HUDSON TECHNOLOGIES INC /NY, 10KSB, 1998-03-31

HUDSON TECHNOLOGIES INC /NY
10KSB, 1998-03-31
HAZARDOUS WASTE MANAGEMENT

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Securities and Exchange Commission
Washington, D.C. 20549

Form 10-KSB

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

For the fiscal year ended December 31, 1997

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

For the transition period from ____________ to ____________

Commission file number 1-13412
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Hudson Technologies, Inc.
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(Exact name of small business issuer as specified in its charter)

New York 13-3641539
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification number)

25 Torne Valley Road
Hillburn, New York 10931
(address of principal executive offices) (ZIP Code)

Small Business Issuer's telephone number, including area code: (914) 368-4990

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, $0.01 par value

Indicate by check mark whether the issuer (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 twelve 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 last 90 days. Yes /X/ No / /.

Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of Small Business Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. /X/

The Small Business Issuer's revenues for the fiscal year ended December 31, 1997
were $23,005,000.

The aggregate market value of the Small Business Issuer's Common Stock held by
non-affiliates as of March 3, 1998 was approximately $14,361,785. As of March 3,
1998, there were 5,065,820 shares of the Small Business Issuer's Stock
Outstanding.

Documents incorporated by reference: None
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Hudson Technologies, Inc.

Index

Part Item Page
---- ---- ----
<S> <C> <C>
Part I. Item 1 - Business 3
Item 2 - Properties 7
Item 3 - Legal Proceedings 7
Item 4 - Submission of Matters to a Vote of Security Holders 8

Part II. Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters 9
Item 6 - Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 7 - Financial Statements 13
Item 8 - Changes in and Disagreements with Accountants on Accounting 13
and Financial Disclosure

Part III. Item 9 - Directors and Executive Officers of the Registrant, Promoters and Control Persons; 14
Compliance with Section 16(a) of the Exchange Act
Item 10 - Executive Compensation 16
Item 11 - Security Ownership of Certain Beneficial Owners and Management 19
Item 12 - Certain Relationships and related parties 20
Item 13 - Exhibits and Reports on Form 8-K 21

Signatures 22

Financial Statements 23
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Part I
Item 1. Description of Business

General

Hudson Technologies, Inc., incorporated under the laws of New York on January
11, 1991, together with its subsidiaries (collectively, "Hudson" or the
"Company"), sells refrigerants and provides refrigerant management services,
consisting primarily of recovery and reclamation of the refrigerants used in
commercial air conditioning and refrigeration systems, as well as
RefrigerantSide(TM) services, through which the Company performs decontamination
to remove moisture, oils and other contaminants in such systems. The Company
operates through its wholly owned subsidiaries Hudson Technologies Company and
Environmental Support Solutions, Inc. ("ESS").

The Company's Executive Offices are located at 25 Torne Valley Road, Hillburn,
New York and its telephone number is (914) 368-4990.

Industry background

The production and use of refrigerants containing chlorofluorocarbons ("CFCs")
and hydrochlorofluorocarbons ("HCFCs"), the most commonly used refrigerants are
subject to extensive and changing regulation under the Clean Air Act (the
"Act"). The Act, which was amended during 1990 in response to evidence linking
the use of CFCs to damage to the earth's ozone layer, prohibits any person in
the course of maintaining, servicing, repairing and disposing of air
conditioning or refrigeration equipment, to knowingly vent or otherwise release
or dispose of ozone depleting substances used as refrigerants. That prohibition
also applies to substitute, non-ozone depleting, refrigerants. The Act further
requires the recovery of refrigerants used in residential, commercial and
industrial air conditioning and refrigeration systems.

In addition, the Act prohibited production of CFC refrigerants effective
January 1, 1996 and limits the production of refrigerants containing HCFCs,
which production is scheduled to be phased out by the year 2030.

Products and Services

RefrigerantSide(TM) Services

The Company offers refrigerants and services, including RefrigerantSide(TM)
services, which encompasses system decontamination, as well as refrigerant
recovery and reclamation. The Company also provides complete refrigerant
management service, which includes testing, banking, blending and packaging
services tailored to individual customer requirements. Hudson also separates
"crossed" (i.e., commingled) refrigerants and provides re-usable cylinder
repair, hydrostatic testing, and tracking services. Hudson performs on-site
system decontamination, as well as recovery and reclamation through the use of
portable, high volume reclamation equipment.

Environmental Compliance Management

Hudson's compliance management products and services include software, training,
consulting, and management services in the fields of refrigerant tracking and
management, hazardous materials, and air quality.

Hudson's Network

Hudsonoperates from a network of reclamation centers located in:
o Hillburn, New York -- Reclamation center and Corporate Offices
o Congers, New York -- Aerosol packaging and training center
o Rantoul, Illinois -- Reclamation center and cylinder refurbishment
o Charlotte, North Carolina -- Reclamation center
o Ft. Lauderdale, Florida -- Reclamation center
o Punta Gorda, Florida -- Reclamation and refrigerant separation center
o Baton Rouge, Louisiana -- Reclamation center
o Sparks, Nevada -- Reclamation center
o Mesa, Arizona -- Environmental compliance programs

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Strategic Alliance

In January 1997, the Company entered into an Industrial Property Management
Segment Marketer Appointment and Agreement and Refrigeration Reclamation
Services Agreement with E.I. DuPont de Nemours and Company ("DuPont"), pursuant
to which the Company (i) provides recovery, reclamation, separation, packaging
and testing services directly to Du Pont for marketing through DuPont's
Authorized Distributor Network and (ii) markets DuPont's SUVA(TM) refrigerant
products to selected market segments together with the Company's reclamation and
refrigerant management services. Under the agreement, 100% of virgin
refrigerants provided to specified market segment customers must be purchased
from DuPont. During 1997, revenues under these agreements aggregated
approximately $1,495,000.

In addition, the Company entered into a Stock Purchase Agreement with DuPont and
DuPont Chemical and Energy Operations, Inc. ("DCEO") pursuant to which the
Company issued to DCEO 500,000 shares of Common Stock in consideration of
$3,500,000 in cash. Concurrently, the parties entered into a Standstill
Agreement, Shareholders' Agreement and Registration Agreement which, among other
things, provide that (i) subject to certain exceptions, neither DuPont nor any
corporation or entity controlled by DuPont will, directly or indirectly, acquire
any shares of any class of capital stock of the Company if the effect of such
acquisition would be to increase DuPont's aggregate voting power to greater than
20% of the total combined voting power relating to any election of directors;
(ii) at DuPont's request, the Company will cause two persons designated by DCEO
and DuPont to be elected to the Company's Board of Directors; and (iii) subject
to certain exceptions, DuPont will have a five-year right of first refusal to
purchase shares of Common Stock sold by the Company's principal shareholders.
The Company also granted to DuPont certain demand and "piggy-back" registration
rights with respect to the shares.

Suppliers

The Company's operating results are in part dependent on its ability to obtain
sufficient quantities of domestic virgin (pure) and reclaimable refrigerants
from wholesalers, distributors, bulk gas brokers and other sources, and on
corresponding demand for reclaimed refrigerants. In the event that the Company
is unable to obtain sufficient quantities of refrigerants in the future, or
resell reclaimed refrigerants at a profit, the Company's financial condition and
results of operations would be materially adversely affected.

Customers

The Company provides its services to commercial, industrial and governmental
customers, as well as to refrigerant wholesalers, distributors, contractors and
to refrigeration equipment manufacturers. Agreements with larger customers
generally provide for standardized pricing for specified services.

For the year ended December 31, 1997, the Company's five largest customers
accounted for approximately 37% of the Company's revenues, with one customer
accounting for approximately 11% of the Company's revenues. The loss of a
principal customer could have a material adverse effect on the Company.

Marketing

Marketing programs are conducted through the efforts of the Company's executive
officers, Company sales personnel, and third parties. Hudson employs various
marketing methods, including direct mailings, technical bulletins, in-person
solicitation, print advertising, response to quotation requests and
participation in trade shows.

The Company's sales personnel are compensated on a commission basis with a
guaranteed minimum draw. The Company's executive officers devote significant
time and effort to customer relationships.

Competition

The Company competes primarily on the basis of price, breadth of services
offered (including RefrigerantSide(TM) Services and other on-site emergency
services), and performance of its high volume, high-speed equipment used in its
operations.

The Company competes with numerous regional companies, which provide refrigerant
recovery and/or reclamation services, as well as companies marketing reclaimed
and new alternative refrigerants. Certain of such competitors, including
National Refrigerants, Inc., Refron, Inc., and Environmental Technologies
Company, Inc., possess greater financial, marketing, distribution and other
resources for the sale and distribution of refrigerants than the Company and, in
some instances, provide services over a more extensive geographic area than the
Company.

The refrigerant recovery and reclamation industry is relatively new and emerging
competition from existing competitors and new market entrants is expected to
increase. Demand and market acceptance for Hudson's newly introduced
RefrigerantSide(TM) services, and for the Company's refrigerant management
products and services are subject to a high degree of uncertainty.
There can be no assurance that the Company will be able to compete successfully.

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Insurance

The Company carries insurance coverage the Company considers sufficient to
protect the Company's assets and operations. The Company currently maintains
general commercial liability insurance and excess liability coverage for claims
up to $7,000,000 per occurrence and $7,000,000 in the aggregate. There can be no
assurance that such insurance will be sufficient to cover potential claims or
that an adequate level of coverage will be available in the future at a
reasonable cost. The Company attempts to operate in a professional and prudent
manner and to reduce its liability risks through specific risk management
efforts, including employee training. Nevertheless, a partially or completely
uninsured claims against the Company, if successful and of sufficient magnitude,
would have a material adverse effect on the Company.

The refrigerant industry involves potentially significant risks of statutory and
common law liability for environmental damage and personal injury. The Company,
and in certain instances, its officers, directors and employees, may be subject
to claims arising from the Company's on-site or off-site services, including the
improper release, spillage, misuse or mishandling of refrigerants classified as
hazardous or non-hazardous substances or materials. The Company may be strictly
liable for damages, which could be substantial, regardless of whether it
exercised due care and complied with all relevant laws and regulations.

Hudson maintains environmental impairment insurance of $1,000,000 for events
occurring subsequent to November 1996. There can be no assurance that the
Company will not face claims resulting in substantial liability for which the
Company is uninsured, that hazardous substances or materials are not or will not
be present at the Company's facilities, or that the Company will not incur
liability for environmental impairment or personal injury (See 'Legal
Proceedings').

Government Regulation

The business of refrigerant reclamation and management is subject to extensive,
stringent and frequently changing federal, state and local laws and substantial
regulation under these laws by governmental agencies, including the
Environmental Protection Agency ('EPA'), the United States Occupational Safety
and Health Administration and the United States Department of Transportation.

Among other things, these regulatory authorities impose requirements which
regulate the handling, packaging, labeling, transportation and disposal of
hazardous and non-hazardous materials and the health and safety of workers, and
require the Company and, in certain instances, its employees, to obtain and
maintain licenses in connection with its operations. This extensive regulatory
framework imposes significant compliance burdens and risks on the Company.

Hudson and its customers are subject to the requirements of the Clean Air Act,
and the regulations promulgated thereunder by the EPA, which make it unlawful
for any person in the course of maintaining, servicing, repairing, and disposing
of air conditioning or refrigeration equipment, to knowingly vent or otherwise
release or dispose of ozone depleting substances, and non-ozone depleting
substitutes, used as refrigerants.

Pursuant to the Clean Air Act, reclaimed refrigerant must satisfy the same
purity standards as newly manufactured refrigerants in accordance with standards
established by the Air Conditioning and Refrigeration Institute ("ARI") prior to
resale to a person other than the owner of the equipment from which it was
recovered. The ARI and the EPA administer certification programs pursuant to
which applicants are certified to reclaim refrigerants in compliance with ARI
standards. Under such programs, the ARI issues a certification for each
refrigerant and conducts periodic inspections and quality testing of reclaimed
refrigerants.

The Company has obtained ARI certification for most refrigerants at each of its
reclamation facilities, and is certified by the EPA. The Company is required to
submit periodic reports to the ARI and pay annual fees based on the number of
pounds of reclaimed refrigerants. Certification by the ARI is not currently
required to engage in the refrigerant management business.

During February 1996, the EPA published proposed regulations, which, if enacted,
would require participation in third-party certification programs similar to the
ARI program. Such proposed regulations would also require laboratories designed
to test refrigerant purity to undergo a certification process. Extensive
comments to these proposed regulations were received by the EPA. The EPA is
still considering these comments and no further or additional regulations have
been proposed or published.

In addition, the EPA has established a mandatory certification program for air
conditioning and refrigeration technicians. Hudson's technicians have applied
for or obtained such certification.

The Company is subject to regulations adopted by the Department of
Transportation ("DOT") which classify most refrigerants handled by the Company
as hazardous materials or substances and impose requirements for handling,
packaging, labeling and transporting refrigerants. Hudson believes that it is in
compliance with these regulations.

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The Resource Conservation and Recovery Act of 1976 ("RCRA") requires that
facilities that treat, store or dispose of hazardous wastes comply with certain
operating standards. Before transportation and disposal of hazardous wastes
off-site, generators of such waste must package and label their shipments
consistent with detailed regulations and prepare a manifest identifying the
material and stating its destination. The transporter must deliver the hazardous
waste in accordance with the manifest to a facility with an appropriate RCRA
permit. Under RCRA, impurities removed from refrigerants consisting of oils
mixed with water and other contaminants are not presumed to be hazardous waste.
Hudson believes that it is in compliance with these regulations.

The Emergency Planning and Community Right-to-Know Act of 1986 requires the
annual reporting of Emergency and Hazardous Chemical Inventories (Tier II
reports) to the various states in which the Company operates and to file annual
Toxic Chemical Release Inventory Forms with the EPA. Hudson believes that it is
in compliance with these regulations.

The Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), establishes liability for clean-up costs and environmental damages
to current and former facility owners and operators, as well as persons who
transport or arrange for transportation of hazardous substances. Almost all
states, including New York, have similar statutes regulating the handling and
storage of hazardous substances, hazardous wastes and non-hazardous wastes. Many
such statutes impose requirements, which are more stringent than their federal
counterparts. The Company could be subject to substantial liability under these
statutes to private parties and government entities, in some instances without
any fault, for fines, remediation costs and environmental damage, as a result of
the mishandling, release, or existence of any hazardous substances at any of its
facilities.

The Occupational Safety and Health Act of 1970 mandates requirements for safe
work places for employees and special procedures and measures for the handling
of certain hazardous and toxic substances. State laws, in certain circumstances,
mandate additional measures for facilities handling specified materials.

The Company believes that it is in substantial compliance with all material
regulations. However, there can be no assurance that Hudson will be able, to
comply with applicable laws, regulations and licensing requirements. Failure to
comply could subject the Company to civil remedies, substantial fines,
penalties, injunctions, or criminal sanctions.

Quality Assurance & Environmental Compliance

The Company utilizes in-house quality and regulatory compliance control
procedures. Hudson maintains its own analytical testing laboratories to assure
that reclaimed refrigerants comply with ARI purity standards and employs
portable testing equipment when performing on-site services to verify certain
quality specifications. The Company employs three persons engaged full-time in
quality control and to monitor the Company's operations for regulatory
compliance.

Employees

The Company has approximately 115 full and part-time employees including air
conditioning and refrigeration technicians, chemists, engineers, and sales and
administrative personnel.

None of the Company's employees are represented by a union. The Company believes
that its employee relations are good.

Patents and Proprietary Information

The Company holds a United States patent relating to various high speed
equipment components and a process to recover and reclaim refrigerants which
expires in January 2012. The Company believes that patent protection is
important to its business and has received an allowance for an additional patent
relating to a high speed refrigerant recovery process. Other recovery and
reclamation equipment and processes not covered by the Company's patents or
patent applications are currently in commercial use by the Company's
competitors. There can be no assurance as to the breadth or degree of protection
that patents may afford the Company, that any patent applications will result in
issued patents or that patents will not be circumvented or invalidated.
Technological development in the refrigerant industry may result in extensive
patent filings and a rapid rate of issuance of new patents. Although the Company
believes that its existing patents and the Company's equipment do not and will
not infringe patents or violate proprietary rights of others, it is possible
that its existing patent rights may not be valid or that infringement of
existing or future patents or violations of proprietary rights of others may
occur. In the event the Company's equipment infringe or are alleged to infringe
patents or other proprietary rights of others, the Company may be required to
modify the design of its equipment, obtain a license or defend a possible patent
infringement action. There can be no assurance that the Company will have the
financial or other resources necessary to enforce or defend a patent
infringement or proprietary rights violation action or that the Company will not
become liable for damages.
<PAGE>

The Company also relies on trade secrets and proprietary know-how, and employs
various methods to protect its technology. However, such methods may not afford
complete protection and there can be no assurance that others will not
independently develop such know-how or obtain access to the Company's know-how,
concepts, ideas and documentation. Failure to protect its trade secrets could
have a material adverse effect on the Company.

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Item 2. Description of Properties

The Company's headquarters are located in approximately 21,000 square feet of
leased industrial space at Hillburn, New York. The building is leased from an
unaffiliated third party pursuant to a five-year agreement at an annual rental
of approximately $74,000 through May 1999.

In March 1995, the Company purchased, for $950,000, a facility in Ft.
Lauderdale, Florida, consisting of a 32,000 square foot building on
approximately 1.7 acres with rail and port access. The property was mortgaged
during 1996 for $700,000. Annual real estate taxes are approximately $24,000.
The Company has entered into a three-year agreement, pursuant to which it leases
15,000 square feet of its Florida facility to an unaffiliated third party at a
monthly rental of approximately $7,500. The lease agreement contains a 90-day
cancellation provision.

The Company's Baton Rouge, Louisiana facility is located in a 20,000 square foot
building leased from an unaffiliated third party at an annual rental of
approximately $54,000 pursuant to an agreement expiring in April 2000.

The Company's Rantoul, Illinois facility is located in a 29,000 square foot
building leased from an unaffiliated third party at an annual rental of
approximately $ 78,000 pursuant to an agreement expiring in September 2002.

The Company's Charlotte, North Carolina facility is located in 12,000 foot
building leased from an unaffiliated third party pursuant to an agreement, which
expires in April 1998. Annual rent is approximately $41,000. The lease agreement
contains an option to extend the lease period for an additional two-year period.

The Company's Sparks, Nevada facility is located in a 11,000 square foot
building leased from an unaffiliated third party at an annual rental of
approximately $49,000 pursuant to an agreement expiring in September 1998, which
agreement contains an option to extend the lease for an additional three year
period.

The Company's Punta Gorda, Florida separation facility is located in a 15,000
square foot building leased from an unaffiliated third party at an annual rent
of $58,000 pursuant to an agreement expiring in April 1999.

The Company's Mesa, Arizona office facility of about 4,000 square feet is leased
from an unaffiliated third party at an annual rental of approximately $41,000;
pursuant to an agreement expiring in January 2000.

During January 1997, the Company entered into a commitment to purchase a 29,000
square foot facility on 5.15 acres in Congers, New York for about $1.4 million;
subject to approvals and ability to obtain financing. The Company is leasing the
facility for approximately $14,000 per month during the interim period.

Item 3. Legal Proceedings

During June 1995, United Water of New York Inc. ("United") alleged that it
discovered that two of its wells within close proximity to the Company's
facility showed elevated levels of refrigerant contamination, specifically
trichlorofluoromethane (R-11). During June 1996, United notified the Company
that it was seeking indemnification by the Company for costs incurred to date as
well as costs expected to be incurred in connection with United taking remedial
action. During July 1996, United threatened to institute legal action in the
event that the Company declined to settle this matter.

During August 1996, the Company received a letter from the New York State
Department of Environmental Conservation ("DEC") which stated that, in the
opinion of DEC, the Company was the cause of the contamination of United's
wells. The DEC letter states that it is not aware of the extent of the
contamination or how the refrigerants entered the groundwater.

During December 1996, the Company and United entered into an interim settlement
agreement which provided for (a) reimbursement ($84,000) of United's operating
costs associated with certain wells through August 1996, (b) reimbursement,
subject to a dollar cap of $12,650 per month, of United monthly operating costs
for certain wells from September 1996 through April 1997, and (c) continued
monitoring of R-11 refrigerant groundwater levels under and around the Company's
facility. Under the agreement, United agreed not to commence legal action
against the Company prior to May 1, 1997. Neither party waived their rights as a
result of the interim agreement.

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During August and September 1997, various proposals for possible further
remediation were discussed with the DEC and United in light of the reduction of
levels of R-11 in United's wells. Since August 1997 the levels of R-11 in
United's wells have remained substantially below the maximum contaminant level
established by the State of New York. The levels of R-11 in some of the
Company's monitoring wells remain above New York State's maximum containment
level. In January 1998, the Company informed the DEC that it is prepared to
install a remediation system at the Company's facility to remove any remaining
R-11 levels in the groundwater under and around the Company's facility. The cost
of this remediation is estimated to be a range of approximately $80,000 to
$100,000.

During December 1997, United Water alleged that it discovered levels of
Dichlorodifluoromethane (R-12) in two of its wells within close proximity to the
Company's facility, and has alleged that the Company is the source. Sampling by
the Company of various monitoring wells installed around the Company's
facilities have been taken on a monthly basis since August 1996 and have failed
to detect any levels of R-12 in the groundwater under and around the Company's
facility in excess of the maximum containment level established by the State of
New York.

There can be no assurance that United will not commence legal action seeking
damages and/or other relief, or that any legal action or settlement will be
resolved in a manner favorable to the Company, or that the ultimate outcome of
any legal action or settlement will not have a material adverse effect on the
Company's financial condition and results of operations.

In June 1997, an action was commenced against the Company in the 19th Judicial
District Court, Parish East Baton Rouge, State of Louisiana, by a former
salesperson and her spouse, who was terminated by the Company in 1996, alleging
that the Company wrongfully terminated the employee, and is seeking unspecified
damages. The Company is defending the action and caused the action to be removed
to the Federal District Court. The Company believes the allegations in the
complaint to be without merit. There can be no assurance that the Company will
be successful in the defense in this action or that the matter ultimately be
resolved in a manner favorable to the Company, or that the ultimate outcome of
any legal action or settlement will not have a material adverse effect on the
Company's financial condition and results of operations.

In March 1998, a complaint alleging violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 was filed by Robert M. Segil, on behalf of
himself and all others similarly situated, against the Company and certain of
its officers and directors in the United States District Court for the Southern
District of New York. The complaint alleges that the defendants, among other
things, misrepresented material information about the Company's financial
results and prospects, and its customer relationships. The complaint seeks
relief on behalf of persons purchasing common stock between August 8, 1995 and
August 15, 1997. The Company believes that the allegations of wrongdoing alleged
in the complaint are without merit and the Company intends to vigorously defend
the claims brought against it. The Company has learned that a second complaint
has been filed in the United States District Court for the Southern District of
New York against the Company and certain individual defendants. The Company has
not yet been served with that complaint. There can be no assurance that this
action will be resolved in a manner favorable to the Company, or that the
ultimate outcome of any legal action will not have a material adverse effect on
the Company's financial condition and results of operations.

The Company and its subsidiaries are subject to various claims from both private
and governmental parties arising from the ordinary course of business; none of
which are material.

Item 4. Submission of Matters to a Vote of Security Holders.

Not Applicable.

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Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

The Common Stock has traded since November 1, 1994 on the NASDAQ Small-Cap
Market under the symbol 'HDSN'. Since September 20, 1995, the Common Stock has
traded on the NASDAQ National Market. The following table sets forth, for the
periods indicated the range of the high and low bid prices for the Common Stock
as reported by NASDAQ. Such prices reflect inter-dealer quotations, without
retail mark-up, markdown or commission and may not necessarily represent actual
transactions.

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High Low
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1996
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o First Quarter $15 3/8 $10 1/4
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o Second Quarter $13 1/2 $8
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o Third Quarter $7 1/2 $6 3/8
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o Fourth Quarter $8 5/8 $5 1/8
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1997
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o First Quarter $13 1/4 $5 3/8
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o Second Quarter $11 7/8 $5 5/8
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o Third Quarter $8 $5 1/4
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o Fourth Quarter $5 3/4 $2 7/8
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On March 3, 1998, the last sale price for the Common Stock as reported by the
NASDAQ National Market was $4.1875 per share. The number of record holders of
the Company's Common Stock was approximately 258 as of March 3, 1998. The
Company believes that there are in excess of 400 beneficial owners of its Common
Stock.

To date, the Company has not declared or paid any cash dividends on its Common
Stock. The payment of dividends, if any in the future is within the discretion
of the Board of Directors and will depend upon the Company's earnings, its
capital requirements and financial condition, borrowing covenants, and other
relevant factors. The Company presently intends to retain all earnings, if any,
to finance the Company's operations and development of its business and does not
expect to declare or pay any cash dividends in the foreseeable future.

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Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.

The statements contained herein which are not historical facts are forward
looking statements that involve risks and uncertainties, including but not
limited to, changes in the markets for refrigerants (including unfavorable
market conditions adversely affecting the demand for, and the price of,
refrigerants), regulatory and economic factors, increased competition, the
nature of supplier or customer arrangements which become available to the
Company in the future, adverse weather conditions, technological obsolescence
and potential environmental liability. The Company's actual results may differ
materially from the results discussed in any forward-looking statement.

Results of Operations

Year ended December 31, 1997 as compared to year ended December 31, 1996

Revenues for 1997 were $23,005,000, an increase of $3,434,000 or 18% from the
$19,571,000 reported during the comparable 1996 period. The increase was
primarily attributable to an increase in refrigerant sales.

Cost of sales for 1997 were $20,268,000, an increase of $6,122,000 or 43% from
the $14,146,000 reported during the comparable 1996 period. As a percentage of
sales, cost of sales were 88% of revenues for 1997, an increase from the 72%
reported for the comparable 1996 period. The increase in both dollars and
percentage of revenues in 1997 as compared to 1996 was primarily attributable to
a higher volume of lower margin refrigerant sales, as compared to 1996 and the
reduction of inventory carrying values in 1997 by $1,443,000 to net realizable
value.

Operating expenses for 1997 were $16,453,000, an increase of $8,115,000 or 97%
from the $8,338,000 reported during the comparable 1996 period. The increase was
attributable to the recognition of a non cash, non recurring charge to
operations for an impairment of its goodwill and intangible assets in the amount
of $7,298,000, the Company's acquisitions of Environmental Support Solutions
("ESS") and GRR Co., Inc. ("GRR") and an increase in payroll and related
expenses offset by the lack of a restructuring reserve in 1996.

Other income (expense) for 1997 were $614,000, an increase of $339,000 or 123%
from the $275,000 reported during the comparable 1996 period. Other income
(expense) includes interest expense of $726,000 and $462,000 for 1997 and 1996,
respectively, offset primarily by other income of $112,000 and $144,000 for 1997
and 1996, respectively. The increase in interest expense is primarily attributed
to an increase in borrowings during 1997 as compared to 1996. Other income
primarily relates to sublease rental income.

Income taxes for 1997 were $1,958,000 as compared to the income tax benefit of
$1,135,000 reported during the comparable 1996 period. In 1997, income taxes of
$1,958,000 were attributed to the Company recognizing a non cash, non recurring
valuation allowance primarily associated with the deferred tax asset acquired in
the 1995 acquisition of Refrigerant Reclamation Corporation of America, Inc.
("RRCA") and a reserve allowance against the tax benefit for the current year
losses. The tax benefit recognized in 1996 primarily relates to the Company's
ability to carry back the 1996 losses to the 1995 tax year.

Net loss for 1997 was $16,288,000 an increase of $14,235,000 from the $2,053,000
net loss reported during the comparable 1996 period. The increase was
attributable mainly to lower gross profits on refrigerant sales, the reduction
of inventory values to net realizable value, an increase in operating expenses,
and the recognition of a non cash, non recurring charge to operations for a
revaluation of the Company's goodwill and intangible assets and deferred tax
asset in the aggregate of $9,276,000.

Liquidity and Capital Resources

At December 31, 1997, the Company had working capital of approximately
$1,439,000. A major component of current assets is inventory. The Company's
ability to sell its inventory and the prices at which it can be sold is subject
to current market conditions. The Company has historically financed its working
capital requirements through cash flows from operations, the issuance of debt
and equity securities, bank borrowings and loans from officers.

Net cash provided by operating activities was $1,586,000 for 1997 compared with
a net cash used in operating activities of $3,189,000 for the comparable 1996
period. Net cash provided by operating activities was attributable mainly to the
reduction of inventories, an increase in accounts payable and accrued expenses,
partially offset by an increase in net loss.

Net cash used in investing activities was $1,126,000 for 1997, compared with net
cash used in operating activities of $3,396,000 for the prior comparable 1996
period. The decrease in net cash usage of $2,270,000 was attributable to the
non-recurrence of the 1996 acquisitions and a reduction in equipment additions.

-10-
<PAGE>

Net cash used by financing activities was $256,000 for 1997 and consisted mainly
of issuance of common stock of $3,912,000 offset by retirement of debt of
$4,168,000. Net cash provided by financing activities totaled $4,547,000 for
1996 and consisted mainly of proceeds of $5,300,000 from the issuance of
convertible debt.

At December 31, 1997, the Company had cash and equivalents of $626,000.

During 1996, the Company obtained financing from two lending institutions which
enabled it to rent an additional $1.7 million of equipment under terms of
operating leases. Hudson utilized these facilities to acquire automated aerosol
packaging equipment of approximately $1,000,000, ten refrigerant gas bulk-tank
storage units of approximately $400,000, and other industrial equipment of
$300,000. (See Note 11 to the Notes to the Consolidated Financial Statements).

On May 10, 1996, the Board of Directors authorized the Company to acquire, from
publicly traded markets, a maximum of 25,000 issued and outstanding shares of
its own Common Stock. During 1996, the Company had repurchased 21,000 shares at
an average price of $8.25 per share. No repurchases were made subsequently.

On June 18, and September 30, 1996, the Company issued Convertible Debentures
(See Note 8 to the Notes to the Consolidated Financial Statements) with a
combined face value of $5.3 million. These convertible debentures were retired
or converted to common stock through January 1997.

In connection with its bankruptcy reorganization in June 1994, prior to its
acquisition by Hudson, RRCA has obligations (as modified by a settlement during
April 1996) totaling $236,000 at December 31, 1997 payable in periodic payments
to bankruptcy creditors through July 2000.

On November 14, 1996, certain officers and stockholders of Hudson made unsecured
loans in the principal amount of $678,000 to the Company; repayable upon receipt
of proceeds from the mortgage, discussed below, or on subsequent demand. On
January 29, 1997, the Company repaid the officer loans together with accrued
interest outstanding (see "Certain Relationships and Related Party Transactions"
and Note 8 to the Notes to the Consolidated Financial Statements).

During 1996, the Company mortgaged its property and building located in Ft.
Lauderdale with Turnberry Savings Bank, NA. The mortgage of $688,000 at December
31, 1997 bears interest rate of 9.5% and is repayable over 20 years commencing
February 1997 (See Note 8 to the Notes to the Consolidated Financial
Statements).

During January 1997, in connection with the execution of various agreements with
E.I. DuPont de Nemours ("DuPont"), the Company obtained additional equity funds
of $3,500,000 from an affiliate of DuPont (see Note 10 to the Notes to the
Consolidated Financial Statements). Proceeds were primarily utilized to retire
debt.

During May 1997, certain officers of Hudson made unsecured loans in the
aggregate principal amount of $585,000 to the Company. Such loans were due on
demand and bore interest from 8% to 8.88% per annum. On August 12, 1997, the
Company repaid the loans together with outstanding interest. (See "Certain
Relationships and Related Transactions").

The Company has a bank line of credit of $3,000,000 with MTB Bank NA ('MTB'),
which bears interest at a rate of prime plus 2%. At December 31, 1997, advances
under the MTB line were $1,244,000. During 1998, MTB limited the Company's
borrowings to only 85% of eligible trade accounts receivable. The agreement,
which expired during August 1996, has been extended by both the Company and MTB
Bank until April 30, 1998. Presently, the Company does not have significant
availability under its line of credit and substantially all of the Company's
assets are pledged as collateral to MTB. The Company has executed a commitment
letter with a lender for an expanded bank credit facility. Failure to obtain
additional financing would have a material adverse effect on the Company's
financial condition and results of operations.

-11-
<PAGE>

Acquisitions

In August 1995, the Company acquired RRCA. The purchase price was approximately
$6,068,000, consisting of cash of $1,250,000, a promissory note in the principal
amount of $750,000 repaid in December 1995 and 174,964 shares of common stock.
The acquisition was accounted for as a purchase with the assets acquired and
liabilities assumed were recorded at fair values, resulting in an excess of cost
over assets acquired of approximately $4,000,000.

In April 1996, the Company acquired all the outstanding capital stock of ESS, a
developer and provider of environmental software, training, and management
services in consideration of $2,375,000, consisting of $700,000 in cash and
promissory notes in the principal amount of $1,675,000 which were repaid during
October 1996. The acquisition was accounted for as a purchase with the assets
acquired and liabilities assumed were recorded at fair values, resulting in an
excess of cost over assets acquired of approximately $800,000.

In June 1996, ESS acquired all the net assets, subject to liabilities, of
E-Soft, Inc. ("E-Soft"), a developer and marketer of software programs related
to hazardous material management, in consideration of a cash payment of $50,000
and 41,560 shares of common stock with the acquired assets and liabilities were
recorded at fair values, resulting in an excess of cost over assets acquired of
approximately $500,000.

In July 1996, the Company acquired all the outstanding common stock of GRR; a
refrigerant reclamation and recovery company in consideration of 20,000 shares
of the common stock resulting in an excess of cost over assets acquired of
approximately $100,000. Concurrent with the acquisition, the Company purchased,
for nominal consideration, all the net assets, subject to liabilities, of GRR.

Inflation

Inflation has not historically had a material impact on the Company's
operations.

Reliance on Suppliers

The Company's financial performance is in part dependent on its ability to
obtain sufficient quantities of domestic virgin and reclaimable refrigerants
from manufacturers, wholesalers, distributors, bulk gas brokers, and from other
sources and on corresponding demand for reclaimed refrigerants. To the extent
that the Company is unable to obtain sufficient quantities of refrigerants in
the future, or resell reclaimed refrigerants at a profit, the Company's
financial condition and results of operations would be materially adversely
affected.

During January 1997, the Company entered into agreements with DuPont to market
DuPont's SUVA(TM) refrigerants. Under the agreement, 100% of virgin refrigerants
provided to specified market segment customers must be purchased from DuPont.

Seasonality and Fluctuations in Operating Results

The Company's operating results vary from period to period as a result of
weather conditions; requirements of potential customers; non-recurring
refrigerant sales and service; availability and price of refrigerant products
(virgin or reclaimable); changes in reclamation technology and regulations,
timing in introduction and/or retrofit of CFC-based refrigeration equipment by
domestic users of refrigerants, the rate of expansion of the Company's
operations; and by other factors. The Company's business has historically been
seasonal in nature with peak sales of refrigerants occurring in the first half
of each year. However, the second quarter of 1997 was adversely impacted, in
part, to the unseasonably cool weather. Delays in securing adequate supplies of
refrigerants at peak demand periods, lack of refrigerant demand, increased
expenses, and declining refrigerant prices have resulted in significant losses.
There can be no assurance that the foregoing factors will not continue to result
in a material adverse affect on the Company's financial position and significant
losses.

Year 2000 Issue

The Company has assessed the potential issues associated with the year 2000 and
believes that its cost to address such issues would not be material. The Company
also believes that costs or consequences of an incomplete or untimely resolution
would not result in the occurrence of a material event or uncertainty reasonably
likely to have a material adverse effect on the Company.

-12-
<PAGE>

Recent Accounting Pronouncements

SFAS No. 130, "Reporting Comprehensive Income", established standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of and enterprise about which separate financial information is
available that is evaluated regularly by Management in deciding how to allocate
resources and in assessing performance.

Both SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. The adoption of SFAS No. 130 is not expected to
have a material effect on the Company's financial position or results of
operations. The Company is currently reviewing the effect of SFAS No. 131 but
has of yet been unable to fully evaluate the impact, if any, it may have on
future financial statements disclosures.

Item 7. Financial Statements

The financial statements appear in a separate section of this report following
Part III.

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None

-13-
<PAGE>

Part III

Item 9. Directors, Executive Officers of the Registrant,
Promoters and Control Persons; Compliance with Section 16(a) of
the Exchange Act

The following table sets forth information with respect to the directors and
officers of the Company:

- ----------------------------- ------ -------------------------------------------
Name Age Position
- ----------------------------- ------ -------------------------------------------
- ----------------------------- ------ -------------------------------------------
Kevin J. Zugibe 34 Chairman of the Board, President and
Chief Executive Officer
- ----------------------------- ------ -------------------------------------------
- ----------------------------- ------ -------------------------------------------
Thomas P. Zugibe 45 Executive Vice President and Director
- ----------------------------- ------ -------------------------------------------
- ----------------------------- ------ -------------------------------------------
Stephen P. Mandracchia 38 Executive Vice President and Secretary
- ----------------------------- ------ -------------------------------------------
- ----------------------------- ------ -------------------------------------------
Brian F. Coleman 36 Vice President and Chief Financial Officer
- ----------------------------- ------ -------------------------------------------
- ----------------------------- ------ -------------------------------------------
Walter A. Phillips 45 Vice President of Sales and Marketing
- ----------------------------- ------ -------------------------------------------
- ----------------------------- ------ -------------------------------------------
Robert Johnson 40 Vice President and Director
- ----------------------------- ------ -------------------------------------------
- ----------------------------- ------ -------------------------------------------
Stephen J. Cole-Hatchard 40 Director
- ----------------------------- ------ -------------------------------------------
- ----------------------------- ------ -------------------------------------------
Vincent Abbatecola 49 Director
- ----------------------------- ------ -------------------------------------------
- ----------------------------- ------ -------------------------------------------
Otto C. Morch 64 Director
- ----------------------------- ------ -------------------------------------------
- ----------------------------- ------ -------------------------------------------
Dominic J. Monetta 54 Director
- ----------------------------- ------ -------------------------------------------
- ----------------------------- ------ -------------------------------------------

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

Kevin T. Zugibe, P.E. is a founder of the Company and has been a director,
President and Chief Executive Officer of the Company since its inception in
1991. Since May 1994, Mr. Zugibe has devoted his full business time to the
Company's affairs. From May 1987 to May 1994, Mr. Zugibe was employed as a power
engineer with Orange and Rockland Utilities, Inc. Mr. Zugibe is a licensed
professional engineer, and from December 1990 to May 1994, he was a member of
Kevin J. Zugibe & Associates, a professional engineering firm. Kevin J. Zugibe
and Thomas P. Zugibe are brothers.

Thomas P. Zugibe has been a Vice President of the Company since its inception in
1991 and a director since April 1995. Mr. Zugibe is responsible for assuring
compliance by the Company with laws and regulations pertaining to its
operations. Prior to May 1995, he devoted only a portion of his business time to
the affairs of the Company. Since that date, Mr. Zugibe has been employed by the
Company on a full time basis. He has been engaged in the practice of law in the
State of New York since 1980 and is on extended leave from the law firm of
Ferraro, Zugibe, and Albrecht, Garnerville, New York.

Stephen P. Mandracchia has been a Vice President of the Company since January
1993 and Secretary of the Company since April 1995. Mr. Mandracchia served as a
director from June 1994 until August 1996. Mr. Mandracchia is responsible for
corporate, administrative and regulatory legal affairs of the Company. Mr.
Mandracchia was a member of the law firm of Martin, Vandewalle, Donohue,
Mandracchia & McGahan, Great Neck, New York until December 31, 1995 (having been
affiliated with such firm since August 1983), and prior to September 1995
devoted only a portion of his business time to the Company's affairs.

Brian F. Coleman has been Vice President and Chief Financial Officer of the
Company since May 1997. Prior to joining Hudson, Mr. Coleman was a Partner with
BDO Seidman, LLP, the Company's independent auditors.

Walter A. Phillips has been Vice President of Sales and Marketing of the Company
since October 1996. Prior to joining Hudson, Mr. Phillips was employed in
various sales and marketing roles with York International.

Robert Johnson has been a director of the Company and Vice President since April
1996. Mr. Johnson founded and is President of Environmental Support Solutions,
Inc., a company which develops and provides environmental software, training and
consulting services, since March 1994. From February 1979 to March 1994, Mr.
Johnson was an Operations Manager for the Arizona Region of Carrier
Corporation's Building Systems Services.

Vincent P. Abbatecola has been a director of the Company since June 1994. Mr.
Abbatecola is the owner of Abbey Ice & Spring Water Company, Spring Valley, New
York, where he has been employed since May 1971.

Otto C. Morch has been a director of the Company since March 1996. For more than
the past five years Mr. Morch has been Senior Vice President, Commercial Banking
at Provident Bank, and retired from that position in December 1997.

-14-
<PAGE>

Dominic J. Monetta has been a director of the Company since April 1996. Since
August 1993, Mr. Monetta has been the President of Resource Alternatives, Inc.,
a corporate development firm concentrating on solving management and
technological problems facing chief executive officers and their senior
executives. From December 1991 to May 1993, Mr. Monetta served as the Director
of Defense Research and Engineering for Research and Advanced Technology for the
United States Department of Defense. From June 1989 to December 1991, Mr.
Monetta served as the Director of the Office of New Production Reactors of the
United States Department of Energy.

Stephen J. Cole-Hatchard has been a director since January 1993 and, until
December 1997 was a Vice President and Treasurer of the Company. Mr.
Cole-Hatchard is a member of the bar of the State of New York. From May 1984 to
May 1995, Mr. Cole-Hatchard was employed as a detective with the Clarkstown, New
York Police Department, Asset Forfeiture/Legal Division. From May 1995 to
January 1996, he was on leave of absence form the Clarkstown Police Department
and employed on a full time basis by the Company. In January 1996, Mr.
Cole-Hatchard returned to the Clarkstown Police Department.

The Company has established a Stock Option Committee, which administers the
Company's Stock Option Plan. The members of such Committee are Messrs.
Abbatecola and Morch. The Company also has an Audit Committee of the Board of
Directors, which supervises the audit and financial procedures of the Company.
The Audit Committee is comprised of Messrs. Abbatecola, Cole-Hatchard and Morch.
During 1997, the Company established an Executive Committee for considering and
determining the compensation of the Board of Directors, the President/CEO and
Executive Vice President. The Executive Committee members are Messrs. Kevin and
Thomas Zugibe, Monetta and Morch. During 1997, the Company also established a
Safety Committee, to review, oversee and direct the implementation of the
Company's Environmental, Health and Safety policies, plans and procedures. The
Safety Committee consists of Messrs. Thomas Zugibe, Monetta and Johnson.

The By-laws of the Company provide that the Board of Directors is divided into
two classes. Each class is to have a term of two years, with the term of each
class expiring in successive years, and is to consist, as nearly as possible, of
one-half of the number of directors constituting the entire Board. The By-laws
provide for a Board of seven members (subject to increase or decrease by a
resolution adopted by the shareholders). Accordingly, one class consists of
three directors and the second class consists of four directors.

Hudson currently maintains directors and officers liability insurance for
covered claims up to $2,000,000 in the aggregate.

-15-
<PAGE>
Item 10. Executive Compensation

The following table discloses the compensation for the Company's Chief Executive
Officer and each officer that earned over $100,000 during such years (the "Named
Executives").

Summary Compensation Long Term Compensation
Table Awards
----------------------
Annual Compensation(1) Securities Underlying
Name Position Year Salary Bonus Options
---- -------- ---- ------ ----- ---------------------
<S> <C> <C> <C> <C> <C>
Kevin J. Zugibe Chairman of the Board, 1997 $158,631 -- 58,000 shares
President & Chief Operating 1996 $145,462 -- -
Officer 1995 $113,076 -- -

Stephen P. Mandracchia Executive Vice President 1997 $120,554 -- 40,000 shares
and Secretary 1996 $104,885 -- --
1995 $ 47,574 -- --

Thomas Zugibe Executive Vice President 1997 $120,169 -- 40,000 shares
1996 $ 98,461 -- --
1995 $ 65,439 -- --

Stephen Spain (2) Vice President 1997 $ 83,649 -- --
1996 $133,960 -- 60,000 shares

Robert Johnson Vice President 1997 $ 81,956 -- --
1996 $133,289 -- 60,000 shares

Walter A. Phillips Vice President Sales & Mkt. 1997 $213,145 -- 22,000 shares
1996 $ 30,046 -- 25,000 shares

</TABLE>

- --------------------------
(1) The value of personal benefits furnished to the Named Executives, during
1995, 1996, and 1997 did not exceed 10% of their respective annual compensation.
(2) Mr. Spain resigned in December 1997.

The Company granted options to the Named Executives during the fiscal year ended
December 31, 1997, as shown in the following table:

<TABLE>
<CAPTION>
Number of % of Total
Securities Options
Underlying Granted to
Options Employees
Summary of Stock Options Granted in Fiscal
Granted to Executive Officers year
------------ ------------ Exercise or Expiration
Name Position Shares Percent Base price ($/sh) Date
---- -------- ------ ------- ----------------- ----
<S> <C> <C> <C> <C> <C>
Kevin J. Zugibe President and Chief 40,000 15.4% $4.47 11/2002
Executive Officer 18,000 7.0% $3.85 12/2002

Thomas P. Zugibe Executive Vice President 25,000 9.6% $4.47 11/2002
15,000 5.8% $3.85 12/2002

Stephen P. Executive Vice President 25,000 9.6% $4.47 11/2002
Mandracchia 15,000 5.8% $3.85 12/2002

Walter A. Phillips Vice President of Sales and 10,000 3.8% $3.87 10/2002
Marketing 12,000 4.6% $3.50 12/2002

</TABLE>

-16-
<PAGE>

The following table sets forth information concerning the value of unexercised
stock options held by Named Executives at December 31, 1997.

<TABLE>
<CAPTION>
Number of Securities
Underlying (1) Value of
Unexercised Options In-the-money Options
Aggregated Fiscal Year End Option Values Table At December 31, 1997 At December 31, 1997
-------------------- --------------------
Shares
Acquired on
Name Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kevin J. Zugibe (2) 7,728 42,126 64,272 61,000 0 0
Chairman of the Board,
President & Chief
Operating Officer

Thomas P. Zugibe (2) 7,728 42,126 64,272 43,000 0 0
Executive Vice President

Stephen P. Mandracchia (2) 7,728 42,126 64,272 43,000 0 0
Executive Vice President
and Secretary

Walter A. Phillips 10,000 48,075 29,700 7,300 $705 $1,095
Vice President of Sales &
Marketing
</TABLE>

- -----------------------
(1) Year-end values of unexercised in-the-money options represent the positive
spread between the exercise price of such options and the year-end market value
of the Common Stock of $3.625.
(2) Includes value as of date of exercise of 3,628 shares purchased at $5.50
per share, which shares are still held by the named individuals.

Compensation of Directors

Non-employee directors receive an annual fee of $3,000 and are reimbursed for
out-of-pocket expenses incurred in attending meetings of the Board of Directors.
In addition, under the Company's Stock Option Plan non-employee directors are
eligible to receive nonqualified stock options.

To date, the Company granted to Dr. Frederick T. Zugibe, a former director of
the Company, options to purchase 75,000 shares of Common Stock at an exercise
price of $5.50 per share. Such option vests at the rate of 18,000 shares for
each of four one-year terms, commencing with the year ended October 31, 1994,
and 3,000 shares for the year ending October 31, 1998. The Company has also
granted to Robert Johnson, in connection with his employment agreement with ESS,
options to purchase 60,000 shares of the Company's Common Stock at an exercise
price of $10.50 per share. Such option vests at the rate of 9,500 shares for
each of four one-year terms, commencing with the year ended April 24, 1996, and
3,000 shares for the year ending April 24, 2002.

Employment Agreements

The Company has entered into a five-year employment agreement with Kevin J.
Zugibe, which expires in May 1999 and is automatically renewable for successive
terms. Pursuant to the agreement, effective January 1, 1998 Mr. Zugibe is
receiving an annual base salary of $130,000 with such increases and bonuses as
the Board may determine. The Company is the beneficiary of a "key-man" insurance
policy on the life of Mr. Zugibe in the amount of $1,000,000.

The Company has also entered into one-year employment agreements with Messrs.
Thomas Zugibe and Mr. Stephen Mandracchia. Pursuant to these agreements these
officers are receiving annual base salaries of $100,000. The agreements are
automatically renewable for successive one-year terms.

The Company has entered into three-year employment contracts with Messrs.
Johnson, Phillips, and Coleman which provide for annual base salaries of
$80,000, $150,000 and $130,000, respectively, and are automatically renewable
for successive one-year terms. Messrs. Phillips's contracts also provide for
annual bonuses not to exceed $25,000, based on achievement of pre-determined
annual goals.

-17-
<PAGE>

Stock Option Plan

1994 Stock Option Plan

The Company has adopted an Employee Stock Option Plan (the "Plan") effective
October 31, 1994 pursuant to which 725,000 shares of Common Stock are currently
reserved for issuance upon the exercise of options designated as either (i)
options intended to constitute incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended (the "Code"), or (ii) nonqualified
options. ISOs may be granted under the Plan to employees and officers of the
Company. Non-qualified options may be granted to consultants, directors (whether
or not they are employees), employees or officers of the Company. Stock
appreciation rights may also be issued in tandem with stock options.

The Plan is intended to qualify under Rule 16b-3 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and is administered by a committee
of the Board of Directors, which currently consists of Messrs. Abbatecola and
Morch. The committee, within the limitations of the Plan, determines the persons
to whom options will be granted, the number of shares to be covered by each
option, whether the options granted are intended to be ISOs, the duration and
rate of exercise of each option, the exercise price per share and the manner of
exercise and the time, manner and form of payment upon exercise of an option.
Unless sooner terminated, the Plan will expire on December 31, 2004.

ISOs granted under the Plan may not be granted at a price less than the fair
market value of the Common Stock on the date of grant (or 110% of fair market
value in the case of persons holding 10% or more of the voting stock of the
Company). The aggregate fair market value of shares for which ISOs granted to
any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company) may not exceed
$100,000. Non-qualified options granted under the Plan may not be granted at a
price less than 85% of the market value of the Common Stock on the date of
grant. Options granted under the Plan will expire not more than ten years from
the date of grant (five years in the case of ISOs granted to persons holding 10%
or more of the voting stock of the Company). All options granted under the Plan
are not transferable during an optionee's lifetime but are transferable at death
by will or by the laws of descent and distribution. In general, upon termination
of employment of an optionee, all options granted to such person which are not
exercisable on the date of such termination immediately terminate, and any
options that are exercisable terminate 90 days following termination of
employment.

As of December 31, 1997, the Company granted options to purchase 725,000 shares
of Common Stock under the Plan. Of such options, options to purchase 75,000
shares at an exercise price of $5.50 per share were granted to each of Kevin J.
Zugibe, Stephen J. Cole-Hatchard, Stephen P. Mandracchia, Thomas P. Zugibe and
Frederick T. Zugibe in 1994. Such options vest at the rate of 18,000 shares for
each of four one-year periods beginning with the period ending October 31, 1994
and 3,000 shares for the period ending October 31, 1998. During 1994, the
Company also granted options to purchase 10,000 shares to a former officer and
103,000 shares to other employees of the Company, exercisable at prices ranging
from $5.00 to $5.625 per share. During 1995, the Company granted options for
19,000 shares, exercisable at prices ranging from $6.00 and $16.00 per share.
During 1996, the Company granted options to purchase 208,600 shares, exercisable
at prices ranging from $5.63 to $10.50 per share. During 1997, the Company
granted options to purchase 22,900 shares, exercisable at prices ranging from
$4.06 to $8.63 per share (also see Note 12 to the Notes to the Consolidated
Financial Statements).

1997 Stock Option Plan

At the Company's 1996 Annual Meeting of the Shareholders, held July 25, 1997,
the Shareholders approved the adoption of the 1997 Stock Option Plan (the "1997
Plan") pursuant to which 1,000,000 shares of Common Stock are currently reserved
for issuance upon the exercise of options designated as either (i) options
intended to constitute incentive stock options ("ISOs") under the Internal
Revenue Code of 1986, as amended (the "Code"), or (ii) nonqualified options.
ISOs may be granted under the Plan to employees and officers of the Company.
Non-qualified options may be granted to consultants, directors (whether or not
they are employees), employees or officers of the Company. Stock appreciation
rights may also be issued in tandem with stock options.

-18-
<PAGE>

As of December 31, 1997, the Company granted options to purchase 237,100 shares
of Common Stock under the 1997 Plan. Of such options, options to purchase
40,000, 25,000 and 25,000 shares at an exercise price of $4.47 per share were
granted to, respectively, Kevin J. Zugibe, Stephen P. Mandracchia and Thomas P.
Zugibe. Such options vest as follows: 18,600 shares on 11/3/98, and the balance
on 11/3/99. Additionally, options to purchase 18,000, 15,000 and 15,000 shares
at an exercise price of $3.85 were granted to, respectively, Kevin J. Zugibe,
Stephen P. Mandracchia and Thomas P. Zugibe. The options issued to Kevin J.
Zugibe vest as follows: 1,000 shares on 11/3/99 and 17,000 on 11/3/00. The
options issued to Thomas P. Zugibe and Stephen P. Mandracchia vest on 11/3/99.
During 1997, the Company also granted options to purchase 99,100 shares to
certain officers and employees, exercisable at prices ranging from $3.50 to
$4.06 per share (also see Note 12 to the Notes to the Consolidated Financial
Statements).

Item 11. Security Ownership of Certain Beneficial Owners and Management.

The following table sets forth information as of March 3, 1998 based on
information obtained from the persons named below, with respect to the
beneficial ownership of Common Stock by (i) each person known by the Company to
be the beneficial owner of more than 5% of the Company's outstanding Common
Stock, (ii) the Named Executives, except for Spain, (iii) each director of the
Company, and (iv) all directors and executive officers of the Company as a
group:

Amount and
Nature of Percentage
Beneficial of Shares
Name and Address of Beneficial Owner (1) Ownership (2) Owned
- ---------------------------------------- ------------- ----------
Kevin J. Zugibe 301,900 (3) 6.0%
Thomas P. Zugibe 306,900 (3) 6.1%
Stephen P. Mandracchia 295,300 (3) 5.8%
Stephen J. Cole-Hatchard 281,000 (3) 5.5%
Walter A. Phillips 29,700 (6) *
Robert Johnson 28,500 (4) *
Vincent Abbatecola 2,600 *
Otto C. Morch 600 *
Dominic J. Monetta 6,000 *
Fredrick T. Zugibe 282,400 (3) 5.6%
DuPont Chemical and Energy
Operations, Inc. 500,000 (5) 10.0%
All directors and officers as a group
(13 persons) 1,277,000 25.5%

* = Less than 1%
- ----------

(1) Unless otherwise indicated, the address of each of the persons listed above
is the address of the Company, 25 Torne Valley Road, Hillburn, New York 10931.

(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this report. Each
beneficial owner's percentage ownership is determined by assuming that options
and warrants that are held by such person (but not held by any other person) and
which are exercisable within 60 days from the date hereof have been exercised.
Unless otherwise noted, the Company believes that all persons named in the table
have sole voting and investment power with respect to all shares of Common stock
beneficially owned by them.

(3) Includes 64,272 shares which may be purchased by the named person at $5.50
per share under an immediately exercisable option expiring in October 1999.

-19-
<PAGE>

(4) Represents immediately exercisable options. Does not include Options to
purchase 31,500 shares.

(5) According to a Schedule 13D filed with the Securities and Exchange
Commission, DuPont Chemical and Energy Operations, Inc. ('DCEO') and E.I. DuPont
de Nemours and Company claim shared voting and dispositive power over the
shares. DCEO's address is DuPont Building, Room 8045, 1007 Market Street,
Wilmington, DE 19898.

(6) Includes 15,000 immediately exercisable shares, which may be purchased by
the named person at $5.625 per share under an immediately exercisable option
expiring in October 2001. Also includes 10,000 shares which may be purchased by
the named person at $4.06 per share under an immediately exercisable option
expiring in October 2002. Also includes 4,700 shares which may be purchased by
the named person at $3.50 per share under an immediately exercisable option
expiring in December 2002.

Kevin J. Zugibe, Thomas P. Zugibe, Frederick T. Zugibe, Stephen Mandracchia and
Stephen J. Cole-Hatchard may be deemed to be "parents" of the Company as such
term is used under the Securities Act of 1933.

Item 12. Certain Relationships and Related Transactions

In November 1996, certain officers and stockholders of Hudson made unsecured
loans, listed below, in aggregate principal amount of $678,000 to the Company;
repayable upon receipt of proceeds from property mortgage or on subsequent
demand. At December 31, 1997, all such loans were repaid:

(in thousands)
Initial Outstanding
Loan Balance
Lender Relationship Amount at 12/31/97
- ------ ------------ ------ -----------
S Mandracchia Company Officer $100 $0
S Cole-Hatchard Company Officer 100 0
T Zugibe Company Officer 100 0
K Zugibe Company Officer 100 0
W Barron Company Officer 50 0
---- --
Subtotal 450 0
---- --
Deerwood Partnership (1) 128 0
D Cole-Hatchard (1) 100 0
---- --
Total $678 $0
==== ==

(1) Deerwood Partnership is a firm owned, in part, by T. Zugibe, S Cole-Hatchard
and D Cole-Hatchard, the officer's mother.

Mr. Barron's note bore interest at an annual rate of 6%. Interest on the other
notes bore interest at a rate of 8.75%. On January 29, 1997, the Company repaid
the officer loans together with accrued interest outstanding.

In May 1997 certain officers of Hudson made unsecured loans of $585,000 to the
Company which were repayable on demand. At December 31, 1997, all such loans
were repaid:

(in thousands)
Initial Outstanding
Loan Balance
Lender Relationship Amount at 12/31/97
- ------ ------------ ------ -----------
S Mandracchia Company Officer $200 $ 0
K Zugibe Company Officer $385 $ 0

Interest on the notes bore interest at rates from 8.00% to 8.88%. On August 12,
1997, the Company repaid the officer loans together with accrued interest
outstanding.

-20-
<PAGE>

Item 13 Exhibits and Reports on Form 8-K.

(a) Exhibits
<TABLE>
<CAPTION>

<S> <C>
3.1 Certificate of Incorporation and Amendment. (1)
3.2 Amendment to Certificate of Incorporation, dated July 20,1994. (1)
3.3 Amendment to Certificate of Incorporation, dated October 26, 1994. (1)
3.4 By-Laws. (1)
10.1 Lease Agreement between the Company and Ramapo Land Co., Inc. (1)
10.2 Consulting Agreement with J.W. Barclay & Co., Inc. (1)
10.3 Stock Option Plan of the Company. (1)
10.4 Employment Agreement with Kevin J. Zugibe. (1)
10.5 Assignment of patent rights from Kevin J. Zugibe to Registrant. (1)
10.6 Agreement dated August 12, 1994 between the Company and PAACO International, Inc. (1)
10.7 Agreement between the Company and James T. and Joan Cook for the purchase of premises
3200 S.E. 14th Avenue, Ft. Lauderdale, Florida. (1)
10.8 Agreement dated as of December 12, 1994, by and between the Company and James Spencer d/b/a CFC Reclamation. (2)
10.9 Employment agreement, dated December 12, 1994, between the Company and James Spencer. (2)
10.10 Agreement, dated July 25, 1995, between the Company and Refrigerant Reclamation Corporation of America. (3)
10.11 Employment Agreements with Thomas P. Zugibe, Stephen P. Mandracchia and Stephen J. Cole-Hatchard. (4)
10.12 Contract of Sale with ESS, Stephen Spain, Robert Johnson and the Company dated April 23, 1996(5)
10.13 Agreement dated June 14, 1996 between Environmental Support, Solutions, Inc. and E-Soft, Inc. (7)
10.14 Agreement dated July 24, 1996 between the Company and GRR Co., Inc. (7)
10.15 Agreements dated June 18, 1996 and September 30, 1996 between Cameron Capital and the Company (7)
10.16 Employment agreement, dated October 1, 1996, between the Company and Walter Phillips. (7)
10.17 Agreement dated February 4, 1997 between Wilson Art, Inc. and the Company
for the purchase of 100 Brenner Drive, Congers, New York. (7)
10.18 Employment agreement, dated April 16, 1997, between the Company and Brian Coleman
10.19 Agreements dated January 29, 1997 between E.I. DuPont de Nemours, DCEO, and the
Company (6)
27 Financial Data Schedule

-------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form SB-2 (No. 33-80279-NY)
(2) Incorporated by reference to the Company's Report on Form 8-K dated December 12, 1994.
(3) Incorporated by reference to the Company's Report on Form 10-QSB for the quarter ended June 30, 1995.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995.
(5) Incorporated by reference to the Company's Report on Form 8-K dated April 29, 1996.
(6) Incorporated by reference to the Company Report in Form8-K dated January 29, 1997.
(7) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996.

(b) Reports on Form 8-K:

During the quarter ended December 31, 1997, no report on Form 8-K was filed.
</TABLE>

-21-
<PAGE>

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly signed this report on its behalf by the
undersigned, thereunto duly authorized on the 30th day of March, 1998.

HUDSON TECHNOLOGIES, INC.

By: /s/ Kevin J. Zugibe
------------------------------
Kevin J. Zugibe, President

In accordance with the requirements of the Securities Exchange Act of 1934, this
report was signed by the following persons in the capacities and on the dates
stated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Kevin J. Zugibe Chairman of the Board, President and Chief Executive March 30, 1998
- ----------------------------- Officer (Principal Executive Officer)
Kevin J. Zugibe

/s/ Thomas P. Zugibe Executive Vice President and Director March 30, 1998
- -----------------------------
Thomas P. Zugibe

/s/ Stephen P. Mandracchia Executive Vice President and Secretary March 30, 1998
- -----------------------------
Stephen P. Mandracchia

/s/ Brian F. Coleman Vice President and Chief Financial Officer March 30, 1998
- ----------------------------- (Principal Financial and Accounting Officer)
Brian F. Coleman

/s/ Robert Johnson Vice President and Director March 30, 1998
- -----------------------------
Robert Johnson

/s/ Stephen J. Cole-Hatchard Director March 30, 1998
- -----------------------------
Stephen J. Cole-Hatchard

/s/ Vincent Abbatecola Director March 30, 1998
- -----------------------------
Vincent Abbatecola

/s/ Otto C. Morch Director March 30, 1998
- -----------------------------
Otto C. Morch

/s/ Dominic J. Monetta Director March 30, 1998
- -----------------------------
Dominic J. Monetta

</TABLE>

-22-
<PAGE>

Hudson Technologies, Inc.
Financial Statements

Contents
- -------------------------------------------------------------------------------

Report of Independent Certified Accountants 24
Audited Financial Statements
o Consolidated Balance Sheet 25
o Consolidated Statements of Operations 26
o Consolidated Statements of Stockholders' Equity 27
o Consolidated Statements of Cash Flows 28
o Notes to the Consolidated Financial Statements 29

-23-
<PAGE>

Report of Independent Certified Accountants

To Stockholders and Board of Directors

Hudson Technologies, Inc.
Hillburn, New York

We have audited the accompanying consolidated balance sheet of Hudson
Technologies, Inc. and subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with 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 from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hudson
Technologies, Inc. and subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.

BDO Seidman, LLP
Valhalla, New York
February 27, 1998

-24-
<PAGE>

Hudson Technologies, Inc. and subsidiaries
Consolidated Balance Sheet
(Amounts in thousands, except for share amounts)
December 31,
1997
------------
Assets (Note 8)
Current assets:
Cash and cash equivalents $ 626
Trade accounts receivable - net (Note 4) 1,737
Inventories (Note 5) 3,755
Income taxes receivable (Note 6) 167
Prepaid expenses and other current assets 185
-------
Total current assets 6,470

Property, plant and equipment, less accumulated
depreciation (Note 7) 5,939
Other assets 95
-------
Total assets $12,504
=======

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $3,429
Short-term debt (Note 8) 1,602
-------
Total current liabilities 5,031
Deferred income 55
Long-term debt, less current maturities (Note 8) 1,155
-------
Total liabilities 6,241
-------

Commitments and contingencies (Note 11)

Stockholders' equity (Notes 2, 8, 10, 12):
Common stock, $0.01 par value; shares authorized 20,000,000;
issued 5,086,820;and outstanding 5,065,820 51
Additional paid-in capital 22,683
Accumulated deficit (16,298)
--------
6,436
Less: Treasury stock, 21,000 shares at cost (173)
-------
Total Stockholders' equity 6,263
-------

Total liabilities and Stockholders' equity $12,504
=======

See accompanying Notes to the Consolidated Financial Statements.

-25-
<PAGE>

Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except for share and per share amounts)

<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1997 1996
------- -------
<S> <C> <C>
Revenues $23,005 $19,571
Cost of sales 18,825 14,146
Inventory write down to net realizable value (Note 5) 1,443 --
------- -------
Gross Profit 2,737 5,425

Operating expenses:
Selling and marketing 1,720 1,448
General and administrative 5,910 4,480
Depreciation and amortization 1,525 1,077
Write-off of intangible assets (Note 2) 7,298 --
Restructuring charge (Note 9) -- 1,333
------- -------
Total operating expenses 16,453 8,338
------- -------

Operating loss (13,716) (2,913)

Other income (expense):
Interest income -- 43
Interest expense (726) (462)
Other income (Note 3) 112 144
------- -------
Total other (expense) (614) (275)
------- -------

Loss before income taxes (benefit) (14,330) (3,188)

Income taxes (benefit) (Note 6) 1,958 (1,135)
------- -------

Net loss $(16,288) $(2,053)
======== =======

Net loss per common share - basic $(3.26) $ (0.47)
======== =======
Weighted average number of shares
outstanding (Note 1) 5,003,343 4,349,495
========= =========
</TABLE>

See accompanying Notes to the Consolidated Financial Statements.

-26-
<PAGE>

Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Stockholders' Equity

(Amounts in thousands, except for share amounts)

<TABLE>
<CAPTION>
Common Stock Additional Retained
-------------------- Treasury Paid-in earnings
Shares Amount Stock Capital (deficit) Total
--------- -------- -------- ---------- ---------- --------
Balance at December 31, 1995 4,242,435 $42 $ - $18,252 $2,043 $20,337
- ---------------------------- --------- --- ---- ------- ------ -------

Issuance of common stock in connection with
<S> <C> <C> <C> <C> <C> <C>
warrant redemption 66,500 1 - 230 - 231
Issuance of common stock in connection with
acquisitions 61,560 1 - 527 - 528
Purchase of treasury stock - (173) - - (173)
Redemption costs of convertible notes - - - (492) - (492)
Net loss - - - - (2,053) (2,053)
--------- --- -------- ------- ------- -------

Balance at December 31, 1996 4,370,495 44 (173) 18,517 (10) 18,378
- ---------------------------- --------- --- -------- ------- ------- -------

Conversion of convertible
notes 133,085 1 -- 624 -- 625
Redemption costs of convertible notes -- -- -- (364) -- (364)
Issuance of common stock - net 500,000 5 -- 3,455 -- 3,460
Issuance of common stock
in connection with exercise of
stock options 83,240 1 - 451 - 452
Net loss -- -- -- -- (16,288) (16,288)
- ---------------------------- --------- --- -------- ------- --------- -------

Balance at December 31, 1997 5,086,820 $ 51 $(173) $22,683 $(16,298) $ 6,263
- ---------------------------- ========= ======== ======= ======== ========= =======
</TABLE>

See accompanying Notes to the Consolidated Financial Statements.

-27-
<PAGE>

Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(Amounts in thousands)

<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net loss $(16,288) $(2,053)
<S> <C> <C>
Adjustments to reconcile net loss
to cash provided (used) by operating activities:
Depreciation and amortization 1,525 1,077
Allowance for doubtful accounts 255 534
Deferred income taxes 1,978 (293)
Write-off of intangible assets 7,298 --
Changes in assets and liabilities:
Trade receivables 484 (467)
Inventories 5,307 (3,718)
Income taxes receivable 763 (930)
Prepaid and other current assets (44) 803
Other assets 34 39
Accounts payable and accrued expenses 667 1,371
Deferred income (16) 71
Reserve for restructuring (377) 377
-------- -------
Cash provided (used) by operating activities 1,586 (3,189)
-------- -------
Cash flows from investing activities:
Proceeds from sales of marketable securities -- 1,100
Additions to property, plant, and equipment (1,126) (2,026)
Acquisitions accounted for as purchases -- (2,470)
------- -------
Cash used by investing activities (1,126) (3,396)
------- -------
Cash flows from financing activities:
Proceeds from redemption of warrants - 231
Proceeds from issuance of common stock - net 3,912 -
Proceeds (payment) from loans to officers and stockholders (202) 202
Proceeds from short-term convertible debt issues - 5,300
Proceeds from long-term debt - 700
Repayment of short-term debt (453) (1,221)
Redemption of convertible debt (2,789) (492)
Repayment of long-term debt (724) --
Purchase of treasury stock -- (173)
------- -------
Cash provided (used) by financing activities (256) 4,547
------- -------
Increase (decrease) in cash and cash equivalents 204 (2,038)
Cash and equivalents at beginning of period 422 2,460
------- -------
Cash and equivalents at end of period $626 $ 422
======= =======

- -------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 726 $ 313
Cash paid during period for income taxes $ -- $ --
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock for acquisitions $ 528
$ --
Conversion of debt to common stock $ 625 $ --
See accompanying Notes to the Consolidated Financial Statements.
</TABLE>

-28-
<PAGE>

Notes to the Consolidated Financial Statements
Note 1- Summary of Significant Accounting Policies

Business

Consolidation

The consolidated financial statements represent all companies of which Hudson
directly or indirectly has majority ownership or otherwise controls. Significant
intercompany accounts and transactions have been eliminated. The Company's
consolidated financial statements include the accounts of wholly-owned
subsidiaries HTI Holdings, Inc., Hudson Technologies Company and ESS.

Fair value of financial instruments

The carrying values of financial instruments including trade accounts
receivable, and accounts payable approximate fair value at December 31, 1997,
because of the relatively short maturity of these instruments. The carrying
value of short-and long-term debt approximates fair value, based upon quoted
market rates of similar debt issues, as of December 31, 1997.

The fair value of officer and shareholder notes cannot be determined due to
the nature of the transactions.

Credit risk

Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and trade accounts
receivable. The Company maintains its temporary cash investments in highly-rated
financial institutions. The Company's trade accounts receivable are due from
companies throughout the U.S. The Company reviews each customer's credit history
before extending credit.

The Company establishes an allowance for doubtful accounts based on factors
associated with the credit risk of specific accounts, historical trends, and
other information.

During 1997, one customer accounted for 11% of revenues.

Revenues and cost of sales

Revenues are recorded upon completion of service or product shipment or passage
of title to customers in accordance with contractual terms. Cost of sales is
recorded based on the cost of products shipped or services performed and related
direct operating costs of the Company's reclamation sites.

Cash and cash equivalents

Temporary investments with original maturities of ninety days or less are
included in cash and cash equivalents.

Inventories

Inventories, consisting primarily of reclaimed refrigerant products available
for sale, are stated at the lower of cost, on a first-in first-out basis, or
market.

Property, plant, and equipment

Property, plant, and equipment are stated at cost; including internally
manufactured equipment. Provision for depreciation is recorded (for financial
reporting purposes) using the straight-line method over the useful lives of the
respective assets. Leasehold improvements are amortized on a straight-line basis
over the shorter of economic life or terms of the respective leases.

Due to the specialized nature of the Company's business, it is possible that
the Company's estimates of equipment useful life periods may change in the
future.

Goodwill and intangible assets

Goodwill was amortized over 25 years using the straight-line method. Other
intangible assets consisting primarily of patents or acquired contract rights
were amortized on a straight-line basis over the remaining life of the patent.

The Company evaluates the recoverability of goodwill based on estimated
undiscounted operating income over the goodwill amortization periods, giving
consideration to sales and cost benefits expected to be realized by the
consolidated group from the acquisition of the acquired company. The Company
also considers industry trends and the potential impact of proposed or pending
regulations as well as the effect of competition in its evaluation.

During the fourth quarter of 1997, the Company recognized an impairment
charge for its goodwill and intangible assets (See Note 2 to the Consolidated
Financial Statements).

Income taxes

Hudson utilizes the assets and liability method for recording deferred income
taxes, which provides for the establishment of deferred tax asset or liability
accounts based on the difference between tax and financial reporting bases of
certain assets and liabilities.

During the fourth quarter of 1997, the Company recorded a valuation allowance
against its deferred tax asset (See Note 6 to the Consolidated Financial
Statements).

-29-
<PAGE>

Treasury stock

Common stock, acquired by the Company under a repurchase program authorized by
the Board of Directors on May 10, 1996, is carried at acquisition cost (market
price at acquisition date).

Loss per common shares

During February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 128 "Earnings Per
Share", which replaced the presentation of primary earnings per share ("EPS"),
with basic EPS. It also requires dual presentation of basic and diluted EPS. The
Company adopted SFAS No. 128 in 1997. The 1996 loss per share has been restated
to conform to SFAS No. 128. Loss per common share (Basic) is computed on the
weighed average number of shares, less treasury stock. If dilutive, common
equivalent shares (common shares assuming exercise of options and warrants)
utilizing the treasury stock method are considered in the presentation of
dilutive earnings per share.

Recent accounting pronouncements

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by Management in deciding how to allocate
resources and in assessing performance.

Both SFAS Nos. 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. The adoption of SFAS No. 130 is not expected
to have a material effect on the Company's financial position or results of
operations. The Company is currently reviewing the effect of SFAS No. 131 but
has as yet been unable to fully evaluate the impact, if any, it may have on
future financial statement disclosures.

Estimates and Risks

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of certain assets and liabilities, the disclosure of
contingent assets and liabilities, and the results of operations during the
reporting period. Actual results could differ from these estimates.

The Company participates in an industry that is highly regulated, changes
in which could affect operating results. Currently the Company purchases
unprocessed refrigerants from domestic suppliers and its customers. The
Company's inability to obtain refrigerants on commercially reasonable terms or a
decline in demand for refrigerants could cause delays in refrigerant processing,
possible loss of revenues, and could materially adversely affect operating
results.

Note 2 - Acquisitions and Impairment Charge

On August 15, 1995, the Company acquired Refrigerant Reclamation Corporation of
America ("RRCA"). The purchase price was approximately $6,068,000, which
consisted of cash of $1,250,000, a note of $750,000 paid during December 1995,
and 174,964 shares of the Company's common stock. The acquisition was accounted
for as a purchase from the date of acquisition with the assets acquired and
liabilities assumed recorded at fair values, resulting in an excess of cost over
assets acquired of approximately $4,000,000. Results of RRCA's operations have
been included in the Company's consolidated financial statements from the date
of acquisition.

On April 23, 1996, the Company acquired all the outstanding capital stock of
ESS, a Mesa, Arizona developer and provider of environmental software, training,
and management services. The capital stock of ESS was purchased for $2,375,000,
which consisted of cash of $700,000 and notes of $1,675,000 paid during October
1996. The acquisition was accounted for as a purchase from the date of
acquisition with the assets acquired and liabilities assumed recorded at fair
values, resulting in an excess of cost over assets acquired of approximately
$800,000. Results of ESS's operations have been included in the Company's
consolidated financial statements from the date of acquisition.

On June 14, 1996, ESS acquired all the net assets, subject to liabilities,
of E-Soft, Inc. ("E-Soft"), a Georgia-based developer and marketer of software
programs related to hazardous material management, in exchange for a cash
payment of $50,000 and 41,560 unregistered shares of the Company's stock. E-Soft
acquired assets and liabilities were recorded at fair values, resulting in an
excess of cost over assets acquired of approximately $500,000. Subsequent to the
acquisition, all E-Soft assets and activities were relocated to ESS headquarters
in Arizona.

-30-
<PAGE>

On July 24, 1996, the Company acquired all the outstanding common stock of
GRR Co., Inc. d.b.a. Golden Refrigerants ("Golden"), a refrigerant reclamation
and recovery company located in Punta Gorda, Florida, in exchange for 20,000
unregistered shares of the Company's stock with a valuation of $100,000 at the
transaction date. Concurrent with the acquisition, the Company purchased, for
nominal consideration, all the net assets, subject to liabilities, of Golden,
and dissolved GRR Co., Inc.

The 1996 acquisitions were not considered material to the Company's
operations and as such, no pro forma information has been presented.

The Company's intangible assets are primarily related to the acquisitions
associated with refrigerant sales and its software products. The Company
considers continued operating losses or significant long term business changes
to be its primary indicators of potential impairment. An impairment is
recognized when the future undiscounted cash flows are estimated to be
insufficient to recover the related carrying value of the asset. As a result,
during the fourth quarter of 1997, the Company recognized a non cash, non
recurring charge to operations for the write-off of recorded goodwill and
intangible assets primarily associated with its 1995 and 1996 acquisitions in
the amount of $7,298,000.

Note 3 - Other income

Other income of $112,000 and $144,000 for the year ended December 31, 1997, and
1996, respectively, consisted mainly of sublease rental income from the
Company's Ft. Lauderdale facility.

Note 4- Trade receivables - net
Trade accounts receivable include reserves for doubtful accounts of $283,000 at
December 31, 1997.

Note 5 - Inventories
Inventories consisted of the following:

December 31, (in thousands) 1997
------
Refrigerant and cylinders $1,604
Packaged refrigerants 2,103
Other 48
------
Total $3,755
------

During January 1997, the Company entered into several agreements, with E.I.
DuPont de Nemours and Company ("DuPont") to market DuPont's SUVA(TM)
refrigerants. Under the agreement, 100% of virgin refrigerants provided to
specified market segment customers must be purchased from DuPont (see Note 10 to
the Notes to Consolidated Financial Statements).

During 1997, the Company recognized a reduction of inventory carrying
values to net realizable value in the aggregate of $1,443,000.

Note 6 - Income taxes

Elements of income tax expense (benefit) for the years 1997 and 1996 are as
follows:

Year ended December 31,
(in thousands) 1997 1996
---- ----
Provision (benefit) for
income tax
Current payable:
- Federal $ (20) $ (753)
- State -- ( 89)
------- -------
Subtotal (20) (842)
------- -------
Deferred:-
- Federal 1,778 ( 262)
- State 200 (31)
------- -------
Subtotal 1,978 (293)
------- -------
Total $1,958 $(1,135)
------- -------

Reconciliation of the Company's actual tax rate to the U.S. Federal statutory
rate is as follows:

Year ended December 31,
(in percents) 1997 1996
---- ----
Income tax rates
- Statutory U.S. Federal rate (34%) (34%)
- States, net U.S. benefits (4%) (4%)
- Permanent differences 23% 2%
- Valuation allowance 29% --
---- -----
Total 14% (36%)
==== =====
<PAGE>

RRCA, acquired during 1995 as a subsidiary of the Company, has available net
operating loss carryforwards ('NOL') expiring through 2010 of approximately
$5,000,000 subject to annual limitations of approximately $400,000. During 1996,
the Company recorded a deferred tax asset of approximately $1,800,000 and
reduced goodwill an equivalent amount.

During the fourth quarter of 1997, the Company recognized a non cash, non
recurring valuation allowance primarily associated with the deferred tax asset
acquired in the RRCA acquisition.

As of December 31, 1997, the Company has net operating loss carryforwards
of approximately $10,700,000 for which a 100% valuation allowance has been
recognized. Approximately $5,000,000 of the net operating loss carryforwards is
subject to annual limitations of $400,000.

Elements of deferred income tax assets (liabilities) are as follows:

Year ended December 31,
(in thousands) 1997
----
Deferred tax assets (liabilities)
- Depreciation & amortization $ (117)
- Reserves for doubtful accounts 108
- NOL 4,100
- NOL valuation allowance (4,100)
- Other 9
------
Total $ --
------

-31-
<PAGE>

Note 7 - Property, plant, and equipment

Elements of property, plant, and equipment are as follows:

December 31,
(in thousands) 1997
-------
Property, plant, & equipment
- Land $335
- Buildings & improvements 748
- Equipment 4,628
- Equipment under capital lease 1,084
- Furniture & fixtures 191
- Leasehold improvements 754
- Equipment under construction 909
-------
subtotal 8,649
Accumulated depreciation &
amortization (2,710)
-------
Total $5,939
-------

Note 8 - Short-term and long-term debt

Elements of short-term and long-term debt are as follows:

Year ended December 31, 1997
(in thousands) ----
Short-term & long-term debt
Short-term debt
- Bank credit line $1,244
- Long-term debt: current 358
------
Short-term debt $1,602
------
Long-term debt
- Mortgage payable $ 688
- Capital lease obligations 589
- RRCA priority claims 236
- Less: current maturities (358)
------
Long-term debt $1,155
------
Total $2,757
------

Bank credit line

At December 31, 1997, the Company had a bank line of credit of $3,000,000 with
MTB Bank NA ('MTB'), which bore interest at prime plus 2% and expires on April
30, 1998. During 1998, MTB limited the Company's borrowings to 85% of eligible
trade accounts receivable.

Under the MTB agreement, substantially all the Company's assets are pledged
as collateral for Hudson obligations to MTB.

Mortgage payable

During 1996, the Company mortgaged its property and building located in Ft.
Lauderdale with Turnberry Savings Bank, NA. At December 31, 1997, the mortgage
bears interest at a rate of 9.5% and repayable over 20 years commencing February
1997.

RRCA Priority Claims

In connection with its bankruptcy reorganization in June 1994, prior to its
acquisition by Hudson, RRCA has unsecured obligations (as modified by a
settlement during April 1996) totaling $236,000 at December 31, 1997 payable in
periodic payments to bankruptcy creditors through July 2000.

Note payable

In connection with its bankruptcy reorganization of June 1994, prior to its
acquisition by Hudson, RRCA had issued a secured promissory Note in principal
amount of $1.0 million due August 15, 1997 to James J. Todack ("Todack"), a
supplier to RRCA. During April 1996, RRCA and Todack rescheduled the remaining
debt providing for a payment ($100,000) and the sum of $800,000 payable in
sixteen equal monthly installments of principal and interest of 7% and a final
payment was made in August 1997.

Convertible note debentures

On June 18, 1996, the Company issued a $3.5 million principal amount
non-interest bearing convertible debenture due June 18, 1998. Under the
debenture agreement (amended on August 16, 1996) the Company redeemed $1.0
million of the debenture principal for $1,150,000 on September 16, 1996,
$625,000 debenture principal for $718,750 on September 30, 1996, and $625,000
debenture principal for $718,750 during November 1996. The Company issued
warrants in connection with the debenture issue and amendment to purchase 16,071
shares of the Company's common stock at an exercise price of $18.00 per share.

On September 30, 1996, the Company issued a $1.8 million principal amount
convertible debenture due September 30, 1998 bearing interest at 7% unless
retired or redeemed within the first six months of issue. No principal amount of
the debenture was retired during 1996. The Company issued warrants in connection
with this debenture issue to purchase 66,000 shares of the Company's common
stock at an exercise price of $10.00 per share.

The debentures convert at an average rate of the lesser of $14 or 85% of
average common stock bid price; as defined in the agreements. The aforementioned
warrants were deemed to have minimal value.

Convertible notes issued during 1996 were recorded at face value with
interest expense calculated at an implicit interest rate of 7% applied to the
outstanding balance. In 1996, to avoid significant dilution, the Company chose
to redeem certain portions of the convertible notes, rather than allow the debt
to convert to common stock. As a result, the excess of the redemption cost over
the debt amount paid in connection with the retirement of the debt has been
charged to stockholders' equity.

On January 29, 1997, the Company redeemed $625,000 note principal balance in
exchange for 133,085 shares of common stock. Concurrently, the Company retired
$2,425,000 note principal balances in exchange for a cash payment of $2,788,750.
In order to limit the dilutive effect of conversion rights of the debentures,
the Company exercised its option to redeem the debt rather than allow
conversion. The excess of the redemption costs over the debt amount repaid was
charged to stockholder's equity.

-32-
<PAGE>

Stockholder loans

On November 14, 1996, certain officers and stockholders of Hudson granted
unsecured loans of $678,000 to the Company; repayable upon receipt of proceeds
from property mortgage or on subsequent demand.

Notes bore interest at annual rates ranging from 6% to 8.75%.

On January 29, 1997, the Company retired the officer loans and accrued
interest outstanding.

During May 1997, certain officers and stockholders of Hudson granted
unsecured loans in the aggregate of $585,000 to the Company. Such loans were due
on demand and bore interest from 8% to 8.88%. On August 12, 1997 the Company
repaid the officers loans and outstanding interest.

Scheduled maturities of the Company's debts and capital lease obligations are as
follows:

(in thousands)
Debts
Years ended December 31, Amount
- ------------------------ ------
- 1998 $1,602
- 1999 351
- 2000 157
- 2001 21
- 2002 20
- Thereafter 606
------
Total $2,757
======
The Company rents certain equipment with a net book value of about $576,000 for
leases which have been classified as capital leases. Scheduled future minimum
lease payments under capital leases net of interest are as follows:

(in thousands)
Scheduled Capital lease payments
Years ended December 31, Amount
- ------------------------ ------
- 1998 $213
- 1999 231
- 2000 142
- 2001 3
----
Total $589
====

Average short-term debt for the year ended December 31, 1997 totaled $ 3,640,000
with a weighted average interest rate of approximately 10.5%.

Note 9 - Restructuring reserves

During the second quarter 1996, the Company established a reserve for
restructuring totaling $1,333,000, for the purposes of consolidating the
Company's activities, relocating the Company's facilities and primary
reclamation center, and to consolidate product offerings.

Note 10 - Stockholders' equity

On March 24, 1995, the Company sold 153,846 redeemable common stock warrants at
$3.25 per warrant realizing proceeds of $500,000. The warrants, exercisable at
$6.25 per share until October 31, 1999, are redeemable by the Company as set
forth in the agreement. As of December 31, 1997, no warrants were exercised.

On August 19, 1995, the Company issued 174,964 shares of common stock in
connection with the acquisition of RRCA (see Note 2 to the Consolidated
Financial Statements).

On September 15, 1995, the Company called for redemption of warrants
pursuant to its initial public offering and overallotment option. A total of
1,530,139 shares of common stock were issued in connection with this redemption
through December 31, 1995; with the Company realizing net proceeds of
approximately $9,200,000. An additional 66,500 shares were issued in connection
with this redemption during 1996; with the Company realizing net proceeds of
approximately $231,000.

On June 14, 1996, the Company issued 41,560 unregistered shares in
connection with ESS's acquisition of E-Soft (see Note 2 to the Consolidated
Financial Statements).

On July 24, 1996, the Company issued 20,000 unregistered shares in
connection with its acquisition of GRR Co, Inc. (see Note 2 to the Consolidated
Financial Statements).

On May 10, 1996, the Board of Directors authorized the Company to acquire,
from publicly traded markets, a maximum of 25,000 issued and outstanding shares
of its own Common Stock. In 1996, the Company had repurchased 21,000 shares at
an average price of $8.25 per share. No shares were purchased in 1997.

On January 29, 1997, the Company entered into a Stock Purchase Agreement
with DuPont and DuPont Chemical and Energy Operations, Inc. ("DCEO") pursuant to
which the Company issued to DCEO 500,000 shares of Common Stock in consideration
of $3,500,000 in cash. Simultaneous with the execution of the Stock Purchase
Agreement, the parties entered into a Standstill Agreement, Shareholders'
Agreement and Registration Agreement.

The Standstill Agreement provides, subject to certain exceptions, that
neither DuPont nor any corporation or entity controlled by DuPont will, directly
or indirectly, acquire any shares of any class of capital stock of the Company
if the effect of such acquisition would be to increase DuPont's aggregate voting
power to greater than 20% of the total combined voting power relating to any
election of directors. The Standstill Agreement also provides that the Company
will cause two persons designated by DCEO and DuPont to be elected to the
Company's Board of Directors.

The Shareholders' Agreement provides that, subject to certain exceptions,
DuPont shall have a right of first refusal to purchase any shares of Common
Stock intended to be sold by the Company's principal shareholders.

-33-
<PAGE>

Pursuant to the Registration Agreement, the Company granted to DuPont
certain demand and "piggy-back" registration rights.

During January 1997, certain then outstanding convertible debentures were
converted into 133,085 shares of common stock (See Note 8 to the Consolidated
Financial Statements).

During 1997, certain officers and other stock option holders exercised
options to purchase an aggregate of 83,240 shares of common stock. The Company
received proceeds of approximately $452,000.

Note 11 - Commitments and contingencies

Rents, operating leases and contingent income

Hudson utilizes leased facilities and operates equipment under non-cancelable
operating leases through the year 2002. In addition, the Company subleases a
portion of its owned Ft. Lauderdale facility to a third party.

Properties

In March 1995, the Company purchased, for $950,000, a facility in Ft.
Lauderdale, Florida, consisting of a 32,000 square foot building on
approximately 1.7 acres with rail and port access. The property was mortgaged
during 1996. Annual real estate taxes are approximately $24,000. The Company has
entered into a three-year agreement, pursuant to which it leases 15,000 square
feet of its Florida facility to an unaffiliated third party at a monthly rental
of $7,500. The agreement contains a 90-day cancellation provision.

The Company's Baton Rouge, Louisiana facility is located in a 20,000 square foot
building which is leased from an unaffiliated third party at an annual rental of
approximately $54,000 pursuant to an agreement expiring in April 2000.

The Company's Rantoul, Illinois facility is located in a 23,000 square foot
building which is leased from an unaffiliated third party at an annual rental of
approximately $78,000 pursuant to an agreement expiring in September 2002.

The Company's Charlotte, North Carolina facility is located in 12,000 square
foot building which is leased from an unaffiliated third party pursuant to an
agreement which expires in April 1998. Annual rent is approximately $41,000.

The Company's Sparks, Nevada facility is located in a 11,000 square foot
building which is leased from an unaffiliated third party at an annual rental of
approximately $49,000 pursuant to an agreement expiring in September 1998.

The Company rents properties and various equipment under operating leases. Rent
expense, net of sublease rental income, for the year ended 1997 and 1996 totaled
approximately $888,000 and $762,000, respectively.

Future commitments under operating leases, are summarized as follows:

(in thousands)
Rent expense
Years ended December 31, Amount
- ------------------------ ------
- 1998 $ 911
- 1999 626
- 2000 423
-2001 386
-2002 71
---------
Total $ 2,417
=========

Legal Proceedings

During December 1996, the Company and United entered into an interim
settlement agreement which provided for (a) reimbursement ($84,000) of United's
operating costs associated with certain wells through August 1996, (b)
reimbursement, subject to a dollar cap of $12,650 per month, of United monthly
operating costs for certain wells from September 1996 through April 1997, and
(c) continued monitoring of R-11 refrigerant groundwater levels under and around
the Company's facility. Under the agreement, United agreed not to commence legal
action against the Company prior to May 1, 1997. Neither party waived their
rights as a result of the interim agreement.

-34-
<PAGE>

During August and September 1997, various proposals for possible
further remediation were discussed with the DEC and United in light of the
reduction of levels of R-11 in United's wells. Since August 1997 the levels of
R-11 in United's wells have remained substantially below the maximum contaminant
level established by the State of New York. The levels of R-11 in some of the
Company's monitoring wells remain above New York State's maximum contaminant
level. In January 1998, the Company informed the DEC that it is prepared to
install a remediation system at the Company's facility to remove any remaining
R-11 levels in the groundwater under and around the Company's facility. The cost
of this remediation is estimated to be a range of approximately $80,000 to
$100,000 for which a reserve has been recognized.

There can be no assurance that United will not commence legal action
seeking damages and/or other relief, or that any legal action or settlement will
be resolved in a manner favorable to the Company, or that the ultimate outcome
of any legal action or settlement will not have a material adverse effect on the
Company's financial condition and results of operations.

In June 1997, an action was commenced against the Company in the 19th
Judicial District Court, Parish East Baton Rouge, State of Louisiana, by a
former salesperson and her spouse, who was terminated by the Company in 1996,
alleging that the Company wrongfully terminated the employee, and is seeking
unspecified damages. The Company is defending the action and caused the action
to be removed to the Federal District Court. The Company believes the
allegations in the complaint to be without merit. There can be no assurance that
the Company will be successful in the defense in this action or that the matter
ultimately will be resolved in a manner favorable to the Company or that the
ultimate outcome of any legal action or settlement will not have a material
adverse effect on the Company's financial condition and results of operations.

In March 1998, a complaint alleging violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 was filed by Robert M. Segil, on
behalf of himself and all others similarly situated, against the Company and
certain of its officers and directors in the United States District Court for
the Southern District of New York. The complaint alleges that the defendants,
among other things, misrepresented material information about the Company's
financial results and prospects, and its customer relationships. The complaint
seeks relief on behalf of persons purchasing common stock between August 8, 1995
and August 15, 1997. The Company believes that the allegations of wrongdoing
alleged in the complaint are without merit and the Company intends to vigorously
defend the claims brought against it. The Company has learned that a second
complaint has been filed in the United States District Court for the Southern
District of New York against the Company and certain individual defendants. The
Company has not yet been served with that complaint. There can be no assurance
that this action will be resolved in a manner favorable to the Company, or that
the ultimate outcome of any legal action will not have a material adverse effect
on the Company's financial condition and results of operations.

The Company and its subsidiaries are subject to various other claims
from both private and governmental parties arising from the ordinary course of
business; none of which are material.

Employment agreements

The Company has entered into six multi-year employment agreements expiring by
2000 with officers of the Company, which provide for aggregate annual base
salaries totaling $694,000.

Note 12 - Stock Option Plan

Effective October 31, 1994, the Company adopted an Employee Stock Option Plan
("Plan") pursuant to which 725,000 shares of common stock are reserved for
issuance upon the exercise of options designated as either (i) options intended
to constitute incentive stock options ("ISOs") under the Internal Revenue Code
of 1986, as amended, or (ii) nonqualified options. ISOs may be granted under the
Plan to employees and officers of the Company. Non-qualified options may be
granted to consultants, directors (whether or not they are employees), employees
or officers of the Company. Stock appreciation rights may also be issued in
tandem with stock options. Unless sooner terminated, the Plan will expire on
December 31, 2004.

ISOs granted under the Plan may not be granted at a price less than the fair
market value of the Common Stock on the date of grant (or 110% of fair market
value in the case of persons holding 10% or more of the voting stock of the
Company). Non-qualified options granted under the Plan may not be granted at a
price less than 85% of the market value of the Common Stock on the date of
grant. Options granted under the Plan expire not more than ten years from the
date of grant (five years in the case of ISOs granted to persons holding 10% or
more of the voting stock of the Company).

-35-
<PAGE>

Effective July 25, 1997, the Company adopted its 1997 Employee Stock Option
Plan (" 1997 Plan") pursuant to which 1,000,000 shares of common stock are
reserved for issuance upon the exercise of options designated as either (i)
options intended to constitute incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended, or (ii) nonqualified options. ISOs
may be granted under the 1997 Plan to employees and officers of the Company.
Non-qualified options may be granted to consultants, directors (whether or not
they are employees), employees or officers of the Company. Stock appreciation
rights may also be issued in tandem with stock options. Unless sooner
terminated, the 1997 Plan will expire on June 11, 2007.

ISOs granted under the 1997 Plan may not be granted at a price less than the
fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). Non-qualified options granted under the 1997 Plan may not be
granted at a price less than 85% of the market value of the Common Stock on the
date of grant. Options granted under the 1997 Plan expire not more than ten
years from the date of grant (five years in the case of ISOs granted to persons
holding 10% or more of the voting stock of the Company).

All stock options have been granted to employees and non-employees at
exercise prices equal to or in excess of the market value on the date of the
grant.

The Company applies APB Opinion 25, 'Accounting for Stock Issued to
Employees', and related Interpretations in accounting for its stock option plan
by recording as compensation expense the excess of the fair market value over
the exercise price per share as of the date of grant. Under APB Opinion 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
cost is recognized.

SFAS No.123 requires the Company to provide pro forma information regarding
net loss and net loss per share as if compensation cost for the Company's stock
option plan had been determined in accordance with the fair value based method
prescribed in FASB 123. The Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants since 1995.

Years ended December 31,
Assumptions 1997 1996
- ------------------------ ----- -----
Dividend Yield % 0 % 0
Risk free interest rate 6 6
Expected volatility 46.5 79.7
Expected lives 5 5

Under the accounting provisions of FASB Statement 123, the Company's net loss
and net loss per share would have been adjusted to the pro forma amounts
indicated below:

(In thousands, except per share amounts)
Years ended December 31,
Pro forma results 1997 1996
- ----------------- ---- ----
Net loss:
As reported $(16,288) $(2,053)
Pro forma $(16,977) $(2,719)
Loss per common share-basic
As reported $(3.26) $(0.47)
Pro forma $(3.39) $(0.63)

<PAGE>

A summary of the status of the Company's stock option plan as of December 31,
1997 and 1996 and changes for the years ending on those dates is presented
below:

Weighted
Shares Average
Exercise
Stock Option Plan Grants Price
- ------------------------ ------- -------
Outstanding at December 31, 1995 514,000 $ 6.16
- -------------------------------- ------- --------
Granted 221,600 9.12
Exercised - -
Forfeited (17,000) 11.90
Outstanding at December 31, 1996 718,600 6.94
- -------------------------------- --------- --------
Granted 260,000 4.21
Exercised (83,240) 5.43
Forfeited (16,500) 7.13
-------- --------
Outstanding at December 31, 1997 878,860 $ 6.03
- -------------------------------- -======= ========

Data summarizing year-end options exercisable and weighted average fair-value of
options granted during the years ended December 31, 1997, and 1996 is shown
below:

Options Exercisable
Year ended Year ended
December 31, December 31,
1997 1996
------------ ------------
Options exercisable
at year-end 619,060 505,300
------- -------

Weighted average
exercise price 5.91 $6.10
------- -------

Weighted average
fair value of
options granted
during the $1.89 $5.66
year ------- -------

-36-
<PAGE>

Options Exercisable at December 31, 1997

Weighted
-average
Number Exercise
Range of Prices Outstanding Price
- --------------- ----------- --------
$4 to $10 553,060 $ 5.28
$10 to $16 66,000 $11.21
-------
$4 to $16 619,060 $ 5.91
=======

The following table summarizes information about stock options outstanding at
December 31, 1997:

Options Outstanding At December 31, 1997

Weighted-
average Weighted
Remaining -average
Range of Number Contractual Exercise
Prices Outstanding Life Price
- -------- ----------- ----------- ---------
$4 to $10 730,860 3.0 years $ 5.06
$10 to $16 148,000 3.3 years $10.82
-------
$4 to $16 878,860 3.1 years $ 6.03
=======

During the initial phase-in period of SFAS 123, the effects on the pro-forma
results are not likely to be representative of the effects on pro-forma results
in future years since options vest over several years and additional awards
could be made each year.

-37-

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
AT DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 626000
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<RECEIVABLES> 2020000
<ALLOWANCES> 283000
<INVENTORY> 3755000
<CURRENT-ASSETS> 6470000
<PP&E> 5939000
<DEPRECIATION> 0
<TOTAL-ASSETS> 12504000
<CURRENT-LIABILITIES> 5031000
<BONDS> 0
0
0
<COMMON> 51
<OTHER-SE> 6212000
<TOTAL-LIABILITY-AND-EQUITY> 12504000
<SALES> 23005000
<TOTAL-REVENUES> 23005000
<CGS> 20268000
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<OTHER-EXPENSES> 1525000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 726000
<INCOME-PRETAX> (14330000)
<INCOME-TAX> 1958000
<INCOME-CONTINUING> (16288000)
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