HAMMONS JOHN Q HOTELS INC, 10-K405, 1998-04-02

HAMMONS JOHN Q HOTELS INC
10-K405, 1998-04-02
HOTELS & MOTELS

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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 2, 1998
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, INC.
(Exact Name of Registrant as specified in its charter)

Delaware 43-16950593
(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:

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Class A Common Stock New York Stock Exchange
$.01 par value per share

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 files 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]

The aggregate market value of the 5,912,062 shares of Class A Common Stock
held by non-affiliates of the Registrant was approximately $45,818,480.50 based
on the closing price on the New York Stock Exchange for such stock on March 20,
1998.

Number of shares of the Registrant's Class A Common Stock outstanding as of
March 18, 1998: 6,042,000

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the annual report to shareholders for the year ended January 2,
1998 are incorporated by reference into Part II. Portions of the proxy
statement for the annual shareholders meeting to be held on May 1, 1998 are
incorporated by reference into Part III.
<PAGE>

PART I

ITEM 1. BUSINESS.

As used herein, the term "Company" means (i) John Q. Hammons Hotels, Inc.,
a Delaware corporation, (ii) Hammons, Inc., a Missouri corporation, as
predecessor general partner, (iii) John Q. Hammons Hotels, L.P., a Delaware
limited partnership, and (iv) corporate and partnership subsidiaries of John Q.
Hammons Hotels, L.P., collectively, or, as the context may require, John Q.
Hammons Hotels, Inc. only. As used herein, the term "Partnership" 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. Unless otherwise stated, references to the Company's
business and properties refer to the business and properties of the Partnership.

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 45 hotels located in 20 states, containing 11,108 guest
rooms or suites (the "Owned Hotels"), and manages four additional hotels located
in two states, containing 952 guest rooms (the "Managed Hotels"). On January 2,
1998, the Company also owned seven upscale hotels at various stages of
development, which are scheduled to open during 1998 and 1999 (the "Scheduled
Hotels"). The Company's existing 49 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 is
developing new hotels).

In some of the Company's developments, it benefits from development
incentives provided by local governments and other organizations interested in
ensuring the development of a quality hotel in their community. The Company
designs each new hotel to meet the specific needs of the market and engages in
selling efforts in advance of the hotel's opening. The Company's entire
management team, including senior management, architects, design specialists,
hotel managers and sales personnel, is involved in the development of each new
hotel. The Company is evaluating development of a number of hotels in addition
to the seven Scheduled Hotels.

The JQH Hotels are designed to appeal to a broad range of hotel customers,
including frequent business travelers, groups or conventions, as well as leisure
travelers. Each of the JQH Hotels is individually designed by the Company, and
most contain an expansive 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 25 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, and contain an average of 262
rooms. The 11 Embassy Suites JQH Hotels are all-suite hotels which appeal to the
traveler needing or desiring greater space and specialized services and contain
an average of 242 suites. The JQH Hotels also include four non-franchise hotels,
two Radissons, one Hampton Inn & Suites, two Marriotts, two
<PAGE>

Homewood Suites, one Crowne Plaza and one Days Inn. Three of the non-franchise
hotels have the word "Plaza" in their name and average 232 rooms. The fourth
non-franchise hotel is a resort hotel with 301 rooms. 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 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 Company conducts all of its business operations through the Partnership
and its subsidiaries. Mr. Hammons beneficially owns all 294,100 shares of Class
B Common Stock of the Company, representing 70.88% of the combined voting power
of both classes of the Company's Common Stock. The Company is the sole general
partner of the Partnership through its ownership of all 6,336,100 general
partner units (the "GP Units"), representing 28.31% of the total equity in the
Partnership. Mr. Hammons beneficially owns all 16,043,900 limited partnership
units of the Partnership (the "LP Units"), representing 71.69% of the total
equity in the Partnership. The Class A Common Stock of the Company represents
27.00% of the total equity of the Partnership, and the Class B Common Stock and
LP Units beneficially owned by Mr. Hammons represent 73.00% of the total equity
in the Partnership. 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 corporation that was formed on
September 29, 1994.

DEVELOPMENT

The Company plans to continue expanding into target market areas where it
believes it can establish a leading market position. The following table sets
forth information as to the Scheduled Hotels:
<TABLE>
<CAPTION>

Number of
---------
Location Franchise/Name Rooms/Suites Description Stage of Development
- -------- -------------- ------------ ----------- --------------------
<S> <C> <C> <C> <C>
Tampa, FL..................... Embassy Suites 247 Atrium; Convention Opened January 1998
Center

St. Augustine, FL............. Resort 300 Atrium; Convention Construction commenced;
Center 2nd Quarter 1998 Expected
opening

Topeka, KS.................... Capitol Plaza 224 Atrium; Convention Construction commenced;
Center 3rd Quarter 1998 Expected
opening

Portland, OR.................. Embassy Suites 251 Atrium; Convention Construction commenced;
Center 3rd Quarter 1998 Expected
opening

Mesquite, TX.................. Hampton Inn & 160 Convention Center Construction commenced;
Suites 1st Quarter 1999 Expected
opening

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

Dallas/Ft. Worth Airport, TX.. Embassy Suites 330 Atrium; Convention Construction commenced;
Center 4th Quarter 1999 Expected
opening
</TABLE>

The Company is currently evaluating development of a number of hotels in
addition to the Scheduled Hotels already under construction.
<PAGE>

Effective February 6, 1998, the Company completed the sale of six hotels to
an unrelated party for approximately $40 million, including $34.9 million in
cash and the assumption of approximately $5.1 million in debt and other
obligations. The purchase price approximated the aggregate net book value of the
hotels sold. Five of these hotels served as collateral under the 1994 and 1995
Mortgage Notes. The Company intends to provide replacement collateral in
accordance with the indenture provisions. Therefore, the net proceeds of the
sale will not be available for new hotel development.

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 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. The Company continually
monitors its portfolio for under-performing hotels which are then evaluated for
potential sale based on investment considerations.

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.

The Company plans to continue with its development of full-service, and
all-suite hotels based on favorable market fundamentals and because few hotels
are being constructed in the upscale sector of the hotel industry. While the
Company believes its development efforts represent the best long-term strategy,
continued aggressive new hotel development is likely to have a negative effect
on short-term earnings.

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 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 49 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 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. Total involvement at each level by management in the layout and design
phases of new hotel developments ensures that each hotel is built to meet the
operational needs of the hotel staff and best serve the guest.
<PAGE>

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 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.

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
<PAGE>

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 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 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. Umbrella,
property, auto, commercial liability and worker's compensation insurance are
provided to the JQH Hotels under a blanket policy. Insurance expenses for the
JQH Hotels were approximately $5.8 million, $6.3 million and $6.2 million in
1995, 1996 and 1997, respectively. 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
<PAGE>

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 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
350 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 Company.

John Q. Hammons is the Chairman, Chief Executive Officer, a director and
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.

David B. Jones is the President, Chief Operating Officer and a director of
the Company. Mr. Jones has been President and a director of the Company since
February 1993. From 1992 until joining the Company, Mr. Jones was Chief
Executive Officer of Davidson Hotel Partnership, a Memphis-based hotel
management company. Prior to 1992, Mr. Jones was President and Chief Executive
Officer of Homewood Suites, Inc., a subsidiary of The Promus Companies
Incorporated, which also then owned Holiday Inns, Inc. Mr. Jones began his
career in the hotel industry with Holiday Inns, Inc. in 1966. While with Holiday
Inns, Inc., Mr. Jones held the position of Senior Vice President of Franchise
and Senior Vice President of Development. He is a former board member of the
American Hotel and Motel Association.

Debra M. Shantz is Corporate Counsel of the Company. She joined the Company
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.
<PAGE>

Pat A. Shivers is Senior Vice President, Administration and Control,
of the Company. 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
Company. 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
Company since 1989. She has been active in Mr. Hammons' hotel operations since
1981. She is an officer of several affiliates of the Company.

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

Glenn R. Malone is Senior Vice President, Financial Planning and
Corporate Development, of the Company. From 1989 until joining the Company in
1993, he served as Senior Manager, Operations Support for the national chains
operated by Hampton Inns, Inc. and Homewood Suites, Inc. (each a subsidiary of
The Promus Companies Incorporated). Mr. Malone held the position of Manager,
Finance and Administration for Embassy Suites, the national chain, from 1988
through 1989. Beginning in 1978 through the end of 1987, he held various
accounting, financial, and operations positions at Holiday Inns, Inc.

Lawrence A. Welch has been Vice President, Food and Beverage, of the
Company since March 1994. Prior to joining the Company, 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.

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 1997,
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 37 of the Owned Hotels are
located, while eight of the Owned Hotels are subject to long-term ground leases.

DESCRIPTION OF HOTELS

GENERAL

The JQH Hotels are located in 20 states and contain a total of 12,060
rooms. The JQH Hotels have an average of 246 guest rooms or suites. The JQH
Hotels operate primarily under the Holiday Inn and Embassy Suites trade names.
The average size of a Holiday Inn hotel room and an Embassy suite is 350 square
feet and 545 square
<PAGE>

feet, respectively. 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 of $21.2 million in 1994, 1995, 1996 and 1997 on the Owned
Hotels. During 1998, the Company expects to spend approximately $20.8 million
on refurbishment of the Owned Hotels.

OWNED HOTELS

The Owned Hotels consist of 45 hotels, which are located in 20 states
and contain a total of 11,108 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>
Montgomery, AL Embassy Suites 237 Atrium; 8/95
Meeting Space: 15,000 sq. ft. (c)
Fort Smith, AR(a)(d) Holiday Inn 255 Atrium; 5/86
Meeting Space: 15,000 sq. ft.
Springdale, AR Holiday Inn 206 Atrium; 7/89
Meeting Space: 18,000 sq. ft.
Convention Ctr: 29,280 sq. ft.
Springdale, AR Hampton Inn & Suites 102 Meeting Space 400 sq. ft. 10/95
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.
Bakersfield, CA Holiday Inn Select 259 Meeting Space: 9,735 sq. ft. (c) 6/95
Fresno, CA(a)(d) Holiday Inn 210 Meeting Space: 5,000 sq. ft. 12/73
Fresno, CA Holiday Inn (Centre Plaza) 321 Atrium; 10/83
Meeting Space: 16,000 sq. ft. (c)
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 279 Meeting Space: 9,000 sq. ft. 6/72
</TABLE>
<PAGE>

Number of
Location Franchise/Name Rooms/Suites Description Opening Date
- -------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Denver, CO(a) Holiday Inn 236 Atrium; 10/82
(International Trade Center: 66,000 sq. ft. (b)
Airport)

Denver, CO Holiday Inn (Northglenn) 236 Meeting Space: 20,000 sq. ft. 12/80
Fort Collins, CO Holiday Inn 259 Atrium; 8/85
Meeting Space: 12,000 sq. ft.
Cedar Rapids, IA Collins Plaza 221 Atrium; 9/88
Meeting Space: 11,250 sq. ft.
Davenport, IA Radisson 223 Meeting Space: 7,800 sq. ft. (c) 10/95
Des Moines, IA Embassy Suites 234 Atrium; 9/90
Meeting Space: 13,000 sq. ft.
Des Moines, IA Holiday Inn 288 Atrium; 1/87
Meeting Space: 15,000 sq. ft.
Joliet, IL Holiday Inn 200 Meeting Space: 5,500 sq. ft. 3/71
Bowling Green, KY University Plaza 219 Meeting Space: 4,000 sq. ft. (c) 8/95
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.
Springfield, MO Holiday Inn 188 Atrium; 9/87
Meeting Space: 3,020 sq. ft.
Billings, MT(d) Holiday Inn 315 Atrium; 10/72
Meeting Space: 15,000 sq. ft.
Trade Center 30,000 sq. ft. (b)
Reno, NV Holiday Inn 286 Meeting Space: 8,700 sq. ft. 2/74
Albuquerque, NM Holiday Inn 311 Atrium; 12/86
Meeting Space: 123,00 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
Portland, OR(a) Holiday Inn 286 Atrium; 4/79
Trade Center: 37,000 sq. ft. (b)
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) Holiday Inn 288 Atrium; 12/85
Meeting Space: 14,300 sq. ft.
Lubbock, TX(d) Holiday Inn (Civic Center) 293 Atrium; 9/82
Meeting Space: 7,000 sq. ft. (c)
Lubbock, TX(d) Holiday Inn 202 Atrium; 10/85
Meeting Space: 24,000 sq. ft.
Madison, WI Holiday Inn 295 Atrium; 10/85
Meeting Space: 15,000 sq. ft.
Convention Ctr: 50,000 sq. ft. (b)
Cheyenne, WY(d) Holiday Inn 244 Meeting Space: 12,000 sq. ft. 6/81
</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.

(d) Sold effective February 6, 1998.
<PAGE>

MANAGED HOTELS

The Managed Hotels consist of four hotels (three Holiday Inns and one Days
Inn) located in two states (Missouri and South Dakota), and contain a total of
952 guest rooms. Mr. Hammons directly owns three of these four 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 Company, and
Daniel L. Earley, a director of the Company, each own a 25% interest in this
entity. The Managed Hotels contain an average of 238 rooms per hotel and two of
the Managed Hotels have an atrium. There is a convention and trade center
adjacent to two 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.

The Company's Class A common stock (the "Class A Common Stock") has been
listed on the New York Stock Exchange sine November 16, 1994 under the symbol
"JQH."
<TABLE>
<CAPTION>
STOCK PRICE PER SHARE
High Low
<S> <C> <C>

1996
First Quarter $ 11-7/8 $ 9-3/4
Second Quarter $ 12-1/8 $ 10
Third Quarter $ 10-7/8 $ 9-5/8
Fourth Quarter $ 9-1/2 $ 7-1/2

1997
First Quarter $ 9-3/4 $ 7-1/2
Second Quarter $ 9-3/8 $ 8
Third Quarter $ 9-5/8 $ 8-5/8
Fourth Quarter $10-13/16 $8-3/16
</TABLE>
<PAGE>

On March 18, 1998, there were approximately 220 holders of record of the Class
A Common Stock then outstanding. Based on the number of annual reports
requested by brokers, the Company estimates that it has approximately 1800
beneficial owners of its Class A Stock. On March 20, 1998, the last reported
sale price of the Class A Common Stock on the NYSE was $7 3/4. No dividends
have been declared for the Company's stock in 1995, 1996 or 1997.

ITEM 6. SELECTED FINANCIAL DATA

The information required by this item is hereby incorporated by reference
to the material appearing in the 1997 Annual Report to Shareholders (the "Annual
Report to Shareholders"), filed as Exhibit 13.1 hereto, under the caption
"Selected Financial Data."

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

The information required by this item is hereby incorporated by reference
to the material appearing in the Annual Report to Shareholders under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Financial Statements of the Company are hereby incorporated by
reference to the Consolidated Financial Statements of the Company appearing in
the Annual Report to Shareholders.

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 information required by this item with respect to directors is hereby
incorporated by reference to the material appearing in the Company's definitive
proxy statement for the annual meeting of shareholders to be held on May 1, 1998
(the "Proxy Statement") under the caption "Election of Directors." Information
required by this item with respect to executive officers is provided in Item 1
of this report. See "Management." The information included in the proxy under
the caption "16(a) Beneficial Ownership Reports" is hereby incorporated by
reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item is hereby incorporated by reference
to the material appearing in the Proxy Statement under the caption "Executive
Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this item is hereby incorporated by reference
to the material appearing in the Proxy Statement under the captions "Security
Ownership of Management" and "Security Ownership of Certain Beneficial Owners."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
<PAGE>

The information required by this item is hereby incorporated by reference
to the material appearing in the Proxy Statement under the captions "Certain
Transactions" and "Compensation Committee Interlocks and Insider Participation."

PART IV

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

14(A)(1) FINANCIAL STATEMENTS

Report of Independent Public Accountants

Consolidated Balance Sheets at Fiscal 1997 Year-End and Fiscal 1996
Year-End

Consolidated Statements of Income for the 1997, 1996 and 1995 Fiscal
Years

Consolidated Statements of Changes In Minority Interest and
Stockholders Equity (Deficit) for Fiscal 1997, 1996 and 1995

Consolidated Statements of Cash Flows for Fiscal 1997, 1996 and 1995

Notes to Consolidated Financial Statements

The Consolidated Financial Statements of the Company are hereby
incorporated by reference to the Consolidated Financial Statements of
the Company appearing in the Annual Report to Shareholders.

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).

<TABLE>
<CAPTION>
<S> <C>
10.5 Form of Option Purchase Agreement
10.14b Amended and restated employment agreement between John Q. Hammons
Hotels, Inc. and David B. Jones
10.18 1994 Stock Option Plan
</TABLE>

14(B) REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the year ended January 2,
1998.

14(C) EXHIBITS

The list of Exhibits filed with this report is set forth in response to
Item 14(a)(3). The required exhibit index has been filed with the exhibits.

14(D) FINANCIAL STATEMENTS

None.
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Springfield, Missouri, on the 31st day of March, 1998

JOHN Q. HAMMONS HOTELS, INC.

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 the capacities at John Q. Hammons Hotels, Inc. on March 31, 1998.

<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C>
/s/ John Q. Hammons Chairman and Founder of John Q. Hammons Hotels, Inc.
- ------------------------- (Principal Executive Officer)
John Q. Hammons

/s/ Glenn R. Malone Senior Vice President, Financial Planning and
- ------------------------- Corporate Development (Principal Financial Officer
Glenn R. Malone and Principal Accounting Officer)

/s/ David B. Jones Director, President of John Q. Hammons Hotels, Inc.
- -------------------------
David B. Jones

/s/ Jacqueline A. Dowdy Director, Secretary of John Q. Hammons Hotels, Inc.
- -------------------------
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/ Robert T. Jones, Jr. Director of John Q. Hammons Hotels, Inc.
- -------------------------
Robert T. Jones, Jr.

/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
--- ----- ----
<C> <S> <C>
*3.1 Restated Certificate of Incorporation of the Company
*3.2 Bylaws of the Company, as amended
*3.3 Second Amended and Restated Agreement of Limited Partnership of the Partnership
*3.4 Certificate of Limited Partnership of the Partnership, filed with the Secretary of State of
the State of Delaware
*3.5 Agreement of Limited Partnership of John Q. Hammons Hotels Two, L.P.
*3.6 Amendment No. 1 to Second Amended and Restated Agreement of Limited Partnership of
the Partnership
**3.7 Amendment No. 2 to Second Amended and Restated Agreement of Limited Partnership of
the Partnership
*10.1 1994 Note Indenture
**10.2 1995 Note Indenture
*10.3 Holiday Inn License Agreement
*10.4 Embassy Suites License Agreement
*10.5 Form of Option Purchase Agreement
*10.6 Collective Bargaining Agreement between East Bay Hospitality Industry Association, Inc.
and Service Employee's International Union
***10.6a 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
*10.8 Letter Agreement re: Hotel Financial Services for Certain Hotels Owned and Operated by
John Q. Hammons or JQH Controlled Companies
***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.)
*10.11 Triple Net Lease
*10.12 Lease Agreement between John Q. Hammons and John Q. Hammons Hotels, L.P.
***10.14b Amended and restated employment agreement between John Q. Hammons Hotels, Inc. and
David B. Jones
***10.15a Ground lease between John Q. Hammons and John Q. Hammons-Branson, L.P. - (Chateau
on the Lake, Branson, Missouri)
***10.15b Ground lease between John Q. Hammons and John Q. Hammons-Hotels Two, L.P. -
(Little Rock, Arkansas)
*10.17 Operating Agreement of Rivercenter Plaza Development Co., L.C., an Iowa limited
liability company
*10.18 1994 Stock Option Plan
12.1 Computations of Ratio of Earnings to Fixed Charges of the Company
13.1 1997 Annual Report to Shareholders
*21 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule

</TABLE>
________________________

* Incorporated by reference to the same numbered exhibit in the Company's
Registration Statement on Form S-1, No. 33-84570.

** Incorporated by reference to the partnership's Registration Statement on Form
S-4, No. 33-99614.

*** Incorporated by reference to the same numbered exhibit in the Company's
Annual Report on Form 10-K for the Fiscal Year Ended January 3, 1997.

<PAGE>

EXHIBIT 12.1

JOHN Q. HAMMONS HOTELS, INC.
HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
(000'S OMITTED)
<TABLE>
<CAPTION>

1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
HISTORICAL EARNINGS:
Net income before extraordinary
item.................................. $15,390 $15,386 $18,729 $18,524 $ 8,791

Add:
Interest, amortization of deferred
financing fees and other fixed
charges (excluding interest
capitalized).......................... 27,839 33,308 28,904 36,337 45,086
------- ------- ------- ------- -------
Historical earnings................. $43,229 $48,694 $47,633 $54,861 $53,877
======= ======= ======= ======= =======

FIXED CHARGES:
Interest expense and
amortization of deferred
financing fees........................ $27,412 $32,932 $28,447 $35,620 $44,325
Interest capitalized................... -- 957 5,270 7,162 10,259
Interest element of rentals............ 427 376 457 717 761
------- ------- ------- ------- -------
Fixed charges....................... $27,839 $34,265 $34,174 $43,499 $55,345
------- ------- ------- ------- -------
RATIO OF EARNINGS TO
FIXED CHARGES
(A)................................... 1.55 1.42 1.39 1.26 0.97
======= ======= ======= ======= =======
</TABLE>
(A) In computing the ratio of earnings to fixed charges, earnings have been
based on income from operations before income taxes and fixed charges
(exclusive of interest capitalized) and fixed charges consist of interest
and amortization of deferred financing fees (including amounts capitalized)
and the estimated interest portion of rents (deemed to be one-third of
rental expense).

<PAGE>

John Q. Hammons Hotels, Inc.

The premiere owner, operator and
developer of upscale, full-service hotels in the nation.
<PAGE>

FINANCIAL HIGHLIGHTS
(in thousands, except per share amounts, ratios and hotel data)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Operating Results
Total Revenues $302,274 $268,847 $235,179

Other Data
EBITDA 87,897 78,178 65,522

Share Data
EBITDA Per Share/LP Unit 3.93 3.49 2.93
Operating cash flow per share 1.95 1.90 1.66
(EBITDA less interest expense)

- -------------------------------------------------------------------------------
Selected Balance Sheet Data
Total assets $816,733 $658,072 $542,371
Total debt, including current portion 695,791 531,143 458,094

Minority Interest of Holders of the LP Units 39,399 33,662 23,082
Equity 18,508 16,094 10,955
-------- -------- --------
Total $ 57,907 $ 49,756 $ 34,037

OPERATING DATA
Owned Hotels
Number of Hotels 45 39 37
Number of Rooms (end of year) 11,108 9,666 9,312
Average Occupancy 62.9% 64.7% 67.1%
Average Daily Room Rate $ 82.38 $ 76.16 $ 71.68
Room Revenue Per
Available Room (RevPAR) $ 51.84 $ 49.25 $ 48.09
- -------------------------------------------------------------------------------
</TABLE>
[BAR GRAPH APPEARS HERE]

Total Revenues

95
96
97

300
290
280
270
260
250
240
230
220
$ IN THOUSANDS

[BAR GRAPH APPEARS HERE]

EBITDA $ Allocation

95
96
97

55 60 65 70 75 80 85 90
$ IN MILLIONS

[_] Original 31 [_] Mgt. Company [_]Class of 95 [_]Class of 96 [_]Class of 97
(6 hotels) (2 hotels) (6 hotels)

[BAR GRAPH APPEARS HERE]
REVPAR

95
96
97
45 46 47 48 49 50 51 52
$
<PAGE>

letter
TO OUR
STOCKHOLDERS

In recognition of our heritage and long-term stability, John Q. Hammons Hotels,
Inc. is proud to celebrate the company's 40th anniversary in the lodging
industry. To commemorate this landmark achievement, the theme: "Building on the
Past, Developing for the Future" is a fitting statement of our organization's
unique competitive advantage in the marketplace.

[PIE CHART APPEARS HERE]

Total Revenue
Food & Beverage Revenue 29%
Rooms & Other Revenue

[PIE CHART APPEARS HERE]
EBITDA
Food & Beverage EBITDA 27%
Rooms & Other EBITDA

Though many things have changed in the last four decades of operation, we have
remained steadfast in our commitment to excellence and serving customers in the
upscale, full-service hotel sector.

As always, our mission is to provide outstanding products, reasonable prices,
and extra amenities to enrich our customers' experience. Our well-known
"signature elements" including larger guest rooms, spectacular atriums, and top
quality meeting room space are three additional amenities we offer to add more
value to each guest's stay. By stressing superior customer service at every
level, we earn the loyalty necessary to keep guests coming back.

To achieve even greater success, John Q. Hammons Hotels will continue to grow
by building upon our many existing strengths and focusing on future customer
needs. Through our emphasis on value-enhancing amenities, superior customer
service, attention to the bottom line, and well-focused objectives, we will
prosper like never before.

In addition to providing you with an overview of the company's financial
success in 1997, this annual report is designed to highlight our major
competitive strengths: Our Points of Difference; Our Performance; Our People;
and Our Development. We will also describe the key objectives that position us
for continued long-term success.

In short, John Q. Hammons Hotels has the resources and objectives to excel.
Our first-class facilities set us apart from the competition. Our performance is
proven. Our people have the experience to succeed. We are dedicated to
innovation and technology. And our plans for new development are as aggressive
as ever encompassing new markets that will drive cash flow.

Join us as we look at another profitable year in our history, and demonstrate
the many reasons why we are poised for greater success in the years ahead.

1997... A Year of Record Performance.
By any measure, 1997 was an outstanding year for John Q. Hammons Hotels. Here is
a "snap-shot" summary of our major accomplishments in 1997:

We opened six new hotels, growing our company by 15%.

We achieved $302 million in Total Revenue, representing a 12% increase over
1996.

We generated $87.9 million in EBITDA, representing a 12% increase over 1996.

We continued to show strong growth in ADR.

We initiated the sale of six hotels, which closed in February, 1998.

We re-franchised three hotels to maximize their potential and profitability.

JQH

Through our emphasis on value-enhancing amenities,
superior customer service, attention to the bottom line, and
well-focused strategies, we will prosper like never before.

" ( ) "

1
<PAGE>

Our Key Strategies

The outstanding achievements of John Q. Hammons Hotels in 1997 are the result of
our company's vision and strategic approach to long-term growth. To better
explain our exciting future, we would like to address the key objectives that
are driving our business decisions.

The full-service, upscale hotel sector is the place to be. Even though the
industry trend in recent years was toward building in the limited-service
hotelsector, we have remained committed to the upscale, full-service market. Now
more than ever, our strategy is paying off. The limited-service sector has been
over-built, but the upscale, full-service sector has had relatively little
supply growth.

For the foreseeable future, we will remain a strong development company for
many reasons. As a rule, guests prefer newer facilities. We can incorporate the
amenities customers want. And our focus on development is creating a steady
stream of new, quality products -- which will drive our cash flow.

In the last three years, over 200,000 new rooms have been added to the hotel
industry. However, the average new hotel had less than 90 rooms. The majority of
this room supply has been added in the Budget, Economy and Mid-Priced sectors
while the Upscale and Luxury sectors have had relatively little new supply
added. Today, most experts agree that the upscale sector is the place to be due
to its more favorable operating fundamentals. While strong growth did occur in
the upscale sector during the late 1980's when 100% financing was available,
today's equity requirement of 30-35% has greatly reduced the playing field in
terms of upscale hotel developers. Our 40-year history, strong reputation as a
developer, and proven track record gives us the ability to develop hotels in the
upscale sector where a limited number of developments are projected for the next
two to three years.

Continuously maximize company value. As part of this strategy, we repositioned
three existing hotels under new brand names in 1997. Due to a

John Q. Hammons Hotels
Company Structure

JQH Hotels Inc.
Stockholders Mr. John Q. Hammons
28.3% General 71.7% Limited
Partner Interest Partner Interest

JQH Hotels L.P.
28 Hotels
('94 & '95 Collateral)

JQH Hotels Two
L.P., 17 Hotels
(Development Entity)

Celebrating 40 years

2
<PAGE>

Letter to our Shareholders continued

[PICTURE OF MANAGEMENT TEAM]
The Management Team of John Q. Hammons Hotels

Front row:
Jacqueline A. Dowdy, Secretary
David B. Jones, President & Chief Operating Officer
Steven E. Minton, Senior Vice President Architecture
John Q. Hammons, Chairman & Chief Executive Officer
2nd row:
Lawrence A. Welch, Vice President Food & Beverage
Pat A. Shivers, Senior Vice President Administration & Control
Bill Parker, Regional Vice President Rocky Mountain Region
William Mead, Regional Vice President Eastern Region
Glenn R. Malone, Senior Vice President Financial Planning & Corporate
Development
Debra Mallonee Shantz, Corporate Counsel
3rd row:
Lonnie Funk, Regional Vice President Midwest Region
Robert Fugazi, Regional Vice President Southern Region
John D. Fulton, Vice President Design & Construction
4th row:
Robert Niehaus, Regional Vice President Western Region
James Miller, Vice President Sales & Marketing

window of opportunity to dispose of several mature assets, we also sold six
existing hotels in February 1998. The six hotels were sold for $40 million and
saved the company approximately $15 million in capital expenditures for 1998.
The net proceeds of the sale will be invested in newer hotels.

EBITDA is the basis to use in determining our equity value. To determine
the equity value of most hotels, and hotel companies that primarily own

1957
1958
John Q. Hammons enters the hotel business.

1959
10 Holiday Inn(R) franchises are purchased by Mr. Hammons.

1961
Mr. Hammons co-founds Winegardner & Hammons, Inc. (WHI) for the purpose of hotel
development.

1967
1969
John Q. Hammons Hotels is formed.

1970
First Holidome hotel is built.

1975
First hotel with expansive meeting space is built.

1977
1979
50 hotels are either owned or managed by the company and WHI.

DEVELOP John Q. Hammons Hotels

3
<PAGE>

hotels, Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA)
is used as the basis for the valuation. As an owner/operator of hotels, we
believe EBITDA is the best place to start in determining our company's equity
value. Since going public in 1994, we have consistently improved EBITDA.

When determining John Q. Hammons Hotels' value, an EBITDA multiple must be
used. Typically, strong EBITDA growth dictates the use of a higher multiple. For
our company, a higher multiple should be considered since 14 of the 45 hotels
operating at the end of 1997 have been opened during 1995, 1996 and 1997. These
14 hotels have been open only 16 months on average and therefore have another
two years on average, to reach a mature EBITDA. The additional time from now to
maturity on these newer hotels will be an important component in the rate of
growth of our future EBITDA.

In addition to the value of the company determined using a multiple of
EBITDA, the amount of cash and the amount of construction in progress on our
balance sheet should be considered since both of these assets are a part of our
development pipeline. As we open each new hotel, our potential for additional
EBITDA growth is increased. Therefore the value of cash and construction in
progress cannot be ignored.

After determining the total of, (1) the product of EBITDA and its multiple,
(2) cash, and (3) construction in progress, one additional factor should be
considered. Total debt on the company's balance sheet should be subtracted from
the total above in order to arrive at an estimate of our equity value.

You may wish to consider some variations of the above process to estimate
the company's equity value. However, EBITDA is an all-important consideration as
a base in any methodology.

New hotels typically outperform older hotels. One of the obvious benefits
derived from being a development company is that we continue to add new hotels
to our portfolio. Industry experts believe that new hotels typically outperform
older hotels.

As a part of our ongoing strategy, we will also continue to review our
existing portfolio to determine if certain hotels should be sold due to market
and/or physical product issues. The sale of six hotels this past February,
coupled with our continued new hotel openings, is creating a "younger" company.
Our youthfulness provides both us and you with an advantage in terms of
performance and value.

The management team at John Q. Hammons believes it is important for
shareholders and employees to understand our key objectives and strengths. By
sharing a common vision, together we can continue to build on the past and
develop for an exciting, more prosperous future.

/s/ John Q. Hammons

John Q. Hammons
Chairman and CEO

/s/ David B. Jones

David B. Jones
President and COO

1980
First atrium style hotel is built.

1987
1988
Embassy Suites(R) franchise is added.

1990
80 hotels are either owned or managed by the company and WHI.

1993
The senior management team is brought on board.

1994
John Q. Hammons Hotels goes public.

1995
Radisson(R) franchise joins the company to enhance our upscale portfolio.

1996
Marriott(R) franchise is added.

1997
The company develops two first-class resorts, Chateau on the Lake, Branson, MO
and World Golf Village, St Augustine, FL.

1997

Hotels GROW DIVERSIFY

4
<PAGE>

Our Points of Difference

Extra amenities that add value.
Unlike many of today's standard hotels that often seem alike, from the moment
you enter a John Q. Hammons hotel, you'll find a large number of sensational
features that add luxury, comfort and differentiate our properties from our
competitors. Upon closer inspection, our "points of difference" become even more
apparent. When you combine all of the extra amenities we provide, our hotels not
only stand out in the marketplace, we deliver a far superior value for our
guests' accommodation dollar.

[PHOTO]

The moment you enter a John Q. Hammons hotel, you'll find a large number of
sensational features that differentiate our facilities from the competition

Our signature atriums.
At John Q. Hammons Hotels, we have become well known for three outstanding
features we refer to as our "signature elements." The first is our awe-
inspiring atriums. They are perhaps some of the most dramatic and obvious points
of difference in many of our properties. By adding spaciousness, lush foliage,
waterfalls and spectacular multi-story views, our atriums project an image of
elegance, luxury and style. Due to their incredible popularity and timeless
architectural appearance, we are incorporating atriums in virtually every new
hotel we develop.

Expansive meeting space.
It's interesting to note that our founder, John Q. Hammons, was one of the first
innovators in the hotel industry to fully recognize the demand for additional
meeting space in America's hotels. Acting on his belief, Mr. Hammons began
adding larger and more flexible meeting space in the company's hotels many years
ago. As business travel has steadily increased in the last few years, expansive
meeting space has become a real benefit to our company, since the industry has
been focused on developing limited service hotels where meeting facilities are
not provided.

[PHOTO]

Larger guest rooms.
Notice something different about your room at a John Q. Hammons hotel? Beyond
its attractive, contemporary decor, there's a good chance the room is
significantly larger than competitive guest rooms you've stayed in. To create
this third signature element in our hotels, we incorporate 15 to 20% additional
square feet on average into all of the new guest rooms we build. Because bigger
is simply better, our spacious rooms make guests feel more relaxed and more at
home.

[PHOTO]

Superior convention and meeting facilities set us apart.

5
<PAGE>

[PHOTO]
Business centers function as satellite offices for business travelers to
maximize their productivity.

[PHOTO]
From beautiful atriums to larger guest rooms, our signature elements enhance
comfort and value.

Podium check-in

Greeting many of our guests as they walk in the door is one of our newest
innovations in personal customer service: Podium Check-In. As a departure from
the traditional hotel "front desk," podium check-in enables our guest service
representatives to meet one-on-one with customers and provide dedicated
individual attention. We believe podium check-in is an exciting new standard in
the hotel industry, and our customer satisfaction surveys confirm the benefits
it provides. By enhancing customer/employee interaction and communication with
podium check-in, we can welcome our guests in a friendlier, more efficient way.

Business traveler amenities.

For the added convenience of our business travelers, we offer a wide variety of
amenities to make officing on the road easier. In many of our locations we are
modifying guest rooms to be more convenient for the business traveler, adding
such amenities as desk areas with swivel chairs, telephone jacks for computer
modems and other features to help guests conduct business. Just open up your
briefcase or laptop computer and you're ready to go to work.

Our new Corporate Business Centers offer still more convenience for today's
executives. Complete with fax machines, computers, secretarial services, and
work stations, corporate business centers function like satellite offices. From
putting the final touches on a proposal or presentation, to faxing off a new
sales contract to the home office, our corporate business centers help keep busy
people productive and profitable when they're on the go.

[PHOTO]
Podium check-in is setting new standards in personal attention and service.

Celebrating 40 years

6
<PAGE>

Our Points of Difference continued

Fine dining is one of
our many specialties.
[PHOTO APPEARS HERE]

Savor the difference in our food.

When you stop and consider that approximately 27% of John Q. Hammons Hotels'
EBITDA is generated in food and beverage sales, you can understand why we are so
committed, even fanatical about the quality, freshness and artistic presentation
of all the food we serve. Thanks to the extra lengths our hotels and employees
go to, our food service excellence is a difference our customer can see and
savor.

Witness the artistry of our
display cooking.
[PHOTO APPEARS HERE]

Display cooking.

Our increasing focus on contemporary display cooking is evidence of our
commitment to offering the finest in culinary delights. Display cooking puts our
kitchens, chefs and food service staff in the spotlight on center stage. As
delicious menu items are carefully prepared in full view of our customers, our
display cooking allows customers to witness our attention to detail, fresh
ingredients, and quality first hand. Display cooking helps ensure that our
guests enjoy both great meals, and fine dining experiences.

Meeting planners
experience menu choices
prior to their event
at our chef's table.
[PHOTO APPEARS HERE]

Chef's table.

Our chef's table is yet another innovative difference at many of our hotels.
When a customer requests a banquet meal for a convention, business meeting,
wedding reception, or another large get-together, our chef's table ensures the
highest level of satisfaction. By allowing the customer to sample various menu
items before the event, they can choose their favorite hors d'oeuvres, salads,
entrees and desserts in advance. Special requests such as fresh seafood,
kosher items and vegetarian dishes are available as well. By taking advantage of
a delicious chef's table preview, there are no worries, no surprises on the day
of the event, and the host earns praise from his or her guests.

We are committed,
even fanatical about
food quality

7
<PAGE>

As our guests' tastes have become more sophisticated, we've added more amenities
to satisfy them. Whether it's a superb meal or an invigorating workout, we
provide our guests with everything they need to relax.

[PHOTOS APPEAR HERE]

Responding to America's health trends.

With the increasing emphasis being placed on leading healthier lifestyles, John
Q. Hammons Hotels is responding and tailoring many of our food and beverage
services to meet guests' more discriminating tastes. Our restaurants are adding
a wider variety of health-conscious menu options. We are also preparing foods to
reduce saturated fats, cholesterol, sodium and preservatives. As Americans'
consumption of liquor has decreased in recent years, reducing demand for night
clubs and lounges, we have been converting portions of that valuable space into
meeting rooms, fitness centers and other productive areas. Sure you can still
enjoy a cocktail at our hotels, but with our new espresso coffee bars, fine
imported beers, wines and bottled waters, today there are more choices than ever
before.

Exercise... your option.

Just because you're traveling doesn't mean you have to give up your exercise
routine. Now, fitness centers and sparkling swimming pools have become standard
features in every new property. From state-of-the-art treadmills and stationary
bicycles, to stair-step machines and weights, our fitness centers are as well
equipped as many of today's upscale health clubs. And our generously sized
swimming pools are great for lap-swimming, water aerobics, or simply a relaxing
dip at the end of the day. In the winter time, many families with children come
to our hotels for weekend getaways with much of the fun centered around the
pool.

Celebrating 40 years

8
<PAGE>

Our Points of Difference continued

So many amenities, yet so affordable.

While other hotels offer limited amenities, John Q. Hammons Hotels takes great
pride in making ordinary features extraordinary. Whether it's the addition of
skylights, marble accents, rich wood furnishings or elegant brass fixtures,
you'll find we go the extra mile to make our properties even more special. We
believe these added touches deliver higher levels of luxury and style that
customers notice and appreciate. To set our hotels even further apart from the
competition, we provide all of our additional amenities, luxury and style at
surprisingly affordable prices, which is another very important point of
difference for John Q. Hammons Hotels. No wonder our guests keep coming back.

Trivia
1

[ART APPEARS HERE]
There is 1,125,086 gallons of water in all of our swimming pools.

Trivia
2
Our hotels have a combined total of 914,200 square feet of meeting space,
[ART APPEARS HERE]
the equivalent to 19+ football fields.

[PHOTOS APPEAR HERE]
Architectural accents, natural lighting and generous plantings enrich the
ambiance of our facilities.

9
<PAGE>

[PHOTOS APPEAR HERE]
Business travelers appreciate
the comfort and meeting facilities
of John Q. Hammons Hotels.

Trivia 3
[ART APPEARS HERE]
In 1997 12,654,000 watts were used in the lightbulbs of JQH Hotels.

Celebrating 40 years

10
<PAGE>

[PHOTO APPEARS HERE]
Being a member of the Marriott family positions the company well in the upscale
sector.

Our Performance

Living up to our commitment.

Many companies in the hotel industry talk about their commitment to service
quality, but at John Q. Hammons Hotels we go many steps further to make sure our
everyday performance is proof of our commitment. By carefully monitoring and
continually measuring our service quality, we know when we are excelling, or if
we need to improve.

We believe it's important for our management teams and every other employee in
the John Q. Hammons Hotels family to know that their performance is being
measured. And, they respond accordingly by raising the service they provide to
the highest levels possible. When our hotels and employees shine, as they
usually do, those who deliver superior service are recognized and rewarded.

In fact, during 1997 the superior performance of John Q. Hammons Hotels was
demonstrated once again by our industry-leading customer satisfaction scores
which are measured by our franchisors. For instance, based on the Total Quality
Index (TQI) scores provided by (Embassy Suites), four of our Embassy Suites
ranked in the top ten of the nation's 140 Embassy Suites hotels. And according
to Combined Quality Index (CQI) scores provided by (Holiday Inn), our Holiday
Inn properties are some of the best performing properties among more than 1,800
Holiday Inns nationwide.

As you can see, when it comes to service quality, John Q. Hammons Hotels does
more than promote it. We measure our performance, track it closely, and
continually work to improve our scores.

We measure
our performance, track it closely,
and continually work to improve
our scores.

[PHOTO APPEARS HERE]
Holiday Inn, the company's first franchise, continues to lead the country in
guest satisfaction.

<PAGE>

Top-performing brands.

Over the years, the John Q. Hammons Hotels name has been closely associated with
Holiday Inn(R), and for good reason. In the late 1950's, Holiday Inn was the
company's first franchise brand. Yet today, in addition to Holiday Inn, John Q.
Hammons Hotels is proud to be affiliated with many of the other finest names in
the hospitality industry. In 1988, we formed an alliance with Embassy Suites(R).
We began our affiliation with Radisson and Hampton Inn & Suites in 1995;
Marriott and Homewood Suites joined our company in 1996.

Through product diversification and association with these premiere
franchises, John Q. Hammons Hotels is able to strengthen the overall performance
of our entire hotel portfolio. With access to this diverse product line, the
company enjoys a key strategic advantage. We are able to identify promising
growth markets and develop the particular hotel franchise that provides the
greatest competitive strength in the marketplace.

Since we began adding new brand names to our premiere product line, our hotel
portfolio has become increasingly diverse in the last several years. We believe
this strategy creates a more balanced product mix and provides additional
stability for the company as a whole.

[ART APPEARS HERE]
The Torchbearer Award signifies that a hotel has achieved the highest levels of
excellence in all aspects of operations - from product quality to customer
satisfaction.

[ART APPEARS HERE]
The Rose Award recognizes excellence in product quality and guest satisfaction
and is the highest distinction an Embassy Suites hotel can achieve.

Brand Mix by Number of Rooms

Other
Embassy
Holiday Inn
1994
[PIE CHART APPEARS HERE]

Marriott
Other
Embassy
1997
Holiday Inn
[PIE CHART APPEARS HERE]

Marriott
Other
1999
Holiday Inn
Embassy
[PIE CHART APPEARS HERE]

Our product mix has become increasing diverse and more evenly balanced. In 1994,
the majority of our hotels were Holiday Inns. By 1999, we will have a more
diverse portfolio of brands.

Celebrating 40 years

12
<PAGE>

Our Performance continued

Positioning the company for greater success.

Due to a number of major accomplishments during 1997, we have gained additional
ground in our efforts to position the company for even greater performance and
success. The accomplishments most relevant to our positioning were made in three
primary areas: hotel dispositions, our financial strength, and the new hotels we
opened.

In terms of the dispositions, as we mentioned in the Shareholder Letter, due
to a window of opportunity to sell several mature assets, we began negotiations
to sell six of our older hotels. The closing of this transaction took place
early in 1998 at a sale price of $40 million. Based on the age and condition of
the hotels we sold, projections indicate that the company will also save
approximately $15 million in capital expenditures during 1998 that would have
been necessary for refurbishment.

When you look at the company's RevPAR (Revenue Per Available Room) over the
last four years, the reasons for selling the hotels becomes even more apparent.
Even though revenues and EBITDA (Earnings Before Interest, Taxes, Depreciation
and Amortization) for the company as a whole increased significantly in 1996 and
1997, RevPAR achievement was inhibited by these hotels. By eliminating the six
hotels from our portfolio, our RevPAR will grow at a much steeper rate in 1998.
The RevPAR graph shown here illustrates the improvement that the sale of the six
hotels creates in the company's historic RevPAR performance. It also illustrates
the RevPAR premium the company has achieved compared to the overall hotel
industry.

EBITDA Margin [BAR GRAPH APPEARS HERE]
95
96
97
22 23 24 25 26 27 28 29 30
%
Mature Hotels Total Company

Note: 1997 included six new hotel openings, holding company margin flat.

RevPAR Comparison [BAR GRAPH APPEARS HERE]
$58.00
$53.00
$48.00
$43.00
$38.00
$33.00
1994 1995 1996 1997

Company RevPAR excluding sold hotels
Company RevPAR including sold hotels
Industry RevPAR
RevPAR performance of 6 hotels sold

During 1997, we set new records for EBITDA Margin and RevPAR in the history of
the company.

we have gained additional ground in our efforts
to position the company
for even greater
performance and success

13
<PAGE>

Six new hotels opened in 1997, "the year of the suites."

Our pipeline of new development projects continued to flow steadily in 1997.
When the year came to close, we had successfully opened six beautiful new
hotels. With the addition of four new Embassy Suites, including one in Omaha,
Nebraska, one in Charleston, West Virginia, one in Little Rock, Arkansas, and
one in Raleigh-Durham, North Carolina, 1997 was definitely the year of the
suites. As demonstrated by these four new developments, along with another new
Embassy Suites opened in January of 1998 in Tampa, Florida, John Q. Hammons
Hotels is firmly committed to the quality and value of the Embassy brand. In
1997, the mature hotels in the Embassy Suites system of 140 hotels achieved an
occupancy of 75.1% and an average room rate of $114.08. Consumers recognize the
value of the Embassy Suites brand. Embassy Suites is larger than all other all-
suite brands combined.
Adding even more prestige and fanfare to this year's development success was
the grand opening of one of the most spectacular showcase facilities ever
constructed in the history of our company, the Chateau on the Lake Resort Hotel
& Convention Center in Branson, Missouri. Also opened during the year was a
Homewood Suites Hotel in Kansas City, Missouri, the company's second hotel of
this brand.
After opening six new hotels in 1995, two hotels in 1996, six hotels in 1997,
and with four more hotels scheduled for completion in 1998, plus the sale of six
older hotels, the average age of the properties in our portfolio is decreasing.
This is yet another way we are positioning John Q. Hammons Hotels for maximum
value in the future.

Average Age of JQH Hotels [BAR GRAPH APPEARS HERE]
96
97
98
8 9 10 11 12
Years

[PHOTO APPEARS HERE]
Chateau on the Lake Resort
Hotel & Convention Center
Branson, Missouri

[PHOTO APPEARS HERE]
Embassy Suites
Charleston, West Virginia

[PHOTO APPEARS HERE]
Embassy Suites, Raleigh-Durham,
North Carolina

[PHOTO APPEARS HERE]
Embassy Suites,
Omaha, Nebraska

[PHOTO APPEARS HERE]
Homewood Suites,
Kansas City, Missouri

[PHOTO APPEARS HERE]
Embassy Suites,
Little Rock, Arkansas

Celebrating 40 years

14
<PAGE>

Employee excellence is recognized and rewarded.
[PHOTO APPEARS HERE]

Our People

Serving guests with pride.

You may be surprised to learn that John Q. Hammons Hotels has one of the lowest
employee turn-over rates in the hotel industry. This fact is even more
remarkable when you consider the nation's unemployment rate has been at or near
an all-time low. So how can we account for this loyalty?
Actually there are many reasons why the more than 8,000 people who work for
the company stay with the company. Since we began as a small, family-oriented
operation, many of the values and philosophies instilled by our founder, John Q.
Hammons, are the foundation of our corporate culture. Taking pride in one's
work, the commitment to quality, honesty, and customer-focused service are just
a few of our guiding principles.
But just as importantly, John Q. Hammons Hotels understands how valuable good
employees truly are, especially when running a successful service business. We
know the better we treat our employees, the better they'll treat our guests.
That's why the company invests heavily in training, incentive-based programs,
and recognition awards.
An excellent example is our Service Above & Beyond program which encourages
every employee to provide guests with service that is above and beyond what is
normally expected. Guests are asked to fill out a card when they receive special
service. By doing so, they are entered in a drawing for a prize. The employee
who is nominated for Service Above & Beyond earns recognition points that can be
redeemed for merchandise and trips.

we understand
how valuable
good employees
truly are, especially
when running a
successful service
business.

Our employee turn-over rate is among the lowest in the industry.
[PHOTOS APPEAR HERE]

15
<PAGE>

[PHOTO APPEARS HERE]
Our emphasis on training and employee development
empowers our people and improves service.

Our entire sales organization participates in ongoing sales training conducted
by Master Connection Associates. Our key sales employees learn how to identify
our customers' needs and tailor our services to maximize sales. Employees are
rewarded based on their sales performance, the company generates additional
business, and customers are more satisfied.

Our reward programs also extend to the management level. The annual
President's Award is presented to the general manager who has demonstrated
exceptional skills in leadership, employee relations, initiative, and who has
managed a financially sound property. We also present awards for Hotel of the
Year, Food & Beverage Team of the Year and Sales Team of the year.

Trivia 4
[ART APPEARS HERE]
9,312,975 sheets are washed at JQH hotels in a year.

Trivia 5
[ART APPEARS HERE]
We serve 5,777,750 meals in a year.

Celebrating 40 years

16
<PAGE>

Our People continued

Superior senior management.

Among the greatest advocates of employee development programs and recognition
awards are the members of our senior management team. With more than 200 years
of combined experience in the hospitality industry, senior management views each
employee as a vital member of John Q. Hammons Hotels' family. By providing
motivation, sharing their vision and helping to instill the spirit of excellence
in every employee, our senior managers are guiding the company toward another 40
years of unprecedented success.

[PHOTO APPEARS HERE]
Motivated to take pride in their
work, our employees deliver
industry-leading service.

Trivia 6
[ART APPEARS HERE]
JQH hotels hosted 11,772
wedding receptions or conventions
last year.

our senior managers
are guiding the company
toward another 40 years of
unprecedented success

Introducing the Class of '98

<PAGE>

Future Stars

With consumer demand for full-service, upscale hotels increasing faster than
supply, we will continue to develop more premiere hotels in promising growth
markets. Presently, four new stars in the John Q. Hammons Hotels' line-up are
scheduled to open during 1998. And you can be sure that more plans are on the
drawing board for 1999 and beyond. Recognizing the vast, untapped potential for
upscale hotels in communities across the country, we look to the future with
optimism and excitement. Whether you're a stockholder, potential investor,
employee or guest, we hope you'll join John Q. Hammons Hotels as we build on the
past, and develop for the future. . .

Trivia 7
[ART APPEARS HERE]
45
miles of wire goes into the average
JQH hotel

[PHOTO APPEARS HERE]
Embassy Suites Tampa, Florida
Opened January 1998

[PHOTO APPEARS HERE]
Capitol Plaza Hotel Topeka, Kansas
Scheduled to open third quarter of 1998

<PAGE>

Trivia 8
26,171
tons of concrete was required
to build the World Golf
Village Resort Hotel.

[PHOTO APPEARS HERE]
Embassy Suites Portland, Oregon
Scheduled to open third quarter of 1998

[PHOTO APPEARS HERE]
Scheduled to open second quarter of 1998
World Golf Resort Hotel & St. Johns
County Convention Center St. Augustine, Florida

Celebrating 40 years

19
<PAGE>

Company Profile

John Q. Hammons Hotels, Inc. and its subsidiaries (collectively, the "Company")
is a leading independent owner, manager and developer of affordable upscale
hotels in secondary and airport market areas. The Company owns and manages 45
hotels located in 20 states, containing 11,108 guest rooms and suites (the
"Owned Hotels"), and manages four additional hotels located in two states,
containing 952 guest rooms (the "Managed Hotels"). On January 2, 1998, the
Company was at various stages of development on seven upscale hotels, which are
scheduled to open during 1998 and 1999 (the "Scheduled Hotels"). The Company's
existing 49 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 is developing new
hotels).

The Company's strategy is to increase cash flow and thereby enhance
shareholder value primarily through (i) developing new hotels in carefully
selected growth market areas in which the Company believes it can establish a
leading and sustainable market position, (ii) converting the franchises of its
existing hotels to franchise brands that are considered to be more upscale, in
terms of these brands' higher average room rates, as opportunities for such
conversions arise, (iii) selling certain mature assets and re-investing the net
proceeds in new hotels constructed by the Company, on a selective basis, and
(iv) capitalizing on positive operating fundamentals in the upscale full-service
sector of the industry, by owning and operating its hotel portfolio. In
implementing its development strategy, the Company works closely with local
businesses and local and state officials to develop hotels which meet business
and social needs of the community and satisfy long-term demand for hotel rooms.
In some of the Company's developments, it benefits from development incentives
provided by local governments and other organizations interested in ensuring the
development of a quality hotel in their community. The Company designs each new
hotel to meet the specific needs of the market and engages in selling efforts in
advance of the hotel's opening. The Company's entire management team, including
senior management, architects, design specialists, hotel managers and sales
personnel, is involved in the development of each new hotel. The Company is
evaluating development of a number of hotels in addition to the seven Scheduled
Hotels.

The JQH Hotels are designed to appeal to a broad range of hotel customers,
including frequent business travelers, groups or conventions, as well as leisure
travelers. Each of the JQH Hotels is individually designed by the Company and
most contain an expansive 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 25 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, and contain an average of 262
rooms. The 11 Embassy Suites JQH Hotels are all-suite hotels which appeal to the
traveler needing or desiring greater space and specialized services and contain
an average of 242 suites. 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 are each 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.

20
<PAGE>

UNAUDITED QUARTERLY STOCK INFORMATION

The Company's Class A common stock (the "Class A Common Stock") has been listed
on the New York Stock Exchange since November 16, 1994 under the symbol "JQH."
Prior to that date, the Company's Class A Common Stock was not publicly traded.

The following sets forth the high and low closing sales prices of the Class A
Common Stock for the period indicated as reported by the New York Stock Exchange
Composite Tape:

Stock Price Per Share

High Low
<S> <C> <C>
1996
First Quarter $ 11-7/8 $ 9-3/4
Second Quarter $ 12-1/8 $ 10
Third Quarter $ 10-7/8 $ 9-5/8
Fourth Quarter $ 9-1/2 $ 7-1/2

1997
First Quarter $ 9-3/4 $ 7-1/2
Second Quarter $ 9-3/8 $ 8
Third Quarter $ 9-5/8 $ 8-5/8
Fourth Quarter $10-13/16 $8-3/16
</TABLE>

On March 13, 1998, the last reported sales price of the Class A Common Stock on
the NYSE was $ 7-7/8.

SELECTED CONSOLIDATED FINANCIAL
INFORMATION OF THE COMPANY

The selected consolidated financial information of the Company for the 1997,
1996, 1995, 1994 and 1993 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 should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein. 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 1993, 1994, 1995 and 1997 Fiscal
Years included 52 weeks of operations.

21
<PAGE>

STATEMENT OF
OPERATIONS DATA:

(DOLLARS IN THOUSANDS,
EXCEPT OPERATING AND
PER SHARE DATA)
<TABLE>
<CAPTION>

Fiscal Year-Ended

1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms(a) $195,296 $171,206 $148,432 $137,387 $130,754
Food and beverage 86,183 79,580 70,840 65,308 67,748
Meeting room rental and other(b) 20,795 18,061 15,907 13,998 12,360
-------- -------- -------- -------- --------
Total revenues 302,274 268,847 235,179 216,693 210,862
-------- -------- -------- -------- --------
Operating expenses:
Direct operating costs and expenses(c)
Rooms 50,265 43,610 38,543 34,413 33,189
Food and beverage 62,383 57,956 54,228 49,721 51,772
Other 3,385 2,929 2,521 2,397 2,225
General, administrative, sales and management expenses(d)(e) 85,766 74,646 64,234 57,981 57,097
Repairs and maintenance 12,578 11,528 10,131 9,888 9,624
Depreciation and amortization 34,781 24,034 18,346 13,975 14,153
-------- -------- -------- -------- --------
Total operating expenses 249,158 214,703 188,003 168,375 168,060
-------- -------- -------- -------- --------
Income from operations 53,116 54,144 47,176 48,318 42,802
Interest expense and amortization of deferred financing fees, net 44,325 35,620 28,447 32,932 27,412
-------- -------- -------- -------- --------
Income before minority interest, provision for income taxes
and extraordinary item(f) 8,791 18,524 18,729 15,386 15,390
Minority interest in earnings of partnership (6,302) (13,280) (13,427) (274) --
-------- -------- -------- -------- --------
Income before provision for income taxes and extraordinary item 2,489 5,244 5,302 15,112 15,390
Provision for income taxes(g) (75) (105) (107) (41) --
-------- -------- -------- -------- --------
Income before extraordinary item 2,414 5,139 5,195 15,071 15,390
Income before extraordinary item prior to
November 23, 1994 allocable to partners -- -- -- (15,004) (15,390)
-------- -------- -------- -------- --------
Income before extraordinary item allocable to the Company $ 2,414 $ 5,139 $ 5,195 $ 67 $ --
======== ======== ======== ======== ========
Basic and diluted earnings per share of common stock (pro forma)
before extraordinary item $ 0.38 $ 0.81 $ 0.82 $ 0.48(l)
======== ======== ======== ========
</TABLE>

(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.
(f) 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
early debt retirement in connection with the Note Offerings and Common Stock
Offering.
(g) After the Common Stock Offering, the Company has been taxed as a C
Corporation on its portion of the Partnership's earnings. Prior to the
Common Stock Offering, net income does not include any provision (benefit)
for income taxes in view of the S Corporation tax status of the general
partner prior to the Common Stock Offering and of the Partnership's status
as a partnership for income tax purposes.
(h) EBITDA represents earnings before net interest expense, provision for income
taxes (if applicable) and depreciation and amortization. EBITDA is used by
the Company for the purpose of analyzing its operating performance, leverage
and liquidity. Such data are not a measure of financial performance under
generally accepted accounting principles and should not be considered as an
alternative to net earnings as an indicator of the Company's operating
performance or as an alternative to cash flows as a measure of liquidity.

22
<PAGE>

CONTINUED Fiscal Year-Ended
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other data:
EBITDA(h) $ 87,897 $ 78,178 $ 65,522 $ 62,293 $ 56,955
Net cash provided by operating activities 27,769 72,052 44,037 46,107 32,341
Net cash used in investing activities (193,271) (136,296) (78,085) (149,510) (9,259)
Net cash provided by (used in) financing activities 161,014 68,916 66,113 104,884 (17,742)
Margin and ratio data:
EBITDA margin (% of total revenue)(h) 29.1% 29.1% 27.9% 28.8% 27.0%
Earnings to fixed charges ratio(i) 0.97x 1.26x 1.39x 1.42x 1.55x
Operating data:
Owned Hotels:
Number of hotels 45 39 37 31 31
Number of rooms 11,108 9,666 9,312 8,054 8,054
Average occupancy 62.9% 64.7% 67.1% 68.5% 68.7%
Average daily room rate $ 82.38 $ 76.16 $ 71.68 $ 68.45 $ 65.63
Room revenue per available room (j) $ 51.84 $ 49.25 $ 48.09 $ 46.88 $ 45.11
Increase in yield(k) 5.3% 2.4% 4.8% 3.9% 3.0%
Balance sheet data:
Total assets $ 816,733 $ 658,072 $542,371 $ 443,044 $297,599
Total debt, including current portion 695,791 531,143 458,094 380,869 342,165
Minority interest of holders of the LP Units 39,399 33,662 23,082 14,820 --
Equity (deficit) 18,508 16,094 10,955 5,852 (71,626)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

(i) Earnings used in computing the earnings to fixed charges ratios consist of
net income plus fixed charges. Fixed charges consist of interest expense
and that portion of rental expense representative of interest (deemed to be
one third of rental expense).

(j) Total room revenue divided by number of available rooms. Available rooms
represent the number of rooms available for rent multiplied by the number
of days in the period presented.

(k) Increase in yield represents the period-over-period increases in yield.
Yield is defined as the room revenue per available room.

(l) The 1994 unaudited pro forma net income per share presents the Company's
allocable share of pre-tax income (28.31%) after giving effect to (i) the
issuance of the Notes and the repayment of the Partnership's then existing
mortgage indebtedness with approximately $240.0 million of the $289.7
million total net proceeds from the Note Offering, (ii) the application of
approximately $36.1 million of the net proceeds from the Common Stock
Offering to the repayment of indebtedness, and (iii) an estimated provision
for income taxes that would have been reported had the Company filed
federal and state income tax returns as a C Corporation. The estimated tax
provision was based on an assumed effective tax rate of 38%. The unaudited
pro forma earnings per share information is based upon 6,336,100 shares of
common stock outstanding after the Common Stock Offering.

23
<PAGE>

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 2, 1998 ("1997"), January 3,
1997 ("1996") and December 29, 1995 ("1995"). The consolidated financial
statements of the Company present the consolidated assets, liabilities, revenues
and expenses of those entities which now comprise the Company as if the Company
had been a single entity for all the periods presented. 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, and 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, sales and marketing, utilities,
insurance, property taxes, rent, management services and other expenses.

From 1993 through 1997, the Company's total revenues grew at an annual
compounded growth rate of 9.4%, from $210.9 million to $302.3 million. Occupancy
for the Owned Hotels during that period decreased 5.8 percentage points from
68.7% to 62.9%. However, the Owned Hotels' average room rate increased by 25.5%
from $65.63 to $82.38 during that period. Room revenue per available room
(RevPAR) increased by 14.9% from $45.11 to $51.84.

In general, hotels opened during the period from 1993 to 1997 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 1997, the New Hotels included six hotels opened in 1997 and two
hotels opened in 1996. The remainder of the Owned Hotels, excluding the New
Hotels, are defined as Mature Hotels. In 1997, the Mature Hotels included 37
hotels opened prior to 1996. 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.

Given the current positive trends in the upscale, full-service sector of
the hotel industry, the Company continues to develop new hotels, including the
seven Scheduled Hotels anticipated to open in 1998 and 1999.

Results of Operations of the Company

The following table shows selected consolidated operating statistics for the
total Owned Hotels:

<TABLE>
<CAPTION>
Fiscal Year-Ended
- --------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average occupancy 62.9% 64.7% 67.1% 68.5% 68.7%
Average room rate $ 82.38 $ 76.16 $ 71.68 $ 68.45 $ 65.63
Room revenue per available room $ 51.84 $ 49.25 $ 48.09 $ 46.88 $ 45.11
Available rooms(a) 3,767,387 3,476,279 3,087,700 2,930,893 2,901,516
Number of hotels 45 39 37 31 31
- --------------------------------------------------------------------------------------------------
</TABLE>

24
<PAGE>

The following table shows selected combined operating statistics for the Mature
Hotels (including the six hotels opened in 1995):

Fiscal Year-Ended
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Average occupancy 63.8% 64.8% 67.1% 68.5% 68.7%
Average room rate $ 79.80 $ 76.06 $ 71.68 $ 68.45 $ 65.63
Room revenue per available room $ 50.90 $ 49.29 $ 48.09 $ 46.88 $ 45.11
Available rooms(a) 3,388,896 3,454,899 3,087,700 2,930,893 2,901,516
Number of hotels 37 37 37 31 31
</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 open during the period reported. The
Company's 1996 Fiscal Year contained 53 weeks or 371 days while its 1993,
1994, 1995 and 1997 Fiscal Years each contained 52 weeks or 364 days.

The following table shows selected combined operating statistics for the New
Hotels:

Fiscal Year-Ended
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Average occupancy 55.3% 42.2% -- -- --
Average room rate $ 108.97 $100.49 -- -- --
Room revenue per available room $ 60.21 $ 42.42 -- -- --
Available rooms(a) 378,491 21,380 -- -- --
Number of hotels 8 2 -- -- --
</TABLE>

The following table shows selected components of the Company's operating income
as a percentage of Total Revenues

Fiscal Year-Ended
<TABLE>
<CAPTION>

1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms 64.6% 63.7% 63.1% 63.4% 62.0%
Food and beverage 28.5 29.6 30.1 30.1 32.1
Meeting room rental and other 6.9 6.7 6.8 6.5 5.9
------ ------ ------ ------ ------
Total Revenues 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------
Operating Expenses:
Direct operating costs and expenses
Rooms 16.6 16.2 16.4 15.9 15.7
Food and beverage 20.6 21.6 23.0 22.9 24.6
Other 1.1 1.1 1.1 1.1 1.0
General, administrative, sales and
management service expenses 28.4 27.8 27.3 26.8 27.1
Repairs and maintenance expenses 4.2 4.3 4.3 4.6 4.6
Depreciation and amortization 11.5 8.9 7.8 6.4 6.7
------ ------ ------ ------ ------
Total Operating Expenses 82.4 79.9 79.9 77.7 79.7
------ ------ ------ ------ ------
Income from Operations 17.6% 20.1% 20.1% 22.3% 20.3%
====== ====== ====== ====== ======
</TABLE>

25
<PAGE>

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 the average room rate 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 room rate of the Mature Hotels.
Average room rates of Mature Hotels increased to $79.80 in 1997 from $76.06 in
1996, from increases in pricing schedules. Partially offsetting the increased
average room rate in the Mature Hotels was a 1.0 percentage point decline in
occupancy to 63.8% in 1997 compared to 64.8% in 1996. This occupancy decline was
the result of competition from new limited service hotels in the Mature Hotels'
markets. The Mature Hotels' room revenue per available room (RevPAR) improved to
$50.90 in 1997 from $49.29 in 1996, an increase of $1.61 or 3.3%. In 1997, the
New Hotels included eight hotels which generated a RevPAR of $60.21, up 41.9%
from the 1996 RevPAR of $42.42 when only two of the 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 $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 revenues 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 services 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. Due to a large portion of these expenses being
fixed costs in nature, new hotel openings cause these expenses to rise faster
than revenues in the first one to two years of operation. 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. This
amount will continue to increase in the foreseeable future as a result of the
Company's continuing development of new hotels.

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 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 minority interest, provision for income taxes and extraordinary
item decreased to $8.8 million in 1997 from $18.5 million in 1996, a decrease of
$9.7 million or 52.5%.

26
<PAGE>

1996 FISCAL YEAR COMPARED TO 1995 FISCAL YEAR

Total revenues increased to $268.8 million in 1996 from $235.2 million in 1995,
an increase of $33.6 million or 14.3%. Of the total revenues reported in 1996,
63.7% were revenues from rooms, 29.6% were revenues from food and beverage, and
6.7% were revenues from meeting room rental and other, compared with 63.1%,
30.1%, and 6.8%, respectively, during 1995.

Rooms revenues increased to $171.2 million in 1996 from $148.4 million in
1995, an increase of $22.8 million or 15.3% as a result of the operation of six
hotels which opened in 1995, two hotels which opened in 1996 and the increase in
average daily room rate. Average daily room rates of Mature Hotels increased to
$74.47 in 1996 from $71.44 in 1995, an increase of $3.03 or 4.2%. During 1996,
the Mature Hotels included the 31 hotels opened prior to 1995. The higher
average daily room rate was attributable to continued increases in pricing
schedules in both the transient and corporate market segments. RevPAR was flat
at $49.11 in 1996 and $49.13 in 1995.

Food and beverage revenues increased to $79.6 million in 1996 from $70.8
million in 1995, an increase of $8.8 million or 12.3%. This increase was due to
revenues associated with the New Hotels and new food franchise operations.
During 1996, the New Hotels included two hotels opened in 1996 and six hotels
opened in 1995.

Meeting room rental and other revenues increased to $18.1 million in 1996 from
$15.9 million in 1995, an increase of $2.2 million or 13.5%. This increase was
due to the addition of meeting space in the New Hotels.

Direct operating costs and expenses for rooms increased to $43.6 million in
1996 from $38.5 million in 1995, an increase of $5.1 million or 13.1%. As a
percentage of rooms revenue, these expenses decreased slightly to 25.5% in 1996
from 26.0% in 1995.

Direct operating costs and expenses for food and beverage increased to $58.0
million in 1996 from $54.2 million in 1995, an increase of $3.8 million or 6.9%.
The increase was due to costs associated with the higher volume of sales.

Other direct operating costs and expenses increased to $2.9 million in 1996
from $2.5 million in 1995, an increase of $0.4 million or 16.2%.

General, administrative, sales and management services expenses increased to
$74.6 million in 1996 from $64.2 million in 1995, an increase of $10.4 million
or 16.2%. Increases in these expenses are primarily attributable to expenses
associated with the opening of the New Hotels in 1995 and 1996, increases in
certain insurance costs and certain other increases in expenses associated with
increased room revenues. As a percentage of total revenues, these expenses
increased to 27.8% in 1996 from 27.3% in 1995.

Repairs and maintenance expenses increased to $11.5 million in 1996 from $10.1
million in 1995, an increase of $1.4 million or 13.8%.

Depreciation and amortization increased to $24.0 million in 1996 from $18.3
million in 1995. As a percentage of total revenues, these expenses increased to
8.9% in 1996 from 7.8% in 1995. The increase was a direct result of the
increased level of capital expenditures for renovation of existing hotels and
construction of the New Hotels.

Income from operations increased to $54.1 million in 1996 from $47.2 million
in 1995, an increase of $6.9 million or 14.8%. The increase was due to higher
profit margins related to the six new hotels opened in 1995. As a percentage of
total revenues, income from operations was 20.1% in 1996 and 1995.

Interest expense and amortization of deferred financing fees, net increased to
$35.6 million in 1996 from $28.5 million in 1995, an increase of $7.1 million or
25.2%. The increase was primarily attributable to new hotel borrowing for new
construction offset in part by capitalized interest associated with projects
under construction during the year.

Income before minority interest, provision for income taxes and extraordinary
item decreased to $18.5 million in 1996 from $18.7 million in 1995, a decrease
of $0.2 million or 1.1%. The $18.7 million in 1995 does not include a $0.3
million extraordinary charge related to prepayment fees on early debt retirement
in connection with the note offering incurred in 1995.

27
<PAGE>

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 in the future will
obtain mortgage financing secured by construction in progress to provide funding
for the hotels it develops. The Company's principle uses of cash are to pay
operating expenses, to service debt and to fund capital expenditures, new hotel
development and permitted distributions to the partners to fund some of the
taxes associated with income allocable to the partners.

At January 2, 1998, the Company had $42.0 million of cash and equivalents and
also had $12.7 million of marketable securities, compared to $46.4 million in
cash and equivalents and $2.4 million of marketable securities at the end of
1996. Such amounts are generally available for development of new hotels and
other working capital requirements of the Company.

Net cash provided by operating activities decreased significantly, to $27.8
million at the end of 1997 from $72.1 million at the end of 1996, a decrease of
$44.3 million or 61.5%. This decrease was primarily due to the timing of payment
of construction related accounts payable associated with hotels opened during
1997.

The Company incurred net capital expenditures of $179.4 million and $155.6
million, respectively, for 1997 and 1996. Capital expenditures typically include
capital improvements on existing hotel properties and expenditures for
development of new hotels. Capital expenditures in 1997 included $160.3 million
for new hotel development and $19.1 million for existing hotels. During 1996,
capital expenditures for new hotel development and existing hotels were $129.1
million and $26.5 million, respectively. During 1998, the Company expects
capital expenditures to total $158.5 million, representing approximately $137.7
million for capital improvements for continued new hotel development and $20.8
million for capital improvements on existing hotels.

At the end of 1997, total debt was $695.8 million compared with $531.1 million
in 1996. The increase is attributable to the six hotels opened during 1997 as
well as six Scheduled Hotels under construction at the end of 1997. Current
portion due of long-term debt was $61.5 million at the end of 1997, compared
with $12.4 million at the end of 1996. The increase is primarily attributable to
two loans totaling $43.5 million. The Company will exercise its option to extend
one loan in the amount of $23.5 million and plans to either extend or refinance
a second loan in the amount of $20 million.

In February 1998, the Company completed the sale of six hotels for
approximately $40 million, consisting of assumption of debt and other
obligations of approximately $5.1 million and cash of approximately $34.9
million. Five of the six hotels sold served as collateral for the 1994 and 1995
Mortgage Notes. The Company intends to provide replacement collateral for these
mortgage notes and, therefore, the net proceeds realized from the sale will
generally not be available for new hotel development.

The Company estimates that building, pre-opening and other costs of the seven
Scheduled Hotels will require aggregate funding of $140.7 million from the
Company (net of $77.6 million included in construction in progress at year end).
The Company has obtained loans and commitments of $122.8 million ($36.3 million
of which had been drawn at year end) on five of the Scheduled Hotels and expects
the remaining capital requirements to be funded by cash, cash flow from
operations, refinancing of certain existing hotels and loans on two unencumbered
Scheduled Hotels.

In addition to the capital expenditures for the Scheduled Hotels, the Company
is at various stages in evaluating other new hotel development. Capital
requirements for the hotels under development are expected to be provided by (i)
construction loans; (ii) refinancing of certain existing hotels; (iii)
contributions from third parties; and (iv) cash flow from operations.

The Company expects to fund development of new hotels through limited
partnerships in which the Company will be the general partner and a wholly-owned
corporate subsidiary of the Company will be the limited partner. As permitted by
the indenture relating to the Notes (the "Note Indenture"), each of these
entities will be an "Unrestricted Subsidiary" for purposes thereof, and,
accordingly, the ability of the Company to fund these entities is subject to
certain limitations contained in the Note Indenture. All of the indebtedness of
this entity will be non-recourse to the Company. The Company believes that
funding permitted under the Note Indenture will be sufficient to meet its
current hotel development plans.

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 1998 capital requirements for the currently planned
projects and normal recurring capital improvement projects.

The Company distributed $0.6 million in 1997, and $2.7 million in 1996 to its
partners. Distributions by the Company to its partners must be made in
accordance with the provisions of the Note Indentures.

28
<PAGE>

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

Systems for several of the Owned Hotels are also believed to be Year 2000
compliant. The Company has not yet determined the effect on 16 of the Owned
Hotels operated as Holiday Inn franchises. The franchisor has indicated that it
will announce its proposal for addressing Year 2000 compliance in May 1998.

For all other Owned Hotels, the Company has included amounts in its capital
expenditures budget for software upgrades and for other systems initiatives.
These planned upgrades and modifications are intended to address Year 2000
issues. Planned costs for system upgrades and modifications currently
approximate $0.8 million to $1.0 million. 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.

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 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.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of
John Q. Hammons Hotels, Inc.:

We have audited the accompanying consolidated balance sheets of John Q. Hammons
Hotels, Inc. and Companies (Note 1) as of January 2, 1998 and January 3, 1997
and the related consolidated statements of income, changes in minority interest
and stockholders' equity and cash flows for each of the three fiscal years ended
January 2, 1998, January 3, 1997 and December 29, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits 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, Inc. and Companies (Note 1) as of January 2, 1998 and
January 3, 1997 and the results of their operations and their cash flows for
each of the three fiscal years ended January 2, 1998, January 3, 1997 and
December 29, 1995 in conformity with generally accepted accounting principles.

/s/ Arthur Andersen LLP

Cincinnati, Ohio,
February 9, 1998

29
<PAGE>

JOHN Q. HAMMONS
HOTELS, INC. AND
COMPANIES

CONSOLIDATED
BALANCE SHEETS

(000'S OMITTED,
EXCEPT SHARE DATA)

ASSETS Fiscal Year-End
- -------------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH AND EQUIVALENTS
(Restricted cash of $1,235 and $5,191 in 1997 and 1996, respectively) (Notes 2 and 5) $ 41,961 $ 46,449

MARKETABLE SECURITIES (Notes 2 and 5) 12,742 2,355

RECEIVABLES:
Trade, less allowance for doubtful accounts of $188 and $163 in 1997 and 1996, respectively 7,652 5,790
Management fees (Note 3) 50 45
Construction reimbursements, shareholder and other (Note 3) 3,739 780

INVENTORIES 1,206 1,019

PREPAID EXPENSES AND OTHER 1,386 1,928
--------- ---------
Total current assets 68,736 58,366
--------- ---------
PROPERTY AND EQUIPMENT, at cost (Notes 2, 5 and 6):
Land and improvements 40,511 29,712
Buildings and improvements 527,856 433,059
Furniture, fixtures and equipment 197,177 160,198
Construction in progress 78,946 120,525
--------- ---------
844,490 743,494
Less- Accumulated depreciation and amortization (166,125) (174,899)
--------- ---------
678,365 568,595
Property and equipment available for sale, net (Note 10) 38,791 --
--------- ---------
717,156 568,595
--------- ---------
DEFERRED FINANCING COSTS, FRANCHISE FEES, AND OTHER, net (Notes 2 and 5) 30,841 31,111
--------- ---------
$ 816,733 $ 658,072
========= =========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.

30
<PAGE>

JOHN Q. HAMMONS
HOTELS, INC. AND
COMPANIES

CONSOLIDATED
BALANCE SHEETS

(000'S OMITTED,
EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
LIABILITIES AND EQUITY Fiscal Year-End
- ------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES:

Current portion of long-term debt (Note 5) $ 61,517 $ 12,444
Accounts payable, including construction payables of
approximately $3,391 and $17,721, respectively 11,232 29,977
Accrued expenses-
Payroll and related benefits 5,529 4,611
Sales and property taxes 8,676 7,069
Insurance (Notes 2 and 3) 11,242 9,511
Interest 12,603 12,634
Utilities, franchise fees and other 5,852 6,347
-------- --------
Total current liabilities 116,651 82,593
Long-term debt (Note 5) 634,274 518,699
Other obligations and deferred revenue (Note 2) 7,901 7,024
-------- --------
Total liabilities 758,826 608,316
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 6)

MINORITY INTEREST OF HOLDERS OF LIMITED PARTNER UNITS (Note 1) 39,399 33,662

STOCKHOLDERS' EQUITY (Note 1):
Preferred stock, $.01 par value, 2,000,000 shares authorized, none outstanding -- --
Class A common stock, $.01 par value, 40,000,000 shares authorized,
6,042,000 shares issued and outstanding 60 60
Class B common stock, $.01 par value, 1,000,000 shares authorized,
294,100 shares issued and outstanding 3 3
Paid-in capital 96,373 96,373
Retained deficit, net (77,928) (80,342)
-------- --------
Total equity 18,508 16,094
-------- --------
$816,733 $658,072
======== ========
- ------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.

31
<PAGE>

JOHN Q. HAMMONS
HOTELS, INC. AND
COMPANIES

CONSOLIDATED
STATEMENTS OF
INCOME

(000'S OMITTED,
EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
Fiscal Year-Ended
- ------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Rooms $195,296 $171,206 $148,432
Food and beverage 86,183 79,580 70,840
Meeting room rental and other 20,795 18,061 15,907
-------- -------- --------
Total revenues 302,274 268,847 235,179
-------- -------- --------
OPERATING EXPENSES (Notes 3, 4 and 6):
Direct operating costs and expenses-
Rooms 50,265 43,610 38,543
Food and beverage 62,383 57,956 54,228
Other 3,385 2,929 2,521
General, administrative, sales and management service expenses 85,766 74,646 64,234
Repairs and maintenance 12,578 11,528 10,131
Depreciation and amortization 34,781 24,034 18,346
-------- -------- --------
Total operating expenses 249,158 214,703 188,003
-------- -------- --------
INCOME FROM OPERATIONS (Note 10) 53,116 54,144 47,176

OTHER EXPENSE:
Interest expense and amortization of deferred financing fees, net of $1,279, $2,103
and $4,044 of interest income in 1997, 1996 and 1995, respectively (Note 2(e)) 44,325 35,620 28,447
-------- -------- --------
INCOME BEFORE MINORITY INTEREST, PROVISION FOR
INCOME TAXES AND EXTRAORDINARY ITEM 8,791 18,524 18,729
Minority interest in earnings of partnership (Note 1) (6,302) (13,280) (13,427)
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM 2,489 5,244 5,302
Provision for income taxes (Note 2(j)) (75) (105) (107)
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 2,414 5,139 5,195
Extraordinary item; cost of early extinguishment of debt,
net of applicable tax benefit (Note 8) -- -- (92)
-------- -------- --------
NET INCOME (Note 1) $ 2,414 $ 5,139 $ 5,103
======== ======== ========
BASIC AND DILUTED EARNINGS PER SHARE (Note 2(o)):
Earnings before extraordinary item $ .38 $ .81 $ .82
Extraordinary item -- -- (.01)
-------- -------- --------
Earnings allocable to the Company $ .38 $ .81 $ .81
======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

32
<PAGE>

JOHN Q. HAMMONS
HOTELS, INC. AND
COMPANIES

CONSOLIDATED
STATEMENTS OF
CHANGES IN MINORITY
INTEREST AND STOCKHOLDERSO EQUITY

(000'S OMITTED]

<TABLE>
<CAPTION>
Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------
Company
Class A Class B Retained
Minority Common Common Paid-In Deficit after
Interest Stock Stock Capital Reorganization Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, Year-End 1994 $14,820 $60 $3 $96,373 $(90,584) $ 5,852
Distributions (4,932) -- -- -- -- --
Net income allocable to
the Company -- -- -- -- 5,103 5,103
Minority interest in earnings
of the partnership, after
extraordinary item of $233 13,194 -- -- -- -- --
------- --- -- ------- -------- -------
BALANCE, Year-End 1995 23,082 60 3 96,373 (85,481) 10,955
Distributions (2,700) -- -- -- -- --
Net income allocable to
the Company -- -- -- -- 5,139 5,139
Minority interest in earnings
of the partnership 13,280 -- -- -- -- --
------- --- -- ------- -------- -------
BALANCE, Year-End 1996 33,662 60 3 96,373 (80,342) 16,094
Distributions (565) -- -- -- -- --
Net income allocable to
the Company -- -- -- -- 2,414 2,414
Minority interest in earnings
of the partnership 6,302 -- -- -- -- --
------- --- -- ------- -------- -------
BALANCE, Year-End 1997 $39,399 $60 $3 $96,373 $(77,928) $18,508
======= === == ======= ======== =======

</TABLE>

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

33
<PAGE>

JOHN Q. HAMMONS
HOTELS, INC. AND COMPANIES
CONSOLIDATED
STATEMENTS OF
CASH FLOWS

(000'S OMITTED)

<TABLE>
<CAPTION>
Fiscal Year-Ended
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,414 $ 5,139 $ 5,103
Adjustments to reconcile net income to cash provided by operating activities-
Minority interest in earnings of partnership 6,302 13,280 13,427
Depreciation, amortization and loan cost amortization 37,662 26,414 19,956
Extraordinary item, net of tax benefit -- -- 92
--------- --------- ---------
46,378 44,833 38,578
Changes in certain assets and liabilities-
Receivables (4,826) 999 (3,003)
Inventories (187) 91 (137)
Prepaid expenses and other 542 (804) (138)
Accounts payable (18,745) 21,595 (236)
Accrued expenses 3,730 3,894 4,375
Other obligations and deferred revenue 877 1,444 4,598
--------- --------- ---------
Net cash provided by operating activities 27,769 72,052 44,037
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (179,385) (155,579) (132,419)
Franchise fees and other (3,499) (4,936) (5,755)
(Purchase) sale of marketable securities, net (10,387) 24,219 60,089
--------- --------- ---------
Net cash used in investing activities (193,271) (136,296) (78,085)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan financing fees and debt offering costs (3,069) (1,433) (6,180)
Proceeds from borrowings 186,684 76,239 112,296
Payments of notes payable to affiliates -- -- (547)
Repayments of debt (22,036) (3,190) (34,524)
Distributions (565) (2,700) (4,932)
--------- --------- ---------
Net cash provided by financing activities 161,014 68,916 66,113
--------- --------- ---------
Increase (decrease) in cash and equivalents (4,488) 4,672 32,065
CASH AND EQUIVALENTS, beginning of period 46,449 41,777 9,712
--------- --------- ---------
CASH AND EQUIVALENTS, end of period $ 41,961 $ 46,449 $ 41,777
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST, net of amounts capitalized $ 43,399 $ 35,441 $ 29,035
========= ========= =========
</TABLE>

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

34
<PAGE>

JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000'S OMITTED, EXCEPT SHARE DATA)

(1) Basis of Presentation-

(a) Entity Matters--The accompanying consolidated financial statements include
the accounts of John Q. Hammons Hotels, Inc. and John Q. Hammons Hotels,
L.P. and subsidiaries. (Collectively the Company or, as the context may
require John Q. Hammons Hotels, Inc. only). As of fiscal year end 1997,
1996 and 1995, the Company had forty-five, thirty-nine and thirty-seven,
respectively, hotels in operation of which thirty-five in 1997 and thirty-
two in 1996 and 1995 operate under the Holiday Inn and Embassy Suites trade
names. The Company's hotels are located in twenty states throughout the
United States.

The Company 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. John Q. Hammons (JQH) contributed
approximately $5 million in cash to the Company in exchange for 294,100
shares of Class B common stock (which represents approximately 72% of the
voting control of the Company). The Company contributed the approximate $96
million of net proceeds from the Class A and Class B common stock offerings
to John Q. Hammons Hotels, L.P. (JQHLP) in exchange for an approximate 28%
general partnership interest.

As the sole general partner of JQHLP, the Company exercises control
over all decisions as set forth in the partnership agreement. The net
income allocable to the Company reported in the accompanying consolidated
statements of income includes the Company's approximate 28% share of all
JQHLP earnings. The approximate 72% minority interest attributable to the
portion of the partnership not owned by the Company has been reflected as
minority interest in the accompanying consolidated financial statements.

All significant balances and transactions between the entities and
properties have been eliminated.

(b) Partnership and Other Matters--A summary of selected provisions of the
partnership agreement as well as certain other matters are summarized as
follows:

Allocation of Income, Losses and Distributions; Pretax income, losses
and distributions of JQHLP will generally be allocated pro rata between the
Company, as general partner, and the limited partner interest beneficially
owned by JQH based on their respective approximate 28% and 72% ownership
interests in JQHLP. However, among other things, to the extent the limited
partners were not otherwise committed to provide further financial support
and pretax losses reported for financial reporting purposes were deemed to
be of a continuing nature, the balance of the pretax losses would be
allocated only to the Company, with any subsequent pretax income also to be
allocated only to the Company until such losses had been offset (Note 5).
In addition, with respect to distributions, in the event JQHLP has taxable
income, distributions are to be made in an aggregate amount equal to the
amount JQHLP 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 Company, if applicable, with the remainder allocated to
the limited partners.

Additional Capital Contributions; In the event proceeds from the sale
of the twenty hotel properties which secure the $300 million first mortgage
notes (1994 notes) (Note 5) are insufficient to satisfy amounts due on the
1994 notes, JQH 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 which secure
the $90 million first mortgage notes (1995 notes) (Note 5) are insufficient
to satisfy amounts due on the 1995 notes, JQH 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 JQH concurrent with the public
equity offering (Note 8), JQH is obligated to contribute up to $50 million
in the event proceeds from the sale of these hotel properties are
insufficient to satisfy amounts due on the then outstanding mortgage
indebtedness related to these properties.

Redemption of Limited Partner Interests; Subject to certain
limitations, the limited partners of JQHLP 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 Company, one share of its class A common stock for each
limited partner unit tendered or the then cash equivalent thereof.

35
<PAGE>

Additional General Partner Interest; Upon the issuance by the Company
of additional shares of its common stock, including shares issued upon the
exercise of its stock options (Note 9), the Company will be required to
contribute to JQHLP the net proceeds received and JQHLP will be required to
issue additional general partner units to the Company in an equivalent
number to the additional shares of common stock issued.

(2) Summary of Significant 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 1998. These securities are valued at
current market value, which approximates cost. Realized gains and losses in
1997 and 1996, 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 $3,825 and $1,239 as of fiscal year-end 1997 and 1996,
respectively (see Note 2(q)).

The components of deferred financing costs, franchise fees, and other are
summarized as follows:

<TABLE>
<CAPTION>
Fiscal Year-End
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred financing costs $24,025 $20,956
Franchise fees 4,716 4,877
Less-Accumulated amortization (9,466) (7,212)
------- -------
19,275 18,621
Restricted cash deposit, interest bearing,
related to insurance coverages (Note 3) -- 4,934
Deposits 7,397 5,986
Preopening expenses and other 4,169 1,570
------- -------
$30,841 $31,111
======= =======
</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. The letter of credit expires in
October 1998.

(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>

36
<PAGE>

Construction in progress includes primarily land, development and
construction costs of certain hotel developments. Costs associated with
hotel development construction in progress approximated $75 million in 1997
and $120 million in 1996, with the remainder representing refurbishments of
operating hotels.

The Company 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 Company believes no
impairment exists at January 2, 1998.

Interest costs, construction overhead and certain other carrying costs
are capitalized during the period hotel properties are under construction.
Interest costs capitalized were $10,259, $7,162 and $5,270 for the fiscal
years ended 1997, 1996 and 1995, 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 1997 consolidated financial statements include the
land costs for thirty-seven of the operating hotel properties. Land for six
of the remaining eight operating hotel properties is leased by the Company
from unrelated parties over long-term leases. Land for the remaining two
operating hotel properties is leased by the Company from a related party
over long-term leases. Rent expense for all land leases was $464, $450 and
$288 for the fiscal years ended 1997, 1996 and 1995, 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 Company 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 1997, 1996 and 1995 was approximately $21,405,
$17,373 and $16,206, respectively, of which approximately $1,296, $291 and
$1,038, respectively, pertained to preopening advertising expenses of the
hotels which opened in these respective years.

(h) Pensions and Other Benefits--The Company 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 $66, $54 and $52 for the fiscal years ended
1997, 1996 and 1995, respectively.

Effective January 1996, the Company implemented an employee savings
plan (a 401(k) plan). The Company matches a percentage of an employee's
contribution. The Company's matching contributions are funded currently.
The cost of the matching program and administrative costs charged to income
were approximately $381 and $293 in 1997 and 1996, respectively. The
Company does not offer any other post-employment or post-retirement
benefits to its employees.

(i) Self-Insurance--The Company 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--The Company's provision for income taxes for fiscal 1997,
1996 and 1995 is summarized as follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable $75 $105 $107
Deferred -- -- --
--- ---- ----
Provision for income taxes $75 $105 $107
=== ==== ====
</TABLE>

37
<PAGE>

A reconciliation between the statutory federal income tax rate and the
effective tax rate is summarized as follows:

<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision for income
taxes at the federal
statutory rate $ 846 34% $ 1,783 34% $ 1,803 34%
Tax benefit allocable
to general partner (846) (34) (1,783) (34) (1,803) (34)
Provision for
state taxes 75 3 105 2 107 2
----- --- ------- --- ------- ---
Provision for
income taxes $ 75 3% $ 105 2% $ 107 2%
===== === ======= === ======= ===
</TABLE>

At January 2, 1998, January 3, 1997 and December 29, 1995, the net
deferred tax liability consisted of the following:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Estimated allocated tax basis in excess
of the Company's proportionate share
of the book value of JQHLP's net assets $ 7,400 $ 9,200 $ 11,000
Deferred tax liabilities (1) (1) (1)
------- ------- --------
7,399 9,199 10,999
Valuation allowance (7,400) (9,200) (11,000)
------- ------- --------
Net deferred tax liability $ (1) $ (1) $ (1)
======= ======= ========

</TABLE>

The realization of the estimated deferred tax asset resulting from
estimated tax basis in excess of the Company's proportionate share of the
book value of JQHLP's net assets is dependent upon, among others,
prospective taxable income allocated to the Company, disposition of the
hotel properties subsequent to the end of a property's respective
depreciable tax life, and the timing of subsequent conversions, if any, of
limited partnership units in JQHLP into common stock of the Company.
Accordingly, a valuation allowance has been recorded in an amount equal to
the estimated deferred tax asset associated with the differences between
the Company's basis for financial reporting and tax purposes. Adjustments
to the valuation allowance, if any, will be recorded in the periods in
which it is determined the asset is realizable.

(k) Revenue Recognition--The Company 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 Company's fiscal year ends on the Friday nearest
December 31 which includes 52 weeks in 1997, 53 weeks in 1996 and 52
weeks in 1995.

The periods ended in the accompanying consolidated financial
statements are summarized as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------
Year Fiscal Year-End
-------------------------------------------------------------
<S> <C>
1997 January 2, 1998
1996 January 3, 1997
1995 December 29, 1995
-------------------------------------------------------------
</TABLE>

38
<PAGE>

(n) Reclassifications--Certain reclassifications have been reflected in 1996
and 1995 to conform with the current period presentation.

(o) Earnings Per Share--In 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share" (SFAS 128). In accordance
with SFAS 128, basic earnings per share are computed by dividing net income
by the weighted average number of common shares outstanding during the
year. Diluted earnings per share are computed similar to basic except the
denominator is increased to include the number of additional common shares
that would have been outstanding if dilutive potential common shares had
been issued.

Options to purchase 750,000 shares of common stock at a price of
$16.50 per share were outstanding during 1997 but were not included in the
computation of diluted earnings per share since the options' exercise
prices were greater than the average market price of the common shares.

Since there are no dilutive securities, basic and diluted earnings per
share are identical thus a reconciliation of the numerator and denominator
is not necessary.

SFAS 128 requires the Company to restate reported earnings per share
for all periods presented. This accounting change had no effect on
previously reported earnings per share.

(p) 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 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 Company intends to adopt
this statement in the first quarter of fiscal 1998 and does not anticipate
such adoption to have any significant impact on the Company's reported
consolidated financial position, results of operations, cash flows or
related disclosures.

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 disclosures for each segment in
which the chief operating decision maker organizes these segments within a
company 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
segregates a company. This statement, which the Company intends to adopt in
fiscal 1998, expands or modifies disclosures and, accordingly, will have no
impact on the Company's reported consolidated financial position, results
of operations or cash flows.

(q) Proposed Accounting Pronouncements--In April 1997, the American Institute
of Certified Public Accountants released a proposed Statement of Position
(SOP) - "Reporting on the Costs of Start-Up Activities." The proposed SOP,
which is expected to be finalized and issued in 1998, would require costs
of start-up activities, including preopening expenses, to be expensed as
incurred. The Company'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. Included in the accompanying 1997 consolidated balance
sheet is approximately $3,825 of unamortized preopening expenses which
would have been expensed had this pronouncement been effective as of
January 2, 1998.

(3) Related Party Transactions-

(a) Hotel Management Fees--In addition to managing the hotel properties
included in the accompanying consolidated financial statements, the Company
provides similar services for other hotel properties owned or controlled by
JQH which included four properties at January 2, 1998. A management fee of
approximately 3% of gross revenues (as defined) is paid to the Company by
these hotels which aggregated approximately $643, $717 and $694 for the
fiscal years ended 1997, 1996, and 1995, 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 $1,411, $1,228 and $1,181 for
the fiscal years ended 1997, 1996 and 1995, respectively.

In 1995, JQH 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.

39
<PAGE>

(c) Insurance Coverage--Umbrella, property, auto, commercial liability and
workers' compensation insurance are provided to the hotel properties under
a blanket commercial policy purchased by the Company or WHI, covering hotel
properties owned by JQHLP, JQH 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 $6,196, $6,265 and $5,764 for the fiscal years
ended 1997, 1996 and 1995, respectively.

(d) Allocation of Common Costs--The Company and its general partner incur
certain hotel management expenses incidental to the operations of all
hotels beneficially owned or controlled by JQH. 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
Company to hotels not included in the accompanying consolidated statements,
based on the respective number of rooms of all hotels owned or controlled
by JQH. These costs approximated $131, $150, and $180 for the fiscal years
ended 1997, 1996 and 1995, respectively. Management considers these
allocations to be reasonable.

(e) Transactions with Stockholders and Directors--At fiscal year-end, there
were certain prepayments to a stockholder associated with the Company's
estimated 1998 and 1997 taxable income, which approximated $2,031 and $315,
respectively, and are included as a component of construction
reimbursements, shareholder and other receivables.

The Company reimburses JQH for development costs incurred on behalf of
the Company, at approximate cost. These costs amounted to approximately
$7,251 (including debt assumed of $4,728) and $4,621 in 1997 and 1996,
respectively. In addition to actual costs incurred, the 1997 reimbursement
includes a return on capital employed by JQH of approximately $120,
calculated based on the Company's approximate incremental borrowing rate.

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

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

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Expenses included within
general, administrative,
sales and management
service expenses:
Accounting and administrative $1,411 $1,228 $1,181
Rental expenses (Note 6) 465 520 420
Financial advisory services
from a director 180 188 --
------ ------ ------
$2,056 $1,936 $1,601
====== ====== ======
Allocated insurance expense
from the pooled coverage
included within various
operating categories $6,196 $6,265 $5,764
====== ====== ======

</TABLE>

(4) Franchise Agreements-

As of year-end 1997 and 1996, forty-one of the forty-five and thirty-six of
the thirty-nine, respectively, operating hotel properties included in the
accompanying consolidated balance sheets have franchise agreements with a
national hotel chain 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 $7,165, $6,250
and $5,534 for the fiscal years ended 1997, 1996 and 1995, 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 income as a
component of sales expense was approximately $6,497, $5,493 and $4,666 for
the fiscal years ended 1997, 1996 and 1995, respectively.

40
<PAGE>

(5) Long-Term Debt-

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

<TABLE>
<CAPTION>
Fiscal Year-End
1997 1996
<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
and additional capital contributions of up to $150 million by JQH 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 and a second
mortgage lien on two hotel properties and additional capital contributions of up to
$45 million by JQH. (Note 1(b)) 90,000 90,000

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 April, 2024, certain of the obligations
are subject to optional prepayments by the bondholders, secured by certain hotel facilities,
fixtures, assignment of rents, a letter of credit and, with respect to approximately $16,102 of
development bonds, a personal guarantee of JQH. 36,063 36,873

Mortgage notes payable to banks, insurance companies and a state retirement plan, variable
interest rates at prime to prime plus 1% with certain instruments subject to a ceiling rate and
a floor rate, fixed rates ranging from 8% to 11%, payable in scheduled installments through
April, 2027, secured by certain hotel facilities, fixtures, assignment of rents, certain other real
property controlled by JQH and, with respect to approximately $252,909 of mortgage notes,
a personal guarantee of JQH. 261,071 93,874

Other notes payable, various variable interest rates and fixed rates ranging from 6.5% to 8.1%,
payable in scheduled installments through July, 2002, secured by certain hotel improvements,
furniture, fixtures and related equipment and, with respect to approximately $2,100 of notes,
a personal guarantee of JQH. 8,657 10,396
-------- --------
695,791 531,143
Less- current portion (61,517) (12,444)
-------- --------
$634,274 $518,699
======== ========
</TABLE>

41
<PAGE>

The indenture agreements relating to the 1994 and 1995 notes include certain
covenants which, among others, limit the ability of JQHLP 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.

Scheduled maturities of long-term debt are summarized as follows:
<TABLE>
<CAPTION>
Year Ending Year-End 1997
<S> <C>
1998(A) $ 61,517
1999 32,968
2000 9,780
2001 13,893
2002 38,533
Thereafter 539,100
---------
$ 695,791
=========
</TABLE>

(A) Maturities of long-term debt of approximately $5.1 million in 1998 are
scheduled to be amortized over periods extending subsequent to 2002.

(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
Company 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 $1,819, $1,629 and $1,076 for the fiscal
years ended 1997, 1996 and 1995, 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 Billings, Montana; Joplin,
Missouri and Portland, Oregon. Each of the trade centers are owned by JQH. The
lease agreements for the Billings and Joplin trade centers stipulate nominal
rentals for each of the fiscal years ended 1997, 1996, and 1995, 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 JQH. In addition, the
Company leases office space in Springfield, Missouri from a partnership (of
which JQH is a partner) for annual payments of approximately $231 through
December 1998. The Company has also entered into land leases with JQH for two
operating hotel properties. Subject to the Company 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 $465, $520
and $420 for the fiscal years ended 1997, 1996 and 1995, respectively.

The minimum annual rental commitments for these noncancelable operating
leases at January 2, 1998 are as follows:

<TABLE>
<CAPTION>
Fiscal Year Ending JQH Other Total
<S> <C> <C> <C>
1998 $ 791 $ 1,489 $ 2,280
1999 570 1,243 1,813
2000 570 970 1,540
2001 570 683 1,253
2002 570 604 1,174
Thereafter 11,245 41,903 53,148
------- ------- -------
$14,316 $46,892 $61,208
======= ======= =======
</TABLE>

42
<PAGE>

(b) Hotel Development--In 1998 and 1999, the Company plans to complete
construction and open seven new hotels. The total estimated aggregate
development and construction costs for these hotels are expected to exceed
$218 million.

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

(7) Fair Value of Financial Instruments-

The fair values of marketable securities and long-term debt approximate
their respective historical carrying amounts except with respect to the
1994 and 1995 notes for which fair market value was approximately $404
million and $387 million at 1997 and 1996, respectively. The fair value of
the first mortgage note issues is estimated by obtaining quotes from
brokers.

(8) Public Offerings-

In addition to the completion of the sale of equity securities as more
fully described in Note 1, JQHLP completed the sale of $90 million of first
mortgage notes in 1995. Proceeds of the offering were primarily used for
retirement of then existing mortgage debt, transaction costs associated
with the debt offering and to provide funding for new hotel development.

In conjunction with the retirement or refinancing of its then existing
mortgage debt, JQHLP incurred approximately $0.3 million of prepayment
charges in 1995. These prepayment charges have been reflected in the
accompanying 1995 consolidated statement of income as an extraordinary
item.

(9) Stock Options-

Concurrent with the sale of equity securities in November 1994, the Company
adopted a stock option plan for its employees. The plan authorizes the
issuance of up to 2,416,800 shares of Class A Common Stock. Options granted
under the plan are at fair market value as of the date of the grant
(approximately $16.50 per share) and are generally exercisable over periods
not exceeding ten years. See Note 1(b) Additional General Partner Interest.

A summary of the changes in options outstanding during 1997 and 1996 is as
follows:

<TABLE>
<CAPTION>
Number Option Price
of Shares Per Share
<S> <C> <C>
Outstanding at December 29, 1995 750,000 $16.50
Granted -- --
Exercised -- --
------- ------
Outstanding at January 3, 1997 750,000 $16.50
------- ------
Granted -- --
Exercised -- --
------- ------
Outstanding at January 2, 1998 750,000 $16.50
======= ======
Exercisable at January 2, 1998 562,500 $16.50
======= ======
</TABLE>

43
<PAGE>

The Company accounts for these option plans under APB Opinion No. 25,
under which no compensation cost has been recognized. In accordance with
Financial Accounting Standards Board Statement No. 123, (SFAS No. 123)
"Accounting for Stock-Based Compensation," the Company is required to
disclose what compensation costs would have been for these option plans
had the accounting ascribed by SFAS No. 123 been adopted. Given that
disclosures under SFAS No. 123 are not applicable to options granted prior
to January 1, 1995 and given the Company has granted no options in 1997,
1996 or 1995, there is no additional pro forma compensation expense to be
disclosed.

(10) Subsequent Event-

Effective February 6, 1998, the Company completed the sale of six hotels
to an unrelated party for $40 million, which approximates the aggregate
net book value of the hotels. Certain of these hotels served as collateral
under the 1994 and 1995 first mortgage notes (Note 5). Under the terms of
these indentures 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.

Summary unaudited operating results for the six hotels for each of the
three years ended 1997, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues $27,485 $28,947 $29,717
------- ------- -------
Income from operations, including
depreciation and amortization of
$2,447, $2,418 and $2,358, respectively $ 3,590 $ 3,373 $ 3,287
======= ======= =======
</TABLE>

(11) Quarterly Financial Data (Unaudited)-
<TABLE>
<CAPTION>
(Thousands, except per share amounts)
Quarter
First Second Third Fourth
<S> <C> <C> <C> <C>
1997
Total revenues $70,542 $76,219 $78,864 $76,649
Income from operations 13,774 16,145 13,793 9,404
Net income (loss) allocable
to the Company 1,187 1,643 557 (973)
Basic and diluted earnings
(loss) per share $ 0.19 $ 0.26 $ 0.09 $ (0.15)

1996
Total revenues $64,620 $68,343 $67,329 $68,555
Income from operations 11,422 14,846 14,902 12,974
Net income allocable
to the Company 599 1,638 1,764 1,138
Basic and diluted earnings
per share $ 0.09 $ 0.26 $ 0.28 $ 0.18
</TABLE>

44
<PAGE>

BOARD OF DIRECTORS

John Q. Hammons
Chairman & Chief Executive Officer

David B. Jones
President & Chief Operating Officer

Mel J. Volmert
Executive Vice President,
Chief Financial Officer & Treasurer

Jacqueline A. Dowdy
Secretary

Daniel L. Earley
President, Clermont Savings Bank

William J. Hart
Partner, Husch & Eppenberger

John E. Lopez-Ona
President, Anvil Capital

Robert Trent Jones, Jr.
President, Robert Trent Jones II International

James F. Moore
Chairman, Champion Products, Inc.

COMMITTEES OF THE BOARD

Audit Committee
Daniel L. Earley-Chairman
James F. Moore
Jacqueline A. Dowdy

Compensation and
Stock Option Committee
John Q. Hammons-Chairman
William J. Hart
Robert Trent Jones, Jr.

Finance Committee
John E. Lopez-Ona-Chairman
Daniel L. Earley
William J. Hart

OFFICERS

John Q. Hammons
Chairman & Chief Executive Officer

David B. Jones
President & Chief Operating Officer

Mel J. Volmert
Executive Vice President,
Chief Financial Officer & Treasurer

Jacqueline A. Dowdy
Secretary

Glenn R. Malone
Senior Vice President
Financial Planning & Corporate Development

Steven E. Minton, AIA
Senior Vice President
Architecture

Pat A. Shivers
Senior Vice President
Administration & Control

John D. Fulton
Vice President
Design & Construction

James Miller
Vice President
Sales & Marketing

Debra Mallonee Shantz
Corporate Counsel

Lawrence A. Welch
Vice President
Food & Beverage

Robert Fugazi
Regional Vice President
Southern Region
Houston, Texas

Lonnie Funk
Regional Vice President
Midwest Region
Kansas City, Missouri

William Mead
Regional Vice President
Eastern Region
Greensboro, North Carolina

Robert Niehaus
Regional Vice President
Western Region
Fresno, California

Bill Parker
Regional Vice President
Rocky Mountain Region
Springfield, Missouri

45
<PAGE>

JOHN Q. HAMMONS HOTELS LIST

Embassy Suites
Raleigh/Durham, North Carolina
Charleston, West Virginia
Columbia, South Carolina
Greenville, South Carolina
Greensboro, North Carolina
Tampa, Florida (Opened 1998)
Des Moines, Iowa
Kansas City Airport, Missouri
Omaha (Old Market), Nebraska
Little Rock, Arkansas
Montgomery, Alabama
Monterey, California
Portland, Oregon (Opens 1998)

Hampton Inn & Suites
Springdale, Arkansas

Homewood Suites
Greensboro, North Carolina
Kansas City Airport, Missouri

Resorts
Chateau on the Lake, Branson, Missouri
World Golf Resort, St. Augustine, Florida (Opens 1998)

Independents
Collins Plaza, Cedar Rapids, Iowa
University Plaza, Bowling Green, Kentucky
Capitol Plaza, Jefferson City, Missouri
Capitol Plaza, Topeka, Kansas (Opens 1998)

Radisson
Quad-City Plaza, Davenport, Iowa
Hobby Airport, Houston, Texas

Marriott
Tucson, Arizona
West Madison, Wisconsin

Crowne Plaza
Pyramid, Albuquerque, New Mexico

Holiday Inn
University Park, West Des Moines, Iowa
Rapid City, South Dakota*
City Centre, Sioux Falls, South Dakota*
Beaumont, Texas
Springdale, Arkansas
Bakersfield, California
Bay Bridge, California
Fresno Centre Plaza, California
Portland Airport, Oregon
Reno, Nevada
Capitol Plaza, Sacramento, California
Tucson Airport, Arizona
Denver International Airport, Colorado
Denver Northglenn, Colorado
Ft. Collins, Colorado
Joliet, Illinois
Joplin, Missouri
Springfield North, Missouri
Springfield University Plaza, Missouri*

Days Inn
Springfield I-44, Missouri*

CORPORATE ADDRESS

John Q. Hammons Hotels, Inc.
300 John Q. Hammons Parkway
Suite 900
Springfield, MO 65806
Telephone: (417) 864-6573

INDEPENDENT AUDITORS

Arthur Andersen L.L.P.
Cincinnati, Ohio

TRANSFER AGENT

First Union National Bank of North Carolina
Shareholder Services Group
230 South Tryon Street
Charlotte, North Carolina 28288-1153
Toll Free (800) 829-8432
Local (704) 374-6531
Fax (704) 383-8030

10-K AVAILABILITY

The Company will furnish to any shareholder, without charge, a copy of the
Company's Annual Report on Form 10-K as filed with the Securities and Exchange
Commission for the year ended January 2, 1998 upon written request to:

Investor Relations
John Q. Hammons Hotels, Inc.
300 John Q. Hammons Parkway
Suite 900
Springfield, MO 65806

[LOGO]
Design: Groves Design Company

*Managed Hotels

<PAGE>

EXHIBIT 23.1

Consent of Independent Public Accountants
-----------------------------------------

As independent public accountants, we hereby consent to the incorporation of
our reports incorporated by reference in this Form 10-K, into the Company's
previously filed registration Statements No.'s 33-84570 and 333-1276.

Cincinnati, Ohio
April 2, 1998

<PAGE>

<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JANUARY 2, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-START> JAN-04-1997
<PERIOD-END> JAN-02-1998
<CASH> 41,961
<SECURITIES> 12,742
<RECEIVABLES> 11,629
<ALLOWANCES> 188
<INVENTORY> 1,206
<CURRENT-ASSETS> 68,736
<PP&E> 844,490
<DEPRECIATION> 166,125
<TOTAL-ASSETS> 816,733
<CURRENT-LIABILITIES> 116,651
<BONDS> 634,274
0
0
<COMMON> 63
<OTHER-SE> 18,445
<TOTAL-LIABILITY-AND-EQUITY> 816,733
<SALES> 0
<TOTAL-REVENUES> 302,274
<CGS> 0
<TOTAL-COSTS> 116,033
<OTHER-EXPENSES> 133,125
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,325
<INCOME-PRETAX> 2,489
<INCOME-TAX> 75
<INCOME-CONTINUING> 2,414
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,414
<EPS-PRIMARY> .38
<EPS-DILUTED> .38

</TABLE>