<PAGE>
 
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     For the fiscal year ended January 1, 1999
     
     OR

[_]  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 1-13486

                          JOHN Q. HAMMONS HOTELS, L.P.
                   JOHN Q. HAMMONS HOTELS FINANCE CORPORATION
                 JOHN Q. HAMMONS HOTELS FINANCE CORPORATION II
           (Exact Name of Registrants as specified in their charters)
 
                Delaware                                43-1523951
                Missouri                                43-1680322
                Missouri                                43-1720400
        (State of Organization)             (I.R.S. employer identification no.)

300 John Q. Hammons Parkway, Ste. 900
          Springfield, Missouri                            65806
(Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code: (417) 864-4300

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

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

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.  YES [X]   NO [_]

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

<PAGE>
 
                                     PART I
                                        
Item 1.  Business.

     As used herein, the term "Company" means John Q. Hammons Hotels, L.P., a
Delaware limited partnership, and its corporate and partnership subsidiaries
collectively, or, as the context may require, John Q. Hammons Hotels, L.P. only.
As used herein, the term "General Partner" means John Q. Hammons Hotels, Inc., a
Delaware corporation, or Hammons, Inc., a Missouri corporation, and the
predecessor general partner of the Company.  As used herein, the term "Finance
Corp." means John Q. Hammons Hotels Finance Corporation, a wholly owned
subsidiary of the Company which has nominal assets and does not conduct any
operations, and Finance Corp. II means John Q. Hammons Hotels Finance
Corporation II, each of which is co-obligor for the 1994 Notes and the 1995
Notes (as defined herein).  As used herein, the term "Registrants" means John Q.
Hammons Hotels, L.P., Finance Corp. and Finance Corp. II.

Overview

     The Company is a leading independent owner, manager and developer of
affordable upscale hotels in capital city, secondary and airport markets.  The
Company owns and manages 42 hotels located in 20 states, containing 10,293 guest
rooms or suites (the "Owned Hotels"), including four new hotels opened in 1998.
The Company also manages five additional hotels located in two states,
containing 1,176 guest rooms (the "Managed Hotels").  On January 1, 1999, the
Company also owned six upscale hotels at various stages of development, which
are scheduled to open during 1999 and 2000 (the "Scheduled Hotels").  The
Company's existing Owned Hotels and Managed Hotels (together, the "JQH Hotels")
operate primarily under the Holiday Inn and Embassy Suites trade names.  Most of
the Company's hotels are near a state capitol, university, airport or corporate
headquarters, plant or other major facility and generally serve markets with
populations of up to 300,000 people (or larger populations in the case of
airport markets and many of the markets in which the Company has developed new
hotels over the past several years).

     The Company's strategy is to increase cash flow and thereby enhance Partner
value primarily through (i) capitalizing on positive operating fundamentals in
the upscale full-service sector of its markets and improving the operating
results of its newer hotels, (ii) converting the franchises of its existing
hotels to franchise brands that are considered to be more upscale, and (iii)
selling certain mature assets and re-investing the net proceeds.

     The JQH Hotels are designed to appeal to a broad range of hotel customers,
including frequent business travelers, groups and conventions, as well as
leisure travelers.  Each of the JQH Hotels is individually designed by the
Company, and most contain an impressive multi-storied atrium, with water
features and lush plantings, expansive meeting space, large guest rooms or
suites and comfortable lounge areas.  The Company believes that these design
features enhance guest comfort and safety and increase the value perceived by
the guest.  The JQH Hotels' meeting facilities can be readily adapted to
accommodate both larger and smaller meetings, conventions and trade shows.  The
18 Holiday Inn JQH Hotels are affordably priced hotels designed to attract the
business and leisure traveler desiring quality accommodations, including meeting
facilities, in-house restaurants, cocktail lounges and room service.  The 13
Embassy Suites JQH Hotels are all-suite hotels which appeal to the traveler
needing or desiring greater space and specialized services.  The JQH Hotels also
include six non-franchise hotels, 



<PAGE>
 
two Radissons, one Hampton Inn & Suites, two Marriotts, two Homewood Suites, one
Crowne Plaza, one Sheraton and one Days Inn. Four of the non-franchise hotels
have the word "Plaza" in their name and the other two non-franchise hotels are
resort hotels. The Company determines which brand of hotel to develop depending
upon the demographics of the market to be served.

     Management of the JQH Hotels is coordinated from the Company's headquarters
in Springfield, Missouri by its senior management team. Five Regional Vice
Presidents and two District Directors are responsible for supervising a group of
general managers of JQH Hotels in day-to-day operations. Centralized management
services and functions include development, design, sales and marketing,
purchasing and financial controls. Through these centralized services,
significant cost savings are realized due to economies of scale.

     The General Partner conducts all of its business operations through the
Company and its subsidiaries. Mr. Hammons beneficially owns all 294,100 shares
of Class B Common Stock of the General Partner, representing 70.88% of the
combined voting power of both classes of the General Partner Common Stock. The
General Partner is the sole general partner of the Company through its ownership
of all 6,336,100 general partner units (the "GP Units"), representing 28.31% of
the total equity in the Company. Mr. Hammons beneficially owns all 16,043,900
limited partnership units of the Company (the "LP Units"), representing 71.69%
of the total equity in the Company. The 6,042,000 shares of Class A Common Stock
of the General Partner represent 27.00% of the total equity of the Company, and
the Class B Common Stock and LP Units beneficially owned by Mr. Hammons
represent 73.00% of the total equity in the Company. Mr. Hammons is also the
beneficial owner of 110,100 shares of Class A Common Stock.

     The Company's executive offices are located at 300 John Q. Hammons 
Parkway, Suite 900, Springfield, Missouri 65806 and its telephone number is
(417) 864-4300. The Company is a Delaware limited partnership that was formed 
on September 5, 1989.


Development

     The Company announced on September 11, 1998 that it was ceasing new
development activity, except for the hotels currently under construction. The
following table sets forth information as to the "Scheduled Hotels":

<TABLE>
<CAPTION>
                                              Number of                             Stage of Development/
Location             Franchise/Name          Rooms/Suites    Description            Estimated Completion Date
--------             --------------          ------------    -----------            -------------------------
<S>                  <C>                     <C>             <C>                    <C>
Mesquite, TX         Hampton Inn & Suites        160         Convention Center      Construction commenced;
                                                                                    2nd Quarter 1999

Coral Springs, FL    Radisson Plaza              224         Atrium; Convention     Construction commenced;
                                                             Center                 2nd Quarter 1999

Dallas/Ft. Worth 
Airport, TX          Embassy Suites              330         Atrium                 Construction commenced;
                                                                                    3rd Quarter 1999

Charlotte, NC        Renaissance Suites          275         Atrium                 Construction commenced;
                                                                                    4th Quarter 1999

Oklahoma City, OK    Renaissance                 312         Atrium; Convention     Construction commenced;
                                                             Center                 1st Quarter 2000

Charleston, SC       Embassy Suites              275         Atrium                 Construction commenced;
                                                                                    1st Quarter 2000
</TABLE>

     Although the Company has in the past chosen to develop rather than acquire
existing hotels, the Company may in the future acquire hotels if suitable
opportunities arise. The

<PAGE>
 
Company continues to be approached from time to time by third-party hotel owners
seeking to sell or buy hotels. The Company will continue to evaluate each offer
and base its decision on the market location, capital required, and return on
investment alternatives.

     On February 6, 1998, the Company completed the sale of six hotels to an
unrelated party for $39.4 million, resulting in a gain of approximately $0.2
million. The net book value of the hotels' property and equipment at the time of
the sale was approximately $38.6 million. On December 31, 1998, the Company
completed the sale of an additional hotel property to an unrelated party for
$16.1 million, resulting in a gain of approximately $8.0 million. The net book
value of the hotel's property and equipment at the time of the sale was
approximately $8.1 million.

     The Company's development activity restricts its ability to grow per share
income in the short term. Fixed charges for new hotels (such as depreciation and
amortization expense and interest expense) exceed new hotel operating cash flow
in the first one to three years of operations. As new hotels mature, the Company
expects, based on past experience, that the operating expenses for these hotels
will decrease as a percentage of revenues, although there can be no assurance
that this will continue to occur.


Operations 

     Management of the JQH Hotels network is coordinated by the Company's senior
management team at the Company's headquarters in Springfield, Missouri. The
management team is responsible for managing the day-to-day financial needs of
the Company, including the Company's internal accounting audits. The Company's
management team administers insurance plans and business contract review,
oversees the financial budgeting and forecasting for the JQH Hotels, analyzes
the financial feasibility of new hotel developments, and identifies new systems
and procedures to employ within the JQH Hotels to improve efficiency and
profitability. The management team also coordinates each JQH Hotel's sales
force, designing sales training programs, tracking future business under
contract, and identifying, employing and monitoring marketing programs aimed at
specific target markets. The management team is indirectly responsible for
interior design of all hotels and each hotel's product quality, and directly
oversees the detailed refurbishment of existing operations. The overall
management of the JQH Hotels is coordinated by the central management team
through five Regional Vice Presidents and two District Directors responsible for
guiding the general managers of each JQH Hotel in day-to-day operations.

     Central management utilizes information systems that track each JQH Hotel's
daily occupancy, average room rate, and rooms and food and beverage revenues.
Contracted business is tracked for each hotel individually five years into the
future using the Company's sales projection and usage reporting system. By
having the latest information available at all times, management is better able
to respond to changes in each market by focusing sales and yield management
efforts on periods of demand extremes (low periods and high periods of demand)
and controlling variable expenses to maximize the profitability of each JQH
Hotel.

     Creating operating, cost and guest service efficiencies in each hotel is a
top priority to the Company. With a total of 47 hotels under management, the
Company is able to realize significant cost savings due to economies of scale.
By leveraging the total hotels/rooms under its management, the Company is able
to secure volume pricing from its vendors that is not available


<PAGE>
 
to smaller hotel companies. The Company employs a systems trainer who is
responsible for installing new computer systems and providing training to hotel
employees to maximize the effectiveness of these systems and to ensure that
guest service is enhanced.

     Regional management constantly monitors each JQH Hotel to verify that the
Company's high level of operating standards are being met. The Company's
franchisors maintain rigorous inspection programs in which chain representatives
visit their respective JQH Hotels (typically 2 or 3 times per year ) to evaluate
product and service quality. Each chain also provides feedback to each hotel
through their guest satisfaction rating systems in which guests who visited the
hotel are asked to rate a variety of product and service issues.


Sales and Marketing

     The Company's marketing strategy is to market the JQH Hotels both through
national and marketing programs. These are local sales managers and a director
of sales at each of the JQH Hotels. While the Company makes periodic
modifications to the concept in order to address differences and maintain a
sales organization structure based on market needs and local preferences, it
generally utilizes the same major campaign concept throughout the country. The
concepts are developed at its management headquarters while the modifications
are implemented by the JQH Hotels regional vice presidents, district directors
and local sales force, all of whom are experienced in hotel marketing. The sales
force reacts promptly to local changes and market trends in order to customize
marketing programs to meet each hotel's competitive needs. In addition, the
local sales force is responsible for developing and implementing marketing
programs targeted at specific customer segments within each market. The Company
requires that each of its sales managers complete an extensive sales training
program. Before finishing the program, the sales manager must successfully
complete certifications in three development phases.

     The Company's core market consists of business travelers who visit a given
area several times per year, including salespersons covering a regional
territory, government and military personnel and technicians. The profile of the
primary target customer is a college educated business traveler, age 25 to 54,
from a two-income household with a middle management white collar occupation or
upper level blue collar occupation. The Company believes that business travelers
are attracted to the JQH Hotels because of their convenient locations in state
capitals, their proximity to airports or corporate headquarters, plants,
convention centers or other major facilities, the availability of ample meeting
space and the high level of service relative to other hotel operators serving
the same markets. The Company's sales force markets to organizations which
consistently produce a high volume of room nights and which have a significant
number of individuals traveling in the Company's operating regions. The Company
also targets groups and conventions attracted by a JQH Hotel's proximity to
convention or trade centers (often adjacent). JQH Hotels' group meetings
logistics include flexible space readily adaptable to groups of varying size,
high-tech audio-visual equipment and on-site catering facilities. The Company
believes that suburban convention centers attract more convention sponsors due
to lower prices than larger, more cosmopolitan cities. In addition to the
business market, the Company's targeted customers also include leisure travelers
looking for secure, comfortable lodging at an affordable price as well as women
travelers who find the security benefits of the Company's atrium hotels
appealing.


<PAGE>
 
     The Company advertises primarily through direct mail, magazine
publications, directories, and newspaper advertisements, all of which focus on
value delivered to and perceived by the guest. The Company has developed in-
house marketing materials including professional photographs and written
materials that can be mixed and matched to appeal to a specific target group
(business traveler, vacationer, religious group, reunions, etc.). The Company's
marketing efforts focus primarily on business travelers who account for
approximately 50% of the rooms rented in the JQH Hotels.

     The Company's franchise hotels utilize the centralized reservation systems
of its franchisors, which the Company believes are among the more advanced
reservation systems in the hotel industry. The franchisors' reservation systems
receive reservation requests entered (i) on terminals located at all of their
respective franchises, (ii) at reservation centers utilizing 1-800 phone access
and (iii) through several major domestic airlines. Such reservation systems
immediately confirm reservations or indicate accommodations available at
alternate system hotels. Confirmations are transmitted automatically to the
hotel for which the reservations are made. The Company believes that these
systems are effective in directing customers to the Company's franchise hotels.


Franchise Agreements

     The Company enters into non-exclusive franchise licensing agreements (the
"Franchise Agreements") with franchisors which it believes are the most
successful brands in the hotel industry. The term of the individual Franchise
Agreement for a hotel typically is 20 years. The Franchise Agreements allow the
Company to start with and then build upon the reputation of the brand names by
setting higher standards of excellence than the brands themselves require. The
non-exclusive nature of the Franchise Agreements allows the Company the
flexibility to continue to develop properties with the brands that have shown
success in the past or to develop in conjunction with other brand names. While
the Company currently has a good relationship with its franchisors, there can be
no assurance that a desirable replacement would be available if any of the
Franchise Agreements were to be terminated.

     Holiday Inn.  The Franchise Agreement grants to the Company a
nonassignable, non-exclusive license to use the Holiday Inns service mark and
computerized reservation network. The Franchisor maintains the right to improve
and change the reservation system to make it more efficient, economical and
competitive. Monthly fees paid by the Company are based on a percentage of gross
revenues attributable to room rentals, plus marketing and reservation
contributions which are also a percentage of gross revenues. The term of the
Franchise Agreement is 20 years with a renewal option in the 15th year.

     Embassy Suites.  The Franchise Agreement grants to the Company a
nonassignable, non-exclusive license to use the Embassy Suites service mark and
computerized reservation network. The franchisor maintains the exclusive right
to improve and change the reservation system for the purpose of making it more
efficient, economical and competitive. Monthly fees paid by the Company are
based on a percentage of gross revenues attributable to suite rentals, plus
marketing and reservation contributions which are also a percentage of gross
revenues. The term of the Franchise Agreement is 20 years with a renewal option
in the 18th year.

     Other Franchisors.  The franchise agreements with other franchisors not
listed above are similar in that they are nonassignable, non-exclusive licenses
to use the franchisor's service mark


<PAGE>
 
and computerized reservation network. Payments and terms of agreement vary based
on specific negotiations with the franchisor.


Competition

     Each of the JQH Hotels competes in its market area with numerous full
service lodging brands, especially in the upscale market, and with numerous
other hotels, motels and other lodging establishments. Chains such as Sheraton
Inns, Marriott Hotels, Ramada Inns, Radisson Inns, Comfort Inns, Hilton hotels
and Doubletree/Red Lion Inns are direct competitors of JQH Hotels in their
respective markets. There is, however, no single competitor or group of
competitors of the JQH Hotels that is consistently located nearby and competing
with most of the JQH Hotels. Competitive factors in the lodging industry include
reasonableness of room rates, quality of accommodations, level of service and
convenience of locations.


Regulations and Insurance

     General.  A number of states regulate the licensing of hotels and
restaurants including liquor license grants by requiring registration,
disclosure statements and compliance with specific standards of conduct. In
addition, various federal and state regulations mandate certain disclosures and
practices with respect to the sales of license agreements and the
licensor/licensee relationship. The Company believes that each of the JQH Hotels
has the necessary permits and approvals to operate its respective businesses.
The Company believes that all necessary permits and approvals to operate the
Scheduled Hotels will be obtained in the ordinary course of business. To
supplement the Company's self insurance programs, umbrella, property, auto,
commercial liability and worker's compensation insurance is provided to the JQH
Hotels under a blanket policy. Insurance expenses for the JQH Hotels were
approximately $6.3 million, $6.2 million and $2.2 million in 1996, 1997 and
1998, respectively. During 1998, the Company realized continued favorable trends
in insurance expense as a result of claim experience and rate improvements and a
favorable buyout of several prior self-insured years. The Company believes that
the JQH Hotels are adequately covered by insurance.

     Americans with Disabilities Act.  The JQH Hotels and any newly developed or
acquired hotels must comply with Title III of the Americans with Disabilities
Act ("ADA") to the extent that such properties are "public accommodations" and
/or "commercial facilities" as defined by the ADA. Compliance with the ADA
requirements could require removal of structural barriers to handicapped areas
in certain public areas of the JQH Hotels where such removal is readily
achievable. Noncompliance could result in a judicial order requiring compliance,
an imposition of fines or an award of damages to private litigants. The Company
has taken into account an estimate of the expense required to make any changes
required by the ADA and believes that such expenses will not have a material
adverse effect on the Company's financial condition or results of operations. If
required changes involve a greater expenditure than the Company currently
anticipates, or if the changes must be made on a more accelerated basis than the
Company anticipates, the Company could be adversely affected. The Company
believes that its competitors face similar costs to comply with the requirements
of the ADA.

     Asbestos Containing Materials.  Certain, federal, state and local laws,
regulations and ordinances govern the removal, encapsulation or disturbance of
Asbestos Containing Materials ("ACMs") when ACMs are in poor condition or in the
event of building, remodeling, renovation or demolition. These laws may impose
liability for the release of ACMs and may permit third


<PAGE>
 
parties to seek recovery from owners or operators of real estate for personal
injury associated with ACMs. Based on prior environmental assessments, seven of
the Owned Hotels contain ACMs and four of the Owned Hotels may contain ACMs,
generally in sprayed-on ceiling treatments or in roofing materials. However, no
removal of asbestos from the Owned Hotels has been recommended, and the Company
has no plans to undertake any such removal, beyond the removal that has already
occurred. The Company believes that the presence of ACMs in the Owned Hotels
will not have a material adverse effect on the Company, but there can be no
assurance that this will be the case.

     Environmental Regulations.  The JQH Hotels are subject to environmental
regulations under federal, state and local laws. Certain of these laws may
require a current or previous owner or operator of real estate to clean up
designated hazardous or toxic substances or petroleum product releases affecting
the property. In addition, the owner or operator may be held liable to a
governmental entity or to third parties for damages or costs incurred by such
parties in connection with the contamination. The Company does not believe that
it is subject to any material environmental liability.


Employees

     The Company employs approximately 8,000 full time employees, approximately
305 of whom are members of labor unions. The Company believes that labor
relations with employees are good.


Management

     The following is a biographical summary of the experience of the executive
officers and other key officers of the General Partner.

     John Q. Hammons is the Chairman, Chief Executive Officer, a director and
founder of the General Partner, and a founder of the Company. Mr. Hammons has
been actively engaged in the development, management and acquisition of hotel
properties since 1959. From 1959 through 1969, Mr. Hammons and a business
partner developed 34 Holiday Inn franchises, 23 of which were sold in 1969 to
Holiday Inns, Inc. Since 1969, Mr. Hammons has developed 81 hotels on a
nationwide basis, primarily under the Holiday Inn and Embassy Suites trade
names.

     Kenneth J. Weber is the Chief Financial Officer of the General Partner. He
joined the General Partner in April 1998 and became a director of the General
Partner in May 1998. Prior to joining the General Partner, Mr. Weber was the
Executive Vice President and Chief Financial Officer of Chartwell Leisure, a New
York based hotel company. From 1992 to 1996, Mr. Weber was the Senior Vice
President and Chief Financial Officer of Omni Hotels, based in Hampton, New
Hampshire. From 1986 to 1992, Mr. Weber worked with Red Lion Hotels, based in
Vancouver, Washington, holding the positions of Senior Vice President, Chief
Accounting Officer and Corporate Controller. Mr. Weber began his career in the
hotel industry with the Marriott Corporation, holding positions in several of
Marriott's divisions, including President and Chief Executive Officer of
Farrell's Ice Cream Parlour Restaurants from 1983 to 1986.

     Lonnie A. Funk is Senior Vice President of Operations. He began with the
Company in 1975 as the General Manager at the Holiday Inn in Billings, Montana.
In 1981, he was promoted


<PAGE>
 
to Regional Vice President of the Midwest Region. In November 1998, he was
promoted to his current position.

     Debra M. Shantz is Corporate Counsel of the General Partner. She joined the
General Partner in May 1995. Prior thereto, Ms. Shantz was a partner of
Farrington & Curtis, P.C. (now Husch & Eppenberger, LLC), a law firm which
serves as Mr. Hammons' primary outside counsel, where she practiced primarily in
the area of real estate law. Ms. Shantz had been with that firm since 1988.

     Pat A. Shivers is Senior Vice President, Administration and Control, of the
General Partner. He has been active in Mr. Hammons' hotel operations since 1985.
Prior thereto, he had served as Vice President of Product Management in
Winegardner & Hammons, Inc., a hotel management company.

     Steven E. Minton is Senior Vice President, Architecture, of the General
Partner. He has been active in Mr. Hammons' hotel operations since 1985. Prior
to that time, Mr. Minton was a project manager with the firm of Pellham and
Phillips working on various John Q. Hammons projects.

     Jacqueline A. Dowdy has been the Secretary and a director of the General
Partner since 1989. She has been active in Mr. Hammons' hotel operations since
1981. She is an officer of several affiliates of the General Partner.

     John D. Fulton is Vice President, Design and Construction of the General
Partner. He joined the General Partner in 1989 from Integra/Brock Hotel
Corporation, Dallas, Texas where he had been Director of Design and Purchasing
for ten years.

     Paul E. Muellner is Vice President, Corporate Controller of the General
Partner. Prior to joining the General Partner in June of 1998, Mr. Muellner was
Vice President of Finance for Carnival Hotels. He also served as Operations
Controller at Omni Hotels as well as positions with Red Lion Inns and Marriott
Corporation.

     Lawrence A. Welch has been Vice President, Food and Beverage, of the
General Partner since March 1994. Prior to joining the General Partner, Mr.
Welch worked in the Food and Beverage division with Davidson Hotel Company for
ten years.


Forward-Looking Statements

     In addition to historical information, this document contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Act of 1995. These statements typically, but not exclusively, are
identified by the inclusion of phrases such as "the Company believes," "the
Company plans," "the Company intends," and other phrases of similar meaning.
These forward-looking statements involve risks and uncertainties and are based
on current expectations. Consequently, actual results could differ materially
from the expectations expressed in the forward-looking statements. Among the
various factors that could cause actual results to differ include a downturn in
the economy (either regionally or nationwide) affecting overall hotel occupancy
rates, revenues at New Hotels not reaching expected levels as quickly as planned
as the result of competitive factors or the Company's inability to obtain
permanent financing for New Hotels on terms similar to those available in the
past.


<PAGE>
 
Item 2.  Properties.

     The Company leases its headquarters in Springfield, Missouri from a
Missouri general partnership of which Mr. Hammons is a 50% partner. In 1998, the
Company made aggregate annual lease payments of approximately $231,000 to such
Missouri general partnership. The Company leases from John Q. Hammons the real
estate on which two of the Company's hotels are located. These leases are more
fully described in Item 13 "Certain Relationships and Related Transactions." The
Company owns the land on which 33 of the Owned Hotels are located, while nine of
the Owned Hotels are subject to long-term ground leases.


Description of Hotels - General

     The JQH Hotels are located in 21 states and contain a total of 11,469
rooms. The JQH Hotels operate primarily under the Holiday Inn and Embassy Suites
trade names. Most of the JQH Hotels have assumed a leadership position in their
local market by providing a high quality product in a market unable to
economically support a second competitor of similar quality.

     Each of the JQH Hotels is individually designed by the Company. Many of the
JQH Hotels contain an expansive multi-storied atrium, large indoor water
features, lush plantings, expansive meeting space, large guest rooms or suites
and comfortable lounge areas. In addition to the visual appeal, the Company
believes that an atrium design in which each of the hotel's room doors face into
the atrium, combined with glass elevators, achieves a greater level of security
for all guests. The Company believes this safety factor is particularly relevant
to women, who represent a growing portion of its business clientele. The JQH
Hotels also appeal to fitness conscious guests as all of the JQH Hotels have at
least one swimming pool and most have exercise facilities.

     The Company believes that the presence of adjacent convention centers
provides incremental revenues for its hotel rooms, meeting facilities, and
catering services, and that hotels which are adjacent to convention centers
occupy a particularly successful niche within the hotel industry. These
convention or trade centers are available for rent by hotel guests. Each of the
JQH Hotels has a restaurant/catering service on its premises which provides an
essential amenity to the convention trade. The Company chooses not to lease out
the restaurant business to third-party caterers or vendors since it considers
the restaurant business an important component of securing convention business.
All of the restaurants in the JQH Hotels are owned and managed by the Company
specifically to maintain direct quality control over a vital aspect of the
convention and hotel business. The Company also derives significant revenue and
operating profit from food and beverage sales due to its ownership and
management of all of the restaurants in the JQH Hotels. The Company believes
that its food and beverage sales are more profitable than its competitors due to
the amount of catering business provided to convention and other meetings at the
Owned Hotels.

     The Company retains responsibility for all aspects of the day-to-day
management of each of the JQH Hotels, including establishing and implementing
standards of operation at all levels; hiring, training and supervising staff;
creating and maintaining financial controls; regulating compliance with laws and
regulations relating to the hotel operations; and providing for the safekeeping,
repair and maintenance of the hotels owned by the Company. The Company typically
refurbishes individual hotels every four to six years, and has spent an average
per year


<PAGE>
 
of $20.9 million in the last four years on the Owned Hotels. During 1999, the
Company expects to spend approximately $15.5 million on refurbishment of the
Owned Hotels.

Owned Hotels

     The Owned Hotels consist of 42 hotels, which are located in 20 states and
contain a total of 10,293 guest rooms or suites. The following table sets forth
certain information concerning location, franchise/name, number of rooms/suites,
description and opening date for each Owned Hotel:

<TABLE>
<CAPTION>

                                                                            Number of
                                                                            ---------
Location                   Franchise/Name               Rooms/Suites        Description                            Opening Date
--------                   --------------               ------------        -----------                            ------------
<S>                        <C>                          <C>                 <C>                 <C>                 <C>
Montgomery, AL             Embassy Suites               237                 Atrium;                                    8/95
                                                                            Meeting Space:      15,000 sq. ft.  (c)
Tucson, AZ                 Holiday Inn                  299                 Atrium;                                   11/81
                                                                            Meeting Space:      14,000 sq. ft.
Tucson, AZ                 Marriott                     250                 Atrium;                                   12/96
                                                                            Meeting Space:      11,500 sq. ft.
Little Rock, AR            Embassy Suites               251                 Atrium;                                    8/97
                                                                            Meeting Space:      14,000 sq. ft.
Springdale, AR             Holiday Inn                  206                 Atrium;                                    7/89
                                                                            Meeting Space:      18,000 sq. ft.
                                                                            Convention Center:  29,280 sq. ft.
Springdale, AR             Hampton Inn & Suites         102                 Meeting Space          400 sq. ft.        10/95
Bakersfield, CA            Holiday Inn Select           259                 Meeting Space:       9,735 sq. ft.  (c)    6/95
Monterey, CA               Embassy Suites               225                 Meeting Space:      13,700 sq. ft.        11/95
Sacramento, CA             Holiday Inn                  364                 Meeting Space:       9,000 sq. ft.         8/79
San Francisco, CA          Holiday Inn                  280                 Meeting Space:       9,000 sq. ft.         6/72
Denver, CO(a)              Holiday Inn (International   256                 Atrium;                                   10/82
                           Airport)                                         Trade Center:       66,000 sq. ft.  (b)
Denver, CO                 Holiday Inn (Northglenn)     235                 Meeting Space:      20,000 sq. ft.        12/80
Fort Collins, CO           Holiday Inn                  259                 Atrium;                                    8/85
                                                                            Meeting Space:      12,000 sq. ft.
St. Augustine, FL          World Golf Village Resort    302                 Atrium;                                    5/98
                                                                            Convention Center:  40,000 sq. ft.
Tampa, FL                  Embassy Suites               247                 Atrium;                                    1/98
                                                                            Meeting Space:      18,000 sq. ft.
Joliet, IL                 Holiday Inn                  200                 Meeting Space:       5,500 sq. ft.         3/71
Cedar Rapids, IA           Collins Plaza                221                 Atrium;                                    9/88
                                                                            Meeting Space:      11,250 sq. ft.
Davenport, IA              Radisson                     221                 Meeting Space:       7,800 sq. ft.  (c)   10/95
Des Moines, IA             Embassy Suites               234                 Atrium;                                    9/90
                                                                            Meeting Space:      13,000 sq. ft.
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

                                                                            Number of
                                                                            ---------  
Location                   Franchise/Name               Rooms/Suites        Description                            Opening Date
--------                   --------------               ------------        -----------                            ------------
<S>                        <C>                          <C>                 <C>                 <C>                 <C>

Des Moines, IA             Holiday Inn                  288                 Atrium;                                    1/87
                                                                            Meeting Space:      15,000 sq. ft.
Topeka, KS                 Capitol Plaza                224                 Atrium;                                    8/98
                                                                            Convention Center:  26,000 sq. ft.
Bowling Green, KY          University Plaza             218                 Meeting Space:       4,000 sq. ft.  (c)    8/95
Branson, MO                Chateau on the Lake          302                 Atrium; Meeting                            5/97
                                                                            Space:              40,000 sq. ft.
Jefferson City, MO         Capitol Plaza                255                 Atrium;                                    9/87
                                                                            Meeting Space:      14,600 sq. ft.
Joplin, MO                 Holiday Inn                  264                 Atrium;                                    6/79
                                                                            Meeting Space:       8,000 sq. ft.
                                                                            Trade Center:       32,000 sq. ft.  (b)
Kansas City, MO(a)         Embassy Suites               236                 Atrium;                                    4/89
                                                                            Meeting Space:      12,000 sq. ft.
Kansas City, MO            Homewood Suites              119                 Extended Stay                              5/97
Springfield, MO            Holiday Inn                  188                 Atrium;                                    9/87
                                                                            Meeting Space:       3,020 sq. ft.
Omaha, NE                  Embassy Suites               249                 Atrium;                                    1/97
                                                                            Meeting Space:      13,000 sq. ft.
Reno, NV                   Holiday Inn                  286                 Meeting Space:       8,700 sq. ft.         2/74
Albuquerque, NM            Holiday Inn                  311                 Atrium;                                   12/86
                                                                            Meeting Space:      12,300 sq. ft.
Greensboro, NC(a)          Embassy Suites               221                 Atrium;                                    1/89
                                                                            Meeting Space:      10,250 sq. ft.
Greensboro, NC(a)          Homewood Suites              104                 Extended Stay                              8/96
Raleigh-Durham, NC         Embassy Suites               273                 Atrium;                                    9/97
                                                                            Meeting Space:      20,000 sq. ft.
Portland, OR(a)            Holiday Inn                  286                 Atrium;                                    4/79
                                                                            Trade Center:       37,000 sq. ft.  (b)
Portland, OR(a)            Embassy Suites               253                 Atrium;                                    9/98
                                                                            Meeting Space:      11,000 sq. ft.
Columbia, SC               Embassy Suites               214                 Atrium;                                    3/88
                                                                            Meeting Space:      13,000 sq. ft.
Greenville, SC             Embassy Suites               268                 Atrium;                                    4/93
                                                                            Meeting Space:      20,000 sq. ft.
Beaumont, TX               Holiday Inn                  253                 Atrium;                                    3/84
                                                                            Meeting Space:      12,000 sq. ft.
Houston, TX(a)             Radisson                     288                 Atrium;                                   12/85
                                                                            Meeting Space:      14,300 sq. ft.
Charleston, WV             Embassy Suites               253                 Atrium;                                   12/97
                                                                            Meeting Space:      14,600 sq. ft.
Madison, WI                Marriott                     292                 Atrium;                                   10/85
                                                                            Meeting Space:      15,000 sq. ft.  (b)
                                                                            Convention Center:  50,000 sq. ft.
</TABLE>
________________________
 
(a)  Airport location
(b)  The trade or convention center is located adjacent to hotel and is owned by
     Mr. Hammons, except the convention centers in Madison, Wisconsin and
     Denver, Colorado, which are owned by the Company.
(c)  Large civic center is located adjacent to hotel.
<PAGE>
  
Managed Hotels

     The Managed Hotels consist of five hotels (three Holiday Inns, one Sheraton
and one Days Inn) located in two states (Missouri and South Dakota), and contain
a total of 1,176 guest rooms. Mr. Hammons directly owns four of these five
hotels. The remaining hotel is owned by an entity controlled by Mr. Hammons in
which he has a 50% interest. Jacqueline Dowdy, a director and officer of the
General Partner, and Daniel L. Earley, a director of the General Partner, each
own a 25% interest in this entity. There is a convention and trade center
adjacent to three of the Managed Hotels.

     The Company provides management services to the Managed Hotels within the
guidelines contained in annual operating and capital plans submitted to the
hotel owner for review and approval during the final 30 days of the preceding
year. The Company is responsible for the day-to-day operations of the Managed
Hotels. While the Company is responsible for the implementation of major
refurbishment and repairs, the actual cost of such refurbishments and repairs is
borne by the hotel owner. The Company earns a fee based on the size of the
project. The Company earns an average annual management fee of 3% of the hotel's
gross revenues. Each of the Managed Hotels' management contracts is for an
initial term of 20 years, which automatically extends for four periods of five
years, unless otherwise canceled. The Company has received an option from Mr.
Hammons or entities controlled by him to purchase each of the Managed Hotels.

Item 3.  Legal Proceedings.

     The Company is not presently involved in any litigation which if decided
adversely to the Company would have a material effect on the Company's financial
condition. To the Company's knowledge, there is no litigation threatened other
than routine litigation arising in the ordinary course of business which would
be covered by liability insurance.

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

     None.
                                    PART II

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

     Not Applicable.

Item 6.  Selected Financial Data.
<PAGE>
 
     The selected consolidated financial information of the Company for the
1998, 1997, 1996, 1995 and 1994 Fiscal Years has been derived from and should be
read in conjunction with the audited consolidated financial statements of the
Company, which statements have been audited by Arthur Andersen LLP, independent
public accountants.  The information presented below also should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included under Item 7.  The Company's fiscal year
ends on the Friday nearest December 31.  Consequently, the Company's 1996 Fiscal
Year included 53 weeks of operations while the 1994, 1995, 1997 and 1998 Fiscal
Years included 52 weeks of operations.

Selected Consolidated Financial Information
-------------------------------------------
<TABLE>
<CAPTION>
                                                   (in thousands, except per share amounts, ratios and hotel data)
                                                                         FISCAL YEAR-ENDED
                                                       1998         1997         1996        1995         1994
<S>                                                  <C>          <C>          <C>          <C>          <C> 
REVENUES
  Rooms (a)                                          $211,989     $195,296     $171,206     $148,432     $137,387
  Food and beverage                                    91,982       86,183       79,580       70,840       65,308
  Meeting room rental and other (b)                    22,159       20,795       18,061       15,907       13,998
                                                     --------     --------     --------     --------     --------
   Total revenues                                     326,130      302,274      268,847      235,179      216,693
                                                     --------     --------     --------     --------     --------
 
OPERATING EXPENSES
  Direct operating costs and expenses (c)
   Rooms                                               54,600       50,265       43,610       38,543       34,413
   Food and beverage                                   64,174       62,383       57,956       54,228       49,721
   Other                                                3,389        3,385        2,929        2,521        2,397
  General, administrative, sales and management
   service expenses (d,e)                              95,500       85,766       74,646       64,234       57,981
  Repairs and maintenance                              13,438       12,578       11,528       10,131        9,888
  Depreciation and amoritization                       45,580       34,781       24,034       18,346       13,975
                                                     --------     --------     --------     --------     --------
   Total operating expenses                           276,681      249,158      214,703      188,003      168,375
                                                     --------     --------     --------     --------     --------
 
INCOME FROM OPERATIONS                                 49,449       53,116       54,144       47,176       48,318

OTHER (INCOME) EXPENSES
  Interest expense and amorization of deferred
   financing fees, net                                 57,286       44,325       35,620       28,447       32,932
  Gain on sales of property and equipment (f)          (8,175)          --           --           --           --
                                                     --------     --------     --------     -------   -  --------
 
INCOME BEFORE EXTRAORDINARY
ITEM (g)                                             $    338     $  8,791     $ 18,524     $ 18,729     $ 15,386
                                                     ========     ========     ========     ========     ========
 
BALANCE SHEET DATA
  Total Assets                                       $876,486     $816,733     $658,072     $542,371     $443,044
  Total Debt, including current portion               759,716      695,791      531,143      458,094      380,869
</TABLE>
<PAGE>
  
(a)  Includes revenues derived from rooms.
(b)  Includes meeting room rental, management fees for providing management
     services to the Managed Hotels and other.
(c)  Includes expenses incurred in connection with rooms, food and beverage, and
     telephones.
(d)  Includes expenses incurred in connection with franchise fees,
     administrative, marketing and advertising, utilities, insurance, property
     taxes, rent and other.
(e)  Includes expenses incurred providing management services to the Managed
     Hotels.
<PAGE>
 
(f)  Gain on sales includes six hotels sold February 6, 1998 and one hotel sold
     December 31, 1998.
(g)  The 1994 and 1995 Fiscal Years do not include a $3.3 million and a $0.3
     million, respectively, extraordinary charge related to prepayment fees on
     Stock Offering.  The 1998 Fiscal Year includes a $2.2 million extraordinary
     charge related to early extinguishment of debt.

Supplemental Financial Information Relating to the 1994 and 1995 Collateral
Hotels

  The following tables set forth, as of January 1, 1999, unaudited selected
financial information with respect to the 20 hotels collateralizing the 1994
Notes (the "1994 Collateral Hotels") and the eight hotels collateralizing the
1995 notes (the "1995 Collateral Hotels") and the Company, excluding
Unrestricted Subsidiaries (as defined in the indentures relating to the 1994
Notes and the 1995 Indentures) (the "Restricted Group").  Under the heading
"Management Operations," information with respect to revenues and expenses
generated by the Company as manager of the 1994 Collateral Hotels, the 1995
Collateral Hotels, the other Owned Hotels owned by John Q. Hammons Hotels Two,
L.P. ("L.P. Two"), and the Managed Hotels is provided.


<TABLE>
<CAPTION>
                                                               12 Months Ended January 1, 1999
                                        1994               1995           Management          
                                     Collateral         Collateral        Operations           Total
                                       Hotels             Hotels             Group          Restricted
                                     ----------         ----------        ----------        ----------
<S>                                  <C>                <C>               <C>                <C>
Statement of Operations Data:
Operating Revenues                     $139,721           $57,528             $6,783(a)      $204,032
 
Operating Expenses:
Direct operating costs and expenses      51,997            21,611                 --           73,608
General Administrative,                  
Sales and Mgmt expenses (b)              39,292            18,617               (917)(c)       56,992
 Repairs and Maintenance                  5,448             1,549                 --            6,998
 Depreciation and Amortization           11,922             5,402                412           17,736
                                       --------           -------             ------         --------
      Total Operating Expense           108,659            47,179               (505)         155,337
                                       --------           -------             ------         --------
Income from Operations                 $ 31,062           $10,349             $7,287         $ 48,699
                                       ========           =======             ======         ========
Operating Data:
   Occupancy                               66.0%             61.6%
   Average Daily Room Rate             $  87.51           $ 80.16
   RevPAR                              $  56.70           $ 49.34
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                                  12 Months Ended January 2, 1998
                                         ------------------------------------------------
                                            1994        1995     Management
                                         Collateral  Collateral  Operations      Total
                                           Hotels      Hotels       Group      Restricted
                                         ----------  ----------  ----------    ----------
<S>                                      <C>          <C>         <C>           <C>
Statement of Operations
 Data:                                    $151,797     $62,209     $ 4,828 (a)   $218,834
Operating Revenues
Operating Expenses:
Direct operating costs and expenses         57,511      24,030          --         81,541
General Administrative,
 Sales and Mgmt expenses(b)                 41,960      18,303      (1,524)(c)     58,739
 Repairs and Maintenance                     6,089       2,771          --          8,860
 Depreciation and                           12,072       5,391          76         17,539
  Amortization                            --------     -------     -------       --------
      Total Operating                      117,632      50,496      (1,448)       166,679
       Expense                            --------     -------     -------       --------
Income from Operations                    $ 34,165     $11,713     $ 6,276       $ 52,154
                                          ========     =======     =======       ========
Operating Data:
   Occupancy                                  65.2%       65.2%
   Average Daily Room Rate                $  80.32     $ 75.30
   RevPAR                                 $  52.33     $ 49.06
</TABLE>   
(a) Represents management revenues derived from the Owned Hotels owned by Two
L.P. and the Managed Hotels.
(b) General, administrative, sales and management expenses for the 1994 and 1995
Collateral Hotels include management expenses allocated to the respective 
hotels.
(c) General, administrative, sales and management expenses applicable to 
management operations are net of management revenues allocated to the 1994 and 
1995 Collateral Hotels.


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
of Operations.

General

     The following discussion and analysis primarily addresses results of
operations of the Company for the fiscal years ended January 1, 1999 ("1998"),
January 2, 1998 ("1997") and January 3, 1997 ("1996"). The following discussion
should be read in conjunction with the selected consolidated financial
information of the Company and the consolidated financial statements of the
Company included elsewhere herein.

     The Company's consolidated financial statements include revenues from the
Owned Hotels and management fee revenues for providing management services to
the Managed Hotels. References to the JQH Hotels include both the Owned Hotels
and the Managed Hotels. Revenues from the Owned Hotels are derived from rooms,
food and beverage, meeting rooms and other revenues. The Company's beverage
revenues include only revenues from the sale of alcoholic beverages, while
revenues from the sale of non-alcoholic beverages are shown as part of food
revenues. Direct operating costs and expenses include expenses incurred in
connection with the direct operation of rooms, food and beverage and telephones.
General, administrative, sales and management services expenses include expenses
incurred from franchise fees, administrative,

<PAGE>
 
sales and marketing, utilities, insurance, property taxes, rent, management
services and other expenses.

     From 1994 through 1998, the Company's total revenues grew at an annual
compounded growth rate of 10.8%, from $216.7 million to $326.1 million.
Occupancy for the Owned Hotels during that period decreased 6.4 percentage
points from 68.5% to 62.1%. However, the Owned Hotels' average daily room rate
(ADR) increased by 33.5% from $68.45 to $91.38 during that period. Room revenue
per available room (RevPAR) increased by 21.1% from $46.88 to $56.79.

     In general, hotels opened during the period from 1994 to 1998 decreased
overall occupancy but increased the overall average room rate. The Company
tracks the performance of the Owned Hotels in two groups. One group of hotels
are those opened by the Company during the current and prior fiscal years (New
Hotels). During 1998, the New Hotels included four hotels opened in 1998 and six
hotels opened in 1997. The remainder of the Owned Hotels, excluding the New
Hotels, are defined as Mature Hotels. In 1998, the Mature Hotels included 32
hotels opened prior to 1997. New hotels typically generate positive cash flow
from operations before debt service in the first year, generate cash sufficient
to service mortgage debt in the second year and create positive cash flow after
Debt service in the third year.

 
<TABLE>
<CAPTION>
                                                               FISCAL YEAR-ENDED
                                           1998         1997         1996         1995         1994
<S>                                     <C>          <C>          <C>          <C>          <C>          
OWNED HOTELS
 Average Occupancy                            62.1%        62.9%        64.7%        67.1%        68.5%
 Average Daily Room Rate (ADR)          $    91.38   $    82.38   $    76.16   $    71.68   $    68.45
 Room Revenue per Available Room
    (RevPAR)                            $    56.79   $    51.84   $    49.24   $    48.09       $46.88
 Available Rooms (a)                     3,733,166    3,767,387    3,476,279    3,087,700    2,930,893
 Number of Hotels                               42           45           39           37           31
 
MATURE HOTELS
 Average Occupancy                            64.1%        63.8%        64.8%        67.1%        68.5%
 Average Daily Room Rate (ADR)          $    86.50   $    79.80   $    76.06   $    71.68   $    68.45
 Room Revenue per Available Room
   (RevPAR)                             $    55.41   $    50.90   $    49.24   $    48.09   $    46.88
 Available Rooms (a)                     3,012,845    3,388,896    3,454,899    3,087,700    2,930,893
 Number of Hotels                               32           37           37           37           31
 
NEW HOTELS
 Average Occupancy                            54.1%        55.3%        42.2%          --           --
 Average Daily Room Rate (ADR)          $   115.55   $   108.97   $   100.49           --           --
 Room Revenue per Available Room
   (RevPAR)                             $    62.54   $    60.21   $    42.42           --           --
 Available Rooms (a)                       720,321      378,491       21,380           --           --
 Number of Hotels                               10            8            2           --           --
 
PERCENTAGES OF TOTAL REVENUES
REVENUES
 Rooms                                        65.0%        64.6%        63.7%        63.1%        63.4%
 Food and beverage                            28.2%        28.5%        29.6%        30.1%        30.1%
 Meeting room rental and other                 6.8%         6.9%         6.7%         6.8%         6.5%
                                        ----------   ----------   ----------   ----------   ----------
   Total revenues                            100.0%       100.0%       100.0%       100.0%       100.0%
                                        ----------   ----------   ----------   ----------   ----------
OPERATING EXPENSES
 Direct operating costs and expenses
   Rooms                                      16.7%        16.6%        16.2%        16.4%        15.9%
   Food and beverage                          19.7%        20.6%        21.6%        23.0%        22.9%
   Other                                       1.0%         1.1%         1.1%         1.1%         1.1%
 General, administrative, sales and
   management service expenses                29.3%        28.4%        27.8%        27.3%        26.8%
 Repairs and maintenance                       4.1%         4.2%         4.3%         4.3%         4.6%
 Depreciation and amortization                14.0%        11.5%         8.9%         7.8%         6.4%
                                        ----------   ----------   ----------   ----------   ----------
   Total operating expenses                   84.8%        82.4%        79.9%        79.9%        77.7%
                                        ----------   ----------   ----------   ----------   ----------
 Income from Operations                       15.2%        17.6%        20.1%        20.1%        22.3%
                                        ==========   ==========   ==========   ==========   ==========
</TABLE>


(a) Available rooms represent the number of rooms available for rent multiplied
by the number of days in the period reported or, in the case of New Hotels, the
number of days the hotel was opened during the period reported. The Company's
1996 Fiscal Year contained 53 weeks or 371 days, while its 1994, 1995, 1997 and
1998 Fiscal Years each contained 52 weeks, or 364 days.

1998 FISCAL YEAR COMPARED TO 1997 FISCAL YEAR

Total revenues increased to $326.1 million in 1998 from $302.3 million in 1997,
an increase of $23.8 million, or 7.9%. Of the total revenues reported in 1998,
65.0% were revenues from rooms, 28.2% were revenues from food and beverage and
6.8% were revenues from meeting room rental and other, compared with 64.6%,
28.5% and 6.9%, respectively, during 1997.

Rooms revenues increased to $212.0 million in 1998 from $195.3 million in 1997,
an increase of $16.7 million, or 8.6%, as a result of the operation of two
hotels which opened in 1996 and six hotels opened in 1997, and the increase in
average daily room rate (ADR). Average daily room rates (ADR) of Mature Hotels
increased to $86.50 in 1998 from $79.80 in 1997. The occupancy in the mature
hotels was a 0.3 percentage point increase to 64.1% in 1998, compared to 63.8%
in 1997. The Mature Hotels' room revenue per available room (RevPAR) improved to
$55.41 in 1998 from $50.90 in 1997, an increase of $4.51 or 8.9%. In 1998, the
New Hotels included ten hotels, which generated a revenue per available room
(RevPAR) of $62.54, up 3.9% from the 1997 revenue per available room (RevPAR) of
$60.21, when eight New Hotels were open. In general, management believes the New
Hotels are more insulated from the effects of new hotel supply than are the
Mature Hotels, since the New Hotels utilize franchise brands that are considered
to be more upscale in nature, and the New Hotels have higher-quality guest rooms
and public spaces.

Food and beverage revenues increased to $92.0 million in 1998 from $86.2 million
in 1997, an increase of $5.8 million, or 6.7%. This increase was due to revenues
associated with newly opened hotels.

Meeting room rental and other revenues increased to $22.2 million in 1998 from
$20.8 million in 1997, an increase of $1.4 million, or 6.7%. This increase was
due to the addition of meeting space in the New Hotels.
<PAGE>
 
Direct operating costs and expenses for rooms increased to $54.6 million in 1998
from $50.3 million in 1997, an increase of $4.3 million, or 8.5%. As a
percentage of rooms revenue, these expenses remained stable, at 25.8%.

Direct operating costs and expenses for food and beverage increased to $64.2
million in 1998 from $62.4 million in 1997, an increase of $1.8 million, or
2.9%, but decreased as a percentage of food and beverage revenues, to 69.8% from
72.4% in 1997. The dollar increase was due to costs associated with the higher
volume of sales.

Direct operating costs and expenses for other remained stable in 1998 at $3.4
million, but decreased as a percentage of meeting room rental and other revenues
to 15.3% from 16.3% in 1997.

General, administrative, sales and management service expenses increased to
$95.5 million in 1998 from $85.8 million in 1997, an increase of $9.7 million,
or 11.3%. Increases in these expenses are primarily attributable to expenses
associated with the opening of new hotels in 1997 and 1998. A large portion of
expenses associated with new hotel openings are fixed costs in nature. As a
result, these expenses rise faster than revenues in the first one to two years
of operation. As a percentage of total revenues, these expenses increased to
29.3% in 1998 from 28.4% in 1997.

Repairs and maintenance expenses increased to $13.4 million in 1998 from $12.6
million in 1997, by $0.8 million or 6.3%, but decreased slightly as a percentage
of total revenues, to 4.1% from 4.2% in 1997.

Depreciation and amortization increased to $45.6 million in 1998 from $34.8
million in 1997, by $10.8 million, or 31.0%. As a percentage of total revenues,
these expenses increased to 14.0% in 1998 from 11.5% in 1997. The increase was a
direct result of the increased level of capital expenditures for the newly
opened hotels.

Income from operations decreased to $49.4 million in 1998 from $53.1 million in
1997, a decrease of $3.7 million, or 7.0%. The decrease was due to higher costs,
including depreciation expense related to the building of new hotels. As a
percentage of total revenues, income from operations was 15.2% in 1998 and 17.6%
in 1997.

Interest expense and amortization of deferred financing fees, net increased to
$57.3 million in 1998 from $44.3 million in 1997, an increase of $13.0 million,
or 29.3%. The increase was attributable to borrowing for new hotel construction.

Income before extraordinary item decreased to $0.3 million in 1998 from $8.8
million in 1997, a decrease of $8.5 million, or 96.6%. The 1998 results include
an $8.2 million gain on sales of property and equipment in connection with the
sale of six Holiday Inns in February of 1998 and one Holiday Inn in December of
1998.

1997 FISCAL YEAR COMPARED TO 1996 FISCAL YEAR

Total revenues increased to $302.3 million in 1997 from $268.8 million in 1996,
an increase of $33.5 million, or 12.4%. Of total revenues recognized in 1997,
64.6% were revenues from rooms, compared to 63.7% in 1996, continuing the
gradual shift over the past several years, as 
 
<PAGE>
 
the average daily room rate (ADR) continues to increase. Revenues from food and
beverage represented 28.5% of total revenues recognized in 1997, compared to
29.6% in 1996, and revenues from meeting room rental and other represented 6.9%
of total revenues compared to 6.7% in 1996.

Rooms revenues increased to $195.3 million in 1997 from $171.2 million in 1996,
an increase of $24.1 million, or 14.1%, as a result of the addition of six
hotels opened in 1997, a full year of operation for the two hotels opened in
1996, and a 4.9% increase in the average daily room rate (ADR) of the Mature
Hotels.

Food and beverage revenues increased to $86.2 million in 1997 from $79.6 million
in 1996, an increase of $6.6 million, or 8.3%. This increase was primarily due
to revenues associated with the New Hotels.

Meeting room rental and other revenues increased to $20.8 million in 1997 from
$18.1 million in 1996, an increase of $2.7 million, or 15.1%. This increase was
primarily a result of the New Hotels.

Direct operating costs and expenses for rooms increased to $50.3 million in 1997
from $43.6 million in 1996, an increase of $6.7 million, or 15.3%. As a
percentage of rooms revenue, these expenses increased slightly to 25.7% in 1997
from 25.5% in 1996. The increased expense was associated with the New Hotels.
These costs generally represent a higher percentage of rooms revenue in newer
hotels until these hotels reach stabilized occupancy levels.

Direct operating costs and expenses for food and beverage increased to $62.4
million in 1997 from $58.0 million in 1996, an increase of $4.4 million, or
7.6%, but decreased slightly as a percentage of food and beverage revenues to
72.4%, from 72.8% in 1996. The dollar increase was due to costs associated with
the higher volume of sales associated with the New Hotels.

Other direct operating costs and expenses were $3.4 million in 1997 and $ 2.9
million in 1996, a 15.6% increase. As a percentage of meeting room rental and
other revenues, these expenses were 16.3% in 1997 and 16.2% in 1996.

General, administrative, sales and management service expenses increased to
$85.8 million in 1997 from $74.6 million in 1996, an increase of $11.2 million,
or 14.9%. Increases in these expenses were primarily attributable to expenses
associated with the New Hotels. As a percentage of total revenues, these
expenses increased to 28.4% in 1997, from 27.8% in 1996.

Repairs and maintenance expenses increased to $12.6 million in 1997 from $11.5
million in 1996, an increase of $1.1 million, or 9.1%, but decreased slightly as
a percentage of revenues to 4.2% from 4.3% in 1996.

Depreciation and amortization increased by $10.8 million, or 44.7%, to $34.8
million in 1997 from $24.0 million in 1996. As a percentage of total revenues,
these expenses increased to 11.5% in 1997 from 8.9% in 1996. The increase was a
direct result of the opening of the eight New Hotels during 1996 and 1997.

Income from operations decreased to $53.1 million in 1997 from $54.1 million in
1996, a decrease of $1.0 million, or 1.9%. As a percentage of total revenues,
income from operations was 

<PAGE>
 
17.6% in 1997 compared to 20.1% in 1996, due primarily to the non-cash expense
of depreciation and amortization associated with the New Hotels.

Interest expense and amortization of deferred financing fees, net increased to
$44.3 million in 1997 from $35.6 million in 1996, an increase of $8.7 million or
24.4%. The increase was attributable to debt associated with the financing of
the New Hotels.

Income before extraordinary item decreased to $8.8 million in 1997 from $18.5
million in 1996, a decrease of $9.7 million, or 52.5%.

LIQUIDITY AND CAPITAL RESOURCES

     In general, the Company has financed its operations through internal cash
flow, loans from financial institutions, the issuance of public debt and equity
and the issuance of industrial revenue bonds. The Company's principal uses of
cash are to pay operating expenses, to service debt and to fund capital
expenditures, new hotel development and permitted distributions to fund some of
the taxes allocable to the partners.

     At January 1, 1999, the Company had $46.2 million of cash and equivalents
and also had $6.5 million of marketable securities, compared to $42.0 million in
cash and cash equivalents and $12.7 million of marketable securities at the end
of 1997. Such amounts are available for development of new hotels and other
working capital requirements of the Company.

     Net cash provided by operating activities increased significantly to $43.5
million at the end of 1998 from $27.8 million at the end of 1997, an increase of
$15.7 million, or 56.5%, primarily as the result of changes in interim financing
of construction through trade payables.

     The Company incurred net capital expenditures of $131.2 million and $179.4
million, respectively, for 1998 and 1997. Capital expenditures typically include
capital improvements on existing hotel properties and expenditures for
development of new hotels. Capital expenditures in 1998 included $111.5 million
for new hotel development and $19.7 million for existing hotels. During 1997,
capital expenditures for existing hotels and new hotel development were $19.1
million and $160.3 million, respectively. During 1999, the Company expects
capital expenditures to approximate $120.8 million, representing approximately
$15.5 million for capital improvements on existing hotels and approximately
$105.3 million for continued new hotel development.

     At the end of 1998, total debt was $759.7 million compared with $695.8
million in 1997. The increase is attributable to the hotels opened during 1998
as well as six Scheduled Hotels under construction at the end of 1998. The
current portion of long-term debt was $42.3 million at the end of 1998, compared
with $61.5 million at the end of 1997.

     In February 1998, the Company completed the sale of six hotels for $39.4
million, resulting in a gain of approximately $0.2 million. Five of the six
hotels sold served as collateral for the 1994 and 1995 Mortgage Notes. Under the
terms of these Indentures, the Company provided replacement collateral.

     On December 31, 1998, the Company completed the sale of an additional hotel
property for $16.1 million, resulting in a gain of approximately $8.0 million.
The net book value of the 
<PAGE>
 
hotel's property and equipment at the time of the sale was approximately $8.1
million. In addition to cash received upon closing, the sales price included a
note receivable for $11.9 million, with 8.0% interest, due in 1999. The note
receivable is secured by the hotel and the personal guarantee of a shareholder
of the buyer. This hotel served as collateral under the 1995 Mortgage Notes.
Under the terms of the Indenture, the Company must provide replacement
collateral of equivalent value or apply the net proceeds from the sale to
amounts outstanding. The Company intends to provide replacement collateral in
accordance with the Indenture provisions.

     The Company estimates that building, pre-opening and other costs of the six
Scheduled Hotels will require aggregate funding of approximately $198.0 million
from the Company (net of $61.0 million included in construction in progress and
other assets at year end). The Company has obtained loans and commitments of
approximately $143.0 million (approximately $22 million of which had been drawn
at year end) on the Scheduled Hotels and expects the remaining 1999 capital
requirements to be funded by cash, cash flow from operations and refinancing of
certain existing hotels.

     Based upon current plans relating to the timing of new hotel development
and loan draw schedules, the Company anticipates that its capital resources will
be adequate to satisfy its 1999 capital requirements for the currently planned
projects and normal recurring capital improvement projects.

     The Company distributed or accrued $10.6 million in 1998, and $0.6 million
in 1997 to its partner for income taxes. Distributions by the Company must be
made in accordance with the provisions of the Indentures.

Year 2000

State Of Readiness

          John Q. Hammons Hotels, Inc. (the "Company") is actively addressing
the impact of the Year 2000 as it relates to the processes of its information
technology environment. Potential problems with internal, external and embedded
systems are being addressed. Capital budget funds have been set aside for
software and hardware upgrades and/or replacements to address Year 2000 issues.
Virtually all such upgrades were anticipated by the Company and would have been
implemented within the next few years even absent a Year 2000 issue.

          The Company is requiring vendors and suppliers to certify Year 2000
compliance of supplied information technology systems and devices. Compliance is
defined as no failures or interruptions occurring due to the processing of date
information or data between the years through 1999 and years beginning with the
year 2000.

          The Company has reviewed the effects of the upcoming Year 2000 on its
computer systems and operations, as well as on those of the hotels it operates.
The Company does not anticipate any material impact on its corporate operation,
given that the current systems used are believed to be Year 2000 compliant.

Corporate Systems
<PAGE>
 
          Hardware-Computer systems were tested for Y2K compliance during the
first quarter of 1998. Ninety percent of those systems not compliant were
replaced by the end of the third quarter of 1998. The remaining systems were
replaced during the fourth quarter of 1998.

          Software-All software systems were tested during the first quarter of
1998. Word processing and spreadsheet software packages were deemed materially
compliant and will not be replaced. The accounting and payroll system was not
Y2K compliant and was replaced during January, 1998.

Hotel Systems

          Hardware-Testing of Company owned computer hardware was started during
the first quarter of 1998. Ninety percent of all systems have been tested and
those systems deemed not Y2K compliant have been identified and have either been
replaced at this time or are scheduled for replacement during the first half of
1999.

          Software-Bass Hotels and Resorts use the Encore Property Management
System. This system is currently not Y2K compliant but is being upgraded at no
expense to the Company.

          Promus Hotels, Inc. uses the HMS Property Management System. This
system is not Y2K compliant and is scheduled for replacement at all non-
compliant hotels during the first half of 1999.

          Radisson Hotels and some Company hotels use the Fidelio Property
Management System. This software is Y2K compliant. The operating system on the
file servers will be compliant with the installation of software patches at no
expense to the Company. These systems are scheduled for upgrade in the year 2000
independent of the Y2K situation.

          Other Company hotels use the Multi-Systems, Inc. Property Management
System, which is Y2K compliant.

Embedded Systems

          Non-Critical-Fax machines, copiers and similar equipment are generally
leased. The majority of these devices have been tested and deemed Y2K compliant.
Those failing the Y2K testing will be replaced by the lessor during 1999 under
current leasing agreements as required in order to be Y2K compliant.

          Critical-Systems in this category include elevators, fire control,
security, energy management, credit card processing and telecommunications. The
Company is currently testing and evaluating these systems. These evaluations are
approximately 75% complete with anticipated completion by the end of the first
quarter, 1999.

Time Keeping and Payroll Systems

          The Company currently uses Time Resource Management software for time
keeping. This software is not Y2K compliant and will be replaced during the
second quarter of
<PAGE>
 
1999. Payroll processing is out-sourced and a Y2K compliance certificate from
the processor is on file.

Vendor Compliance Certifications

     Strategic Relationships-Requests for Y2K compliance have been sent to those
vendors which have a strategic relationship with the Company specifically and
with the hotels in general. Those compliance letters will be on file in our
offices.

          Utility Suppliers-Requests for Y2K compliance have been sent to those
suppliers which have a strategic relationship with the Company specifically and
with the hotels in general. Those compliance letters will be on file in our
offices.


Compliance Testing

     Information Technology

          Vendor Certification-The Company has received Y2K compliance
certifications from the majority of its property management system vendors. All
certifications are expected to be on file by the end of the second quarter,
1999.

          Field Testing-The Company has received Y2K compliance testing software
from our property management system vendors. These tests were completed during
the fourth quarter, 1998.

          Evaluation-The Company will monitor all systems currently in place and
those Y2K upgrades that will be installed during the first half of 1999 to
insure Y2K integrity. This evaluation will continue throughout the year 2000.

     Embedded Systems

          Vendor Certification-The Company has received Y2K compliance
certifications from the majority of its vendors. All certifications are expected
to be on file by the end of the first quarter, 1999.

          Field Testing-The Company or its authorized vendors began conducting
Y2K compliance field testing during the fourth quarter of 1998 and will continue
testing throughout 1999.

          Evaluation-The Company will monitor all systems currently in place and
those Y2K upgrades that will be installed during the first half of 1999, to
insure Y2K integrity. This evaluation will continue throughout the year 2000.

Cost of Implementation

     Corporate Office

          Information Technology-Expenses for hardware and software that were
<PAGE>
 
directly attributed to Y2K compliance were less than $75,000.

          Embedded Systems-The Company has no current expenses directly
attributed to Y2K compliance for embedded systems.

     Hotels

          Information Technology

          Bass Hotels & Resorts-The Company has upgraded hardware and software
systems over the last two years that were required from a technology standpoint.
Y2K compliance was an ancillary benefit of these upgrades.

          Promus Hotels, Inc.-The Company has allocated less than $15,000 to
date for upgrades necessary to meet Y2K compliance at these hotels.

          Embedded Systems-The Company has not expended any funds directly
attributed to Y2K compliance for these systems. Those upgrades and replacements
of equipment that have occurred over the last two years were required to replace
equipment that had reached the end of the normal life cycle and not specifically
for Y2K compliance.

Future Costs

     Corporate Office

          Additional software upgrades are anticipated to maintain current
technology levels but are not directly attributed to Y2K compliance.

     Hotels

          Information Technology
 
          Bass Hotels & Resorts-Hotels operating under this flag (eighteen
hotels) will incur minimal costs to replace some computer systems. Average cost
per hotel is estimated to be less than $10,000. Hardware requirements will be
offset with the transfer of existing Y2K compliant hardware from other hotels
that are receiving technology-driven upgrades.

          Promus Hotels, Inc.-Hotels operating under this flag (sixteen hotels)
will receive new hardware and software as part of a technology and Y2K compliant
upgrade. The estimated cost for this upgrade is approximately $625,000.

          The balance of the Company's hotels have budgeted approximately
$400,000 in capital funds for technology replacements and Y2K compliancy issues.

          Embedded Systems-Final evaluation of these systems has not been
completed at this time. No major replacements are expected based upon the
results of early testing.

Risk Factors
<PAGE>
 
          Information Technology-Based upon current testing results and
evaluation of those results, it is believed that all hardware and software
systems in the Company's corporate office and hotels will be Y2K compliant by
the end of the second quarter, 1999. Risk to the operation of the Company is
therefore considered to be low.

          Embedded Systems-Complete analysis of all embedded systems has not
been completed at this time. Final evaluation is scheduled for the end of the
first quarter, 1999, with testing to be completed by the end of the second
quarter, 1999. Based upon early reports, risk to the operation of the Company is
considered to be low.

          Vendors and Suppliers-The Company does not rely on the services of any
one single vendor or supplier that will materially impact its operations. To
date, no strategic vendor or supplier has reported that it will not be Y2K
compliant by the end of 1999. Based upon these reports, risk to the operations
of the Company is considered to be low.

Contingency Plans

     Information Technology

          Hardware-A number of non-critical (time/date critical operations are
not dependent on these systems) hardware systems have failed Y2K compliancy
testing. These systems are scheduled for replacement during the first half of
1999. Failure to replace these systems will not materially impact the operation
of the Company or its hotels.

          Software-Manual operation of guest services, reservations, credit card
processing and time keeping systems can be accomplished with existing personnel
and equipment. Since all known, non-compliant software systems will be replaced
during the first half of 1999, no material impact to the operation of the
Company is expected.

     Embedded Systems

          Contingency plans will be finalized during the first quarter of 1999,
when evaluation of these systems is complete. All known embedded systems can be
manually over-ridden if necessary, in the event of a failure due to a Y2K issue.

     Vendors and Suppliers

          The Company will use alternative vendors and suppliers in the event
any one strategic vendor or supplier is incapable of operating as a result of a
Y2K compliance issue. The Company maintains a list of alternative vendors and
suppliers. These vendors and suppliers will be certified as Y2K compliant in the
event their services are required.

Seasonality

     Demand is affected by normally recurring seasonal patterns. For most of the
JQH Hotels, demand is higher in the spring and summer months (March through
October) than during the remainder of the year. Accordingly, the Company's
operations are seasonal in nature, with lower
<PAGE>
 
revenue, operating profit and cash flow in the first and fourth quarters due to
decreased travel during the winter months.

Inflation

     The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on the revenues or operating results of the
Company during the three most recent fiscal years.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to changes in interest rates primarily as a result of its
investing and financing activities. Investing activity includes operating cash
accounts and investments, with an original maturity of three months or less, and
certain balances of various money market and common bank accounts. The financing
activities of the Company are comprised of long-term fixed and variable rate
debt obligations utilized to fund business operations and maintain liquidity.
The following table presents the principle cash repayments and related weighted
average interest rates by maturity date for the Company's long-term fixed and
variable rate debt obligations as of January 1, 1999:
<PAGE>
 
                            Expected Maturity Date
                                 (in millions)
<TABLE>
<CAPTION>
                                                                                          There-
                                       1999      2000       2001       2002      2003      After     Total   Fair Value (d)
<S>                                    <C>       <C>       <C>        <C>        <C>       <C>       <C>      <C>
Long-Term Debt(a)                                                                                                
   $300 Million 1st Mortgage Notes      $ -     $   -      $   -      $   -      $   -      $ 300     $300       $313
   Average interest rate (b)                      8.9%       8.9%       8.9%       8.9%       8.9%     8.9%       8.9%
    $90 Million 1st Mortgage Notes      $ -     $   -      $   -      $   -      $   -      $  90     $ 90       $ 94
    Average interest rate(b)                      9.8%       9.8%       9.8%       9.8%       9.8%     9.8%       9.8%
    Other fixed-rate debt               $41     $   6      $  13      $  30      $  20      $ 213     $323       $323
     obligations                                                                                                 
    Average interest rate(b)                      8.8%       8.4%       8.2%       8.8%       8.7%     8.7%       8.7%
    Other variable-rate debt            $ 1     $   1      $   7      $  10      $   3      $  25     $ 47       $ 47
     obligations                                                                                                 
    Average interest rate(c)                      8.1%       8.1%       8.1%       8.1%       8.1%     8.1%       8.1%
</TABLE>

(a) Includes amounts reflected as long-term debt due within one year
(b) For the long-term fixed rate debt obligations, the weighted average interest
rate is based on the stated rate of the debt that is maturing in the year
reported. The weighted average interest rate excludes the effect of the
amortization of deferred financing costs.
(c) For the long-term variable rate debt obligations, the weighted average
interest rate assumes no changes in interest rates and  is based on the variable
rate of the debt, as of January 1, 1999,  that is maturing in the year reported.
The weighted average interest rate excludes the effect of the amortization of
deferred financing costs.

(d) The fair values of long-term debt obligations approximate their
respective historical carrying amounts except with respect to the $300 million
1st Mortgage Notes and the $90 million 1st Mortgage Notes.  The fair value of
the first mortgage note issues is estimated by obtaining quotes from brokers.

Item 8.  Financial Statements and Supplementary Data.

     Reference is made to the Index to Consolidated Financial Statements and the
Financial Statements following such index in Item 14.

Item 9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

     None.
                                    PART III

Item 10.  Directors and Executive Officers of the Registrant.

     The Company does not have any directors or officers.  The General Partner
in its capacity as general partner, manages and controls the activities of the
Company.  The following sets forth certain information concerning the directors
and director nominees of the General Partner who are not also officers of the
General Partner.  Information required by this item with respect to officers of
the General Partner is provided in Item 1 of this report.  See "Management."
Finance Corp. and Finance Corp. II each have the same directors and officers as
the General Partner, except that 
<PAGE>
 
Messrs. Earley, Hart, Lopez-Ona, and Moore are not directors of Finance Corp. or
Finance Corp. II.

     Daniel L. Earley, age 56, has been a director of the General Partner since
February 1994.  Since 1985, Mr. Earley has been President, Chief Executive
Officer and a director of Clermont Savings Bank, FSB, a community bank located
in Milford, Ohio, which is owned by Mr. Hammons.

     William J. Hart, age 58, has been a director of the General Partner since
December 1993.  He is a partner in the law firm of Husch & Eppenberger, LLC
formerly Farrington & Curtis, P.C., a position he has held since 1970.  Mr.
Hart's firm performs legal services on a regular basis for the Company and
personally for Mr. Hammons.  Mr. Hart has also been a director since 1981 of
Johnston Industries, Inc., a commercial textiles company listed on the New York
Stock Exchange.

     John E. Lopez-Ona, age 41, became a director of the General Partner in May
1996.  Mr. Lopez-Ona was a Managing director of Kidder Peabody & Company, Inc.
an investment banking firm, from March 1990 through March 1995.  Since June 1995
Mr. Lopez-Ona has been the President of Anvil Capital, Inc., a firm owned by
him, which specializes in principal investments.

     James F. Moore, age 57, became a director of the General Partner in May
1995.  Since 1987, Mr. Moore has been Chairman, Chief Executive Officer and a
Director of Champion Products, Incorporated, a privately owned manufacturing
company serving the telecommunications industry located in Strafford, Missouri.
Prior to 1987, Mr. Moore had served as President of the Manufacturing Division
of Service Corporation International, a company listed on the New York Stock
Exchange.

Item 11. Executive Compensation.

Cash Compensation

     The following table sets forth the salary, cash bonus and certain other
forms of compensation paid by the General Partner and its subsidiaries for
services rendered in all capacities during the 1998, 1997 and 1996 fiscal years
to the Chief Executive Officer of the General Partner and the four most highly
compensated executive officers of the General Partner other than the Chief
Executive Officer serving at the end of the 1998 fiscal year (the "named
executive officers").
<PAGE>

<TABLE>  
<CAPTION>
                                      Summary Compensation Table

                                                                                       Long Term      
                                                                                  Compensation Awards
                                         Annual Compensation                     ---------------------
                                Fiscal  ---------------------    All Other       Securities Underlying
Name and Principal Positions     Year   Salary ($)  Bonus ($)  Compensation ($)       Options (#)
----------------------------    ------  ----------  ---------  ----------------  --------------------- 
<S>                             <C>     <C>         <C>        <C>               <C> 
John Q. Hammons                  1998    $200,000    $50,000       $   --             200,000 (b)
Chairman of the Board and        1997     150,000         --           --                  --
Chief Executive Officer          1996     100,000         --           --                  --
 
Kenneth J. Weber (a)             1998     169,840     57,500           --             100,000 (b)
Executive Vice President and     1997          --         --           --                  --
Chief Financial Officer          1996          --         --           --                  --
 
Debra M. Shantz                  1998     135,000     47,500        1,544(c)           70,000 (b)
Corporate Counsel                1997      97,500     40,000        1,139(c)               --
                                 1996      93,000     30,000           --                  --
 
Steven E. Minton                 1998     130,000     45,000        1,563(c)           40,000 (b)
Senior Vice President,           1997     118,000     40,000        1,275(c)               --
Architecture                     1996     106,000     25,000        1,490(c)               --
 
Pat A. Shivers                   1998     124,000     40,000        1,553(c)           35,000 (d)
Senior Vice President,           1997     120,000     37,500        1,296(c)               --
Administration and Control       1996     112,125     30,000        2,072(c)               --

</TABLE>
---------------
(a)  Mr. Weber joined the Company in April of 1998.
(b)  Comprised of options with an exercise price of $7.375 per share.
(c)  Matching contributions to Company's 401(k) Plan.
(d)  Comprised of 25,000 options granted to replace cancelled options and 
     10,000 additional options, all with an exercise price of $7.375 per share.
     See "Option Grants".

Option Grants
<TABLE>
<CAPTION>      
                                                                                             Potential Realizable 
                                               Individual Grants                               Value at Assumed
                      -------------------------------------------------------------------    Annual Rates of Stock
                          Number of        % of Total Options/                                Price Appreciation 
                          Securities         SARs Granted to     Exercise or                  for Option Term(1) 
                      Underlying Options      Employees in       Base Price    Expiration   -----------------------
Name                     Granted (#)           Fiscal Year         ($/Sh)         Date         5%($)       10%($)  
----                  ------------------   -------------------   -----------   ----------   ----------   ----------
<S>                   <C>                  <C>                   <C>           <C>          <C>          <C>
John Q. Hammons            200,000                19.4%            $7.375        6/5/08     $2,288,000   $3,478,000
Kenneth J. Weber           100,000                 9.7%             7.375        6/5/08      1,144,000    1,739,000
Debra M. Shantz             70,000                 6.8%             7.375        6/5/08        800,800    1,217,300
Steven A. Minton (2)        40,000                 3.9%             7.375        6/5/08        457,600      695,600
Pat A. Shivers (2)          35,000                 3.4%             7.375        6/5/08        400,400      608,650
</TABLE>

(1)  Potential realizable value assumes the stock price will appreciate at the
     annual rates shown. These rates are compounded annually from the date of
     grant until the end of the 10-year term of the option. The potential
     realizable value is:

          - the potential stock price at the end of the term based on the 5
            percent and 10 percent assumed rates of appreciation,
          - less the exercise price,
          - times the number of shares subject to the option.

     These numbers are calculated based on the requirements of the Securities
     and Exchange Commission and do not reflect the Company's estimate of future
     stock price growth.


<PAGE>

(2)  On June 5, 1998, options originally granted in 1994 were cancelled and new
options were granted at an exercise price of $7.375, an amount equal to the fair
market value on that date. The options granted on that date also included a new
vesting schedule, with none of the new options being exercisable until June 5,
1999, at which point 25% vest, with the rest vesting 25% on each succeeding June
5th. See "Ten-Year Option/SAR Repricing" and "Report of the Compensation
Committee - Stock Options."

<TABLE>
<CAPTION>
Option Holdings
                         Fiscal Year-End Option Values
                             Number of Unexercised                       Value of Unexercised
                                    Options                              In-the-Money Options
Name                  Exercisable            Unexercisable        Exercisable           Unexercisable
----                  -----------            -------------        -----------           -------------
<S>                   <C>                    <C>                  <C>                   <C>
John Q. Hammons           --                     200,000               --                     --
Kenneth J. Weber          --                     100,000               --                     --
Debra M. Shantz           --                      70,000               --                     --
Steven A. Minton          --                      40,000               --                     --
Pat A. Shivers            --                      35,000               --                     --
</TABLE>

     The $7.375 exercise price per share of the stock options granted on June 5,
1998 (which comprise all of the options held by the Named Executive Officers) is
greater than the $3.6875 closing price of the Company's Class A Common Stock as
reported on the New York Stock Exchange on December 31, 1998, thus no options
are "In the Money." As discussed above, none of the options are exercisable
until June 5, 1999, with 25% becoming exercisable on that date, with the rest
vesting 25% on each succeeding June 5th.

Ten-Year Option/SAR Repricings

<TABLE>
<CAPTION>
                                                                                                          Length of
                                Number of                                                                 Original Option
                                Securities                                                                Term
                                Underlying        Market Price of       Exercise Price                    Remaining at
                                Options/SARs      Stock at Time         at Time of        New             Date of
                                Repriced or       of Repricing or       Repricing or      Exercise        Repricing or
Name                   Date     Amended (#)       Amendment ($)         Amendment ($)     Price ($)       Amendment
----                   ----     ------------      ---------------       ---------------   ---------      ---------------
<S>                   <C>       <C>               <C>                   <C>               <C>            <C>
Steven E. Minton      6/5/98        40,000            $7.375                 $16.50         $7.375          6 years,
                                                                                                            6 months
Pat A. Shivers        6/5/98        25,000             7.375                  16.50          7.375          6 years,
                                                                                                            6 months
</TABLE>

     401(k) Plan

          Effective January 1, 1996, the Company adopted a contributory
     retirement plan (the "401(k) Plan") for its employees age 21 and over with
     at least one year of service to the Company. The 401(k) Plan is designed to
     provide tax-deferred income to the Company's employees in accordance with
     the provisions of Section 401(k) of the Internal Revenue Code of 1986. The
     401(k) Plan provides that the Company will make a matching contribution to
     each participant's account equal to 50% of such participant's eligible
     contributions up to a maximum of 3% of such participant's annual
     compensation.

     Employment Agreements

          The Company entered into an employment agreement with Kenneth J.
     Weber, effective April 27, 1998. Under that agreement, Mr. Weber's annual
     base salary is $250,000, plus a discretionary bonus of up to 35% of his
     base salary, with such annual increases in compensation as may be
     determined by the Compensation Committee of the Company. The agreement
<PAGE>
 
contains significant non-competition provisions extending for a period of one
year following termination of the agreement. The initial term of the agreement
is for three years.

     The Company entered into an employment agreement with Debra M. Shantz,
dated as of May 1, 1995 as amended on October 31, 1997. Under the agreement, Ms.
Shantz's annual base salary is $135,000, plus a discretionary bonus, with such
annual increases in compensation as may be determined by the Compensation
Committee of the Company. The term of the agreement is for three years from
October 31, 1997.

     Notwithstanding anything to the contrary set forth in any of the Company's
filings under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, that might incorporate other filings with the
Securities and Exchange Commission ("SEC"), including this Proxy Statement, in
whole or in part, the following Report of the Compensation Committee and
Comparative Company Performance Graph shall not be incorporated by reference
into any such filings.

Compensation of Directors

     Non-employee directors of the General Partner received $1,000 for each
regular Board meeting attended during the fiscal year ended January 2, 1998. No
compensation was paid to non-employee directors for attending meetings of
committees of the Board. Employee directors are not compensated for their
services as directors or committee members.

     At a meeting held on February 23, 1999 the General Partner's Board of
Directors adopted a new compensation package for its non-employee directors. The
package provides each non-employee director with the following payments for
service on the General Partner's Board: (1) $1,000 for each regular Board
meeting attended and (2) $500 for each regular committee meeting attended ($750
per meeting for the committee chair). In addition, the package provides each 
non-employee director with the following annual payments for service on the
General Partner's Board, payable on the day following the election of directors
at the annual meeting: (1) a cash payment of $10,000, (2) that number of shares
of the General Partner's Class A Common Stock with a fair market value equal to
$10,000 on the date of payment (the "Director Stock"), and (3) an option to
purchase 10,000 shares of the General Partner's Class A Common Stock (the
"Director Options"). The Director Stock and Director Options will be issued
pursuant to the 1999 Non-Employee Director Stock and Stock Option Plan.


Item 12. Security Ownership of Certain Beneficial Owners and Management.

     Mr. Hammons is the beneficial owner of all 16,043,900 limited partnership
units of the Company, representing 71.69% of the total equity in the Company.
The General Partner owns all 6,336,100 general partner units of the Company,
representing 28.31% of the total equity of the Company.

Item 13. Certain Relationships and Related Transactions.

     In the past, Mr. Hammons has engaged Anvil Capital an investment and
consulting firm owned by Mr. Lopez-Ona, a director of the General Partner, to
provide personal financial advisory services. Mr. Hammons and Anvil Capital also
have formed a limited liability
<PAGE>
 
company through which they have invested in securities of one or more companies
in industries unrelated to the Company's business. Mr. Lopez-Ona has entered
into a consulting agreement with a major consulting firm to provide services to
that firm in connection with their hospitality practice. Under that contract,
Mr. Lopez-Ona receives a percentage of compensation from the Company to the firm
in connection with services provided to the Company by that firm, if any.

     Mr. Hart is a non-employee director of the General Partner, and is a
partner in the law firm of Husch & Eppenberger, LLC, which performs legal
services on a regular basis for the Company and personally for Mr. Hammons. The
Company paid such firm approximately $303,500 in legal fees during the fiscal
year ended January 1, 1999.

     The Company is controlled by Mr. Hammons through his control of the General
Partner, the sole general partner of the Company. His equity interest in the
Company (based on his beneficial ownership of 244,300 shares of Class A Common
Stock of the General Partner, all 294,100 shares of Class B Common Stock of the
General Partner and all 16,043,900 limited partnership units of the Company (the
"LP Units") is 73.4%. There are significant potential conflicts of interests
between Mr. Hammons as a limited partner of the Company, and the holders of
Class A Common Stock of the General Partner, which conflicts may be resolved in
favor of Mr. Hammons.

     Holders of LP Units have the right to require the redemption of their LP
Units. This redemption right will be satisfied, at the sole option of the
General Partner, by the payment of the then cash equivalent thereof or by the
issuance of shares of Class A Common Stock on a one-for-one basis. Mr. Hammons
beneficially owns all 16,043,900 LP Units. If Mr. Hammons, as a holder of LP
Units, requires the Company to redeem LP Units, the non-employee directors of
the General Partner would decide, consistent with their fiduciary duties as to
the best interests of the Company, whether to redeem the LP Units for cash or
for shares of Class A Common Stock. Mr. Hammons would not vote or otherwise
participate in the decision of the non-employee directors. Mr. Hammons has
informed the Company that he has no current plan to require the Company to
redeem his LP Units.

     During 1998, the Company provided management services to five hotels not
owned by the Company (the "Managed Hotels") pursuant to management contracts
(the "Management Contracts"). Four of the Managed Hotels are owned by Mr.
Hammons and one is owned 50% by Mr. Hammons; 25% by Jacqueline A. Dowdy, the
Secretary and a director of the General Partner; and 25% by Daniel L. Earley, a
director of the General Partner. Management fees of approximately 3% of gross
revenues were paid to the Company by the Managed Hotels in the aggregate amount
of $715,000 in the fiscal year ended January 1, 1999. Each of the Management
Contracts is for an initial term of 20 years, which automatically extends for
four periods of five years, unless otherwise canceled. In addition to the
management fees paid by the Managed Hotels to the Company in that year, the
Managed Hotels reimbursed the Company for a portion of the salaries paid by the
Company to its five regional vice presidents, whose duties include management
services related to the Managed Hotels, and for certain marketing and other
expenses allocated to the Managed Hotels. Such reimbursed services and expenses
aggregated $145,000 in the fiscal year ended January 1, 1999.

     The Company has an option granted by Mr. Hammons or persons or entities
controlled by him to purchase the Managed Hotels. The options are effective
until February 2009. If an option is exercised, the purchase price is based on a
percentage of the fair market value of the
<PAGE>
 
Managed Hotel as determined by an appraisal firm of national standing. One hotel
owned by the Company and two Managed Hotels are located in Springfield,
Missouri. These hotels are potentially competing with one another for customers.
The Company, however, believes that these hotels do not significantly compete
with one another due to their respective locations and attributes.

     Mr. Hammons has a 45% ownership interest in Winegardner & Hammons, Inc.
("WHI"). All of the hotels owned by the Company (the "Owned Hotels") have
contracted with WHI to provide accounting and other administrative services. The
accounting and administrative charges expensed by the Owned Hotels were
approximately $1,388,000 in the fiscal year ended January 1, 1999. The fee may
increase if the number of hotels for which accounting and administrative
services are performed drops below 35 hotels. The accounting services contract
expires in June 1999.

     The Company leases space in the John Q. Hammons Building for its
headquarters from a Missouri general partnership, of which Mr. Hammons is a 50%
partner and the remaining 50% is collectively held by other employees, including
Jacqueline A. Dowdy, the Secretary and a director of the General Partner, who is
a 9.5% partner. Pursuant to four lease agreements, expiring December 31, 1998,
the Company paid monthly rental payments of approximately $19,250 in 1998. In
December 1998, the Company entered into four new lease agreements, expiring
December 31, 2001. The Company made aggregate annual lease payments to the
Missouri general partnership of approximately $231,000 in 1998.

     Mr. Hammons also owns trade centers adjacent to three of the Owned Hotels
(the "JQH Trade Centers"). The Company leases the convention space in the JQH
Trade Center located in Portland, Oregon from Mr. Hammons pursuant to a long-
term lease expiring in 2004, requiring annual payments of approximately
$300,000. With respect to the other two JQH Trade Centers, the Company makes
nominal annual lease payments to Mr. Hammons. The Company has assumed
responsibility for all operating expenses of the JQH Trade Centers.

     The Company leases the real estate for the Company's Chateau on the Lake
Resort, opened in mid-1997, in Branson, Missouri, from Mr. Hammons. Annual rent
was $120,000 in 1998. Thereafter, rent will be an amount based on adjusted gross
revenues from room sales on the property. The lease term is 50 years, with an
option to renew for an additional 10 years. The Company also has an option to
purchase the land after March 1, 2118 at a proposed transfer price of the
greater of $3,000,000 or the current appraised value.

     The Company also leases the real estate for the Company's Embassy Suites
hotel in Little Rock, Arkansas which opened in the fall of 1997, from Mr.
Hammons. Annual rent is $100,000 in 1998, and $120,000 per year for the next
three years. The lease term is 40 years. The Company has an option to purchase
the land at any time during the first 10 years of the lease term, for the
greater of $1,900,000 or the current appraised value.

     The Company also leases the real estate for the Company's Renaissance
Suites Hotel in Charlotte, NC, which will open in November, 1999 from Tulsa
Hills Investments, Inc., an Ohio corporation, of which Mr. Hammons is a 99%
owner and Jacqueline A. Dowdy is a 1% owner. The lease term is 99 years.
Commencing October 15, 1997, annual rent is $80,000 in years one and two,
$120,000 in years three through five, $124,800 in years six through ten with
cost of living adjustments for each year thereafter.
 
<PAGE>
 
     Mr. Hammons owns parcels of undeveloped land throughout the United States.
Although there are no current plans to do so, the Company may purchase or lease
one or more of these parcels in the future in order to develop hotels. Since Mr.
Hammons controls the Company, such transactions would not be arms-length
transactions but will be subject to restrictions contained in the indentures
relating to the Company's outstanding mortgage notes due in 2004 and 2005.

     The General Partner receives no management fee or similar compensation in
connection with its management of the Company. The General Partner receives the
following remuneration from the Company: (i) distributions, if any, in respect
of its equity interest in the Company; and (ii) reimbursement for all direct and
indirect costs and expenses incurred by the General Partner for or on behalf of
the Company and all other expenses necessary or appropriate to the conduct of
the business of, and allocable to, the Company.

     The Company is unaware of any other transactions to which the Company is a
party in which any director or executive officer of the Company has or will have
a direct or indirect material interest.

                                    PART IV

Item 14. Exhibits, Financial Schedules, and Reports on Form 8-K.

14(a)(1)  Financial Statements

     Reference is made to the Index to Consolidated Financial Statements and the
Consolidated Financial Statements following such index.

14(a)(2)  Financial Statement Schedules

     All schedules have been omitted because the required information in such
schedules is not present in amounts sufficient to require submission of the
schedule or because the required information is included in the consolidated
financial statements or is not required.

14(a)(3)  Exhibits

     Exhibits required to be filed by Item 601 of Regulation S-K are listed in
the Exhibit Index attached hereto, which is incorporated by reference. Set forth
below is a list of management contracts and compensatory plans and arrangements
required to be filed as exhibits by Item 14(c).

           10.5  Form of Option Purchase Agreement
           10.8  Employment Agreement between John Q. Hammons Hotels, Inc.
                 and Debra M. Shantz dated as of May 1,1995 as amended on
                 October 31, 1997.
          10.13  Employment Agreement between the General Partner and
                 Kenneth J. Weber dated as of April 27, 1998
          10.18  1994 Stock Option Plan of the General Partner
          10.19  1999 Non-Employer Director Stock and Stock Option Plan of the
                 General Partner
 
14(b)     Reports on Form 8-K

     No reports on Form 8-K were filed during the fiscal year ended January 1,
     1999.
<PAGE>
 
14(c)     Exhibits

     Reference is made to the exhibit index which has been filed with the
     exhibits.

14(d)     Financial Statements
<PAGE>
 
                    Report of Independent Public Accountants
                    ----------------------------------------
                                        


To the Partners of
   John Q. Hammons Hotels, L.P.:


     We have audited the accompanying consolidated balance sheets of John Q.
Hammons Hotels, L.P. (Note 1) as of January 1, 1999 and January 2, 1998 and the
related consolidated statements of operations, changes in equity and cash flows
for each of the three fiscal years ended January 1, 1999, January 2, 1998 and
January 3, 1997.  These financial statements are the responsibility of the
Partnership's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
John Q. Hammons Hotels, L.P. (Note 1) as of January 1, 1999 and January 2, 1998
and the results of their operations and their cash flows for each of the three
fiscal years ended January 1, 1999, January 2, 1998, and January 3, 1997 in
conformity with generally accepted accounting principles.



Cincinnati, Ohio,
   February 17, 1999
<PAGE>
 
                     John Q. Hammons Hotels, L.P. (Note 1)
                                        
                          Consolidated Balance Sheets
                                        
                                (000's omitted)
                                        
                                     ASSETS
                                     ------
                                        
<TABLE>
<CAPTION>
                                                                                  Fiscal         Fiscal
                                                                                   1998           1997
                                                                                 Year-End       Year-End
                                                                                 ---------      ---------
<S>                                                                              <C>            <C>
CASH AND EQUIVALENTS (Restricted cash of $860 and $1,235 in 1998 and 1997,                  
 respectively) (Notes 2 and 5)                                                   $  46,233      $  41,961
                                                                                            
MARKETABLE SECURITIES (Notes 2 and 5)                                                6,533         12,742
                                                                                            
RECEIVABLES:                                                                                
  Trade, less allowance for doubtful accounts of $206 and $188 in 1998 and                  
   1997, respectively                                                                8,852          7,652
  Management fees (Note 3)                                                              62             50
  Construction reimbursements, shareholder and other (Note 3)                               
                                                                                     5,269          3,739
                                                                                            
INVENTORIES                                                                          1,205          1,206
                                                                                            
PREPAID EXPENSES AND OTHER                                                           1,089          1,386
                                                                                 ---------      ---------
          Total current assets                                                      69,243         68,736
                                                                                 ---------      ---------
                                                                                            
PROPERTY AND EQUIPMENT, at cost (Notes 2, 5 and 6):                                         
  Land and improvements                                                             47,982         40,511
  Buildings and improvements                                                       605,586        527,856
  Furniture, fixtures and equipment                                                239,648        197,177
  Construction in progress                                                          63,078         78,946
                                                                                 ---------      ---------
                                                                                   956,294        844,490
  Less- Accumulated depreciation and amortization                                 (194,860)      (166,125)
                                                                                 ---------      ---------
                                                                                   761,434        678,365
  Property and equipment available for sale, net (Note 8)                             -            38,791
                                                                                 ---------      ---------
                                                                                   761,434        717,156
                                                                                 ---------      ---------
                                                                                            
DEFERRED FINANCING COSTS, FRANCHISE FEES                                                    
 AND OTHER, net (Notes 2, 4 and 5)                                                  45,809         30,841
                                                                                 ---------      ---------
                                                                                 $ 876,486      $ 816,733
                                                                                 =========      =========
</TABLE>

          The accompanying notes to consolidated financial statements
           are an integral part of these consolidated balance sheets.
<PAGE>
 
                     John Q. Hammons Hotels, L.P. (Note 1)

                          Consolidated Balance Sheets

                                (000's omitted)

                             LIABILITIES AND EQUITY
                             ----------------------
                                        
<TABLE>
<CAPTION>
                                                                     Fiscal       Fiscal
                                                                      1998         1997
                                                                    Year-End     Year-End
                                                                    --------     --------
<S>                                                                 <C>          <C>
LIABILITIES:                                                                
  Current portion of long-term debt (Note 5)                        $ 42,256     $ 61,517
  Accounts payable, including construction payables of                      
   approximately $2,203 and $3,391, respectively                      13,141       11,232
  Accrued expenses-                                                         
     Payroll and related benefits                                      6,843        5,529
     Sales and property taxes                                          9,558        8,676
     Insurance (Notes 2 and 3)                                        10,061       11,242
     Interest                                                         12,540       12,603
     Utilities, franchise fees and other                               5,568        5,822
  Accrued dividends                                                    2,936            -
                                                                    --------     --------
          Total current liabilities                                  102,903      116,621
                                                                            
  Long-term debt (Note 5)                                            717,460      634,274
  Other obligations and deferred revenue (Note 2)                     10,883        7,900
                                                                    --------     --------
          Total liabilities                                          831,246      758,795
                                                                    --------     --------
                                                                            
COMMITMENTS AND CONTINGENCIES (Note 6)                                      
                                                                            
EQUITY (Note 1):                                                            
  Contributed capital                                                 96,436       96,436
  Partners' and other deficits, net                                  (51,196)     (38,498)
                                                                    --------     --------
          Total equity                                                45,240       57,938
                                                                    --------     --------
                                                                    $876,486     $816,733
                                                                    ========     ========
</TABLE>

          The accompanying notes to consolidated financial statements
           are an integral part of these consolidated balance sheets.
<PAGE>
 
                     John Q. Hammons Hotels, L.P. (Note 1)

                     Consolidated Statements of Operations

                                (000's omitted)

<TABLE>
<CAPTION>
                                                              Fiscal Year Ended
                                                      ----------------------------------
                                                        1998         1997         1996
                                                      --------     --------     --------
<S>                                                   <C>          <C>          <C>
REVENUES:                                             
  Rooms                                               $211,989     $195,296     $171,206
  Food and beverage                                     91,982       86,183       79,580
  Meeting room rental and other                         22,159       20,795       18,061
                                                      --------     --------     --------
          Total revenues                               326,130      302,274      268,847
                                                      --------     --------     --------
OPERATING EXPENSES (Notes 3, 4 and 6):                                       
  Direct operating costs and expenses-                                       
     Rooms                                              54,600       50,265       43,610
     Food and beverage                                  64,174       62,383       57,956
     Other                                               3,389        3,385        2,929
  General, administrative, sales and management                              
   service expenses                                     95,500       85,766       74,646
  Repairs and maintenance                               13,438       12,578       11,528
  Depreciation and amortization                         45,580       34,781       24,034
                                                      --------     --------     --------
          Total operating expenses                     276,681      249,158      214,703
                                                      --------     --------     --------
                                                                             
INCOME FROM OPERATIONS (Note 8)                         49,449       53,116       54,144
                                                                             
OTHER (INCOME) EXPENSE:                                                      
  Interest expense and amortization of deferred                              
   financing fees, net of $3,794, $1,279 and $2,103                          
   of interest income in 1998, 1997 and 1996,                                
   respectively (Note 2(e))                             57,286       44,325       35,620
  Gain on sales of property and equipment (Note 8)      (8,175)        -            -
                                                      --------     --------     --------
                                                                             
  Income before extraordinary item                         338        8,791       18,524
                                                                             
EXTRAORDINARY ITEM:                                                          
  Cost of early extinguishment of debt (Note 5)         (2,249)        -            -
                                                      --------     --------     --------
          Net income (loss) (Note 2(j))               $ (1,911)    $  8,791     $ 18,524
                                                      ========     ========     ========
</TABLE>

          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.
<PAGE>
 
                     John Q. Hammons Hotels, L.P. (Note 1)

                  Consolidated Statements of Changes in Equity

                                (000's omitted)
                                        
<TABLE>
<CAPTION>
                                                               Partners and
                                  Contributed Capital     Other Equity (Deficit)
                                  -------------------     ----------------------
                                  General     Limited     General        Limited 
                                  Partner     Partner     Partner        Partner        Total
                                  -------     -------    --------       --------      --------
<S>                               <C>         <C>        <C>            <C>           <C>
Balance, Year-End 1995            $96,436      $   -     $(85,373)      $ 23,082      $ 34,145
Distributions (Note 1(b))            -             -         (107)        (2,700)       (2,807)
Net income                           -             -        5,244         13,280        18,524
                                  -------    --------    --------       --------      --------
                                                                               
Balance, Year-End 1996             96,436          -      (80,236)        33,662        49,862
Distributions (Note 1(b))            -             -         (150)          (565)         (715)
Net income                           -             -        2,489          6,302         8,791
                                  -------    --------    --------       --------      --------
                                                                               
Balance, Year-End 1997             96,436          -      (77,897)        39,399        57,938
Distributions (Note 1(b))            -             -         (150)       (10,637)      (10,787)
Net loss                             -             -         (541)        (1,370)       (1,911)
                                  -------    --------    --------       --------      --------
                                                                               
Balance, Year-End 1998            $96,436      $   -     $(78,588)      $ 27,392      $ 45,240
                                  =======    ========    ========       ========      ========
</TABLE>

          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.
<PAGE>
 
                     John Q. Hammons Hotels, L.P. (Note 1)
                                        
                     Consolidated Statements of Cash Flows
                                        
                                (000's omitted)


<TABLE>
<CAPTION>
                                                                                       Fiscal Year Ended
                                                                       ----------------------------------------------------
                                                                             1998              1997               1996
                                                                       ----------------   ---------------    --------------
<S>                                                                 <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                        $  (1,911)         $   8,791          $  18,524
  Adjustments to reconcile net income (loss) to cash
   provided by operating activities-
     Depreciation, amortization and loan cost amortization
                                                                              48,448             37,662             26,414
     Extraordinary item (Note 5)                                               2,249                  -                  -
     Gain on sales of property and equipment (Note 8)                         (8,175)                 -                  -
  Changes in certain assets and liabilities-
     Receivables                                                              (2,742)            (4,826)               999
     Inventories                                                                (112)              (187)                91
     Prepaid expenses and other                                                  297                542               (804)
     Accounts payable                                                          1,909            (18,745)            21,595
     Accrued expenses                                                            698              3,805              3,896
     Other obligations and deferred revenue                                    2,983                877              1,444
                                                                       ----------------   ----------------   --------------
          Net cash provided by operating activities                           43,644             27,919             72,159
                                                                       ----------------   ----------------   --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Additions to property and equipment, net                                  (131,183)          (179,385)          (155,579)
  Proceeds from sales of property and equipment (Note 8)                      43,577                  -                  -
  Franchise fees and other                                                   (11,528)            (3,499)            (4,936)
  (Purchase) sale of marketable securities, net                                6,209            (10,387)            24,219
                                                                       ----------------   ----------------   --------------
          Net cash used in investing activities                              (92,925)          (193,271)          (136,296)
                                                                       ----------------   ----------------   --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Loan financing fees                                                         (2,521)            (3,069)            (1,433)
  Proceeds from borrowings                                                   260,771            186,684             76,239
  Repayments of debt                                                        (196,846)           (22,036)            (3,190)
  Distributions to partners, net                                              (7,851)              (715)            (2,807)
                                                                       ----------------   ----------------   --------------
          Net cash provided by financing activities                           53,553            160,864             68,809
                                                                       ----------------   ----------------   --------------
          Increase (decrease) in cash and equivalents                          4,272             (4,488)             4,672

CASH AND EQUIVALENTS, beginning of period                                     41,961             46,449             41,777
                                                                       ----------------   ----------------   --------------
CASH AND EQUIVALENTS, end of period                                        $  46,233          $  41,961          $  46,449
                                                                       ================   ================   ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST, net of amounts capitalized                         $  58,733          $  43,399          $  35,441
                                                                       ================   ================   ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
  Note receivable from sale of property and equipment (Note 8)
                                                                           $  11,900          $       -          $       -
                                                                       ================   ================   ==============
</TABLE>
          The accompanying notes to consolidated financial statements
            are an integral part of these consolidated statements.
                                        
<PAGE>
 
                         John Q. Hammons Hotels, L.P.

                  Notes To Consolidated Financial Statements

                                (000's omitted)
                                        


(1)  Basis of Presentation-

   (a) Entity Matters--The accompanying consolidated financial statements
       include the accounts of John Q. Hammons Hotels, L.P. and its wholly-owned
       subsidiaries (the Partnership), John Q. Hammons Hotels Finance
       Corporation, a corporation with nominal assets and no operations, the
       catering corporations, which consist of separate corporations for each
       hotel location chartered to own the respective food and liquor licenses
       as well as operate the related food and beverage facilities and certain
       wholly-owned subsidiaries which consist of certain hotel operations. As
       of fiscal year-end 1998, 1997 and 1996, the Partnership had forty-two,
       forty-five, and thirty-nine, respectively, hotels in operation of which
       twenty-eight in 1998, thirty-five in 1997 and thirty-two in 1996 operate
       under the Holiday Inn and Embassy Suites trade names. The Partnership's
       hotels are located in twenty states throughout the United States.

       In conjunction with a public offering of debt securities in February,
       1994 and a public offering of equity securities in November, 1994 by John
       Q. Hammons Hotels, Inc., J.Q.H. Hotels, L.P., which owned and operated
       ten hotel properties, obtained through transfers or contributions from
       Mr. John Q. Hammons (Mr. Hammons) or enterprises which he controlled,
       twenty-one additional operating hotel properties, equity interests in two
       hotels under construction, the stock of the catering corporations and
       management contracts relating to all of Mr. Hammons' hotels. Upon
       consummation of these transactions J.Q.H. Hotels, L.P. changed its name
       to John Q. Hammons Hotels, L.P. and the allocation of income or loss was
       modified from 1% to its general partner and 99% to its limited partner to
       10% and 90%, respectively, upon completion of the public debt offering
       and to 28.31% to its general partner and 71.69% to its limited partner
       upon completion of the public equity offering.

       The Partnership is directly or indirectly owned and controlled by Mr.
       Hammons, as were all enterprises which transferred or contributed net
       assets to the Partnership. Accordingly, the accompanying financial
       statements present, as a combination of entities under common control as
       if using the pooling method of accounting, the financial position and
       related results of operations of all entities on a consolidated basis for
       all periods presented. All significant balances and transactions between
       the entities and properties have been eliminated.

   (b) Partnership Matters--A summary of selected provisions of the Partnership
       agreement and other matters are as follows:
<PAGE>
 
       General and Limited Partner; John Q. Hammons Hotels, Inc. was formed in
       September 1994 and had no operations or assets prior to its initial
       public offering of 6,042,000 Class A common shares at $16.50 per share on
       November 23, 1994. Immediately prior to the initial public offering, Mr.
       Hammons contributed approximately $5 million in cash in exchange for
       294,100 shares of Class B common stock (which represents approximately
       72% of the voting control of the company). John Q. Hammons Hotels, Inc.
       contributed the approximate $96 million of the net proceeds from the
       Class A and Class B common stock offerings to the Partnership in exchange
       for an approximate 28% general partnership interest.

       As a result of the public equity offering, John Q. Hammons Hotels, Inc.
       became the sole general partner and John Q. Hammons Revocable Living
       Trust and Hammons, Inc., entities beneficially owned and controlled by
       Mr. Hammons, became its limited partners.

       Allocation of Income, Losses and Distributions; Income, losses and
       distributions of the Partnership will generally be allocated between the
       general partner and the limited partners based on their respective
       ownership interests of approximately 28% and 72%.

       In the event the Partnership has taxable income, distributions are to be
       made to the partners in an aggregate amount equal to the amount that the
       Partnership would have paid for income taxes had it been a C corporation
       during the applicable period. Aggregate tax distributions will first be
       allocated to the general partner, if applicable, with the remainder
       allocated to the limited partners. Distributions for taxes approximated
       $10,637, $565 and $2,700 for the fiscal years ended 1998, 1997 and 1996,
       respectively.

       Additional Capital Contributions; In the event proceeds from the sale of
       the twenty hotel properties (or applicable replacement collateral) which
       secure the $300 million first mortgage notes (1994 notes) (Note 5) are
       insufficient to satisfy amounts due on the 1994 notes, Mr. Hammons and
       Hammons, Inc. (as general partners at the time the 1994 notes were
       secured) are severally obligated to contribute up to $135 million and $15
       million, respectively, to satisfy amounts due, if any. In the event
       proceeds from the sale of the eight hotel properties (or applicable
       replacement collateral) which secure the $90 million first mortgage notes
       (1995 notes) (Note 5) are insufficient to satisfy amounts due on the 1995
       notes, Mr. Hammons is obligated to contribute up to $45 million to
       satisfy amounts due, if any. In addition, with respect to the eleven
       hotel properties contributed by Mr. Hammons concurrent with the public
       equity offering, Mr. Hammons is obligated to contribute up to $50 million
       in the event proceeds from the sale of these hotel properties (or
       applicable replacement collateral) are insufficient to satisfy amounts
       due on the then outstanding mortgage indebtedness related to these
       properties.
<PAGE>
 
       Redemption of Limited Partner Interests; Subject to certain limitations,
       the limited partners have the right to require redemption of their
       limited partner interests at any time subsequent to November 1995. Upon
       redemption, the limited partners receive, at the sole discretion of the
       general partner, one share of John Q. Hammons Hotels, Inc.'s Class A
       common stock for each limited partner unit tendered or the then cash
       equivalent thereof.

       Additional General Partner Interests; Upon the issuance by the general
       partner of additional shares of its common stock, including shares issued
       upon the exercise of its stock options, the general partner will be
       required to contribute to the Partnership the net proceeds received and
       the Partnership will be required to issue additional general partner
       units to the general partner in an equivalent number to the additional
       shares of common stock issued.


(2) Summary of Major Accounting Policies-

   (a) Cash and Equivalents--Cash and equivalents include operating cash
       accounts and investments, with an original maturity of three months or
       less, and certain balances of various money market and common bank
       accounts.

       Restricted cash consists of certain funds maintained in escrow for
       property taxes and certain other obligations.

   (b) Marketable Securities--Marketable securities consist of available-for-
       sale commercial paper and government agency obligations which mature or
       will be available for use in operations in 1999. These securities are
       valued at current market value, which approximates cost. Realized gains
       and losses in 1998 and 1997, determined using the specific identification
       method, were nominal.

   (c) Inventories--Inventories consist of food and beverage items. These items
       are stated at the lower of cost, as determined by the first-in, first-out
       valuation method, or market.

   (d) Deferred Financing Costs, Franchise Fees and Other--Franchise fees paid
       to the respective franchisors of the hotel properties are amortized on a
       straight-line basis over ten to twenty years which approximates the terms
       of the respective agreements. Costs of obtaining financing are
       capitalized and amortized over the respective terms of the debt.

       Costs directly related to commencing a hotel's operations are deferred
       until the hotel has opened. The preopening expense is amortized over one
       year using the straight-line method. Unamortized preopening costs were
       approximately $2,296 and $3,825 as of fiscal year-end 1998 and 1997,
       respectively (Note 2(o)).

       The components of deferred financing costs, franchise fees and other are
       summarized as follows:
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                  Fiscal Year-End
                                                                                              -----------------------
                                                                                                1998            1997
                                                                                              --------        -------
             <S>                                                                              <C>             <C>
             Deferred financing costs                                                         $ 23,534        $24,025
             Franchise fees                                                                      6,412          4,716
             Less- Accumulated amortization                                                    (12,009)        (9,466)
                                                                                              --------        -------
                                                                                                17,937         19,275
             Note receivable, related to sale of hotel and a component of
              replacement collateral for 1994 and 1995 first mortgage notes (Note 8)            11,900            -
             Restricted cash deposits, interest bearing, related to sales of hotels
              and a component of replacement collateral for 1994 and 1995 first
              mortgage notes (Note 8)                                                            6,266            -
                                                                                                 7,017          7,397
             Deposits                                                                            2,689          4,169
                                                                                              --------        -------
             Preopening expenses and other, net                                               $ 45,809        $30,841
                                                                                              ========        =======


</TABLE>

          In October 1997, the Partnership entered into an irrevocable stand-by
          letter of credit agreement with a bank for approximately $5.6 million.
          The letter of credit replaced the restricted cash deposit which was
          required by and maintained with an insurance carrier. In December
          1998, the letter of credit amount was amended to approximately $2.2
          million. The letter of credit expires in October 1999.
          
     (e)  Property and Equipment--Property and equipment are stated at cost
          (including interest, real estate taxes and certain other costs
          incurred during development and construction) less accumulated
          depreciation and amortization. Buildings and improvements are
          depreciated using the straight-line method while all other property is
          depreciated using both straight-line and accelerated methods. The
          estimated useful lives of the assets are summarized as follows:

<TABLE>
<CAPTION>
                                                                                                        Lives In Years
                                                                                                        --------------
               <S>                                                                                      <C>
               Land improvements                                                                             5-25
               New buildings and improvements                                                                5-40
               Purchased buildings                                                                            25
               Furniture, fixtures and equipment                                                             5-10
</TABLE>

          Construction in progress includes primarily land, development and
          construction costs of certain hotel developments. Costs associated
          with hotel development construction in progress approximated $59
          million in 1998 and $75 million in 1997, with the remainder
          representing refurbishments of operating hotels.
<PAGE>
 
          The Partnership periodically reviews the carrying value of these
          assets and other long-lived assets and impairments are recognized when
          the expected undiscounted future cash flows are less than the carrying
          amount of the asset. Based on its most recent analysis, the
          Partnership believes no impairment exists at January 1, 1999.

          Interest costs, construction overhead and certain other carrying costs
          are capitalized during the period hotel properties are under
          construction. Interest costs capitalized were $6,163, $10,259 and
          $7,162 for the fiscal years ended 1998, 1997 and 1996, respectively.
          Construction in progress is recorded at the lower of cost or market.
          Costs incurred for prospective hotel projects ultimately abandoned are
          charged to operations in the period such plans are finalized. Costs of
          significant improvements are capitalized, while costs of normal
          recurring repairs and maintenance are charged to expense as incurred.

          The accompanying 1998 consolidated financial statements include the
          land costs for thirty-three of the operating hotel properties. Land
          for seven of the remaining nine operating hotel properties is leased
          by the Partnership from unrelated parties over long-term leases. Land
          for the remaining two operating hotel properties is leased by the
          Partnership from a related party over long-term leases. Rent expense
          for all land leases was $1,008, $464, and $450 for the fiscal years
          ended 1998, 1997 and 1996, respectively.

     (f)  Par Operating Equipment--A hotel's initial expenditures for the
          purchase of china, glassware, silverware, linens and uniforms are
          capitalized into furniture, fixtures and equipment and amortized on a
          straight-line basis over a three to five year life. Costs for
          replacement of these items are charged to operations in the period the
          items are placed in service.

     (g)  Advertising--The Partnership expenses the cost of advertising
          associated with operating hotels as incurred. Advertising costs
          incurred for a hotel prior to its opening are deferred and charged to
          expense in the period the hotel commences operations.

          Advertising expense for 1998, 1997 and 1996 was approximately $23,571,
          $21,405 and $17,373, respectively, of which approximately $797,
          $1,296, and $291, respectively, pertained to preopening advertising
          expenses of the hotels which opened in these respective years.

     (h)  Pensions and Other Benefits--The Partnership contractually provides
          retirement benefits for certain union employees at two of its hotel
          properties under a union sponsored defined benefit plan and a defined
          contribution plan. Contributions to these plans, based upon the
          provisions of the respective union contracts, approximated $70, $66,
          and $54 for the fiscal years ended 1998, 1997 and 1996, respectively.
<PAGE>
 
          Effective January 1996, the Partnership implemented an employee
          savings plan (a 401(k) plan). The Partnership matches a percentage of
          an employee's contribution. The Partnership's matching contributions
          are funded currently. The cost of the matching program and
          administrative costs charged to income were approximately $591, $381
          and $293 in 1998, 1997 and 1996, respectively. The Partnership does
          not offer any other post-employment or post-retirement benefits to its
          employees.

      (i) Self-Insurance--The Partnership is self-insured for certain levels of
          general liability and workers' compensation coverage. Estimated costs
          of these self-insurance programs are accrued based on known claims and
          projected settlements of unasserted claims. Subsequent changes in,
          among others, assumed claims, claim costs, claim frequency, as well as
          changes in actual experience, could cause these estimates to change.

      (j) Income Taxes--Prior to 1994, the entities and properties included in
          the accompanying consolidated financial statements consisted of a
          Partnership, S Corporations and a sole proprietorship. Accordingly,
          the Partnership generally is not responsible for payment of income
          taxes. Rather, the respective partner, stockholder or sole proprietor,
          as applicable, is taxed on the Partnership's taxable income at the
          respective individual federal and state income tax rates. Therefore,
          no income taxes have been provided in the accompanying consolidated
          financial statements.

          As described in Note 1, the Partnership and its general partner, as
          applicable, completed public offerings of first mortgage notes and
          equity securities. Prior to the consummation of these offerings, the S
          Corporation status of the catering companies was terminated, and,
          accordingly, the Partnership is subject to federal and state income
          taxes on taxable income, if any, earned by the catering companies
          after the effective date of the securities registrations. There were
          nominal, if any, earnings attributable to the catering companies after
          the applicable public offerings and there were no undistributed
          earnings of the S Corporations at the time of termination.

     (k)  Revenue Recognition--The Partnership recognizes revenues from its
          rooms, catering and restaurant facilities as earned on the close of
          business each day.

     (l)  Use of Estimates--The preparation of financial statements in
          conformity with generally accepted accounting principles requires
          management to make estimates and assumptions that affect the reported
          amounts of assets and liabilities at the date of the financial
          statements and the reported amounts of revenues and expenses during
          the reporting period. Actual results could differ from those
          estimates.

     (m)  Fiscal Year--The Partnership's fiscal year ends on the Friday nearest
          December 31 which includes 52 weeks in 1998 and 1997 and 53 weeks in
          1996.

          The periods ended in the accompanying consolidated financial
          statements are summarized as follows:
<PAGE>
 
<TABLE>
<CAPTION>
                           Year                         Fiscal Year-End
                           ----                         ---------------
<S>                        <C>                          <C>
                           1998                         January 1, 1999
                           1997                         January 2, 1998
                           1996                         January 3, 1997
</TABLE>

     (n)  Reclassifications--Certain reclassifications have been reflected in
          1997 and 1996 to conform with the current period presentation.

     (o)  New Accounting Pronouncements--In June 1997, the Financial Accounting
          Standards Board (FASB) issued Statement of Financial Accounting
          Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130),
          which requires comprehensive income and the associated income tax
          expense or benefit to be reported in a financial statement that is
          displayed with the same prominence as other financial statements with
          an aggregate amount of comprehensive income reported in that same
          financial statement. "Other Comprehensive Income" refers to revenues,
          expenses, gains and losses that under generally accepted accounting
          principles are included in comprehensive income but not in net income.
          The Partnership adopted this statement in the first quarter of fiscal
          1998 with no impact on the Partnership's reported consolidated
          financial position, results of operations, cash flows or related
          disclosures.

          Also in June 1997, the FASB issued Statement of Financial Accounting
          Standards No. 131, "Disclosures About Segments of an Enterprise and
          Related Information" (SFAS No. 131), which requires disclosure for
          each segment in which the chief operating decision maker organizes
          these segments within a partnership for making operating decisions and
          assessing performance. Reportable segments are based on products and
          services, geography, legal structure, management structure and any
          manner in which management disaggregates a partnership. The
          Partnership adopted this statement in the fourth quarter of fiscal
          1998 with no impact on the Partnership's reported consolidated
          financial position, results of operations, cash flows or related
          disclosures.

          In April 1998, the American Institute of Certified Public Accountants
          issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
          Activities" (SOP 98-5), which requires costs of start-up activities,
          including preopening expenses, to be expensed as incurred. The
          Partnership's current practice is to defer these expenses until a
          hotel has commenced operations, at which time the costs, other than
          advertising costs which are expensed upon opening, are amortized over
          a one-year period. The Partnership intends to adopt SOP 98-5 in the
          first quarter of fiscal 1999. Included in the accompanying 1998
          consolidated balance sheet is approximately $2,296 of unamortized
          preopening expenses which would have been expensed had this
          pronouncement been effective as of January 1, 1999.
<PAGE>
 
          In June 1998, the FASB issued Statement of Financial Accounting
          Standards No. 133, "Accounting for Derivative Instruments and Hedging
          Activities" (SFAS No. 133). This statement establishes accounting and
          reporting standards requiring that every derivative instrument
          (including certain derivative instruments embedded in other contracts)
          be recorded in the balance sheet as either an asset or liability
          measured at its fair value. This statement requires that changes in
          the derivative's fair value be recognized currently in earnings unless
          specific hedge accounting criteria are met. SFAS 133 is effective for
          fiscal years beginning after June 15, 1999. Upon adoption of this
          statement, the Partnership anticipates no impact on its reported
          consolidated financial position, results of operations, cash flows or
          related disclosures.


(3)  Related Party Transactions-

     (a)  Hotel Management Fees--In addition to managing the hotel properties
          included in the accompanying consolidated financial statements, the
          Partnership provides similar services for other hotel properties owned
          or controlled by Mr. Hammons which included five properties at January
          1, 1999. A management fee of approximately 3% of gross revenues (as
          defined) is paid to the Partnership by these hotels which aggregated
          approximately $715, $643 and $717 for the fiscal years ended 1998,
          1997 and 1996, respectively.

     (b)  Accounting and Administrative Services--The hotels have contracted for
          accounting and other administrative services with Winegardner &
          Hammons, Inc. (WHI), a company related by common ownership. The
          accounting and administrative charges expensed by the hotel
          properties, included in administrative expenses, were approximately
          $1,388, $1,411, and $1,228 for the fiscal years ended 1998, 1997 and
          1996, respectively.

          In 1995, the Partnership negotiated a new contract with WHI to
          continue to provide accounting and administrative services through
          June 1999. Charges for these services provided by WHI will approximate
          $32 per year for each hotel property for the duration of the
          agreement.

      (c) Insurance Coverage--To supplement the Partnership's self-insurance
          programs, umbrella, property, auto, commercial liability and workers'
          compensation insurance is provided to the hotel properties under a
          blanket commercial policy purchased by John Q. Hammons Hotels, Inc. or
          WHI, covering hotel properties owned by the Partnership, Mr. Hammons,
          or managed by WHI. Generally, premiums allocated to each hotel
          property are based upon factors similar to those used by the insurance
          provider to compute the aggregate group policy premium. Insurance
          expense for the properties included in operating expenses was
          approximately $2,158, $6,196 and $6,265 for the fiscal years ended
          1998, 1997 and 1996, respectively. During fiscal 1998, the Partnership
          realized continued favorable trends in insurance expense as a
<PAGE>
 
          result of experience and rate improvements and a favorable buyout of
          several prior self-insured years.

     (d)  Allocation of Common Costs--The Partnership incurs certain hotel
          management expenses incidental to the operations of all hotels
          beneficially owned or controlled by Mr. Hammons. These costs
          principally include the compensation and related benefits of certain
          senior hotel executives. Commencing in May of 1993, these costs were
          allocated by the Partnership to hotels not included in the
          accompanying statements, based on the respective number of rooms of
          all hotels owned or controlled by Mr. Hammons. These costs
          approximated $145, $131, $150 for the fiscal years-ended 1998, 1997
          and 1996, respectively. Management considers these allocations to be
          reasonable.

     (e)  Transactions with Partners and Directors--At fiscal 1997 year-end, 
          there were certain prepayments to a partner associated with the
          Partnership's estimated 1998 taxable income, which approximated $2,031
          and are included as a component of construction reimbursements,
          shareholder and other receivables.

          In 1997, the Partnership reimbursed Mr. Hammons for development costs
          incurred on behalf of the Partnership, at approximate cost. These
          transactions amounted to approximately $7,251 (including debt assumed
          of $4,728). In addition to actual costs incurred, the 1997
          reimbursement includes a return on capital employed by Mr. Hammons of
          approximately $120, calculated based on the Partnership's approximate
          incremental borrowing rate. During 1998, no such transactions
          occurred. Consistent with the Partnership's plans to suspend new
          development activity, in 1998 Mr. Hammons assumed approximately $0.3
          million in costs incurred associated with new developments.

          During 1996, the Partnership entered into an agreement with a director
          relating to certain financial advisory services. The Partnership has
          recognized approximately $17, $180 and $188 in expense for the fiscal
          years ended 1998, 1997 and 1996 under this agreement.

     (f)  Summary of Related Party Expenses--The following summarizes expenses
          reported as a result of activities with related parties:

<TABLE>
<CAPTION>
                                                          Fiscal Year-End
                                                     --------------------------
                                                      1998      1997      1996
                                                     ------    ------    ------
          <S>                                        <C>       <C>       <C>
          Expenses included within general,    
           administrative, sales and management
           service expenses:                   
            Accounting and administrative            $1,388    $1,411    $1,228
            Rental expenses (Note 6)                    800       465       520
            Financial advisory services from a 
             director                                    17       180       188
                                                     ------    ------    ------
                                                     $2,205    $2,056    $1,936
                                                     ======    ======    ======
 
          Allocated insurance expense from the 
           pooled coverage included within 
           various operating categories              $2,158    $6,196    $6,265
                                                     ======    ======    ====== 
</TABLE>
<PAGE>
 
(4)  Franchise Agreements-

     As of year-end 1998 and 1997, thirty-six of the forty-two and forty-one of
     the forty-five, respectively, operating hotel properties included in the
     accompanying consolidated balance sheets have franchise agreements with
     national hotel chains which require each hotel to remit to the franchisor
     monthly fees equal to approximately four percent of gross room revenues, as
     defined. Franchise fees expensed under these contracts were $8,110, $7,165
     and $6,250 for the fiscal years ended 1998, 1997 and 1996, respectively.

     As part of the franchise agreement, each hotel also pays additional
     advertising, reservation and maintenance fees to the franchisor which range
     from 1% to 3.5% of room revenues, as defined. The amount of expense related
     to these fees included in the consolidated statements of operations as a
     component of sales expenses was approximately $7,083, $6,497 and $5,493 for
     the fiscal years ended 1998, 1997 and 1996, respectively.

(5)  Long-Term Debt-

     The components of long-term debt are summarized as follows:

<TABLE>
<CAPTION>
                                                                          Fiscal Year-End
                                                                        --------------------
                                                                          1998        1997
                                                                        --------    -------- 
     <S>                                                                <C>         <C>
     First mortgage notes, interest at 8.875%, interest only payable 
     February 15 and August 15, principal due February 15, 2004, 
     secured by a first mortgage lien on twenty hotel properties (or 
     applicable replacement collateral) and additional capital 
     contributions of up to $150 million by Mr. Hammons and an
     entity under his control. (Note 1(b))                              $300,000    $300,000
                                                                        
     First mortgage notes, interest at 9.75%, interest only payable 
     April 1 and October 1, principal due October 1, 2005, secured 
     by a first mortgage lien on six hotel properties (or applicable 
     replacement collateral) and a second mortgage lien on two 
     hotel properties and additional capital contributions of up to 
     $45 million by Mr. Hammons. (Note 1(b))                              90,000      90,000
                                                                        
</TABLE> 
<PAGE>

<TABLE>
<CAPTION>
                                                                           Fiscal Year-End
                                                                         --------------------
                                                                           1998        1997
                                                                         --------    --------
     <S>                                                                  <C>        <C>  
     Development Bonds, variable interest rate approximates 85% 
     of the bond equivalent yield of thirteen week U.S. Treasury 
     bills (not to exceed 12%) and fixed rates ranging from 7.125% 
     to 9.00%, payable in scheduled installments through June 
     2015, certain of the obligations are subject to optional 
     prepayments by the bondholders, secured by certain hotel
     facilities, fixtures and an assignment of rents.                      14,443      36,063
                                                                          
 
     Mortgage notes payable to banks, insurance companies and a 
     state retirement plan, variable interest rates at prime to LIBOR 
     plus 3.25% with certain instruments subject to a ceiling rate 
     and a floor rate, fixed rates ranging from 7.97% to 9.5%, 
     payable in scheduled installments through April 2027, secured 
     by certain hotel facilities, fixtures, assignment of rents, certain
     other real property controlled by Mr. Hammons, with certain 
     instruments subject to cross-collateralization provisions and, 
     with respect to approximately $334,005 of mortgage notes, a 
     personal guarantee of Mr. Hammons.                                   344,369     261,071 

                                                                          
 
     Other notes payable, various variable interest rates and fixed 
     rates ranging from 6.8% to 8.1%, payable in scheduled 
     installments through March 2003, secured by certain hotel 
     improvements, furniture, fixtures and related equipment and, 
     with respect to approximately $1,725 of notes, a personal
     guarantee of Mr. Hammons.                                             10,904       8,657
                                                                         --------    -------- 
                                                                          759,716     695,791
     Less-- current portion                                               (42,256)    (61,517)
                                                                         --------    -------- 
                                                                         $717,460    $634,274
                                                                         ========    ========
</TABLE>

The indenture agreements relating to the 1994 and 1995 notes include certain
covenants which, among others, limit the ability of the Partnership and its
restricted subsidiaries (as defined) to make distributions, incur debt and issue
preferred equity interests, engage in certain transactions with its partners,
stockholders or affiliates, incur certain liens, engage in mergers or
consolidations and achieve certain interest coverage ratios, as defined.  In
addition, certain of the other credit agreements include subjective acceleration
clauses and limit, among others, the incurrence of certain liens and additional
indebtedness.  The 1994 and 1995 notes and certain other obligations include
scheduled prepayment penalties in the event the obligations are paid prior to
their scheduled maturity.

In 1998, the Partnership paid off or refinanced approximately $133.0 million of
long-term debt in 1998.  In connection with these transactions, the Partnership
incurred approximately $2.2 million in charges related to the early
extinguishment of debt.  These debt extinguishment charges have been reflected
in the accompanying 1998 consolidated statement of operations as an
extraordinary item.

     Scheduled maturities of long-term debt are summarized as follows:
<PAGE>
 
<TABLE>
<CAPTION>
                                                                  Year-End
          Year Ending                                               1998
          -----------                                             --------
          <S>                                                     <C>
          1999                                                    $ 42,256
          2000                                                       6,828
          2001                                                      19,844
          2002                                                      39,946
          2003                                                      23,533
          Thereafter                                               627,309
                                                                  --------
                                                                  $759,716
                                                                  ========
</TABLE>

(6)  Commitments and Contingencies-

     (a)  Operating Leases--The hotel properties lease certain equipment and 
          land from unrelated parties under various lease arrangements. In
          addition, the Partnership leases certain parking spaces at one hotel
          for the use of its patrons and is billed by the lessor based on actual
          usage. Rent expense for these leases was approximately $2,715, $1,819
          and $1,629 for the fiscal years ended 1998, 1997 and 1996,
          respectively, which has been included in general and management
          service expenses.

          Included in the accompanying consolidated financial statements are the
          operating results of trade centers located in Joplin, Missouri and
          Portland, Oregon. Both of the trade centers are owned by Mr. Hammons.
          The lease agreement for the Joplin trade center stipulates nominal
          rentals for each of the fiscal years ended 1998, 1997, 1996 and for
          each ensuing year through 2014. The lease agreement for the Portland
          facility extends through 2004 and requires minimum annual rents of
          $300 to Mr. Hammons. In addition, the Partnership leases office space
          in Springfield, Missouri from a partnership (of which Mr. Hammons is a
          partner) for annual payments of approximately $234 through December
          2001. The Partnership has also entered into land leases with Mr.
          Hammons for two operating hotel properties. Subject to the Partnership
          exercising purchase options provided under these agreements, these
          leases extend through 2036 and 2045, respectively, and require
          aggregate minimum annual payments of approximately $270. Rent expense
          for these related party leases was approximately $800, $465 and $520
          for the fiscal years ended 1998, 1997 and 1996, respectively.

          The minimum annual rental commitments for these noncancelable
          operating leases at January 1, 1999 are as follows:

<TABLE>
<CAPTION>
               Fiscal Year
                 Ending             Mr. Hammons     Other      Total
               -----------          -----------    -------    -------
               <S>                  <C>            <C>        <C>
                  1999                $   553      $ 1,442    $ 1,995
                  2000                    570        1,195      1,765
                  2001                    570          839      1,409
                  2002                    570          640      1,210
                  2003                    570          574      1,144
                  Thereafter           10,805       40,200     51,005
                                      -------      -------    -------
                                      $13,638      $44,890    $58,528
                                      =======      =======    =======
</TABLE>
<PAGE>
 
     (b)  Hotel Development--In 1999 and early 2000, the Partnership plans to
          complete construction and open six new hotels.  The total estimated
          aggregate development and construction costs for these hotels are
          expected to exceed $197 million.

     (c)  Legal Matters--The Partnership is party to various legal proceedings
          arising from its consolidated operations. Management of the
          Partnership believes that the outcome of these proceedings,
          individually and in the aggregate, will have no material adverse
          effect on the Partnership's consolidated financial position, results
          of operations or its cash flows.


(7)  Fair Value of Financial Instruments-

     The fair values of marketable securities, and long-term debt approximate
     their historical carrying amounts except with respect to the 1994 and 1995
     notes for which fair market value was approximately $408 million and $404
     million at 1998 and 1997, respectively. The fair value of the first
     mortgage note issues is estimated by obtaining quotes from brokers.


(8)  Sales of Property and Equipment-

     On February 6, 1998, the Partnership completed the sale of six hotels to an
     unrelated party for $39.4 million, resulting in a gain of approximately
     $0.2 million. The net book value of the hotels' property and equipment at
     the time of the sale was approximately $38.6 million. Certain of these
     hotels served as collateral under the 1994 and 1995 first mortgage notes
     (Note 5). Under the terms of these indentures, the Partnership provided
     replacement collateral in accordance with the indenture provisions.

     On December 31, 1998, the Partnership completed the sale of an additional
     hotel property to an unrelated party for $16.1 million, resulting in a gain
     of approximately $8.0 million. The net book value of the hotel's property
     and equipment at the time of the sale was approximately $8.0 million. In
     addition to cash received upon closing, the sales price included a note
     receivable for $11.9 million, 8.0% interest, due in 1999. The note
     receivable is secured by the hotel and a personal guarantee by a
     shareholder of the buyer. This hotel served as collateral under the 1994
     first mortgage notes (Note 5). Under the terms of this indenture, the
     Partnership must provide replacement collateral of equivalent value or
     apply the net proceeds from the sale to amounts outstanding. The
     Partnership intends to provide replacement collateral in accordance with
     the indenture provisions.
<PAGE>
 
Summary unaudited operating results for the seven hotels for each of the three
years ended 1998, 1997, and 1996 are as follows:

<TABLE>
<CAPTION>
                                               1998      1997       1996
                                              ------    -------    ------- 
<S>                                           <C>       <C>        <C>
Revenues                                      $9,716    $35,673    $36,637
                                              ======    =======    ======= 

Income from operations, including 
 depreciation and amortization of $861, 
 $3,101, and $2,971, respectively             $1,250    $ 5,122    $ 4,722
                                              ======    =======    ======= 
</TABLE>
<PAGE>
 
                                   SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrants have duly caused this report to be signed
on their behalf by the undersigned, thereunto duly authorized, in the City of
Springfield, Missouri, on the 31st day of March, 1999.


                                  JOHN Q. HAMMONS HOTELS, L.P.

                                  By:  John Q. Hammons Hotels, Inc.,
                                    its general partner


                                  By: /s/ John Q. Hammons
                                     ------------------------
                                    John Q. Hammons
                                    Chairman and Founder


                                  JOHN Q. HAMMONS HOTELS FINANCE
                                  CORPORATION



                                  By: /s/ John Q. Hammons
                                      -----------------------
                                    John Q. Hammons
                                    Chairman and Founder

                                  JOHN Q. HAMMONS HOTELS FINANCE
                                  CORPORATION II


                                  By: /s/ John Q. Hammons
                                      -----------------------
                                    John Q. Hammons
                                    Chairman and Founder

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
in their capacities at John Q. Hammons Hotels, Inc. as general partner of John
Q. Hammons Hotels, L.P., and in the capacities indicated for John Q. Hammons
Hotels Finance Corporation, and John Q Hammons Hotels Finance Corporation II, on
March 31st, 1999.
<PAGE>
 
<TABLE>
<CAPTION>
           Signatures                                                       Title
---------------------------------  ---------------------------------------------------------------------------------------
<S>                                <C>
/s/ John Q. Hammons                Chairman and Founder of John Q. Hammons Hotels, Inc., John Q. Hammons Hotels Finance
---------------------------------  Corporation and John Q. Hammons Finance Corporation II (Principal Executive Officer)
John Q. Hammons

/s/ Kenneth J. Weber               Director, Chief Financial Officer of John Q. Hammons Hotels, Inc.  [John Q. Hammons
---------------------------------  Hotels Financial Corporation and John Q. Hammons Finance Corporation II] (Principal
Kenneth J. Weber                   Financial and Accounting Officer)

/s/ Jacqueline A. Dowdy            Director, Secretary of John Q. Hammons Hotels, Inc., John Q. Hammons Hotels Finance
---------------------------------  Corporation and John Q. Hammons Finance Corporation II
Jacqueline A. Dowdy

/s/ William J. Hart                Director of John Q. Hammons Hotels, Inc.
---------------------------------
William J. Hart

/s/ Daniel L. Earley               Director of John Q. Hammons Hotels, Inc.
---------------------------------
Daniel L. Earley
                                   
/s/ James F. Moore                 Director of John Q. Hammons Hotels, Inc.
---------------------------------  
James F. Moore

/s/ John E. Lopez-Ona              Director of John Q. Hammons Hotels, Inc.
---------------------------------
John E. Lopez-Ona
</TABLE>
<PAGE>
 
                                 EXHIBIT INDEX
                                        
<TABLE>
<CAPTION>

 No.       Title                                                                                                    Page
------     -----------------------------------------------------------------------------------------  ------------------
<S>        <C>                                                                                                      <C>
     *3.1  Second Amended and Restated Agreement of Limited Partnership of the Company (the
           "Partnership Agreement")
      3.2  Amendment No. 1 to Partnership Agreement (incorporated by reference to the
           Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1994)
    **3.3  Amendment No. 2 to Partnership Agreement
  ****3.4  Certificate of Limited Partnership of the Company filed with the Secretary of State of
           the State of Delaware
     *3.5  Restated Certificate of Incorporation of the General Partner
   ***3.6  Certificate of Incorporation of John Q. Hammons Hotels Finance Corporation II
   **10.1  1994 Note Indenture
   **10.2  1995 Note Indenture
   **10.3  Embassy Suites License Agreement
   **10.4  Form of Option Purchase Agreement
    *10.5  Collective Bargaining Agreement between East Bay Hospitality Industry Association, Inc.
           and Service Employee's International Union
  ***10.6  Collective Bargaining Agreement between Hotel Employee and Restaurant Employee Union
           Local 49 and Holiday Inn Sacramento--Capitol Plaza, for 06/01/95 to 5/31/98
    *10.7  Letter Agreement re: Hotel Financial Services for Certain Hotels Owned and Operated
           by John Q. Hammons or JQH Controlled Companies
     10.8  Employment Agreement between John Q. Hammons Hotels, Inc. and Debra M. Shantz dated as of
           May 1,1995 as amended on October 31, 1997.
 ***10.9a  John Q. Hammons Building Lease Agreement - 9th Floor (6000 sq. ft.)
 ***10.9b  John Q. Hammons Building Lease Agreement - 7th Floor (2775 sq. ft.)
 ***10.9c  John Q. Hammons Building Lease Agreement - 7th Floor (2116 sq. ft.)
 ***10.9d  John Q. Hammons Building Lease Agreement - 8th Floor (6000 sq. ft.)
   *10.10  Triple Net Lease
   *10.11  Lease Agreement between John Q. Hammons and John Q. Hammons Hotels, L.P.
    10.13  Employment Agreement between John Q. Hammons Hotels, Inc. and Kenneth J. Weber dated
           as of April 27, 1998.
 ***10.14  Ground lease between John Q. Hammons and John Q. Hammons-Branson, L.P. -
           (Chateau on the Lake, Branson, Missouri)
 ***10.15  Ground lease between John Q. Hammons and John Q. Hammons-Hotels Two, L.P. -
           (Little Rock, Arkansas)
   *10.16  Operating Agreement of Rivercenter Plaza Development Co., L.C., an Iowa limited liability
           company
   *10.17  Agreement of Limited Partnership of John Q. Hammons Hotels, L.P. Two
   *10.18  1994 Stock Option Plan
****10.19  Agreement of Limited Partnership of John Q. Hammons Hotel--Montgomery L.P.
    10.20  1999 Non-Employee Director Stock and Stock Option Plan of the General Partner
     12.1  Computations of Ratio of Earnings to Fixed Charges of the Company
     27    Financial Data Schedule
</TABLE>
     ________________________
*     Incorporated by reference to the General Partner's Registration Statement
      on Form S-1, No. 33-84570.
**    Incorporated by reference to the Company's Registration Statement on Form
      S-4, No. 33-73340.
***   Incorporated by reference to the Company's Annual Report on Form 10-K for
      the Fiscal Year Ended January 3, 1997.
****  Incorporated herein by reference to the Company's Registration Statement
      (Registration No. 33-99614) previously filed with the Commission.