the Company's 
common stock at a strike price of $4.00. This was the approximate trading 
price of the stock at issuance of the warrants. M,L,R&R and its partners 
collectively own more than 10% of the Company's outstanding common stock; in 
addition, Mr. Sands is the husband of Jennifer Sands, the beneficiary of the
Q-Tip Trust of Jennifer L. Ansley, which Q-Tip Trust is a greater than 5% 
shareholder of the Company.
    

   
ACQUISITION OF PROPERTIES. In August 1998, the Company organized a Virginia 
limited partnership, HH Bridge, L.P.,  to acquire three properties. It
contributed $3,643,000 to the capital of the Partnership for a 1% general 
partnership interest and a 41.2% limited partnership interest M,L,R&R, 
contributed $5,000,000 for a 57.8% limited partnership interest. The 
partnership agreement provides that:
    

   
     - M,L,R&R receives a $250,000 guaranteed payment each quarter
     - Hudson receives all income of the partnership in excess of that 
       preferred return
     - M,L,R&R has the right to require the Company to purchase its partnership
       interest on August 14, 1999 for $6,000,000.
     - M,L,R&R has the right to acquire Hudson's interest in the partnership 
       for $1.00 if:
         (a) the preferred return is not paid, or
         (b) we are unable to purchase M,L,R&R's interest on August 14,
             1999 as required.
    

   
On August 14, 1998, the partnership purchased three hotel properties for an 
aggregate purchase price of approximately $26,600,000.

SALE OF STOCK.  On August 17, 1998, the Company sold 333,334 shares of its 
common stock to M,L,R&R for an aggregate consideration of $1,000,000, or 
$3.00 per share. The per-share price was approximately the market price of 
the Company's shares at the date of sale.
    

   
TRANSFER OF PROPERTIES. In December 1998 and January 1999 Hudson transferred 
certain of its properties to companies which are affiliates of M,L,R&R, a 
holder of more than 5% of its outstanding shares. The Company undertook these 
transfers to obtain working capital which it required to pay operating 
expenses and debt service during its traditionally slow first quarter. The 
transfers were:
    

   
     - Canandaigua Hotel Corp., a subsidiary of Hudson, terminated its lease 
       of the Inn on the Lake, owned by L, R, R & M. L.L.C., and entered into a
       management contract for that property.
     - H.H. Properties--Southwest, Inc., a subsidiary of Hudson, sold four 
       parcels of vacant land in Texas and Arizona to Transport Associates.
     - The Company elected not to make the guaranteed payment due January 1, 
       1999 and M.L. R & R exercised its right to acquire our limited 
       partnership Interests in H.H. Bridge, L.P.
    

   
The Company received or retained approximately $1,850,000 in cash from these 
transfers. Our mezzanine loan agreement required us to use the proceeds of 
asset sales to pay down the debt; however, Hudson has instead used these 
proceeds for working capital. This violation of the mezzanine loan agreement 
gives our lender the right to demand immediate repayment of the mezzanine 
loan.
    

   
Mr. Lockwood, the Secretary of the Company, is also a partner in Boylan, 
Brown, Code, Fowler, Vigdor & Wilson, LLP, which law firm is general counsel 
to the Company. In 1997, the Company paid approximately $356,000 to the law 
firm in legal fees.
    

                                       3
<PAGE>











                   HUDSON HOTELS CORPORATION AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

                         TOGETHER WITH AUDITORS' REPORTS


<PAGE>





REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
Hudson Hotels Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheet of Hudson Hotels
Corporation and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, changes in shareholders' investment and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of Hudson Hotels Corporation and Subsidiaries for the year ended
December 31, 1996, were audited by other auditors, whose report, dated March 28,
1997, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with generally accepted auditing standards.
This standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hudson Hotels
Corporation and Subsidiaries as of December 31, 1997, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.

/s/ Coopers & Lybrand, LLP
Rochester, New York
February 27, 1998


<PAGE>






INDEPENDENT AUDITORS' REPORT

To the Shareholders of
   Hudson Hotels Corporation:

We have audited the accompanying consolidated balance sheets of Hudson Hotels
Corporation (a New York corporation) and subsidiaries as of December 31, 1996,
and the related consolidated statements of income, changes in shareholders'
investment and cash flows for the year ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We did not audit the financial
statements of HH Properties-I, Inc., a wholly-owned subsidiary, at December 31,
1996 and for the period from November 15, 1996 to December 31, 1996, which
statements reflect total assets of $88,632,482 as of December 31, 1996, and
total revenues of $2,236,396 for the period then ended. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for HH Properties-I, Inc.
as of December 31, 1996, and for the period then ended, is based solely on the
report of the other auditors.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 and the report of other
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Hudson Hotels Corporation and
subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.

/s/ Bonadio & Co., LLP
Rochester, New York
March 28, 1997


                                       2

<PAGE>


REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors
Hudson Hotels Corporation

We have audited the accompanying balance sheet of HH Properties-I, Inc., a 
wholly-owned subsidiary of Hudson Hotels Properties Corp., as of December 31, 
1996, and the related statements of operation, changes in stockholder's 
equity and cash flows for the period November 15, 1996 through December 31, 
1996.  These financial statements are the responsibility of the Company's 
management.  Our responsibility is to express an opinion on these financial 
statements based on our audit.

We conducted our audit 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 audit provides a 
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in 
all material respects, the financial position of HH Properties-I, Inc. as of 
December 31, 1996, and the results of its operation and its cash flows for 
the period November 15, 1996 through December 31, 1996 in conformity with 
generally accepted accounting principles.


                                            Coopers & Lybrand LLP
/s/ Coopers & Lybrand LLP
Rochester, New York
March 22, 1997


                                       3

<PAGE>

HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND1996

<TABLE>
<CAPTION>

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

ASSETS                                                                     1997                        1996
------                                                                     ----                        ----

CURRENT ASSETS:

<S>                                                                   <C>                        <C>
     Cash and cash equivalents                                        $    670,736               $  1,057,368
     Cash - restricted                                                   3,463,928                  1,515,879
     Accounts receivable - trade                                           897,878                    442,992
     Prepaid expenses and other                                          1,378,069                  1,497,909
                                                                       -----------                -----------

TOTAL CURRENT ASSETS                                                     6,410,611                  4,514,148

INVESTMENTS IN PARTNERSHIP INTERESTS                                     1,781,621                  1,974,900

LAND AND REAL ESTATE DEVELOPMENT                                         4,147,151                  4,432,944

PROPERTY AND EQUIPMENT, NET                                            129,749,648                 83,673,682

DEFERRED TAX ASSET                                                       1,387,926                    377,448

OTHER ASSETS                                                             8,641,153                  7,919,834
                                                                       -----------                -----------

TOTAL ASSETS                                                          $152,118,110               $102,892,956
                                                                      ============               ============

LIABILITIES AND SHAREHOLDERS' INVESTMENT

CURRENT LIABILITIES:

     Lines of credit                                                  $    712,537               $         --
     Current portion of long-term debt                                   3,433,217                  3,527,950
     Accounts payable - trade                                            1,394,460                  1,859,596
     Other accrued expenses                                              3,595,288                  2,839,115
                                                                      ------------               ------------

TOTAL CURRENT LIABILITIES                                                9,135,502                  8,226,661

LONG-TERM DEBT                                                         128,559,291                 80,064,186

DEFERRED REVENUE - LAND SALE                                               185,055                    185,055

LIMITED PARTNERS' INTEREST IN

CONSOLIDATED PARTNERSHIP                                                 1,099,266                  1,099,939

SHAREHOLDERS' INVESTMENT:

     Preferred stock                                                           295                        295
     Common stock                                                            5,166                      4,788
     Additional paid-in capital                                         17,836,573                 15,954,745
     Warrants outstanding                                                   50,000                     50,000
     Accumulated deficit                                                (4,711,787)                (2,692,713)
                                                                     --------------              ------------

                                                                        13,180,247                 13,317,115

     Less:  10,000 shares of common stock in treasury,
        at cost at December 31, 1997                                       (41,251)                        --
                                                                     --------------              ------------

TOTAL SHAREHOLDERS' INVESTMENT                                          13,138,996                 13,317,115
                                                                     -------------               ------------

TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT                        $152,118,110               $102,892,956
                                                                      ============               ============
</TABLE>


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



                                       4
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

   
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
OPERATING REVENUES:                                                      1997                     1996
                                                                         ----                     ----

<S>                                                                 <C>                        <C>
     Hotel operations                                                $36,922,896               $11,730,296
     Management fees                                                     801,057                   978,668
     Royalties                                                           757,047                   602,049
     Other                                                               250,097                   837,036
                                                                    ------------             -------------

TOTAL OPERATING REVENUES                                              38,731,097                14,148,049

OPERATING COSTS AND EXPENSES:

     Direct                                                           24,808,798                 8,925,508
     Corporate                                                         2,617,158                 1,782,906
     Indirect operating costs                                          1,225,788                   551,149
     Depreciation and amortization                                     4,096,761                 1,021,857
                                                                    ------------             -------------
     Total operating costs and expenses                               32,748,505                12,281,420
                                                                    ------------             -------------
     Income from operations                                            5,982,592                 1,866,629
                                                                    ------------             -------------

OTHER INCOME (EXPENSE):
     Gain on sale of worldwide franchise rights                               --                 1,385,758
     Interest income                                                     194,755                   298,825
     Interest expense                                                 (9,028,366)               (2,068,440)
                                                                    -------------            --------------

TOTAL OTHER (EXPENSE)                                                 (8,833,611)                 (383,857)
     Income/(Loss) before income taxes, minority interest
        and equity in operations of affiliates                        (2,851,019)                1,482,772

PROVISION/(BENEFIT) FOR INCOME TAXES                                  (1,000,849)                  472,014
                                                                    -------------            -------------

     Income/(Loss) before minority interest, and equity in
        operations of affiliates                                      (1,850,170)                1,010,758

MINORITY INTEREST                                                       (107,419)                 (392,235)
EQUITY IN OPERATIONS OF AFFILIATES                                        65,835                    17,527
                                                                    ------------             -------------

NET INCOME (LOSS)                                                    $(1,891,754)              $   636,050
                                                                    =============            =============

NET INCOME (LOSS) PER COMMON SHARE - BASIC                              $(0.40)                   $0.13
                                                                        =======                   =====

NET INCOME PER COMMON SHARE - DILUTED                                     N/A                     $0.12
                                                                          ===                     =====
</TABLE>
    

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



                                       5
<PAGE>

HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>

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

                                            SERIES A        ADDITIONAL                        ADDITIONAL
                                            PREFERRED    PAID-IN CAPITAL       COMMON      PAID-IN CAPITAL    
                                              STOCK         PREFERRED          STOCK            COMMON        
                                              -----         ---------          -----            ------        
<S>                                           <C>         <C>                 <C>            <C>              
BALANCE, DECEMBER 31, 1995                      $295      $1,560,705           $3,280       $ 5,610,844            
     Net Income                                   --              --               --                --            
     Exercise of stock options,
     including related tax benefits               --              --               24            17,643            
     Conversion of debentures                     --              --              600         2,999,400            
     Purchase of treasury stock                   --              --               --                --            
     Issuance of common stock and use
       of treasury stock for
       purchase of five hotels                    --              --              513         3,324,491            
       Issuance of common stock and use
       of treasury stock for
       purchase of SB Motel Corp. portfolio       --              --              371         2,358,502            
     Other                                        --              --               --            83,160            
     Cash dividends paid on preferred stock       --              --               --                --            
                                                 ---     -----------           ------       -----------            

BALANCE, DECEMBER 31, 1996                       295       1,560,705            4,788        14,394,040            
     Net Loss                                     --              --               --                --            
     Purchase of treasury stock                   --              --               --                --            
     Exercise of stock options                    --              --              233         1,046,855            
     Issuance of common stock and
     options for investor
     relation services                            --              --              145           834,973            
     Cash dividends paid on preferred stock       --              --               --                --            
                                                 ---     -----------           ------       -----------            

BALANCE, DECEMBER 31, 1997                      $295      $1,560,705           $5,166       $16,275,868            
                                                ====     ===========           ======       ===========            

<CAPTION>

                                              WARRANTS        ACCUMULATED         TREASURY                   
                                            OUTSTANDING         DEFICIT            STOCK               TOTAL 
                                            -----------         -------            -----               ----- 
<S>                                           <C>               <C>                 <C>               <C>      
BALANCE, DECEMBER 31, 1995                   $ 60,000     $(3,201,443)        $  (122,855)       $ 3,910,826 
     Net Income                                    --         636,050                  --            636,050 
     Exercise of stock options,                                                                              
     including related tax benefits           (10,000)             --                  --              7,667 
     Conversion of debentures                      --              --                  --          3,000,000 
     Purchase of treasury stock                    --              --          (3,953,042)        (3,953,042)
     Issuance of common stock and use                                                                        
       of treasury stock for                                                                                 
       purchase of five hotels                     --              --           4,075,897          7,400,901 
       Issuance of common stock and use                                                                      
       of treasury stock for                                                                                 
       purchase of SB Motel Corp. portfolio        --              --                  --          2,358,873 
     Other                                         --              --                  --             83,160 
     Cash dividends paid on preferred stock        --        (127,320)                 --           (127,320)
                                              -------     ------------          ----------       ------------
                                                                                                             
BALANCE, DECEMBER 31, 1996                     50,000      (2,692,713)                 --         13,317,115 
     Net Loss                                      --      (1,891,754)                 --         (1,891,754)
     Purchase of treasury stock                    --              --             (41,251)           (41,251)
     Exercise of stock options                     --              --                  --          1,047,088 
     Issuance of common stock and                                                                            
     options for investor                                                                                    
     relation services                             --              --                  --            835,118 
     Cash dividends paid on preferred stock        --        (127,320)                 --           (127,320)
                                              -------     ------------        ------------       ----------- 
                                                                                                             
BALANCE, DECEMBER 31, 1997                   $ 50,000     $(4,711,787)        $   (41,251)       $13,138,996 
                                             ========     ============        ============       =========== 
</TABLE>


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


                                       6
<PAGE>


HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>

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


CASH FLOWS FROM OPERATING                1997                      1996
                                         ----                      ----
ACTIVITIES:


<S>                                    <C>                       <C>
NET INCOME (LOSS)                      $(1,891,754)               $  636,050
Adjustments to reconcile net
income (loss) to net cash
 provided by operating activities:
  Deferred tax provision                (1,010,478)                  265,767
  Depreciation and amortization          4,096,761                 1,070,050
  Non-cash expenses                        835,118                    83,160
  Gain on sale of land                     (28,812)                       --
  Gain on installment sale                      --                (1,385,758)
  Bad debt expense                         167,163
  Minority interest                        107,419                   392,235
  Equity in operations of affiliates       (65,835)                  (17,527)
  Capital distributions                    163,577                    92,272
   from unconsolidated 
   partnership interests
  Cash collected on installment sale       288,112                   694,983
(Increase) decrease in assets:
    Accounts receivable  -  trade         (454,886)                   36,924
    Prepaid expenses and other             (35,126)                 (434,100)
Increase (decrease) in liabilities:
      Accounts payable                    (465,136)                1,388,338
      Other accrued expenses               756,173                   731,468
                                       -----------              ------------

Net cash provided by operating 
   activities                            2,462,296                 3,553,862
                                       -----------              ------------
</TABLE>




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



                                       7
<PAGE>

HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>

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


                                                                                  1997                       1996
                                                                                  ----                       ----

CASH FLOWS FROM INVESTING ACTIVITIES:
<S>                                                                              <C>                      <C>
   Acquisition of land/real estate development                                       (85,054)              (2,094,550)
   Cash collected on sale of land                                                    399,659                       --
   Increase in restricted cash                                                    (1,948,049)              (1,515,879)
   Capital contribution to unconsolidated partnership interests                           --                  (12,900)
   Collection on non-affiliate mortgage                                                   --                  200,000
   Change in non-affiliates accounts and notes receivable                             29,049                  (32,360)
   Purchase of equipment                                                          (2,595,035)                (640,982)
   Change in other assets                                                            (11,937)                 (40,582)
   Purchase of hotels                                                            (47,148,504)             (58,794,287)
   Deposits                                                                         (343,034)                (329,262)
   Cash received in acquisition                                                           --                  557,538
   Change in affiliate accounts receivable                                           125,188                   25,751
                                                                                -------------            -------------

                   Net cash used in investing activities                         (51,577,717)             (62,677,513)
                                                                                -------------            -------------

CASH FLOWS FROM FINANCING ACTIVITIES:

   Proceeds of borrowings                                                         51,884,052               83,400,000
   Financing costs                                                                (1,154,545)              (2,508,238)
   Repayment of mortgages                                                         (3,483,680)             (17,023,406)
   Distributions to limited partners                                                (108,092)                (381,070)
   Proceeds from stock options exercised                                           1,047,088                    7,667
   Dividends paid                                                                   (127,320)                (127,320)
   Purchase of treasury stock                                                        (41,251)              (3,953,042)
   Borrowings on line of credit, net                                                 712,537                       --
                                                                                ------------             ------------

                   Net cash provided by financing activities                      48,728,789               59,414,591
                                                                                ------------             ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                (386,632)                 290,940

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                                    1,057,368                  766,428
                                                                                ------------             ------------

CASH AND CASH EQUIVALENTS - END OF PERIOD                                        $   670,736             $  1,057,368
                                                                                 ===========             ============

OTHER INFORMATION:
Cash paid during the period for:
   Interest                                                                      $ 8,747,412             $  1,662,972
   Income taxes                                                                  $    31,693             $    205,269
Non-cash financing and investing activities
   Issuance of 600,000 shares of common stock upon
   conversion of convertible subordinated debentures                                      --             $  3,000,000
Acquisition of seventeen properties in 1996 for stock                                     --             $  9,759,773
Liabilities assumed for the purchase of the five properties                               --
   on July 31, 1996                                                                                      $ 12,263,011
</TABLE>



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



                                       8
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997

1.  THE COMPANY:

Hudson Hotels Corporation (the "Company") was organized as Microtel Franchise
and Development Corporation to develop and franchise a national chain of economy
limited service lodging facilities ("Microtels"), using the service mark
"MICROTEL", which offers downsized rooms with higher quality furnishings at
rates below those available at competing national lodging chains. The Company
was incorporated in New York State on June 5, 1987.

   
On October 5, 1995, the Company entered into an agreement with US 
Franchise Systems, Inc. ("USFS") pursuant to which USFS purchased worldwide 
franchising and administration for the Microtel hotel chain (the "USFS 
Agreement"). Following this transaction, the Company ceased its franchising 
activities. Although the agreement was entitled Joint Venture Agreement, the 
transaction was structured as an outright sale of the Company's franchising 
rights.
    

   
The Company, in return, will receive $4 million over a three year period, 
allocated as follows: $3,037,640 for the purchase of the franchising assets; 
$700,000 for consulting services over three years; and $262,360 in interest 
related to deferred payments. Expenses of $121,759 were netted against the 
purchase price. Of the total consideration, $2 million was paid at closing, 
$1 million was paid at the first anniversary and $500,000 at the second 
anniversary, and an additional $500,000 is due at the third anniversary. In 
addition to the lump sum payments, the Company is entitled to receive royalty 
payments from properties franchised by USFS at the rate of 1% of gross room 
revenues from hotels 1-100; 75% from hotels 101-250 and .5% for all hotels 
in excess of 250.
    



Under this Agreement, the Company has the right to franchise and construct an
additional twenty-two (22) Microtel Inn properties and ten (10) "suites"
properties and to receive all royalties on the fifty (50) Microtels (28 existing
and 22 new ones to be undertaken by the Company) and ten (10) suites.

   
As a result of the sale of its franchising system pursuant to the USFS 
Agreement, the Company has focused its efforts on developing, building and 
managing various hotel products, including Microtel Inns, which has been the 
Company's strength since it acquired Hudson Hotels Corporation in 1992. 
During 1996 and 1997, the Company embarked upon a significant expansion and 
development program, which includes several acquisitions (see Note 12) and 
development of five (5) Microtel Inns through a joint venture partnership.
    

The Company operates in the industry segment of hotel development and
management.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries collectively referred to as the Company. The
consolidated financial statements also include the accounts of a partnership
which is controlled by the Company (see below and Note 3). Other investments in
partnerships which the Company does not control are accounted for under the
equity method (see below and Note 3). Income and expenses are recorded on the
accrual basis of accounting and all significant intercompany accounts and
transactions have been eliminated.

INVESTMENTS IN PARTNERSHIP INTERESTS

The Company owns or owned equity interests, either as a general or limited
partner, in entities which own hotel properties or real estate which may be
developed as a hotel property. Effective August 1, 1996, the Company acquired
various remaining general and limited partner interests in five (5) hotel
partnerships in which the Company was a minority partner. Subsequent to that
date, the operations of those five hotels are included in the operating results
of the Company.

Income and losses of controlled partnerships are allocated to the Company
according to the terms of each partnership agreement.

The Company received development and franchise placement fees totaling $40,500
and $180,000 for the years ended 1997 and 1996, respectively, from
unconsolidated entities in which the Company has a minority 


                                       9
<PAGE>

interest. Development fees represent cost reimbursement. The Company also
receives ongoing royalties from these entities on the same basis as independent
parties.

CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and amounts due from banks with maturities of less than 30 days. The
Company maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any significant credit risk
on cash and cash equivalents.

RESTRICTED CASH

The Company is required to maintain certain levels of escrowed cash in order to
comply with the terms of its debt agreements. All cash is trapped for
application against required escrows for debt, tax, insurance and capital asset
reserve. A substantial portion of the escrowed cash funds are released several
times monthly for application against current liabilities.

ACCOUNTS RECEIVABLE - TRADE

Accounts Receivable - Trade represent billed receivables to hotel entities for
management services or royalties due. At December 31, 1997 and 1996, $35,130 and
$46,542, respectively, represents amounts due from entities in which the Company
has a minority interest.

INVENTORIES

Inventories are stated at the lower of cost, on a first-in, first-out method, or
market and consist primarily of hotel supplies.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. When retired or otherwise disposed
of, the related cost and accumulated depreciation are reversed and the net
difference, less any amount realized from the disposition, is reflected as
income or loss. Betterments, renewals and extraordinary repairs that extend the
life of an asset are capitalized; other repairs and maintenance are expensed.

Property and equipment consists of the following at December 31,

<TABLE>
<CAPTION>

                                                    1997                   1996
                                                    ----                   ----

<S>                                            <C>                    <C>
Land                                           $ 14,991,042            $ 10,507,123
Building and building improvements               99,366,884              62,477,004
Furniture and equipment                          19,834,696              11,464,956
                                               ------------            ------------

                                                134,192,622              84,449,083
Less - Accumulated depreciation                  (4,442,974)               (775,401)
                                               -------------           -------------

                                               $129,749,648            $ 83,673,682
                                               ============            ============
</TABLE>


For financial reporting purposes, depreciation is computed using the
straight-line method for building and accelerated methods for furniture and
equipment over the following estimated useful lives:


Building and building improvements                                  20-40 years
Furniture and Equipment                                               5-7 years






                                       10
<PAGE>


The Company quarterly reviews its properties in accordance with the Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of Long
Lived Assets" to determine if its carrying costs will be recovered from future
operating cash flows. In cases where the Company does not expect to recover its
carrying costs, the Company recognizes an impairment loss. No such losses have
been recognized to date.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Based on the borrowing rates currently quoted by financial institutions for
loans with terms and maturities similar to the Company's long-term debt, the
carrying value of such debt approximates its fair value.

DEFERRED FINANCING COSTS

Costs incurred to acquire financing are being amortized over the estimated term
of the related financing. Accumulated amortization was $169,557 and $11,936 as
of December 31, 1997 and 1996, respectively.

REVENUE RECOGNITION

   
Royalty fee revenue is based on gross room revenues and the number of franchised
businesses open under the Company's Joint Venture Agreement with US Franchise
Systems, Inc. in accordance with the provisions of FAS 45 Accounting for 
Franchise Fee Revenue.
    

   
Franchise placement income is recognized at the date the "Microtel Inn" is
opened, as allowed under the Company's Joint Venture Agreement with US Franchise
Systems, Inc. in accordance with the provisions of FAS 45 Accounting for 
Franchise Fee Revenue.
    

Management fee revenue is recognized monthly as the services are performed in
accordance with the terms of the management contracts and is generally based on
a percentage of the managed property's revenue plus charges for accounting and
marketing fees.

Development fee revenue is recognized monthly as the services are performed in
accordance with the terms of the development contracts.

Membership dues for the beach club of the Seagate Hotel and Beach Club are
recognized ratably over the membership period. Membership dues received in
advance are reflected as deferred membership dues.

Hotel operation revenue, principally from room rentals, is recognized as earned.
Ongoing credit evaluations are performed and an allowance for potential credit
losses is provided against the portion of accounts receivable which is estimated
to be uncollectible.

BEACH CLUB MEMBERSHIP

As a result of the acquisition of the Seagate Hotel and Beach Club, the Beach
Club operation was valued at $3,206,531, based on an independent appraisal.
Amortization is provided using the straight-line method over the 20 year
estimated useful life of the asset. Accumulated amortization is $227,129 and
$66,803 as of December 31, 1997 and 1996, respectively.

EARNINGS PER SHARE

The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share" ("EPS"), which is effective for both interim and
annual periods ending after December 15, 1997.



                                       11
<PAGE>


SFAS No. 128 requires dual presentation of basic EPS and diluted EPS. Basic EPS
is computed as net earnings, less preferred stock dividends, divided by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects dilution that could occur from common shares issuable through stock
options, convertible subordinated debentures and convertible preferred stock.
Reported EPS in prior periods have been restated to conform to the provisions of
SFAS 128.

<TABLE>
<CAPTION>

                                                                  12/31/97          12/31/96

Net Earnings Applicable to Common Stock:

<S>                                                            <C>                <C>
     Net earnings (loss)                                        $(1,891,754)    $   636,050
     Deduct preferred stock dividends paid                         (127,320)       (127,320)
                                                               -------------      ----------

     Net earnings (loss) applicable to common stock             $(2,019,074)    $   508,730
                                                                ============    ===========

Weighted average number of common shares outstanding              4,996,694       3,771,702
                                                               ============     ===========

EARNINGS (LOSS) PER SHARE - BASIC                                  $(0.40)          $0.13
                                                                   =======          =====

<CAPTION>

<S>                                                             <C>                <C>
Net earnings applicable to common stock per above               $      --       $   508,730
                                                                ==========         ========

Shares used in calculating primary earnings per share                  --         3,771,702
Additional shares assuming conversion of options and warrants          --           478,143
                                                                ----------      -----------

Total shares for diluted                                               --         4,249,845
                                                                ==========         ========

EARNINGS PER SHARE - DILUTED                                       N/A              $0.12
</TABLE>

The exercise of outstanding stock options, convertible subordinated debenture
and convertible preferred stock were not included in some of the calculations of
diluted EPS, as their effect would be antidilutive. Unexercised stock
options/warrants to purchase 1,648,134 and 772,357 shares of the Company's
common stock were not included in the computations of diluted EPS because the
prices were greater than the average market price of the Company's stock or the
addition of the options and warrants are considered antidilutive during the
years ended December 31, 1997 and 1996, respectively.

The Company did not include the conversion of convertible preferred stock and
convertible subordinated debentures totaling 1,294,723 shares of the Company's
common stock in the calculation of EPS because the addition is considered
antidilutive for the years ended December 31, 1997 and 1996.

ACCOUNT RECLASSIFICATIONS

Certain account balances at December 31, 1996 were reclassified to conform to
account classifications used by the Company at December 31, 1997. These changes
had no effect on reported results of operations or financial position.

ESTIMATES

In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenue and expenses during the reporting period. Actual results could differ
from those estimates.


                                       12
<PAGE>
3.  SUMMARIZED FINANCIAL INFORMATION - INVESTMENTS IN PARTNERSHIP INTERESTS:

The following is a summary of condensed financial information for the
unconsolidated partnerships which the Company does not control for the
partnerships year ended December 31, 1997 and 1996.

<TABLE>
<CAPTION>
                                                                1997                         1996
                                                                ----                         ----
<S>                                                         <C>                           <C>
Property and equipment, net of
  accumulated depreciation                                  $29,943,215                     $29,490,826
Current assets                                                2,925,293                       2,918,869
Other assets                                                    938,340                       1,341,308
                                                            -----------                     -----------

  TOTAL ASSETS                                               33,806,848                      33,751,003
                                                            -----------                     -----------

Mortgage and notes payable - current                            302,732                       2,157,446
Other current liabilities                                       712,866                         847,865
Mortgage and note payable - noncurrent                       25,056,584                      24,118,255
                                                            -----------                     -----------

  TOTAL LIABILITIES                                          26,072,182                      27,123,566
                                                            -----------                     -----------

NET ASSETS                                                  $ 7,734,666                     $ 6,627,437
                                                            ===========                     ===========

  COMPANY'S SHARE                                           $ 1,796,050                     $ 1,889,814
                                                            ============                    ===========

Net revenues                                                 12,387,125                      13,668,878
Operating expenses                                           (7,192,947)                     (9,301,426)
                                                            ------------                    ------------

Income from operations                                        5,194,178                       4,367,452
Other income (expense), net                                  (4,228,999)                     (3,678,898)
                                                            ------------                    ------------

NET INCOME                                                  $   965,179                     $   688,554
                                                            ===========                     ===========

  COMPANY'S SHARE                                           $    65,835                     $    17,527
                                                            ===========                     ===========
</TABLE>

4.  LAND AND REAL ESTATE DEVELOPMENT

Real estate development is summarized as follows at December 31:

<TABLE>
<CAPTION>
                                                             1997                 1996                   ACRES
                                                             ----                 ----                   -----
<S>                                                         <C>                  <C>                    <C>
        Cost of land under development:
             Tonawanda, New York                            $  780,822            $  780,822             8.13
             Strawberry Plains Pike, Tennessee                      --               310,204             1.39
             Irving, Texas                                     472,932               472,932             2.02
             Plano, Texas                                      595,661               595,661             2.00
             Plano, Texas                                      677,697               677,697             2.00
             Arlington, Texas                                  604,629               604,629             2.00
             Tucson, Arizona                                   478,851               478,851             2.00
                                                          ------------          ------------

                                                             3,610,592             3,920,796
        Development costs                                      536,559               512,148
                                                          ------------          ------------
        Total real estate development in process            $4,147,151            $4,432,944
                                                            ==========            ==========
</TABLE>

                                       13
<PAGE>
Development costs include land and site development costs which are accumulated
by specific site. Upon sale to a specific ownership entity, the Company will be
reimbursed for all land and site development costs specifically associated with
the parcel.

5.  LINE OF CREDIT

The Company has lines of credit notes with two commercial banks, with interest
rates of prime plus 1/2% and 1 1/2%, for a total of $1,400,000. Amounts borrowed
are collateralized by a hotel property which the Company owns in Virginia Beach,
Virginia and land in Tonawanda, New York.

6.  DEBT:

Long-term debt consists of the following at December 31:

<TABLE>
<CAPTION>
                                                                                             1997             1996
                                                                                             ----             ----
<S>                                                                                         <C>               <C>
Mortgage payable to Nomura Asset Capital Corporation, by HH Properties-I, Inc.,
a wholly owned subsidiary dated November 27, 1996, due in monthly installments
of $477,257, including principal and interest at 9.19% over a 25 year period. On
December 11, 2008, the interest rate recasts at no less than 14.19%. The
mortgage is collateralized by all of the assets of HH Properties-I, Inc., the
Company's wholly-owned hotel subsidiary                                                    $55,468,137    $56,000,000

Mortgage payable to Nomura Asset Capital Corporation, by HH Properties-II, Inc.,
a wholly owned subsidiary, dated October 31, 1997, due in monthly installments
of $239,147, including principal and interest at 8.38% over a 25 year period. On
February 15, 2007, the interest rate recasts at no less than 13.38%. The
mortgage is collateralized by all of the assets of HH Properties-II, Inc., the
Company's wholly-owned hotel subsidiary.                                                    29,970,353             --

Mezzanine note payable to Nomura Asset Capital Corporation, dated November 27,
1996, payable in monthly installments of interest only at LIBOR plus 6%. On
October 31, 1997, the Company borrowed an additional $18,000,000 at LIBOR plus
6% interest only. As part of the additional borrowing, the Company and the
lender agreed to pay monthly installments of interest only in year one and two,
and LIBOR plus 6% and $583,333 monthly of minimum principal in years three
through five. The note is due October 11, 2002. This note
is collateralized by substantially all assets of the Company.                               35,000,000     17,000,000

7.5% convertible subordinated debenture due July 1, 2001.                                    7,500,000      7,500,000

10% note payable to Equity Inns Partnership, L.P. by the Company, payable in
monthly installments of interest only. Principal payments of $2,500,000 and
$1,384,052 are due October 31, 1998 and 1999, respectively. The note is
collateralized by 2,000,000 shares of the Company's common stock issued in the
name of Hudson Hotels Properties Corp., a wholly owned subsidiary                            3,884,052             --

10% note payable to SB Motel Corp. by the Company, payable in
monthly installments of $24,167, which represents interest only.                                    --      2,900,000

4.4% Town of Tonawanda bonds with yearly principal payments of $22,169 through
1997 and yearly principal payments of $18,745
thereafter until 2006.                                                                         169,966        192,136
                                                                                       ---------------   ------------

Total long-term debt                                                                       131,992,508     83,592,136
Less - current portion                                                                      (3,433,217)    (3,527,950)
                                                                                       ----------------  -------------

                                                                                          $128,559,291    $80,064,186
                                                                                       ----------------  -------------
                                                                                       ----------------  -------------
</TABLE>

 The conversion price of the 7.5% convertible subordinated debenture due July 1,
2001 is $7.50 per common share. This price will reset on December 31, 1998,
based on 125% of the average volume weighted price 

                                       14
<PAGE>

over the last thirty days or such number of days having 150,000 shares of
trading volume. A maximum and minimum conversion price for common shares are set
at $7.50 and $4.50, respectively. At the holder's option, at any time on or
before the maturity, the debenture or any part may be converted for common
shares subject to the terms above. This debenture is subordinate and junior in
right of payment to the senior indebtedness of the Company.

Future minimum repayments under long-term debt are as follows:

       1998                                     $ 3,433,217
       1999                                       2,985,083
       2000                                       6,096,952
       2001                                       6,213,286
       2002                                      13,825,812
       Thereafter                                99,438,158
                                              -------------

       TOTAL                                   $131,992,508

7.  SHAREHOLDERS' INVESTMENT:

(A)  PREFERRED STOCK

At December 31, 1997, the Company's authorized preferred shares were 10,000,000
at $.001 par value, of which 294,723 were issued and outstanding and December
31, 1997 and 1996, respectively.

Series A Preferred Stock - 294,723 shares are issued and outstanding and
includes a liquidation preference of $5.40 per share. Dividends are paid at
$.432 per share annual, cumulative, subject to Board declaration. Voting rights
are co-equal with Common Shares; 1 share, 1 vote. Each Preferred Share is
convertible at the option of the holder into one share of the Company's Common
Stock, with antidilution protection. The Preferred Shares are redeemable at the
option of the Company for debentures.

(B)  COMMON STOCK

At December 31, 1997, the Company's authorized common shares were 20,000,000 at
$.001 par value per share, of which 5,155,162 and 4,787,462 were issued and
outstanding at December 31, 1997 and 1996, respectively.

The Company has established the following stock option plans, authorized by the
Board of Directors and approved by shareholders:

         --1990 Employee Stock Option Plan, whereby 100,000 shares of the
         Company's common stock is reserved for issuance under plan provisions
         to Directors, Officers and key employees pursuant to the exercise of
         qualified stock options, non-qualified stock options and direct
         purchase of stock. The granted options vest over a two year period,
         with 1/3 vesting immediately, 1/3 vesting at each of the first and
         second anniversary. At December 31, 1997, 3,000 shares were available
         for grant under this plan.

         --1993 Employee Stock Option Plan, whereby 550,000 shares of the
         Company's common stock is reserved for issuance under plan provisions
         to Officers and key employees pursuant to the exercise of qualified
         stock options, non-qualified stock options and direct purchase of
         stock. The granted options vest over a two year period, with 1/3
         vesting immediately, 1/3 vesting at each of the first and second
         anniversary. In 1996, the Board of Directors authorized the issuance of
         an additional 300,000 shares, which was approved by shareholders at the
         annual meeting. At December 31, 1997, 199,500 shares were available for
         grant under this plan.



                                       15
<PAGE>

         --1993 Directors Stock Option Plan, whereby 135,000 shares of the
         Company's common stock is reserved for issuance under plan provisions
         to outside Directors. The granted options vest over a two year period
         with 1/3 vesting immediately, with 1/3 vesting over the first and
         second anniversary. At December 31, 1997, 27,000 shares were available
         for grant under this plan.

In addition, the Company, from time to time, grants warrants to non-employees,
at a price equal to or greater than the fair market value at the date of grant.

The Chairman of the Board and Chief Executive Officer of the Company has
purchased 211,875 warrants from non-affiliate third parties.

A summary of changes in common stock options and warrants during the year ended
December 31, 1997 and 1996 is:

<TABLE>
<CAPTION>

                                                NUMBER OF SHARES           PRICE PER SHARE

<S>                                             <C>                        <C>
Outstanding at December 31, 1995                  1,308,000                $1.50 - $8.375
Granted                                             128,500                $7.00 - $7.375
Exercised/Expired                                   (28,833)               $2.00
                                                   ---------

Outstanding at December 31, 1996                  1,407,667                $1.50 - $8.375

Granted                                             627,000                $5.50 - $10.00
Exercised/Expired                                  (283,000)               $2.00 - $6.00
                                                  ----------

Outstanding at December 31, 1997                  1,751,667                $1.50 - $10.00
                                                  =========

Options and warrants exercisable at:

   December 31, 1997                              1,648,134
                                                  =========
   December 31, 1996                              1,250,500
                                                  =========
</TABLE>


The FASB has issued SFAS No. 123, Accounting for Stock-Based Compensation
effective for the fiscal years beginning after December 15, 1995. The Company
has adopted the disclosure provisions of the Statement.

The Company accounts for its stock-based compensation plans under APB No. 25,
under which no compensation expense has been recognized because all employee
stock options have been granted with the exercise prices equal to the fair value
of the Company's Class A common stock on the date of grant. The Company adopted
SFAS No. 123 for disclosure purposes only in 1996. During the phase-in period of
SFAS No. 123, pro forma disclosures may not be indicative of future amounts
until the new rules are applied to all awards. For SFAS No. 123 purposes, the
fair value of each employee options grant has been estimated as of the date of
grant using the Black-Scholes option pricing model and the following weighted
average assumptions: risk-free interest rate of 6.25%, expected life of five (5)
years, no dividends and expected volatility of 33.1%. Using these assumptions,
the fair value of the employee stock options granted in 1997


                                       16
<PAGE>


and 1996 is $168,000 and $384,000, respectively, which would be amortized as
compensation expense over the vesting period of the options. Had compensation
cost been determined in accordance with SFAS No. 123, utilizing the assumptions
detailed above, the Company's net income and net income per share would have
been reduced to the following pro forma amounts for the period ended December
31:

<TABLE>
<CAPTION>

                                                    1997                   1996
                                                    ----                   ----

<S>                                          <C>                         <C>
         Net income (loss):
            As reported                       $(1,891,754)                $636,050
            Pro forma                          (2,069,452)                 426,650

         Net income per share - basic:

            As reported                           $(0.40)                   $0.13
            Pro forma                             $(0.44)                   $0.08
</TABLE>


8.   COMMITMENTS:

Certain office space and automobiles are rented under non-cancelable operating
leases that expire at various dates through 2000. The following is a schedule of
future minimum annual rentals on non-cancelable operating leases:

                   1998                             $123,724
                   1999                               21,209
                   2000                               13,056

Total rent expense for the year ended December 31, 1997 and 1996, was $159,566
and $148,102, respectively. As a partner in the partnerships disclosed in Note
3, the Company has guaranteed portions of mortgages payable relating to the
partnerships. Amounts guaranteed by the Company related to the partnerships'
mortgages payable were approximately $3.7 million and $3.9 million at December
31, 1997 and 1996, respectively.

The Company is required to remit monthly royalty fees from 2% to 4% of gross 
room revenue, plus additional monies for marketing assessments and 
reservation fees to its franchisors, based on franchise agreements which 
extend from ten to seventeen years. Some of these agreements specify 
restrictions on transferability of franchise and liquidated damages upon 
termination of franchise agreement due to the franchisee's default. Total 
fees were approximately $739,482 and $146,000 for the years ended December 31, 
1997and 1996, respectively.

In October 1996, the Company entered into an option agreement to purchase three
(3) hotels (Hampton Inn - Buffalo, New York; Comfort Inn Suites - Buffalo, New
York; Holiday Inn - Cleveland, Ohio) for $25,500,000. The Company had a $480,000
deposit as of December 31, 1997, with $30,000 in monthly fees being paid from
January 1997 to May 1998.

The total amount paid will be applied against the purchase price, if exercised.
The option expires May 30, 1998.

9.   INCOME TAXES:

Income taxes are provided in accordance with Statement of Financial Accounting
Standard, No. 109, "Accounting for Income Taxes", which requires an asset and
liability approach to financial accounting and reporting for income taxes. The
Statement requires that deferred income taxes be provided to reflect the impact
of "temporary differences" between the amount of assets and liabilities for
financial reporting purposes



                                       17
<PAGE>

and such amounts as measured by current tax laws and regulations. A valuation
allowance is established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.

The components of the provision/(benefit) for income taxes are as follows:

<TABLE>
<CAPTION>

                                                     1997                      1996
                                                     ----                      ----
CURRENT:
<S>                                               <C>                         <C>
  Federal                                         $        --                   $195,539
  State                                                 9,629                     10,708
DEFERRED:

  Federal                                            (765,864)                   196,232
  State                                              (244,614)                    69,535
                                                  ------------                  --------

TOTAL                                             $(1,000,849)                  $472,014
                                                  ============                  ========
</TABLE>


Deferred tax (liabilities) assets are comprised of the following at December 31:

<TABLE>
<CAPTION>

                                                    1997                    1996
                                                    ----                    ----

<S>                                             <C>                        <C>
Depreciation                                     $(1,079,515)                $(403,567)
Gross up of purchased Company                             --                   (39,278)
Minority interest                                     (7,288)                  (12,900)
                                                  -----------                 ---------

Gross deferred tax liability                      (1,086,803)                 (455,745)
                                                  -----------                 ---------

Loss carryforwards                                 1,799,384                   357,142
Accrued expenses                                     212,000                        --
Deferred revenue                                      74,112                    86,279
Deferred consulting                                   45,054                    45,558
Bad debt reserve                                     221,916                   151,456
Tax credit                                            79,884                   151,472
Miscellaneous                                         42,379                    41,286
                                                  ----------                  --------

  Gross deferred tax assets                        2,474,729                   833,193
                                                  ----------                  --------

Net deferred tax asset                            $1,387,926                  $377,448
                                                  ==========                  ========

</TABLE>

Realization of the deferred tax asset is dependent on generating sufficient
taxable income. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax asset will be realized. The
amount of deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income are reduced.

The provision for income taxes differs from the amount of income tax determined
by applying the applicable US statutory federal income tax rate to pretax income
as a result of the following differences:

<TABLE>
<CAPTION>

                                                                     1997               1996
                                                                     ----               ----
<S>                                                           <C>                  <C>
Statutory US tax rates                                           $(938,485)           $ 376,742
Increase (decrease) in rates resulting from:
State income taxes, net of federal income tax                     (155,090)              66,495
Permanent differences                                               72,080                   --
Other                                                               20,646               28,777
                                                               -----------            ---------

Provision/(Benefit) for income taxes                           $(1,000,849)           $ 472,014
                                                               ============           =========
</TABLE>


At December 31, 1997, the Company has tax net operating loss carryforwards of
approximately $4,400,000 which may be used to offset future taxable income.
These loss carryforwards will begin to expire in 2003.



                                       18
<PAGE>


10.  LITIGATION

On June 20, 1995, Ladenburg, Thalmann & Co., Inc., the Company's former
investment bankers, filed a complaint in New York State Supreme Court against
the Company alleging breach of contract and damages of $906,250 relating to the
Company's rescission of a warrant granted to them in connection with the
investment advisory agreement. In February 1994, the Board of Directors of the
Company determined that Ladenburg had been otherwise adequately compensated for
such services as were actually performed, and rescinded the warrant. The Company
has answered the complaint, denying the relevant allegations and asserting
several affirmative defenses. Cross-motions for summary judgment were argued in
October, 1997; the judge has recently denied both motions, and Ladenburg has
appealed. It is anticipated that the suit will now proceed to trial. The
ultimate outcome of the litigation cannot presently be determined. Accordingly,
no provision for any liability that may result has been made in the financial
statements.

In addition, the Company and its subsidiaries are parties to various legal
actions and complaints arising in the ordinary course of business. No such
pending matters are expected to have a material adverse effect on the Company's
financial position, results of operations, or cash flows.

11.  LEASEHOLD INTEREST

The Company provided a $450,000 cash deposit to secure a ten year operating
lease through 2006 and management contract of a full-service hotel located in
Canandaigua, New York from L, R, R & M L.L.C. The deposit shall be returned to
the Company on expiration or in the event the Landlord sells the premises based
on 25% of the net proceeds of such sale, as defined in the lease agreement.
Also, during 1996, the Company earned a $250,000 fee for managing the
reconstruction project. One of the minority owners of L, R, R, & M, L.L.C., is a
greater than 5% shareholder who is not involved in the management or operation
of the Company. Base rent is equal to one-twelfth of 2% of the outstanding
principal balance under the credit facilities per month, plus amounts payable by
the Landlord under the credit facilities monthly. The Company is also obligated
to pay/or have due additional monthly rent/or abatement on positive/negative
earnings based on 15% of the leased operation's adjusted net revenues as defined
in the lease agreement. At December 31, 1997, $94,416 was due from the Landlord.
At December 31, 1996, $77,450 was due from the Landlord. Future minimum lease
payments under this operating lease are approximately: 1998 - $914,000; 1999 -
$914,000; 2000 - $914,000; 2001 - $914,000; thereafter $2,589,667.

The Company assumed a ground lease for the land on which a hotel was acquired by
the Company in 1996 in Statesville, North Carolina. The initial term of this
lease commenced in February 1984 and expires April 30, 2005. The Company renewed
the lease at its option, for three additional ten-year periods ending April 30,
2035. The annual rental during the final ten years of the initial term and each
extension is the greater of $22,000 less one-half percent of gross room rentals
from the Statesville hotel during the 1991 lease year of the lease term or four
percent of gross room rentals from the Statesville hotel during each lease year.
The Company has a right to buy the land subject to the ground lease from the
lessor during the lease term subject to the first refusal rights of Roses
Department Stores, Inc., or its successors. Rent expense on the ground lease was
$59,167 for the year ended December 31, 1997, and $1,833 from November 27, 1996,
the date of acquisition, to December 31, 1996. The future minimum ground lease
rental payments, assuming no gross room rentals during the initial lease term
and no increases in the consumer price index, are as follows for the years ended
December 31:

                    1998                      $22,000  
                    1999                       22,000  
                    2000                       22,000  
                    2001                       22,000  
                    2002                       22,000  
                    Thereafter                726,000
                                             --------
                                             $836,000
                                             --------
                                             --------


                                       19
<PAGE>


12.      ACQUISITIONS

    On October 31, 1997, the Company acquired nine (9) hotel properties
operating as Hampton Inns from Equity Inns Partnership, L.P. for $46,250,000,
determined by arms length negotiations with Equity Inns Partnership, L.P., after
analysis and valuation by the Company based upon historical and projected
operating results of the properties. The purchase price was paid by issuing a
subordinated promissory note in the amount of approximately $3.9 million
(maturing October 31, 1999) secured by 2,000,000 shares of the Company's common
stock in the name of Hudson Hotels Properties Corp. (a wholly owned subsidiary
of the Company). The cash portion of the purchase price was obtained (a) by
placing a $30 million mortgage issued by Nomura Asset Capital Corporation and
(b) by the Company securing $18,000,000 of mezzanine financing from Nomura Asset
Capital Corporation.

On August 28, 1996, the Company completed the acquisition of the remaining
partnership interests in five hotel partnerships in which the Company was the
owner of varying minority general and limited partnership equity interests for
1,170,103 shares of the Company's common stock. The acquisition has been
accounted for under the purchase method and, accordingly, the operating results
of the five hotel partnerships acquired have been included in the consolidated
operating results since the effective date of the acquisition, July 31, 1996.
One of the partnerships acquired, Delray Beach Hotel Properties Limited, was
included in the consolidated operating results of the Company, net of minority
interests, prior to the acquisition, as the Company, in its capacity as sole
general partner and by the terms of the partnership agreements, controlled the
partnership of Delray Beach Hotel Properties Limited.

The Company shares to be exchanged therefore were valued at the average closing
price for the five trading days prior to the effective date of the exchange,
i.e. July 31, 1996. The share value was determined by that method to be $6.325.
The Company utilized 657,292 treasury shares and 512,811 newly issued shares to
satisfy its obligations. The Company has agreed to register the shares so
exchanged for sale pursuant to the Securities Act of 1933. In addition to the
shares thus exchanged, the Company has agreed to indemnify each exchanging
partner for his or her continuing liability upon guarantees of the outstanding
mortgages on each property.

On November 27, 1996, the Company acquired 12 hotel properties, consisting of
eight (8) Fairfield Inns by Marriott(R) and four (4) Cricket Inns. The purchase
price for the properties was $60,400,000, determined by arms-length negotiation
with the Sellers. The purchase price was paid by issuing 370,657 shares of
Company common stock, valued at $2,400,000, by issuing the Company's
subordinated promissory note in the amount of $2,900,000 (maturing November 27,
1997) to the Seller, and by paying the balance of $55,100,000 in cash. The cash
portion of the purchase price was obtained a) by placing a $37,470,000 mortgage
issued by Nomura Asset Capital Corporation, b) by securing $17,000,0000 of
mezzanine financing from Nomura Asset Capital Corporation, and c) by the Company
utilizing $530,000 of its available capital.

Proforma unaudited results of operations assuming the acquisition of the nine
(9) Hampton Inns in 1997 had occurred on January 1, 1996 are as follows: (in
thousands, except earnings per share data)

<TABLE>
<CAPTION>

                                                            1997           1996
                                                            ----           ----
<S>                                                      <C>            <C>
             Total operating revenues                     $53,814        $30,829
             Net income                                    (1,467)           693
             Net income per common share - basic          $(0.36)          $0.14
             Net income per common share - diluted          N/A            $0.13
</TABLE>






                                       20
<PAGE>

13.      INDIRECT OPERATING COSTS

During the fourth quarter of 1997, the Company had charges of $1,225,788 as a
result of indirect costs. This amount is comprised of $835,118 of non-cash
consulting expense relating to investor relations services which were written
off as its expected value in the future appears minimal. In addition, this
amount is comprised of indirect costs relating to the acquisition of nine (9)
Hampton Inns and the write off of several deposits which the Company will no
longer pursue.

During the fourth quarter of 1996, the Company had charges of $551,149 primarily
a result of the acquisition of the SB Motel Corp. portfolio.



                                       21
<PAGE>


SIGNATURES



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

HUDSON HOTELS CORPORATION

Dated:   February 17, 1999           By:   /s/ E. Anthony Wilson
                                           -------------------------------------
                                           E. Anthony Wilson
                                           Chief Executive Officer, and Director

Dated:   February 17, 1999             By:   /s/ John Sabin
                                           -------------------------------------
                                            John Sabin
                                            Executive Vice President and 
                                            Chief Financial Officer

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


SIGNATURE                              TITLE                          DATE

/s/ E. Anthony Wilson       Chairman of the Board,             February 17, 1999
--------------------------    Chief Executive Officer, 
E. Anthony Wilson             and Director

/s/ Michael George          President, Chief Operating         February 17, 1999
--------------------------    Officer, and Director
Michael George

/s/ Ralph L. Peek           Vice President, Treasurer          February 17, 1999
--------------------------    and Director
Ralph L. Peek

/s/ John P. Buza            Director                           February 17, 1999
--------------------------
John P. Buza