<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

For the Year Ended                                          Commission File
December 31, 1998                                            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

300 Bausch & Lomb Place                                (716) 454-3400
Rochester, New York 14604

          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 / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The Registrant's revenues for the year ended December 31, 1998:  $57,639,638.

The aggregate market value of the Common Stock held by non-affiliates of the
Registrant (computed by reference to the closing price as reported by the
National Quotation Bureau, Inc. as of March 26, 1999) was $11,198,532 (6,399,161
shares at $1 3/4 per share).

The number of shares outstanding of each of the Registrant's classes of common
stock as of February 20, 1999, is as follows:

                        5,732,495 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 June 17, 1999 are incorporated by reference to Part III of the Form
10-K Report.

Index to Exhibits is located on pages _____ through _____.

<PAGE>

                                     PART 1

              ITEMS 1 AND 2. DESCRIPTION OF BUSINESS AND PROPERTIES

Throughout this report, Hudson Hotels Corporation, together with its
consolidated subsidiaries, is referred to as "Hudson" or the "Company".

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain matters discussed in this Annual Report on Form 10-K are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes",
"anticipates", "expects" or words of similar import. Similarly, statements that
describe the Company's future plans, objectives or goals are also
forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties which are described in close proximity to such
statements and which could cause actual results to differ materially from those
currently anticipated. Shareholders, potential investors and other readers are
urged to consider these factors in evaluating the forward-looking statements and
are cautioned not to place undue reliance on such forward-looking statements.
The forward-looking statements included herein are made as of the date of this
report, and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.

NARRATIVE DESCRIPTION OF BUSINESS

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". The Company was incorporated in New York State on June 5, 1987. For
a number of years, the Company has provided development, construction,
operations, marketing, accounting and professional development services for its
own operations and for third party hotel/motel investors.

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, received $4.0 million over a three (3) year period,
allocated as follows: $3,037,640 for the purchase of the franchising assets;
$700,000 for consulting services over three (3) years; and $262,360 in interest
related to deferred payments. Expenses of $121,759 were netted against the
purchase price. Of the total consideration, $2.0 million was paid at closing,
$1.0 million was paid at the first anniversary and $500,000 at the second
anniversary, and an additional $500,000 was paid 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% of gross room revenues from hotels 101-250 and
 .5% of gross room revenues 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, 1997 and 1998, the Company embarked upon a significant expansion and
development program, which includes several acquisitions (see Note 13) and
development of five (5) Microtel Inns through a joint venture partnership.

As of December 31, 1998, the Company managed forty-three (43) hotel properties
located primarily in the Northeast and Southeast United States. Of the
forty-three (43) hotel properties under management, twenty-five (25) are owned
directly by the Company. These properties range from super budget "Microtel
Inns" to full-service hotels. The Company competes for management contracts with
many other hotel management companies, many of which have significantly larger
organizations and greater financial resources. In some cases, hotel owners may
require the hotel management company to invest in or advance funds to the hotel
in order to obtain the management contract. In these cases, the Company is at a
competitive disadvantage when compared to these larger, better capitalized
competitors.

<PAGE>

The management contracts are entered into on variations of the Company's
standard form management contract, for terms which vary from month to month to
ten years, and provide for a full range of hotel management services, including
operations management, personnel and staffing, sales and marketing, business
systems, financial management, and food and beverage management, for a fee
typically, a percentage of gross revenues.

The Company's portfolio of managed properties, owned, and partially owned
through partnerships in which the Company has a minority equity position, or
owned by unrelated parties, is made up of the following franchise affiliations:

<TABLE>
<CAPTION>
                                                                                           PERCENT OF COMPANY'S
                                                                            NUMBER OF              TOTAL
                FRANCHISE                      NUMBER OF HOTELS            GUEST ROOMS          GUEST ROOMS
                ---------                      ----------------            -----------          -----------
<S>                                                    <C>                       <C>                <C>  

                  OWNED
Fairfield Inn                                          8                         949                19.6%
Hampton Inns                                           9                       1,085                22.4%
Comfort Inn                                            2                         184                 3.8%
Econo Lodge                                            1                          65                 1.3%
Red Roof Inn                                           1                         147                 3.0%
Independent                                            4                         459                 9.5%
                                                      --                       -----                -----
                                                      25                       2,889                59.6%

    MANAGED WITH A FINANCIAL INTEREST
Microtel Inn                                           8                         842                17.4%
Econo Lodge                                            1                         102                 2.1%
Holiday Inn                                            1                         146                 3.0%
Hampton Inn                                            1                         133                 2.7%
Comfort Suites                                         1                         100                 2.1%
                                                      --                       -----                -----
                                                      12                       1,323                27.3%

              OTHER MANAGED
Microtel Inn                                           3                         305                 6.3%
Comfort Inn                                            2                         193                 4.0%
Independent                                            1                         134                 2.8%
                                                      --                       -----                -----
                                                       6                         632                13.1%

                 TOTAL                                43                       4,844                 100%
                                                      ==                       =====                 ====
</TABLE>


The Company has a minority equity position, either as a general or a limited
partner, in seven (7) entities that own hotel properties. In addition, it is a
general partner in Watertown Hotel Properties II, L.P., an entity which
previously owned a hotel property and which now holds a mortgage upon a Microtel
Inn, which represents a portion of the sale price of this property and in
Microtel Partners 1995-1, L.P., which owns a parcel of land in Tonawanda, New
York for hotel development.

The Company's owned and managed properties are located in the following areas of
the United States and had the indicated capital renovation, average occupancy,
and average daily rate during the fiscal year ended December 31, 1998.


                                       2
<PAGE>

<TABLE>
<CAPTION>
                                                                      1998                      1998              1998
                                               Number of       Planned & Completed             Average           Average
         Hotel Type and Region                Guest Rooms    Renovation Expenditures*         Occupancy        Daily Rate
         ---------------------                -----------    ------------------------         ---------        ----------
<S>                                                 <C>            <C>                            <C>          <C>       
Northeastern Region
    Luxury                                            134          $    4,004                     57.6%        $    89.62
    Midrange                                          834          $  476,207                     74.7%        $    62.05
    Budget                                            571          $  146,513                     76.2%        $    42.98
                                               ----------          ----------                   -------        ----------
    Sub-Total                                       1,539          $  626,724                     73.8%        $    57.38
                                                                                          
Southeastern Region                                                                       
    Luxury                                             70          $  234,976                     75.9%        $   120.30
    Midrange                                         1713          $  991,184                     69.2%        $    53.75
    Budget                                            890          $  216,469                     70.3%        $    42.38
                                               ----------          ----------                   -------        ----------
    Sub-Total                                       2,673          $1,442,629                     69.7%        $    51.71
                                                                                          
Midwest                                                                                   
    Luxury                                             --                  --                     --                --
    Midrange                                          269          $  133,562                     73.0%        $    68.95
    Budget                                             --                  --                     --                --
                                               ----------          ----------                   -------        ----------
    Sub-Total                                         269          $  133,562                     73.0%        $    68.95
                                                                                          
Southwest                                                                                 
    Luxury                                             --                  --                     --                --
    Midrange                                          363          $   44,956                     63.6%        $    57.63
    Budget                                             --                  --                     --                --
                                               ----------          ----------                   -------        ----------
    Sub-Total                                         363          $   44,956                     63.6%        $    57.63
                                               ----------          ----------                   -------        ----------
    TOTAL                                           4,844          $2,247,871                     70.7%        $    54.91
                                               ==========          ==========                   =======        ==========
</TABLE>

----------
* 5% of room revenue for the owned hotels is projected to be used for the
collective renovations of the owned hotels annually.

RECENT DEVELOPMENTS

Beginning in 1996, the Company began a significant expansion and development
program. During 1996, the Company acquired the partnership interests it did not
already own in five (5) hotel partnerships, in exchange for 1,170,103 shares of
the Company's common stock. In addition, the Company acquired twelve (12) hotel
properties from SB Motel Corp., an indirect wholly owned subsidiary of Salomon
Inc. The purchase price for the properties was $60.4 million, determined by
arms-length negotiation with SB Motel Corp., after analysis and valuation by the
Company. The price was based upon historic and projected operating results of
the properties. The purchase price was paid by issuing 370,657 registered shares
of Company common stock, valued at $2.4 million, by issuing the Company's
subordinated promissory note in the amount of $2.9 million to SB Motel Corp.
(which was repaid by the Company on October 31, 1997), and by paying the balance
of $55.1 million in cash. The cash portion of the purchase price was obtained by
(a) placing a $37.5 million mortgage issued by Nomura Asset Capital Corporation
on the properties purchased (b) the Company securing $17.0 million of mezzanine
financing from Nomura Asset Capital Corporation and (c) the Company utilizing
$.6 million of its available capital. In addition to the consideration stated
above, the Company has granted to Salomon Inc, a right of first refusal to
undertake equity offerings on behalf of the Company.

On October 31, 1997, the Company acquired nine (9) hotel properties operating as
Hampton Inns from Equity Inns Partnership, L.P., pursuant to a Hotel Asset
Purchase Agreement between the Company and Equity Inns Partnership, L.P. The
purchase price for the nine (9) Hampton Inns was $46.3 million, determined by
arms length negotiation with Equity Inns Partnership, L.P., after analysis and
valuation by the Company based upon historical and projected operating results
of the properties. As part of its pre-closing due diligence, the Company
obtained independent valuations of the nine (9) properties from Hospitality
Valuation Services, which supported the negotiated purchase price. The purchase
price was paid by issuing a subordinated promissory note in the amount of
approximately $3.9 million (currently maturing October 31, 2000) secured by
2,000,000 shares of the Company's common stock issued 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 $30.0 million
mortgage issued by Nomura Asset Capital Corporation and (b) by the Company
securing $18.0 million of mezzanine financing from

                                       3
<PAGE>

Nomura Asset Capital Corporation. The Company obtained $5.6 million of financing
in excess of the purchase price which was used to fund escrow and reserve
accounts, pay for the costs of the transaction and to provide for repairs and
upgrades to the properties.

In 1998, the Company announced its plans to "paper clip" with Hudson Hotels
Trust ("Hudson Trust"), a newly formed entity that planned an initial public
offering ("IPO"), led by a group of seven (7) underwriters to raise funds to
acquire a group of twenty-nine (29) hotel properties, which would then be leased
to the Company. Prior to the IPO, Hudson Trust borrowed a total of $4.0 million
from two different third party sources (in the form of two $2.0 million notes).
As part of the loan agreement, the Company pledged 1,333,332 shares of its stock
as security for the repayment of the loans from the third parties. These funds
were used to put deposits on the hotels to be acquired by Hudson Trust and for
other expenses related to the IPO. Due to difficult capital market conditions,
Hudson Trust was not able to complete its IPO. As a result, it is unlikely that
Hudson Trust will be able to repay these loans when they come due April 30,
1999. Subsequent to fiscal year-end one of the holders of these notes agreed to
convert one of the $2.0 million notes into 666,666 shares of Hudson common
stock.

On August 14, 1998, the Company acquired three properties through a limited 
partnership ("HH Bridge, L.P.") in conjunction with a third party that owned 
the majority (58%) of the limited partnership interests in HH Bridge, L.P. 
This third party also had the right to acquire the Company's interest in 
HH Bridge, L.P. in the event of default of certain obligations in the limited 
partnership agreement for $1. As of December 31, 1998, the partnership was 
unable to make certain "guaranteed return" payments to this third party, who 
then exercised its rights to acquire the Company's 41% limited partnership 
interest for $1. The operations of HH Bridge, L.P. have been consolidated by 
the Company from August 14, 1998, to December 31, 1998, however, the balance 
sheet has been deconsolidated at December 31, 1998 and a loss on asset 
valuation was taken for the Company's investment in the partnership of $3.4 
million in the fourth quarter of 1998. Presently the Company owns a 1% 
interest in HH Bridge, L.P., as a general partner.

In December of 1998 the Company sold its leasehold interest in the Inn on the
Lake in Canandaigua, NY to the lessor thereof and entered into a management
agreement to manage the property.

Additionally, the Company, in February 1999, completed the sale of five (5)
parcels of its undeveloped land for a price of $1.7 million. This transaction
was undertaken to provide working capital during the Company's seasonally slow
period. Because this transaction was in process at the fiscal year-end, a loss
on asset valuation of $1.8 million was recognized, along with the loss of $3.4
million from the loss of the Company's interest in HH Bridge, L.P.

The Company's mezzanine loan agreement requires Hudson 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 
gave the lender the right to demand immediate repayment of the mezzanine 
loan. In April 1999, the Company entered into an agreement with this lender, 
which waives these violations of the mezzanine loan agreement if the Company 
fulfills certain conditions. One of these conditions is that the Company is 
not to make any principal payments to creditors that are subordinated to this 
lender, including Equity Inns, LP ("Equity Inns") for its 10% subordinated 
note or on the $7.5 million convertible subordinated debenture or for the 
obligations of Hudson Hotels Trust. Such requirements will cause the Company 
to default in its obligations to Equity Inns. However, under the 
subordination agreement with Equity Inns, that company is currently prevented 
from taking legal action to enforce the payment of its debt. After default, 
Equity Inns could obtain 2,000,000 shares of Hudson Hotels common stock, 
which is collateral for this debt. Additionally, upon default, the holders of 
$4.0 million debt in Hudson Hotels Trust can convert their debt into a total 
of 1,333,332 shares of Hudson common stock. One of these holders, in 1999, 
has already converted $2.0 million of this debt into 666,666 shares of Hudson 
common stock. Additionally, the Company at December 31, 1998 had certain 
portions of its mezzanine debt that would begin to amortize in the fourth 
quarter of 1999. As a result of the recent agreement with the holder of this 
debt, the amortization of this debt now begins in the second quarter of 2000, 
which amortization the Company will not, at current operating levels, be able 
to service. Therefore, the Company's viability is dependent upon the 
restructuring of its debt obligations and strengthening its equity and asset 
base, and ultimately, a return of profitability.

As a result of these losses the Company's equity position has been substantially
diminished and due to the Company's inability to attain profitable operations
the Company was also compelled to eliminate its net deferred tax asset resulting
in a deferred tax expense of $1,387,926 in the fourth quarter of 1998. Because
of these conditions the Company may have to obtain additional equity to continue
to maintain its stock listing on the NASDAQ stock market.

                                       4
<PAGE>

EMPLOYEE RELATIONS

At December 31, 1998, the Company had approximately 1,600 employees working at
the hotels it owns or manages or in its administrative support functions. None
of these employees are subject to collective bargaining agreements. The Company
believes that all of its relations with these employees are good.

COMPANY PROPERTIES

The Company currently owns twenty-five (25) hotel properties in addition to
having a minority equity interest in entities that own hotel properties. There
are 2,889 guestrooms in these twenty-five (25) properties.

                            DESCRIPTION OF PROPERTIES

At fiscal year end, the Company owned six (6) parcels of land, which were either
being held for sale to hotel/restaurant developers or development by the
Company. Subsequent to fiscal year-end, the Company sold five (5) of these
parcels to meet its seasonal liquidity needs. The Company has recognized a loss
in the amount of $1,818,211 in its fourth quarter for the impairment in the 
value of this land based on the proceeds from the sale.

Investment in land/real estate under development or held for sale is summarized
as follows:

TONAWANDA, NEW YORK: This land is north of Buffalo, New York, off Interstate 290
and is in proximity to major businesses, universities and shopping centers. The
Company owns about 7 acres at a cost of $780,822 or $113,657 an acre. The parcel
is zoned for hotel and restaurant development. Also, this piece of land is
adjacent to an existing Microtel and a parcel owned by Microtel Partners 1995-I,
L.P. (see below).

The following five (5) parcels of land were sold in the first quarter of 1999
and the net loss of $1,818,211 for the five (5) parcels was accrued as an
impairment loss in the fourth quarter of 1998.

ARLINGTON, TEXAS: This land is between the cities of Dallas and Fort Worth, off
State Highway 360. The Company owned 2.0 acres at a cost of $604,629, or
$302,314 an acre. The parcel is zoned for hotel development.

TUCSON, ARIZONA: This land is outside the city limits of Tucson, off Interstate
10. The Company owned 2.0 acres at a cost of $478,851, or $239,425 an acre. The
parcel is zoned for hotel development.

PLANO, TEXAS (PLANO PARKWAY): This land is north of Dallas, Texas, accessible to
Lyndon B. Johnson Freeway I-635, the Dallas North Tollway and Central Expressway
US-75. The Company owned 2.0 acres at a cost of $677,697, or $338,848 an acre.
The parcel is zoned for hotel development.

PLANO, TEXAS: This land is north of Dallas, Texas, off the North Central
Expressway. The Company owned 2.0 acres at a cost of $595,661 or $297,831 per
acre. The parcel is zoned for hotel development.

IRVING, TEXAS: This land is located west of Dallas, Texas, adjacent to the
Dallas-Fort Worth International Airport, off John W. Carpenter Freeway. The
Company owned 2.02 acres, at a cost of $472,932 or $234,124 per acre. The parcel
is zoned for hotel development.

The Company, through its equity investments, owns minority interests in the
following:

THE MONTGOMERY GROUP, L.P.: This limited partnership operates an 84 room Comfort
Inn and is located in Montgomeryville, Pennsylvania. The Company's ownership
percentage totals 2.74%. The hotel was opened in 1991, and is in very good
condition. The total outstanding mortgage balance at December 31, 1998, was
approximately $3.1 million. The Company does not currently manage this hotel.

950 JEFFERSON ASSOCIATES, L.P.: This limited partnership operates a 102 room
Econo Lodge that is located in Henrietta, New York. The Company's ownership
percentage totals 2%. The hotel was built in 1984 and is in fair condition. The
partnership has a first mortgage with a balance of approximately $2.5 million at
December 31, 1998.

MICROTEL GATLINBURG L.P.: This limited partnership operates a 102 room Microtel
Inn that is located in Gatlinburg, Tennessee. The hotel is located adjacent to
the Great Smoky Mountain National Park and a short distance from Dollywood in
Pigeon Forge, Tennessee. The Company's ownership percentage totals 10%. The
hotel was built in 1994 and is in excellent condition. The partnership has a
first mortgage with a balance of approximately $2.2 million at December 31,
1998.


                                       5
<PAGE>

FISHERS ROAD HOTEL PROPERTIES, L.P.: This limited partnership operates a 99 room
Microtel Inn which is located in Victor, New York, adjacent to Interstate 90.
The Company's ownership percentage is 22.5%. The hotel was built in 1994 and is
in excellent condition. The partnership has a first mortgage with a balance of
approximately $1.5 million at December 31, 1998.

ESSEX MICROTEL LERAY, L.P.: This limited partnership operates the 100 room
Microtel Inn located in Watertown, New York, which opened in 1990. The Company's
ownership interest as a special limited partner totals 4.0%. The first mortgage
on the property totals approximately $1.1 million and is held by Watertown Hotel
Properties II, L.P., a partnership in which the Company has the general
partnership interest and controls under the terms of the partnership agreement.
The Company does not currently manage this hotel.

ROCHESTER HOSPITALITY PARTNERS, L.P.: This limited partnership was formed to
build and operate six Microtel Inns. The Company's ownership percentage is 20%.
The partnership owns six (6) Microtel Inns which opened between 1995 and 1997,
varying from 99 to 122 rooms. All of these properties are in excellent
condition. The partnership has an aggregate first mortgage on the six (6)
properties, with a balance of approximately $15.5 million at December 31, 1998.

HH BRIDGE, L.P.: This limited partnership owns a 146-room Holiday Inn in
Cleveland, Ohio; a 133-room Hampton Inn in Cheektowaga, New York; and a 100-room
Comfort Suites in Cheektowaga, New York. These properties are in good to
excellent condition. The partnership has a first mortgage with a balance of
$18.3 million. The Company owns a 1% general partnership interest in the limited
partnership.

MICROTEL PARTNERS 1995-I, L.P.: This limited partnership owns 2.87 acres of land
in Tonawanda, New York, on which it had plans to build a suite hotel. The
project is currently on hold waiting for market conditions to improve.
The Company's ownership percentage is 50%.

WATERTOWN HOTEL PROPERTIES II, L.P.: This limited partnership holds 
approximately an $1.1 million mortgage receivable from Essex Microtel Leray L.P.
which is collateralized by a 100 room Microtel Inn located in Watertown, New
York. Monthly payments consist of interest only at 9% per annum. The entire
principal amount is due April 30, 2000. The Company's general partnership
interest totals 1%.

COMPANY OWNED HOTELS

The Company, through its indirect wholly owned subsidiary HH Properties-I, Inc.,
owns the following properties. The properties are secured by a first mortgage
from Nomura Asset Capital Corporation, with an aggregate balance of $54.9
million at December 31, 1998. As part of the first mortgage agreement with
Nomura, the Company is required to reserve 5% of operating revenues as defined
in the loan agreement, which is used for capital improvements to the properties.
All properties are in good to very good condition.

<TABLE>
<CAPTION>

           PROPERTY NAME                                    LOCATION                            NUMBER OF ROOMS
           -------------                                    --------                            ---------------

<S>                                   <C>                                                              <C>
Seagate Hotel and Beach Club          Delray Beach, Florida                                             70
Brookwood Inn                         Pittsford, New York                                              108
Comfort Inn West                      Greece, New York                                                  83
Comfort Inn                           Jamestown, New York                                              101
Econo Lodge                           Canandaigua, New York                                             65
Fairfield Inn                         Albany, Georgia                                                  120
Fairfield Inn                         Cary, North Carolina                                             125
Fairfield Inn                         North Charleston, South Carolina                                 120
Fairfield Inn                         Columbia, South Carolina                                         128
Fairfield Inn                         Durham-Research Triangle Park, North Carolina                     96
Fairfield Inn                         Richmond, Virginia                                               124
Fairfield Inn                         Statesville, North Carolina                                      116
Fairfield Inn                         Wilmington, North Carolina                                       120
Brookwood Inn                         Durham, North Carolina                                           149
Red Roof Inn                          Raleigh, North Carolina                                          147
Brookwood Inn                         Charlotte, North Carolina                                        132
                                                                                                    ------
                                                                                                     1,804
</TABLE>


                                       6
<PAGE>

For a narrative description of the properties, please refer to the Company's 8-K
filings dated September 13, 1996 and December 12, 1996.

The Company, through its indirect wholly owned subsidiary HH Properties-II,
Inc., owns the following properties. The properties are secured by a first
mortgage from Nomura Asset Capital Corporation, with an aggregate balance of
$29.6 million at December 31, 1998. As part of the first mortgage agreement with
Nomura, the Company is required to reserve 5% of operating revenues as defined
in the loan agreement, which is used for capital improvements to the properties.
All properties are in very good condition.

<TABLE>
<CAPTION>

             PROPERTY NAME                             LOCATION                            NUMBER OF ROOMS
             -------------                             --------                            ---------------
<S>                                      <C>                                                    <C>
Hampton Inn                              Greenville, South Carolina                               123
Hampton Inn                              Spartanburg, South Carolina                              110
Hampton Inn                              Albuquerque, New Mexico                                  124
Hampton Inn                              Greensboro, North Carolina                               121
Hampton Inn                              Eden Prairie, Minnesota                                  123
Hampton Inn                              San Antonio, Texas                                       123
Hampton Inn                              Amarillo, Texas                                          116
Hampton Inn                              Roswell, Georgia                                         129
Hampton Inn                              Syracuse, New York                                       116
                                                                                                -----
                                                                                                1,085
</TABLE>

For a narrative description of the properties, please refer to the Company's 8-K
filing dated November 14, 1997.

On August 14, 1998, the Company acquired three properties through a limited 
partnership ("HH Bridge, L.P.") in conjunction with a third party that owned 
the majority (58%) of the limited partnership interests in HH Bridge, L.P. 
This third party also had the right to acquire the Company's interest in 
HH Bridge, L.P. in the event of default of certain obligations in the limited 
partnership agreement for $1. As of December 31, 1998, the partnership was 
unable to make certain "guaranteed return" payments to this third party, who 
then exercised its rights to acquire the Company's 41% limited partnership 
interest for $1. The operations of the HH Bridge, L.P. have been consolidated 
by the Company from August 14, 1998, to December 31, 1998, however, the 
balance sheet has been deconsolidated at December 31, 1998 and a loss on 
asset valuation was taken for the Company's investment in the partnership of 
$3.4 million in the fourth quarter of 1998. Presently the Company owns a 1% 
interest in HH Bridge, L.P., as a general partner.

The three (3) properties contained in HH Bridge, L.P. include the following (the
Company owns a 1% general partnership interest in HH Bridge, L.P.):

         HOLIDAY INN - CLEVELAND AIRPORT: This full-service hotel has 146
         guestrooms, a restaurant and bar. The property is located 3 miles from
         the Cleveland, Ohio airport. The hotel provides van service to its
         guests. It is located in Cleveland, Ohio, on 4.0 acres of land owned by
         HH Bridge, L.P.

         COMFORT SUITES - BUFFALO AIRPORT: This limited-service, mid-priced
         hotel has 100 guestrooms and is located 2 miles from the Buffalo
         Airport. The hotel provides free continental breakfast, van service to
         the airport and a 100% guest satisfaction guarantee. The hotel is
         located in Cheektowaga, New York, on 3.7 acres of land owned by HH
         Bridge, L.P.

         HAMPTON INN - BUFFALO AIRPORT: This limited-service, mid-priced hotel
         has 133 guestrooms and is located 3 miles from the Buffalo Airport. The
         hotel provides free continental breakfast, van service to the airport
         and a 100% guest satisfaction guarantee. The hotel is located in
         Cheektowaga, New York, on 2.5 acres of land owned by HH Bridge, L.P.


                                       7
<PAGE>

OTHER PROPERTIES

In addition to its hotels, the Company also leases about 19,000 square feet of
office space in Rochester, New York, which serves as the Company's headquarters.
The lease has an initial term of five years, which expires in 2003. The Company
also has an option to extend this lease to 2008.

HOTEL LODGING INDUSTRY

Although the hospitality lodging industry experienced strong profits in 1998,
the increases in occupancy, ADR (average room rate) and RevPAR (revenue per
available room), which the industry had often experienced since 1992 were
moderated with declining occupancy in 1997 and 1998. According to Smith Travel
Research, hotel room demand has outpaced supply from 1992 through 1996. But,
beginning in 1997, room supply increases exceeded demand increases. Room supply
has increased as a result of favorable financing, which had become increasingly
available until the summer of 1998, when financing hotel properties became more
difficult.

Currently, the majority of properties owned or managed by the Company fall under
the limited service economy/mid-price category. This category is defined as a
hotel which provides some, but not all of the amenities of a full-service hotel.
It is appropriate to compare the Company's portfolio to this segment since the
majority of the Company's properties fall within this segment (Hampton Inn,
Comfort Inn, Econo Lodge, Fairfield Inn and Red Roof Inn.) The limited-service
economy/mid-priced segment has seen increases in occupancy, room revenue and
RevPAR from 1992 to 1995. In 1996 through 1998, the segment of the hotel
industry that the Company competes in experienced a decline in occupancy, but
room rate and RevPAR continued to increase. ADR percentage growth has decreased
compared to prior years. These results are due to added supply exceeding added
demand, moderated by guests willing to pay a premium for clean/fresh hotel rooms
with certain amenities offered by nationally branded limited-service hotels.

The tables below compare the Company's performance to the limited service
economy/midscale segment as a whole (in the United States) in the categories of
occupancy, ADR (room revenue) and RevPAR (revenue per available room). The
industry statistics represent results obtained from Smith Travel Research
("STR") and are based on the data STR has compiled for hotels STR classifies as
limited service mid-price and economy hotels with 75-125 rooms.

                                    OCCUPANCY

                                                        U.S. LIMITED SERVICE
    YEAR               COMPANY OWNED HOTELS               ECONOMY/MIDPRICED
    ----               --------------------               -----------------
1994                            N/A                               64.1%
1995                            N/A                               64.3%
1996                           62.6%                              63.0%
1997                           65.2%                              62.0%
1998                           68.7%                              61.6%

                                       ADR

                                                        U.S. LIMITED SERVICE
    YEAR               COMPANY OWNED HOTELS               ECONOMY/MIDPRICED
    ----               --------------------               -----------------
1994                            N/A                              $44.42
1995                            N/A                              $46.75
1996                          $62.96                             $49.18
1997                          $56.51                             $51.48
1998                          $58.74                             $53.63



                                       8
<PAGE>

                                     REVPAR

                                                        U.S. LIMITED SERVICE
    YEAR               COMPANY OWNED HOTELS               ECONOMY/MIDPRICED
    ----               --------------------               -----------------
1994                            N/A                              $28.49
1995                            N/A                              $30.04
1996                          $39.39                             $31.00
1997                          $36.82                             $31.91
1998                          $40.35                             $33.05

BUSINESS STRATEGY

The Company plans to continue to improve its position in the lodging industry by
implementing the following strategies:

ENHANCE OPERATING PERFORMANCE OF ITS EXISTING HOTELS OWNED OR UNDER MANAGEMENT.
The Company operated forty-three (43) hotels at the end of 1998. The Company
intends to utilize its operating, marketing and financial systems resources to
enhance operating performance by maximizing revenues and reducing operating
expenses. To do this, in 1998, the Company substantially changed its management
structure at both the hotel properties and in its administrative support
functions. During the year, the Company hired a new President and Chief
Operating Officer, a new Executive Vice President and Chief Financial Officer, a
new Vice President of Human Resources, as well as regional operations and
revenue management personnel. In addition, a substantial number of managers at
the hotels were replaced or were reassigned to new positions. All of these steps
were taken to enhance the operating performance of the hotels by improving
revenue and customer service and to provide administrative support for hotel
operations. Much of this support was added in anticipation of the growth of the
Company, which was expected to occur as a result of the additional hotels the
Company would manage upon the completion of the Hudson Trust IPO. Because Hudson
Trust did not complete its IPO, the Company now has higher administrative costs
than expected, for its current size. Some of these costs and the support
services related to them may have to be eliminated if the Company is unable to
continue its growth plans.

ACQUIRE ADDITIONAL HOTEL MANAGEMENT CONTRACTS. In addition to the twenty-five
(25) hotels that the Company owns, it also manages eighteen (18) hotels at
December 31, 1998, for other owners. The Company has a minority ownership
position in twelve (12) of these eighteen (18) hotels. The Company is active in
trying to obtain additional hotel management contracts in order to utilize its
information systems and personnel to enhance the operating performance of
additional managed hotels. The Company believes that due to its size,
experience, information systems, purchasing power and support systems it is
often a more effective hotel manager than individuals or smaller firms, which
lack these resources. Additionally, the Company is better able to utilize its
operating structure and spread its administrative costs as it grows the number
of hotels it operates. However, as described above, the Company often must
compete with larger and better-capitalized hotel management companies that have
competitive advantages when compared to the Company.

OPPORTUNISTIC ACQUISITION OF HOTELS. The Company will attempt to capitalize on
its strength as an owner/operator by continuing to identify and pursue the
acquisition of hotels. Since 1996, the Company acquired twenty-one (21) hotels
for approximately $40,750 per room, totaling $106.7 million. This acquisition
included eight (8) Fairfield Inns, four (4) Cricket Inns (of which two (2) were
converted to Brookwood Inns and one (1) was converted to a Red Roof Inn and one
(1) which was sold during the fiscal year ended December 31, 1998) and nine (9)
Hampton Inns, which are geographically dispersed throughout the country. The
Company believes that hotel acquisitions will provide future growth
opportunities through increased cash flow and an incremental increase in the
value of the hotels acquired. However, given the Company's highly leveraged
financial condition and its current losses, it is at a substantial disadvantage
in acquiring additional hotel properties since it does not have significant
ability to obtain capital to acquire hotel assets. Such acquisitions, if any are
to occur, will probably require the Company to raise new capital.

SERVICE MARKS

As a result of the USFS Agreement, the Company transferred all proprietary marks
relating to the "Microtel" name to US Franchise Systems, Inc. The Company
retains service marks for certain independent properties which it owns including
"Brookwood Inn" and "Seagate".


                                       9
<PAGE>

The Company uses various national trade names pursuant to licensing arrangements
with national franchisors which include: Microtel Inn(R), a registered trademark
of USFS; Comfort Inn(R) and Econo Lodge(R), registered trademarKS oF Choice
Hotels International, Inc.; Fairfield Inn by Marriott(R), a registered trademark
of Marriott International, Inc.; Hampton Inn(R), a registered trademark of
Promus Corp.; and Red Roof Inn(R), a registered trademark of Red ROOf Inns, Inc.

COMPETITION

The hospitality industry is highly competitive. There is no single competitor or
small number of competitors of the Company that are dominant in the industry.
The Company's hotel properties operate in areas that contain numerous
competitors, many of which have substantially greater resources than the
Company. Competition in the lodging industry is based generally on location,
room rates, quality of services and guest amenities offered. The Company's
properties compete against all hotel products in any given market for market
share. In practice, the hotel industry is highly segmented, ranging from luxury
destination resorts to small "mom and pop" properties. The Company's properties
compete directly against other national and regional chains of hotels in each
geographical market in which the Company hotels are located. New or existing
competitors could significantly lower rates or offer greater conveniences,
services or amenities or significantly expand, improve or introduce new
facilities in markets in which the hotels compete, thereby adversely affecting
the Company's operations. The Company also competes with other regional and
national hotel companies for development and management contracts.

There are hundreds of hotel management companies in the United States, including
several which manage over 100 properties and many which manage about as many or
more hotels than the Company. Although most of the firms are private companies,
several are public companies and many of these companies have greater financial
strength than the Company and few are as highly financially leveraged as is the
Company.

Although most of the Company's hotels operate under national brands, the Company
has several properties that do not have the benefit of a national brand.
Currently, more than seventy (70%) percent of all U.S. hotel rooms operate under
a national brand which provides certain competitive advantages over hotels which
do not have national brands.

SEASONALITY

The lodging industry is seasonal in nature. Generally, the Company's hotel
revenues are greater in the second and third quarters than in the first and
fourth quarters. This seasonality can be expected to cause quarterly
fluctuations in revenues and profitability of the Company. Quarterly earnings
also may be adversely affected by events beyond the Company's control, such as
extreme weather conditions, economic factors and other considerations affecting
travel.

GOVERNMENT REGULATION

A number of states regulate the licensing of hotels and restaurants, including
liquor licenses, by requiring registration, disclosure statements and compliance
with specific standards of conduct. The Company believes it is substantially in
compliance with these requirements. The Company is also subject to laws
governing its relationship with hotel employees, including minimum wage
requirements, overtime, working conditions and work permit requirements.
Compliance with, or changes in, these laws could reduce the revenue and
profitability of the Company owned hotels or otherwise adversely affect the
Company's operations.

Under the Americans with Disabilities Act (ADA), all public accommodations are
required to meet certain requirements related to access and use by disabled
persons. These requirements became effective in 1992. Although significant
dollars have been and continue to be invested in ADA required upgrades to the
Company owned hotels, a determination that the Company is not in compliance with
the ADA could result in a judicial order requiring compliance, imposition of
fines or an award of damages to private litigants. The Company is likely to
incur additional costs of complying with the ADA; however, such costs are not
expected to have a material adverse effect on the Company's results of
operations or financial condition.

ENVIRONMENTAL COMPLIANCE

The Company has not been materially affected by, nor has it incurred any
significant costs related to compliance with federal, state or local
environmental laws.


                                       10
<PAGE>

YEAR 2000 COMPLIANCE

Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the year 2000 from the year 1900.
Like other organizations, the Company could be adversely affected if the
computer systems used by it or its service providers do not properly address
this problem prior to January 1, 2000. Currently, the Company does not
anticipate that the transition to the year 2000 will have any material impact on
its performance. The Company's plan to respond to the Year 2000 problem consists
of three phases that address the state of readiness, Year 2000 costs, risks and
contingency plans.

Phase I includes a plan to respond to the Year 2000 problem, which includes the
following areas (the "Focus Areas"): (i) telephone and call accounting systems;
(ii) credit card readers; (iii) sprinkler systems and fire suppression system;
(iv) security systems; (v) card entry systems; (vi) elevator systems; (vii)
computer systems and vendor contracts (hardware); (viii) fax machines and
laundry equipment; (ix) HVAC (heating and air conditioning systems) and utility
companies; (x) food, beverage, equipment, supplies and other ordering systems;
and (xi) computer software systems, including franchisor and non-franchisor
reservation systems. The Company has created a task force and procedures to
survey, test and report results for management's review. The Company believes
that the estimated cost to remediate its Year 2000 problems is about $1,000,000.

The Company is currently proceeding with Phase II of its assessment of the Year
2000 problem. Phase II involves initiating a survey and checklist to each hotel
manager for completion and return to management. The survey was developed by the
Company after a review of franchisor and other Year 2000 compliance information
to include (i) the current vendor list with a column for a listing of current
product usage and (ii) a vendor address log and telephone number listing. Each
hotel checklist included the front desk, business center, housekeeping/back
office, beverage and guest rooms. Phase II also involves the testing of the
Company's computer systems. The Company is in the process of conducting testing
on the systems identified in Phase I and has yet to encounter any Year 2000
compliance issue which cannot be corrected before January 1, 2000.

Phase III of the Company's assessment of the Year 2000 problem includes the
results of testing, action plans, reporting of results and contingency plans to
remediate any Year 2000 problems. The risks and contingency plans include a
"reasonably likely worst case Year 2000 scenario." The Company believes that the
consequences of a worst case scenario rest almost exclusively with outside
vendors. The contingency plan, which the Company is currently initiating, is to
replace non-compliant vendors with new compliant vendors. A thorough review of
all vendors will continue to be an ongoing Year 2000 strategy for the Company.
However, the Company's contingency plan has back-up support to address each of
the focus areas.

The franchisors of many of the hotels have provided compliance guides to assist
in the Company's response to the Year 2000 problem. Promus Hotel Corporation,
Holiday Hospitality/Bass Hotels & Resorts, Marriott International, Inc., and
Choice Hotels International, Inc. have completed third party vendor checks,
reviewed computer systems and provided for reference a preferred compliant
vendor list. A checklist for Year 2000 issues, a work plan and a sample vendor
letter was provided to help the Company complete its assessment of the Year 2000
problem.

The Company is in the process of mailing a questionnaire to third party vendors
to assess third party risks. The results of this risk assessment will be
completed by April 30, 1999. In addition, the Company has sought assurances from
the Lessee and other service providers that they are taking all necessary steps
to ensure that their computer systems will accurately reflect the year 2000, and
the Company will continue to monitor the situation. There can be no assurance
that the systems of such third parties will be Year 2000 compliant or that any
third party's failure to have Year 2000 compliant systems would not have a
material adverse effect on the Company's systems and operations.

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;
however, this indemnity specifically excludes indemnity for punitive damages
which may be assessed against the Company. 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


                                       11
<PAGE>

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 May of 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 $20.0
million 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. In March 1999 this lawsuit was settled and the case dismissed. All
expenses of this lawsuit were covered by the Company's insurer.

On December 4, 1998 and February 5, 1999, the Company was served with claims 
before the State of South Carolina Human Affairs Division arising out of an 
incident that occurred at the Greenville, SC Hampton Inn on November 7, 1997. 
A security guard employed by Security Masters, Inc. (the contract provider of 
security services at the Hampton Inn) allegedly confronted a group of black 
students with a starter pistol, and directed racially biased comments to the 
students during that confrontation. The Company has provided requested 
information to the Human Affairs Division regarding the incident, and has 
agreed to take part in a proposed mediation to resolve the matter. The 
complainants have not requested any specific damages or other relief.

On April 13, 1999, the Company and its subsidiary, Canandaigua Hotel Corp., 
were each served with a summons and complaint by Cheryl K. Lee, as 
administratrix of the Estate of Eugene R. Guthrie, Deceased, alleging 
negligence relating to the design and maintenance of the handicapped access 
ramp at the Inn on the Lake, which negligence allegedly caused injuries 
resulting in the death of the decedent. L, R, R & M, LLC, the owner of the Inn
on the Lake, is also a defendant. The action has been commenced in New York 
Supreme Court, Monroe County, and demands damages in the amount of $2,000,000 
plus costs and disbursements. This action has been turned over to the 
Company's insurance company for defense; the Company believes that it has 
adequate insurance to cover any potential loss.

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.

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

No matter was submitted during the fourth quarter of the year ended December 31,
1998, to a vote of the Company's security holders, through the solicitation of
proxies or otherwise.

                                       12
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND  RELATED STOCKHOLDER MATTERS

The Common Stock of the Company has been traded in the over-the-counter market
since its initial public offering on April 13, 1989, and is listed in the Nasdaq
Stock Market under the symbol "HUDS". The following table sets forth, for the
calendar quarters indicated, the range of high and low quotations on the Nasdaq
Stock Market.

     FISCAL YEAR ENDED DECEMBER 31, 1997

                                                          High      Low
                                                          ----      ---

     First Quarter (January - March, 1997)                6 3/4    4 1/2
     Second Quarter (April - June, 1997)                  6 1/4    3 1/2
     Third Quarter (July - September, 1997)               6 15/16  5 1/8
     Fourth Quarter (October - December, 1997)            6 3/4    3 7/8

     FISCAL YEAR ENDED DECEMBER 31, 1998

     First Quarter (January - March, 1998)                4 7/8    3 13/16
     Second Quarter (April - June, 1998)                  4 15/16  3 7/8
     Third Quarter (July - September, 1998)               4 5/16   2
     Fourth Quarter (October - December, 1998)            2 3/8    1 1/8

The quotations listed above reflect inter-dealer prices, without retail mark-up,
markdown, or commissions and may not necessarily represent actual transactions.

To date, the Company has not paid a dividend on its Common Stock. The payment of
future dividends is subject to the Company's earnings and financial position and
such other factors, including contractual restrictions, as the Board of
Directors may deem relevant and it is unlikely that dividends will be paid on
common stock in the foreseeable future.

As of March 26, 1999, there were approximately 265 holders of record of the
Common Shares of the Company with approximately 2,500 beneficial shareholders.

ITEM 6.  SELECTED HISTORICAL FINANCIAL DATA

The following table presents summary selected historical financial data for the
Company derived from its financial statements as of and for the five periods
ended December 31, 1998. The historical information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes thereto, each contained herein.

<TABLE>
<CAPTION>
                                       (IN THOUSANDS ($,000) EXCEPT FOR PER SHARE DATA)
                                  1998         1997         1996       1995 (1)  3/31/95 (1)
                                ---------    ---------    ---------   ---------   ---------
<S>                             <C>          <C>          <C>         <C>         <C>      
INCOME STATEMENT DATA:
Operating Revenue               $  57,640    $  38,731    $  14,148   $   6,896   $   7,294
Income from Operations          $   5,215    $   5,983    $   1,867   $     653   $   1,042
Net Income / (Loss)             $ (15,165)   $  (1,892)   $     636   $   1,311   $   1,065
PER SHARE DATA:
Net Income (Diluted)            $   (2.86)   $   (0.40)   $    0.12   $    0.31   $    0.28
BALANCE SHEET DATA (AT END OF
PERIOD):
Total Assets                    $ 142,676    $ 152,118    $ 102,893   $  15,781   $  14,680
Long-Term and
Convertible                     $ 128,040    $ 128,559    $  80,064   $   8,506   $   8,546
Subordinated Debt
Shareholders' Investment        $    (166)   $  13,139    $  13,317   $   3,911   $   2,315
</TABLE>

(1)    In 1995, the Company changed its fiscal year-end from March 31 to
       December 31. As a result, the Company had a "short year" of only nine (9)
       months for the period April 1, 1995 to December 31, 1995. The year ended
       March 31, 1995 is a full 12 month fiscal year.


                                       13
<PAGE>

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

The following Management's Discussion and Analysis should be read in conjunction
with this entire Form10-K 1998 Annual Report. Particular attention should be
directed to the Consolidated Financial Statements found at Item 8.

As a result of the acquisitions of (i) five partnerships in which the Company
had a minority interest, (ii) twelve (12) hotels from SB Motel Corp., and (iii)
nine (9) Hampton Inns during the past three years, a significant portion of the
current results are not directly comparable to prior year results, specifically
hotel operations and direct costs, expenses and interest expense.

                              RESULTS OF OPERATIONS

TWELVE MONTHS ENDED DECEMBER 31, 1998, COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1997:

Total operating revenues increased $18,908,541, or 49%, to $57,639,638 for 1998
from $38,731,097 in 1997, reflecting changes in revenue categories and the
inclusion of added properties for a longer period of time in 1998 than in 1997,
as discussed below.

HOTEL OPERATIONS were $55,383,217 for the twelve months ended December 31, 1998,
an increase of $18,460,321, or 50%, from $36,922,896 for the twelve months ended
December 31, 1997. Hotel operations consisted of the following:

<TABLE>
<CAPTION>
                                                             Twelve Months Ended
                                                 DECEMBER 31, 1998         DECEMBER 31, 1997
                                                 -----------------         -----------------
<S>                                                 <C>                        <C>        
          Hotel room revenue                        $47,231,157                $30,617,628
          Beach club revenue                          1,396,984                  1,346,522
          Food and beverage revenue                   4,901,800                  3,565,646
          Other                                       1,853,276                  1,393,100
                                                    -----------                -----------

               Total                                $55,383,217                $36,922,896
                                                    ===========                ===========
</TABLE>

Hotel room revenues were $47,231,157 for the twelve month period ended December
31, 1998 an increase of $16,613,529, or 54%, from the $30,617,628 for the twelve
month period ended December 31, 1997. The increase is a result of (i) the
acquisition of nine (9) hotels on October 31, 1997 and, therefore, the Company
only recognized revenues from these hotels for a portion of 1997 while the
Company recognized revenues from these hotels for all of 1998, and (ii) the
Company consolidating the operations of three (3) hotels acquired by a
partnership (HH Bridge, L.P.) in which the Company had a 42% interest. The HH
Bridge, L.P. partnership agreement states that in an event of default of certain
obligations, the third parties have the right to acquire the Company's 41%
limited partnership interest for $1. As a result of the Company's default as of
December 31, 1998 of certain of these obligations these third parties exercised
their rights to acquire the Company's 41% limited partnership interest in HH
Bridge, L.P. for $1 and as a result, the balance sheet has been deconsolidated
at December 31, 1998.

Occupancy and average daily room rates for Company-owned hotels were 68.7% and
$58.74, respectively, for the twelve month period ended December 31, 1998
compared to 65.2% and $56.51, respectively, for the twelve months ended December
31, 1997.

The Beach Club revenue relates to the operation of the beach club at the Seagate
Hotel and Beach Club, which was $1,396,984 for the twelve month period ended
December 31, 1998 an increase of $50,462, or 4%, from $1,346,522 for the twelve
month period ended December 31, 1997, as a result of an increase in new member
dues (initiation fees).

Food and beverage revenue was $4,901,800 for the twelve month period ended
December 31, 1998, an increase of $1,336,154, or 37%; compared to $3,565,646 for
the twelve month period ended December 31, 1997. The increase is primarily the
result of the acquisition of HH Bridge, L.P. on August 14, 1998, which has a
full-service restaurant and additional food and beverage volume at the
Canandaigua Inn on the Lake.


                                       14
<PAGE>

Other revenues were $1,853,276 for the twelve month period ended December 31,
1998 an increase of $460,176, or 33%, from the $1,393,100 for the twelve month
period ended December 31, 1997 as a result of the acquisition of nine (9) hotels
on October 31, 1997; therefore, the Company only recognized revenues from these
hotels for a portion of 1997. Additionally, the Company consolidated the three
(3) hotels (HH Bridge, L.P.) on August 14, 1998, which added to the revenues for
1998.

ROYALTIES for the twelve month period ended December 31, 1998 increased
$492,522, or 65% to $1,249,569 from $757,047 for the twelve month period ended
December 31, 1997. The increase is attributable to a total of one hundred
twenty-four (124) franchised Microtel Inns in operation at December 31, 1998, as
opposed to sixty-two (62) franchised Microtel Inns in operation at December 31,
1997. The Company receives all royalties on twenty-eight (28) of the previously
cited Microtel Inns and on the remaining ninety-six (96) franchises established
by US Franchise Systems, Inc., the Company receives royalty payments from USFS
of 1% of gross room revenues from hotels 1-100; .75% of gross room revenues from
hotels 101-250; and .5% of gross room revenues above 250 units.

Pursuant to the USFS Agreement, the Company has retained the right to franchise,
construct and collect franchise placement fees on an additional twenty-two (22)
Microtel Inn properties and ten (10) "suite" properties. The USFS Agreement
allows the Company to retain all royalties on fifty (50) Microtel Inns
(twenty-eight (28) existing and twenty-two (22) new ones to be developed by the
Company) and ten (10) Microtel Suites to be developed by the Company. Hudson
also receives royalty payments from USFS for franchises it opens based on the
schedule discussed in the preceding paragraph.

MANAGEMENT FEES for the twelve month period ended December 31, 1998 increased
$73,948, or 9%, to $875,005, compared to management fees of $801,057 for the
twelve month period ended December 31, 1997. The increase in management fees is
primarily due to increased gross revenues at hotels managed by the Company as
management fees are generally based on a percentage of gross revenues. The
schedule of owned and managed hotels at December 31, 1998 is summarized below:

                                         DECEMBER 31, 1998    DECEMBER 31, 1997
                                         -----------------    -----------------

     Owned                                       25                  26
     Managed with financial interest             12                  10
     Other managed                                6                   5
                                               ----                ----
                                                 43                  41
                                               ====                ====

Management fees of approximately $2,735,524 were generated by the owned hotels
for the twelve month period ended December 31, 1998, which were eliminated for
consolidation purposes.

OTHER REVENUE for the twelve month period ended December 31, 1998 decreased
$118,250, or 47%, to $131,847 from $250,097 for the year ended December 31,
1997. This is primarily the result of non-recurring fees received in 1997 for
the construction of one (1) hotel, the gain from the sale of real estate and
franchise placement fees.

The Company plans to continue its revenue growth by maintaining the following
strategies: (i) enhance operating performance of its existing hotels owned or
under management, (ii) acquire additional hotel management contracts, and (iii)
pursue opportunistic acquisition or management of existing hotels. However,
given the Company's highly leveraged financial condition, it is at a substantial
disadvantage in acquiring additional hotel properties.

GROSS OPERATING MARGIN for hotel operations (consisting of total hotel revenues,
less direct expenses; departmental expenses, undistributed expenses, property
occupancy costs and insurance costs) for the twelve months ended December 31,
1998 was 33.7%, compared to 32.8% for the twelve months ended December 31, 1997.
The increase is the result of undertaking operational steps to more effectively
and efficiently manage the hotel properties.

CORPORATE EXPENSE represents general and administrative costs and expenses
associated with the corporate office. Corporate costs and expenses increased
$1,124,793, or 43%, to $3,741,951 from $2,617,158 for the year ended December
31, 1998. The increase is primarily a result of the following: (1) professional
fees increased as a result of Company growth, (2) payroll expense increased as a
result of pay increases, and the addition of employees, and (3) rent expense
associated with leasing new office space.


                                       15
<PAGE>

INDIRECT OPERATING COSTS represents costs incurred by the Company which do 
not represent direct hotel or corporate expenses. During 1998 the Company had 
$577,074 of indirect operating costs, a decrease of $648,714, or 53%, from 
the prior year. The 1998 indirect operating costs represent a one time 
non-cash charge of $529,764 associated with warrants issued by the Company 
and valued as a result of two $2.0 million notes issued by Hudson Hotels 
Trust. The remaining indirect operating costs are associated with corporate 
moving expenses associated with relocation to new office space. The 1997 
indirect operating costs consisted primarily of a non-cash charge of $835,118 
for consulting expenses related to investor relations services. This amount 
was written off in 1997, as its expected future value appeared minimal. The 
remaining indirect operating costs in 1997 are comprised of costs relating to 
the acquisition of nine (9) Hampton Inns and write-offs of several 
development expenditures which the Company will no longer pursue.

LOSS ON ASSET VALUATION totaling $5,259,701 was recorded in 1998 as a result of
the subsequent sale and disposition of assets in 1999 (see Note 17).

DEPRECIATION AND AMORTIZATION for the twelve month period ended December 31, 
1998 increased $2,033,625, or 50%, to $6,130,386 from $4,096,761 for the 
twelve month period ended December 31, 1997. The increase is a result of 
depreciation charges for a full year in 1998 related to the acquisition of 
nine (9) hotels on October 31, 1997 and depreciation charges for three (3) 
hotels consolidated August 14, 1998 to December 31, 1998.

OTHER INCOME (EXPENSE) for the year ended December 31, 1998 increased
$10,258,133, or 116%, to $19,091,744 from $8,833,611 for the year ended December
31, 1997. The increase is primarily the result of incurring additional debt for
the acquisition of nine (9) hotels on October 31, 1997 and the three (3) HH
Bridge, L.P. hotels consolidated by the Company since August 14, 1998. Of the
$14,180,437 in total interest expense, 61% relates to the mortgages on the
hotels acquired or consolidated by the Company in 1996, 1997 and 1998. The
remaining amount represents interest on the Company's outstanding convertible
debentures, mezzanine financing, notes payable relating to purchase of hotels,
Tonawanda bond issue and line of credit. In addition, the Company had a
litigation settlement totaling $475,000 (see Note 15) and non-recurring charges
totaling $4,838,872 (see Note 16).

EQUITY IN OPERATIONS OF AFFILIATES represents the net income earned from the
Company's equity investment in various hotels. The income for the year ended
December 31, 1998 increased by $133,075 to $198,910, or 202%, from $65,835 for
the year ended December 31, 1997. The increase is a result of various hotel
properties in a partnership still undergoing a start-up period during 1997 and
other hotel properties increasing profitability.

INCOME TAXES - The provision for income tax of $1,421,057 includes recording a
valuation allowance for the Company's deferred tax asset as realization of the
future tax benefits related to the deferred tax assets is dependent on many
factors, including the Company's ability to generate taxable income within the
net operating loss carryforward period. The benefit for income tax of $1,000,849
for the twelve month period ended December 31, 1997 represents federal and state
tax income tax benefit from the recognition of deferred tax assets and
liabilities on loss before tax of $2,892,603. See Note 10 for a detailed
description of deferred tax assets and liabilities.

NET INCOME/LOSS - As a result of the above factors, net loss increased
$13,273,440, or 702%, from the twelve month period ended December 31, 1997 to a
net loss of $15,165,194 for the twelve month period ended December 31, 1998. The
net loss per common share - basic of $2.86, compared with a net loss per common
share - basic of $0.40 for the twelve month period ended December 31, 1997.

TWELVE MONTHS ENDED DECEMBER 31, 1997, COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1996:

Total operating revenues increased $24,583,048, or 174% to $38,731,097 for 1997,
reflecting changes in revenue categories, as discussed below.

HOTEL OPERATIONS were $36,922,896 for the twelve months ended December 31, 1997,
an increase of $25,192,600, or 215%, from the twelve months ended December 31,
1996. Hotel operations consist of the following:


                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                                    Twelve Months Ended

                                                        DECEMBER 31, 1997          DECEMBER 31, 1996
                                                        -----------------          -----------------
<S>                                                        <C>                         <C>       
        Hotel room revenue                                 $30,617,628                 $ 7,167,164
        Beach club revenue                                   1,346,522                   1,416,695
        Food and beverage revenue                            3,565,646                   2,444,842
        Other                                                1,393,100                     701,595
                                                           -----------                 -----------

            Total                                          $36,922,896                 $11,730,296
                                                           ===========                 ===========
</TABLE>

Hotel room revenues for the twelve month period ended December 31, 1997
increased $23,450,464, or 327%, from the twelve month period ended December 31,
1996. The increase is a result of the fact that the acquisition of five (5)
hotels on July 31, 1996 and twelve (12) hotels on November 27, 1996 occurred
during the year and, therefore, the Company only recognized revenues from these
hotels for a portion of 1996. Additionally, the company acquired nine (9) hotels
on October 31, 1997, which added to the revenues for 1997. In addition, the
Canandaigua Inn on the Lake was open only seven (7) months during the twelve
month period ended December 31, 1996, as the facility underwent major
renovations during the first five months. Operating revenues (which includes
hotel room revenue, beach club revenue and food and beverage revenue) for the
Seagate Hotel and Beach Club are included prior to the acquisition on July 31,
1996, as a result of the Company being the controlling partner in the limited
partnership. Occupancy and average daily room rate for company owned hotels were
65.2% and $56.51, respectively, for the twelve month period ended December 31,
1997.

The Beach Club revenue relates to the operation of the beach club at the Seagate
Hotel and Beach Club, which decreased $70,173, or 5%, from the twelve month
period ended December 31, 1996, as a result of a reduction in new member dues
(initiation fees).

Food and beverage revenue was $3,565,646 for the twelve month period ended
December 31, 1997, compared to $2,444,842 for the twelve month period ended
December 31, 1996, an increase of $1,120,804, or 46%. The increase is primarily
the result of the Canandaigua Inn on the Lake being closed, as the facility
underwent major renovations and reopened June 1996.

Other hotel revenue increased $691,505, or 99% to $1,393,100 from $701,595 in
fiscal year 1996, as a result of the acquisition of five (5) hotels on July 31,
1996 and twelve (12) hotels on November 27, 1996 occurred during the year and,
therefore, the Company only recognized revenues from these hotels for a portion
of 1996. Additionally, the Company acquired nine (9) hotels on October 31, 1997,
which added to the revenues for 1997.

ROYALTIES for the twelve month period ended December 31, 1997 have increased
$154,998 or 26% to $757,047 from $602,049 for the twelve month period ended
December 31, 1996. The increase is attributable to sixty-two (62) franchised
Microtel Inns in operation, as opposed to twenty-six (26) during the same twelve
month period in 1996. The Company receives all royalties on twenty-eight (28) of
the previously cited Microtel Inns and on the remaining ninety-six (96)
franchises established by US Franchise Systems, Inc., the Company receives
royalty payments from USFS of 1% of gross room revenues from hotels 1-100; .75%
of gross room revenues from hotels 101-250; and .5% of gross room revenues above
250 units.

The Company has retained the right to franchise, construct and collect franchise
placement fees on an additional twenty-two (22) Microtel Inn properties and ten
(10) "suite" properties. The USFS Agreement allows the Company to retain all
royalties on fifty (50) Microtel Inns (twenty-eight (28) existing and twenty-two
(22) new ones to be developed by the Company) and ten (10) Microtel Suites to be
developed by the Company. Hudson also receives royalty payments from USFS for
franchises it opens based on the schedule discussed in the preceding paragraph.

MANAGEMENT FEES for the twelve month period ended December 31, 1997 remained
consistent with the same twelve month period ended December 31, 1996. During the
twelve month period ended December 31, 1997, the Company obtained one (1)
management contract, compared with three (3) for the twelve month period ended
December 31, 1996. The schedule of owned and managed hotels is summarized below:


                                       17
<PAGE>

<TABLE>
<CAPTION>
                                                     DECEMBER 31, 1997     DECEMBER 31, 1996
                                                     -----------------     -----------------
<S>                                                          <C>                    <C>
                 Owned                                       26                     17
                 Managed with financial interest             10                     11
                 Other managed                                5                      4
                                                            ---                    ---
                                                             41                     32
                                                            ===                    ===
</TABLE>

Management fees of approximately $1,807,000 generated by the twenty-six (26)
owned hotels for the twelve months ended December 31, 1997, were eliminated for
consolidation purposes.

OTHER REVENUE for the year ended December 31, 1997 decreased $586,939, or 70% to
$250,097 from $837,036 for the year ended December 31, 1996. This is primarily
the result of non-recurring development fees received in 1996 for the
construction/renovation of four (4) Microtel Inns and one full-service hotel.
Other revenue for the year ended December 31, 1997 represents consulting fees of
$10,000 for the construction of one (1) hotel; consulting fees of $150,000 as
part of the USFS Agreement under which the Company will be receiving fees for
various consulting services during 1998 (see Note 1) and the gain from the sale
of real estate totaling $28,812, franchise placement fees of $55,500 for two (2)
franchise sales (Greenville, South Carolina and Springfield, Missouri) and other
miscellaneous income of $5,785.

GROSS OPERATING MARGIN for hotel operations (consisting of total hotel revenues,
less direct expenses; departmental expenses, undistributed expenses, property
occupancy costs and insurance costs) for the twelve months ended December 31,
1997 was 32.8%, compared to 23.9% for the twelve months ended December 31, 1996.
The increase is a result of acquiring twelve (12) hotel properties on November
27, 1996 and reporting the results for only the month of December, which is
typically one of the slowest operating months, thus adversely effecting the
gross operating margin for the year ended December 31, 1996. In addition, the
Canandaigua Inn on the Lake reopened and resumed operations in June 1996 and had
not yet stabilized operations.

CORPORATE EXPENSE represents general and administrative costs and expenses
associated with the corporate office. Corporate costs and expenses increased
$834,252 or 47% to $2,617,158 from $1,782,906 from the prior year. The increase
is primarily a result of the following: (1) professional fees increased as a
result of Company growth and (2) payroll expense increased as a result of pay
increases, and the addition of employees.

INDIRECT OPERATING COSTS represents costs incurred by the Company which do not
represent direct hotel or corporate expenses. These costs increased $674,639 or
122% to $1,225,788 from $551,149 in fiscal year 1996. The Company incurred
charges of $1,225,788 during the fourth quarter of 1997. The increase is
primarily due to $835,118 of non-cash consulting expense related to investor
relations services. This amount was written off as its expected value in the
future appeared minimal. The balance is comprised of costs relating to the
acquisition of nine (9) Hampton Inns and write-off of several development
expenditures which the Company will no longer pursue.

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

DEPRECIATION AND AMORTIZATION for the twelve month period ended December 31,
1997 increased $3,074,904, or 301%, to $4,096,761 from $1,021,857 for the twelve
month period ended December 31, 1996. The increase is a result of the
acquisition of five (5) hotels on July 31, 1996, twelve (12) hotels on November
27, 1996, and nine (9) hotels on October 31, 1997.

OTHER EXPENSE (NET) for the year ended December 31, 1997 increased $8,449,754 or
2,201% to $8,833,611 from $383,857 for the year ended December 31, 1996. The
increase is primarily the result of incurring additional debt for the
acquisition of twelve (12) hotels on November 27, 1996 and nine (9) hotels on
October 31, 1997. Of the $9,028,366 in total interest expense, 63% relates to
the mortgages held on the hotels acquired in 1996 and 1997. The remaining amount
represents interest on the Company's outstanding convertible debentures,
mezzanine financing, notes payable relating to purchase of hotels, Tonawanda
bond issue and line of credit.

During the three month period ended December 31, 1995, the Company had elected
to record the proceeds receivable on the installment method of accounting
relating to the USFS Agreement with USFS. This method is applicable in cases
where receivables are collectible over an extended period of time and where
there is little basis for estimating the degree of collectability.


                                       18
<PAGE>

During 1996, USFS completed an initial public offering with proceeds to that
entity of approximately $37.0 million. As a result, it was determined that the
future collectability was not in doubt and the balance of the deferred revenue
was recognized during the three month period ended December 31, 1996.

EQUITY IN OPERATIONS OF AFFILIATES represents the net income earned from the
Company's equity investment in various hotels. The income for the year ended
December 31, 1997 increased $48,308, or 276% to $65,835 from $17,527 for the
year ended December 31, 1996 as a result of various hotel properties in a
partnership still undergoing a start-up period of lower revenues for the year
ended December 31, 1996.

INCOME TAXES - The income tax benefit for the twelve months ended December 31,
1997 represents federal and state income tax benefit generated by a loss before
tax of $2,892,603. The benefit includes tax expense/benefit from the recognition
of deferred tax assets and liabilities. The provision for income taxes of
$472,014 for the twelve month period ended December 31, 1996 represents federal
and state tax expense on income before tax of $1,108,064. See Note 10 for a
detail description of deferred tax assets and liabilities.

NET INCOME/LOSS - As a result of the above factors, net income decreased
$2,527,804 from the twelve month period ended December 31, 1996 to a net loss of
$1,891,754 for the twelve month period ended December 31, 1997. The net loss per
common share - basic of $(.40), compared with a net income per common share -
basic of $.13 for the twelve month period ended December 31, 1996.

CAPITAL RESOURCES AND LIQUIDITY

At December 31, 1998, the Company had a $400,000 working capital demand line
note with a commercial bank, which bears interest at a rate of prime plus 1
1/2%. Amounts borrowed are collateralized by unencumbered land. At December 31,
1998, $400,000 was borrowed under the terms of this line.

At December 31, 1998, the Company had $1,751,580 of cash and cash equivalents
compared with $670,736 at December 31, 1997.

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, taxes, insurance and capital
asset reserves. A substantial portion of the escrowed cash funds are released
several times monthly for application against current liabilities. The balances
held in escrow on December 31, 1998 and 1997 were $3,013,617 and $3,463,928,
respectively.

Net cash flows from operating activities decreased $1,548,531 to $913,765 for
the year ended December 31, 1998 from $2,462,296 for the year ended December 31,
1997. The net decrease is primarily the result of actual losses generated as a
result of non-recurring charges, net of amounts accrued and not paid at December
31, 1998.

Net cash flows used in investing activities increased by $49,249,970 for
the year ended December 31, 1997 to $2,327,747 for the year ended December 31,
1998. Net cash flow provided by investing activities for the twelve months ended
December 31, 1998 reflects cash received for the sale of a hotel and a lease,
changes in restricted cash, collection of deposits and other assets, less the
purchase of equipment. Net cash used in investing activities for the twelve
months ended December 31, 1997, reflects the acquisition of nine (9) Hampton
Inns on October 31, 1997, amounts placed into escrow as required by the loan
agreements, capital improvements to the seventeen (17) hotels acquired in 1996
and deposits submitted for the acquisition of three (3) hotels.

Net cash flows provided by financing activities decreased by $46,233,963 
to $2,494,826 at December 31, 1998. Net borrowing on the line of credit 
decreased by $312,537 for the 1998 twelve month period, compared to an 
increase of $712,537 for the 1997 twelve months. Net cash flows from 
financing activities for the twelve months ended December 31, 1998 reflects 
the proceeds from the sale of common stock and exercise of options. This was 
offset by repayment of mortgages, preferred stock dividends and repayments on 
our line of credit. Net cash flows provided by financing activities for the 
twelve months ended December 31, 1997 reflects amounts borrowed to acquire 
nine (9) Hampton Inns on October 31, 1997, cash proceeds from the exercise of 
options and proceeds from our line of credit. This was offset by financing 
costs, repayment of mortgages, preferred dividends paid and purchase of 
treasury stock.

                                       19
<PAGE>

EBITDA increased by $6,525,512, or 65%, to $16,604,865 during the twelve 
months ended December 31, 1998; compared to $10,079,353 for the twelve months 
ended December 31, 1997. EBITDA is defined as total operating revenues less 
direct, corporate and indirect operating costs. The Company believes this 
definition of EBITDA provides a meaningful measure of its ability to service 
debt. The increase is a result of the acquisition of nine (9) hotel 
properties on October 31, 1997, and the consolidation of three (3) hotels 
effective August 14, 1998.

LIQUIDITY - In December of 1998, and the first quarter of 1999, the Company 
sold certain assets and took other actions as described in Item 1 "Recent 
Developments" to generate cash or avoid cash payment which would allow 
sufficient liquidity to maintain current operations during its seasonally 
slow operating season (the fourth and first quarters). The Company's 
mezzanine loan agreement requires Hudson 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 gave the 
lender the right to demand immediate repayment of the mezzanine loan. In 
April 1999 the Company entered into an agreement with this lender, which 
waives these violations of the mezzanine loan agreement if the Company 
fulfills certain conditions. One of these conditions is that the Company is 
not to make any principal payments to creditors which are subordinated to 
this lender, including Equity Inns, LP ("Equity Inns") for its 10% 
subordinated note or on the $7.5 million convertible subordinated debenture 
or for the obligations of Hudson Hotels Trust. Such requirements will cause 
the Company to default in its obligations to Equity Inns. However, under the 
subordination agreement with Equity Inns, that company is currently prevented 
from taking legal action to enforce the payment of its debt. After default, 
Equity Inns could obtain 2,000,000 shares of Hudson Hotels common stock, 
which is collateral for this debt. Additionally, upon default, the holders of 
$4.0 million debt in Hudson Hotels Trust can convert their debt into a total 
of 1,333,332 shares of Hudson common stock. One of these holders, in 1999, has 
already converted $2.0 million of this debt into 666,666 shares of Hudson 
common stock. Additionally, the Company at December 31, 1998 had certain 
portions of its mezzanine debt that would begin to amortize in the fourth 
quarter of 1999. As a result of the recent agreement with the holder of this 
debt, the amortization of this debt now begins in the second quarter of 2000, 
which amortization the Company will not, at current operating levels, be able 
to service. Therefore, the Company's viability is dependent upon the 
restructuring of its debt obligations and strengthening its equity and asset 
base, and ultimately, a return of profitability.

The Company is currently in discussions with several of its institutional
lenders about its debt obligations and activities to restructure its debt. There
is negative working capital of $6,504,154 at December 31, 1998 with a
significant amount of this negative working capital generated by significant
principal debt payments. These principal payments described herein are expected
to continue. Furthermore, the Company is severely restricted in accessing the
cash flows generated from revenues as they are trapped for application against
required escrows for debt, tax, insurance, capital asset reserve, and now
beginning in the second quarter of 2000, principal amortization of the Company's
mezzanine debt.

There can be no assurances that the Company's restructuring efforts will be
successful, or that the institutional lenders will agree to a course of action
consistent with the Company's requirements in restructuring the obligations.
Even if such agreement is reached it may require approval of additional debt
holders, or possibly agreements of other creditors and shareholders of the
Company, none of which is assured. Furthermore, there can be no assurance that
restructuring of the Company's debt can be successfully accomplished on terms
acceptable to the Company. Under current circumstances, the Company's ultimate
ability to remain viable depends upon the successful restructuring of its debt
obligations. If the Company is unsuccessful in these efforts, it may be unable
to make its future obligations associated with its principal payments, as well
as other obligations, making it necessary to undertake such other actions
including seeking court protection as may be appropriate to preserve asset
value.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. This
statement requires that comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is defined as the change in equity of a
business enterprise arising from non-owner sources. The classifications of
comprehensive income under current accounting standards include foreign currency
items, minimum pension liability adjustments and unrealized gains and losses on
certain investments in debt and equity securities. The Company adopted the
provisions of SFAS No. 130 on January 1, 1998. However, since the Company does
not have any comprehensive income items, there was no impact on the presentation
of its consolidated financial statements.


                                       20
<PAGE>

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments for an Enterprise and Related Information." This
statement changed the way public companies report information about segments of
their business in their annual financial statements and requires them to report
segment information in their quarterly reports issued to shareholders. It also
requires entity-wide disclosures about the products and services an entity
provides, and its major customers. The Company adopted the provision of SFAS No.
131 on January 1, 1998.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following tables summarize the financial instruments held by the Company at
December 31, 1998, which are sensitive to changes in interest rates. At December
31, 1998, approximately 26% of the Company's debt and capital lease obligations
are subject to changes in market interest rates and are sensitive to those
changes. The Company currently has no derivative instruments to offset the risk
of interest rate changes. In the future, the Company may choose to use
derivative instruments, such as interest rate swaps to manage the risk
associated with interest rate changes.

The following table presents principal cash flows for debt outstanding at 
December 31, 1998, by maturity date and the related average interest rate.

<TABLE>
<CAPTION>
                                            1999       2000       2001       2002   THEREAFTER     TOTAL
                                            ----       ----       ----       ----   ----------     -----
<S>                                         <C>        <C>        <C>        <C>      <C>          <C>
Long-term debt:
     Fixed rate                             6,018      2,981      8,713      1,326    80,019       99,057
         Weighted-average interest rate      8.99%      8.93%      8.98%      9.04%     9.05%
     Variable rate                              -      6,167      5,000      5,000    18,833       35,000
         Weighted-average interest rate     11.00%     11.00%     11.00%     11.00%    11.00%
</TABLE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                       21
<PAGE>

                   HUDSON HOTELS CORPORATION AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                         TOGETHER WITH AUDITORS' REPORTS


                                       22
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheets and the related 
consolidated statements of operations, changes in shareholders' investment 
(deficit) and cash flows present fairly, in all material respects, the 
financial position of Hudson Hotels Corporation and Subsidiaries (the 
"Company") at December 31, 1998 and 1997 and the results of its operations 
and its cash flows for the years then ended in conformity with generally 
accepted accounting principles. 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 audits. We conducted 
our audits of these statements in accordance with generally accepted auditing 
standards, which 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, assessing 
the accounting principles used and significant estimates made by management, 
and evaluating the overall financial statement presentation. We believe that 
our audits provide a reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers, LLP
Rochester, New York
March 24, 1999 except as to the information in Note 2 
as to which the date is April 14, 1999.


                                       23
<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


                                       24
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

March 22, 1997

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

In our opinion, the accompanying balance sheet and the related statements of
operations, changes in stockholder's equity and cash flows present fairly, in
all material respects, the financial position of HH Properties-I, Inc. (the
"Company"), a wholly owned subsidiary of Hudson Hotels Properties Corp. at
December 31, 1996, and the results of its operations and its cash flows for the
period November 15, 1996 through December 31, 1996, in conformity with generally
accepted accounting principles. 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
of these statements in accordance with generally accepted auditing standards,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.


/s/ PricewaterhouseCoopers LLP
Rochester, New York
March 22, 1997


                                       25
<PAGE>

HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ASSETS                                                        1998            1997
------                                                        ----            ----
<S>                                                     <C>             <C>          
CURRENT ASSETS:
     Cash and cash equivalents                          $   1,751,580   $     670,736
     Cash - restricted                                      3,013,617       3,463,928
     Accounts receivable - trade                              931,212         897,878
     Prepaid expenses and other                             1,356,730       1,378,069
                                                        -------------   -------------

TOTAL CURRENT ASSETS                                        7,053,139       6,410,611

INVESTMENTS IN PARTNERSHIP INTERESTS                        1,781,218       1,781,621

LAND AND REAL ESTATE DEVELOPMENT                            2,430,880       4,147,151

PROPERTY AND EQUIPMENT, NET                               124,434,369     129,749,648

DEFERRED TAX ASSET                                                 --       1,387,926

OTHER ASSETS                                                6,976,612       8,641,153
                                                        -------------   -------------

TOTAL ASSETS                                            $ 142,676,218   $ 152,118,110
                                                        =============   =============

LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT)
--------------------------------------------------

CURRENT LIABILITIES:

     Lines of credit                                    $     400,000   $     712,537
     Current portion of long-term debt                      6,017,698       3,433,217
     Accounts payable - trade                               1,112,851       1,394,460
     Other accrued expenses                                 6,026,744       3,595,288
                                                        -------------   -------------

TOTAL CURRENT LIABILITIES                                  13,557,293       9,135,502

LONG-TERM DEBT                                            128,039,543     128,559,291

DEFERRED REVENUE - LAND SALE                                  185,055         185,055

LIMITED PARTNERS' INTEREST IN
CONSOLIDATED PARTNERSHIP                                    1,060,581       1,099,266

SHAREHOLDERS' INVESTMENT (DEFICIT):

     Preferred stock                                              295             295
     Common stock                                               5,743           5,166
     Additional paid-in capital                            19,873,260      17,836,573
     Warrants outstanding                                          --          50,000
     Accumulated deficit                                  (20,004,301)     (4,711,787)
                                                        -------------   -------------

                                                             (125,003)     13,180,247

     Less:  10,000 shares of common stock in treasury,
        at cost at December 31, 1998 and 1997                 (41,251)        (41,251)
                                                        -------------   -------------

TOTAL SHAREHOLDERS' INVESTMENT (DEFICIT)                     (166,254)     13,138,996
                                                        -------------   -------------

TOTAL LIABILITIES AND SHAREHOLDERS'
    INVESTMENT (DEFICIT)                                $ 142,676,218   $ 152,118,110
                                                        =============   =============
</TABLE>

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


                                       26
<PAGE>

HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
OPERATING REVENUES:                                              1998           1997           1996
                                                                 ----           ----           ----
<S>                                                         <C>            <C>            <C>         
     Hotel operations                                       $ 55,383,217   $ 36,922,896   $ 11,730,296
     Management fees                                             875,005        801,057        978,668
     Royalties                                                 1,249,569        757,047        602,049
     Other                                                       131,847        250,097        837,036
                                                            ------------   ------------   ------------

TOTAL OPERATING REVENUES                                      57,639,638     38,731,097     14,148,049

OPERATING COSTS AND EXPENSES:
     Direct                                                   36,715,748     24,808,798      8,925,508
     Corporate                                                 3,741,951      2,617,158      1,782,906
     Indirect operating costs                                    577,074      1,225,788        551,149
     Loss on asset valuation                                   5,259,701             --             --
     Depreciation and amortization                             6,130,386      4,096,761      1,021,857
                                                            ------------   ------------   ------------
     Total operating costs and expenses                       52,424,860     32,748,505     12,281,420
                                                            ------------   ------------   ------------

     Income from operations                                    5,214,778      5,982,592      1,866,629
                                                            ------------   ------------   ------------

OTHER INCOME (EXPENSE):
     Gain on sale of worldwide franchise rights                       --             --      1,385,758
     Interest income                                             328,042        194,755        298,825
     Interest expense                                        (14,180,437)    (9,028,366)    (2,068,440)
     Settlement of litigation                                   (475,000)            --             --
     Non-recurring costs                                      (4,838,872)            --             --
     Gain on sale of property and equipment                       74,523             --             --
                                                            ------------   ------------   ------------

TOTAL OTHER (EXPENSE)                                        (19,091,744)    (8,833,611)      (383,857)
                                                            ------------   ------------   ------------

     Income/(Loss) before income taxes, minority interest
        and equity in operations of affiliates               (13,876,966)    (2,851,019)     1,482,772

PROVISION/(BENEFIT) FOR INCOME TAXES                           1,421,057     (1,000,849)       472,014
                                                            ------------   ------------   ------------

     Income/(Loss) before minority interest, and equity in
        operations of affiliates                             (15,298,023)    (1,850,170)     1,010,758

MINORITY INTEREST                                                (66,081)      (107,419)      (392,235)
EQUITY IN OPERATIONS OF AFFILIATES                               198,910         65,835         17,527
                                                            ------------   ------------   ------------

NET INCOME (LOSS)                                           $(15,165,194)  $ (1,891,754)  $    636,050
                                                            ============   ============   ============

NET INCOME (LOSS) PER COMMON SHARE - BASIC                  ($      2.86)  $      (0.40)  $       0.13
                                                            ============   ============   ============

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

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


                                       27
<PAGE>

HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998, 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
                                                                       
     Net Loss                                   --               --         --             -- 
     Sale of common stock                       --               --        333        999,667
     Issuance of common stock to                --               --         40         67,460
     employees and consultants                                         
     Settlement of lawsuit                      --               --        200        424,800
     Exercise of options                        --               --          4         14,996
     Cash dividends paid on preferred stock     --               --         --             -- 
     Other                                      --               --         --        529,764
                                              ----       ----------     ------    -----------
                                                                       
BALANCE, DECEMBER 31, 1998                    $295       $1,560,705     $5,743    $18,312,555
                                              ====       ==========     ======    ===========

<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

     Net Loss                                        --      (15,165,194)             --      (15,165,194)
     Sale of common stock                            --               --              --        1,000,000
     Issuance of common stock to                     --               --              --           67,500
     employees and consultants
     Settlement of lawsuit                      (50,000)              --              --          375,000
     Exercise of options                             --               --              --           15,000
     Cash dividends paid on preferred stock          --         (127,320)             --         (127,320)
     Other                                           --               --         529,764
                                               --------     ------------     -----------     ------------

BALANCE, DECEMBER 31, 1998                     $      0     $(20,004,301)    $   (41,251)    $   (166,254)
                                               ========     ============     ===========     ============
</TABLE>

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


                                       28
<PAGE>

HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:                                  1998          1997          1996
                                                                       ----          ----          ----
<S>                                                                <C>            <C>           <C>        
NET INCOME (LOSS)                                                  $(15,165,194)  $(1,891,754)  $   636,050
Adjustments to reconcile net income (loss) to net cash
 provided by operating activities:
  Deferred tax provision                                              1,387,926    (1,010,478)      265,767
  Depreciation and amortization                                       6,130,386     4,096,761     1,070,050
  Loss on asset valuation                                             5,259,701            --            --
  Non-cash expenses                                                     972,264       835,118        83,160
  Gain on sale of assets                                                (74,523)      (28,812)           --
  Gain on installment sale                                                   --            --    (1,385,758)
  Bad debt expense                                                           --       167,163
  Minority interest                                                      66,081       107,419       392,235
  Equity in operations of affiliates                                   (198,910)      (65,835)      (17,527)
  Capital distributions from unconsolidated partnership interests       281,739       163,577        92,272
  Cash collected on installment sale                                    454,546       288,112       694,983
(Increase) decrease in assets:
    Accounts receivable - trade                                         (33,334)     (454,886)       36,924
    Prepaid expenses and other                                         (316,764)      (35,126)     (434,100)
Increase (decrease) in liabilities:
      Accounts payable                                                 (281,609)     (465,136)    1,388,338
      Other accrued expenses                                          2,431,456       756,173       731,468
                                                                   ------------   -----------   -----------

         Net cash provided by operating activities                      913,765     2,462,296     3,553,862
                                                                   ------------   -----------   -----------
</TABLE>

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


                                       29
<PAGE>

HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                     1998           1997           1996
                                                                     ----           ----           ----
<S>                                                              <C>            <C>            <C>         
CASH FLOWS FROM INVESTING ACTIVITIES:

   Acquisition of land/real estate development                       (101,940)       (85,054)    (2,094,550)
   Cash collected on sale of assets                                 2,188,625        399,659             --
   Change in restricted cash                                          450,311     (1,948,049)    (1,515,879)
   Capital contribution to unconsolidated partnership interests            --             --        (12,900)
   Collection on non-affiliate mortgage                                38,000             --        200,000
   Change in non-affiliates accounts and notes receivable              78,180         29,049        (32,360)
   Purchase of equipment                                           (2,056,524)    (2,595,035)      (640,982)
   Purchase of partnership interest                                (3,556,837)            --             --
   Change in other assets                                             384,477        (11,937)       (40,582)
   Purchase of hotels                                                      --    (47,148,504)   (58,794,287)
   Deposits                                                           450,000       (343,034)      (329,262)
   Cash received in acquisition                                            --             --        557,538
   Change in affiliate accounts receivable                           (202,039)       125,188         25,751
                                                                 ------------   ------------   ------------

         Net cash used in investing activities                     (2,327,747)   (51,577,717)   (62,677,513)
                                                                 ------------   ------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES:

         Proceeds of borrowings                                     4,000,000     51,884,052     83,400,000
         Financing costs                                                   --     (1,154,545)    (2,508,238)
         Repayment of mortgages                                    (1,935,267)    (3,483,680)   (17,023,406)
         Distributions to limited partners                           (145,050)      (108,092)      (381,070)
         Proceeds from stock options exercised                         15,000      1,047,088          7,667
         Dividends paid                                              (127,320)      (127,320)      (127,320)
         Purchase of treasury stock                                        --        (41,251)    (3,953,042)
         Proceeds from sale of common stock                         1,000,000             --             --
         Borrowings on line of credit, net                           (312,537)       712,537             --
                                                                 ------------   ------------   ------------

         Net cash provided by financing activities                  2,494,826    48,728,789     59,414,591
                                                                 ------------   ------------   ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                1,080,844       (386,632)       290,940

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                       670,736      1,057,368        766,428
                                                                 ------------   ------------   ------------

CASH AND CASH EQUIVALENTS - END OF PERIOD                        $  1,751,580   $    670,736   $  1,057,368
                                                                 ============   ============   ============

OTHER INFORMATION:
Cash paid during the period for:
   Interest                                                      $ 14,152,439   $  8,747,412   $  1,662,972
   Income taxes                                                  $     40,690   $     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.


                                       30
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

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". The Company was incorporated in New York State on June 5, 1987.

The principal activity of the Company is as owner/manager of hotels. The Company
also manages hotels with financial interest (through various partnerships) and
manages hotels through third party management contracts. The owned and managed
hotels are located in twelve (12) states, and are operated under various
franchise agreements. The Company operates in the industry segment of hotel
operations and management.

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, received $4.0 million over a three (3) year period,
allocated as follows: $3,037,640 for the purchase of the franchising assets;
$700,000 for consulting services over three (3) years; and $262,360 in interest
related to deferred payments. Expenses of $121,759 were netted against the
purchase price. Of the total consideration, $2.0 million was paid at closing,
$1.0 million was paid at the first anniversary and $500,000 at the second
anniversary, and an additional $500,000 was paid 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% of gross room revenues from hotels 101-250 and
 .5% of gross room revenues 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 twenty-two (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, 1997 and 1998, the Company embarked upon a significant expansion and
development program, which includes several acquisitions and development of five
(5) Microtel Inns through a joint venture partnership.

2.       LIQUIDITY:

In December of 1998, and the first quarter of 1999, the Company sold certain 
assets and took other actions as described in Item 1 "Recent Developments" to 
generate cash or avoid cash payments which would allow sufficient liquidity 
to maintain current operations during its seasonally slow operating season 
(the fourth and first quarters). The Company's mezzanine loan agreement 
requires Hudson 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 gave the lender the right to demand 
immediate repayment of the mezzanine loan. In April 1999, the Company entered 
into an agreement with this lender, which waives these violations of the 
mezzanine loan agreement if the Company fulfills certain conditions. One of 
these conditions is that the Company is not to make any principal payments to 
subordinated creditors of this lender, including Equity Inns, LP ("Equity 
Inns"), its $7.5 million convertible subordinated debenture or for the 
obligations of Hudson Hotels Trust. Such requirement will cause the Company 
to default in its obligations to Equity Inns, however, under the 
subordination agreement with Equity Inns, that company is currently prevented 
from taking legal action to enforce the payment of its debt. However, after 
default, Equity Inns could obtain 2,000,000 shares of Hudson Hotels common 
stock, which is collateral for this debt. Additionally, upon default, the 
holders of $4.0 million debt in Hudson Hotels Trust can convert their debt 
upon default into a total of 1,333,332 shares of Hudson common stock. One of 
these holders has already converted $2.0 million of this debt into 666,666 
shares of Hudson common stock. Additionally, the Company at December 31, 1998 
had certain portions of its mezzanine debt that would begin to amortize in 
the fourth quarter of 1999. As a result of

                                       31
<PAGE>

this recent agreement with the holder of this debt, the amortization of this
debt now begins in the second quarter of 2000, which amortization the Company
will not, at current operating levels, be able to service. Therefore, the
Company's viability is dependent upon the restructuring of its debt obligations
and strengthening its equity and asset base, and ultimately, a return of
profitability.

The Company is currently in discussions with several of its institutional
lenders about its debt obligations and activities to restructure its debt. There
is negative working capital of $6,504,154 at December 31, 1998 with a
significant amount of this negative working capital generated by significant
principal debt payments. These principal payments described herein are expected
to continue. Furthermore, the Company is severely restricted in accessing the
cash flows generated from revenues as they are trapped for application against
required escrows for debt, tax, insurance, capital asset reserve, and now
beginning in the second quarter of 2000, principal amortization of the Company's
mezzanine debt.

There can be no assurances that the Company's restructuring efforts will be
successful, or that the institutional lenders will agree to a course of action
consistent with the Company's requirements in restructuring the obligations.
Even if such agreement is reached it may require approval of additional debt
holders, or possibly agreements of other creditors and shareholders of the
Company, none of which is assured. Furthermore, there can be no assurance that
restructuring of the Company's debt can be successfully accomplished on terms
acceptable to the Company. Under current circumstances, the Company's ultimate
ability to remain viable depends upon the successful restructuring of its debt
obligations. If the Company is unsuccessful in these efforts, it may be unable
to make its future obligations associated with its principal payments, as well
as other obligations, making it necessary to undertake such other actions
including seeking court protection as be appropriate to preserve asset value.

3.       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
that is controlled by the Company. Other investments in partnerships that the
Company does not control are accounted for under the equity method (see below
and Note 4). Income and expenses are recorded on the accrual basis of accounting
and all significant inter-company 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 that own hotel properties or real estate that 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 $0,
$40,500 and $180,000 for the years ended 1998, 1997 and 1996, respectively, from
unconsolidated entities in which the Company has a minority interest.
Development fees represent cost reimbursement. The Company also receives ongoing
royalties from some of 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.


                                       32
<PAGE>

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 is released several
times monthly for application against current liabilities.

ACCOUNTS RECEIVABLE - TRADE

Accounts Receivable - Trade represents billed receivables to hotel entities for
management services, royalties due and hotel room rentals. At December 31, 1998
and 1997, $72,952 and $35,130, 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 property or equipment is
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>
                                                     1998              1997
                                                     ----              ----
<S>                                             <C>               <C>          
Land                                            $  16,283,653     $  14,991,042
Building and building improvements                 98,656,047        99,366,884
Furniture and equipment                            18,813,802        19,834,696
                                                -------------     -------------

                                                  133,753,502       134,192,622
Less - accumulated depreciation                    (9,319,133)       (4,442,974)
                                                -------------     -------------

                                                $ 124,434,369     $ 129,749,648
                                                =============     =============
</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

The Company reviews quarterly 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. In the fourth quarter
of 1998 the Company recognized an impairment loss of $1,818,211 in relation to
five (5) parcels of undeveloped land that were sold in the first quarter of
1999. Additionally, a loss of $3,441,490 was recognized from the loss of the
Company's limited partnership interest in HH Bridge, L.P.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Given the Company's current financial position, it is not practical to determine
the fair value of its financial instruments.

DEFERRED FINANCING COSTS

Costs incurred to acquire financing are being amortized over the estimated term
of the related financing. Accumulated amortization was $562,465 and $169,557 as
of December 31, 1998 and 1997, respectively.


                                       33
<PAGE>

REVENUE RECOGNITION

Hotel operations 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.

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.

Royalty fee revenue is based on gross room revenues and the number of franchised
businesses open under the USFS Agreement.

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.

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 twenty (20)
year estimated useful life of the asset. Accumulated amortization is $387,456
and $227,129 as of December 31, 1998 and 1997, respectively.

EARNINGS PER SHARE

The Company calculates earning per share ("EPS") in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, which is effective for both
interim and annual periods ending after December 15, 1997.

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.

<TABLE>
<CAPTION>
                                                                   1998         1997         1996
                                                                   ----         ----         ----
<S>                                                            <C>           <C>          <C>        
Net Earnings Applicable to Common Stock:

     Net earnings (loss)                                       $(15,165,194) $(1,891,754) $   636,050
     Deduct preferred stock dividends paid                         (127,320)    (127,320)    (127,320)
                                                               ------------  -----------  -----------

     Net earnings (loss) applicable to common stock            $(15,292,514) $(2,019,074) $   508,730
                                                               ============  ===========  ===========

Weighted average number of common shares outstanding              5,353,078    4,996,694    3,771,702
                                                               ============  ===========  ===========

EARNINGS (LOSS) PER SHARE - BASIC                              $      (2.86) $     (0.40) $      0.13
                                                               ============  ===========  ===========

Net earnings applicable to common stock per above              $         --  $        --  $   508,730
                                                               ============  ===========  ===========

Shares used in calculating basic 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          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 anti-dilutive. Unexercised stock
options/warrants to purchase 3,459,092; 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, 1998, 1997 and 1996, respectively.


                                       34
<PAGE>

The Company did not include the conversion of convertible preferred stock and
convertible subordinated debentures totaling 1,961,390, 1,294,723, and 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, 1998, 1997
and 1996, respectively.

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.

4.       SUMMARIZED FINANCIAL INFORMATION - INVESTMENTS IN PARTNERSHIP 
         INTERESTS:

The following is a summary of condensed financial information for the
unconsolidated partnerships that the Company does not control for the
partnerships years ended December 31, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
                                            1998           1997           1996
                                            ----           ----           ----
<S>                                     <C>            <C>            <C>         
Property and equipment, net of
  accumulated depreciation              $ 57,248,847   $ 29,943,215   $ 29,490,826
Current assets                             3,495,286      2,925,293      2,918,869
Other assets                               1,088,155        938,340      1,341,308
                                        ------------   ------------   ------------

  TOTAL ASSETS                            61,832,288     33,806,848     33,751,003
                                        ------------   ------------   ------------

Mortgage and notes payable - current         550,524        302,732      2,157,446
Other current liabilities                  2,429,449        712,866        847,865
Mortgage and note payable - noncurrent    43,614,917     25,056,584     24,118,255
                                        ------------   ------------   ------------

  TOTAL LIABILITIES                       46,594,890     26,072,182     27,123,566
                                        ------------   ------------   ------------

NET ASSETS                              $ 15,237,398   $  7,734,666   $  6,627,437
                                        ============   ============   ============

  COMPANY'S SHARE                       $  1,781,218   $  1,781,621   $  1,974,900
                                        ============   ============   ============

Net revenues                              17,794,838     12,387,125     13,668,878
Operating expenses                       (10,984,777)    (7,192,947)    (9,301,426)
                                        ------------   ------------   ------------

Income from operations                     6,810,061      5,194,178      4,367,452
Other income (expense), net               (5,546,368)    (4,228,999)    (3,678,898)
                                        ------------   ------------   ------------

NET INCOME                              $  1,263,693   $    965,179   $    688,554
                                        ============   ============   ============

  COMPANY'S SHARE                       $    198,910   $     65,835   $     17,527
                                        ============   ============   ============
</TABLE>

5.      LAND AND REAL ESTATE DEVELOPMENT:

Real estate held for development or sale is summarized as follows at December
31:

<TABLE>
<CAPTION>
                                              1998         1997         ACRES
                                              ----         ----         -----
<S>                                       <C>           <C>              <C> 
Cost of land under development:
     Tonawanda, New York                  $   780,822   $  780,822       6.87
     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    3,610,592
Development costs                             638,499      536,559
                                          -----------   ----------
Total real estate development in process    4,249,091    4,147,151
Less:  Valuation allowance                 (1,818,211)          --
                                          -----------   ----------
Total real estate development in process  $ 2,430,880   $4,147,151
                                          ===========   ==========
</TABLE>


                                       35
<PAGE>

Development costs include land and site development costs that 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.

The Company reviews quarterly its land and real estate development 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 flow. As a result of the sale of five (5)
parcels of land in February 1999, the Company recognized a loss on asset
valuation. See Note 3 for further discussion.

6.      LINE OF CREDIT:

The Company has a line of credit note with a commercial bank, with an interest
rate of prime plus 1 1/2%, for a total of $400,000. Amount borrowed is
collateralized by undeveloped land in Tonawanda, New York.

7.      DEBT:

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

<TABLE>
<CAPTION>
                                                      1998             1997
                                                      ----             ----
<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 
In 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., one of the
Company's indirect wholly-owned hotel
subsidiaries                                     $  54,884,544    $  55,468,137

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 
In 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., one of the
Company's indirect wholly-owned hotel
subsidiaries                                        29,640,847       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 $18.0 million 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, at an interest rate of
LIBOR plus 6% and additionally $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. Subsequent to
December 31, 1998 the Note was amended
to provide that principal payments would
not begin until April 11, 2000                      35,000,000       35,000,000

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

Two $2.0 million notes due April 30,
1999. Subsequent to year-end one of
these notes was converted into 666,666
shares of the Company's common stock                 4,000,000               --

10% subordinated note payable to Equity
Inns Partnership, L.P. by the Company,
payable in monthly installments of
interest only. Principal payments of
$250,000 are due January 31, April 30,
July 31, October 31 of each year with
the unpaid balance due October 31, 2000 
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                                           2,884,052        3,884,052

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                          147,798          169,966
                                                 -------------    -------------

Total long-term debt                               134,057,241      131,992,508
Less - current portion                              (6,017,698)      (3,433,217)
                                                 -------------    -------------
                                                 $ 128,039,543    $ 128,559,291
                                                 =============    =============
</TABLE>


                                       36
<PAGE>

The conversion price of the 7.5% convertible subordinated debenture due July 1,
2001, reset on December 31, 1998 based on 125% of the average volume weighted
price over the last thirty days having 150,000 shares of trading volume. A
maximum and minimum conversion price for common shares is set at $7.50 and
$4.50, respectively. As a result of the reset, the new conversion price is $4.50
per common share.

In September 1998, the Company and Equity Inns agreed to revise the principal
payment schedule to provide a $1,000,000 principal payment on October 31, 1998
and $250,000 principal payments every three months thereafter. A balloon payment
of $1,134,052 is due October 31, 2000. The interest rate remained at 10%.

As a result of postponing the initial public offering of Hudson Hotels Trust and
its relationship with Hudson Hotels Trust, the Company is required to
consolidate the financial statements of Hudson Hotels Trust that includes $4.0
million in promissory notes. The promissory notes consist of two (2) 12% notes
payable to third parties payable in monthly installments of interest only, 
with the principal balance due on April 30, 1999. At the option of the note 
holders, at the stated maturity, the notes may be converted into term loans, 
bearing interest at 12% and 60 equal monthly principal payments of $33,333. 
The notes can be prepaid at any time prior to maturity. The notes are secured 
by the pledge of 1,333,332 shares of common stock of the Company as security 
of the payment of the notes. In addition, the Company issued warrants to 
acquire 500,000 shares of the Company's common stock at $4.00 a share, which 
expire April 30, 2003, to note holders as an inducement for amounts loaned 
other than the pledge of the stock. The Company is not obligated to repay the 
principal or interest on these notes, however.

The Company's mezzanine loan agreement requires Hudson 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 
gave the lender the right to demand immediate repayment of the mezzanine 
loan. In April 1999 the Company entered into an agreement with this lender, 
which waives these violations of the mezzanine loan agreement if the Company 
fulfills certain conditions. One of these conditions is that the Company is 
not to make any principal payments to creditors which are subordinated to 
this lender, including Equity Inns, LP ("Equity Inns") for its 10% 
subordinated note or on the $7.5 million convertible subordinated debenture 
or for the obligations of Hudson Hotels Trust. Such requirements will cause 
the Company to default in its obligations to Equity Inns. However, under the 
subordination agreement with Equity Inns, that company is currently prevented 
from taking legal action to enforce the payment of its debt. After default, 
Equity Inns could obtain 2,000,000 shares of Hudson Hotels common stock, 
which is collateral for this debt. Additionally, upon default, the holders of 
$4.0 million debt in Hudson Hotels Trust can convert their debt into a total 
of 1,333,332 shares of Hudson common stock. One of these holders, in 1999, 
has already converted $2.0 million of this debt into 666,666 shares of Hudson 
common stock. Additionally, the Company at December 31, 1998 had certain 
portions of its mezzanine debt that would begin to amortize in the fourth 
quarter of 1999. As a result of the recent agreement with the holder of this 
debt, the amortization of this debt now begins in the second quarter of 2000, 
which amortization the Company will not, at current operating levels, be able 
to service. Therefore, the Company's viability is dependent upon the 
restructuring of its debt obligations and strengthening its equity and asset 
base, and ultimately, a return of profitability.

At December 31, 1998 future minimum repayments under long-term debt are as
follows:

                  1999                        6,017,698
                  2000                        9,147,670
                  2001                       13,713,286
                  2002                        6,325,594
                  Thereafter                 98,852,993
                                           ------------

                  TOTAL                    $134,057,241
                                           ============

8.       SHAREHOLDERS' INVESTMENT:

(A)      PREFERRED STOCK

At December 31, 1998, the Company's authorized preferred shares were 10,000,000
at $.001 par value, of which 294,723 were issued and outstanding at December 31,
1998 and 1997, respectively.


                                       37
<PAGE>

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 annually and are 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, 1998, the Company's authorized common shares were 20,000,000 at
$.001 par value per share, of which 5,732,495 and 5,155,162 were issued and
outstanding at December 31, 1998 and 1997, respectively.

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

         --1988 Employee Stock Option Plan, whereby 100,000 shares of the
         Company's common stock are 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.

         --1993 Employee Stock Option Plan, whereby 550,000 shares of the
         Company's common stock are 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, 1998, 185,500 shares were available for
         grant under this plan.

         --1993 Directors Stock Option Plan, whereby 135,000 shares of the
         Company's common stock are reserved for issuance under plan provisions
         to outside Directors. The granted options vest over a two year period
         with 1/3 vesting immediately, with an additional 1/3 vesting at the
         first and second anniversaries. In 1998, the Board of Directors
         authorized the issuance of an additional 81,000 shares, which was
         approved by shareholders at the annual meeting. At December 31, 1998,
         108,000 shares were available for grant under this plan.

         --1998 Long-Term Incentive Compensation Plan, whereby 1,500,000 shares
         of the Company's common stock are reserved for issuance under plan
         provisions to officers and key employees pursuant to the issuance of
         non-qualified stock options, stock appreciation rights, restricted
         stock awards, phantom stock and direct purchase of stock. The purpose
         of the plan is to attract, retain and motivate key employees of the
         Company by offering incentive compensation tied to the performance of
         the Company and its share price and, therefore, more closely align with
         the interests of shareholders. At December 31, 1998, all of these
         shares have been committed to be granted but the grants had not yet
         been made, therefore -0- 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, 1998, 1997 and 1996 is:


                                       38
<PAGE>

<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

Granted                                              520,000                $4.00 -  $4.50
Exercised/Expired/Forfeited                         (312,575)              $4.125 -  $7.00
                                                  ----------

Outstanding at December 31, 1998                   1,959,092                $1.50 - $10.00
                                                  ==========

Options and warrants exercisable at:
   December 31, 1998                               1,952,133
                                                  ==========
   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 1998, 1997, and 1996 is $152,000, $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 (loss) and net income (loss) per share would have been 
reduced to the following pro forma amounts for the period ended December 31:

<TABLE>
<CAPTION>
                                              1998             1997            1996
                                              ----             ----            ----
<S>                                     <C>              <C>             <C>           
Net income (loss):
   As reported                          $  (15,165,194)  $   (1,891,754) $      636,050
   Pro forma                               (15,317,487)      (2,069,452)        426,650

Net income (loss) per share - basic:
   As reported                          $        (2.86)  $        (0.40) $         0.13
   Pro forma                            $        (2.89)  $        (0.44) $         0.08
</TABLE>

9.       COMMITMENTS:

Certain office space and automobiles are rented under non-cancelable operating
leases that expire at various dates through 2003. The following is a schedule of
future minimum annual rentals on non-cancelable operating leases:

                     1999                           $475,854
                     2000                            470,160
                     2001                            446,043
                     2002                            420,000
                     Thereafter                      420,000


                                       39
<PAGE>

Total rent expense for the year ended December 31, 1998, 1997 and 1996, was
$307,773, $159,566 and $148,102, respectively.

As a partner in the partnerships disclosed in Note 4, 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
$3.6 million and $3.7 million at December 31, 1998 and 1997, 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 $2,731,604, $1,567,564 and $146,000 for the years ended December
31, 1998, 1997 and 1996, respectively.

10.      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 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>
                                     1998               1997             1996
                                     ----               ----             ----
<S>                               <C>               <C>                 <C>     
CURRENT:
  Federal                         $       --        $        --         $195,539
  State                               33,182              9,629           10,708
DEFERRED:
  Federal                          1,094,465           (765,864)         196,232
  State                              293,410           (244,614)          69,535
                                  ----------        -----------         --------

TOTAL                             $1,421,057        $(1,000,849)        $472,014
                                  ==========        ===========         ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                     1998               1997
                                                     ----               ----
<S>                                              <C>                <C>         
Depreciation                                     $(1,581,218)       $(1,079,515)
Minority interest                                    (11,888)            (7,288)
                                                 -----------        -----------

Gross deferred tax liability                      (1,593,106)        (1,086,803)
                                                 -----------        -----------

Loss carryforwards                                 3,511,081          1,799,384
Accrued expenses                                   1,051,893            212,000
Deferred revenue                                      73,975             74,112
Deferred consulting                                       --             45,054
Bad debt reserve                                     236,424            221,916
Tax credit                                            79,751             79,884
Financing costs                                       62,566                 --
Writedown of assets                                2,044,569                 --
Miscellaneous                                         42,636             42,379
                                                 -----------        -----------

  Gross deferred tax assets                        7,102,895          2,474,729
                                                 -----------        -----------
Valuation allowance                               (5,509,789)                --
                                                 -----------        -----------
Net deferred tax asset                           $       -0-        $ 1,387,926
                                                 ===========        ===========
</TABLE>


                                       40
<PAGE>

The deferred tax consequences of temporary differences in reporting items for
financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss carryforward period and its history of
taxable earnings. Management has considered these factors in reaching its
conclusion as to the valuation allowance for financial reporting purposes.

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>
                                                   1998          1997        1996
                                                   ----          ----        ----
<S>                                            <C>           <C>           <C>     
Statutory US tax rates                         $(4,673,006)  $  (938,485)  $376,742
Increase (decrease) in rates resulting from:
State income taxes, net of federal income tax     (634,924)     (155,090)    66,495
Change in valuation allowance                    5,509,789            --         --
Permanent differences                            1,291,238        72,080         --
Other                                              (72,040)       20,646     28,777
                                               -----------   -----------   --------

Provision/(Benefit) for income taxes           $ 1,421,057   $(1,000,849)  $472,014
                                               ===========   ===========   ========
</TABLE>

At December 31, 1998, the Company has tax net operating loss carryforwards of
approximately $8,800,000 that may be used to offset future taxable income. These
loss carryforwards will begin to expire in 2003.

11.      LITIGATION:

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.

12.      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 the hotel's owner a non-affiliated limited liability
company, M,L,R&R. In December of 1998 the Company sold its leasehold interest in
this property and received its $450,000 cash deposit and began to manage the
property pursuant to a Management Agreement entered into with M,L,R&R.

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, 1998, and $57,417 for the year ended
December 31, 1997. 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:

                        1999                        $ 22,000
                        2000                          22,000
                        2001                          22,000
                        2002                          22,000
                        2003                          22,000
                        Thereafter                   704,000
                                                    --------
                                                    $814,000
                                                    ========


                                       41
<PAGE>

13.      ACQUISITION:

On August 14, 1998, HH Bridge, L.P. ("the Partnership"), a limited partnership 
in which the Company had a 42% interest, completed the acquisition of three (3) 
hotel properties from an unrelated third party for approximately $26.6 million, 
plus other indirect costs. The acquisition has been accounted for under the 
purchase method and, accordingly, the operating results of the three hotels have
been included in the consolidated operating results since the date of the 
acquisition.

The funds used to acquire the three hotel properties were provided by cash from
the Partnership and long-term borrowings. The Company funded the Partnership
through long-term borrowings and cash from operations.

The partnership agreement provides for "Put" and "Call" arrangements on the 
third party limited partner's ("M,L,R&R") 58% partnership interest in HH 
Bridge, L.P. M,L,R&R had the right, prior to July 14, 1999, to cause the 
Company to purchase M,L,R&R's entire partnership interest for $6.0 million 
(the "Put"). If the Put would have been exercised, the closing of the 
purchase of M,L,R&R's partnership interest would take place on August 14, 
1999. The Company had the right to purchase M,L,R&R's entire partnership 
interest for $6.0 million by November 13, 1999, after such time the purchase 
price of $6.0 million would have increased $66,667 for each month thereafter. 
The Company would have been required to purchase M,L,R&R's partnership 
interest on August 13, 2003, for $9.0 million if not sooner purchased. 
However, M,L,R&R also had the right to acquire the Company's limited 
partnership interest in HH Bridge, L.P. for $1 in the event the Company 
defaulted in any of its obligations to M,L,R&R.

As of December 31, 1998, the partnership was unable to make certain "guaranteed
return" payments to this third party, who then exercised its rights to acquire
the Company's 41% limited partnership interest for $1. As a result, the
operations of HH Bridge, L.P. have been consolidated by the Company from August
14, 1998, to December 31, 1998, however, the balance sheet has been
deconsolidated at December 31, 1998 and a loss on asset valuation were taken for
the Company's investment in the partnership of $3.4 million in the fourth
quarter of 1998. Presently the Company owns a 1% interest in HH Bridge, L.P., as
a general partner.

14.      INDIRECT OPERATING COSTS:

During the fourth quarter of 1998 the Company had charges of $577,074 as a
result of indirect costs. This amount is comprised of a one-time non-cash charge
of $529,764 associated with warrants issued and valued as a result of two $2.0
million notes issued. The remaining indirect operating costs are associated with
corporate moving expenses with relocation to new office space.

During the fourth quarter of 1997, the Company had charges of $1,225,788 as a 
result of indirect costs. This amount is comprised primarily of $835,118 of 
non-cash consulting expense relating to investor relations services which 
were written off as its expected value of these services in the future 
appeared 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
as a result of the acquisition of the SB Motel Corp. portfolio.

15.      SETTLEMENT OF LITIGATION:

On September 30, 1998, the Company reached a settlement in a long standing
litigation with plaintiffs, Ladenburg, Thalmann Co., whom alleged a breach of
contract by the Company. In exchange for termination of the lawsuit and mutual
release, the Company paid to the plaintiff a total of $100,000 in cash and
200,000 shares of common stock valued at $375,000.

16. NON-RECURRING COSTS:

During the third quarter of 1998, the Company recognized charges of $4.8
million. These charges include (i) a deposit and direct costs related to the
terminated acquisition of twenty-six Fairfield Inns by Marriott that were under
contract to Hudson Hotels Trust and (ii) costs incurred by the Company as Hudson
Hotels Trust was unable to raise funds through an initial public offering. These
costs and deposits were written off due to current economic conditions, which
have prevented the completion of Hudson Hotels Trust's initial public offering.


                                       42
<PAGE>

17.      SUBSEQUENT EVENTS:

In February 1999, the Company sold five (5) parcels of land for $1.8 million to
a third party. As a result of the sale, the Company recognized a $1,818,211 loss
on asset valuation at December 31, 1998.

In addition, as of December 31, 1998, the Company failed to make its $250,000
"guaranteed quarterly payment" to a third party for its $5 million contribution
to HH Bridge, L.P. As a result of this non-performance, the independent third
party exercised its right under the agreement to acquire the Company's 41%
limited partnership interest in HH Bridge, L.P. for $1 in January 1999. As a
result of this, the Company recorded a $3,441,490 loss on asset valuation at
December 31, 1998. (See Note 13).

18.      BUSINESS SEGMENTS:

As described in Note 1, the Company operates in two segments: (1) hotel 
owner/operator; and (2) hotel management services and other. Revenues, 
identifiable assets and capital expenditures of each segment are those that 
are directly identified with those operations.

The Company evaluates the performance of its segments based primarily on
earnings before interest, taxes and depreciation and amortization ("EBITDA")
generated by the operations of its Owned Hotels. Interest expense is primarily
related to debt incurred by the Company through its corporate obligations and
collateralized mortgage obligations on its hotel properties. The Company's taxes
are included in the consolidated Federal income tax return of the Company and
are allocated based upon the relative contribution to the Company's consolidated
taxable income/losses and changes in temporary differences.

The following table presents revenues and other financial information by
business segment for the years ended December 31, 1996, 1997 and 1998 (in
thousands):

<TABLE>
<CAPTION>

1998                           HOTEL OPERATIONS   MANAGEMENT & OTHER   ELIMINATION (A)   CONSOLIDATED
----                           ----------------   ------------------   ---------------   ------------
<S>                                <C>                 <C>                <C>               <C>     
Revenues                           $ 55,383            $ 4,993            $ (2,736)         $ 57,640
EBITDA                             $ 15,931            $   674                  --          $ 16,605
Depreciation and amortization      $  5,890            $   240                  --          $  6,130
Interest expense                   $ 13,177            $ 1,003                  --          $ 14,180
Capital expenditures               $  1,775            $   282                  --          $  2,057
Total assets                       $127,205            $66,495            $(51,024)         $142,676
</TABLE>

<TABLE>
<CAPTION>

1997                           HOTEL OPERATIONS   MANAGEMENT & OTHER   ELIMINATION (A)   CONSOLIDATED
----                           ----------------   ------------------   ---------------   ------------
<S>                                <C>                 <C>                <C>               <C>     
Revenues                           $ 36,923            $ 3,615            $ (1,807)         $ 38,731
EBITDA                             $ 10,307            $  (228)                 --          $ 10,079
Depreciation and amortization      $  3,877            $   220                  --          $  4,097
Interest expense                   $  8,314            $   714                  --          $  9,028
Capital expenditures               $  2,479            $   116                  --          $  2,595
Total assets                       $132,731            $74,025            $(54,638)         $152,118
</TABLE>

<TABLE>
<CAPTION>

1996                           HOTEL OPERATIONS   MANAGEMENT & OTHER   ELIMINATION (A)   CONSOLIDATED
----                           ----------------   ------------------   ---------------   ------------
<S>                                <C>                 <C>                <C>               <C>     
Revenues                           $ 11,730            $ 2,898            $   (480)         $ 14,148
EBITDA                             $  2,804            $    85                  --          $  2,889
Depreciation and amortization      $    908            $   114                  --          $  1,022
Interest expense                   $  1,550            $   519                  --          $  2,069
Capital expenditures               $    568            $    73                  --          $    641
Total assets                       $ 92,317            $44,765            $(34,189)         $102,893
</TABLE>

(A)      Eliminations represent inter-company management fees and inter-company 
         receivables/payables and investments in subsidiaries

The following presents the segments' performance measure to the Company's 
consolidated income (loss) before taxes, minority interest, and equity in 
operations of partnerships:

<TABLE>
<CAPTION>
                                                           1998          1997          1996
                                                        ----------    ----------    ----------
<S>                                                     <C>           <C>           <C>
EBITDA
   Hotel Operations                                     $   15,931    $   10,307    $    2,804
   Management and Other                                        674          (228)           85
Interest                                                   (14,180)       (9,028)       (2,069)
Depreciation and Amortization                               (6,130)       (4,097)       (1,022)
Loss on Asset Valuation                                     (5,260)          -             -
Non-recurring costs                                         (4,839)          -             -
Other                                                          (73)          195         1,685
                                                        ----------    ----------    ----------
Income (loss) before income taxes, minority             
  interest, and equity in operations of partnerships    $  (13,877)   $   (2,851)   $    1,483
                                                        ==========    ==========    ==========
</TABLE>

                                       43
<PAGE>

ITEM 9.  CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANTS

On April 22, 1997, the Board of Directors of the Company, upon the
recommendation of the Audit Committee, directed management to engage
PricewaterhouseCoopers LLP for appointment as the Company's principal
accountants to audit the Company's financial statements, as voted during the
Company's annual meeting held on May 29, 1997. This selection followed the
solicitation of proposals for accounting services by the Company from several
accounting firms, and the review of those proposals and the accompanying
presentations. In connection with this designation, the Company's existing
accountants, Bonadio & Co., LLP, were dismissed.

(a)(1)(i)   The Company's former accountants, Bonadio & Co., LLP, were dismissed
            effective April 22,1997.

            (ii)        Bonadio & Co., LLP's reports on the Company's financial
                        statements for the past two years did not contain an
                        adverse opinion or disclaimer of opinion, nor was either
                        such opinion modified as to uncertainty, audit scope, or
                        accounting principles.

            (iii)       The decision to change accounts was adopted by the Audit
                        Committee of the Board of Directors and by the full
                        Board.

            (iv)        There were no disagreements with Bonadio & Co., LLP on
                        any matter of accounting principals or practices,
                        financial statement disclosure, or auditing scope or
                        procedure.

(a)(2)      Effective April 22, 1997, PricewaterhouseCoopers LLP was engaged to
            serve as the Company's principal accountants to audit its financial
            statements. In connection with its solicitation for proposals, the
            Company did not consult with the new accountants regarding either
            (1) the application of accounting principals to a specific completed
            or contemplated transaction, or the type of audit opinion that might
            be rendered on the Company's financial statements, or (2) any
            disagreements with the Company's prior accountants.


                                       44
<PAGE>

                                    PART III

As described below, certain information appearing in the Company's Proxy
Statement to be furnished to shareholders in connection with the 1999 Annual
Meeting, is incorporated by reference in this Form 10-K Annual Report.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Certain additional information is incorporated by reference to the "Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance" sections of the
Company's Proxy Statement to be furnished to shareholders in connection with the
1999 Annual Meeting. Information regarding the Company's Executive Officers is
included below.

Name and Title                           Age          Business Experience

E. Anthony Wilson, Chairman of the        54    E. Anthony Wilson serves as the
                                                Chairman of the Board and Chief
                                                Board and Chief Executive
                                                Officer Executive Officer of the
                                                Company. Mr. Wilson was a
                                                co-founder of the Company, has
                                                served as its Chairman of the
                                                Board since its inception, and
                                                as Chief Executive Officer since
                                                January 1993. In 1984 he
                                                co-founded Hudson Hotels Corp.
                                                which was acquired by the
                                                Company in June 1992. In
                                                addition to his hotel
                                                experience, Mr. Wilson was a
                                                founder of S&W Restaurants, and
                                                of Mid-America Properties, which
                                                is the owner of eight Chi Chi's
                                                Restaurants, and was a partner
                                                and developer of the Ocean Club,
                                                a night club and restaurant, and
                                                Union Square, a theme
                                                restaurant. He has over 25 years
                                                experience in the hospitality
                                                and real estate industries as a
                                                developer, owner and manager. As
                                                general partner of Wilson
                                                Enterprises, L.P., a real estate
                                                development firm in Rochester,
                                                New York, he has developed a
                                                significant amount of office,
                                                warehouse, apartments and
                                                related facilities for tenants,
                                                including Xerox Corporation,
                                                Eastman Kodak, Rochester
                                                Telephone Corp., R.T. French,
                                                Champion Products, the United
                                                States Government and other
                                                national corporations. Mr.
                                                Wilson is an alumnus of the
                                                School of Business at Indiana
                                                University. He has served as the
                                                Chairperson of the Strong
                                                Memorial Hospital Children's
                                                Fund, and has been a Director of
                                                the First National Bank of
                                                Rochester, Erdle Perforating
                                                Corp., and the Rochester Family
                                                of Mutual Funds.

Michael T. George, President and          40    Michael T. George serves as the
                                                Company's President and Chief
                                                Chief Operating Officer
                                                Operating Officer. Mr. George is
                                                a Certified Hotel Administrator
                                                with approximately 17 years of
                                                experience in the hotel
                                                industry. From 1997 to 1998, he
                                                served as Chief Operating
                                                Officer of Sunstone Hotel
                                                Properties, the affiliated
                                                lessee of Sunstone Investors,
                                                Inc., a hotel REIT located in
                                                San Clemente, California that
                                                owns hotels under various brand
                                                names, including Marriott,
                                                Hilton, Sheraton, Holiday Inn,
                                                Hawthorn Suites, Residence Inn,
                                                Courtyard Inn by Marriott,
                                                Hampton Inn and Best Western.
                                                From 1995 to 1997, Mr. George
                                                served as Senior Vice President
                                                of Operations for Capstar Hotels
                                                Company located in Washington,
                                                D.C. From 1990 to 1995, Mr.
                                                George served as Vice President
                                                of Operations and ultimately as
                                                Chief Operating Officer for
                                                Devon Hotels Ltd. in Montreal.
                                                Prior to that time, Mr. George
                                                served in various capacities
                                                with Radisson Hotels, Hilton
                                                Hotels and Sheraton Hotels. In
                                                addition, for various durations
                                                over the last six years Mr.
                                                George has served on franchise
                                                operations boards for the
                                                national hotel chains Marriott,
                                                Westin and Hilton. Mr. George
                                                graduated from the Purdue Hotel
                                                and Restaurant Management School
                                                in 1981.


                                       45
<PAGE>

John M. Sabin, Executive Vice             44    John M. Sabin serves as the
President and Chief Financial Officer           Company's Executive Vice
                                                President and Chief Financial
                                                Officer since May 1998. From
                                                February 1997 to May 1998, Mr.
                                                Sabin served as Senior Vice
                                                President and Treasurer of
                                                Vistana, Inc., a publicly-owned
                                                company that owns, operates and
                                                develops time share resorts, and
                                                served as Chief Financial
                                                Officer of Vistana from February
                                                1997 to November 1997. From June
                                                1996 to February 1997, Mr. Sabin
                                                served as Vice President -
                                                Finance of Choice Hotels
                                                International, Inc. From June
                                                1995 to February 1997, Mr. Sabin
                                                also served as Vice President -
                                                Mergers and Acquisitions of
                                                Choice Hotels International,
                                                Inc., and, from December 1993 to
                                                October 1996, he served as Vice
                                                President - Finance and
                                                Assistant Treasurer of Manor
                                                Care, Inc., the former parent of
                                                Choice Hotels International,
                                                Inc. From 1990 to December 1993,
                                                Mr. Sabin served as Vice
                                                President - Corporate Mergers
                                                and Acquisitions of Marriott
                                                Corporation. In addition, Mr.
                                                Sabin is a Director and
                                                non-executive Chairman of the
                                                Board of Competitive
                                                Technologies, Inc., a
                                                publicly-owned technology
                                                licensing and transfer company.
                                                Mr. Sabin received B.S., M.Acc.
                                                (Masters of Accountancy) and
                                                M.B.A. degrees from Brigham
                                                Young University and a J.D.
                                                degree from the J. Reuben Clark
                                                Law School at Brigham Young
                                                University.

Ralph L. Peek, CPA, Vice President        50    Ralph L. Peek has been a general
and Treasurer                                   partner of E. Anthony Wilson in
                                                Wilson Enterprises, L.P. since
                                                1978 and he has been involved
                                                with the Company and has served
                                                as a Director of the Company
                                                since it inception in 1987. As
                                                of December 31, 1996 Mr. Peek
                                                was named Vice President and
                                                Treasurer of the Company. Mr.
                                                Peek is also a certified public
                                                accountant and received his
                                                degree from the Rochester
                                                Institute of Technology.

Taras M. Kolcio, CPA, Vice President      33    Taras M. Kolcio serves as the
and Controller                                  Company's Vice President and
                                                Controller. Mr. Kolcio joined
                                                the Company as its Controller in
                                                June 1993, and in November 1996
                                                was named Chief Financial
                                                Officer, a position he held
                                                until May 1998. Prior to that he
                                                was employed at Deloitte &
                                                Touche for six years. Mr. Kolcio
                                                received his Bachelor of Science
                                                degree in Business
                                                Administration from the State
                                                University of New York at
                                                Buffalo, and is licensed as a
                                                certified public accountant in
                                                the State of New York. Mr.
                                                Kolcio is a member of the New
                                                York State Society of Certified
                                                Public Accountants.

ITEM 11. EXECUTIVE COMPENSATION

This information is incorporated by reference to the "Executive Compensation"
section of the Company's Proxy Statement to be furnished to shareholders in
connection with the 1999 Annual Meeting.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

This information is incorporated by reference to the "Principal Shareholders"
section of the Company's Proxy Statement to be furnished to shareholders in
connection with the 1999 Annual Meeting.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH WILSON ENTERPRISES, L.P. AND E. ANTHONY WILSON

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, the Company's Chairman and Chief
Executive Officer and Ralph L. Peek, the Company's Treasurer, 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.


                                       46
<PAGE>

Wilson Enterprises, L.P. also shares office space with the Company and
reimburses the Company for the direct costs that are associated therewith.
During 1998, Wilson Enterprises, L.P. reimbursed the Company $1,200 for such
costs and during 1997 the Company received $4,829 of reimbursement for such
costs.

As of December 31, 1998, E. Anthony Wilson was indebted to the Company in the
amount of $114,935. This amount represents the cumulative unpaid advances made
by the Company to Mr. Wilson. These advances have been made over the years and
have been periodically repaid.

TRANSACTIONS WITH M,L,R&R PARTNERSHIP

M,L,R&R is a New York partnership owned by members of the Sands family. M,L,R&R
and its partners are together the owners of greater than 10% of the Company's
outstanding common stock as reflected on Form 13D filed by them. In addition,
Richard 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. The Company has entered into a number of transactions with
M,L,R&R or its affiliates, as follows:

HUDSON HOTELS TRUST - In May 1998, Hudson Hotels Trust, a newly-formed Maryland
real estate investment trust, borrowed $2.0 million in seed capital financing
from M,L,R&R to finance its startup 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. In addition, the loan was collateralized by
the pledge of 666,666 shares of common stock of the Company. Subsequent to
December 31, 1999 this loan was converted to 666,666 shares of common stock in
the Company.

ACQUISITION OF HH BRIDGE, L.P. PROPERTIES - In August 1998, the Company
organized a Virginia limited partnership, HH Bridge, L.P., to acquire three
properties. The Company contributed $3.6 million to the capital of the
Partnership for a 1% general partnership interest and a 41.2% limited
partnership interest M,L,R&R contributed $5.0 million for a 57.8% limited
partnership interest. The partnership agreement provided that: M,L,R&R receive a
$250,000 guaranteed payment each quarter; Hudson receive all income of the
partnership in excess of that guaranteed return; M,L,R&R had the right to
require the Company to purchase its partnership interest on August 14, 1999 for
$6.0 million; M,L,R&R had the right to acquire Hudson's interest in the
partnership for $1.00 if: (1) the guaranteed return is not paid, or (b) the
Company is 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 $26.6 million.

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 AND SALE OF CERTAIN ASSETS - In December 1998 and January 1999 Hudson
transferred properties and a lease to companies which are affiliates of M,L,R&R.
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: (i) the lease of the Inn on the Lake,
owned by L,R,R&M L.L.C. by Canandaigua Hotel Corp., a subsidiary of Hudson, and
entered into a management contract for that property; and (ii) H.H. Properties
Southwest, Inc., a subsidiary of Hudson, sold five (5) parcels of vacant land in
Texas and Arizona to Transport Associates.

The Company also was unable to make the guaranteed payment due January 1, 1999
to M,L,R&R and M,L,R&R exercised its right to acquire the Company's limited
partnership interest in HH Bridge, L.P. The Company received or retained
approximately $2.3 million in cash from these transactions.

TRANSACTIONS WITH BOYLAN, BROWN, CODE, FOWLER, VIGDOR & WILSON, LLP

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 1998, the Company paid approximately $202,805 to the law firm in
legal fees. In addition, Mr. Lockwood was a limited partner in two of the
limited partnerships acquired on August 28, 1996 and received 8,233 shares in
exchange for his partnership interests.


                                       47
<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A)      The following exhibits are filed as part of this Form 10-K

         (1)      Financial Statements

                  The response to this portion of Item 14 is submitted under
                  Item 8 of this Report on Form 10-K.

         (2)      Financial Statement Schedules

                  All schedules for which provision is made in the applicable
                  accounting regulations of the Securities and Exchange
                  Commission are not required under the related instructions or
                  are inapplicable and therefore have been omitted.

         (3)      Exhibits

                  Any shareholder who desires a copy of the following Exhibits
                  may obtain a copy upon request from the Company at a charge
                  that reflects the reproduction cost of such Exhibits. Requests
                  should be made to the Secretary, Hudson Hotels Corporation,
                  300 Bausch & Lomb Place, Rochester, NY 14604.

EXHIBIT NUMBER

         3.1      Restated Certificate of Incorporation of Registrant (a)

         3.2      By-Laws of Registrant (a)

         3.3      Amendment to Certificate of Incorporation to authorize the
                  issuance of 10,000,000 shares of Preferred Stock, with a par
                  value of $.001 (f)

         3.4      Amendment to Certificate of Incorporation stating the number,
                  designation, relative rights, preferences and limitations of
                  Series A Preferred Shares, with a par value of $.001, to be
                  issued (f)

         3.5      Amendment to Certificate of Incorporation changing the
                  Company's name to Hudson Hotels Corporation (i)

         4.1      Form of Stock Purchase and Loan Agreement, dated September 19,
                  1988, between the Registrant, the Stockholders named therein
                  and the Investors identified in the amended Schedule of
                  Investors attached thereto (a)

         4.2      Form of Promissory Note issued on September 19, 1988 to each
                  Investor identified on the amended Schedule of Investors
                  included with Exhibit 4.1 (a)

         4.3      Form of Registration Agreement, dated September 19, 1988,
                  between the registrant and each Investor identified on the
                  amended Schedule of Investors included with Exhibit 4.1 (a)

         4.4      Registrant's form of Non-Statutory Stock Option Agreement,
                  attached to which is an Option Schedule setting forth the
                  material terms of options granted by the Registrant pursuant
                  thereto (a)

         4.5      Line of Credit Note and Subordination Agreement between the
                  Registrant and Hudson Hotels Corp. dated December 28, 1988 (a)

         4.6      Convertible subordinated debenture due February 1, 2004, with
                  the Bond Fund for Growth (f)

         4.7      Stock Exchange Agreement: 30,500 shares of Common Stock for
                  16,495 shares of Series A Preferred Stock (f)

         4.8      Convertible subordinated debenture due February 1, 2005, with
                  the Bond Fund for Growth (g)


                                       48
<PAGE>

         4.9      Convertible Subordinated Debenture due July 1, 2001 with
                  Oppenheimer Bond Fund for Growth (k)

         9        Voting Trust Agreement (not applicable)

         10.1     Franchise Agreement, dated January 10, 1989, between the
                  Registrant and Lehigh Hotel Corp. (a)

         10.2     Employment Agreement, dated December 1, 1988, between the
                  Registrant and Loren G. Ansley (a)

         10.3     Agreement, dated June 1, 1988, between Hudson Hotels Corp. and
                  the Registrant (a)

         10.4     Agreement, dated April 11, 1988, between the Registrant and
                  Petrus II (a)

         10.5     Master Franchise Agreement, dated February 13, 1991, between
                  the Registrant and Essex Microtel International Lodging,
                  Inc.(b)

         10.6     Exclusive Development Agreement, dated September 30, 1991,
                  between the Registrant and S&E Hospitality Partnership (c)

         10.7     Form of Management Agreement (d)

         10.8     Partnership Agreement of Crestmount Associates (d)

         10.9     Partnership Agreement of Brookwood Hotel Properties (d)

         10.10    Partnership Agreement of Montgomery Group (d)

         10.11    Partnership Agreement of Microtel Leray L.P. (d)

         10.12    Partnership Agreement of Lehigh Hotel Properties (d)

         10.13    Partnership Agreement of Delray Beach Hotel Properties Ltd.
                  (d)

         10.14    Warrant for the Purchase of 125,000 Shares of Common Stock
                  issued to Ladenburg, Thalmann & Co. Inc. (e)

         10.15    Warrant for the Purchase of 25,000 Shares of Common Stock
                  issued to William R. Lerner (e)

         10.16    First Amendment to Master Franchise Agreement between the
                  Company and Essex Microtel International Lodging, Inc. dated
                  March 29, 1993 (e)

         10.17    Agreement between Microtel and Jennifer L. Ansley, as
                  Executrix of the Estate of Loren G. Ansley (f)

         10.18    Termination of Exclusive Development Agreement (f)

         10.19    Second Amendment to Master Franchise Agreement between the
                  Company and Essex Microtel International Lodging, Inc., dated
                  April 29, 1994 (f)

         10.20    1993 Non-Statutory Employee Stock Option Plan (f)

         10.21    Lease agreement between L,R,R&M, L.L.C., and Canandaigua Hotel
                  Corp. (g)

         10.22    Purchase of remaining partnership interest in Crestmount
                  Associates (g)

         10.23    Sale of land to Microtel Partners 1995-I, L.P. (g)

         10.24    Joint Venture Agreement Between Microtel Franchise and
                  Development Corporation and US Franchise Systems, Inc. (h)


                                       49
<PAGE>

         10.25    Termination of Master Franchise Agreement

         10.26    Three Party Agreement Between Microtel Franchise and
                  Development Corporation, Stonehurst Capital, Inc. and Essex
                  Investment Group, Inc.

         10.27    Form of Offer Letter, Transfer Agreement and List of Investors
                  (j)

         10.28    Agreement of Purchase and Sale, as amended for the acquisition
                  of the SB Motel Corp. portfolio (l)

         10.29    Hotel Asset Purchase Agreement between the Company and Equity
                  Inns Partnership, L.P. (m)

         10.30    Promissory Note between the Company and Equity Inns
                  Partnership, L.P. (m)

         10.31    Guaranty between the Company and Equity Inns Partnership, L.P.
                  (m)

         10.32    Pledge Agreement between the Company and Equity Inns
                  Partnership, L.P. (m)

         10.33    Amended and Restated Mezzanine Loan Agreement (m)

         10.34    Employment Agreement (Wilson)

         10.35    Employment Agreement (George)

         10.36    Employment Agreement (Sabin)

         11       Statement re: Computation of Per Share Earnings

         18       Letter on Accounting Change for Revenue Recognition of
                  Franchise Fees (e)

         21       Subsidiaries of the Registrant

         24       Power of Attorney (a)

         27       Financial Data Schedule

         28.1     Form of Consulting Agreement entered into between the
                  Registrant and the Underwriter (a)

         28.2     Form of Employee Stock Plan adopted by the Registrant (a)

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

         (a)      Previously filed as part of, and hereby incorporated by
                  reference to, the Exhibits in the Company's Registration
                  Statement on Form S-18 (File Number 33-26780-NY), as amended
                  by Amendment No. 1 (The "Registration Statement")

         (b)      Filed as an Exhibit to the Company's Form 10-K Annual Report
                  for the year ended March 31, 1991, and incorporated hereby by
                  reference

         (c)      Filed as an Exhibit to the Company's Form 10-K Annual Report
                  for the year ended March 31, 1992, and incorporated hereby by
                  reference

         (d)      Filed as an Exhibit to the Company's Form 8-K Current Report
                  dated June 26, 1992, and incorporated hereby by reference

         (e)      Filed as an Exhibit to the Company's Form 10-KSB Annual Report
                  for the year ended March 31, 1993

         (f)      Filed as an Exhibit to the Company's Form 10-KSB Annual Report
                  for the year ended March 31, 1994


                                       50
<PAGE>

         (g)      Filed as an Exhibit to the Company's Form 10-KSB Annual Report
                  for the year ended March 31, 1995

         (h)      Filed as an Exhibit to the Company's Form 10-QSB Quarterly
                  Report for the Quarter Ended September 30, 1995

         (i)      Filed as an Exhibit to the Company's Form 10-QSB Quarterly
                  Report for the quarter ended June 30, 1996

         (j)      Filed as an Exhibit to the Company's Form 8-K Current Report
                  dated August 28, 1996

         (k)      Filed as an Exhibit to the Company's Form 10-QSB Quarterly
                  Report for the quarter ended September 30, 1996

         (l)      Filed as an Exhibit to the Company's Form 8-K Current Report
                  dated November 27, 1996

         (m)      Filed as an Exhibit to the Company's 8-K Current Report dated
                  October 31, 1997

(B)      Form 8-K - The following report was filed on Form 8-K:

          DATE OF REPORT                            ITEM
          --------------                            ----

          April 22, 1997                    Change in Accountants

          October 31, 1997                  Acquisition of Assets


                                       51
<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: April 14, 1999                  By:      /s/ E. Anthony Wilson
                                           _____________________________________
                                                    E. Anthony Wilson
                                                    Chief Executive Officer,
                                                    President and Director


Dated: April 14, 1999                  By:      /s/ John M. Sabin
                                           _____________________________________
                                                    John M. Sabin
                                                    Chief Financial Officer
                                                    and Executive Vice President

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:

<TABLE>
<CAPTION>
SIGNATURE                                  TITLE                            DATE
---------                                  -----                            ----
<S>                                <C>                                 <C> 
PRINCIPAL EXECUTIVE OFFICER:

/s/ E. Anthony Wilson              Chairman of the Board,
________________________________   Chief Executive Officer,            April 14, 1999
E. Anthony Wilson                  President and Director
                                   
PRINCIPAL FINANCIAL OFFICER:

/s/ John M. Sabin
________________________________   Chief Financial Officer and         April 14, 1999
John M. Sabin                      Executive Vice President

PRINCIPAL ACCOUNTING OFFICER:

/s/ Taras M. Kolcio
________________________________   Chief Accounting Officer and        April 14, 1999
Taras M. Kolcio                    Vice President

/s/ Ralph L. Peek
________________________________   Vice President, Treasurer           April 14, 1999
Ralph L. Peek                      and Director

/s/ Michael T. George
________________________________   President, Chief Operating Officer  April 14, 1999
Michael T. George                  and Director

/s/ Michael Cahill
________________________________
Michael Cahill                     Director                            April 14, 1999

/s/ Robert Fagenson
________________________________
Robert Fagenson                    Director                            April 14, 1999
</TABLE>


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