<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


<PAGE>


                                     PART 1

                         ITEM 1. DESCRIPTION OF BUSINESS

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

    Certain matters discussed in this Annual Report on Form 10-KSB 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", which offers downsized rooms with higher quality furnishings at
rates below those available at competing national lodging chains. The Company
was incorporated in New York State on June 5, 1987. The Company provides
development, construction, operations, marketing, accounting and professional
development services for hotel/motel investors.

    On October 5, 1995, the Company signed an exclusive Joint Venture
Agreement with US Franchise Systems, Inc. ("USFS"), in which USFS purchased
worldwide franchising and administration for the Microtel franchise chain. As
a result of the Joint Venture Agreement, the Company has focused its efforts
on acquiring, developing, building and managing various hotel products,
including Microtels. During 1996 and 1997, the Company continued with a
significant expansion and development program, as described in "Recent
Developments" below.

    The Company has retained the right to franchise and construct for its
account a total of fifty (50) Microtel Inn properties and ten (10) "suite"
properties and to receive all royalties on fifty (50) Microtel Inns and ten (10)
suites. Therefore, the Company retains all royalties on Microtel Inns existing
prior to the execution of the Joint Venture Agreement and the royalties
attributable to the subsequently developed Microtel Inns previously cited. In
addition, the Company will receive royalty payments from properties franchised
by USFS consisting of 1% of gross room revenues from hotels 1-100; .75% from
hotels 101-250; and .5% above 250 units. As of December 31, 1997, the Company
has the right to franchise and construct twenty-two (22) Microtel Inn properties
and ten (10) suite properties.

    As a result of this agreement, the Company is no longer responsible for
administration of the Microtel franchise. This included regulatory compliance
with the Federal Trade Commission ("FTC"), Microtel service marks, franchise
sales, quality assurance inspections and franchise administration.

    As of December 31, 1997, the Company managed forty-one hotel properties
located primarily in the Northeast and Southeast United States. Of the forty-one
(41) hotel properties under management, twenty-six (26) are owned directly by
the Company. The properties range from super budget "Microtel Inns" to
full-service hotels. It competes for management contracts with other hotel
management companies.

    The management contracts are set forth on variations of the Company's
standard form contract, for terms of one 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 as a percentage of gross
revenues.


                                       2
<PAGE>


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

<TABLE>
<CAPTION>

                                                                                             PERCENT OF COMPANY'S
                                                                           NUMBER OF                 TOTAL
                FRANCHISE                      NUMBER OF HOTELS           GUEST ROOMS             GUEST ROOMS
                ---------                      ----------------           -----------             -----------

                  OWNED

<S>                                               <C>                      <C>                     <C>
Fairfield Inn                                          8                      953                    20.6%

Hampton Inns                                           9                    1,088                    23.5%

Comfort Inn                                            2                      184                     4.0%

Econo Lodge                                            1                       65                     1.4%

Red Roof Inn                                           1                      148                     3.2%

Cricket Inn                                            1                      150                     3.3%

Independent                                            4                      460                    10.0%

     MANAGED WITH FINANCIAL INTEREST

Microtel Inn                                           8                      842                    18.2%

Econo Lodge                                            1                      102                     2.2%

Independent                                            1                      134                     2.9%

              OTHER MANAGED

Microtel Inn                                           3                      305                     6.6%

Comfort Inn                                            2                      193                     4.1%
                                                     ----                   -----                     ----

                 TOTAL                                41                    4,624                     100%
                                                     ===                    =====                     ====
</TABLE>


    The Company has a minority equity position, either as a general or a limited
partner, in seven (7) entities which 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.

    In November 1994, the Company provided a $250,000 cash deposit to secure a
ten year operating lease and management contract on a full-service hotel located
in Canandaigua, New York, from L, R, R & M, L.L.C. In June 1996, the Company
provided an additional $200,000 cash deposit, which extends the lease term an
additional eighteen months and provides additional security on the renovations
performed from November 1995 through May 1996.

RECENT DEVELOPMENTS

In 1997, the Company continued with its significant expansion and development
program. Beginning in 1996, the Company acquired the remaining partnership
interests 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 $60,400,000, determined
by arms-length negotiation with SB Motel Corp., after analysis and valuation
by the Company 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 $2,400,000, by issuing the Company's
subordinated promissory note in the amount of $2,900,000 to SB Motel Corp.
(which was repaid by the Company on October 31, 1997), and by paying the
balance of $55,100,000 in cash. The cash portion of the purchase price was
obtained by (a) placing a $37,470,000 mortgage issued by Nomura Asset Capital
Corporation on the properties purchased (b) the Company securing $17,000,000
of mezzanine financing from Nomura Asset Capital Corporation and (c) the
Company utilizing $530,000 of its available capital.


                                       3
<PAGE>

    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 properties was $46,250,000, 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 (maturing October 31, 1999) 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 million mortgage issued by
Nomura Asset Capital Corporation and (b) by the Company securing $18,000,000 of
mezzanine financing from Nomura Asset Capital Corporation.

HOTEL LODGING INDUSTRY

    Over the past several years, the hospitality lodging industry has seen
increases in occupancy, ADR (average room rate) and RevPAR (revenue per
available room) since its lowest point in 1992. According to Smith Travel
Research, hotel room demand has outpaced supply from 1992 through 1996. But,
through the first three quarters of 1997, room supply has exceeded demand.
Supply has increased as a result of favorable financing, which has become
available to every level of hotel operator.

    Currently, the majority of properties owned 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 under 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; 1996 and 1997 saw a decline in occupancy in both
years, but room rate and RevPAR continued to increase. ADR percentage growth has
decreased compared to prior years. This is a result of 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.



                                       4
<PAGE>


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 the results obtained from Smith Travel Research.

                                    OCCUPANCY

                                                       U.S. LIMITED SERVICE
   YEAR               COMPANY OWNED HOTELS              ECONOMY/MIDPRICED
   ----               --------------------              -----------------
1993                          N/A                                66.3%
1994                          N/A                                67.3%
1995                          N/A                                67.1%
1996                         62.6%                               65.2%
1997                         65.2%                               63.8%


                                       ADR

                                                       U.S. LIMITED SERVICE
   YEAR               COMPANY OWNED HOTELS              ECONOMY/MIDPRICED
   ----               --------------------              -----------------
1993                          N/A                               $44.37
1994                          N/A                               $46.50
1995                          N/A                               $49.06
1996                         $62.96                             $51.87
1997                         $56.51                             $54.01

                                     REVPAR

                                                       U.S. LIMITED SERVICE
   YEAR               COMPANY OWNED HOTELS              ECONOMY/MIDPRICED
   ----               --------------------              -----------------
1993                          N/A                               $29.43
1994                          N/A                               $31.27
1995                          N/A                               $32.91
1996                         $39.39                             $33.81
1997                         $36.82                             $34.46


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. Over the past two years, the Company has acquired twenty-one (21)
hotels. The Company intends to utilize its operating, marketing and financial
systems resources to enhance operating performance by maximizing revenues and
reducing operating expenses.



                                       5
<PAGE>

    DEVELOP AND BUILD MICROTEL INNS ON SITES ACQUIRED. Currently, the Company
owns five (5) parcels on which it plans to develop and build Microtel Inns
(see Item 2, "Description of Property", for a detailed description of sites.)
The Company believes that by developing and building Microtel Inns, it will
increase revenues through hotel operating revenues, franchise royalties and
management fees. The Company has secured a financing commitment from an
established hospitality lender and it is anticipated that construction will
begin during 1998.

    OPPORTUNISTIC ACQUISITION OF HOTELS. The Company intends to capitalize on
its strength as an owner/operator by continuing to identify and pursue the
acquisition of hotels. Over the past two years, the Company acquired twenty-one
(21) hotels for approximately $40,750 per room, totaling $106,650,000. 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 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.

COMPANY PROPERTIES

    The Company currently owns twenty-six (26) hotel properties in addition to
having a minority equity interest in entities which own hotel properties. The
Company also has five (5) parcels of land under development, which it owns, and
one parcel of land held for sale. The Company has and will continue to develop
various hotel products, including Microtel Inns. See Item 2 for a detailed
description of each property.

FRANCHISING

    As a result of the Joint Venture Agreement with USFS the Company no
longer franchises Microtel Inns, and accordingly, is no longer subject to
regulation by the Federal Trade Commission or the individual (50) states,
with varying state requirements.

SERVICE MARKS

    As a result of the Joint Venture Agreement with USFS in 1995, 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".

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

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.



                                       6
<PAGE>

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 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.

EMPLOYEES

    As of December 31, 1997, the Company had 954 full-time employees and 258
part-time employees, of which 1,082 were compensated on an hourly basis. There
are 28 employees who work at the corporate headquarters.

    YEAR 2000

         The Company utilizes various servers and PC based computer software
packages as tools in running its daily operations. Management does not believe
that the Company will encounter any material problems with this software as a
result of the change of the millenium on January 1, 2000, based on
communications with software and other key suppliers.



                                       7
<PAGE>


                       ITEM 2. DESCRIPTION OF PROPERTIES

    The Company's headquarters are located at One Airport Way, Suite 200,
Rochester International Airport, Rochester, New York 14624. The 6,185 square
feet of office space is leased through August 1998. The Company is currently in
the process of evaluating its needs and looking for alternate office space.

    The Company owns six (6) parcels of land, which are either being held for
sale to hotel/restaurant developers or development by the Company. The
investment policy is determined by Company management and can be changed without
a vote of security holders.

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

LAND HELD FOR SALE

    TONAWANDA, NEW YORK - This land is north of Buffalo, New York, off
Interstate 290 and is in proximity of major businesses, universities and
shopping centers. The Company owns 8.13 acres at a cost of $780,822 or $96,042
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).

LAND HELD FOR DEVELOPMENT

    ARLINGTON, TEXAS - This land is between the cities of Dallas and Fort Worth,
off State Highway 360, and is in proximity of major businesses, an amusement
park, Arlington Stadium and shopping centers. The Company owns 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, and is in proximity of major businesses, universities and
airport. The Company owns 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. It is in proximity of major businesses and shopping
centers. The Company owns 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 and is in proximity of major businesses and shopping centers. The
Company owns 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 and is in
proximity of major businesses. The Company owns 2.02 acres, at a cost of
$472,932 or $234,124 per acre. The parcel is zoned for hotel development.

    In 1997, the Company sold a parcel of land located at Strawberry Plains
Pike, Tennessee, for $399,659. The Company recognized a gain of $28,812 based
on its cash proceeds, less the cost of land and its related improvements.

    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, 1997, was
$3,168,520.



                                       8
<PAGE>

    950 JEFFERSON ASSOCIATES, L.P. - This limited partnership operates a 102
room Econo Lodge which is located in Henrietta, New York. The Company's
ownership percentage totals 2%. The hotel was built in 1984 and is in good
condition. The partnership has a first mortgage with a balance of $2,599,499 at
December 31, 1997.

    MICROTEL GATLINBURG L.P. - This limited partnership operates a 102 room
Microtel Inn which 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 $2,371,453 at December 31, 1997.

    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 $1,519,018 at December 31, 1997.

    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 $1,100,000 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.

    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. The partnership has an
aggregate first mortgage on the six (6) properties, with a balance of
$15,700,826 at December 31, 1997.

    MICROTEL PARTNERS 1995-I, L.P. - This limited partnership owns 2.87 acres of
land in Tonawanda, New York, on which it currently plans to build a suite hotel.
The project is in the development stage at December 31, 1997. The Company's
ownership percentage is 50%.

    WATERTOWN HOTEL PROPERTIES II, L.P. - This limited partnership holds a
$1,100,000 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 10% per annum. The entire principal
amount is due October 31, 1998. The Company's general partnership interest
totals 1%.



                                       9
<PAGE>

    The Company, through its 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 $55,468,137 at
December 31, 1997. As part of the first mortgage agreement with Nomura, the
Company is required to reserve 5% of operating revenues, 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                                                   122

Fairfield Inn                        Cary, North Carolina                                              125

Fairfield Inn                        North Charleston, South Carolina                                  119

Fairfield Inn                        Columbia, South Carolina                                          129

Fairfield Inn                        Durham-Research Triangle Park, North Carolina                      96

Fairfield Inn                        Richmond, Virginia                                                124

Fairfield Inn                        Statesville, North Carolina                                       118

Fairfield Inn                        Wilmington, North Carolina                                        120

Brookwood Inn                        Durham, North Carolina                                            150

Red Roof Inn                         Raleigh, North Carolina                                           148

Brookwood Inn                        Charlotte, North Carolina                                         132
</TABLE>


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


                                       10
<PAGE>


    The Company, through its 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 $29,970,353
at December 31, 1997. As part of the first mortgage agreement with Nomura, the
Company is required to reserve 5% of operating revenues, 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                              112

Hampton Inn                             Albuquerque, New Mexico                                  125

Hampton Inn                             Greensboro, North Carolina                               121

Hampton Inn                             Eden Prairie, Minnesota                                  122

Hampton Inn                             San Antonio, Texas                                       123

Hampton Inn                             Amarillo, Texas                                          116

Hampton Inn                             Atlanta, Georgia                                         129

Hampton Inn                             Syracuse, New York                                       117
</TABLE>



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

         The Company, through its wholly-owned subsidiary HH Properties-VB,
Inc., owns a 150 unit Cricket Inn in Virginia Beach, Virginia. As of December
31, 1997, the property was encumbered by a line of credit with a balance of
approximately $412,000. This property is considered in good condition. For a
complete narrative description of this property, please refer to the Company's
8-K filing dated December 12, 1996.



                                       11
<PAGE>


                           Item 3. Legal Proceedings

On October 26, 1990, a complaint was filed in Palm Beach County Circuit Court,
Florida, by Seagate Beach Quarters, Inc., a Florida corporation (Bearing Case
#90-12358-AB), seeking damages plus interest and costs, against Rochester
Community Savings Bank, ("RCSB"), a New York based bank, Shore Holdings, Inc.
("SHORE"), a subsidiary of RCSB and naming Hudson as a co-defendant. On December
6, 1990, Delray Beach Hotel Properties Limited, a Florida limited partnership
controlled by Hudson Hotels, purchased the Seagate Hotel and Beach Club from
RCSB's subsidiary, SHORE. The purchase contract included an indemnification of
Hudson Hotels against any action resulting from previously negotiated contracts
between RCSB's subsidiaries and third-parties. Case #90-12358-AB contained
allegations that RCSB's subsidiary, SHORE, defaulted in its obligations under a
Contract for Purchase and Sale, dated August 16, 1990, and failed to go forward
with the transaction due to alleged tortious negotiations between RCSB and
Hudson. On March 17, 1994, the Court granted Summary Judgment in favor of RCSB
and Hudson Hotels which judgment was appealed by Seagate. The Fourth District
Court of Appeal in Florida affirmed the summary judgment on RCSB and reversed
the summary judgment granted in favor of Hudson, remanding the action to Circuit
Court for further consideration. On August 15, 1994, Seagate proceeded to trial
against SHORE in case #90-12358-AB. During the course of the trial, Seagate took
a voluntary dismissal of their action against SHORE. On September 8,1994,
Seagate refiled its lawsuit against SHORE and joined Delray Beach Hotel
Properties Limited, through its general partner, Delray Beach Hotel Corp.
(bearing Case #94-6961-AF). The new case against SHORE was brought essentially
on the same facts as stated above. The claim against Delray Beach Hotel
Properties Limited was identical to the conspiracy and tortious interference
with a business relationship claim currently existing against Hudson Hotels. On
January 27, 1995, the Court issued an Order dismissing the Amended Complaint as
to Delray Beach Hotel Properties Limited. The Circuit Court has consolidated the
case against Hudson Hotels (Case #90-12358-AB) and the case against SHORE (Case
#94-6961-AF) and it is anticipated those suits will go to trial in early 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 damages and costs against Quality Inn International, Choice
Hotels International, and naming Hudson as a co-defendant. The requested relief
in this case, John Miranda and Susan Miranda and Christopher Miranda vs. Quality
Inns International Inc., Choice Hotels International Inc., Ridge Road Hotel
Properties, Ridge Road Hotel Properties d/b/a Comfort Inn, a/k/a Comfort Inn
West, Hudson Hotels Corp., and Jennifer L. Ansley, as Executrix of the Estate of
Loren G. Ansley, was based on allegations that John Miranda, while staying at
the Comfort Inn, stepped on a needle, and claims negligence and lack of due care
on the part of the defendants. This case is being diligently defended by the
insurance carrier of Ridge Road Hotel Properties and Hudson. The Company
believes that it has adequate insurance for any potential loss.

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

US Franchise Systems, Inc. ("USFS") has informed Hudson Hotels Corporation that
USFS will claim indemnity under the Joint Venture Agreement for any liability to
USFS arising out of the following suit: Plaintiff Larry Owens, a guest in the
process of registering at the Birmingham Microtel Inn, claims damages arising
out of a gun shot wound to the buttocks, which occurred during a robbery of the
hotel. The claim is based upon plaintiff's assertion that the hotel owner had a
duty to warn potential guests that a robbery was in progress. Hudson does not
own or manage this hotel. USFS was named in the lawsuit as franchisor of
Microtel Inns. Hudson's liability under this claim is being defended by the
hotel's insurance company.


                                       12
<PAGE>

On January 16, 1998, the Company was served with a complaint alleging
discrimination based upon the gender of the plaintiff and sexual harassment. The
plaintiff is a former employee of S&W Restaurant, Inc., the company which
operates the restaurant in the Brookwood Inn in Pittsford, New York. The Company
is in the process of investigating the facts surrounding the allegations in the
complaint, and preparing its answer. The ultimate outcome of this litigation
cannot be determined at this time.

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.



                                       13
<PAGE>

           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,
1997 to a vote of the Company's security holders, through the solicitation of
proxies or otherwise.



                                       14
<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, as reported by the National Quotation Bureau, Inc.

<TABLE>
<CAPTION>

                  TRANSITION PERIOD ENDED DECEMBER 31, 1996

                                                                                  HIGH           LOW
<S>                                                                             <C>             <C>
                  First Quarter (January - March, 1996)                        10 7/8          7 7/8
                  Second Quarter (April - June, 1996)                           8 3/8          5 3/4
                  Third Quarter (July - September, 1996)                        8 3/4          5 1/8
                  Fourth Quarter (October - December, 1996)                     7 7/8          4 3/4


                  FISCAL YEAR ENDED DECEMBER 31, 1997

                  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
</TABLE>




    For a recent reported quotation for the Company's Common Stock, see the
cover page of this Form 10-KSB. The quotations listed above reflect inter-dealer
prices, without retail mark-up, mark-down, 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 in the foreseeable future.

    As of March 11, 1998, there were approximately 278 holders of record of the
Common Shares of the Company with approximately 1,900 beneficial shareholders.



                                       15
<PAGE>
ITEM 6. 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 Form 10-KSB 1997 Annual Report. Particular attention should be
directed to the Consolidated Financial Statements found at Item 7.

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 two 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

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

Total operating revenues increased $4,812,955, or 88% to $10,273,692 for 1997,
reflecting changes in revenue categories, as discussed below.

HOTEL OPERATIONS were $9,918,677 for the three months ended December 31, 1997,
an increase of $4,924,085, or 99%, from the three months ended December 31,
1996. Hotel operations consisted of the following:

<TABLE>
<CAPTION>
                                                              Three Months Ended
                                                 DECEMBER 31, 1997         DECEMBER 31, 1996

<S>                                               <C>                         <C>
            Hotel room revenue                       $8,336,308                 $3,371,807
            Beach club revenue                          359,962                    365,937
            Food and beverage revenue                   802,551                    715,476
            Other                                       419,856                    541,372
                                                     ----------                 ----------

                 Total                               $9,918,677                 $4,994,592
                                                     ==========                 ==========
</TABLE>

Hotel room revenues for the three month period ended December 31, 1997 increased
$4,964,501 from the three month period ended December 31, 1996. The increase is
primarily the result of acquiring twelve (12) hotels on November 27, 1996, thus
the revenue for the acquisition was not included for the full three months ended
December 31, 1996. In addition, the Company acquired nine (9) Hampton Inns on
October 31, 1997, whose results are not included in the comparable prior period.
Occupancy and average daily room rate for the Company owned hotels were 57.6%
and $55.69, respectively, for the three months ended December 31, 1997.

The Beach Club revenue relates to the operation of the beach club at the Seagate
Hotel and Beach Club, and this revenue remained consistent from the three month
period ended December 31, 1996.

Food and beverage revenue was $802,551 for the three month period ended December
31, 1997, compared to $715,476 for the three month period ended December 31,
1996, an increase of $87,075, or 12%. The increase is primarily the result of
the Canandaigua Inn on the Lake restaurant opening in June 1996 and not
attaining stabilized operations for the first twelve months.

ROYALTIES for the three month period ended December 31, 1997 have increased
$61,847 over the three month period ended December 31, 1996, an increase of 41%.
The increase is attributable to sixty-two (62) franchised Microtel Inns in
operation, as opposed to twenty-six (26) during the same three month period in
1996. The Company receives all royalties on twenty-eight (28) of the previously
cited Microtel Inns and on the remaining thirty-four (34) 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% from hotels 101-250; and
 .5% above 250 units.

As a result of the Company's joint venture with US Franchise Systems, Inc., the
Company has retained the right to franchise, construct and collect franchise
placement fees on an additional twenty-two (22) Microtel


                                       16
<PAGE>

Inn properties and ten (10) "suite" properties and retain all royalties on the
fifty (50) Microtel Inns (twenty-eight (28) existing and twenty (20) new ones to
be undertaken by the Company) and ten (10) suites. The Company will also receive
royalty payments in the future from US Franchise Systems, Inc., for franchises
they open based on the schedule discussed in the preceding paragraph, along with
consulting payments over the next year.

MANAGEMENT FEES for the three month period ended December 31, 1997, remained
consistent compared to the same three-month period ended December 31, 1996. The
schedule of owned and managed hotels is summarized below:

<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 $575,000 were generated by the twenty-six (26)
owned hotels for the three month period ended December 31, 1997, which were
eliminated for consolidation purposes.

OTHER revenue for the three month period ended December 31, 1997 decreased
$51,234, or 57%, compared to the same three month period ended December 31,
1996. This is primarily a result of development and franchise placement fees
recognized in the prior period, which were non-recurring. A significant portion
of the three month period ended December 31, 1997 revenue represents consulting
fees of $37,500 as part of the Company's joint venture with US Franchise
Systems, Inc., under which the Company will be receiving fees for various
consulting services over the next year.

The Company plans to continue its rapid revenue growth by maintaining the
following strategies: (i) enhance operating performance of its existing hotels
owned or under management (ii) develop and build Microtel Inns on sites acquired
and (iii) opportunistic acquisition of existing hotels.

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 three months ended December 31,
1997 was 29.1%, compared to 17.4% for the three months ended December 31, 1996.
The increase is the result of acquiring twelve (12) hotel properties on November
27, 1996 and reporting their results for only the month of December, which is
one of the slowest operating months, thus adversely effecting the gross
operating margin for the three months ended December 31, 1996. In addition, the
Canandaigua Inn on the Lake reopened and resumed operations in June 1996 and did
not stabilize operations until twelve months after resuming operations.

CORPORATE represents general and administrative costs and expenses associated
with the corporate office. Corporate costs and expenses increased $237,283 from
prior year. The increase is primarily a result of the following: (1)
professional fees increased for the three month period 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. During the fourth quarter of 1997,
the Company had charges of $1,225,788 , an increase of $674,639, or 122%, from
prior year. This increase is primarily due to $835,118, or 68%, of such amounts
which is comprised of a non-cash consulting expense related to investor
relations services. This amount was written off as its expected value in the
future appears minimal. The balance is 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.

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.


                                       17
<PAGE>
DEPRECIATION AND AMORTIZATION for the period ended December 31, 1997 increased
$661,328, or 121%, over the three month period ended December 31, 1996. The
increase is a result of the acquisition of twelve (12) hotels on November 27,
1996, and nine (9) hotels on October 31, 1997, thus recording additional
depreciation and amortization during the three months ended December 31, 1997.

OTHER INCOME (EXPENSE) for the three month period ended December 31, 1997
increased $2,789,853 from the three month period 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 $2,918,425 in total interest expense, for the three
months ended December 31, 1997 48% relates to the mortgage held on the hotels
acquired in 1996 and 1997. The remaining 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 Joint Venture Agreement with US Franchise Systems, Inc. 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.

During 1996, US Franchise Systems, Inc., completed an initial public offering
with proceeds to that entity of approximately $37,000,000. 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 loss incurred from the
Company's equity investment in various hotels. The loss for the three month
period ended December 31, 1997 decreased $38,642, or 84%, from the comparable
three month period December 31, 1996, as a result of various hotel properties in
a partnership still undergoing a start-up period of lower revenues for the three
months ended December 31, 1996.

INCOME TAXES - The income tax benefit for the three months ended December 31,
1997 and 1996 represents federal and state income tax benefit generated by a
loss before tax of $2,710,654 and $295,775, respectively. The provision includes
tax expense/benefit from the valuation of deferred tax assets and liabilities.
See Note 9 for a detail description of deferred tax assets and liabilities.

NET INCOME/LOSS - As a result of the above factors, net loss increased
$1,505,633 from the three month period ended December 31, 1996 to a net loss of
$1,782,585 for the three month period ended December 31, 1997. The net loss per
common share - basic of $0.35, compared with a net loss per common share - basic
of $0.07 for the three month period ended December 31, 1996.

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:

<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>

                                       18
<PAGE>
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 increased $691,505, or 99%, 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 over the twelve month period ended December 31, 1996, an increase of
26%. 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 thirty-four (34) 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% from hotels 101-250; and
 .5% above 250 units.

As a result of the Company's joint venture with US Franchise Systems, Inc. (see
Note 1), 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 and retain all royalties on the fifty
(50) Microtel Inns (28 existing and 22 new ones to be undertaken by the Company)
and ten (10) suites. The Company will also receive royalty payments in the
future from US Franchise Systems, Inc., for franchises they open based on the
schedule discussed in the preceding paragraph, along with consulting payments
over the next twelve months.

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:

<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.
                                       19
<PAGE>

OTHER revenue for the year ended December 31, 1997 decreased $586,939, or 70%,
compared to 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 our joint
venture with US Franchise Systems, Inc., under which the Company will be
receiving fees for various consulting services over the next year (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.

The Company plans to continue its rapid revenue growth by maintaining the
following strategies: (i) enhance operating performance of its existing hotels
owned or under management (ii) develop and build Microtel Inns on sites acquired
and (iii) pursue opportunistic acquisition of existing hotels.

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 did
not stabilize operations until twelve months after resuming operations.

CORPORATE represents general and administrative costs and expenses associated
with the corporate office. Corporate costs and expenses increased $834,252
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. During the fourth quarter of 1997,
the Company had charges of $1,225,788, an increase of $674,639, or 122%, from
prior year. The increase is primarily due to $835,118, or 68%, which is
comprised of non-cash consulting expense related to investor relations services.
This amount was written off as its expected value in the future appears 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%, over 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 INCOME (EXPENSE) for the year ended December 31, 1997 increased
$8,449,754 from 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 Joint Venture Agreement with US Franchise Systems, Inc. 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.

During 1996, US Franchise Systems, Inc., completed an initial public offering
with proceeds to that entity of approximately $37,000,000. 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.


                                       20
<PAGE>

EQUITY IN OPERATIONS OF AFFILIATES represents the net income incurred from the
Company's equity investment in various hotels. The income for the year ended
December 31, 1997 increased $48,308, or 276%, from 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 provision includes tax expense/benefit from the valuation
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 9 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, 1997, the Company had a $1,400,000 working capital demand line
note with two commercial banks which bears interest at rates between prime plus
1/2% and 1 1/2%. Amounts borrowed are collateralized by a hotel property and
unencumbered land. At December 31, 1997, $712,537 was borrowed under the terms
of these lines.

At December 31, 1997, the Company had $670,736 of cash and cash equivalents
compared with $1,057,368 at December 31, 1996.

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, 1997 and 1996 were $3,463,928 and
$1,515,879, respectively.

Net cash flows from operating activities decreased $1,091,566 to $2,462,296 for
the year ended December 31, 1997 from $3,553,862 for the year ended December 31,
1996. The net decrease is primarily the result of the acquisition of nine (9)
Hampton Inns on October 31, 1997, which reduced earnings as the hotels were
purchased during their seasonal slow months. In addition, the Company reduced
its accounts payable from the prior year by approximately $460,000.

Net cash flows used in investing activities decreased by $11,099,796 for the
year ended December 31, 1996 to $51,577,717 for the year ended December 31,
1997. Net cash used by 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 flow used by
investing activities for the twelve months ended December 31, 1996 reflects the
acquisition of seventeen (17) hotels and amounts placed into escrow as required
by the loan agreements.

Net cash flows from financing activities decreased by $10,685,802 to $48,728,789
at December 31, 1997. Net borrowing on the line of credit increased to $712,537
for the 1997 twelve month period, compared to $-0- for the 1996 twelve months.
Net cash flows used in 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. Net cash flows from financing
activities for the twelve months ended December 31, 1996 reflects the
acquisition of seventeen (17) hotels, which includes proceeds from borrowings.



                                       21
<PAGE>


EBITDA increased by $7,190,867 during the 1997 twelve months, an increase of
249% over the 1996 twelve months. EBITDA is defined as earnings before interest
expense, income taxes, depreciation, amortization, minority interest and equity
of affiliates. 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 twenty-six (26) hotel properties (five (5) of which were
acquired on July 31, 1996, twelve (12) acquired on November 27, 1996 and the
remaining nine (9) acquired on October 31, 1997).

Funds on hand, internally generated future cash flows and funds available on the
Company's secured demand notes are expected to be sufficient to meet capital
requirements, as well as operating expenses and debt service requirements
through at least the next twelve months. The Company continues to evaluate the
necessity of other financing alternatives.

ITEM 7.  FINANCIAL STATEMENTS

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

ITEM 8.  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 Coopers &
Lybrand, 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, Coopers & Lybrand, LLP were 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.



                                       22
<PAGE>

                                    PART III

ITEM 9.           DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
                  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

ITEM 10.          EXECUTIVE COMPENSATION

ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for in Part III, Items 9-12, is incorporated by reference
to the Hudson Hotels Corporation and Subsidiaries Proxy Statement for the
Company's Annual Meeting of Stockholders to be held on May 29, 1998.

ITEM 13.    EXHIBITS LIST AND REPORTS ON FORM 8-K

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

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)



                                       23
<PAGE>

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)

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)



                                       24
<PAGE>


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)

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)

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


                                       25
<PAGE>

(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

(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

ITEM 7.  FINANCIAL STATEMENTS



                                       26
<PAGE>











                   HUDSON HOTELS CORPORATION AND SUBSIDIARIES

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

                         TOGETHER WITH AUDITORS' REPORTS


<PAGE>





REPORT OF INDEPENDENT ACCOUNTANTS

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

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

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

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

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


<PAGE>






INDEPENDENT AUDITORS' REPORT

To the Shareholders of
   Hudson Hotels Corporation:

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

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

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

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


                                       2

<PAGE>


REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors
Hudson Hotels Corporation

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

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

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


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


                                       3

<PAGE>

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

<TABLE>
<CAPTION>

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

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

CURRENT ASSETS:

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

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

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

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

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

DEFERRED TAX ASSET                                                       1,387,926                    377,448

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

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

LIABILITIES AND SHAREHOLDERS' INVESTMENT

CURRENT LIABILITIES:

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

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

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

DEFERRED REVENUE - LAND SALE                                               185,055                    185,055

LIMITED PARTNERS' INTEREST IN

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

SHAREHOLDERS' INVESTMENT:

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

                                                                        13,180,247                 13,317,115

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

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

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


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



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

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

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

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

OPERATING COSTS AND EXPENSES:

     Direct                                                           24,808,798                 8,925,508
     Corporate                                                         2,617,158                 1,782,906
     Indirect operating costs                                          1,225,788                   551,149
                                                                    ------------             -------------
     Total operating costs and expenses before
        depreciation and amortization                                 28,651,744                11,259,563
                                                                    ------------             -------------

     Income from operations before depreciation

        and amortization                                              10,079,353                 2,888,486

DEPRECIATION AND AMORTIZATION                                          4,096,761                 1,021,857
                                                                    ------------             -------------

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

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

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

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

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

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

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

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

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


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



                                       5
<PAGE>

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

<TABLE>
<CAPTION>

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

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

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

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

<CAPTION>

                                              WARRANTS        ACCUMULATED         TREASURY
                                            OUTSTANDING         DEFICIT            STOCK               TOTAL
                                            -----------         -------            -----               -----
<S>                                           <C>               <C>                 <C>               <C>
BALANCE, DECEMBER 31, 1995                   $ 60,000     $(3,201,443)        $  (122,855)       $ 3,910,826
     Net Income                                    --         636,050                  --            636,050
     Exercise of stock options,
     including related tax benefits           (10,000)             --                  --              7,667
     Conversion of debentures                      --              --                  --          3,000,000
     Purchase of treasury stock                    --              --          (3,953,042)        (3,953,042)
     Issuance of common stock and use
       of treasury stock for
       purchase of five hotels                     --              --           4,075,897          7,400,901
       Issuance of common stock and use
       of treasury stock for
       purchase of SB Motel Corp. portfolio        --              --                  --          2,358,873
     Other                                         --              --                  --             83,160
     Cash dividends paid on preferred stock        --        (127,320)                 --           (127,320)
                                              -------     ------------          ----------       ------------

BALANCE, DECEMBER 31, 1996                     50,000      (2,692,713)                 --         13,317,115
     Net Loss                                      --      (1,891,754)                 --         (1,891,754)
     Purchase of treasury stock                    --              --             (41,251)           (41,251)
     Exercise of stock options                     --              --                  --          1,047,088
     Issuance of common stock and
     options for investor
     relation services                             --              --                  --            835,118
     Cash dividends paid on preferred stock        --        (127,320)                 --           (127,320)
                                              -------     ------------        ------------       -----------

BALANCE, DECEMBER 31, 1997                   $ 50,000     $(4,711,787)        $   (41,251)       $13,138,996
                                             ========     ============        ============       ===========
</TABLE>


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


                                       6
<PAGE>


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

<TABLE>
<CAPTION>

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


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


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

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




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



                                       7
<PAGE>

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

<TABLE>
<CAPTION>

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


                                                                                  1997                       1996
                                                                                  ----                       ----

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

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

CASH FLOWS FROM FINANCING ACTIVITIES:

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

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

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

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

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

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



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



                                       8
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997

1.  THE COMPANY:

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

On October 5, 1995, the Company has an exclusive Joint Venture Agreement with
US Franchise Systems, Inc. ("USFS") in which USFS purchased worldwide
franchising and administration for the Microtel hotel chain.

The Company, in return, will receive $4 million over a three year period in
exchange for the exclusive franchise rights of the Microtel name and various
consulting services; $2 million was paid at closing, another $1 million was paid
at the first anniversary and $500,000 is due at each of the second and third
anniversaries. In addition to the lump sum payments, the Company will receive
royalty payments from properties franchised by USFS. Royalty payments will
consist of 1% of gross room revenues from hotels 1-100; .75% from hotels
101-250; and .5% above 250 units.

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

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

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

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

INVESTMENTS IN PARTNERSHIP INTERESTS

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

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

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


                                       9
<PAGE>

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

CASH AND CASH EQUIVALENTS

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

RESTRICTED CASH

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

ACCOUNTS RECEIVABLE - TRADE

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

INVENTORIES

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

PROPERTY AND EQUIPMENT

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

Property and equipment consists of the following at December 31,

<TABLE>
<CAPTION>

                                                    1997                   1996
                                                    ----                   ----

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

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

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


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


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






                                       10
<PAGE>


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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

DEFERRED FINANCING COSTS

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

REVENUE RECOGNITION

Royalty fee revenue is based on gross room revenues and the number of franchised
businesses open under the Company's Joint Venture Agreement with US Franchise
Systems, Inc.

Franchise placement income is recognized at the date the "Microtel Inn" is
opened, as allowed under the Company's Joint Venture Agreement with US Franchise
Systems, Inc.

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

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

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

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

BEACH CLUB MEMBERSHIP

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

EARNINGS PER SHARE

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



                                       11
<PAGE>


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

<TABLE>
<CAPTION>

                                                                  12/31/97          12/31/96

Net Earnings Applicable to Common Stock:

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

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

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

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

<CAPTION>

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

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

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

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

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

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

ACCOUNT RECLASSIFICATIONS

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

ESTIMATES

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


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

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

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

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

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

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

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

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

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

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

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

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

4.  LAND AND REAL ESTATE DEVELOPMENT

Real estate development is summarized as follows at December 31:

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

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

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

5.  LINE OF CREDIT

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

6.  DEBT:

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

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

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

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

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

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

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

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

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

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

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

                                       14
<PAGE>

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

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

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

       TOTAL                                   $131,992,508

7.  SHAREHOLDERS' INVESTMENT:

(A)  PREFERRED STOCK

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

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

(B)  COMMON STOCK

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

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

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

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



                                       15
<PAGE>

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

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

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

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

<TABLE>
<CAPTION>

                                                NUMBER OF SHARES           PRICE PER SHARE

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

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

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

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

Options and warrants exercisable at:

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


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

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


                                       16
<PAGE>


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

<TABLE>
<CAPTION>

                                                    1997                   1996
                                                    ----                   ----

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

         Net income per share - basic:

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


8.   COMMITMENTS:

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

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

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

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

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

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

9.   INCOME TAXES:

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



                                       17
<PAGE>

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

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

<TABLE>
<CAPTION>

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

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

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


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

<TABLE>
<CAPTION>

                                                    1997                    1996
                                                    ----                    ----

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

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

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

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

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

</TABLE>

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

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

<TABLE>
<CAPTION>

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

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


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



                                       18
<PAGE>


10.  LITIGATION

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

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

11.  LEASEHOLD INTEREST

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

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

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


                                       19
<PAGE>


12.      ACQUISITIONS

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

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

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

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

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

<TABLE>
<CAPTION>

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






                                       20
<PAGE>

13.      INDIRECT OPERATING COSTS

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

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



                                       21
<PAGE>


EXHIBIT 22

HUDSON HOTELS CORPORATION

LIST OF SUBSIDIARIES

<TABLE>
<CAPTION>

                                   STATE OF INCORPORATION OR
NAME                                      ORGANIZATION                           DOING BUSINESS AS

<S>                                       <C>                         <C>
Watertown Hotel Corp.                        New York                  Watertown Hotel Corp.
Delray Beach Hotel Corp.                     New York                  Delray Beach Hotel Corp.
Brookwood Funding Corp.                      New York                  Brookwood Funding Corp.
Muar Lakes Hotel Corp.                       New York                  Muar Lakes Hotel Corp.
Ridge Road Hotel Corp.                       New York                  Ridge Road Hotel Corp.
Airport Hotel Corp.                          New York                  Airport Hotel Corp.
950 Jefferson Hotel Corp.                    New York                  950 Jefferson Hotel Corp.
Jamestown Hotel Corp.                        New York                  Jamestown Hotel Corp.
Victor Hotel Corp.                           New York                  Victor Hotel Corp.
Canandaigua Hotel Corp.                      New York                  Inn on the Lake
Microtel Partners Corp.                      New York                  Microtel Partners Corp.
Hudson Hotels Properties Corp.               New York                  Hudson Hotels Properties Corp.
HH Properties-Southwest, Inc.                New York                  HH Properties-Southwest, Inc.
HH Properties-Tonawanda, Inc.                New York                  HH Properties-Tonawanda, Inc.
HH Properties-VB, Inc.                       New York                  HH Properties-VB, Inc.
HH Properties-I, Inc.                        New York                  HH Properties-I, Inc.
HH Properties-II, Inc.                       New York                  HH Properties-II, Inc.
</TABLE>



                                       22
<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:   March 16, 1998              By:   /s/ E. Anthony Wilson
                                           ----------------------------------
                                           E. Anthony Wilson
                                           Chief Executive Officer, President
                                              and Director

Dated:   March 16, 1998              By:   /s/ Bruce A. Sahs
                                           ----------------------------------
                                            Bruce A. Sahs
                                            Chief Operating Officer, Executive
                                              Vice President and Director

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


SIGNATURE                              TITLE                          DATE

/s/ E. Anthony Wilson       Chairman of the Board,               March 16, 1998
--------------------------    Chief Executive Officer President
E. Anthony Wilson             and Director

/s/ Bruce A. Sahs           Chief Operating Officer, Executive   March 16, 1998
--------------------------    Vice President and Director
Bruce A. Sahs

/s/ Taras M. Kolcio         Chief Financial Officer and          March 16, 1998
--------------------------    Chief Accounting Officer
Taras M. Kolcio

/s/ Ralph L. Peek           Vice President, Treasurer            March 16, 1998
--------------------------    and Director
Ralph L. Peek

/s/ John P. Buza            Director                             March 16, 1998
--------------------------
John P. Buza

<PAGE>


                                       EXHIBIT INDEX

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)

<PAGE>

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)

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)

<PAGE>


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)

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)

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

<PAGE>

(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

(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