<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                   FORM 10-Q

(Mark One)
[X]  JOINT QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
     For the quarterly period ended June 30, 1997

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

 
For the transition period from ___________________ to _____________________

Commission File Number 1-9319                     Commission File  Number 1-9320

PATRIOT AMERICAN HOSPITALITY,                      PATRIOT AMERICAN HOSPITALITY
             INC.                                        OPERATING COMPANY
-----------------------------                     ------------------------------
 (Exact name of registrant                          (Exact name of registrant 
as specified in its charter)                       as specified in its charter)

    Delaware           94-0358820                Delaware        94-2878485
--------------------------------------   ---------------------------------------
(State or other     (I.R.S. Employer      (State or other     (I.R.S. Employer
 jurisdiction of   Identification No.)    jurisdiction of    Identification No.)
incorporation or                          incorporation or 
 organization)                             organization)

3030 LBJ Freeway, Suite 1500             3030 LBJ Freeway, Suite 1500
Dallas, Texas                    75234   Dallas, Texas                     75234
--------------------------------------   ---------------------------------------
(Address of principal       (Zip Code)   (Address of principal        (Zip Code)
 executive offices)                       executive offices)

           (972) 888-8000                            (972) 888-8000
--------------------------------------   ---------------------------------------
   (Registrant's telephone number,           (Registrant's telephone number, 
         including area code)                      including area code)


       CALIFORNIA JOCKEY CLUB                  BAY MEADOWS OPERATING COMPANY
     2600 South Delaware Street                 2600 South Delaware Street
    San Mateo, California  94403               San Mateo, California  94402
--------------------------------------   ---------------------------------------
   (Former name, former address and         (Former name, former address and 
 former fiscal year, if changed since     former fiscal year, if changed since 
            last report)                             last report)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes    X      No        
    -------      -------      

The number of shares outstanding of each registrant's classes of common stock,
par value $.01 per share, as of the close of business on August 12, 1997, was as
follows:

               Registrant                               Number of Shares
               ----------                               ----------------
   Patriot American Hospitality, Inc.                      66,161,092
   Patriot American Hospitality Operating Company          66,161,092
<PAGE>
 
                    PATRIOT AMERICAN HOSPITALITY, INC. AND
                PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                                     INDEX

                        PART I - FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS:                                               PAGE
                                                                            ----
                                                                                
PATRIOT AMERICAN HOSPITALITY, INC. AND PATRIOT AMERICAN 
 HOSPITALITY OPERATING COMPANY (FORMERLY CALIFORNIA 
 JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND
 SUBSIDIARY):
  Separate and Combined Statements of Operations for the six months ended
   June 30, 1997 (unaudited)................................................  5
  Separate and Combined Statements of Operations for the six months ended
   June 30, 1996 (unaudited)................................................  6
  Separate and Combined Statements of Operations for the three months ended
   June 30, 1997 (unaudited)................................................  7
  Separate and Combined Statements of Operations for the three months ended
   June 30, 1996 (unaudited)................................................  8
  Combined Balance Sheets as of June 30, 1997 (unaudited)
   and December 31, 1996....................................................  9
  Combined Statements of Cash Flows for the six months ended June 30, 1997
   and 1996 (unaudited)..................................................... 10
  PATRIOT AMERICAN HOSPITALITY, INC.
   (FORMERLY CALIFORNIA JOCKEY CLUB):
   Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996..... 11
   Statements of Cash Flows for the six months ended June 30, 1997 and 1996
    (unaudited)............................................................. 12
  PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
   (FORMERLY BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY):
   Consolidated Balance Sheets as of June 30, 1997 (unaudited) and
    December 31, 1996....................................................... 13
   Consolidated Statements of Cash Flows for the six months ended June 30,
    1997 and 1996 (unaudited)............................................... 14
  Notes to Financial Statements as of June 30, 1997 (unaudited)............. 15

PATRIOT AMERICAN HOSPITALITY, INC.:
  Consolidated Balance Sheets as of June 30, 1997 (unaudited) and
   December 31, 1996........................................................ 18
  Consolidated Statements of Operations for the three months ended June 30,
   1997 and 1996 and the six months ended June 30, 1997 and 1996 (unaudited) 19
  Consolidated Statements of Cash Flows for the six months ended June 30,
   1997 and 1996 (unaudited)................................................ 20
  Notes to Consolidated Financial Statements as of June 30, 1997 (unaudited) 21

CHC LEASE PARTNERS:
  Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996...... 34
  Statements of Operations for the three months ended June 30, 1997 and 1996
   and the six months ended June 30, 1997 and 1996 (unaudited).............. 35
  Statements of Cash Flows for the six months ended June 30, 1997 and 1996
   (unaudited).............................................................. 36
  Notes to Financial Statements as of June 30, 1997 (unaudited)............. 37

NORTHCOAST HOTELS, L.L.C.:
  Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996...... 40
  Statements of Operations for the three months ended June 30, 1997,
   the six months ended June 30, 1997 and the period April 2, 1996
   (inception of operations) through June 30, 1996 (unaudited).............. 41
  Statements of Cash Flows for the six months ended June 30, 1997 and the
   period April 2, 1996 (inception of operations) through June 30, 1996
   (unaudited).............................................................. 42
  Notes to Financial Statements as of June 30, 1997 (unaudited)............. 43

                                       2
<PAGE>
 
                    PATRIOT AMERICAN HOSPITALITY, INC. AND
                PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                               INDEX - CONTINUED


                                                                            PAGE
                                                                            ----
                                                                                
PAH RSI, L.L.C.:
  Consolidated Balance Sheet as of June 30, 1997 (unaudited)................ 46
  Consolidated Statements of Operations for the three months ended June 30,
   1997 and the period January 16, 1997 (inception of operations) through 
   June 30, 1997 (unaudited)................................................ 47
  Consolidated Statement of Members' Equity for the period January 16, 1997   
   (inception of operations) through June 30, 1997 (unaudited).............. 48 
  Consolidated Statement of Cash Flows for the period January 16, 1997          
   (inception of operations) through June 30, 1997 (unaudited).............. 49
  Notes to Consolidated Financial Statements as of June 30, 1997 (unaudited) 50
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS OF OPERATIONS...................................................... 55
 
                          PART II - OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS................................................... 71
 
ITEM 5. OTHER INFORMATION................................................... 71

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
  Exhibits.................................................................. 71
  Reports on Form 8-K....................................................... 71
 
SIGNATURES.................................................................. 73
 

                                       3
<PAGE>
 
                    PATRIOT AMERICAN HOSPITALITY, INC. AND
                PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

          INTRODUCTION TO SEPARATE AND COMBINED FINANCIAL STATEMENTS


     On July 1, 1997, the entity formerly known as Patriot American Hospitality,
Inc. ("Patriot") merged with and into California Jockey Club ("Cal Jockey"),
with Cal Jockey being the surviving legal entity (the "Merger").  Cal Jockey's
shares of common stock are paired and trade together with the shares of common
stock of Bay Meadows Operating Company ("Bay Meadows") as a single unit pursuant
to a stock pairing arrangement.  In connection with the Merger, Cal Jockey
changed its name to "Patriot American Hospitality, Inc." (the "Corporation") and
Bay Meadows changed its name to "Patriot American Hospitality Operating Company"
(the "Operating Company").

     The Merger has been accounted for as a reverse acquisition whereby Cal
Jockey is considered to be acquired by Patriot. Consequently, the historical
financial information of Patriot will become the historical financial
information of the Corporation in all future filings.  The  interim financial
information which Patriot would have been required to file with the Securities
and Exchange Commission for the quarterly period ended June 30, 1997 has been
included in this Joint Quarterly Report of the Corporation and the Operating
Company for the quarterly period ended June 30, 1997 and follows the interim
separate and combined financial statements of the Corporation and the Operating
Company (formerly Cal Jockey and Bay Meadows and Subsidiary).  This interim
financial information includes interim financial statements of Patriot and of
certain of the lessees who are responsible for operating the hotels owned by
Patriot and its subsidiaries.

                                       4
<PAGE>
 
                        PART I:  FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
(FORMERLY CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND
SUBSIDIARY)
 
SEPARATE AND COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  (UNAUDITED)
--------------------------------------------------------------------------------
 
<TABLE> 
<CAPTION> 
                                                     PATRIOT 
                                  PATRIOT           AMERICAN 
                                 AMERICAN          HOSPITALITY 
                                HOSPITALITY,        OPERATING
                                    INC.             COMPANY          ELIMINATIONS       COMBINED
                                ------------       -----------        ------------       --------
<S>                             <C>                <C>                <C>                <C> 
REVENUES:
Pari-mutuel revenue.............. $    --            $17,786             $    --          $17,786
Producer fees....................      --                321                  --              321
Admissions, programs, parking
 and other racing income.........      --              2,434                  --            2,434
Concession sales.................      --              1,424                  --            1,424
Rental of racing facility........   2,017                573              (2,017)             573
Interest and dividend income.....     194                 68                 (24)             238
Gain on sale of securities.......   1,497                 --                  --            1,497
Other income.....................      24                457                  --              481
                                  -------            -------            --------          -------

       Total.....................   3,732             23,063              (2,041)          24,754
                                  -------            -------            --------          -------

COSTS AND EXPENSES:
Purses and incentive awards......      --              7,241                  --            7,241
Commissions paid to guest tracks.      --              1,089                  --            1,089
Direct operating costs...........      --              9,288                  --            9,288
Cost of concession sales.........      --                456                  --              456
Depreciation and amortization....     478                358                  --              836
Racing facility rental...........      --              2,024              (2,017)               7
Marketing........................      --                497                  --              497
General and administrative
 expense.........................     565              1,507                 (24)           2,048
Legal expenses...................     222                407                  --              629
Merger related costs.............   1,270                234                  --            1,504
Termination payments.............     600              1,151                  --            1,751
                                  -------            -------            --------          -------

       Total.....................   3,135             24,252              (2,041)          25,346
                                  -------            -------            --------          -------

INCOME (LOSS) BEFORE TAXES.......     597             (1,189)                 --             (592)

INCOME TAX BENEFIT...............      --                472                  --              472
                                  -------            -------            --------          -------

NET INCOME (LOSS)................ $   597            $  (717)           $     --          $  (120)
                                  =======            =======            ========          =======

PER SHARE AMOUNTS /(1)/:
   NET INCOME (LOSS).............    $.05              $(.06)                               $(.01)
                                  =======            =======                              =======

   DIVIDEND......................    $.19                                                    $.19
                                  =======                                                 =======

WEIGHTED AVERAGE NUMBER OF
 COMMON SHARES OUTSTANDING /(1)/.  11,106             11,106                               11,106
                                  =======            =======                              =======
</TABLE>

(1)  After restatement to reflect the impact of the 1.927-to-1 stock split
     effected in the form of a stock dividend distributed on July 25, 1997 to
     shareholders of record on July 15, 1997.

See notes to financial statements.

                                       5
<PAGE>
 
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
(FORMERLY CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND
SUBSIDIARY)
 
SEPARATE AND COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  (UNAUDITED)
--------------------------------------------------------------------------------
 
<TABLE> 
<CAPTION> 
 
                                                        PATRIOT 
                                     PATRIOT           AMERICAN 
                                    AMERICAN          HOSPITALITY 
                                   HOSPITALITY,        OPERATING
                                       INC.             COMPANY          ELIMINATIONS       COMBINED
                                   ------------       -----------        ------------       --------
<S>                                <C>                <C>                <C>                <C> 
REVENUES:
   Pari-mutuel revenue.............. $    --            $23,534            $    --           $23,534
   Producer fees....................      --                398                 --               398
   Admissions, programs, parking
    and other racing income.........      --              2,731                 --             2,731

Concession sales....................      --              1,218                 --             1,218
   Rental of racing facility........   2,610                430             (2,610)              430
   Interest and dividend income.....     250                 93                 (4)              339
   Other income.....................       5                924                 --               929
                                     -------            -------            -------           -------

       Total........................   2,865             29,328             (2,614)           29,579
                                     -------            -------            -------           -------

COSTS AND EXPENSES:
   Purses and incentive awards......      --              9,639                 --             9,639
   Commissions paid to guest tracks.      --              1,599                 --             1,599
   Direct operating costs...........      --             10,574                 --            10,574
   Cost of concession sales.........      --                368                 --               368
   Depreciation and
    amortization....................     459                333                 --               792
   Racing facility rental...........      --              2,622             (2,610)               12
   Marketing........................      --                736                 --               736
   General and administrative
    expense.........................     432              1,632                 (4)            2,060
                                     -------            -------            -------           -------
       Total........................     891             27,503             (2,614)           25,780
                                     -------            -------            -------           -------

INCOME BEFORE INCOME TAX PROVISION..   1,974              1,825                 --             3,799

INCOME TAX PROVISION................      --                730                 --               730
                                     -------            -------            -------           -------

NET INCOME.......................... $ 1,974            $ 1,095            $    --           $ 3,069
                                     =======            =======            =======           =======

PER SHARE AMOUNTS /(1)/:
   NET INCOME....................... $   .18               $.10                                 $.28
                                     =======            =======                              =======

   DIVIDEND......................... $   .21                                                    $.21
                                     =======                                                 =======

WEIGHTED AVERAGE NUMBER OF COMMON
  SHARES OUTSTANDING /(1)/..........  11,106             11,106                               11,106
                                     =======            =======                              =======
</TABLE>

(1)  After restatement to reflect the impact of the 1.927-to-1 stock split
     effected in the form of a stock dividend distributed on July 25, 1997 to
     shareholders of record on July 15, 1997.

See notes to financial statements.

                                       6
<PAGE>
 
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
(FORMERLY CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND
SUBSIDIARY)
 
SEPARATE AND COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  (UNAUDITED)
--------------------------------------------------------------------------------
 
<TABLE> 
<CAPTION> 
 
                                                        PATRIOT 
                                     PATRIOT           AMERICAN 
                                    AMERICAN          HOSPITALITY 
                                   HOSPITALITY,        OPERATING
                                       INC.             COMPANY          ELIMINATIONS       COMBINED
                                   ------------       -----------        ------------       --------
<S>                                <C>                <C>                <C>                <C> 
REVENUES:
   Pari-mutuel revenue.............  $    --            $   687            $    --           $   687
   Admissions, programs, parking
    and other racing income........       --                808                 --               808
   Concession sales................       --                361                 --               361
   Rental of racing facility.......      357                413               (357)              413
   Interest and dividend income....       82                 19                 --               101
   Gain on sale of securities......    1,497                 --                 --             1,497
   Other income....................       22                274                 --               296
                                     -------            -------            -------           -------

       Total.......................    1,958              2,562               (357)            4,163
                                     -------            -------            -------           -------

COSTS AND EXPENSES:
   Purses and incentive awards.....       --                  1                 --                 1
   Direct operating costs..........       --              2,680                 --             2,680
   Cost of concession sales........       --                127                 --               127
   Depreciation and amortization...      239                177                 --               416
   Racing facility rental..........       --                358               (357)                1
   Marketing.......................       --                 32                 --                32
   General and administrative
    expense........................      410                779                 --             1,189
   Legal expenses..................      160                206                 --               366
   Merger related costs............      971                103                 --             1,074
   Termination payments............      600              1,151                 --             1,751
                                     -------            -------            -------           -------

       Total.......................    2,380              5,614               (357)            7,637
                                     -------            -------            -------           -------

LOSS BEFORE TAXES..................     (422)            (3,052)                --            (3,474)

INCOME TAX BENEFIT.................       --              1,220                 --             1,220
                                     -------            -------            -------           -------

NET LOSS...........................  $  (422)           $(1,832)           $    --           $(2,254)
                                     =======            =======            =======           =======

PER SHARE AMOUNTS /(1)/:
   NET LOSS........................    $(.04)             $(.16)                               $(.20)
                                     =======            =======                              =======

   DIVIDEND........................     $.19                                                    $.19
                                     =======                                                 =======

WEIGHTED AVERAGE NUMBER OF
 COMMON SHARES OUTSTANDING /(1)/...   11,106             11,106                               11,106
                                     =======            =======                              =======
</TABLE>


(1)  After restatement to reflect the impact of the 1.927-to-1 stock split
     effected in the form of a stock dividend distributed on July 25, 1997 to
     shareholders of record on July 15, 1997.

See notes to financial statements.

                                       7
<PAGE>
 
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
(FORMERLY CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND
SUBSIDIARY)
 
SEPARATE AND COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  (UNAUDITED)
--------------------------------------------------------------------------------
 
<TABLE> 
<CAPTION> 
 
                                                        PATRIOT 
                                     PATRIOT           AMERICAN 
                                    AMERICAN          HOSPITALITY 
                                   HOSPITALITY,        OPERATING
                                       INC.             COMPANY          ELIMINATIONS       COMBINED
                                   ------------       -----------        ------------       --------
<S>                                <C>                <C>                <C>                <C> 
REVENUES:
   Pari-mutuel revenue.............  $    --            $   701            $    --           $   701
   Admissions, programs, parking
    and other racing income........       --                796                 --               796
   Concession sales................       --                363                 --               363
   Rental of racing facility.......      398                290               (398)              290
   Interest and dividend income....      127                  7                 --               134
   Other income....................        2                479                 --               481
                                     -------            -------            -------           -------

       Total.......................      527              2,636               (398)            2,765
                                     -------            -------            -------           -------

COSTS AND EXPENSES:
   Purses and incentive awards.....       --                  5                 --                 5
   Direct operating costs..........       --              2,503                 --             2,503
   Cost of concession sales........       --                135                 --               135
   Depreciation and amortization...      229                167                 --               396
   Racing facility rental..........       --                404               (398)                6
   Marketing.......................       --                125                 --               125
   General and administrative
    expense........................      255                607                 --               862
                                     -------            -------            -------           -------
       Total.......................      484              3,946               (398)            4,032
                                     -------            -------            -------           -------

INCOME (LOSS) BEFORE TAXES.........       43             (1,310)                --            (1,267)

INCOME TAX BENEFIT.................       --                528                 --               528
                                     -------            -------            -------           -------

NET INCOME (LOSS)..................  $    43            $  (782)           $    --           $  (739)
                                     =======            =======            =======           =======

PER SHARE AMOUNTS /(1)/:
   NET INCOME (LOSS)...............  $    --              $(.07)                               $(.07)
                                     =======            =======                              =======

   DIVIDEND........................     $.21                                                    $.21
                                     =======                                                 =======

WEIGHTED AVERAGE NUMBER OF COMMON
   SHARES OUTSTANDING /(1)/........   11,106             11,106                               11,106
                                     =======            =======                              =======
</TABLE>

(1)  After restatement to reflect the impact of the 1.927-to-1 stock split
     effected in the form of a stock dividend distributed on July 25, 1997 to
     shareholders of record on July 15, 1997.


See notes to financial statements.

                                       8
<PAGE>
 
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
(FORMERLY CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND
SUBSIDIARY)
 
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
 
<TABLE> 
<CAPTION> 
 
                                            JUNE 30,      DECEMBER 31,
                                              1997           1996
                                           -----------    ------------
<S>                                        <C>            <C>  
ASSETS                                     (UNAUDITED)
CURRENT ASSETS:
   Cash and cash equivalents..............  $  4,256       $  2,027
   Securities available for sale (at......        --          2,612
    fair value)
   Securities held to maturity (at cost)..        --          4,463
   Accounts receivable (net of allowance
    for doubtful accounts of $22 in 1997
    and $77 in 1996)......................       163            527
   Prepaid expenses and other current
    assets................................       670            525
                                            --------       --------

       Total current assets...............     5,089         10,154
                                            --------       --------

PROPERTY, PLANT AND EQUIPMENT:
   Land...................................        --            691
   Land held for sale.....................     7,557          3,083
   Racing plant...........................    24,715         24,177
   Tennis facility held for sale..........       308            308
   Equipment and leasehold improvements...    11,428         11,032
                                            --------       --------

       Total..............................    44,008         39,291

   Accumulated depreciation and
    amortization..........................   (22,928)       (22,092)
                                            --------       --------

   Property, plant and equipment - net....    21,080         17,199
                                            --------       --------

OTHER ASSETS (net of accumulated
 amortization of $1,374 in 1997 and 1996).       101             96
                                            --------       --------

DEFERRED INCOME TAXES.....................       227            227
                                            --------       --------

TOTAL ASSETS..............................  $ 26,497       $ 27,676
                                            ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable.......................  $    892       $  1,328
   Accrued liabilities....................     4,649          1,983
   Note payable...........................     2,900          2,900
                                            --------       --------

       Total current liabilities..........     8,441          6,211
                                            --------       --------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Common Stock, $.01 par value,
    authorized 10,000,000 shares;
    issued and outstanding
    11,105,796 shares /(1)/...............       116            116
   Additional paid in capital.............    18,384         18,385
   Retained earnings (deficit)............      (444)         1,750
   Unrealized gain on securities
    available for sale....................        --          1,214
                                            --------       --------

       Total stockholders' equity.........    18,056         21,465
                                            --------       --------

TOTAL LIABILITIES AND STOCKHOLDERS'
 EQUITY...................................  $ 26,497       $ 27,676
                                            ========       ========
</TABLE>

(1)  After restatement to reflect the impact of the 1.927-to-1 stock split
     effected in the form of a stock dividend distributed on July 25, 1997 to
     shareholders of record on July 15, 1997.

See notes to financial statements.

                                       9
<PAGE>
 
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
(FORMERLY CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND
SUBSIDIARY)
 
COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(IN THOUSANDS) (UNAUDITED)
--------------------------------------------------------------------------------
 
<TABLE> 
<CAPTION> 
                                            1997     1996
                                          -------- --------
<S>                                       <C>      <C>  
OPERATING ACTIVITIES:
   Net income (loss)..................... $  (120)  $ 3,069
   Adjustments to reconcile net income
    to net cash provided by (used in)
    operating activities:
    Depreciation and amortization........     836       792
    Gain on sale of securities...........  (1,497)       --
    Changes in operating assets and
     liabilities:
       Accounts receivable...............     364     2,258
       Amounts held on deposit for
        Thoroughbred horse owners........      --     2,920
       Income taxes receivable and
        payable..........................      --       637
       Prepaid expenses and other
        current assets...................    (150)     (414)
       Accounts payable..................    (436)   (3,417)
       Accrued liabilities...............   2,666      (975)
       Accrued purses....................      --      (687)
       Due to Thoroughbred horse owners..      --    (2,920)
       Uncashed pari-mutuel tickets and
        vouchers.........................      --    (4,321)
                                          -------   -------

       Net cash provided by (used in)
        operating activities.............   1,663    (3,058)
                                          -------   -------

INVESTING ACTIVITIES:
   Sale of securities available for sale.   2,895        --
   Purchase of securities held to
    maturity.............................  (2,000)   (8,382)
   Maturities of securities held to
    maturity.............................   6,463     8,575
   Purchase of property, plant and
    equipment............................  (4,717)   (1,631)
                                          -------   -------

       Net cash provided by (used in)
        investing activities.............   2,641    (1,438)
                                          -------   -------

FINANCING ACTIVITIES:
   Proceeds from note payable - bank.....      --     2,000
   Dividends.............................  (2,075)   (2,305)
                                          -------   -------

       Net cash used in financing
        activities.......................  (2,075)     (305)
                                          -------   -------

INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS.............................   2,229    (4,801)

CASH AND CASH EQUIVALENTS AT BEGINNING
 OF PERIOD...............................   2,027     7,307
                                          -------   -------

CASH AND CASH EQUIVALENTS AT END OF
 PERIOD.................................. $ 4,256   $ 2,506
                                          =======   =======
</TABLE>


See notes to financial statements.

                                       10
<PAGE>
 
PATRIOT AMERICAN HOSPITALITY, INC. 
(FORMERLY CALIFORNIA JOCKEY CLUB) 
 
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
 
<TABLE> 
<CAPTION> 
                                             JUNE 30,    DECEMBER 31,
                                               1997          1996
                                           -----------   ------------
<S>                                        <C>           <C>  
ASSETS                                    (UNAUDITED)
 
CURRENT ASSETS:
   Cash and cash equivalents..............  $  3,956       $  1,138
   Securities available for sale (at
    fair value)...........................        --          2,612
   Securities held to maturity (at cost)..        --          4,463
   Accounts receivable....................        20             36
   Receivable from Patriot American
    Hospitality Operating Company.........     1,299          2,332
   Prepaid expenses.......................        51              3
                                            --------       --------

       Total current assets...............     5,326         10,584
                                            --------       --------

PROPERTY, PLANT AND EQUIPMENT:
   Land...................................        --            691
   Land held for sale.....................     7,557          3,083
   Racing plant...........................    24,715         24,177
   Tennis facility held for sale..........       308            308
   Equipment..............................       460            460
                                            --------       --------

       Total..............................    33,040         28,719

   Accumulated depreciation...............   (16,407)       (15,929)
                                            --------       --------

       Property, plant and equipment -
        net...............................    16,633         12,790
                                            --------       --------

TOTAL ASSETS..............................  $ 21,959       $ 23,374
                                            ========       ========


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable.......................  $    143       $    184
   Accrued liabilities....................     1,827            509
   Note payable...........................     2,900          2,900
                                            --------       --------

       Total current liabilities..........     4,870          3,593
                                            --------       --------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Common Stock, $.01 par value,
    authorized 10,000,000 shares;
    issued and outstanding
    11,105,796 shares /(1)/...............        58             58
   Additional paid in capital.............    17,597         17,597
   Retained earnings (deficit)............      (566)           912
   Unrealized gain on securities
    available for sale....................        --          1,214
                                            --------       --------

       Total stockholders' equity.........    17,089         19,781
                                            --------       --------

TOTAL LIABILITIES AND STOCKHOLDERS'
 EQUITY...................................  $ 21,959       $ 23,374
                                            ========       ========
</TABLE>

(1)  After restatement to reflect the impact of the 1.927-to-1 stock split
     effected in the form of a stock dividend distributed on July 25, 1997 to
     shareholders of record on July 15, 1997.


See notes to financial statements.

                                       11
<PAGE>
 
PATRIOT AMERICAN HOSPITALITY, INC.
(FORMERLY CALIFORNIA JOCKEY CLUB)
 
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(IN THOUSANDS)     (UNAUDITED)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
 
                                           1997      1996
                                         --------  --------
<S>                                      <C>       <C>
OPERATING ACTIVITIES:
  Net income............................. $   597   $ 1,974
  Adjustments to reconcile net income
   to net cash provided by operating
   activities:
   Depreciation..........................     478       459
   Gain on sale of securities............  (1,497)       --
   Changes in operating assets and
    liabilities:
    Accounts receivable..................      16        (2)
    Receivable from Patriot American
     Hospitality Operating Company.......   1,033       349      
    Prepaid expenses and other assets....     (48)       --
    Accounts payable.....................     (41)      (62)
    Accrued liabilities..................   1,318        77
                                          -------   -------

    Net cash provided by operating
     activities..........................   1,856     2,795
                                          -------   -------

INVESTING ACTIVITIES:
  Sale of securities available for sale..   2,895        --
  Purchase of securities held to
   maturity..............................  (2,000)   (8,382)
  Maturities of securities held to
   maturity..............................   6,463     8,575
  Purchase of property, plant and
   equipment.............................  (4,321)     (747)
                                          -------   -------
    Net cash provided by (used in)
     investing activities................   3,037      (554)
                                          -------   -------

FINANCING ACTIVITIES:
   Dividends.............................  (2,075)   (2,305)
                                          -------   -------

    Net cash used in financing activities  (2,075)   (2,305)
                                          -------   -------

INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS.............................   2,818       (64)

CASH AND CASH EQUIVALENTS AT BEGINNING
 OF PERIOD...............................   1,138       989
                                          -------   -------

CASH AND CASH EQUIVALENTS AT END OF
 PERIOD.................................. $ 3,956   $   925
                                          =======   =======


</TABLE>


See notes to financial statements.

                                       12
<PAGE>
 
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
(FORMERLY BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY) 
 
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
 
<TABLE> 
<CAPTION> 
 
                                             JUNE 30,    DECEMBER 31,
                                               1997          1996
                                             --------    ------------
<S>                                        <C>           <C>
ASSETS                                     (UNAUDITED)
 
CURRENT ASSETS:
 Cash and cash equivalents...............  $   300        $   889
 Accounts receivable (net of
  allowance for doubtful accounts of
  $22 in 1997 and $77 in 1996)...........      143            491
 Prepaid expenses and other current
  assets.................................      619            522
                                           -------        -------

       Total current assets..............    1,062          1,902
                                           -------        -------

PROPERTY, PLANT AND EQUIPMENT:
 Equipment and leasehold improvements....   10,968         10,572
 Accumulated depreciation and            
  amortization...........................   (6,521)        (6,163)
                                           -------        -------  
 Property, plant and equipment - net.....    4,447          4,409
                                           -------        -------

OTHER ASSETS (net of accumulated
 amortization of $1,374 in 1997 and 1996)      101             96
                                           -------        -------

DEFERRED INCOME TAXES....................      227            227
                                           -------        -------

TOTAL ASSETS.............................  $ 5,837        $ 6,634
                                           =======        =======

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
 Accounts payable........................  $   749        $ 1,144
 Accrued liabilities.....................    2,822          1,474
 Payable to Patriot American
  Hospitality, Inc.......................    1,299          2,332
                                           -------        -------
       Total current liabilities.........    4,870          4,950
                                           -------        -------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
 Common Stock .01 par value
  authorized 10,000,000 shares;
  issued and outstanding
  11,105,796 shares /(1)/................       58             58
 Additional paid in capital..............      787            788
 Retained earnings.......................      122            838
                                           -------        -------

       Total stockholders' equity........      967          1,684
                                           -------        -------

TOTAL LIABILITIES AND STOCKHOLDERS'
 EQUITY..................................  $ 5,837        $ 6,634
                                           =======        =======
</TABLE>

(1)  After restatement to reflect the impact of the 1.927-to-1 stock split
     effected in the form of a stock dividend distributed on July 25, 1997 to
     shareholders of record on July 15, 1997.


See notes to financial statements.

                                       13
<PAGE>
 
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
(FORMERLY BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY)
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(IN THOUSANDS)  (UNAUDITED)
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                            1997      1996
                                          --------  --------
<S>                                       <C>       <C>
OPERATING ACTIVITIES:
   Net income (loss)....................  $  (717)  $ 1,095
   Adjustments to reconcile net income
    to net cash
    used in operating activities:
    Depreciation and amortization.......      358       333
    Changes in operating assets and
     liabilities:
    Accounts receivable.................      348     2,260
    Amounts held on deposit for
     Thoroughbred horse owners..........       --     2,920
    Income taxes receivable and
     payable............................       --       637
     Prepaid expenses and other assets..     (102)     (414)
     Accounts payable...................     (395)   (3,355)
     Accrued liabilities................    1,348    (1,052)
     Accrued purses.....................       --      (687)
     Due to Thoroughbred horse owners...       --    (2,920)
     Payable to Patriot American
      Hospitality, Inc..................   (1,033)     (349)
     Uncashed pari-mutuel tickets and
      vouchers..........................       --    (4,321)
                                          -------   -------

      Net cash used in operating
       activities.......................     (193)   (5,853)
                                          -------   -------

INVESTING ACTIVITIES:
   Purchase of property, plant and
    equipment...........................     (396)     (884)
                                          -------   -------
      Net cash used in investing
       activities.......................     (396)     (884)
                                          -------   -------

FINANCING ACTIVITIES:
   Proceeds from note payable - bank....       --     2,000
                                          -------   -------
      Net cash provided by financing
       activities.......................       --     2,000
                                          -------   -------

DECREASE IN CASH AND CASH EQUIVALENTS...     (589)   (4,737)

CASH AND CASH EQUIVALENTS AT BEGINNING
 OF PERIOD..............................      889     6,318
                                          -------   -------

CASH AND CASH EQUIVALENTS AT END OF
 PERIOD.................................  $   300   $ 1,581
                                          =======   =======

</TABLE>


See notes to financial statements.

                                       14
<PAGE>
 
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
(FORMERLY CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND 
SUBSIDIARY)

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          The accompanying unaudited financial statements include condensed
unaudited financial statements of Patriot American Hospitality, Inc. (the
"Corporation") formerly known as California Jockey Club ("Cal Jockey") and
Patriot American Hospitality Operating Company (collectively with its
subsidiaries, the "Operating Company") formerly known as Bay Meadows Operating
Company (collectively with its subsidiary, "Bay Meadows") on a combined basis
and for each company individually. The term "Companies" as used herein includes
the Corporation and the Operating Company. These combined financial statements
include the accounts of Cal Jockey and Bay Meadows and its wholly-owned
subsidiary. All significant affiliate and intercompany balances and transactions
have been eliminated. The accompanying condensed unaudited financial statements
should be read in conjunction with Cal Jockey's and Bay Meadows' 1996 Annual
Report on Form 10-K for the year ended December 31, 1996. Net income per share
is computed as net income divided by weighted average shares outstanding.
Certain prior year amounts have been reclassified to conform to the 1997
presentation.

          In the opinion of management, all adjustments (consisting of only
recurring adjustments) considered necessary for a fair presentation of the
financial condition and results of operations for the Corporation and the
Operating Company individually, have been included in the financial statements.
The results of operations for the six months ended June 30, 1997, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997, because of the seasonal nature of the operations.

          On July 10, 1997, the Board of Directors declared a 1.927-for-1 stock
split on common stock effected in the form of a stock dividend distributed on
July 25, 1997 to shareholders of record on July 15, 1997. Unless otherwise
indicated, all references in the combined financial statements to the number of
shares, per share amounts, and market prices of the common stock and options to
purchase common stock have been restated to reflect the impact of the stock
split. The total number of authorized shares has not been restated as a result
of the 1.927-for-1 stock split. The total number of authorized shares has been
increased as a result of the Merger (see discussion of the Merger below).

2.   NEW ACCOUNTING STANDARD

          In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("Statement 128"). Statement 128 specifies the computation, presentation and
disclosure requirements for basic earnings per share and diluted earnings per
share. Management believes that adoption of Statement 128 will not have a
material effect of the Companies' earnings per share.

3.   SUBSEQUENT EVENTS:

          On October 31, 1996, Cal Jockey and Bay Meadows entered into a merger
agreement with the entity formerly known as Patriot American Hospitality, Inc.
("Patriot").  The parties, together with Patriot American Hospitality
Partnership, L.P., a limited partnership and subsidiary of Patriot (the "Realty
Partnership"), thereafter entered into an Agreement and Plan of Merger, dated as
of February 24, 1997 (the "Merger Agreement"), which by its terms supersedes the
October 31, 1996 Agreement and more fully details the transactions to be
consummated by the parties.  This agreement was approved unanimously by the
respective Boards of Directors of Patriot, Cal Jockey and Bay Meadows and was
approved by the shareholders of each of Patriot, Cal Jockey and Bay Meadows at
the respective special meetings of shareholders on July 1, 1997.

          On July 1, 1997, pursuant to the Merger Agreement, Patriot merged with
and into Cal Jockey (the "Merger"), with Cal Jockey being the surviving legal
entity. In connection with the Merger, Cal Jockey changed its name to "Patriot
American Hospitality, Inc." and Bay Meadows changed its name to "Patriot
American Hospitality Operating Company."

                                       15
<PAGE>
 
PATRIOT AMERICAN HOSPITALITY, INC. AND
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
(FORMERLY CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND 
SUBSIDIARY)

NOTES TO FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
--------------------------------------------------------------------------------


          Each share of the Corporation's common stock is "paired" and trades as
a single unit with one share of the Operating Company's common stock. By
operation of the Merger, each issued and outstanding share of Patriot's common
stock was converted into 0.51895 shares of the Corporation's common stock and
0.51895 shares of the Operating Company's common stock (prior to giving effect
to the 1.927-for-1 stock split in July 1997). Each paired share of Cal Jockey
and Bay Meadows common stock remains outstanding and represents the same number
of paired shares of the Corporation and the Operating Company.

          In connection with the Merger, Bay Meadows formed an operating
partnership (the "Operating Partnership") into which Bay Meadows contributed its
assets in exchange for limited partnership units of the Operating Partnership,
and Cal Jockey contributed certain of its assets to the Realty Partnership in
exchange for limited partnership units of the Realty Partnership (collectively,
the Operating Partnership and the Realty Partnership are referred to herein as
the "Patriot Partnerships"). Upon completion of the Merger and the transactions
contemplated by the Merger Agreement, substantially all of the operations of the
Corporation and the Operating Company will be conducted through the Patriot
Partnerships.

          The Corporation and the Operating Company incurred certain legal and
termination costs as a result of the Merger. The Companies' Separate and
Combined Statements of Operations for the six months ended June 30, 1997 include
$3,884 of such termination, legal and Merger related expenses.

          See Patriot's financial statements included elsewhere in this Joint
Quarterly Report for discussion of events which occurred subsequent to the July
1, 1997 Merger.



 

                                       16
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

               INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS


     Following are unaudited consolidated financial statements for the entity
formerly known as Patriot American Hospitality, Inc. ("Patriot") for the
quarterly period ended June 30, 1997.  On July 1, 1997, Patriot merged with and
into California Jockey Club (the "Merger"), with California Jockey Club being
the surviving legal entity.

     The following financial data represents the interim financial information
Patriot would have been required to file with the Securities and Exchange
Commission for the quarterly period ended June 30, 1997.  This interim financial
information also includes interim financial statements of certain of the lessees
who are responsible for operating the hotels owned by Patriot and its
subsidiaries.

 
 
 

                                       17
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

                          CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                            JUNE 30,     DECEMBER 31,
                                              1997          1996
                                          -----------    ------------
<S>                                       <C>           <C>
                                          (UNAUDITED)
ASSETS
Investment in hotel properties and land
   held for development, net of
   accumulated depreciation of $37,930
   in 1997 and $19,815 in 1996...........  $1,011,940      $641,825
Cash and cash equivalents, including
   capital improvement reserves of
   $4,473 in 1997 and $2,458 in 1996.....       8,975         6,604
Lease revenue receivable.................      12,353         5,351
Receivables from selling entities........         722           847
Investments in unconsolidated
   subsidiaries..........................      12,448        11,291
Mortgage notes and other receivables
   from unconsolidated subsidiaries......      77,324        72,209
Mortgage and promissory notes and other
   receivables from Lessees and their
   affiliates............................      30,896           631
Inventory................................       2,150         1,648
Deferred expenses, net of accumulated
   amortization of $1,646 in 1997
   and $750 in 1996......................       9,656         3,063
Prepaid expenses and other assets........      10,937        17,462
                                           ----------      --------
         Total assets....................  $1,177,401      $760,931
                                           ==========      ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under line of credit and
   mortgage notes........................  $  584,294      $214,339
Dividends and distributions payable......          --        13,129
Accounts payable and accrued expenses....      10,069        10,117
Due to unconsolidated subsidiaries.......       6,314         6,034
Due to PAH RSI, L.L.C....................       1,944            --
Minority interest in Realty Partnership..     118,151        68,562
Minority interest in other partnerships..      15,767        11,711
Commitments and contingencies............          --            --
Shareholders' equity:
  Preferred stock, no par value,
    20,000,000 shares authorized,
    no shares issued and outstanding.....          --            --
  Common stock, no par value, 200,000,000
    shares authorized, shares issued and
    outstanding were 44,311,225 in 1997
    and 43,613,496 in 1996 /(1)/.........          --            --
  Paid-in capital........................     460,029       442,540
  Unearned stock compensation, net of
    accumulated amortization
    of $3,066 in 1997 and $1,139 in 1996.     (16,397)       (5,427)
  Distributions in excess of retained 
    earnings.............................      (2,770)          (74)
                                           ----------      --------
         Total shareholders' equity......     440,862       437,039
                                           ----------      --------
         Total liabilities and
          shareholders' equity...........  $1,177,401      $760,931
                                           ==========      ========

</TABLE>

(1)  After restatement to reflect the impact of the 2-for-1 stock split effected
in the form of a stock dividend distributed on March 18, 1997 to shareholders of
record on March 7, 1997, after conversion of each Patriot share into 0.51895
paired shares issued in the merger with California Jockey Club, and after
restatement to reflect the impact of the 1.927-for-1 stock split effected in the
form of a stock dividend distributed on July 25, 1997 to shareholders of record
on July 15, 1997.


                       See notes to financial statements.

                                       18
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
 
 
                                           THREE MONTHS ENDED     SIX MONTHS ENDED
                                                JUNE 30,              JUNE 30,
                                           ------------------   -------------------
                                             1997      1996       1997       1996
                                           ------------------   -------------------
<S>                                        <C>        <C>       <C>        <C>
Revenue:
Participating lease revenue.............   $36,973    $17,913    $71,986    $30,269
Interest and other income...............       757         94      1,132        201
                                           -------    -------    -------    -------
Total revenue...........................    37,730     18,007     73,118     30,470
                                           -------    -------    -------    -------
 
Expenses:
Real estate and personal property taxes    
 and casualty insurance.................     3,765      1,460      6,966      2,542
Ground lease expense....................       338        223        683        300
General and administrative..............     2,299        951      5,081      1,892
Interest expense........................     9,523      2,171     17,328      2,772
Depreciation and amortization...........     9,510      3,946     18,006      6,784
                                           -------    -------    -------    -------
Total expenses..........................    25,435      8,751     48,064     14,290
                                           -------    -------    -------    -------
Income before equity in earnings of
 unconsolidated subsidiaries and
 minority interest......................    12,295      9,256     25,054     16,180
Equity in earnings of unconsolidated
 subsidiaries...........................     2,072      1,243      3,093      2,605
                                           -------    -------    -------    -------
Income before minority interest.........    14,367     10,499     28,147     18,785
 
Minority interest in Realty Partnership.    (2,302)    (1,816)    (4,534)    (2,974)
Minority interest in other partnerships.      (247)        --       (447)        --
                                           -------    -------    -------    -------
Net income applicable to common
 shareholders...........................   $11,818    $ 8,683    $23,166    $15,811
                                           =======    =======    =======    =======
                                                  
 
Net income per common share /(1)/.......     $0.26      $0.29      $0.52      $0.53
                                           =======    =======    =======    =======
 
Dividend per common share /(1)/.........     $0.32      $0.24      $0.58      $0.48
                                           =======    =======    =======    =======
 
Weighted average number of common
 shares and common share equivalents
 outstanding /(1)/......................    44,985     30,349     44,783     29,906
                                           =======    =======    =======    =======
</TABLE>

(1)  After restatement to reflect the impact of the 2-for-1 stock split effected
in the form of a stock dividend distributed on March 18, 1997 to shareholders of
record on March 7, 1997, after conversion of each Patriot share into 0.51895
paired shares issued in the merger with California Jockey Club, and after
restatement to reflect the impact of the 1.927-for-1 stock split effected in the
form of a stock dividend distributed on July 25, 1997 to shareholders of record
on July 15, 1997.



                       See notes to financial statements.

                                       19
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                SIX MONTHS
                                              ENDED JUNE 30,
                                          ---------------------
                                             1997        1996
                                          ---------   ---------
<S>                                       <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income...........................  $  23,166   $  15,811
   Adjustments to reconcile net income 
     to net cash provided by operating
     activities:
   Depreciation........................      17,949       6,724 
   Amortization of unearned stock          
     compensation......................       1,927         284 
   Amortization of deferred loan costs          770         122
   Amortization of lease inducement         
     costs.............................          72          46 
   Other amortization..................          57          60
   Payment of interest on notes 
     receivable from Unconsolidated 
     subsidiaries......................       1,394       2,129
   Accrued interest added to notes 
     receivable from Lessees and
     their affiliates..................        (576)         --
   Issue common stock to directors....           --          37
   Equity in earnings of                   
     unconsolidated subsidiaries.......      (3,093)     (2,605) 
   Minority interest in income of          
     Realty Partnership................       4,534       2,974 
   Minority interest in income of          
     other partnerships................         447          -- 
   Changes in assets and liabilities:
   Lease revenue receivable...........       (7,002)     (1,947)
   Receivables from selling entities..            7          --
   Receivables from Lessees...........          311          --
   Prepaid expenses and other assets..         (296)        152
   Accounts payable and other accrued      
     expenses..........................        (337)      1,037 
   Due to unconsolidated subsidiaries.          280         (21)
   Due to PAH RSI, L.L.C..............       (1,147)         --
                                          ---------   ---------
          Net cash provided by            
           operating activities.........     38,463      24,803
                                          ---------   --------- 

CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of hotel properties and     
    related working capital assets......   (242,625)   (139,152)
   Improvements and additions to hotel                         
    properties..........................    (33,636)     (3,619)
   Collection of receivables from                              
    selling entities....................        287         572 
   Prepaid acquisition costs............     (7,744)     (2,166)
   Investment in unconsolidated            
    subsidiaries........................     (1,574)         --
   Investment in mortgage and                          
    promissory notes receivable from                        
    Lessees and their affiliates            (30,035)         -- 
   Principal payment received on other    
    note receivable.....................         --         101
                                          ---------   --------- 
          Net cash used in investing      
           activities...................   (315,327)   (144,264)
                                          ---------   --------- 

CASH FLOWS FROM FINANCING ACTIVITIES:
   Borrowings under line of credit and      
    mortgage note.......................    354,854     141,161 
   Repay borrowings under line of credit    (13,388)    (39,500)
   Payment of deferred loan costs.......     (7,358)       (846)
   Payment of offering costs............        (79)     (2,477)
   Net proceeds of private placement....         --      39,417
   Proceeds from exercise of options....         56          --
   Contribution received from minority      
    interest in other partnerships......      3,608          -- 
   Payments to redeem OP Units..........    (14,441)         --
   Dividends and distributions paid.....    (44,017)    (16,388)
                                          ---------   ---------
          Net cash provided by            
           financing activities.........    279,235     121,367
                                          ---------   --------- 

Net increase in cash and cash             
 equivalents............................      2,371       1,906
Cash and cash equivalents at beginning                         
 of period..............................      6,604       4,769
                                          ---------   --------- 
Cash and cash equivalents at end of       
 period.................................  $   8,975   $   6,675
                                          =========   ========= 
Supplemental disclosure of cash flow
 information:
   Cash paid during the period for        
    interest............................  $  17,250   $   2,713
                                          =========   ========= 
</TABLE>

See notes to financial statements.

                                       20
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)


1.   ORGANIZATION AND BASIS OF PRESENTATION:

          Patriot American Hospitality, Inc. (collectively with its
subsidiaries, "Patriot"), a Virginia corporation, was formed April 17, 1995 as a
self-administered real estate investment trust ("REIT") for the purpose of
acquiring equity interests in hotel properties. On October 2, 1995, Patriot
completed an initial public offering (the "Initial Offering") of 29,210,000
shares of its common stock and commenced operations.

          Patriot, through its wholly-owned subsidiary, PAH GP, Inc., is the
sole general partner and the holder of a 1.0% general partnership interest in
Patriot American Hospitality Partnership, L.P. (the "Realty Partnership"). In
addition, Patriot, through its wholly-owned subsidiary, PAH LP, Inc., owns an
approximate 83.4% limited partnership interest in the Realty Partnership as of
June 30, 1997.

          At June 30, 1997, Patriot, through the Realty Partnership and other
subsidiaries, owned interests in 56 hotels in 22 states with an aggregate of
13,355 guest rooms.

          Patriot leases each of its hotels, except the Crowne Plaza Ravinia
Hotel and the Marriott WindWatch Hotel, which are separately owned through
special purpose entities, to lessees who are responsible for operating the
hotels (the "Lessees"). Patriot leases 25 of its hotel investments to CHC Lease
Partners for staggered terms of ten to twelve years pursuant to separate
participating leases providing for the payment of the greater of base or
participating rent, plus certain additional charges, as applicable (the
"Participating Leases"). Nine of the hotels are leased to NorthCoast Hotels,
L.L.C. ("NorthCoast Lessee") under similar Participating Lease agreements. Eight
of the hotels are leased to PAH RSI, L.L.C. ("PAH RSI Lessee") under similar
Participating Lease agreements. DTR North Canton, Inc. (the "Doubletree Lessee")
leases six hotels; Crow Hotel Lessee, Inc. (the "Wyndham Lessee") leases two
hotels; Metro Hotels Leasing Corporation ("Metro Lease Partners") leases one
hotel and Grand Heritage Leasing, L.L.C. (the "Grand Heritage Lessee") leases
three hotels under similar Participating Lease agreements. The Lessees, in turn,
have entered into separate agreements with hotel management entities (the
"Operators") to manage the hotels. The Crowne Plaza Ravinia Hotel and the
Marriott WindWatch Hotel acquisitions were structured without lessees and are
managed directly by Holiday Inns, Inc. and Marriott International, Inc.,
respectively.

          These unaudited consolidated financial statements include the accounts
of Patriot, its wholly-owned subsidiaries and the partnerships in which Patriot
owns at least 50% controlling interest. All significant intercompany accounts
and transactions have been eliminated. These financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in Patriot's Annual Report
on Form 10-K for the year ended December 31, 1996. Certain prior year amounts
have been reclassified to conform to current period presentation.

          On January 30, 1997, the Board of Directors declared a 2-for-1 stock
split on Patriot's common stock effected in the form of a stock dividend
distributed on March 18, 1997 to shareholders of record on March 7, 1997. The
number of units of limited partnership interest in the Realty Partnership ("OP
Units") outstanding did not change after the 2-for-1 stock split.

          On July 1, 1997, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") between Patriot, California Jockey Club ("Cal Jockey") and
Bay Meadows Operating Company ("Bay Meadows"), Patriot merged with and into Cal
Jockey (the "Merger"), with Cal Jockey being the surviving legal entity. Cal
Jockey's shares of common stock are paired and trade together with the shares of
common stock of Bay Meadows as a single unit pursuant to a stock pairing
arrangement. In connection with the Merger, Cal Jockey changed its name to
Patriot American Hospitality, Inc. (the "Corporation") and Bay Meadows changed
its name to Patriot American Hospitality 

                                       21
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                  (UNAUDITED)
                 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)


Operating Company (the "Operating Company"). By operation of the Merger, each
issued and outstanding share of Patriot's common stock was converted into
0.51895 shares of the Corporation's common stock and 0.51895 shares of the
Operating Company's common stock (prior to giving effect to the 1.927-for-1
stock split discussed below).

          In addition, on July 10, 1997, the respective Boards of Directors of
the Corporation and the Operating Company declared a 1.927-for-1 stock split on
its shares of common stock effected in the form of a stock dividend distributed
on July 25, 1997 to shareholders of record on July 15, 1997.

          Unless otherwise indicated, all references in the consolidated
financial statements to the number of shares, per share amounts, and market
prices of the common stock and options to purchase common stock have been
restated to reflect the impact of the conversion of each share of Patriot common
stock into 0.51895 paired shares issued in the Merger and the 1.927-for-1 stock
split. In addition, all references in the consolidated financial statements to
the number of shares, per share amounts, and market prices of the common stock
and options to purchase common stock related to periods prior to the 2-for-1
stock split distributed in March 1997 have been restated to reflect the impact
of such stock split.

          As a result of the 2-for-1 stock split in March 1997 and the Merger
and the 1.927-for-1 stock split in July 1997, the number of OP Units outstanding
and the OP Unit conversion factor will be adjusted to re-establish a 1-for-1
exchange ratio of OP Units to common shares.

          In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("Statement 128"). Statement 128 specifies the computation, presentation and
disclosure requirements for basic earnings per share and diluted earnings per
share. Management believes that adoption of Statement 128 will not have a
material effect on Patriot's earnings per share.
 
          Repairs and maintenance of hotel properties owned by Patriot are paid
by the Lessees. Major renewals and betterments are capitalized. Interest
associated with borrowings used to finance substantial hotel additions is
capitalized and depreciated over the estimated useful life of the assets.
Interest of $951 was capitalized for the six months ended June 30, 1997. No
interest was capitalized for the six months ended June 30, 1996.

2.   ACQUISITION OF HOTEL PROPERTIES:

          On January 16, and January 17, 1997, Patriot acquired Resorts Limited
Partnership, Carefree Resorts Corporation and their assets (the "Carefree
Acquisition"). The assets of these entities include a 100% fee interest in The
Boulders near Scottsdale, Arizona and The Lodge at Ventana Canyon in Tucson,
Arizona, and a 50% partnership interest in the entities that own The Peaks
Resort and Spa at Telluride, Colorado and Carmel Valley Ranch in Carmel,
California. The four resort properties are collectively referred to as the
"Carefree Resorts."

          Additionally, on January 17, 1997, Patriot acquired from The Morgan
Stanley Real Estate Fund, L.P. and certain of its affiliates the remaining 50%
partnership interest in the entities that own The Peaks Resort and Spa and
Carmel Valley Ranch (the "Morgan Stanley Acquisition").

          The aggregate purchase price of the Carefree Acquisition and the
Morgan Stanley Acquisition was approximately $263,600 and consisted of 1,295,077
OP Units valued at approximately $58,662, the assumption of approximately
$28,489 of debt related to The Lodge at Ventana Canyon, the assumption of a net
working capital liability of approximately $5,900 and approximately $170,549 in
cash (including closing costs and loan commitment fees). The cash portion of the
purchase price was financed primarily with funds drawn on Patriot's revolving
credit facility (the "Line of Credit").

          Patriot has leased the Carefree Resorts to PAH RSI Lessee for a period
of one year pursuant to separate Participating Lease agreements. PAH RSI Lessee
is owned and controlled by certain executive officers of Patriot.

                                       22
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                  (UNAUDITED)
                 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)


          On January 14, 1997, Patriot, through the Realty Partnership, acquired
the 190-room Radisson Hotel in Overland Park, Kansas for approximately $7,700,
which was financed primarily with funds drawn on the Line of Credit. The hotel
is leased for a period of ten years to CHC Lease Partners pursuant to a
Participating Lease agreement.

          On January 29, 1997, Patriot, through the Realty Partnership, acquired
the 313-room Radisson Hotel in Northbrook, Illinois for approximately $15,600,
which was financed primarily with funds drawn on the Line of Credit. The hotel
is leased to PAH RSI Lessee for a period of one year pursuant to a Participating
Lease agreement.

          On March 6, 1997, Patriot, through the Realty Partnership, acquired
the 112-room Holiday Inn Redmont Hotel in Birmingham, Alabama for approximately
$2,700. The acquisition was financed primarily with funds drawn on the Line of
Credit. The hotel is leased to Grand Heritage Lessee for a period of ten years
pursuant to a Participating Lease agreement.
 
          In addition, during the first quarter of 1997, Patriot, through a
consolidated partnership (see Note 7), acquired the 230-room Doubletree Guest
Suites Hotel (formerly the Luxeford Suites Hotel) in Minneapolis, Minnesota for
approximately $18,600. The hotel is leased to PAH RSI Lessee for a one-year
period pursuant to a Participating Lease agreement. The acquisition of the hotel
was financed through a combination of cash and funds drawn on the Line of
Credit.
 
          On April 14, 1997, Patriot, through a consolidated partnership (see
Note 7), acquired the 298-room Sheraton Park Place Hotel in Minneapolis,
Minnesota for approximately $17,000. The hotel is leased to PAH RSI Lessee for a
one-year period pursuant to a Participating Lease agreement. The acquisition of
the hotel was financed through a combination of cash and funds drawn on the Line
of Credit.
 
          On May 15, 1997, Patriot, through the Realty Partnership, acquired the
385-room Hilton Inn Myrtle Beach in Myrtle Beach, South Carolina for
approximately $35,000. The acquisition was financed primarily with funds drawn
on the Line of Credit. The hotel is leased to PAH RSI Lessee for a period of ten
years pursuant to a Participating Lease agreement.
 
3.   LAND HELD FOR DEVELOPMENT:

          In connection with the acquisition of the Carefree Resorts, Patriot
acquired certain land held for development, including commercial and residential
land and construction in progress of single-family homes.  A balance of
approximately $26,280 of land held for development is included in Investment in
Hotel Properties and Land Held for Development in the accompanying balance sheet
as of June 30, 1997.  Patriot recorded proceeds of approximately $4,896 as a
result of land sales for the six months ended June 30, 1997 which was recorded
as a reduction in the basis of land held for development.
 
4.   INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES:

          In connection with the Carefree Acquisition, Patriot, through the
Realty Partnership, contributed certain assets associated with the Carefree
Resorts (including the right to receive certain royalty fees) valued at $1,574
in exchange for an approximate 99% non-voting ownership interest in PAH
Boulders, Inc., a Virginia corporation. The controlling 1% voting ownership
interest in PAH Boulders, Inc. is held by certain executive officers of Patriot.

5.   MORTGAGE AND PROMISSORY NOTES AND OTHER RECEIVABLES FROM LESSEES AND THEIR
     AFFILIATES:

Mortgage Notes

          In June 1997, Patriot loaned approximately $20,500 to a partnership
affiliated with members of CHC Lease Partners, related to the Doubletree Hotel
in Glenview, Illinois which is owned by such partnership. The loan matures in
two years, bears interest at a rate per annum equal to 30-day LIBOR plus 2.75%
and is secured by a first 

                                       23
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                  (UNAUDITED)
                 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)


priority lien on the hotel. Patriot has agreed in principle to loan an aggregate
of $103,000 to partnerships affiliated with the members of CHC Lease Partners to
enable such partnerships to refinance existing indebtedness relating to four
hotels: the Doubletree Hotel in Glenview, Illinois discussed above, the Sheraton
Gateway Hotel in Miami, Florida (also known as the Sheraton River House Hotel),
the Grand Bay Hotel in Miami, Florida, and the Sheraton Grand Hotel in Tampa,
Florida.

PAH RSI Lessee

          In connection with the Carefree Acquisition, the Realty Partnership
and certain of its subsidiaries acquired certain assets relating to the Carefree
Resorts and then sold these assets to PAH RSI Lessee for approximately $2,000.
In addition, PAH RSI Lessee acquired from the Realty Partnership and certain of
its subsidiaries certain trade names and the right to receive royalty fees
through the issuance of a promissory note for $9,000. The principal amount of
the note is due January 17, 2002. Interest at an annual rate of 13% is payable
semi-annually commencing July 1, 1997.

NorthCoast Lessee

          In March 1997, the Realty Partnership advanced $500 to the NorthCoast
Lessee for construction of laundry facilities at the Hyatt Regency in Lexington,
Kentucky. Interest accrues on the outstanding note balance at a rate of 9.6% per
annum. Monthly payments of principal and interest are required in an amount
sufficient to pay accrued interest and amortize the principal balance over the
three year loan term. The note may be prepaid without penalty.

6.   LINE OF CREDIT AND MORTGAGE NOTES:

          Borrowings under the Line of Credit and other mortgage notes consist
of the following:

<TABLE>
<CAPTION>
                                           June 30,    December 31,
                                             1997          1996
                                          ---------    ------------
<S>                                       <C>          <C>
Line of credit...........................  $520,305      $192,339
Mortgage note payable to Paine Webber
 Real Estate Securities, Inc.............    22,000        22,000
Mortgage note payable to First National
 Bank of Commerce........................    13,500            --
Senior note payable to FINOVA Capital
 Corporation.............................    18,758            --
Junior note payable to FINOVA Capital
 Corporation.............................     8,830            --
Interest payable to FINOVA Capital
 Corporation.............................       901            --
                                           --------      --------
                                           $584,294      $214,339
                                           ========      ======== 
</TABLE> 

Line of Credit

          In January 1997, the maximum amount available under Patriot's Line of
Credit with Paine Webber Real Estate Securities, Inc. ("Paine Webber Real
Estate") was increased from $250,000 to $475,000, along with certain other
modifications.  In addition, Paine Webber Real Estate extended a $22,000 single
asset loan related to the Wyndham Greenspoint Hotel (the "Greenspoint Loan") on
economic terms substantially similar to the Line of Credit.  The Line of Credit
and the Greenspoint Loan are cross-defaulted.  In May 1997, the maximum amount
available under Patriot's Line of Credit was increased to $625,000, and certain
other modifications were also made. The Line of Credit and the Greenspoint Loan
bear interest on the outstanding balances at a rate per annum equal to 30-day
LIBOR plus 1.90%. LIBOR was 5.69% at June 30, 1997 and 5.56% at December 31,
1996. The weighted average interest rate incurred by Patriot under this
borrowing was 7.59% and 7.34% for the three months ended June 30, 1997 and 1996,
respectively, and 7.48% and 7.36% for the six months ended June 30, 1997 and
1996, respectively.

                                       24
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                  (UNAUDITED)
                 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)



          The Line of Credit requires Patriot to maintain certain financial
ratios with respect to liquidity, loan to value and net worth and imposes
certain limitations on acquisitions. Patriot is in compliance with such
covenants at June 30, 1997.

Mortgage Notes

          On January 17, 1997, Patriot, through the Realty Partnership, obtained
financing from the First National Bank of Commerce, New Orleans, Louisiana in
the amount of $13,500. The net proceeds from the financing of approximately
$13,388 were used to repay the Line of Credit and release the Bourbon Orleans
Hotel from the borrowing base of the Line of Credit. The principal amount of the
note along with accrued interest is due January 1, 2004. Interest at a rate of
LIBOR plus 2% is payable monthly commencing February 1, 1997 through January 1,
1999. Thereafter, monthly payments of principal and interest are due through
maturity. The weighted average interest rate incurred by Patriot under this
borrowing during the three months and the six months ended June 30, 1997 was
7.69% and 7.58%, respectively.  The note is collateralized by a first mortgage
lien on the Bourbon Orleans Hotel.

          In connection with the Carefree Acquisition, Patriot assumed certain
mortgage debt in the amount of $28,489 which is collateralized by the property
and equipment at The Lodge at Ventana Canyon. The senior and junior notes
payable to FINOVA Capital Corporation ("FINOVA") provide for annual interest to
accrue at a rate of 6.5% (computed based on stated interest payment amounts);
however, through March 1, 1998, actual interest paid is dependent on the
attainment of certain levels of annual cash flows, as defined, of The Lodge at
Ventana Canyon. Any interest that accrues on the notes which is unpaid during
this period is added to the senior note balance. If The Lodge at Ventana Canyon
is sold after March 1, 2000 and distributions of the net sales proceeds, as
defined, are made to FINOVA in accordance with the terms specified in the
related purchase agreement, any remaining unpaid balance on the junior note may
be deemed discharged. Except as noted above, all unpaid principal and interest
is due upon maturity on March 1, 2005.

          Patriot also has a construction loan available from FINOVA which was
assumed in connection with the acquisition of The Lodge at Ventana Canyon. Under
the terms of the construction loan agreement, FINOVA is required to loan to
Patriot a maximum of $4,500 (approximately 60% of the budgeted construction
cost) for the planned expansion of The Lodge at Ventana Canyon. No funds have
been drawn under this agreement by Patriot as of June 30, 1997.

7.   MINORITY INTERESTS:

Minority Interest in Realty Partnership

          During the first quarter of 1997, the Realty Partnership issued an
additional 10,188 OP Units valued at approximately $370 in connection with The
Tutwiler Hotel acquisition, and 1,295,077 OP Units valued at approximately
$58,662 in connection with the Carefree Resorts acquisition.

          In accordance with their redemption rights, during the first quarter
of 1997 certain partners elected to redeem a total of 4,255 OP Units for a total
of $201 in cash (based upon the market price of Patriot's common stock on the
effective dates of the redemptions). During the second quarter of 1997, certain
partners elected to redeem a total of 375,351 OP Units for a total of $14,240 in
cash (based upon the market price of Patriot's common stock on the effective
dates of the redemptions) and 150,000 shares of Patriot's common stock.

          The Realty Partnership has 3,443,467 OP Units and 662,391 Preferred OP
Units outstanding as of June 30, 1997 (excluding OP Units held by Patriot).

                                       25
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                  (UNAUDITED)
                 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)


Minority Interest in Other Partnerships

          In February 1997, Patriot entered into a partnership agreement in
which the Realty Partnership owns a 90% general partnership interest and DTR PAH
Holding, Inc. ("DTR"), an affiliate of Doubletree Hotels Corporation, owns a 10%
limited partnership interest. The partnership, PAH-DT Minneapolis Partnership,
L.P. ("PAH-DT Minneapolis"), was formed for the purpose of acquiring certain
hotel properties.

          On March 3, 1997, PAH-DT Minneapolis acquired the 230-room Doubletree
Guest Suites Hotel (formerly the Luxeford Suites Hotel) in Minneapolis,
Minnesota for approximately $18,600. The acquisition was financed through cash
contributions to the partnership of approximately $16,737 by Realty Partnership
and $1,863 by DTR. Realty Partnership's contribution was financed primarily with
funds drawn on the Line of Credit.
 
          In April 1997, Patriot entered into a partnership agreement in which
Realty Partnership owns a 90% general partnership interest and DTR owns a 10%
limited partnership interest. The partnership, PAH-DT Park Place Partners, L.P.
("PAH-DT Park Place"), was formed for the purpose of acquiring certain hotel
properties. On April 14, 1997, PAH-DT Park Place acquired the 298-room Sheraton
Park Place Hotel in Minneapolis, Minnesota for approximately $17,000. The
acquisition was financed through cash contributions to the partnership of
approximately $15,305 by Realty Partnership and $1,695 by DTR. Realty
Partnership's contribution was financed primarily with funds drawn on the Line
of Credit.

8.   SHAREHOLDERS' EQUITY:

Capital Stock

          On January 30, 1997, Patriot declared a 2-for-1 stock split effected
in the form of a stock dividend, which was distributed on March 18, 1997 to
shareholders of record on March 7, 1997.

          On June 19, 1997, Patriot declared a $0.2625 per common share dividend
to holders of record on June 27, 1997. In addition, in connection with the
Merger, Patriot also declared a special dividend of $0.06 per common share
payable to holders of record on June 27, 1997. These dividends were paid on June
30, 1997. On March 24, 1997, Patriot declared a $0.2625 per common share
dividend to holders of record on March 31, 1997. Concurrent with each of the
dividend declarations, the Realty Partnership authorized distributions in the
same amount. Patriot paid dividends of $0.24 per common share for the each of
the first and second quarters of 1996.

Stock Grant Awards

          During the first quarter of 1997, pursuant to Patriot's 1995 Incentive
Plan, the Board of Directors awarded 480,007 shares of common stock to two of
its executive officers.  During the second quarter of 1997, pursuant to
Patriot's 1995 Incentive Plan, the Board of Directors awarded 63,700 shares of
common stock to two other officers of the company.  Patriot has recorded a total
of $12,897 (the aggregate value of Patriot's common stock based on the market
price at the date of the award) as unearned stock compensation, which is being
amortized over the vesting periods of one to five years. For the three months
ended June 30, 1997 and 1996, $1,306 and $118, respectively, of amortization of
stock compensation related to stock grants awarded to Patriot's directors,
officers and certain employees is included in general and administrative expense
in the accompanying consolidated financial statements. For the six months ended
June 30, 1997 and 1996, $1,927 and $284, respectively, of amortization of stock
compensation related to stock grants awarded to Patriot's directors, officers
and certain employees is included in general and administrative expense in the
accompanying consolidated financial statements.

Stock Option Awards

          In connection with the Carefree Acquisition, on January 17, 1997,
certain former owners of the Carefree Resorts who are also employees of Resorts
Services, Inc., the company which manages the Carefree Resorts, were granted
nonqualified options to purchase an aggregate of 780,008 shares of Patriot
common stock at an exercise 

                                       26
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                  (UNAUDITED)
                 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)


price of $19.125 (based on the market price of Patriot's common stock on the
date the purchase contract with Carefree Resorts was executed after giving
effect to the March 1997 and July 1997 stock splits and the merger transaction
discussed in Notes 1 and 12) as additional consideration for entering into the
purchase and sale agreement for the Carefree Resorts. The estimated fair value
of the options issued, in the aggregate amount of $3,266, was recorded as
additional purchase consideration for the acquisition of the Carefree Resorts.
The options to purchase common stock vest annually over a period of four years.
 
          During the first quarter of 1997, one of the executive officers of
Patriot was granted nonqualified options to purchase an aggregate of 560,009
shares of common stock at an exercise price of $24.12 (based on the market price
of Patriot's common stock on the date of the grant after giving effect to the
March 1997 and July 1997 stock splits and the merger transaction discussed in
Notes 1 and 12). These options to purchase common stock vest annually over a
period of four years.
 
          During the second quarter of 1997, the Compensation Committee of
Patriot's Board of Directors awarded a two-tier option program for Patriot's
chief executive officer which is intended to be his sole equity award for the
next five years. The tier one award is a ten-year option to purchase 1,350,022
shares of common stock with an exercise price equal to $22.375 per share, the
fair market value of Patriot's common stock on the date of the grant (after
giving effect to the July 1997 stock split and the merger transaction discussed
in Note 12). This option is not exercisable until April 1, 2002. The tier two
award is a ten-year premium priced option to purchase an aggregate of 1,250,020
shares of common stock. This grant has five equal tranches of 250,004 shares
each with an increasing exercise price ranging from $24.60 to $36.03. This tier
two option is not exercisable until April 1, 2002.
 
          Additionally, during the second quarter of 1997, another executive
officer of Patriot was granted nonqualified options to purchase an aggregate of
100,001 shares of common stock at an exercise price of $22.62 (based on the
market price of Patriot's common stock on the date of the grant after giving
effect to the July 1997 stock split and the merger transaction discussed in Note
12). These options to purchase common stock vest annually over a period of five
years.

9.   NONCASH INVESTING AND FINANCING ACTIVITIES:

          In connection with the acquisition of hotel properties, the following
assets and liabilities were assumed:

<TABLE>
<CAPTION>
                                                       1997       1996
                                                     --------   --------
<S>                                                  <C>        <C>
          Receivables from selling entities......... $  (169)   $   277
          Inventory.................................    (485)       107
          Prepaid expenses and other assets.........     (23)       323
          Mortgage debt.............................  28,489         --
          Accounts payable and accrued liabilities..     (54)     2,657
          Due to PAH RSI Lessee for working
           capital liabilities assumed..............   3,712         --
          
          Due to PAH RSI Lessee for land development
           costs.................................... $ 1,412    $    --

          Land sale proceeds due from PAH RSI
           Lessee................................... $(4,145)   $    --

          Reclassification of prepaid acquisition
           costs to property costs.................. $11,473    $    --

          Capital lease obligation acquired......... $   430    $    --

          Issuance of options in connection with
           the acquisition of hotel properties...... $ 3,266    $    --

          Issuance of OP Units in connection with
           the acquisition of hotel properties...... $59,032    $12,803
</TABLE>

                                       27
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                  (UNAUDITED)
                 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)



10.  COMMITMENTS AND CONTINGENCIES:

Proposed Acquisitions

          On April 14, 1997, Patriot entered into a merger agreement with
Wyndham Hotel Corporation ("Wyndham"), through which the Corporation agreed to
acquire Wyndham's portfolio of 23 owned and leased hotels, with an aggregate of
4,877 guest rooms, management and franchise agreements for Wyndham's 64 managed
and franchised properties throughout North America, management and franchise
agreements for 15 properties which are currently closed for renovation or
construction or are in the process of being converted to the Wyndham brand, and
Wyndham's proprietary brand names, including Wyndham/sm/, Wyndham Garden(R) and
Wyndham Hotels & Resorts/sm/ (the "Wyndham Acquisition"). Terms of the Wyndham
Acquisition provide for Wyndham shareholders to receive 1.372 paired shares of
the Corporation common stock and Operating Company common stock (subject to
adjustment under certain circumstances), with up to $100,000 of such
consideration payable in cash, at the option of the Wyndham shareholders.

          Additionally, in July 1997, Wyndham acquired ClubHouse Hotels, Inc.
("ClubHouse"), a privately-held company based in Kansas which owns a chain of 16
hotels along with the ClubHouse brand name and a franchise for one additional
hotel. As a result of the transaction, Wyndham will directly or indirectly own
and manage 13 of the hotels, will own partial interests and manage three of the
hotels and will license one franchised ClubHouse hotel.
 
          In connection with the proposed Wyndham Acquisition, Patriot also
entered into a definitive agreement with partnerships affiliated with members of
the Trammell Crow family providing for the acquisition by the Corporation of 11
full-service Wyndham-branded hotels with 3,072 rooms (the "Crow Properties
Acquisition" and, collectively with the Wyndham Acquisition, the "Wyndham
Transactions") for an aggregate purchase price of approximately $331,664 in
cash, plus up to approximately $14,000 in additional cash consideration if two
of the hotels meet certain cash flow targets. The Wyndham Transactions, are
subject to various closing conditions including approval of the Wyndham
Acquisition by the stockholders of the Corporation, the Operating Company and
Wyndham. It is currently anticipated that the stockholder meetings to approve
the Wyndham Acquisition will occur in the fourth quarter of 1997.
 
Potential Acquisitions

          The Corporation has entered into agreements or letters of intent to
purchase six hotels with an aggregate of 1,883 rooms for a combined purchase
price (excluding closing costs and other acquisition-related expenses) of
approximately $185,500. These acquisitions are subject to a number of conditions
including completion of the Corporation's due diligence.   In addition, the
Corporation has entered into an agreement to acquire Grand Heritage Hotels, a
hotel management and marketing company, and other Grand Heritage subsidiaries,
including an investment in one hotel property, for a total acquisition price
estimated to be approximately $25,300.

Development Fees

          The Carefree Resorts which are leased to PAH RSI Lessee are managed by
Resorts Services, Inc., an Arizona corporation. In connection with the
acquisition of the Carefree Resorts, Patriot agreed to pay certain executive
officers and employees a development fee equal to 3% of the total development
cost, as defined, of certain new resort construction. In connection with the
Merger, the parties have agreed to evaluate the existing agreement and may
modify existing terms.

Contingencies

          Except as described below, Patriot currently is not subject to any
material legal proceedings or claims nor, to management's knowledge, are any
material legal proceedings or claims currently threatened.

                                       28
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                  (UNAUDITED)
                 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)


          On April 14, 1997, an action styled Kwalbrun v. James D. Carreker, et.
al., was filed in the Delaware Court of Chancery in and for New Castle County,
purportedly as a class action on behalf of Wyndham stockholders, against
Wyndham, Patriot and the members of the Board of Directors of Wyndham. The
complaint alleges that the Wyndham Board of Directors breached its fiduciary
duties owed to Wyndham's public stockholders in connection with the Board of
Directors' approval of the Wyndham Acquisition. In particular, the complaint
alleges that the Wyndham Acquisition was negotiated at the expense of Wyndham's
public stockholders, and that the Wyndham Board of Directors permitted Patriot
to negotiate on more favorable terms the Crow Properties Acquisition with
members of the Trammell Crow family. Patriot is alleged to have knowingly aided
and abetted the alleged breach of fiduciary duties. The complaint seeks to
enjoin, preliminarily and permanently, consummation of the Wyndham Acquisition
under the terms presently proposed and also seeks unspecified damages. Patriot
denies the allegations in the complaint and expects to defend the action
vigorously.
 
 

                                       29
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                  (UNAUDITED)
                 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)


11.  PRO FORMA FINANCIAL INFORMATION:

            The following unaudited pro forma condensed consolidated statements
of operations of Patriot are presented as if (i) the acquisition of the 56
hotels owned by Patriot as of June 30, 1997, and (ii) the private placement of
equity securities and public offering of Patriot's common stock which occurred
during 1996 had occurred on January 1, 1996, and the hotels (except the Crowne
Plaza Ravinia Hotel and the Marriott WindWatch Hotel) had been leased to the
Lessees pursuant to the Participating Leases. These unaudited pro forma
condensed consolidated statements of operations are not necessarily indicative
of what actual results of operations of Patriot would have been assuming such
transactions had been completed as of January 1, 1996, nor do they purport to
represent the results of operations for future periods.

<TABLE>
<CAPTION>
                                                         SIX MONTHS ENDED
                                                             JUNE 30,
                                                   ---------------------------
                                                     1997               1996
                                                   --------           --------
<S>                                                <C>                <C>
                                                          (IN THOUSANDS, 
                                                      EXCEPT PER SHARE DATA)
Revenue:
   Participating lease revenue....................  $75,222            $70,925
   Interest and other income......................    2,017              1,672
                                                    -------            -------
     Total revenue................................   77,239             72,597
                                                    -------            -------
Expenses:
   Real estate and personal property
    taxes and casualty insurance..................    7,647              7,227
   Ground lease expense...........................      683                680
   General and administrative.....................    6,132              4,586
   Interest expense...............................   22,886             22,755
   Depreciation and amortization..................   19,264             17,702
                                                    -------            -------
     Total expenses...............................   56,612             52,950
                                                    -------            -------
Income before equity in earnings of unconsolidated 
 subsidiaries and minority interest...............   20,627             19,647
   Equity in earnings of
    unconsolidated subsidiaries...................    3,093              3,113
                                                    -------            -------
Income before minority interests..................   23,720             22,760
   Minority interest in Realty
    Partnership...................................   (3,625)            (3,475)
   Minority interest in other
    partnerships..................................     (480)              (487)
                                                    -------            -------
Net income applicable to common
 shareholders.....................................  $19,615            $18,798
                                                    =======            =======

Net income per common share /(1)/.................    $0.43              $0.42
                                                    =======            =======
Weighted average number of common
 shares and common share equivalents
 outstanding /(1)/................................   45,095             45,095
                                                    =======            =======
</TABLE> 

(1)  After restatement to reflect the impact of the 2-for-1 stock split effected
in the form of a stock dividend distributed on March 18, 1997 to shareholders of
record on March 7, 1997, after conversion of each Patriot share into 0.51895
paired shares issued in the merger with California Jockey Club, and after
restatement to reflect the impact of the 1.927-for-1 stock split effected in the
form of a stock dividend distributed on July 25, 1997 to shareholders of record
on July 15, 1997.

                                       30
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                  (UNAUDITED)
                 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)


12.  SUBSEQUENT EVENTS:

The Merger

          On July 1, 1997, pursuant to the Merger Agreement, Patriot merged with
and into Cal Jockey, with Cal Jockey being the surviving legal entity. In
connection with the Merger, Cal Jockey changed its name to "Patriot American
Hospitality, Inc." (referred to herein as the Corporation) and Bay Meadows
changed its name to "Patriot American Hospitality Operating Company" (referred
to herein as the Operating Company). The Merger has been accounted for as a
reverse acquisition whereby Cal Jockey is considered to be acquired by Patriot.
Consequently, the historical financial information of Patriot will become the
historical financial information of the Corporation in all future filings.

          Each share of the Corporation's common stock is "paired" and trades as
a unit with one share of the Operating Company's common stock. By operation of
the Merger, each issued and outstanding share of Patriot's common stock was
converted into 0.51895 shares of the Corporation's common stock and 0.51895
shares of the Operating Company's common stock (prior to giving effect to the
1.927-for-1 stock split in July 1997). Each paired share of Cal Jockey and Bay
Meadows common stock remains outstanding and represents the same number of
paired shares of the Corporation and the Operating Company.

          In connection with the Merger, Bay Meadows formed an operating
partnership (the "Operating Partnership") into which Bay Meadows contributed its
assets in exchange for limited partnership units of the Operating Partnership,
and Cal Jockey contributed certain of its assets to the Realty Partnership in
exchange for limited partnership units of the Realty Partnership (collectively,
the Operating Partnership and the Realty Partnership are referred to herein as
the "Patriot Partnerships"). Upon completion of the Merger and the transactions
contemplated by the Merger Agreement (the "Related Transactions"), substantially
all of the operations of the Corporation and the Operating Company will be
conducted through the Patriot Partnerships.

          In connection with the Merger, the total number of shares authorized
was increased. The amounts of authorized shares are as follows: (i) 100 million
shares of preferred stock, (ii) 650 million shares of common stock, and (iii)
750 million shares of excess stock (as defined in the amended and restated
charters of the Corporation and the Operating Company).


Acquisition of Properties

          In July 1997, the Corporation, through the Realty Partnership and its
subsidiaries, acquired eight hotels with a total of 1,595 rooms for
approximately $107,900, which included the 266-room Holiday Inn Westlake, the
196-room Radisson Beachwood, and the 113-room Courtyard by Marriott Beachwood,
all in Cleveland, Ohio; the 130-room Radisson Hotel in Akron, Ohio; the 224-room
Holiday Inn at the San Francisco International Airport; the 323-room Ramada Inn
at the San Francisco International Airport; the 219-room Ambassador West, a
Grand Heritage Hotel in Chicago, Illinois; and the 124-room Union Station Hotel,
a Grand Heritage Hotel in Nashville, Tennessee. The Holiday Inn and the Ramada
Inn at the San Francisco International Airport have been leased to the
NorthCoast Lessee for a one-year period pursuant to separate Participating Lease
agreements.  The remaining six hotel properties acquired in July 1997 have been
leased to the Operating Company for periods ranging from 5 to 10 years pursuant
to separate Participating Lease agreements.

                                       31
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                  (UNAUDITED)
                 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)


Land Sale

          On July 14, 1997, the Corporation sold approximately 174 acres of land
in San Mateo, California, representing substantially all of the land which was
owned by Cal Jockey prior to the Merger, to an affiliate of PaineWebber
Incorporated ("PaineWebber") for a purchase price of approximately $81,100 (the
"PaineWebber Land Sale"). These funds were placed in a restricted account in
order to facilitate a tax-deferred, like-kind exchange through the acquisition
of suitable hotel properties. During July 1997, three suitable hotels were
acquired using the proceeds from this restricted account. The Corporation
retained ownership of the improvements located on the land, including the Bay
Meadows Racecourse (the "Racecourse") and its related facilities. Simultaneously
with the consummation of the PaineWebber Land Sale, the PaineWebber affiliate
and the Corporation entered into a ground lease covering a portion of the land
on which the Racecourse is situated for a term of seven years. The lease
provides for quarterly rental payments of $750 through March 1998, $813 through
March 1999, $875 through March 2000, $1,000 through March 2002 and $1,250
through July 2004. Additionally, the Corporation subleased the Racecourse land
and leased the related improvements to the Operating Company in order to permit
the Operating Company to continue horseracing operations at the Racecourse
through the term of the Corporation's lease. The sublease is for a term of seven
years with annual payments based on percentages of revenue generated. In
connection with the sale, the Corporation assigned all of its rights and
benefits under existing leases, contracts, permits and entitlements relating to
the land sold to the PaineWebber affiliate, and the PaineWebber affiliate
assumed all of the Corporation's development obligations including, but not
limited to, all obligations for on and off-site improvements and all obligations
under existing lease and contracts. Under the ground lease, the Corporation is
responsible for reimbursing the PaineWebber affiliate for up to approximately
$10,300 of costs relating to certain development obligations which relate to the
leased land as a racing facility, including the building of new stable
facilities. The parties have the option to renew such leases upon their
expiration under certain circumstances.

New Revolving Credit Facility and Term Loan

          On July 21, 1997, the Companies entered into a revolving credit
facility with Paine Webber Real Estate, The Chase Manhattan Bank ("Chase") and
certain other lenders (collectively, the "Lenders") for a three-year $700,000
unsecured revolving line of credit (the "Revolving Credit Facility"). Borrowings
have been made under the Revolving Credit Facility to repay all outstanding
amounts under Patriot's secured Line of Credit with Paine Webber Real Estate.
The Revolving Credit Facility also will be used for acquisition of additional
properties, businesses and other assets, for capital expenditures and for
general working capital purposes. The interest rate for the Revolving Credit
Facility ranges from LIBOR plus 1.0% to 2.0% (depending on the Companies'
leverage ratio or investment grade ratings received from the rating agencies) or
the customary alternate base rate announced from time to time plus 0.0% to 0.5%
(depending on the Companies' leverage ratio). The initial interest rate for the
Revolving Credit Facility is 7.372% per annum.

          Additionally, the Corporation has entered into a commitment letter
with Paine Webber Real Estate and Chase for a $500,000 term loan (the "Term
Loan"). It is anticipated that the Term Loan will be secured by specific assets
and properties of the Companies that will be transferred to a special purpose
"bankruptcy remote" entity. The Term Loan will be used to finance payments to be
made in connection with the Wyndham Transactions and the acquisition of certain
other properties and is expected to have an interest rate per annum equal to
LIBOR plus 1.75%.

          Effective August 4, and August 5, 1997, the Companies entered into two
interest rate swap arrangements as a hedge against $250,000 of the $700,000
Revolving Credit Facility. As discussed above, the initial interest rate for
borrowings under the Revolving Credit Facility is 7.372% per annum. Each of the
interest rate swaps covers $125,000 of borrowings under the Revolving Credit
Facility and bears interest at 6.09% and 6.255%, respectively. The interest rate
swap arrangements expire November 2002.

                                       32
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                  (UNAUDITED)
                 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)


Mortgage Loans and Other Investments

          As discussed in Note 6, the Corporation loaned approximately $20,500
to a partnership affiliated with members of CHC Lease Partners relating to the
Doubletree Hotel in Glenview, Illinois which is owned by the partnership. During
July 1997, the Corporation loaned approximately $25,500 to another partnership
affiliated with members of CHC Lease Partners, relating to the Sheraton Gateway
Hotel in Miami (also known as the Sheraton River House Hotel) which is owned by
such partnership. Both loans mature in two years, bear interest at a rate per
annum equal to 30-day LIBOR plus 2.75%, and are secured by first priority liens
on the respective hotels. Additionally, the Corporation has purchased two
additional loans on which partnerships affiliated with the members of CHC Lease
Partners are borrowers for an aggregate purchase price of $57,000. One of the
purchased loans, in the principal amount of approximately $30,700, matures in
December 2000 and bears interest at a rate per annum equal to 8.0% until
November 30, 1997, 8.5% from December 1, 1997 until November 30, 1999, and 9.0%
from December 1, 1999 until December 1, 2000. The second purchased loan, in the
principal amount of approximately $24,400, matures on December 31, 1999 and
bears interest at a rate per annum equal to 8.0% until December 31, 1997 and
9.5% from January 1, 1998 until December 31, 1999. Each of the purchased loans
is secured by first priority liens on the respective hotels. In connection with
such loans, the Corporation has entered into a short-term financing arrangement
with an affiliate of Paine Webber Real Estate, whereby such affiliate loaned the
Corporation $103,000 through April 15, 1998 at a rate equal to the greater of 
30-day LIBOR plus 1.75% or the borrowing rate on the Revolving Credit Facility.
This financing is secured by a collateral assignment of the mortgage loans
encumbering the four hotels. CHC Lease Partners currently leases 25 of the
Corporation's hotels and is the Corporation's largest independent Lessee.

          On August 1, 1997, the Corporation purchased a participating loan from
National Resort Ventures, L.P., a Delaware limited partnership, related to the
1,013-room Buena Vista Palace Hotel in Orlando, Florida for $23,750 in cash (the
"Participating Note"). The Buena Vista Palace Hotel is owned by a joint venture
between Equitable Life Insurance Company who owns a 55% interest and Hotel
Venture Partners, Ltd., a Florida limited partnership ("HVP"), who owns a 45%
interest.  The loan is subordinated to a ground lease, a $51,000 first leasehold
mortgage loan and a separate $8,500 participating loan.

Public Offering of Securities

          In August 1997, the Companies completed a public offering of 9,200,000
paired shares of common stock, with net proceeds (less underwriter discount and
expenses) of approximately $209,400. The net proceeds were used to reduce the
outstanding debt under the Revolving Credit Facility. In addition, in August
1997, the Companies' underwriters exercised the over-allotment option and the
Companies issued an additional 1,380,000 paired shares of common stock. The net
proceeds of approximately $31,000 were used to reduce the outstanding debt under
the Revolving Credit Facility.

                                       33
<PAGE>
 
                              CHC LEASE PARTNERS

                                BALANCE SHEETS

                                (IN THOUSANDS)


<TABLE>
<CAPTION>
 
 
                                           JUNE 30,    DECEMBER 31,
                                             1997          1996
                                          ----------  ------------- 
                                          (UNAUDITED)
<S>                                      <C>          <C>  
                           ASSETS
Current assets:
   Cash and cash equivalents..............   $10,297        $11,096
   Accounts receivable, net of
    allowance for doubtful accounts
    of $152 and $159 at June 30, 1997          
    and December 31, 1996, respectively...     8,890          6,895
   Due from affiliates....................       600            341
   Inventories............................     2,843          2,588
   Prepaid expenses.......................     1,561          1,189
                                             -------        -------
         Total current assets.............    24,191         22,109
Investments...............................     5,100          5,100
Deposits..................................       236            272
                                             -------        -------
   Total assets...........................   $29,527        $27,481
                                             =======        =======
 
                 LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
   Accounts payable.......................   $ 4,774        $ 4,656
   Accrued lease payments due to
    Patriot American Hospitality               
    Partnership, L.P......................     5,078          3,829
   Due to affiliates......................       120             57
   Accrued payroll........................     3,462          2,922
   Taxes payable..........................     1,792          1,452
   Guest deposits.........................     1,686          2,412
   Accrued expenses and other liabilities      3,431          2,611
                                             -------        -------
         Total current liabilities........    20,343         17,939
Due to Patriot American Hospitality              
 Partnership, L.P.........................       790            809
Lease inducement..........................     1,473          1,546
                                             -------        -------
         Total liabilities................    22,606         20,294
Commitments and contingencies (Note 2)....        --             --
Partners' capital.........................     6,921          7,187
                                             -------        -------
         Total liabilities and partners'     
           capital........................   $29,527        $27,481
                                             =======        =======
</TABLE>

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

                                       34
<PAGE>
 
                              CHC LEASE PARTNERS

                           STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                                (IN THOUSANDS)
<TABLE>
<CAPTION>


                                           THREE MONTHS ENDED     SIX MONTHS ENDED
                                                JUNE 30,              JUNE 30,
                                           ------------------     ----------------
                                             1997       1996       1997       1996
                                           -------     ------     ------     ------
<S>                                       <C>        <C>        <C>        <C>
Revenue:
  Rooms..................................  $32,968    $28,377    $65,184    $52,637
  Food and beverage......................   11,804      8,919     23,469     16,917
  Conference center......................      615        551      1,363      1,196
  Telephone and other....................    3,059      2,423      6,181      4,718
                                           -------    -------    -------    -------
     Total revenue.......................   48,446     40,270     96,197     75,468
                                           -------    -------    -------    -------
Expenses:
  Departmental costs and expenses........   18,043     14,306     35,461     27,071
  Participating lease payments...........   15,829     13,904     31,343     25,807
  General and administrative.............    4,499      3,419      8,666      6,302
  Repairs and maintenance................    2,234      1,746      4,394      3,290
  Utilities..............................    1,930      1,693      3,927      3,189
  Marketing..............................    4,716      3,653      9,260      6,827
  Insurance..............................      251        178        505        398
                                           -------    -------    -------    -------
     Total expenses......................   47,502     38,899     93,556     72,884
                                           -------    -------    -------    -------
     Income before lessee income
      (expense)..........................      944      1,371      2,641      2,584
                                           -------    -------    -------    -------
  Limited partnership distributions,
   interest and miscellaneous income.....      340        278        685        473
  Management fees........................     (697)      (992)    (1,217)    (1,589)
  Lessee general and administrative         
    expenses.............................     (208)      (354)      (375)      (532)
                                           -------    -------    -------    -------
     Total lessee expense................     (565)    (1,068)      (907)    (1,648)
                                           -------    -------    -------    -------
     Net income..........................  $   379    $   303    $ 1,734    $   936
                                           =======    =======    =======    =======

</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                       35
<PAGE>
 
                              CHC LEASE PARTNERS

                            STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
 
 
                                           SIX MONTHS ENDED
                                               JUNE 30,
                                            1997     1996
                                          -------- --------
<S>                                      <C>       <C>
Cash flows from operating activities:
  Net income............................   $ 1,734   $   936
   Adjustments to reconcile net income
    to net cash provided by (used in)
    operating activities:
       Recognition of lease inducement..       (73)      (46)
       Provision for losses on accounts         
        receivable......................         7        46
   Changes in assets and liabilities:
   (Increase) decrease in:
       Accounts receivable..............    (1,997)   (3,548)
       Due from affiliates..............      (259)
       Inventories......................      (192)      111
       Prepaid expenses.................      (359)     (533)
       Deposits.........................        36       (22)
   Increase (decrease) in:
       Accounts payable.................       118       521
       Accrued lease payments due to
        Patriot American Hospitality                   
        Partnership, L.P................     1,249      (618)
       Due to affiliates................        63       326
       Accrued payroll..................       540       581
       Taxes payable....................       340       145
       Guest deposits...................      (737)       80
       Accrued expenses and other              
        liabilities.....................       724     1,317
                                           -------   -------
Net cash provided by (used in)               1,194      (704)
 operating activities...................   -------   -------
 
Cash flows from investing activities:
  Acquired cash from new operating               
   leases...............................         7       726
                                           -------   -------
Net cash provided by investing             
 activities.............................         7       726
                                           -------   -------
 
Cash flows from financing activities:
  Partnership distribution..............    (2,000)     (790)
                                           -------   -------
Net cash used in financing activities...    (2,000)     (790)
                                           -------   -------
 
Net decrease in cash and cash                 
 equivalents............................      (799)     (768)
Cash and cash equivalents at beginning     
 of period..............................    11,096     9,385
                                           -------   -------
Cash and cash equivalents at end of        
 period.................................   $10,297   $ 8,617
                                           =======   =======
 
Supplemental Schedule of Non-Cash
 Investing and Financing Activities:
Assumption of assets and liabilities
 upon consummation of participating
 lease agreements with Patriot American
 Hospitality Partnership, L.P.:
   Acquired cash........................   $     7   $   726
   Accounts receivable..................         5        --
   Inventories .........................        63       (78)
   Prepaid expenses.....................        13       112
   Due to Patriot American Hospitality         
    Partnership, L.P....................       (63)       78
   Guest deposits.......................       (11)       --
   Accrued expenses and other                  
    liabilities.........................       (14)     (838) 
                                           -------    ------
   Net assets                              $    --    $   --
                                           =======   ======
</TABLE>
The accompanying notes are an integral part of these financial statements.

                                       36
<PAGE>
 
                              CHC LEASE PARTNERS

                         NOTES TO FINANCIAL STATEMENTS
                                  (UNAUDITED)
                            (DOLLARS IN THOUSANDS)

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     CHC Lease Partners was formed as the initial lessee to lease and operate
certain hotels owned by Patriot American Hospitality Partnership, L.P. (the
"Realty Partnership"). CHC Lease Partners, a general partnership, is owned
jointly by CHC REIT Lessee Corp., a wholly owned subsidiary of CHC
International, Inc. ("CHC") and by Gencom Lessee, L.P., an affiliate of a
principal of the Gencom group of companies.

     CHC Lease Partners began operating the twenty initial hotels on October 2,
1995. During 1996 and 1997, CHC Lease Partners and the Realty Partnership
entered into additional operating leases for five hotels acquired by the Realty
Partnership. The leases are substantially similar to the other lease agreements
between CHC Lease Partners and the Realty Partnership. At June 30, 1997, CHC
Lease Partners leases twenty-five hotels.

     The hotels are leased by the Realty Partnership to CHC Lease Partners under
separate participating operating lease agreements that contain cross-default
provisions. These leases, which require CHC Lease Partners to maintain minimum
levels of net worth and working capital, have terms ranging from ten to twelve
years and require payment of the greater of (1) minimum base rent or (2)
participating rent based upon certain percentages of room revenue, food and
beverage revenue, conference center revenue and telephone and other revenues of
each of the hotels.

     The hotels leased by CHC Lease Partners consist of nineteen full service
hotels, four limited service hotels, one executive conference center and one
resort. Twenty-one of the twenty-five hotels are operated under franchise
licenses with nationally recognized hotel companies. The cost of obtaining the
franchise licenses is paid by the Realty Partnership while continuing franchise
fees are paid by CHC Lease Partners. Franchise and related fees generally range
from 3.5% to 8.0% of room revenues for hotels under franchise licenses.

     These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six month periods ended June 30, 1997 and 1996 are not
necessarily indicative of the results that may be expected for the years ended
December 31, 1997 and 1996, respectively. For further information, refer to the
CHC Lease Partners financial statements and footnotes thereto included in the
Annual Report on Form 10-K of Patriot American Hospitality, Inc. for the year
ended December 31, 1996.  Certain prior year amounts have been reclassified to
conform to current period presentation.

2.  COMMITMENTS AND RELATED PARTY TRANSACTIONS:

     Under the participating lease agreements for the twenty initial hotels, CHC
Lease Partners is obligated to return the inventory to the Realty Partnership at
the end of each lease term less a total of $1,000, which is accounted for as a
lease inducement. Additionally, a lease inducement of $685 was received in 1996
related to leasing one resort property. These lease inducements are recorded as
reductions on a straight-line basis to participating lease payments over the
lives of the participating lease agreements. Exclusive of the lease inducements,
for the three months ended June 30, 1997 and 1996, CHC Lease Partners incurred
base rents of $10,875 and $8,739 and participating rents of $4,991 and $5,187,
respectively, and for the six months ended June 30, 1997 and 1996, base rents of
$20,390 and $16,060 and participating rents of $11,026 and $9,787, respectively.
CHC Lease Partners owed the Realty Partnership $5,078 and $3,829 at June 30,
1997 and December 31, 1996, respectively, for lease payments due under the terms
of the participating leases. Lease inducements were $1,473 and $1,546 and
inventory due to the Realty Partnership was $790 and $809 at June 30, 1997 and
December 31, 1996, respectively.

     CHC Lease Partners entered into management agreements with  hotel
management  subsidiaries of  CHC  and GAH-II, L.P. ("GAH"), an affiliate of CHC
and the Gencom group of companies, to perform all management

                                       37
<PAGE>
 
                              CHC LEASE PARTNERS

                  NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
                                  (UNAUDITED)
                            (DOLLARS IN THOUSANDS)

functions necessary to operate 24 of the 25 hotels leased by CHC Lease Partners.
The terms of these agreements range from ten to twelve years with management
fees due based upon a percentage of gross revenue of each of the hotels. The
fees under these management agreements are subordinate to CHC Lease Partners'
obligations to the Realty Partnership under the participating lease agreements.
If, after payment of management fees at the contract rate, CHC Lease Partners
would incur an operating loss under any of the participating lease agreements in
any year, CHC and GAH would be required to refund and forego management fees for
each of the hotels which are deficient in participating lease payments up to the
amount of the operating loss. If after the management fees are refunded and
foregone, CHC Lease Partners would still incur an operating loss under any of
the participating lease agreements, CHC and GAH would be required to pay CHC
Lease Partners up to 50% of the management fees earned by CHC and GAH,
respectively. For the three months ended June 30, 1997 and 1996, management fees
incurred under these management agreements were $619 and $913, respectively, and
for the six months ended June 30, 1997 and 1996, such management fees were
$1,060 and $1,429, respectively. These management fees are net of management
fees refunded and foregone by CHC and GAH of $803 and $457 for the three months
ended June 30, 1997 and 1996, respectively, and of $1,585 and $754 for the six
months ended June 30, 1997 and 1996, respectively. Included in due to (from)
affiliates at June 30, 1997 and December 31, 1996, were amounts for management
fees under these management agreements due from CHC of $284 and $300 and due
from GAH of $316 and $41, respectively.

     CHC Lease Partners fully reimburses CHC for office space it occupies within
the corporate offices of CHC and for the payroll and related costs CHC and GAH
incur on behalf of CHC Lease Partners. These costs amounted to $77 and $136 for
the three months ended June 30, 1997 and 1996, respectively, and $316 and $285
for the six months ended June 30, 1997 and 1996, respectively. At June 30, 1997
and December 31, 1996, CHC Lease Partners owed CHC and GAH in the aggregate $120
and $57, respectively, which is included in due to affiliates.

     CHC Lease Partners made distributions to its partners of  $1,000 and $450
for the three months ended June 30, 1997 and 1996, respectively, and $2,000 and
$790 for the six months ended June 30, 1997 and 1996, respectively.

                                       38
<PAGE>
 
                              CHC LEASE PARTNERS

                  NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
                                  (UNAUDITED)
                            (DOLLARS IN THOUSANDS)

3.  PRO FORMA FINANCIAL INFORMATION:

     The unaudited pro forma statements of operations are presented as if the
leases and the operation of the twenty-five hotels had commenced on January 1,
1996. The unaudited pro forma statements of operations are not necessarily
indicative of what the actual results of operations of CHC Lease Partners would
have been assuming such operations had commenced as of January 1, 1996, nor do
they purport to represent the results of operations for future periods. Pro
forma lessee expenses include management fees, estimated lessee overhead
expenses, distribution income on 250,001 units of limited partnership interest
in the Realty Partnership and interest income associated with working capital
balances. No pro forma interest income associated with working capital balances
has been included.
<TABLE>
<CAPTION>

                                       SIX MONTHS ENDED
                                           JUNE 30,
                                      ------------------
                                        1997      1996
                                      ------------------
<S>                                   <C>       <C>
                                        (IN THOUSANDS)
Revenue:
   Rooms............................   $65,285   $62,521
   Food and beverage................    23,509    22,511
   Conference center................     1,363     1,196
   Telephone and other..............     6,185     6,670
                                       -------   -------
   Total revenue....................    96,342    92,898
                                       -------   -------
Expenses:
   Departmental costs and expenses..    35,525    35,331
   Participating lease payments.....    31,382    29,588
   General and administrative.......     8,680     8,241
   Repairs and maintenance..........     4,401     4,214
   Utilities........................     3,935     4,102
   Marketing........................     9,273     8,575
   Insurance........................       505       576
                                       -------   -------
   Total expenses...................    93,701    90,627
                                       -------   -------
Income before lessee expenses.......     2,641     2,271
Lessee expenses.....................       901     1,304
                                       -------   -------
   Net income.......................   $ 1,740   $   967
                                       =======   =======
</TABLE>

                                       39
<PAGE>
 
                           NORTHCOAST HOTELS, L.L.C.

                                 BALANCE SHEETS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>


                                           JUNE 30,    DECEMBER 31,
                                             1997          1996
                                          -----------  ------------
                                          (UNAUDITED)
<S>                                      <C>           <C>
                        ASSETS
Current assets:
   Cash and cash equivalents.............    $ 2,367         $1,756
   Cash held in trust....................        172             --
   Accounts receivable, net of allowance
    for doubtful accounts of $44 and $43        
    at June 30, 1997 and December 31,
    1996, respectively...................      4,416          4,224
   Receivable from Patriot American       
    Hospitality Partnership, L.P.........        274            245
   Inventories...........................        295            320
   Prepaid expenses......................        643            387
   Other assets..........................        816            792
                                             -------         ------
         Total current assets............      8,983          7,724
Deferred assets, net of accumulated
 amortization of $57 and $33 at                  
 June 30, 1997 and December 31, 1996,
 respectively ...........................        482            500
Investments..............................        825            825
Fixed assets, net of accumulated                 
 depreciation of $6 at June 30, 1997.....        518             --
                                             -------         ------
         Total assets....................    $10,808         $9,049
                                             =======         ======

             LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
   Accounts payable.......................   $ 1,538         $2,064
   Accrued rent due to Patriot American       
    Hospitality Partnership, L.P..........     1,926            943
   Due to affiliates......................       166            113
   Accrued payroll and benefits...........     1,990          2,088
   Guest deposits.........................       571            155
   Accrued expenses and other                  
    liabilities...........................     1,372            986
   FF&E reserve due to (from) Patriot
    American Hospitality                                        
    Partnership, L.P......................      (156)           415
                                             -------         ------
         Total current liabilities .......     7,407          6,764
Note payable and accrued interest payable
 to Patriot American Hospitality                  
 Partnership, L.P........................        504             --
Due to Patriot American Hospitality            
 Partnership, L.P........................        242            242 
                                             -------         ------
         Total liabilities................     8,153          7,006
Commitments and contingencies.............        --             --
Members' equity..........................      2,655          2,043
                                             -------         ------
   Total liabilities and members' equity..   $10,808         $9,049
                                             =======         ======
</TABLE> 

                            See accompanying notes.

                                       40
<PAGE>
 
                           NORTHCOAST HOTELS, L.L.C.

                           STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                       APRIL 2,
                                                                         1996
                                                                     (INCEPTION OF
                                             THREE         SIX         OPERATIONS)
                                          MONTHS ENDED  MONTHS ENDED    THROUGH
                                            JUNE 30,      JUNE 30,      JUNE 30,
                                             1997         1997          1996
                                          -----------   ---------     ----------
<S>                                       <C>        <C>              <C>
Revenue:                                                            
   Rooms.................................  $12,130      $22,042          $ 7,720
   Food and beverage.....................    5,779       10,571            3,237
   Telephone and other...................      945        1,889              707
                                           -------      -------          -------
       Total revenue.....................   18,854       34,502           11,664
                                           -------      -------          -------
                                                                        
Expenses:                                                               
   Departmental costs and other expenses.    7,366       14,172            4,639
   Participating lease payments..........    5,534       10,217            3,307
   General and administrative............    1,448        2,856              998
   Ground lease expense..................      314          634              278
   Repairs and maintenance...............      897        1,808              621
   Utilities.............................      571        1,157              357
   Marketing.............................    1,353        2,601              789
                                           -------      -------          -------
       Total expenses....................   17,483       33,445           10,989
                                           -------      -------          -------
       Income before lessee income                                      
        (expense)........................    1,371        1,057              675
                                           -------      -------          -------
   Dividend and interest income..........       83          139               59
   Service fee income....................      478          900               --
   Management fees.......................     (536)      (1,007)            (281)
   Depreciation and amortization.........      (16)         (30)              (8)
   Lessee general and administrative                                    
    expenses.............................     (191)        (282)             (98)
                                           -------      -------          -------
       Total lessee income (expense).....     (182)        (280)            (328)
                                           -------      -------          -------
       Net income........................  $ 1,189      $   777          $   347
                                           =======      =======          =======
                                                                  
</TABLE>                                                          
                            See accompanying notes.

                                       41
<PAGE>
 
                           NORTHCOAST HOTELS, L.L.C.

                            STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                (IN THOUSANDS)
<TABLE>
<CAPTION>


                                                       APRIL 2,
                                                         1996
                                                     (INCEPTION OF
                                          SIX MONTHS  OPERATIONS)
                                             ENDED      THROUGH
                                           JUNE 30,     JUNE 30,
                                             1997         1996
                                          ---------- -------------
<S>                                       <C>          <C>
Cash flows from operating activities:
   Net income..............................   $  777   $  347
   Adjustments to reconcile net loss to
     net cash provided by operating
     activities:
    Depreciation and amortization..........       30        8
   Changes in assets and liabilities:
    Accounts receivable....................     (191)  (2,392)
    Accounts receivable from Patriot                  
     American Hospitality Partnership, L.P.      (29)      --
    Inventories............................       25      (11)
    Prepaid expenses and other assets......     (256)    (159)
    Accounts payable.......................     (522)   1,186
    Accrued rent due to Patriot American
     Hospitality Partnership, L.P..........      983    2,277
    Due to affiliates......................       53      148
    Accrued payroll and benefits...........      (98)   1,174
    Guest deposits.........................      416      133
    Accrued expenses and other liabilities.      468       92
    FF&E Reserve due to Patriot American
     Hospitality Partnership, L.P..........     (571)      --
                                              ------   ------
Net cash provided by operating activities.     1,085    2,803
                                              ------   ------
 Cash flows from investing activities:
   Purchases of equipment and leasehold
    improvements..........................      (517)      (7)
   Cash held in trust.....................      (172)      --
   Payment of organization costs and
    capitalized lease costs...............        (6)    (383)
   Payment for deferred purchase
    consideration.........................       (31)    (785)
                                              ------   ------
Net cash used in investing activities.....      (726)  (1,175)
                                              ------   ------

Cash flows from financing activities:
   Cash received from assumption of                 
    operating liabilities.................        --      682
   Payment for capital improvements on               
    behalf of owner.......................        --      (86)
   Cash contributions.....................        --    1,425
   Proceeds from issuance of note.........       500       --
   Distributions..........................      (248)      --
                                              ------   ------
Net cash provided by financing
 activities...............................       252    2,021
                                              ------   ------
Net increase in cash and cash
 equivalents..............................       611    3,649
Cash and cash equivalents at beginning
 of period................................     1,756       --
                                              ------   ------
Cash and cash equivalents at end of
 period...................................    $2,367   $3,649
                                              ======   ======

</TABLE>
                            See accompanying notes.

                                       42
<PAGE>
 
                           NORTHCOAST HOTELS, L.L.C.

                         NOTES TO FINANCIAL STATEMENTS
                                  (UNAUDITED)
                            (DOLLARS IN THOUSANDS)

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     NorthCoast Hotels, L.L.C. ("NorthCoast Lessee"), a Washington limited
liability company, was formed January 10, 1996 to lease and operate certain
hotels owned by Patriot American Hospitality Partnership, L.P. (the "Realty
Partnership").  NorthCoast Lessee will continue for a term of fifty years unless
terminated earlier pursuant to the terms of the limited liability company
agreement. In general, members are not individually liable for any debts or
losses of NorthCoast Lessee that exceed their respective capital contribution,
and losses are generally allocated to the members in proportion to their capital
contributions.

     NorthCoast Lessee began leasing five hotels on April 2, 1996. During 1996,
NorthCoast Lessee and the Realty Partnership entered into additional operating
leases for four hotels that were acquired by the Realty Partnership. At June 30,
1997, NorthCoast Lessee leased nine hotels.

     Each hotel is leased by the Realty Partnership to NorthCoast Lessee under
separate participating operating lease agreements. Eight of the nine hotel
leases contain cross-default provisions. These leases, which have an average
term of eleven years, require NorthCoast Lessee to maintain a minimum net worth,
a minimum level of cash, and adequate working capital, (as those terms are
defined) and require payment of the greater of (1) minimum base rent or (2)
participating rent based upon certain percentages of room revenue, food and
beverage revenue, and telephone and other revenues of each of the hotels, plus
certain additional charges, as applicable.

  These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 1997 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1997. For
further information, refer to the NorthCoast Hotels, L.L.C. financial statements
and footnotes thereto included in the Annual Report on Form 10-K of Patriot
American Hospitality, Inc. for the year ended December 31, 1996.

2.  MEMBERS' EQUITY:

Initial Capitalization

     Each of the four members is required to contribute $825 to NorthCoast
Lessee. Contributions can be in the form of cash or other property. At June 30,
1997, cash contributions of $1,475 and units of limited partnership interest in
the Realty Partnership ("OP Units") of $825 have been received.

     Two members contributed notes receivable totaling $1,050 which bear
interest at 7% per annum. One note, which is unsecured, is due in two
installments, with $50 paid July 31, 1996 and the balance due November 30, 1997.
The other note is due October 31, 1998, and can be paid with either cash or OP
Units. This note is secured by an approximate 12.6% interest in LeParc
Investment Group, LLC. These notes receivable from members have been offset
against members' equity in the accompanying financial statements.

                                       43
<PAGE>
 
                           NORTHCOAST HOTELS, L.L.C.

                  NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
                                  (UNAUDITED)
                            (DOLLARS IN THOUSANDS)

Minimum Net Worth

     Under the terms of the participating lease agreements, NorthCoast Lessee is
required to maintain minimum net worth, as defined, equal to 20% of the
projected annual lease payments for all hotels leased, subject to certain agreed
upon adjustments. The minimum net worth must be composed of certain components
in specified minimum amounts, including at least 15% in cash or certain cash
equivalents. No more than 25% of the minimum net worth can be composed of a
promissory note secured by an interest in LeParc Investment Group, LLC.
NorthCoast Lessee is also required to maintain ownership of shares of common
stock of Patriot American Hospitality, Inc. or OP Units of the Realty
Partnership.

3.  COMMITMENTS AND RELATED PARTY TRANSACTIONS:

     NorthCoast Lessee incurred rents of $5,534 during the three months ended
June 30, 1997, $10,217 during the six months ended June 30, 1997 and $3,307
during the period April 2, 1996 through June 30, 1996. Rents consist of $4,667,
$8,569 and $2,277 in base rents, $583, $1,073 and $846 in participating rents,
and $283, $575 and $200 in additional rent for the three months ended June 30,
1997, the six months ended June 30, 1997 and the period April 2, 1996 through
June 30, 1996, respectively. At June 30, 1997 and December 31, 1996, NorthCoast
Lessee owed the Realty Partnership $1,926 and $943, respectively, for rents
under the terms of the participating leases.

  Under the participating lease agreements, NorthCoast Lessee is obligated to
return to the Realty Partnership the inventory at each of the hotels at the end
of the related lease term. As of June 30, 1997, the balance of the inventory due
to the Realty Partnership was $242. In addition, two of the hotels are managed
by Hyatt Corporation ("Hyatt"). Under the terms of the hotel management
agreements, Hyatt funds a percentage of the hotel gross revenues to a reserve
account for furniture, fixtures and equipment (the "FF&E Reserve"), which is
payable to the Realty Partnership to make improvements to the hotels. At
December 31, 1996, the FF&E Reserve payable to the Realty Partnership was $415.
At June 30, 1997, expenditures for furniture, fixtures and equipment exceeded
the reserves by $156.

  NorthCoast Lessee pays WestCoast Hotels for office space it occupies within
the corporate offices of WestCoast Hotels and for the payroll and related costs
WestCoast Hotels administers on behalf of NorthCoast Lessee. The amount paid to
WestCoast Hotels for these costs was $7 for the three months ended June 30,
1997, $13 for the six months ended June 30, 1997 and $6 during the period April
2, 1996 through June 30, 1996.

  NorthCoast Lessee borrowed $500 from the Realty Partnership on March 13, 1997
(the "Note") for the construction of a laundry facility at the Hyatt Regency
Lexington. The Note bears interest at 9.6% per annum, requires monthly payments
of principal and interest commencing June 1, 1997 and is due March 13, 1999.

  As of June 30, 1997, NorthCoast Lessee had capitalized direct costs and
capitalized interest of $504 related to this laundry facility.  Cash held in
trust of $172 is restricted to expenditures related to the project.

  Service fee income consists of fees received for acquisition, project
development and renovation services provided to the Realty Partnership.
NorthCoast Lessee recorded $478 and $900 for such services during the three
months ended June 30, 1997 and the six months ended June 30, 1997, respectively,
net of reimbursed expenses of $53.

                                       44
<PAGE>
 
                           NORTHCOAST HOTELS, L.L.C.

                         NOTES TO FINANCIAL STATEMENTS
                                  (UNAUDITED)
                            (DOLLARS IN THOUSANDS)

4.  PRO FORMA FINANCIAL INFORMATION:

     The following unaudited pro forma statement of operations for the six
months ended June 30, 1996 is presented as if the leases and the operation of
the nine hotels leased by NorthCoast Lessee had commenced on January 1, 1996.
The unaudited pro forma statement of operations is not necessarily indicative of
what the actual results of operations of NorthCoast Lessee would have been
assuming such operations had commenced as of January 1, 1996, nor do they
purport to represent the results of operations for future periods. Pro forma
lessee expenses represent management fees and estimated lessee overhead expenses
and exclude pro forma dividend income on 31,074 units of limited partnership
interest of the Realty Partnership and pro forma interest income associated with
working capital balances.
<TABLE>
<CAPTION>

                                         SIX MONTHS
                                           ENDED
                                          JUNE 30,
                                            1996
                                        ------------
                                       (IN THOUSANDS)
<S>                                     <C>
Revenue:
   Rooms...............................     $20,494
   Food and beverage...................       9,373
   Telephone and other.................       1,868
                                            -------
        Total revenue..................      31,735
                                            -------
Expenses:
   Departmental costs and expenses.....      13,424
   Participating lease payments........       9,850
   General and administrative..........       2,809
   Ground lease expense................         567
   Repairs and maintenance.............       1,805
   Utilities...........................       1,170
   Marketing...........................       2,371
   Insurance...........................         183
                                            -------
        Total expenses.................      32,179
                                            -------
Loss before lessee expenses............        (444)
Lessee expenses........................       1,034
                                            -------
   Net loss............................     $(1,478)
                                            =======

</TABLE>

5.  SUBSEQUENT EVENT:

    In July 1997, NorthCoast Lessee entered into one-year leases for two
additional hotels that were acquired by the Realty Partnership.

                                       45
<PAGE>
 
                                PAH RSI, L.L.C.

                           CONSOLIDATED BALANCE SHEET
                                  (UNAUDITED)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>


                                          JUNE 30,
                                            1997
                                          --------
<S>                                      <C>
                   ASSETS

Current assets:
   Cash and cash equivalents.............. $ 9,637
   Accounts receivable, net of
    allowance for doubtful accounts of
    $130..................................   7,696
   Due from Patriot American
    Hospitality Partnership, L.P and
    affiliates............................   1,944
   Due from Resorts Services, Inc.........     238
   Inventories............................   2,040
   Prepaid expenses and other assets......   1,429
                                           -------
        Total current assets..............  22,984
Organizational costs, net of
 accumulated amortization of $3...........      90
Tradenames, net of accumulated
 amortization of $137.....................   8,863
Other assets..............................     335
                                           -------
        Total assets...................... $32,272
                                           =======

    LIABILITIES AND MEMBERS' EQUITY

Current Liabilities:
   Accounts payable....................... $ 2,193
   Accrued rent due to Patriot American
    Hospitality Partnership, L.P..........   2,862
   Accrued expenses and other
    liabilities...........................   3,968
   Accrued interest.......................     533
   Guest and other deposits...............   5,953
                                           -------
        Total current liabilities.........  15,509
Due to selling entities...................   7,515
Note payable to Patriot American
 Hospitality Partnership, L.P.............   9,000
                                           -------
        Total liabilities.................  32,024
Commitments and contingencies.............      --
Members' equity...........................     248
                                           -------
        Total liabilities and
           members' equity................ $32,272
                                           =======

</TABLE>
                            See accompanying notes.

                                       46
<PAGE>
 
                                PAH RSI, L.L.C.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                                (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                      JANUARY 16,
                                                         1997
                                                     (INCEPTION OF
                                            THREE     OPERATIONS)
                                        MONTHS ENDED   THROUGH
                                          JUNE 30,     JUNE 30,
                                            1997          1997
                                          --------   -------------
<S>                                     <C>        <C>
Revenue:
   Rooms.................................. $13,164     $24,293
   Food and beverage......................   6,585      11,566
   Telephone and other revenue............   3,071       6,246
   Club, club membership and spa revenue..   7,348      15,361
   Shopping center revenue................     502         865
   Royalty revenues.......................     389         771
                                           -------     -------
        Total revenue.....................  31,059      59,102
                                           -------     -------

Expenses:
   Departmental costs and other expenses..  14,003      25,202
   Participating lease payments...........   8,698      16,713
   General and administrative.............   2,262       3,879
   Repairs and maintenance................   2,600       4,412
   Utilities..............................   1,181       1,887
   Marketing..............................   2,140       3,195
   Interest expense.......................     296         533
   Insurance..............................     136         240
                                           -------     -------
        Total expenses....................  31,316      56,061
                                           -------     -------
        Income (loss) before lessee
          expenses.......................     (257)      3,041
                                           -------     -------
   Interest income........................      41          47
   Management fees........................  (1,091)     (2,433)
   Amortization...........................     (77)       (140)
   Lessee general and administrative
    expenses..............................    (167)       (267)
                                           -------     -------
        Total lessee expenses.............  (1,294)     (2,793)
                                           -------     -------
        Net income (loss)................. $(1,551)    $   248
                                           =======     =======

</TABLE>
                            See accompanying notes.

                                       47
<PAGE>
 
                                PAH RSI, L.L.C.

                   CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
                                  (UNAUDITED)
                                (IN THOUSANDS)
<TABLE>
<CAPTION>


                                                              JANUARY 16,
                                                                 1997
                                                             (INCEPTION OF
                                                               OPERATIONS)
                                                                THROUGH
                                                                JUNE 30,
                                                                  1997
                                                              -----------
<S>                                                          <C>
Initial capitalization at inception.........................    $ 4,110
Capital contributions of new members........................      2,740
Notes receivable from members...............................     (6,850)
Net income..................................................        248
                                                                -------
Balance, June 30, 1997......................................    $   248
                                                                =======

</TABLE>
                            See accompanying notes.

                                       48
<PAGE>
 
                                PAH RSI, L.L.C.

                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (UNAUDITED)
                                (IN THOUSANDS)
<TABLE>
<CAPTION>


                                                                 JANUARY 16,
                                                                    1997
                                                                (INCEPTION OF
                                                                  OPERATIONS)
                                                                    THROUGH
                                                                    JUNE 30,
                                                                      1997
                                                                  -----------
<S>                                                              <C>

Cash flows from operating activities:
   Net income..................................................... $   248
   Adjustments to reconcile net income to net cash provided
    by operatig activities:
       Provision for losses on accounts receivable................     130
       Amortization...............................................     140
   Increase in assets and liabilities:
       Accounts receivable........................................  (7,074)
       Due from Patriot American Hospitality Partnership, L.P.....   1,768
       Due from Resorts Services, Inc.............................    (238)
       Inventories................................................    (282)
       Prepaid expenses and other assets..........................     360
       Other assets...............................................    (335)
       Accounts payable...........................................   2,092
       Accrued rent due to Patriot American Hospitality
        Partnership, L.P..........................................   2,862
       Accrued expenses and other liabilities.....................  (2,768)
       Accrued interest...........................................     533
       Guest and other deposits...................................     443
       Due to sellers.............................................   7,515
                                                                   -------
Net cash provided by operating activities.........................   5,394
                                                                   -------

Cash flows from investing activities:
   Payment of organization costs..................................     (93)
   Cash acquired at inception.....................................   4,336
                                                                   -------
Net cash used in investing activities.............................   4,243
                                                                   -------

Net increase in cash and cash equivalents.........................   9,637
                                                                   -------
Cash and cash equivalents at end of period........................ $ 9,637
                                                                   =======
Supplemental Disclosure of Non-Cash
 Investing and Financing Activities:
Contribution of member notes receivable........................... $ 6,850
                                                                   =======
Issuance of note payable to Patriot American Hospitality
 Partnership, L.P. for purchase of tradenames..................... $ 9,000
                                                                   =======
Operating liabilities assumed in exchange for receivables from
 Patriot American Hospitality Partnership, L.P.................... $ 3,712
                                                                   =======
</TABLE>
                            See accompanying notes.

                                       49
<PAGE>
 
                                PAH RSI, L.L.C.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                                (IN THOUSANDS)

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

ORGANIZATION
 
     PAH RSI, L.L.C. (the "PAH RSI Lessee"), a Delaware limited liability
company, was formed on January 16, 1997 to lease and operate certain hotels
owned by Patriot American Hospitality Partnership, L.P. (the "Realty
Partnership").  PAH RSI Lessee, is owned jointly by Messrs. Paul A. Nussbaum,
William Evans, Thomas W. Lattin, Rex E. Stewart and Michael Murphy, each of whom
is an executive officer of Patriot. PAH RSI Lessee will continue for a term of
49 years unless terminated earlier pursuant to the terms of the limited
liability company agreement. In general, members are not personally liable for
any debts or losses of PAH RSI Lessee that exceed their respective capital
contribution, except as discussed in Note 5, and losses are generally allocated
to the members in proportion to their capital contributions.
 
     PAH RSI Lessee commenced operations and began leasing two resort properties
from the Realty Partnership on January 16, 1997. Subsequently in the first
quarter of 1997, PAH RSI Lessee and the Realty Partnership entered into four
additional operating leases for two additional resort properties and two hotels
that were acquired by the Realty Partnership.  During the second quarter of
1997, PAH RSI Lessee and the Realty Partnership entered into additional
operating leases for two hotels that were acquired by the Realty Partnership. At
June 30, 1997, PAH RSI Lessee leased eight hotels as follows:
 
       Property Name                         Location            Guest Rooms
  ----------------------------------   -------------------      -----------

  Resorts:
     Carmel Valley Ranch                Carmel, California            100
     The Boulders                       Scottsdale, Arizona           160
     The Lodge at Ventana Canyon        Tucson, Arizona                49
     The Peaks Resort and Spa           Telluride, Colorado           177
   Full-service hotels:
     Doubletree Guest Suites Hotel
      (formerly Luxeford Suites Hotel)  Minneapolis, Minnesota        230
     Hilton Inn Myrtle Beach            Myrtle Beach, South Carolina  385
     Radisson Hotel                     Northbrook, Illinois          313
     Sheraton Park Place                Minneapolis, Minnesota        298


     Each hotel is leased by the Realty Partnership to PAH RSI Lessee for one-
year terms under separate participating operating lease agreements. These
leases, which require PAH RSI Lessee to maintain a minimum net worth and
adequate working capital, require payment of the greater of (1) minimum base
rent or (2) participating rent based upon certain percentages of room revenue,
food and beverage revenue, and telephone and other revenues of each of the
hotels, plus certain additional charges, as applicable.

     These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
period January 16, 1997 (inception of operations) through June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. Significant accounting policies are summarized below.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

     The consolidated financial statements include the accounts of PAH RSI
Lessee and its wholly-owned subsidiaries, Boulders Carefree Sewer Corporation,
BJV Realty, Inc., and The Peaks Real Estate Services, Inc. All significant
intercompany accounts and transactions have been eliminated.

                                       50
<PAGE>
 
                                PAH RSI, L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                  (UNAUDITED)
                                (IN THOUSANDS)

 
Cash and Cash Equivalents

     All highly liquid investments with an original maturity date of three
months or less when purchased are considered to be cash equivalents.

Inventories

     Inventories, consisting of food, beverages, china, linens, silverware,
glassware, and gift and golf shop merchandise, are principally stated at the
lower of cost (generally first-in, first-out) or market.

Tradenames

     Tradenames are stated at cost and are amortized using the straight-line
method over a 40-year estimated useful life.

Organization costs

     Organization costs are being amortized using the straight-line method over
five years.

Revenue Recognition

     Revenue is recognized upon performance of hotel-related services and
delivery of food and beverages. Credit evaluations are performed and an
allowance for doubtful accounts is provided against accounts receivable which
are estimated to be uncollectible.

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 amounts reported in the financial statements and
accompanying notes. Management believes that the actual results will not differ
materially from the estimates used in preparing the financial statements.

Income Taxes

     Under the provisions of the Internal Revenue Code and applicable state
income tax law, PAH RSI Lessee is taxed as a limited liability company, an
entity which is taxed in the same manner as a partnership and, therefore, is not
subject to taxation on income. The federal and state income tax consequences of
PAH RSI Lessee's profits and losses accrue to the limited liability company
members.

2.  TRADENAMES:

     PAH RSI Lessee acquired certain tradenames or licensing rights to certain
tradenames, including the Carefree(R) and Boulders(R) trademarks, simultaneously
with the Realty Partnership's acquisition of the four Carefree Resort
properties. The acquisition of the tradenames and licensing rights was financed
by a promissory note in the amount of $9,000 payable to a subsidiary of the
Realty Partnership (see Note 3). PAH RSI Lessee has assigned certain of these
licensing rights to Resorts Services, Inc. ("RSI"), an Arizona corporation.
Substantially all of the economic interests in RSI are owned individually by the
members of PAH RSI Lessee (see Note 4).

                                       51
<PAGE>
 
                                PAH RSI, L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                  (UNAUDITED)
                                (IN THOUSANDS)

3.  NOTES PAYABLE:

     In connection with the acquisition of certain tradenames and licensing
rights, on January 17, 1997, PAH RSI Lessee issued a promissory note in the
amount of $9,000 payable to a subsidiary of the Realty Partnership. The
principal amount of the note is due January 17, 2002. Interest at an annual rate
of 13% is payable semi-annually commencing July 1, 1997.

4.  COMMITMENTS AND RELATED PARTY TRANSACTIONS:

Participating Lease Commitments

     At June 30, 1997, PAH RSI Lessee has future lease commitments to the Realty
Partnership under the participating lease agreements through March 1998. Minimum
future rental payments under these operating leases for the remainder of the
lease terms aggregate approximately $10,362. PAH RSI Lessee incurred base rents
of $5,123 and $7,963 and participating rents of $3,575 and $8,750 for the three
months ended June 30, 1997 and the period January 16, 1997 through June 30,
1997, respectively. At June 30, 1997, PAH RSI Lessee owed the Realty Partnership
$2,862 for rents under the terms of the participating leases.

     The Realty Partnership has the right to terminate all participating lease
agreements with PAH RSI Lessee. In the event such termination occurs, the Realty
Partnership will be obligated to pay PAH RSI Lessee the fair market value of the
leasehold interests. In addition, in the event of such termination, the Realty
Partnership or its affiliates intend to acquire the assets, including inventory,
tradenames and right to receive certain royalty fees, of PAH RSI Lessee.

Management and Franchise Agreements

     The four resort properties leased by PAH RSI Lessee are managed by RSI. RSI
receives management fees per resort ranging from 2% to 3% of gross room revenue,
as defined. In addition, certain executive officers and employees of RSI are
entitled to receive an annual incentive fee equal to 10% of the excess recurring
cash flow of the resorts, as defined. All management fees payable to RSI are
subordinate to PAH RSI Lessee's obligations to the Realty Partnership under the
terms of the participating lease agreements.

     The Doubletree Guest Suites Hotel (formerly the Luxeford Suites Hotel) is
managed by Doubletree Hotels Corporation which receives a management fee of 3%
of gross revenues, plus incentive fees if certain operating results based on
cash flow and profits (as defined) are achieved by the hotel. The Radisson Hotel
in Northbrook, Illinois and the Hilton Inn Myrtle Beach are managed by a hotel
management entity affiliated with CHC International, Inc. and the Gencom group
of companies which receives a management fee of 3.0% of gross revenues, as
defined.

     RSI is subject to an exclusive license agreement with PAH RSI Lessee for
the use of certain tradenames. Certain royalties may be paid to PAH RSI Lessee
by RSI if adjusted gross receipts, as defined, of RSI exceed certain thresholds.
Royalties earned in conjunction with this agreement were approximately $389 and
$771 for the three months ended June 30, 1997 and the period January 16, 1997
through June 30, 1997, respectively.

Stock Purchase Option

     Pursuant to a stock option agreement dated January 17, 1997, PAH RSI
Lessee's members were granted an exclusive option to purchase all of the
outstanding voting common stock (an aggregate 625 shares of common stock, no par
value per share) of RSI for $1.00 per share. The option expires January 17,
2007.

                                       52
<PAGE>
 
                                PAH RSI, L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                  (UNAUDITED)
                                (IN THOUSANDS)

Expense Reimbursements

     PAH RSI Lessee fully reimburses the Realty Partnership for office space it
occupies within the corporate offices of Patriot American Hospitality, Inc. and
for payroll and related costs the Realty Partnership incurs on behalf of PAH RSI
Lessee. These costs amounted to $167 and $267 for the three months ended June
30, 1997 and the period January 17, 1997 through June 30, 1997. At June 30,
1997, PAH RSI Lessee owed the Realty Partnership $267 for such reimbursements.

Payables to Selling Entities

     At June 30, 1997, PAH RSI Lessee has aggregate payables of $7,515 due to
certain of the former owners of the four resort properties leased from the
Realty Partnership. These payables to selling entities are related to the final
proration of net current assets of the resort properties and are to be repaid
from the collection of such net assets.

5.  MEMBERS' EQUITY:

Initial Capitalization

     Each of the three members has executed a non-interest bearing demand note
in the principal amount of $1,370 in consideration of their required capital
contributions.  Additionally, during the second quarter of 1997, two additional
members were voted into PAH RSI Lessee each of whom have executed non-interest
bearing demand notes in the principal amount of $1,370 in consideration of their
required capital contributions.  These notes receivable from members have been
offset against members' equity in the accompanying financial statements.

Minimum Net Worth

     Under the terms of the participating lease agreements, PAH RSI Lessee is
required to maintain minimum net worth, as defined, equal to 20% of the
projected annual lease payments for all resorts or hotels leased. The minimum
net worth must be composed of certain components, which generally exclude
intangible assets as defined by generally accepting accounting principles. In
addition, PAH RSI Lessee is required to maintain at all times during the
participating lease term a debt to members' equity ratio of no more than four to
one.

6.  LEASES:

     The El Pedregal Shopping Center leases have remaining terms that range from
one to four years. The leases generally provide for minimum annual rental
amounts that may be subject to cost of living increases, and for reimbursement
by tenants for common area environmental costs. Minimum future rental income
under these noncancelable operating leases for the next four years is as
follows:
<TABLE>
<CAPTION>
 
        Year                      Rent Amount
        ----                      -----------
<S>                              <C>
        1997....................  $       534
        1998....................          666
        1999....................          448
        2000....................          165
                                  -----------
                                  $     1,813
                                  ===========
</TABLE>

                                       53
<PAGE>
 
                                PAH RSI, L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                  (UNAUDITED)
                                (IN THOUSANDS)

7.  PRO FORMA FINANCIAL INFORMATION:

     The following unaudited pro forma statements of operations are presented as
if the leases and the operation of the eight hotels leased by PAH RSI Lessee had
commenced on January 1, 1996. The unaudited pro forma statements of operations
are not necessarily indicative of what the actual results of operations of PAH
RSI Lessee would have been assuming such operations had commenced as of January
1, 1996, nor do they purport to represent the results of operations for future
periods. Pro forma lessee expenses represent management fees and estimated
lessee overhead expenses and exclude pro forma interest income associated with
working capital balances.
<TABLE>
<CAPTION>

                                           SIX  MONTHS ENDED
                                                JUNE 30,
                                           ------------------
                                             1997      1996
                                           --------   -------
                                             (IN THOUSANDS)
<S>                                        <C>       <C>
Revenue:
   Rooms................................   $30,473    $27,907
   Food and beverage....................    14,842     14,586
   Telephone and other revenue..........     7,110      5,794
   Club, club membership and spa revenue    17,407     17,033
   Shopping center revenue..............       976        907
   Royalty revenue......................       771        697
                                           -------    -------
   Total revenue........................    71,579     66,924
                                           -------    -------
Expenses:
   Departmental costs and expenses......    32,964     29,592
   Participating lease payments.........    19,805     18,396
   General and administrative...........     4,945      4,741
   Repairs and maintenance..............     5,270      4,980
   Utilities............................     2,485      2,540
   Marketing............................     4,344      4,224
   Interest expense.....................       618        618
   Insurance............................       318        330
                                           -------    -------
   Total expenses.......................    70,749     65,421
                                           -------    -------
Income before lessee expenses...........       830      1,503
Lessee expenses.........................     3,209      2,630
                                           -------    -------
   Net loss.............................   $(2,379)   $(1,127)
                                           =======    =======

</TABLE>

                                       54
<PAGE>
 
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

  Certain statements in this Form 10-Q constitute "forward-looking statements"
as that term is defined under the Private Securities Litigation Reform Act of
1995 (the "Act"). The words "believe", "expect", "anticipate", "intend",
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements and to note that they speak only as of the date
hereof. Reliance should not be placed on forward-looking statements because they
involve known and unknown risks, uncertainties and other factors, which may
cause the actual results, performance or achievement of the Companies to differ
materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements. The Companies undertake
no obligation to publicly update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise. Certain
factors that might cause a difference include, but are not limited to, Patriot's
(and subsequent to the Merger, the Corporation's) dependence upon rental
payments from the Lessees for substantially all of Patriot's (the Corporation's)
income and the dependence upon the abilities of the Lessees and the Operators
(as such terms are defined herein) to manage the hotels, risks associated with
the hotel industry and real estate markets in general, and risks associated with
debt financing.

THE PATRIOT TRANSACTION

The Merger

  On October 31, 1996, the entities formerly known as California Jockey Club
("Cal Jockey") and Bay Meadows Operating Company (collectively with its
subsidiary, "Bay Meadows") entered into a merger agreement (the "October 31,
1996 Agreement") with the entity formerly known as Patriot American Hospitality,
Inc. ("Patriot"). The parties, together with Patriot American Hospitality
Partnership, L.P., a limited partnership and subsidiary of Patriot (the "Realty
Partnership"), thereafter entered into an Agreement and Plan of Merger, dated as
of February 24, 1997, as amended (the "Merger Agreement"), which by its terms
supersedes the October 31, 1996 Agreement and more fully details the transaction
to be consummated by the parties. The Merger Agreement was approved unanimously
by the respective Board of Directors of Patriot, Cal Jockey and Bay Meadows and
on July 1, 1997 was approved by the shareholders of each of Patriot, Cal Jockey
and Bay Meadows.

  Pursuant to the Merger Agreement, on July 1, 1997 Patriot merged with and into
Cal Jockey (the "Merger"), with Cal Jockey being the surviving legal entity. In
connection with the Merger, Cal Jockey's name changed to Patriot American
Hospitality, Inc. (the "Corporation") and Bay Meadows' name changed to Patriot
American Hospitality Operating Company (collectively with its subsidiaries, the
"Operating Company").

  Each share of the Corporation's common stock is "paired" and trades as a unit
with one share of the Operating Company's common stock. By operation of the
Merger, each issued and outstanding share of Patriot's common stock was
converted into 0.51895 shares of the Corporation's common stock and 0.51895
shares of the Operating Company's common stock (prior to giving effect to the
1.927-for-1 stock split in July 1997 discussed below). Each paired share of Cal
Jockey and Bay Meadow common stock remains outstanding and represents the same
number of paired shares of the Corporation and the Operating Company.

  In connection with the Merger, the total number of shares authorized was
increased.  The amounts of authorized shares are as follows:  (i) 100 million
shares of preferred stock, (ii) 650 million shares of common stock, and (iii)
750 million shares of excess stock (as defined in the amended and restated
charters of the Corporation and the Operating Company).

  The Merger has been accounted for as a reverse acquisition whereby Cal Jockey
is considered to be acquired by Patriot. Consequently, the historical financial
information of Patriot will become the historical financial information of the
Corporation in all future filings.  The interim financial information which
Patriot would have been required to file with the Securities and Exchange
Commission for the quarterly period ended June 30, 1997 has been included in
this Joint Quarterly Report of the Corporation and the Operating Company.
Management's discussion and analysis of Patriot's financial condition and
results of operations as of and for the quarter ended June 30, 1997 has been
included in this Item 2.

                                       55
<PAGE>
 
  In connection with the Merger, Bay Meadows formed an operating partnership
(the "Operating Partnership") into which Bay Meadows contributed its assets in
exchange for limited partnership units of the Operating Partnership, and Cal
Jockey contributed certain of its assets to the Realty Partnership in exchange
for limited partnership units of the Realty Partnership ("OP Units")
(collectively, the Operating Partnership and the Realty Partnership are referred
to herein as the "Patriot Partnerships"). Upon completion of the Merger and the
transactions contemplated by the Merger Agreement substantially all of the
operations of the Corporation and the Operating Company will be conducted
through the Patriot Partnerships.

  As of July 31, 1997, the Corporation, through the Realty Partnership and its
subsidiaries, owned 64 hotels in 23 states with an aggregate of 14,982 rooms.
The Realty Partnership leases each of the hotels, except two hotels that are
separately owned through special purpose entities, to lessees who are
responsible for operating the hotels (the "Lessees").  The Lessees, in turn,
have entered into separate agreements with hotel management entities (the
"Operators") to manage the hotels.

The Subscription

  By operation of the Merger, each issued and outstanding share of Patriot
common stock was converted into the right to receive 0.51895 shares of
Corporation common stock (prior to giving effect to the 1.927-for-1 stock split
in July 1997), subject to certain real estate investment trust ("REIT")
qualification requirements. The Realty Partnership, in connection with the
Merger, subscribed (the "Subscription") for shares of Bay Meadows common stock
(which in connection with the Merger became the Operating Company common stock)
(the "Subscribed Shares") in an amount equal to the number of shares of
Corporation common stock that were issued to Patriot stockholders in the Merger.
Immediately prior to the Merger, the Realty Partnership funded the Subscription
and Patriot and the Realty Partnership designated the Patriot stockholders as
the recipients of the Subscribed Shares, in compliance with the Companies' stock
pairing arrangement, on the basis of 0.51895 Subscribed Shares for each share of
Patriot common stock outstanding at the effective time of the Merger, subject to
certain REIT qualification requirements. The result of the Merger and the
Subscription was that Patriot stockholders received 0.51895 shares of the
Corporation's common stock and 0.51895 shares of the Operating Company common
stock (prior to giving effect to the 1.927-for-1 stock split in July 1997
discussed below), subject to certain REIT qualification requirements, for each
share of Patriot common stock held by them at the effective time of the Merger,
which shares of the Corporation's common stock and Operating Company common
stock are paired and transferable only as a single unit.

Stock Split

  On July 10, 1997, the respective Boards of Directors of the Corporation and
the Operating Company declared a 1.927-for-1 stock split on its shares of common
stock effected in the form of a stock dividend distributed on July 25, 1997 to
shareholders of record on July 15, 1997.

  Unless otherwise indicated, all references herein to the number of shares, per
share amounts, and market prices of the common stock and options to purchase
common stock have been restated to reflect the impact of the conversion of each
share of Patriot common stock into 0.51895 paired shares issued in the Merger
and to reflect the impact of the 1.927-for-1 stock split.  In addition, all
references herein to the number of shares, per share amounts, and market prices
of the common stock and options to purchase common stock related to periods
prior to Patriot's 2-for-1 stock split distributed in March 1997 have been
restated to reflect the impact of such stock split.

  As a result of Patriot's 2-for-1 stock split in March 1997, the Merger and the
1.927-for-1 stock split in July 1997, the number of OP Units outstanding and the
OP Unit conversion factor will be adjusted to re-establish a 1-for-1 exchange
ratio of OP Units to common shares.

                                       56
<PAGE>

PATRIOT AMERICAN HOSPITALITY, INC.
(FORMERLY CALIFORNIA JOCKEY CLUB)

Results of Operations: Quarter Ended June 30, 1997
Compared with Quarter Ended June 30, 1996

  Total revenues for Cal Jockey increased $1,431,000 (272%) for the three months
ended June 30, 1997, compared to the same period in the prior year. The increase
was due to the gain on sale of securities, offset by a decrease in interest and
dividend income. The interest and dividend income decrease was due to lower
investment balances. During the quarter ended June 30, 1997, Bay Meadows did not
host any live race days.

  Expenses for the three months ended June 30, 1997 increased $1,896,000 (392%),
primarily as a result of Merger related costs including legal expenses,
termination payments and interest expense on the note payable to Patriot.

Results of Operations: Six Months Ended June 30, 1997
Compared with Six Months Ended June 30, 1996

  Total revenues for Cal Jockey increased $867,000 (30%) for the six months
ended June 30, 1997, compared to the same period in the prior year.  The
increase was primarily due to the gain on sale of securities. Rental income
derived from the leasing of its racing facility is based on Bay Meadows' racing
revenues and decreased $593,000 as a result of 19 less racing days in the first
six months of 1997 than in the same period in 1996.

  Total costs and expenses for the six months ended June 30, 1997, increased
$2,244,000 (252%), primarily as a result of the same factors affecting the three
months ended June 30, 1997.

Liquidity and Capital Resources

  During the first six months of 1997, Cal Jockey's primary sources of capital
were from proceeds of maturing securities and operating activities. Net cash
provided by operating activities was $1,856,000 consisting primarily of net
income excluding a decrease in receivables from Bay Meadows. Receivables from
Bay Meadows decreased primarily due to amounts related to the rental of the
racing facility. Net cash provided by investing activities was $3,037,000
consisting of net proceeds of $7,358,000 on securities, offset by purchases of
$4,321,000 in property, plant and equipment.

  Cash and cash equivalents increased to $3,956,000 at June 30, 1997, from
$1,138,000 at December 31, 1996. This increase primarily was the result of
rental payments received from Bay Meadows and the proceeds of securities sales.
During the first six months of 1997, there were 19 less racing days than in the
first six months of 1996. In 1997, Bay Meadows has been allocated 9 less racing
days than in 1996. This is expected to negatively impact revenues and
profitability for 1997. See Patriot's discussion of liquidity and capital
resources for additional information regarding post-Merger activity.

PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
(FORMERLY BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY)

  Bay Meadows has been allocated 106 racing days for the year ending December
31, 1997 versus 115 racing days for 1996. Of these racing days, Bay Meadows
conducted 44 days of racing in the six months ended June 30, 1997 versus 63 days
in the same period in 1996. Historically, Bay Meadows and Cal Jockey have
derived a major portion of their revenues from the racing meet.

Results of Operations:  Quarter Ended June 30, 1997
Compared with Quarter Ended June 30, 1996

  Total revenues decreased $74,000 (3%) for the three months ended June 30, 1997
compared with the same period in 1996. This was due to an increase in racing
facility rental of $123,000 and interest and dividend income of $12,000 offset
by decreases in other income of $205,000, pari-mutuel revenues of $14,000 and
concession sales of $2,000. Admissions, program, parking and other racing income
increased $12,000. 

                                       57
<PAGE>

  Total costs and expenses increased $1,668,000 (42%) for the three months ended
June 30, 1997, compared with the same period in the prior year. This increase
was primarily due to Merger related costs including legal expenses and
termination payments.
 
Results of Operations: Six Months Ended June 30, 1997
Compared with Six Months Ended June 30, 1996

  Total revenues decreased $6,265,000 (21%) for the six months ended June 30,
1997 compared with the same period in 1996. This was due to a decrease in pari-
mutuel revenues of $5,748,000. Pari-mutuel revenues decreased primarily due to
19 fewer racing days in the first six months of 1997 compared to the same period
in 1996. Admissions, programs, parking and other racing income decreased
$297,000 due to the same factors affecting pari-mutuel revenues. Concession
sales increased $206,000 as a result of Bay Meadows operating Turf Club
concessions previously out-sourced to a third party. 

  Total costs and expenses decreased $3,251,000 (12%) for the six months ended
June 30, 1997, compared with the same period in the prior year. This was
primarily due to decreases in expenses associated with lower operating revenues,
including (i) purses and incentive awards ($2,398,000), (ii) commissions paid to
guest locations ($510,000), (iii) direct operating costs ($1,286,000), (iv)
racing facility rental ($598,000) and (v) marketing ($239,000). However, this
decrease was offset by $234,000 of Merger related costs, $407,000 of legal costs
and $1,151,000 of termination payments.

Liquidity and Capital Resources

  Cash and cash equivalents decreased to $300,000 at June 30, 1997, from
$889,000 at December 31, 1996. Net cash used in operating activities was
$193,000, consisting primarily of depreciation of $358,000, increases in
accounts receivable of $348,000, accrued liabilities of $1,348,000, decreases in
prepaid expenses and other assets of $102,000, accounts payable of $395,000 and
amounts payable to Cal Jockey of $1,033,000. Net cash used in investing
activities was $396,000 for the purchase of property, plant and equipment.

  As of June 30, 1997, Bay Meadows' current liabilities exceeded its current
assets by $3,808,000. The current ratio (current assets to current liabilities)
was .22 to 1 at June 30, 1997, compared to .38 to 1 at December 31, 1996.
 
  The Operating Company's principal source of cash to meet its cash
requirements, including distributions to its shareholders and rent payments due
to the Corporation, will be cash flow from the operation of the hotels and the
Racecourse leased from the Corporation. The Operating Company is dependent on
the Corporation's assistance in securing a bank line of credit for its working
capital needs throughout the year.
 
PATRIOT: (FORMERLY PATRIOT AMERICAN HOSPITALITY, INC.)

  The accompanying discussion and analysis of financial condition and results of
operations is based on the consolidated financial statements of Patriot and the
financial statements of three of the Lessees who operate hotel properties: CHC
Lease Partners, NorthCoast Hotels, L.L.C., and PAH RSI, L.L.C., which are
included elsewhere in this Joint Quarterly Report.

BACKGROUND

  Patriot, a Virginia corporation, was formed April 17, 1995 as a self-
administered REIT for the purpose of acquiring equity interests in hotel
properties. On October 2, 1995, Patriot completed its initial public offering
(the "Initial Offering") of 29,210,000 shares of its common stock and commenced
operations. Patriot, through its wholly-owned subsidiary, PAH LP, Inc.,
contributed substantially all of the net proceeds of the Initial Offering to the
Realty Partnership in exchange for an approximate 85.3% limited partnership
interest in the Realty Partnership. Patriot, through its wholly-owned
subsidiary, PAH GP, Inc., is the sole general partner and the holder of a 1.0%
general partnership interest in the Realty Partnership.

                                       58
<PAGE>

  The Realty Partnership used approximately $263,600,000 of the net proceeds
from Patriot to acquire 20 hotel properties with a total of 4,206 guest rooms
(the "Initial Hotels") from various entities and to repay existing mortgages and
other indebtedness of the Initial Hotels. In addition, in connection with the
Initial Offering, Patriot closed on a line of credit (the "Line of Credit") with
Paine Webber Real Estate Securities, Inc. ("Paine Webber Real Estate"), which
was to be utilized primarily for the acquisition of additional hotels,
renovation of certain hotels and for working capital.
 
  In 1995, Patriot used the balance of the proceeds from the Initial Offering,
together with proceeds from the Line of Credit, to finance acquisitions of two
additional hotel investments, provide for renovations to existing hotels and for
working capital.

  During 1996, Patriot acquired 24 hotel properties in 13 states with an
aggregate 6,416 guest rooms. The total purchase price for these hotels,
including acquisition costs, was approximately $403,249,000.

  During the first quarter of 1997, Patriot acquired four resort properties and
four hotel properties in seven states with an aggregate 1,331 guest rooms. The
total purchase price for these hotels, including acquisition costs, was
approximately $308,200,000.

  During the second quarter of 1997, Patriot acquired two hotel properties in
two states with an aggregate 683 guest rooms. The total purchase price for these
hotels, including acquisition costs, was approximately $52,300,000.

  Patriot leases each of its hotels, except the Crowne Plaza Ravinia Hotel and
the Marriott WindWatch Hotel, which are separately owned through special purpose
entities, to lessees that are responsible for operating the hotels (the
"Lessees").  At June 30, 1997, Patriot leased 25 of the hotels to CHC Lease
Partners for staggered terms of ten to twelve years pursuant to separate
participating leases providing for the payment of the greater of base or
participating rent, plus certain additional charges, as applicable (the
"Participating Leases"). Nine of the hotels were leased to NorthCoast Hotels,
L.L.C. ("NorthCoast Lessee"); DTR North Canton, Inc. ("Doubletree Lessee"), a
subsidiary of Doubletree Hotels Corporation, leased six hotels; PAH RSI, L.L.C.
("PAH RSI Lessee") leased eight hotels; Crow Hotel Lessee, Inc. ("Wyndham
Lessee") leased two hotels; Grand Heritage Leasing, L.L.C. ("Grand Heritage
Lessee") leased three hotels and Metro Lease Partners, Inc. ("Metro Lease
Partners") leased one hotel under similar Participating Lease agreements. The
Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel acquisitions were
structured without lessees.

  As of June 30, 1997, Patriot, through the Realty Partnership, PAH Ravinia,
Inc. ("PAH Ravinia"), PAH Windwatch, L.L.C. ("PAH Windwatch") and other
partnerships, owned 56 hotel properties in 22 states with an aggregate 13,355
guest rooms (the "Hotels"). The Hotels are diversified by franchise or brand
affiliation and serve primarily major U.S. business centers, including Atlanta,
Boston, Chicago, Cleveland, Dallas, Denver, Houston, Miami, Minneapolis, New
York and Seattle. In addition to hotels catering primarily to business
travelers, the Hotels include prominent hotels in major tourist destinations,
including New Orleans, San Antonio, Fort Lauderdale and San Diego. The Hotels
include 46 full service hotels, four limited service hotels, five resorts and an
executive conference center. Fifty-two of the Hotels are operated under
franchise or brand affiliations with nationally recognized hotel companies.

RESULTS OF OPERATIONS OF PATRIOT

Actual (for the three months ended June 30, 1997 and 1996)

  For the three months ended June 30, 1997, Patriot's Participating Lease
revenue from Lessees increased 106.4%, to $36,973,000 in 1997 from $17,913,000
in 1996, primarily due to the acquisition of 23 hotel properties during the past
twelve months. As of June 30, 1997, Patriot owned 56 hotels as compared to 33
owned as of June 30, 1996. Interest and other income was $757,000 for the three
months ended June 30, 1997, compared to $94,000 for the three months ended June
30, 1996. Depreciation and amortization expense was $9,510,000 for 1997,
compared to $3,946,000 for 1996. Real estate and personal property taxes and
property insurance increased to $3,765,000 for the three months ended June 30,
1997, compared to $1,460,000 for the three months ended June 30, 1996. General
and administrative expenses were $2,299,000 for the three months ended June 30,
1997 (which included amortization of unearned stock compensation of $1,306,000
and expenses associated with evaluating 

                                       59
<PAGE>

properties for acquisition which were ultimately not purchased of $87,000),
compared to $951,000 (including amortization of unearned stock compensation of
$118,000) for 1996. Patriot reported $9,523,000 of interest expense for the
three months ended June 30, 1997 (which included $9,087,000 of interest incurred
on the Line of Credit and mortgage note balances and $436,000 of amortization of
deferred financing costs). Interest expense for the three months ended June 30,
1996 was $2,171,000 (which included $2,081,000 of interest incurred on the Line
of Credit and mortgage note balances and $79,000 of amortization of deferred
financing costs). Ground lease expense related to the Holiday Inn Lenox in
Atlanta, Georgia and the Hyatt Regency in Lexington, Kentucky totaled $338,000
in 1997, compared to $223,000 in 1996. Patriot's share of income from
unconsolidated subsidiaries was $2,072,000 from the three months ended June 30,
1997, compared to $1,243,000 in the same period for 1996. The minority
interest's share of income of Patriot was $2,549,000 for the three months ended
June 30, 1997 (including $247,000 related to the minority interest in the
partnerships with DTR), compared to $1,816,000 for 1996. The resulting net
income to common shareholders was $11,818,000 for the three months ended June
30, 1997, compared to $8,683,000 for the three months ended June 30, 1996.

Actual (for the six months ended June 30, 1997 and 1996)

  For the six months ended June 30, 1997, Patriot's Participating Lease revenue
from the Lessees increased 138%, to $71,986,000 from $30,269,000 in 1996,
primarily due to the acquisition of 23 hotel properties during the past twelve
months. Interest and other income was $1,132,000 for the first six months of
1997, compared to $201,000 for the first six months of 1996. Depreciation and
amortization expense was $18,006,000 for 1997, compared to $6,784,000 for 1996.
Real estate and personal property taxes and insurance was $6,966,000 for 1997,
compared to $2,542,000 for 1996. General and administrative expenses were
$5,081,000 for the first six months of 1997 (including amortization of unearned
stock compensation of $1,927,000 and expenses associated with evaluating
properties for acquisition which ultimately were not purchased of $655,000),
compared to $1,892,000 (including amortization of unearned stock compensation of
$284,000) for 1996. Patriot reported $17,328,000 of interest expense for the
first six months of 1997 (which included $16,564,000 of  interest incurred on
the Line of Credit and mortgage note balances outstanding and $764,000 of
amortization of deferred financing costs). Interest expense for the first six
months of 1996 was $2,772,000 (which included $2,639,000 of interest incurred on
the Line of Credit balance and $122,000 of amortization of deferred financing
costs). Ground lease expense related to the Holiday Inn Lenox in Atlanta,
Georgia and the Hyatt Regency in Lexington, Kentucky totaled $683,000 in 1997,
compared to $300,000 for 1996. Patriot's share of income from unconsolidated
subsidiaries was $3,093,000 for 1997, compared to $2,605,000 for 1996. The
minority interest's share of income of Patriot was $4,981,000 for the first six
months of 1997 (including $447,000 related to the minority interest in the
partnerships with DTR), compared to $2,974,000 for 1996. The resulting net
income applicable to common shareholders was $23,166,000 for the six months
ended June 30, 1997, an increase of 46.5% from $15,811,000 for the six months
ended June 30, 1996.

Pro Forma (for the six months ended June 30, 1997 and 1996)

  On a pro forma basis, Patriot's lease revenue grew 6.1% from $70,925,000 for
the first six months of 1996 to $75,222,000 for 1997, reflecting improvements in
average room rates due to continuing improvement in market conditions in the
U.S. lodging industry during 1996 and improved results from renovated and
repositioned hotels (see Pro Forma Results of Operations of Lessees below). Pro
forma interest and other income increased $345,000, from $1,672,000 for 1996 to
$2,017,000 for 1997, as a result of increased interest income from cash reserved
for capital improvements and interest income earned on notes receivable. Total
operating expenses increased approximately 6.9% from $52,950,000 for the first
six months of 1996 to $56,612,000 for 1997. Pro forma general and administrative
expenses were $4,586,000 for the first six months of 1996, compared to
$6,132,000 for 1997 (including amortization of unearned stock compensation of
$2,978,000 for both periods). The increase of $1,546,000 is primarily
attributable to $655,000 of expenses recognized in the first six months of 1997
related to the evaluation of properties for acquisition which ultimately were
not purchased and increases in staffing required by the continued growth of
Patriot which have resulted in increased salaries and related benefits costs.
Pro forma interest expense increased $131,000, from $22,755,000 for the first
six months of 1996 to $22,886,000 for 1997, primarily as a result of the
increase in the 30-day LIBOR rate upon which the Line of Credit interest rate is
based. Pro forma depreciation and amortization expense increased $1,562,000,
from $17,702,000 for the first six months of 1996 to $19,264,000 for 1997,
primarily as a result of depreciation expense related to capital improvements.
As a result, pro forma net income increased $817,000 or 4.3%, from $18,798,000
for the six months ended June 30, 1996 to $19,615,000 for 1997.

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<PAGE>
 
RESULTS OF OPERATIONS OF THE LESSEES

Actual (for the six months ended June 30, 1997 and 1996)

  CHC Lease Partners. CHC Lease Partners' room revenue increased from
  ------------------                                                 
$52,637,000 for the six months ended June 30, 1996 to $65,184,000 for the six
months ended June 30, 1997. The increase is primarily attributable to the
increase in the number of hotels leased by CHC Lease Partners from 23 at June
30, 1996 to 25 at June 30, 1997. Food and beverage, conference center and other
revenues increased from $22,831,000 for the first six months of 1996 to
$31,013,000 for 1997 which is primarily attributable to the leasing of the
Registry Spa and Resort which provides extensive meeting and banquet facilities
as well as the overall increase in the number of hotels being leased by CHC
Lease Partners. Participating Lease payments increased from $25,807,000 for the
first six months of 1996 to $31,343,000 for 1997. Hotel operating expenses were
$47,077,000 for the first six months of 1996 compared to $62,213,000 for 1997.
Net income for the six months ended June 30, 1996 was $936,000 compared to net
income of $1,734,000 for the six months ended June 30, 1997.

  NorthCoast Lessee. For the six months ended June 30, 1997, NorthCoast Lessee
  -----------------                                                           
had room revenues of $22,042,000 from the nine hotels it leased during the
period. NorthCoast Lessee commenced operations in April 1996 and had room
revenues of $7,720,000 from the seven hotels it leased during the period April
2, 1996 (inception of operations) through June 30, 1996.  Food and beverage and
other revenues were $12,460,000 for the first six months of 1997, compared to
$3,944,000 for 1996. Participating Lease payments were $10,217,000 in 1997,
compared to $3,307,000 for 1996.  Hotel operating expenses were $23,228,000 for
1997, compared to $7,682,000 for 1996. Net income was $777,000 for the first six
months of 1997 compared to net income of $347,000 for the period April 2, 1996
(inception of operations) through June 30, 1996.

  PAH RSI Lessee. PAH RSI Lessee began leasing four resort properties from the
  --------------                                                              
Realty Partnership and commenced operations on January 16, 1997. Subsequently,
in January and March 1997, PAH RSI Lessee began leasing two additional hotels
from the Realty Partnership. In addition during the second quarter of 1997, PAH
RSI Lessee leased two additional hotels. For the period from January 16, 1997
through June 30, 1997, PAH RSI Lessee had room revenues of  $24,293,000 from the
eight hotels it leased during the period. Food and beverage and telephone and
other revenues were $17,812,000 and revenues from the club, club membership and
spa facilities were $15,361,000 for the period. PAH RSI Lessee had shopping
center lease revenue of $865,000 and royalty revenues of $771,000 for the
period. Participating Lease payments and hotel and resort operating expenses
were $16,713,000 and $39,348,000, respectively, and net income was $248,000 for
the period from January 16, 1997 (inception of operations) through June 30,
1997.

  Combined Lessees. For the six months ended June 30, 1997, the combined Lessees
  ----------------                                                              
(consisting of CHC Lease Partners, NorthCoast Lessee, PAH RSI Lessee, Doubletree
Lessee, Wyndham Lessee, Grand Heritage Lessee, and Metro Lease Partners) had
room revenues of $141,543,000 from the 54 hotels leased to the Lessees during
the period, compared to $62,887,000 from the 32 hotels leased for the six months
ended June 30, 1996. Food and beverage, conference center, and telephone and
other revenues were $75,273,000 for the first six months of 1997, compared to
$27,548,000 for 1996. In addition, the combined Lessees reported club, club
membership and spa revenue of $15,361,000, shopping center revenue of $865,000,
and royalty revenue of $771,000 for the six months ended June 30, 1997.

  Participating Lease payments were $71,986,000 for the first six months of
1997, compared to $30,269,000 for 1996. Hotel operating expenses were
$154,498,000 for the first six months of 1997, compared to $56,902,000 for 1996.
Net income for the six months ended June 30, 1997 was $1,831,000, compared to
net income of $1,265,000 for 1996.

Pro Forma (for the six months ended June 30, 1997 and 1996)

  CHC Lease Partners. Pro forma room revenue increased from $62,521,000 for the
  ------------------                                                           
six months ended June 30, 1996 to $65,285,000 for 1997, an increase of
$2,764,000 or 4.4%. Average occupancy decreased from 70.5% in 1996 to 68.5% in
1997 and average daily rates increased from $85.27 in 1996 to $92.15 in 1997,
resulting in a 4.9% increase in revenue per available room from $60.13 in 1996
to $63.09 in 1997. The increases in both average daily rates and revenue per
available room were primarily due to continuing improvement in market conditions
in the U.S. lodging industry, completion of renovations at certain of the
Initial Hotels and increased

                                       61
<PAGE>
 
marketing efforts. Excluding rooms that were under renovation, average occupancy
increased from 70.7% in 1996 to 71.9% in 1997 and revenue per available room
increased to $66.26 in 1997 compared to $60.32 for 1996.

  Pro forma food and beverage revenue increased from $22,511,000 for the first
six months of 1996 to $23,509,000 for 1997, a total increase of $998,000 and a
variance of 4.4%, primarily as a result of increased banquet and catering
business. Conference center revenue increased from $1,196,000 for the first six
months of 1996 to $1,363,000 for 1997, an increase of $167,000, or 14%,
primarily due to increased marketing efforts. Telephone and other revenue
decreased from $6,670,000 for the first six months of 1996 to $6,185,000 for
1997, a decrease of $485,000, or 7.3%, due primarily to the decrease in
cancellation fees during the period.

  Pro forma Participating Lease payments were $29,588,000 for the six months
ended June 30, 1996 compared to $31,382,000 for 1997, an increase of 6.1%. Pro
forma hotel operating expenses increased $1,280,000 from $61,039,000 for the
first six months of 1996 to $62,319,000 for 1997. Departmental costs and
expenses increased $194,000, or less than 1%. General and administrative
expenses increased $439,000, or 5.3%, primarily due to additional salaries and
related benefit costs. Marketing expenses increased $698,000, or 8.1%, as a
result of increased marketing efforts at newly renovated hotels. Pro forma hotel
operating expenses as a percentage of total revenue remained relatively stable,
decreasing from 65.7% in 1996 to 64.7% in 1997.

  Lessee expenses, which on a pro forma basis consist of management fees and
overhead expenses, net of interest and dividend income, decreased $403,000, or
30.9%, from $1,304,000 for the first six months of 1996 to $901,000 for 1997,
primarily as a result of increases in historical interest and dividend income.

  CHC Lease Partners' net income on a pro forma basis was $967,000 for the six
months ended June 30, 1996 compared to $1,740,000 for 1997 as a result of the
variances discussed above.

  NorthCoast Lessee. (The comparisons presented herein are actual results of
  -----------------                                                         
operations of NorthCoast Lessee for the six months ended June 30, 1997 to pro
forma results of operations for the six months ended June 30, 1996). Pro forma
room revenue increased from $20,494,000 for the six months ended June 30, 1996
to $22,042,000 for 1997, an increase of $1,548,000 or 7.6%. Average occupancy
decreased from 66.5% in 1996 to 64.8% in 1997 and average daily rates increased
from $82.85 in 1996 to $91.66 in 1997 resulting in an 7.8% increase in revenue
per available room from $55.13 in 1996 to $59.43 in 1997. The increases in both
average daily rates and revenue per available room were primarily due to
continuing improvement in market conditions in the U.S. lodging industry,
increased marketing efforts at newly renovated hotels and management's continued
focus on maximizing room rates. Excluding rooms that were under renovation,
average occupancy increased from 66.5% in 1996 to 67.0% in 1997 and revenue per
available room increased to $61.37 in 1997 compared to $55.13 for 1996.

  Pro forma food and beverage revenue increased from $9,373,000 for the first
six months of 1996 to $10,571,000 for 1997, a total of $1,198,000, or 12.8%.
Telephone and other revenue increased from $1,868,000 for the first six months
of 1996 to $1,889,000 for 1997, an increase of $21,000, or 1.1%.

  Pro forma Participating Lease payments were $9,850,000 for the first six
months of 1996 compared to $10,217,000 for 1997, an increase of 3.7% primarily
due to increased revenues upon which the Participating Lease payment calculation
is based. Pro forma hotel operating expenses increased from $22,329,000 for the
first six months of 1996 to $23,228,000 for 1997, an increase of $899,000, or
4%. Departmental costs and expenses increased $748,000, or 5.6%, as a result of
increased salaries and benefits at certain of the hotels. General and
administrative expenses increased $47,000, or 1.7%, and marketing expenses
increased $230,000, or 9.7%. Pro forma hotel operating expenses as a percentage
of total revenue decreased from 70.4% for the first six months of 1996 to 67.3%
for 1997 primarily due to stabilization of certain operating costs.

  Lessee expenses, which on a pro forma basis consist of management fees and
overhead expenses, net of actual interest and other income, decreased $754,000
or 72.9%, from $1,034,000 for the first six months of 1996 to $280,000 for 1997
primarily as a result of service fee income of $900,000 earned in 1997 related
to the acquisition by Patriot of certain hotel properties owned by affiliates of
the NorthCoast Lessee.

  NorthCoast Lessee's net loss on a pro forma basis was $1,478,000 for the six
months ended June 30, 1996 compared to net income of  $777,000 for the six
months ended June 30, 1997.

                                       62
<PAGE>
 
  PAH RSI Lessee. Pro forma room revenue increased to $30,473,000 for the first
  --------------                                                               
six months of 1997 from $27,907,000 for 1996, an increase of $2,566,000 or 9.2%.
Average occupancy increased from 68.4% in 1996 to 70.2% in 1997 and average
daily rates increased from $133.62 in 1996 to $144.51 in 1997 resulting in a
10.8% increase in revenue per available room from $91.46 in 1996 to $101.38 in
1997. The increases in both average daily rates and revenue per available room
were primarily due to continuing improvement in market conditions in the U.S.
lodging industry as well as continued efforts to market the resorts.

  Pro forma food and beverage revenue increased from $14,586,000 for the first
six months of 1996 to $14,842,000 for 1997, a total of $256,000 or 1.8%. Pro
forma telephone and other revenues increased from $5,794,000 for the first six
months of 1996 to $7,110,000 for 1997, an increase of $1,316,000, or 22.7%, as a
result of the overall increase in occupancy and increased marketing efforts. Pro
forma club, club membership and spa revenue increased 2.2% from $17,033,000 for
the first six months of 1996 to $17,407,000 for 1997. Shopping center revenue
increased from $907,000 for the first six months of 1996 to $976,000 for 1997,
and royalty revenue increased from $697,000 for the first six months of 1996 to
$771,000 for 1997.

  Pro forma Participating Lease payments were $18,396,000 for the first six
months of 1996 compared to $19,805,000 for 1997, an increase of 7.7%, primarily
due to increased revenues upon which the Participating Lease payment calculation
is based. Pro forma hotel operating expenses increased from $47,025,000 for the
first six months of 1996 to $50,944,000 for 1997, an increase of $3,919,000, or
8.3%. This increase is primarily attributable to a $3,372,000 increase in
departmental costs and expenses as a result of increased salaries and benefits
at certain of the hotels. Pro forma hotel operating expenses as a percentage of
total revenue increased from 70.3% in 1996 to 71.2% in 1997.

  Lessee expenses, which on a pro forma basis consist of management fees and
overhead expenses, increased $579,000 or 22.0%, from $2,630,000 for the first
six months of 1996 to $3,209,000 for 1997 primarily as a result of increased
management fees in accordance with the terms of certain management agreements.

  PAH RSI Lessee's net loss on a pro forma basis was $1,127,000 for the first
six months of 1996 compared to $2,379,000 for 1997.  The increase in loss is
primarily attributable to the increased departmental costs, which increased by
8.3% as discussed above.

  Combined Lessees. On a combined basis, pro forma room revenue from the hotels
  ----------------                                                             
was $148,056,000 for the six months ended June 30, 1997, an increase of 5.8%
from $139,934,000 in 1996. Average occupancy decreased from 69.6% in 1996 to 67%
in 1997 and average daily rates increased from $90.73 in 1996 to $99.49 in 1997
resulting in a 5.5% increase in revenue per available room from $63.13 in 1996
to $66.62 in 1997. The increases in both average daily rates and revenue per
available room were primarily due to continuing improvement in market conditions
in the U.S. lodging industry and increased marketing efforts at newly renovated
hotels. Excluding rooms that were under renovation, average occupancy decreased
from 69.9% in 1996 to 69.7% in 1997, resulting in revenue per available room of
$69.38 in 1997 compared to $63.47 for 1996.

  Combined pro forma food and beverage, conference center, and telephone and
other hotel revenues increased 4.6%, from $76,049,000 for the first six months
of 1996 to $79,542,000 for 1997. Pro forma club, club membership and spa revenue
increased 2.2%, from  $17,033,000 for the first six months of 1996 to
$17,407,000 for 1997. Pro forma shopping center revenue increased from $907,000
for the first six months of 1996 to $976,000 for 1997, and pro forma royalty
revenue increased from $697,000 for the first six months of 1996 to $771,000 for
1997.

  Combined pro forma Participating Lease payments were $75,222,000 for 1997
compared to $70,925,000 for 1996, a 6.1% increase, as a result of increased room
revenues upon which the Participating Lease payment calculations are based.
Hotel operating expenses on a pro forma basis increased $5,211,000, or 3.2%, to
$166,491,000 for the first six months of 1997 compared to $161,280,000 for 1996.
As a result, combined pro forma net loss for the six months ended June 30, 1997
was $885,000 compared to $3,998,000 for 1996.

LIQUIDITY AND CAPITAL RESOURCES

  During the first six months of 1997, Patriot acquired six hotels and four
resort properties for approximately $360,500,000 (including closing costs).
These acquisitions were financed primarily with funds drawn on the Line of

                                       63
<PAGE>
Credit, the issuance of 1,295,077 OP Units valued at approximately $58,662,000,
and the assumption of mortgage debt in the amount of approximately $28,489,000.
 
  Borrowings under Patriot's Line of Credit generally bear interest at a rate
per annum equal to the 30-day LIBOR rate plus 1.9%. The Line of Credit is
secured by a mortgage on certain of the hotels.  In January 1997, the maximum
amount available under the Line of Credit was increased to $475,000,000, along
with the modification of certain terms.   In May 1997, the maximum amount
available under the Line of Credit was increased, to $625,000,000, along with
certain other modifications.

  As of June 30, 1997, Patriot had approximately $520,305,000 outstanding under
the Line of Credit. As of such date, Patriot also had approximately  $63,989,000
of other mortgage debt outstanding, resulting in total indebtedness of
approximately $584,294,000. As of June 30, 1997, the Line of Credit was secured
by 38 of the 56 hotels and Patriot had single asset mortgage loans that encumber
three additional hotels.

  Pursuant to the Merger with Patriot, the Corporation assumed Patriot's
$625,000,000 Line of Credit which was secured by a mortgage on certain of the
hotel properties and approximately $63,972,000 of other mortgage debt. On July
21, 1997, the Companies entered into a revolving credit facility with Paine
Webber Real Estate, The Chase Manhattan Bank ("Chase") and certain other lenders
(collectively, the "Lenders") for a three-year $700 million unsecured revolving
line of credit (the "Revolving Credit Facility"). Borrowings have been made
under the Revolving Credit Facility to repay all outstanding amounts under the
Line of Credit. The Revolving Credit Facility also will be used for acquisition
of additional properties, businesses and other assets, for capital expenditures
and for general working capital purposes. The interest rate for the Revolving
Credit Facility ranges from LIBOR plus 1.0% to 2.0% (depending on the Companies'
leverage ratio or investment grade ratings received from the rating agencies) or
the customary alternate base rate announced from time to time plus 0.0% to 0.5%
(depending on the Companies' leverage ratio). The initial interest rate for the
Revolving Credit Facility is 7.372% per annum. As of August 1, 1997, the unused
commitment under the Revolving Credit Facility is approximately $308.3 million.
 
  Effective August 4, and August 5, 1997, the Companies entered into two
interest rate swap arrangements as a hedge against $250 million of the $700
million Revolving Credit Facility.  As discussed above, the initial interest
rate for borrowings under the Revolving Credit Facility is 7.372% per annum.
Each of the interest rate swaps covers $125 million of borrowings under the
Revolving Credit Facility and bears interest at 6.09% and 6.255%, respectively.
The interest rate swap arrangements expire November 2002.

  Additionally, the Corporation has entered into a commitment letter with Paine
Webber Real Estate and Chase for a $500 million term loan (the "Term Loan"). It
is anticipated that the Term Loan will be secured by specific assets and
properties of the Companies that will be transferred to a special purpose
"bankruptcy remote" entity. The Term Loan will be used to finance payments to be
made in connection with the acquisition of certain properties and is expected to
have an interest rate per annum equal to LIBOR plus 1.75%.

  The Corporation's principal source of cash to meet its cash requirements,
including distributions to its shareholders, is its share of the Realty
Partnership's cash flow. The Realty Partnership's principal source of revenue is
rent payments under the participating leases. The Lessees' ability to make rent
payments to the Realty Partnership (including rent payments due from the
Operating Company), and, therefore, the Corporation's liquidity, including the
ability to make distributions to its shareholders, is dependent upon the
Lessees' ability to generate sufficient cash flow from operation of the hotels.

  In addition, the Companies are evaluating other permanent sources of capital,
including the issuance of equity and long-term debt. It is expected that
additional common or preferred stock offerings will be used both to acquire
hotel properties and to limit the Companies' overall debt to market
capitalization ratio.  In August 1997, the Companies completed a public offering
of 9,200,000 paired shares of common stock, the net proceeds of which (less
underwriter discount and expenses) were approximately $209.4 million.  The net
proceeds were used to reduce the outstanding debt under the Revolving Credit
Facility. In addition, in August 1997, the Companies' underwriters exercised the
over-allotment option and issued an additional 1,380,000 paired shares of common
stock.  The net proceeds of approximately $31 million were used to reduce the
outstanding debt under the Revolving Credit Facility.

                                       64
<PAGE>
 

Acquisitions and Investments

  During June and July 1997, the Corporation loaned approximately $46 million to
partnerships affiliated with members of CHC Lease Partners, relating to two
hotels owned by the partnerships: the Doubletree Hotel in Glenview, Illinois and
the Sheraton Gateway Hotel in Miami (also known as the Sheraton River House
Hotel). These loans mature in two years, bear interest at a rate per annum equal
to 30-day LIBOR plus 2.75%, and are secured by first priority liens on the
respective hotels. Additionally, the Corporation has purchased two additional
loans on which partnerships affiliated with the members of CHC Lease Partners
are borrowers for an aggregate purchase price of $57 million. One of the
purchased loans, in the principal amount of approximately $30.7 million, matures
in December 2000 and bears interest at a rate per annum equal to 8.0% until
November 30, 1997, 8.5% from December 1, 1997 until November 30, 1999, and 9.0%
from December 1, 1999 until December 1, 2000. The second purchased loan, in the
principal amount of approximately $24.4 million, matures on December 31, 1999
and bears interest at a rate per annum equal to 8.0% until December 31, 1997 and
9.5% from January 1, 1998 until December 31, 1999. Each of the purchased loans
is secured by first priority liens on the respective hotels. In connection with
such loans, the Corporation has entered into a short-term financing arrangement
with an affiliate of Paine Webber Real Estate, whereby such affiliate loaned the
Corporation $103 million through April 15, 1998 at a rate equal to the greater
of 30-day LIBOR plus 1.75% or the borrowing rate on the Revolving Credit
Facility. This financing is secured by a collateral assignment of the mortgage
loans encumbering the four hotels. CHC Lease Partners currently leases 25 of the
Corporation's hotels and is the Corporation's largest independent Lessee.

  On August 1, 1997, the Corporation purchased a participating loan from
National Resort Ventures, L.P., a Delaware limited partnership, related to the
1,013-room Buena Vista Palace Hotel in Orlando, Florida for $23.75 million in
cash (the "Participating Note"). The Participating Note acquisition closed
simultaneously with the closing of the public offering of common stock and
effectively was financed with funds drawn on the Revolving Credit Facility.  The
Buena Vista Palace Hotel is owned by a joint venture between Equitable Life
Insurance Company who owns a 55% interest and Hotel Venture Partners, Ltd., a
Florida limited partnership ("HVP"), who owns a 45% interest.  The Participating
Note is subordinated to a ground lease, a $51 million first leasehold mortgage
loan and a separate $8.5 million participating loan.

  In July 1997, the Corporation, through the Realty Partnership and its
subsidiaries, acquired eight hotels with a total of 1,595 rooms for
approximately $107.9 million, which was financed with (i) funds held in a
restricted escrow account related to the land sale discussed below, (ii) funds
drawn on the Revolving Credit Facility, and (iii) the assumption of
approximately $5.8 million in debt related to the acquisition of the Radisson
Beachwood Hotel. The hotels acquired included the 266-room Holiday Inn Westlake,
the 196-room Radisson Beachwood, and the 113-room Courtyard by Marriott
Beachwood, all in Cleveland, Ohio; the 130-room Radisson Hotel in Akron, Ohio;
the 224-room Holiday Inn at the San Francisco International Airport; the 323-
room Ramada Inn at the San Francisco International Airport; the 219-room
Ambassador West, a Grand Heritage Hotel in Chicago, Illinois; and the 124-room
Union Station Hotel, a Grand Heritage Hotel in Nashville, Tennessee. The Holiday
Inn and the Ramada Inn at the San Francisco International Airport have been
leased to NorthCoast Hotels, L.L.C. for a one-year period pursuant to separate
participating lease agreements. The remaining six hotel properties acquired in
July 1997 have been leased to the Operating Company for periods ranging from 5 
to 10 years pursuant to separate participating lease agreements.

  On July 14, 1997, the Corporation sold approximately 174 acres of land in San
Mateo, California, representing substantially all of the land which was owned by
Cal Jockey prior to the Merger, to an affiliate of PaineWebber Incorporated
("PaineWebber") for a purchase price of approximately $81.1 million (the
"PaineWebber Land Sale"). These funds were placed in a restricted account in
order to facilitate a tax-deferred, like-kind exchange through the acquisition
of suitable hotel properties.  In July 1997, three suitable hotels were acquired
using the proceeds from this restricted account.  The Corporation retained
ownership of the improvements located on the land, including the Bay Meadows
Racecourse (the "Racecourse") and its related facilities. Simultaneously with
the consummation of the PaineWebber Land Sale, the PaineWebber affiliate and the
Corporation entered into a ground lease covering a portion of the land on which
the Racecourse is situated for a term of seven years. The lease provides for
quarterly rental payments of $750,000 through March 1998, $812,500 through March
1999, $875,000 through March 2000, $1,000,000 through March 2002 and $1,250,000
through July 2004. Additionally, the Corporation subleased the Racecourse land
and leased the related improvements to the Operating Company in order to permit
the Operating Company to continue horseracing operations at the Racecourse
through the term of the Corporation's lease. The sublease is for a term of seven
years with annual payments based on percentages of

                                       65
<PAGE>
 
revenue generated. In connection with the sale, the Corporation assigned all of
its rights and benefits under existing leases, contracts, permits and
entitlements relating to the land sold to the PaineWebber affiliate, and the
PaineWebber affiliate assumed all of the Corporation's development obligations
for on and off-site improvements and all obligations under existing lease and
contracts. Under the ground lease, the Corporation is responsible for
reimbursing the PaineWebber affiliate for up to approximately $10.3 million of
costs relating to certain development obligations which relate to the leased
land as a racing facility, including the building of new stable facilities.

Potential Acquisitions

  On April 14, 1997, Patriot entered into a merger agreement with Wyndham Hotel
Corporation ("Wyndham") described below.  Subsequent to the Merger, the
Companies ratified and succeeded to Patriot's interest in the agreement with
Wyndham.  Through this agreement, the Corporation agreed to acquire Wyndham's
portfolio of 23 owned and leased hotels, with an aggregate of 4,877 guest rooms,
management and franchise agreements for Wyndham's 64 managed and franchised
properties throughout North America, management and franchise agreements for 15
properties which are currently closed for renovation or construction or are in
the process of being converted to the Wyndham Brand, and Wyndham's proprietary
brand names, including Wyndham/sm/, Wyndham Garden(R) and Wyndham Hotels &
Resorts/sm/ (the "Wyndham Acquisition").  Terms of the Wyndham Acquisition
provide for Wyndham shareholders to receive 1.372 paired shares of Corporation
common stock and Operating Company common stock for each share of Wyndham common
stock (subject to adjustment under certain circumstances), with up to $100
million of such consideration payable in cash, at the option of Wyndham's
shareholders.  The Corporation will also assume or retire all of Wyndham's
outstanding indebtedness, which totaled approximately $151 million as of June
30, 1997.

  Additionally, in July 1997, Wyndham acquired ClubHouse Hotels, Inc.
("ClubHouse"), a privately-held company based in Kansas which owns a chain of 16
hotels along with the ClubHouse brand name and a franchise for one additional
hotel. As a result of the transaction, Wyndham will directly or indirectly own
and manage 13 of the hotels, will own partial interests and manage three of the
hotels, and will license one franchised ClubHouse hotel.

  In connection with the proposed Wyndham Acquisition, the Corporation also
entered into a definitive agreement with partnerships affiliated with members of
the Trammell Crow family providing for the Corporation's acquisition of 11 full-
service Wyndham-branded hotels with 3,072 rooms (the "Crow Properties
Acquisition" and, collectively with the Wyndham Acquisition, the "Wyndham
Transactions") for an aggregate purchase price of approximately $332 million in
cash, plus up to $14 million in additional cash consideration if two of the
hotels meet certain cash flow targets.  The Corporation expects the Wyndham
Transactions will be completed in the fourth quarter of 1997.  The Wyndham
Transactions are subject to various closing conditions, including approval of
the Wyndham Acquisition by the shareholders of the Companies and Wyndham.
Accordingly, no assurances can be given that the Wyndham Transactions will be
consummated.

  In addition to the Wyndham Transactions, the Corporation has entered into
agreements or letters of intent to purchase six additional hotels aggregating
1,883 rooms (the "Other Hotel Acquisitions") for an aggregate purchase price
(excluding closing costs and other acquisition-related expenses) of
approximately $185.5 million.  The Corporation has also agreed to purchase Grand
Heritage Hotels, a hotel management and marketing company, and other
subsidiaries of Grand Heritage Hotels, including an interest in one hotel with
an aggregate of 235 rooms (the "Grand Heritage Acquisition"), for a combined
purchase price of approximately $25.3 million.  No assurances can be made that
the Other Hotel Acquisitions or the Grand Heritage Acquisition will be
consummated.
 
  As part of its ongoing business, the Companies continually engage in
discussions with public and private real estate entities, including, without
limitation, current lessees of the Companies' hotels, regarding possible
portfolio or single asset acquisitions, as well as the acquisition of hotel
leasing and management operations.  No assurances can be made that the Companies
will acquire any such acquisition opportunities.

  Cash and cash equivalents as of June 30, 1997 were $8,975,000, including
capital improvement reserves of $4,473,000. Additionally, the June 30, 1997
lease revenue receivable was $12,353,000, of which $10,692,000 was paid by the
Lessees in July 1997. Cash flows from operating activities of Patriot was
$38,463,000 for the first six months of 1997, which primarily represents
collection of rents under the Participating Leases, less Patriot's

                                       66
<PAGE>
 
operating expenses for the period. Cash flows used in investing activities in
the amount of $315,327,000 for the first six months of 1997 resulted from the
acquisition of hotel properties and renovation expenditures at certain hotels.
Cash flows from financing activities of $279,235,000 for the first six months of
1997 were primarily related to borrowings under the Line of Credit and mortgage
notes, net of payments of dividends and distributions.

  Cash and cash equivalents as of June 30, 1996 were $6,675,000, including
capital improvement reserves of $3,605,000.  Cash flows from operating
activities of Patriot were $24,803,000 for the six months ended June 30, 1996,
which primarily represents collection of rents under the Participating Leases,
less Patriot's operating expenses for the period. Cash flows used in investing
activities in the amount of $144,264,000 for the first six months of 1996
resulted primarily from the acquisition of hotel properties. Cash flows from
financing activities of $121,367,000 were primarily related to $101,661,000 in
net borrowings on the Line of Credit and $39,417,000 of net proceeds from the
private placement of equity securities, net of dividends and distributions paid
during the period.

RENOVATIONS AND CAPITAL IMPROVEMENTS

  Pursuant to the Participating Leases, Patriot is obligated to establish a
reserve for each hotel for capital improvements, including the periodic
replacement or refurbishment of furniture, fixtures and equipment ("F, F & E").
The aggregate amount of such reserves average 4.0% of total revenue, with the
amount of such reserve with respect to each hotel based upon projected capital
requirements of such hotel. Management believes such amounts are sufficient to
fund recurring capital expenditures for the hotels. Capital expenditures,
exclusive of renovations, may exceed 4.0% of total revenues in a single year.

  Patriot completed over $16,873,000 of capital improvements during 1996 as well
as commenced and completed renovations at certain of the Hotel properties.
During 1996, approximately $11,097,000 of total capital improvement expenditures
were related to significant renovations at certain of the hotel properties which
included upgrading the rooms, public meeting space and lobby areas. Patriot has
budgeted approximately $20,768,000 of capital improvements, excluding
renovations, to complete recurring capital expenditures in 1997 for the 56
hotels owned as of June 30, 1997.

  Patriot has completed over $34,873,000 of capital improvements during the six 
months ended June 30, 1997 as well as commenced and completed additions and 
renovations at certain of the Hotel properties. During 1997, approximately 
$22,213,000 of total capital improvement expenditures were related to 
significant additions and renovations at certain of the hotel properties.

  During 1997 for the 56 hotels owned as of June 30, 1997, Patriot has budgeted
a total of approximately $39,220,000 related to the renovations or completion of
renovations at a number of the hotels. Total budgeted renovations include
approximately $11,744,000 related to the completion of major additions and
renovations begun during 1996 at the Tremont House in Boston, Massachusetts; The
Registry Resort and Spa in Fort Lauderdale, Florida; and the WestCoast Long
Beach Hotel and Marina in Long Beach, California. The renovation of the Tremont
House in Boston included the construction of 32 additional guest rooms.
Additionally, major planned renovations of approximately $10,549,000 began in
late 1996 and are currently in process at the Holiday Inn - Miami Airport in
Miami, Florida and the Holiday Inn in Des Plaines, Illinois (both of which will
be converted to Doubletree brands upon completion of the renovations); and the
Doubletree Hotel in Tallahassee, Florida. Renovations which total approximately
$15,514,000 are expected to be started and completed during 1997 on the recently
acquired Doubletree Hotel at Allen Center in Houston, Texas; the Radisson Hotel
in Northbrook, Illinois; the Radisson Hotel in Overland Park, Kansas; the
Doubletree Guest Suites Hotel (formerly Luxeford Suites Hotel) in Minneapolis,
Minnesota and the Pickwick Hotel in San Francisco, California.

  The budgeted capital improvements excluding renovations consist of upgrades
and replacements of soft goods and furniture and fixtures, upgrades of telephone
systems, and other equipment purchases and improvements which management
believes will continue to enhance and maintain the revenue-producing
capabilities of certain of the hotels. The budgeted renovations to certain of
the hotel properties include complete renovation of rooms, lobby, public areas
and meeting space by replacing existing soft and hard goods with a higher
quality of furnishings, with the intention of upgrading the overall quality of
the hotel facility. Management believes these renovations will enhance the
revenue-producing capabilities of these hotels and strengthen the hotels'
position in their respective markets.

                                       67
<PAGE>
  Patriot attempts to schedule renovations and improvements during traditionally
lower occupancy periods in an effort to minimize disruption to the hotel's
operations. Therefore, Patriot does not believe such renovations and capital
improvements will have a material effect on the results of operations of the
hotels. Capital expenditures will be financed through the capital expenditure
reserves, the Revolving Credit Facility or other financing sources or with
working capital.
 
INFLATION

  Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures may limit the Lessees' ability to raise
room rates in the face of inflation.

SEASONALITY

  The hotel industry is seasonal in nature. Revenues for certain of the
Corporation's hotels are greater in the first and second quarters of a calendar
year and at other hotels in the second and third quarters of a calendar year.
Seasonal variations in revenue at the hotels may cause quarterly fluctuations in
the Corporation's lease revenues.

PATRIOT'S FUNDS FROM OPERATIONS

  Funds from Operations (as defined and computed below) was $24,509,000 for the
three months ended June 30, 1997 and $14,949,000 for the three months ended June
30, 1996.  Funds from Operations was $47,432,000 for the six months ended June
30, 1997 and $26,583,000 for the six months ended June 30, 1996. On a pro forma
basis, Funds from Operations was $44,235,000 for the six months ended June 30,
1997 compared to $41,811,000 for the six months ended June 30, 1996.

  Patriot considers Funds from Operations to be a key measure of REIT
performance. Funds from Operations represents net income (loss) (computed in
accordance with generally accepted accounting principles), excluding gains (or
losses) from debt restructuring or sales of property, plus depreciation of real
property, and after adjustments for unconsolidated partnerships, joint ventures
and corporations. Adjustments for Patriot's unconsolidated subsidiaries are
calculated to reflect Funds from Operations on the same basis. Patriot has also
made certain adjustments to Funds from Operations for real estate related
amortization. Funds from Operations should not be considered as an alternative
to net income or other measurements under generally accepted accounting
principles as an indicator of operating performance or to cash flows from
operating, investing or financing activities as a measure of liquidity. Funds
from Operations does not reflect working capital changes, cash expenditures for
capital improvements or principal payments on indebtedness.

  The following reconciliation of net income to Funds from Operations
illustrates the difference between the two measures of operating performance for
the three months ended June 30, 1997 and 1996:

                                       68
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                                  Three Months Ended
                                                                       June 30,
                                                                 --------------------
                                                                   1997       1996
                                                                 ---------  ---------
                                                                    (in thousands)
<S>                                                              <C>        <C>
     Net income................................................   $11,818    $ 8,683
     Add:
       Minority interest in Realty Partnership.................     2,302      1,816
       Depreciation of buildings and improvements and
          furniture, fixtures and equipment....................     9,480      3,916
       Amortization of franchise fees..........................        22         22
       Amortization of capitalized lease costs.................        36         23
     Adjustment for Funds from Operations of
       unconsolidated subsidiaries:
       Equity in earnings of unconsolidated subsidiaries.......    (2,072)    (1,243)
       Funds from Operations of unconsolidated subsidiaries....     2,923      1,732
                                                                  -------    -------
     Funds from Operations.....................................   $24,509    $14,949
                                                                  =======    =======
 
     Patriot's share of Funds from Operations..................   $20,514    $12,363
                                                                  =======    =======
 
     Primary /(1)/:
       Weighted average shares and OP Units outstanding /(2)/..    53,629     36,671
                                                                  =======    =======
       Weighted average number of common shares and
          common share equivalents outstanding.................    44,985     30,349
                                                                  =======    =======
 
     Fully-diluted /(1)/:
       Weighted average shares and OP Units outstanding /(2)/..    53,847     36,741
                                                                  =======    =======
       Weighted average number of common shares and
          common share equivalents outstanding.................    45,203     30,419
                                                                  =======    =======
</TABLE>

  See notes on following page.

                                       69
<PAGE>
 
    The following reconciliation of net income to Funds from Operations
illustrates the difference between the two measures of operating performance for
the six months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
 
                                                                  Six Months Ended
                                                                      June 30,
                                                                 -----------------
                                                                    1997      1996
                                                                 -------   -------
                                                                  (in thousands)
<S>                                                              <C>       <C>
     Net income................................................  $23,166   $15,811
     Add:
       Minority interest in Realty Partnership.................    4,534     2,974
       Depreciation of buildings and improvements and
          furniture, fixtures and equipment....................   17,947     6,724
       Amortization of franchise fees..........................       44        44
       Amortization of capitalized lease costs.................       72        46
     Adjustment for Funds from Operations of
       unconsolidated subsidiaries:
       Equity in earnings of unconsolidated subsidiaries.......   (3,093)   (2,605)
       Funds from Operations of unconsolidated subsidiaries....    4,762     3,589
                                                                 -------   -------
     Funds from Operations.....................................  $47,432   $26,583
                                                                 =======   =======
 
     Patriot's share of Funds from Operations..................  $39,668   $22,372
                                                                 =======   =======
 
     Primary /(1)/:
       Weighted average shares and OP Units outstanding /(2)/..   53,351    35,442
                                                                 =======   =======
       Weighted average number of common shares and
          common share equivalents outstanding.................   44,783    29,906
                                                                 =======   =======
 
     Fully-diluted /(1)/:
       Weighted average shares and OP Units outstanding /(2)/..   53,504    36,952
                                                                 =======   =======
       Weighted average number of common shares and
          common share equivalents outstanding.................   44,936    29,981
                                                                 =======   =======
 
</TABLE>
------------------------------------
(1) Shares outstanding in 1996 have been restated to reflect the impact of the
    2-for-1 stock split effected in the form of a stock dividend distributed on
    March 18, 1997 to shareholders of record on March 7, 1997, the conversion of
    each Patriot share into 0.51895 paired shares issued in the Merger, and the
    impact of the 1.927-for-1 stock split effected in the form of a stock
    dividend distributed on July 25, 1997 to shareholders of record on July 15,
    1997.
(2) The number of OP Units used in the calculation is based upon the equivalent
    number of shares of Patriot's common stock after giving effect to the change
    in the OP Unit conversion factor which coincides with the 2-for-1 stock
    split, the Merger exchange ratio of 0.51895 paired shares of Cal Jockey
    common stock and Bay Meadows common stock for each share of Patriot common
    stock, and the change in the OP Unit conversion factor which coincides with
    the 1.927-for-1 stock split.

                                       70
<PAGE>
 
                          PART II:  OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

     On April 14, 1997, an action styled Kwalbrun v. James D. Carreker, et. al.,
was filed in the Delaware Court of Chancery in and for New Castle County,
purportedly as a class action on behalf of Wyndham stockholders, against
Wyndham, Patriot and the members of the Board of Directors of Wyndham. The
complaint alleges that the Wyndham Board of Directors breached its fiduciary
duties owed to Wyndham's public stockholders in connection with the Board of
Directors' approval of the Wyndham Acquisition. In particular, the complaint
alleges that the Wyndham Acquisition was negotiated at the expense of Wyndham's
public stockholders, and that the Wyndham Board of Directors permitted Patriot
to negotiate on more favorable terms the Crow Properties Acquisition with
members of the Trammell Crow family. Patriot is alleged to have knowingly aided
and abetted the alleged breach of fiduciary duties. The complaint seeks to
enjoin, preliminarily and permanently, consummation of the Wyndham Acquisition
under the terms presently proposed and also seeks unspecified damages. Patriot
denies the allegations in the complaint and expects to defend the action
vigorously.

ITEM 2.  CHANGES IN SECURITIES

         None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None

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

         None

ITEM 5.  OTHER INFORMATION

Stock Option Plan

     Bay Meadows has granted options for 162,000 paired shares to persons who
are or were Bay Meadows Officers and Employees. Bay Meadows maintains that Cal
Jockey has agreed to and is obligated to provide stock options to Bay Meadows
for the purchase of 162,000 shares of Cal Jockey stock to match the options
granted by Bay Meadows. Cal Jockey has acknowledged agreement to provide options
to purchase 107,500 shares of Cal Jockey stock to back up the option grants by
Bay Meadows. The difference relates to options for paired shares that Bay
Meadows granted to certain Bay Meadows Officers and Employees in 1996. In order
to show the greatest possible dilution, the disclosures in the financial
statements assume that the options were granted by both Companies. However,
there has been no resolution of this difference and no determination has been
made as to the possible effects, which could be material, of the ultimate
resolution of this uncertainty on the accompanying financial statements if it is
determined that the options for all or a portion of the difference were not
granted in 1996 by Cal Jockey.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    (a)  Exhibits

         None

    (b)  Reports on Form 8-K

         Current Report on Form 8-K dated January 16, 1997, as amended (File
         No. 001-13898 filed January 31, 1997, February 21, 1997, April 8,
         1997, April 9, 1997 and May 19, 1997), reporting the consummation of
         the acquisition of Carefree Resorts Corporation and Resorts Limited
         partnership and certain other assets and

                                       71
<PAGE>
 
         Current Report on Form 8-K dated April 14, 1997, as amended (File No.
         001,13898 filed April 17, 1997 and April 18, 1997), reporting the
         execution of a merger agreement between Patriot American Hospitality,
         Inc. (Patriot) and Wyndham Hotel Corporation and the related stock
         purchase agreement and the execution of agreements with partnerships
         affiliated with members of the Trammell Crow family providing for the
         acquisition by Patriot American Hospitality, Inc. (the Corporation) of
         11 full-service Wyndham-branded hotels.

                                       72
<PAGE>
 
                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrants have duly caused this report to be signed on their
behalf by the undersigned, thereunto duly authorized.

DATED:  August 13, 1997



                    PATRIOT AMERICAN HOSPITALITY, INC.



                    /s/  Rex E. Stewart
                    -------------------
                    Rex E. Stewart
                    Executive Vice President and Chief Financial Officer
                    (Authorized Officer and Principal Accounting and
                    Financial Officer)



                    PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY



                    /s/ Rex E. Stewart
                    ------------------
                    Rex E. Stewart
                    Executive Vice President and Chief Financial Officer
                    (Authorized Officer and Principal Accounting and
                    Financial Officer)

                                       73