<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 September 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 ____________________


<TABLE> 
<CAPTION> 
             Commission File Number 1-9319                               Commission File Number 1-9320


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

              Delaware                   94-0358820                      Delaware                     94-2878485
--------------------------------------------------------  ------------------------------------------------------------
(State or other jurisdiction of    (I.R.S. Employer           (State or other jurisdiction of      (I.R.S. Employer
incorporation or organization)      Identification No.)       incorporation or organization)     Identification No.)
                                            
3030 LBJ Freeway, Suite 1500                              3030 LBJ Freeway, Suite 1500
Dallas, Texas                                   75234     Dallas, Texas                                       75234
--------------------------------------------------------  ------------------------------------------------------------
  (Address of principal executive offices)  (Zip Code)       (Address of principal executive offices)      (Zip Code)

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

--------------------------------------------------------  ------------------------------------------------------------
</TABLE> 

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 November 12, 1997, was
as follows:

<TABLE> 
<CAPTION> 

             Registrant                                       Number of Shares
             ----------                                       ----------------
      <S>                                                     <C>  
      Patriot American Hospitality, Inc.                          68,006,621
      Patriot American Hospitality Operating Company              68,006,621

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

                                     INDEX

                        PART I - FINANCIAL INFORMATION

<TABLE> 
<CAPTION> 

Item 1. Financial Statements:                                                                                  Page
                                                                                                               ----
<S>                                                                                                            <C> 
Combined Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company:
     Combined Balance Sheets as of  September 30, 1997 (unaudited) and December 31, 1996....................
     Combined  Statements of Operations for the three months ended  September 30, 1997 and 1996 and the nine
       months ended September 30, 1997 and 1996 (unaudited).................................................
     Combined Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (unaudited)....
     Patriot American Hospitality, Inc. :
       Consolidated Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996...............
       Consolidated  Statements of Operations for the three months ended September 30, 1997 and 1996 and the
         nine months ended September 30, 1997 and 1996 (unaudited)..........................................
       Consolidated  Statements  of Cash  Flows  for the  nine  months  ended  September  30,  1997 and 1996
         (unaudited)........................................................................................
     Patriot American Hospitality Operating Company:
       Consolidated Balance Sheet as of September 30, 1997 (unaudited)......................................
       Consolidated Statement of Operations for the three months ended September 30, 1997 (unaudited).......
       Consolidated Statement of Cash Flows for the three months ended September 30, 1997 (unaudited).......
     Notes to Financial Statements as of September 30, 1997 (unaudited).....................................

CHC Lease Partners:
     Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996..............................
     Statements  of  Operations  for the three months ended  September 30, 1997 and 1996 and the nine months
       ended September 30, 1997 and 1996 (unaudited)........................................................
     Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (unaudited).............
     Notes to Financial Statements as of September 30, 1997 (unaudited).....................................

NorthCoast Hotels, L.L.C.:
     Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996..............................
     Statements  of  Operations  for the three months  ended  September  30, 1997 and 1996,  the nine months
       ended  September 30, 1997 and the period April 2, 1996  (inception of operations)  through  September
       30, 1996 (unaudited).................................................................................
     Statements of Cash Flows for the  nine months  ended  September 30, 1997  and the  period April 2, 1996
       (inception of operations) through September 30, 1996 (unaudited).....................................
     Notes to Financial Statements as of September 30, 1997 (unaudited).....................................

PAH RSI, L.L.C.:
     Consolidated Balance Sheet as of September 30, 1997 (unaudited)........................................
     Consolidated  Statements  of  Operations  for the three months ended  September 30, 1997 and the period
       January 16, 1997 (inception of operations) through September 30, 1997 (unaudited)....................
     Consolidated  Statement of Members'  Equity  (Deficit)  for the period  January 16, 1997  (inception of
       operations) through September 30, 1997 (unaudited)...................................................
     Consolidated  Statement of Cash Flows for the period January 16, 1997 (inception of operations) through
       September 30, 1997 (unaudited).......................................................................
     Notes to Consolidated Financial Statements as of September 30, 1997 (unaudited)........................
</TABLE> 

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

                               INDEX - Continued

<TABLE> 
<CAPTION> 
                                                                                                               Page
                                                                                                               ----
<S>                                                                                                            <C> 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............

                                    PART II - OTHER INFORMATION

Item 1. Legal Proceedings...................................................................................

Item 5. Other Information...................................................................................

Item 6. Exhibits and Reports on Form 8-K:
     Exhibits ..............................................................................................
     Reports on Form 8-K....................................................................................

Signatures..................................................................................................
</TABLE> 

                                       3
<PAGE>
 
                         PART I: FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                    PATRIOT AMERICAN HOSPITALITY, INC. AND
                PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                            COMBINED BALANCE SHEETS
                     (in thousands, except share amounts)

<TABLE> 
<CAPTION> 
                                                                                September 30,       December 31,
                                                                                    1997               1996
                                                                              -----------------   ------------------
                                                                                 (unaudited)
<S>                                                                           <C>                 <C> 
                                    ASSETS

Investment in real estate and related improvements and land held for sale,
   net of accumulated depreciation of $50,319 in 1997 and $19,815 in 1996...  $       1,477,512   $          641,825
Cash and cash equivalents...................................................             21,515                6,604
Restricted cash.............................................................             38,196                   --
Accounts receivable.........................................................             38,540                6,198
Investment in unconsolidated subsidiaries...................................             12,061               11,291
Mortgage notes and other receivables from unconsolidated subsidiaries.......             74,053               72,209
Mortgage and promissory notes and other receivables from lessees and their
   affiliates...............................................................             98,538                  631
Inventories.................................................................              3,439                1,648
Management contracts........................................................             22,453                   --
Trade names and franchise costs.............................................              2,500                   --
Deferred expenses, net......................................................             16,626                3,063
Deferred acquisition costs..................................................             46,036               15,394
Goodwill, net of accumulated amortization of $716...........................            120,839                   --
Prepaid expenses and other assets...........................................              7,099                2,068
Deferred income taxes.......................................................                700                   --
                                                                              -----------------   ------------------

       Total assets.........................................................  $       1,980,107   $          760,931
                                                                              =================   ==================

                     LIABILITIES AND SHAREHOLDERS' EQUITY

Borrowings under line of credit facility and mortgage notes.................  $         727,177   $          214,339
Accounts payable and accrued expenses.......................................             48,561               10,117
Dividends and distributions payable.........................................             21,727               13,129
Sales taxes payable.........................................................              2,968                   --
Deposits....................................................................              2,037                   --
Due to unconsolidated subsidiaries..........................................              5,904                6,034
Deferred income tax liability...............................................              4,846                   --

Minority interest in the Patriot Partnerships...............................            257,274               68,562
Minority interest in other consolidated subsidiaries........................             29,284               11,711

Commitment and contingencies................................................                 --                   --

Shareholders' Equity:
   Preferred stock (paired shares), $0.01 par value, authorized: 100,000,000 
    shares each; no shares issued and outstanding...........................                 --                   --
   Excess stock (paired shares), $0.01 par value, authorized: 750,000,000
     shares each; no shares issued and outstanding..........................                 --                   --
   Common stock (paired shares), $0.01 par value, authorized: 650,000,000
     shares each; issued and outstanding: 68,005,704 shares each in 1997 and
     43,613,496 shares in 1996/(1)/.........................................              1,360                  436
   Additional paid in capital...............................................            941,674              442,104
   Unearned stock compensation, net of accumulated amortization of $4,451 in
     1997 and $1,139 in 1996................................................            (15,075)              (5,427)
   Distributions in excess of retained earnings.............................            (47,630)                 (74)
                                                                              -----------------   ------------------

       Total shareholders' equity...........................................            880,329              437,039
                                                                              -----------------   ------------------

       Total liabilities and shareholders' equity...........................  $       1,980,107   $          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-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.

                                       4
<PAGE>
 
                    PATRIOT AMERICAN HOSPITALITY, INC. AND
                PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                       COMBINED STATEMENTS OF OPERATIONS
                                  (unaudited)
                   (in thousands, except per share amounts)

<TABLE> 
<CAPTION> 
                                                           Three Months Ended               Nine Months Ended
                                                              September 30,                   September 30,
                                                     ------------------------------   ------------------------------
                                                          1997            1996             1997            1996
                                                     --------------  --------------   --------------  --------------
<S>                                                  <C>             <C>              <C>             <C> 
Revenue:
   Participating lease revenue.....................  $      35,098   $      22,466    $   107,084     $    52,735
   Hotel revenue...................................         30,271              --         30,271              --
   Racecourse facility and land lease revenue......         10,861              --         10,861              --
   Management fee and service fee income...........          1,577              --          1,577              --
   Interest and other income.......................          3,831             211          4,963             412
                                                     -------------   -------------    -----------     -----------
         Total revenue.............................         81,638          22,677        154,756          53,147
                                                     -------------   -------------    -----------     -----------

Expenses:
   Departmental costs -- hotel operations..........         10,032              --         10,032              --
   Racing facility operations......................          9,213              --          9,213              --
   Direct operating costs of management company 
     and service department........................            260              --            260              --
   General and administrative......................          6,582           1,381         11,663           3,273
   Ground lease expense............................          1,310             411          1,993             711
   Repair and maintenance..........................          1,186              --          1,186              --
   Utilities.......................................          1,450              --          1,450              --
   Interest expense................................         13,933           1,709         31,261           4,481
   Real estate and personal property taxes and
     casualty insurance............................          4,301           1,910         11,267           4,452
   Marketing.......................................          3,122              --          3,122              --
   Management fees.................................            699              --            699              --
   Cost of acquiring leaseholds....................         43,820              --         43,820              --
   Depreciation and amortization...................         13,792           4,844         31,798          11,628
                                                     -------------   -------------    -----------     -----------
         Total expenses............................        109,700          10,255        157,764          24,545
                                                     -------------   -------------    -----------     -----------

Income (loss) before equity in earnings of
   unconsolidated subsidiaries, income tax
   provision, minority interests and extraordinary         (28,062)         12,422         (3,008)         28,602
   item............................................   
   Equity in earnings of unconsolidated 
   subsidiaries....................................          1,395           1,772          4,488           4,377
                                                     -------------   -------------    -----------     -----------        
Income (loss) before income tax provision, minority
   interests and extraordinary item................        (26,667)         14,194          1,480          32,979
   Income tax provision............................            (94)             --            (94)             --
                                                     -------------   -------------    -----------     -----------

Income (loss) before minority interests and
   extraordinary item..............................        (26,761)         14,194          1,386          32,979
   Minority interest in the Patriot Partnerships...          3,225          (2,168)        (1,309)         (5,142)
   Minority interest in consolidated subsidiaries..           (934)             (2)        (1,381)             (2)
                                                     -------------   -------------    -----------     -----------

Income (loss) before extraordinary item............        (24,470)         12,024         (1,304)         27,835
   Extraordinary loss from early extinguishment of
     debt, net of minority interest................         (2,534)             --         (2,534)             --
                                                     -------------   -------------    -----------     -----------

Net income (loss) applicable to common shareholders
                                                     $     (27,004)  $      12,024    $    (3,838)    $    27,835
                                                     =============   =============    ===========     ===========

Net income (loss) per common Paired Share/(1)/:
   Income (loss) before extraordinary item.........  $       (0.38)  $        0.30    $     (0.03)    $      0.83
   Extraordinary loss..............................  $       (0.04)  $          --    $     (0.05)    $        --
                                                     -------------   -------------    -----------     -----------
     Net income (loss) per common Paired Share.....  $       (0.42)  $        0.30    $     (0.08)    $      0.83
                                                     =============   =============    ===========     ===========
</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-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

                       COMBINED STATEMENTS OF CASH FLOWS
                                  (unaudited)
                                (in thousands)

<TABLE> 
<CAPTION> 
                                
                                                                                              Nine Months Ended
                                                                                                September 30,
                                                                                   --------------------------------------
                                                                                          1997                1996
                                                                                   ------------------  ------------------
<S>                                                                                <C>                 <C> 
Cash flows from operating activities:                                        
   Net income (loss)...........................................................    $          (3,838)  $           27,835
   Adjustments to reconcile net income to net cash provided by                  
     operating activities:                                                      
     Depreciation..............................................................               30,539               11,538
     Amortization of unearned stock compensation...............................                3,312                  630
     Amortization of deferred loan costs.......................................                1,342                  273
     Amortization of lease inducement costs....................................                  102                   76
     Amortization of management contracts and tradenames.......................                  469                   --
     Amortization of goodwill..................................................                  716                   --
     Other amortization........................................................                   93                   90
     Cost of acquiring leaseholds..............................................               43,820                   --
     Payment of interest on notes receivable from unconsolidated subsidiaries..                3,448                3,204
     Accrued interest receivable...............................................               (1,497)                  --
     Issue common stock to directors...........................................                   --                   37
     Equity in earnings of unconsolidated subsidiaries.........................               (4,488)              (4,377)
     Minority interest in income of the Patriot Partnerships...................                1,309                5,142
     Minority interest in income of other consolidated subsidiaries............                1,381                    2
     Extraordinary loss from early extinguishment of debt......................                2,534                   --
     Changes in assets and liabilities:                                         
       Accounts receivable.....................................................              (24,164)              (5,611)
       Prepaid expenses and other assets.......................................               (3,112)                 (53)
       Accounts payable and accrued expenses...................................               29,341                1,259
       Due to unconsolidated subsidiaries......................................                 (130)                 (45)
       Due from PAH RSI, L.L.C.................................................               (6,709)                  --
       Deposits................................................................                1,418                   --
                                                                                   ------------------  ------------------
         Net cash provided by operating activities.............................               75,886               40,000
                                                                                   ------------------  ------------------
                                                                                
Cash flows from investing activities:                                           
   Acquisition of hotel properties and related working capital assets..........             (507,734)            (278,725)
   Improvements and additions to hotel properties..............................              (53,761)              (9,085)
   Net proceeds from sale of land..............................................               77,226                   --
   Acquisition hotels from restricted cash.....................................              (39,142)                  --
   Restricted cash.............................................................              (38,196)                  --
   Collection of receivables from selling entities.............................                  525                1,003
   Prepaid acquisition costs...................................................              (34,846)                 246
   Investment in unconsolidated subsidiaries...................................               (1,574)                  --
   Investment in mortgage note receivable from unconsolidated subsidiaries.....                   --              (31,400)
   Investment in mortgage and promissory notes from Lessees and their           
     affiliates................................................................             (112,625)                  --
   Principal payment received on mortgage and other notes receivable...........                   --                  399
                                                                                   ------------------  ------------------
         Net cash used in investing activities.................................             (710,127)            (317,562)
                                                                                   ------------------  ------------------
                                                                                
Cash flows from financing activities:                                           
   Borrowings under line of credit facility and mortgage notes.................            1,300,820              295,555
   Repay borrowings under line of credit facility..............................             (822,226)            (191,463)
   Payment of deferred loan costs..............................................              (18,723)              (1,184)
   Capital lease...............................................................                  119                   --
   Payment of merger costs.....................................................              (11,414)                  --
   Proceeds of equity offerings................................................              253,289              213,061
   Payment of offering costs...................................................              (12,602)             (13,884)
   Proceeds from exercise of options to purchase common stock..................                2,298                   --
   Contribution received from minority interest in consolidated subsidiaries...               16,204                3,213
   Payments to redeem OP Units.................................................              (14,596)                  --
   Dividends and distributions paid............................................              (44,017)            (25,501)
                                                                                   ------------------  ------------------
         Net cash provided by financing activities.............................              649,152              279,797
                                                                                   ------------------  ------------------
                                                                                
Net increase in cash and cash equivalents......................................               14,911                2,235
Cash and cash equivalents at beginning of period...............................                6,604                4,769
                                                                                   ------------------  ------------------
Cash and cash equivalents at end of period.....................................    $          21,515   $            7,004
                                                                                   ==================  ==================
</TABLE> 
                       See notes to financial statements.

                                       6
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.
                          CONSOLIDATED BALANCE SHEETS
                     (in thousands, except share amounts)

<TABLE> 
<CAPTION> 
                                                                                    September 30,      December 31,
                                                                                         1997             1996
                                                                                   ---------------   ---------------
                                                                                     (unaudited)
<S>                                                                                <C>               <C> 
                                     ASSETS
Investment in hotel properties and land held for development,
     net of accumulated depreciation of $49,436 in 1997 and $19,815 in 1996....    $     1,444,404   $       641,825 
Investment in Racecourse facility and related improvements,
     net of accumulated depreciation of $392 in 1997...........................             15,179                --
Cash and cash equivalents, including capital improvement reserves of                 
     $2,600 in 1997 and $2,458 in 1996.........................................             10,332             6,604
Restricted cash................................................................             38,196                --
Lease revenue receivable.......................................................             18,938             5,351
Receivables from selling entities..............................................              1,870               847
Investment in unconsolidated subsidiaries......................................             12,061            11,291
Mortgage notes and other receivables from unconsolidated subsidiaries..........             74,053            72,209
Mortgage and promissory notes and other receivables from Lessees and their           
     affiliates ...............................................................             98,538               631
Inventory......................................................................              1,908             1,648
Goodwill, net of accumulated amortization of $538..............................             86,532                --
Deferred expenses, net of accumulated amortization of $936 in 1997                   
     and $750 in 1996..........................................................             16,626             3,063
Deferred acquisition costs.....................................................             21,802            15,394
Prepaid expenses and other assets..............................................              2,926             2,068
                                                                                   ---------------   ---------------
         Total assets..........................................................    $     1,843,365   $       760,931
                                                                                   ===============   ===============
<CAPTION> 

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under line of credit facility and mortgage notes....................    $       727,177   $       214,339
Subscription notes payable.....................................................             24,170                --
Accounts payable and accrued expenses..........................................             22,974            10,117
Dividends and distributions payable............................................             21,301            13,129
Due to unconsolidated subsidiaries.............................................              5,904             6,034
Minority interest in Patriot REIT Partnership..................................            218,196            68,562
Minority interest in other subsidiaries........................................             29,284            11,711
Commitments and contingencies..................................................                 --                --
Shareholders' equity:
     Preferred stock, $0.01 par value; authorized: 100,000,000 shares; 
      no shares issued and outstanding.........................................                 --                --
     Excess stock, $0.01 par value; authorized: 750,000,000 shares;
      no shares issued and outstanding.........................................                 --                --
     Common stock, $0.01 par value; authorized: 650,000,000 shares; 
      issued and outstanding: 68,005,704 shares in 1997 and 43,613,496 shares 
      in 1996 (1)..............................................................                680               436
     Paid-in capital...........................................................            857,093           442,104
     Unearned stock compensation, net of accumulated amortization                    
         of $4,451 in 1997 and $1,139 in 1996..................................            (15,075)           (5,427)
     Distributions in excess of retained earnings..............................            (48,339)              (74)
                                                                                   ---------------   ---------------
         Total shareholders' equity............................................            794,359           437,039
                                                                                   ---------------   ---------------
         Total liabilities and shareholders' equity............................    $     1,843,365   $       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.

                                       7
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (unaudited)
                   (in thousands, except per share amounts)

<TABLE> 
<CAPTION> 
                                                       Three Months Ended                 Nine Months Ended
                                                         September 30,                      September 30,
                                              ---------------------------------  ---------------------------------
                                                    1997              1996             1997              1996
                                              ---------------   ---------------  ---------------   ---------------
<S>                                           <C>               <C>              <C>               <C> 
Revenue:
   Participating lease revenue............... $        45,784   $        22,466  $       117,770   $        52,735
   Racecourse land lease revenue.............           1,323                --            1,323                --
   Interest and other income.................           3,083               211            4,215               412
                                              ---------------   ---------------  ---------------   ---------------
       Total revenue.........................          50,190            22,677          123,308            53,147
                                              ---------------   ---------------  ---------------   ---------------

Expenses:
   Real estate and personal property taxes
     and casualty insurance..................           4,253             1,910           11,219             4,452
   Ground lease expense......................           1,310               411            1,993               711
   General and administrative................           2,501             1,381            7,582             3,273
   Interest expense..........................          14,649             1,709           31,977             4,481
   Cost of acquiring leaseholds..............          43,820                --           43,820                --
   Depreciation and amortization.............          12,650             4,844           30,656            11,628
                                              ---------------   ---------------  ---------------   ---------------
       Total expenses .......................          79,183            10,255          127,247            24,545
                                              ---------------   ---------------  ---------------   ---------------
Income (loss) before equity in earnings of
   unconsolidated subsidiaries, minority
   interests and extraordinary item..........         (28,993)           12,422           (3,939)           28,602
   Equity in earnings of unconsolidated
     subsidiaries............................           1,395             1,772            4,488             4,377
                                              ---------------   ---------------  ---------------   ---------------
Income (loss) before minority interests and
   extraordinary item........................         (27,598)           14,194              549            32,979
   Minority interest in Patriot REIT
     Partnership.............................           3,340            (2,168)          (1,194)           (5,142)
   Minority interest in other consolidated
     subsidiaries............................            (921)               (2)          (1,368)               (2)
                                              ----------------  ---------------- ----------------  ----------------
Income (loss) before extraordinary item......         (25,179)           12,024           (2,013)           27,835
   Extraordinary loss from early extinguish-
     ment of debt, net of minority interest..          (2,534)               --           (2,534)               --
                                              ----------------  ---------------  ----------------  ---------------
Net income (loss) applicable to common
   shareholders.............................. $       (27,713)  $        12,024  $        (4,547)  $        27,835
                                              ================  ===============  ================  ===============

Net income (loss) per common share(1):
   Income (loss) before extraordinary item... $        (0.39)   $          0.30  $        (0.04)   $          0.83
   Extraordinary loss........................          (0.04)                --           (0.05)                --
                                              ---------------   ---------------  ---------------   ---------------
   Net income (loss) per common share........ $        (0.43)   $          0.30  $        (0.09)   $          0.83
                                              ===============   ===============  ===============   ===============
</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.


                                       8
<PAGE>
 
                      PATRIOT AMERICAN HOSPITALITY, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (unaudited)
                                 (in thousands)
<TABLE> 
<CAPTION> 
                                                                                         Nine Months Ended
                                                                                           September 30,
                                                                              ------------------------------------
                                                                                     1997              1996
                                                                              -----------------  -----------------
<S>                                                                           <C>                <C> 
Cash flows from operating activities:
   Net income (loss)......................................................... $          (4,547) $          27,835
   Adjustments to reconcile net income to net cash provided by operating
     activities:
     Depreciation............................................................            30,048             11,538
     Amortization of unearned stock compensation.............................             3,312                630
     Amortization of deferred loan costs.....................................             1,342                273
     Amortization of lease inducement costs..................................               102                 76
     Amortization of goodwill................................................               538                 --
     Other amortization......................................................                90                 90
     Cost of acquiring leaseholds............................................            43,820                 --
     Payment of interest on notes receivable from unconsolidated subsidiaries             3,448              3,204
     Accrued interest receivable.............................................            (1,095)                --
     Issue common stock to directors.........................................                --                 37
     Equity in earnings of unconsolidated subsidiaries.......................            (4,488)            (4,377)
     Minority interest in income of Patriot REIT Partnership.................             1,194              5,142
     Minority interest in income of other consolidated subsidiaries..........             1,368                  2
     Extraordinary loss from early extinguishment of debt....................             2,534                 --
   Changes in assets and liabilities:
     Lease revenue receivable................................................           (13,475)            (5,611)
     Receivables from Lessees................................................               150                 --
     Prepaid expenses and other assets.......................................              (747)               (53)
     Accounts payable and other accrued expenses.............................            14,481              1,259
     Due to unconsolidated subsidiaries......................................              (130)               (45)
     Due from PAH RSI, L.L.C.................................................            (6,709)                --
                                                                              -----------------  -----------------
                  Net cash provided by operating activities..................            71,236             40,000
                                                                              -----------------  -----------------
Cash flows from investing activities:
   Acquisition of hotel properties and related working capital assets........          (502,413)          (278,725)
   Improvements and additions to hotel properties............................           (53,168)            (9,085)
   Net proceeds from sale of land............................................            77,226                 --
   Aquisition of hotels from restricted cash.................................           (39,142)                --
   Restricted cash escrow....................................................           (38,196)                --
   Collection of receivables from selling entities...........................               525              1,003
   Prepaid acquisition costs.................................................           (11,014)               246
   Investment in unconsolidated subsidiaries.................................            (1,574)                --
   Investment in mortgage and promissory notes receivable from Lessees and 
     their affiliates........................................................          (112,625)                --
                                                                                           
   Investment in mortgage note receivable from unconsolidated subsidiaries...                --            (31,400)
   Principal payment received on mortgage note receivable....................                --                298
   Principal payment received on other note receivable.......................                --                101
                                                                              -----------------  -----------------
                  Net cash used in investing activities......................          (680,381)          (317,562)
                                                                              -----------------  -----------------
Cash flows from financing activities:
   Borrowings under line of credit and mortgage note.........................         1,300,820            295,555
   Repay borrowings under line of credit ....................................          (822,226)          (191,463)
   Payment of deferred loan costs............................................           (18,723)            (1,184)
   Payment for capital leases................................................               (22)                --
   Payment on subscription notes receivable..................................           (35,486)                --
   Proceeds of equity offering and private placement.........................           241,223            213,061
   Payment of offering costs.................................................           (12,602)           (13,884)
   Proceeds from exercise of options.........................................             2,298                 --
   Contribution received from minority interest in consolidated subsidiaries.            16,204              3,213
   Payments to redeem OP Units...............................................           (14,596)                --
   Dividends and distributions paid..........................................           (44,017)           (25,501)
                                                                              -----------------  -----------------
                  Net cash provided by financing activities..................           612,873            279,797
                                                                              -----------------  -----------------
Net increase in cash and cash equivalents....................................             3,728              2,235
Cash and cash equivalents at beginning of period.............................             6,604              4,769
                                                                              -----------------  -----------------
Cash and cash equivalents at end of period................................... $          10,332  $           7,004
                                                                              =================  =================
Supplemental disclosure of cash flow information:
     Cash paid during the period for interest................................ $           9,205  $           4,243
                                                                              =================  =================
</TABLE> 

                      See notes to financial statements.

                                       9
<PAGE>
 
                PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
                          CONSOLIDATED BALANCE SHEET
                                  (unaudited)
                     (in thousands, except share amounts)
<TABLE> 
<CAPTION> 
                                                                                                     September 30,
                                                                                                         1997
                                                                                                   -----------------
<S>                                                                                                <C> 
                                               ASSETS
 Current assets:
      Cash and cash equivalents................................................................... $        11,183
      Accounts receivable.........................................................................          23,165
      Subscription notes receivable...............................................................          24,170
      Inventories.................................................................................           1,531
      Prepaid expenses and other current assets...................................................           3,880
                                                                                                   --------------- 
          Total current assets....................................................................          63,929
 Investment in furniture, fixtures and equipment, net of accumulated depreciation of $491.........          17,929
 Management contracts, net........................................................................          22,453
 Trade names and franchise costs, net.............................................................           2,500
 Deferred acquisition costs.......................................................................          24,234
 Goodwill, net of accumulated amortization of $178................................................          34,307
 Other assets, net of accumulated amortization of $474............................................             293
 Deferred income taxes............................................................................             700
                                                                                                   ---------------
          Total assets............................................................................ $       166,345
                                                                                                   ===============


                                LIABILITIES AND SHAREHOLDERS' EQUITY
 Current liabilities:
      Accounts payable and accrued expenses....................................................... $        10,837
      Accrued liabilities.........................................................................          13,633
      Dividends and distributions payable.........................................................             426
      Participating lease payments payable........................................................           4,706
      Sales taxes payable.........................................................................           2,968
      Deposits....................................................................................           2,037
                                                                                                   ---------------
          Total current liabilities...............................................................          34,607
 Deferred income tax liability....................................................................           4,846
 Other liabilities................................................................................           1,844
 Minority interest in Patriot Operating Company Partnership.......................................          39,078
 Commitments and contingencies....................................................................              --
 Shareholders' equity:
      Preferred stock, $0.01 par value; authorized: 100,000,000 shares;
          no shares issued and outstanding........................................................              --
      Excess Stock, $0.01 par value; authorized: 750,000,000 shares; 
          no shares issued and outstanding........................................................              --
      Common stock, $0.01 par value; authorized: 650,000,000 shares; 
          issued and outstanding: 68,005,704 shares...............................................             680
      Paid-in capital.............................................................................          84,581
      Retained earnings...........................................................................             709
                                                                                                   ---------------
          Total shareholders' equity..............................................................          85,970
                                                                                                   ---------------
          Total liabilities and shareholders' equity.............................................. $       166,345
                                                                                                   ===============
</TABLE> 

                      See notes to financial statements.


                                      10
<PAGE>
 
                PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
                     CONSOLIDATED STATEMENT OF OPERATIONS
                                  (unaudited)
                   (in thousands, except per share amounts)

<TABLE> 
<CAPTION> 
                                                                                                     Three Months
                                                                                                        Ended
                                                                                                     September 30,
                                                                                                         1997
                                                                                                   -----------------
<S>                                                                                                <C> 
Revenue:
   Room revenue..................................................................................  $        20,437
   Other hotel revenue...........................................................................            9,834
   Racecourse facility revenue...................................................................           10,861
   Management fee and service fee income.........................................................            1,577
   Interest and other income.....................................................................            1,475
                                                                                                   ---------------
       Total revenue.............................................................................           44,184
                                                                                                   ---------------

Expenses:
   Departmental costs-- hotel operations.........................................................           10,032
   Racecourse facility operations................................................................           10,536
   Direct operating costs of management company and service department...........................              260
   General and administrative....................................................................            4,081
   Repair and maintenance........................................................................            1,186
   Utilities.....................................................................................            1,450
   Marketing.....................................................................................            3,122
   Management fees...............................................................................              699
   Depreciation and amortization.................................................................            1,142
   Participating lease payments..................................................................           10,686
   Interest expense..............................................................................               11
   Real estate and personal property taxes and casualty insurance................................               48
                                                                                                   ---------------
       Total expenses ...........................................................................           43,253
                                                                                                   ---------------
Income before income tax provision and minority interests........................................              931
   Income tax provision..........................................................................              (94)
                                                                                                   ---------------
Income before minority interests.................................................................              837
   Minority interest in Patriot Operating Company Partnership....................................             (115)
   Minority interest in other consolidated subsidiaries..........................................              (13)
                                                                                                   ---------------

Net income applicable to common shareholders.....................................................  $           709
                                                                                                   ===============

Net income per common share......................................................................  $          0.01
                                                                                                   ===============
</TABLE> 



                      See notes to financial statements.


                                      11
<PAGE>
 
                PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (unaudited)
                                (in thousands)

<TABLE> 
<CAPTION> 
                                                                                                    Three Months
                                                                                                       Ended
                                                                                                    September 30,
                                                                                                        1997
                                                                                                 -------------------
<S>                                                                                              <C> 
Cash flows from operating activities:
     Net income................................................................................. $              709
     Adjustments to reconcile net income to net cash                                                      
         provided by operating activities:                                                                
         Depreciation...........................................................................                491
         Amortization of management contracts and tradenames....................................                469
         Amortization of goodwill...............................................................                178
         Other amortization.....................................................................                  3
         Accrued interest receivable............................................................               (402)
         Minority interest in income of Patriot Operating Company Partnership...................                115 
         Minority interest in income of other subsidiaries......................................                 13 
     Changes in assets and liabilities:
         Accounts receivable....................................................................            (12,910)
         Prepaid expenses and other assets......................................................             (2,365)
         Accounts payable and other accrued expenses............................................             14,860    
         Deposits...............................................................................              1,418  
         Accrued rent due to Patriot REIT.......................................................              2,071
                                                                                                 ------------------
                  Net cash provided by operating activities.....................................              4,650
                                                                                                 ------------------
Cash flows from investing activities:
     Acquisition of hotel furniture and fixtures and related working capital assets.............             (5,321)
     Improvements and additions to furniture and fixtures.......................................               (593)
     Prepaid acquisition costs..................................................................            (23,832)
                                                                                                 ------------------
                  Net cash used in investing activities.........................................            (29,746) 
                                                                                                 ------------------        
Cash flows from financing activities:
     Payment of merger related costs............................................................            (11,414)
     Payments received on subscription notes receivable.........................................             35,486
     Capital leases.............................................................................                141
     Proceeds of equity offering................................................................             12,066
                                                                                                 ------------------
                  Net cash provided by financing activities.....................................             36,279
                                                                                                 ------------------
Net increase in cash and cash equivalents.......................................................             11,183
Cash and cash equivalents at beginning of period................................................                 --
                                                                                                 ------------------
Cash and cash equivalents at end of period...................................................... $           11,183 
                                                                                                 ==================
Supplemental disclosure of cash flow information:
     Cash paid during the period for income taxes............................................... $              142
                                                                                                 ==================
</TABLE> 

                      See notes to financial statements.


                                      12
<PAGE>
 
                     PATRIOT AMERICAN HOSPITALITY, INC. AND
                 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                         NOTES TO FINANCIAL STATEMENTS
                                  (unaudited)
                (dollars in thousands, except per share amounts)

1.   Organization and Basis of Presentation:

         The entity formerly known as Patriot American Hospitality, Inc.
(collectively with its subsidiaries, "Old Patriot REIT"), 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, Old Patriot REIT completed an initial public
offering (the "Initial Offering") of 29,210,000 shares of its common stock and
commenced operations.

         On July 1, 1997, Old Patriot REIT merged with and into California
Jockey Club ("Cal Jockey"), with Cal Jockey being the surviving legal entity
(the "Cal Jockey 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 Cal Jockey Merger, Cal Jockey changed its name to "Patriot
American Hospitality, Inc." ("Patriot REIT") and Bay Meadows changed its name to
"Patriot American Hospitality Operating Company" (collectively with its
subsidiaries, "Patriot Operating Company"). The term "Patriot Companies" as used
herein includes Patriot REIT, Patriot Operating Company and their respective
subsidiaries. Patriot REIT and Patriot Operating Company are both Delaware
corporations.

         The Cal Jockey Merger has been accounted for as a reverse acquisition
whereby Cal Jockey is considered to be the acquired company for accounting
purposes. Consequently, the historical financial information of Old Patriot REIT
became the historical financial information for Patriot REIT. For accounting
purposes, Patriot Operating Company commenced its operations concurrent with the
closing of the Cal Jockey Merger on July 1, 1997. The interim financial
statements have been adjusted for the purchase method of accounting whereby the
Bay Meadows Racecourse ("Racecourse") facilities and related leasehold
improvements owned by Cal Jockey and Bay Meadows have been adjusted to estimated
fair market value. The excess purchase consideration over the estimated fair
market value of the assets acquired and the liabilities assumed was recorded as
goodwill.

         By operation of the Cal Jockey Merger, each issued and outstanding
share of common stock, no par value per share of Old Patriot REIT ("Old Patriot
REIT Common Stock") was converted into 0.51895 shares of common stock, par value
$0.01 per share of Patriot REIT ("Patriot REIT Common Stock") and 0.51895 shares
of common stock, par value $0.01 per share of Patriot Operating Company
("Patriot Operating Company Common Stock"), which shares are paired and
transferable only as a single unit (collectively, shares of Patriot REIT Common
Stock and shares of Patriot Operating Company Common Stock are referred to
herein as the "Paired Shares"). Each paired share of Cal Jockey and Bay Meadows
common stock remained outstanding and represented the same number of Paired
Shares of Patriot REIT Common Stock and Patriot Operating Company Common Stock.

         In connection with the Cal Jockey Merger, Bay Meadows formed an
operating partnership, Patriot American Hospitality Operating Partnership, L.P.
(the "Patriot Operating Company Partnership") into which Bay Meadows contributed
its assets in exchange for units of limited partnership interest ("OP Units") of
the Patriot Operating Company Partnership, and Cal Jockey contributed certain of
its assets to Patriot American Hospitality Partnership, L.P. (the "Patriot REIT
Partnership") in exchange for OP Units of the Patriot REIT Partnership
(collectively, the Patriot Operating Company Partnership and the Patriot REIT
Partnership are referred to herein as the "Patriot Partnerships"). Subsequent to
completion of the Cal Jockey Merger and the transactions contemplated by the Cal
Jockey Merger Agreement (the "Related Transactions"), substantially all of the
operations of Patriot REIT and Patriot Operating Company have been conducted
through the Patriot Partnerships and their subsidiaries.

         Patriot REIT, 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 Patriot REIT Partnership. In addition, Patriot REIT, through its wholly
owned subsidiary, PAH LP, Inc., owns an approximate 82.9% limited partnership
interest in the Patriot REIT Partnership as of September 30, 1997.

         Patriot Operating Company owns a 1.0% general partnership interest and
an approximate 81.5% limited partnership interest in the Patriot Operating
Company Partnership.

                                       13
<PAGE>
 
                     PATRIOT AMERICAN HOSPITALITY, INC. AND
                 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
                (dollars in thousands, except per share amounts)

         At September 30, 1997, Patriot REIT, through the Patriot REIT
Partnership and other subsidiaries, owned interests in 76 hotels with an
aggregate of over 18,800 guest rooms. Patriot REIT leases each of its hotels,
except the Crowne Plaza Ravinia Hotel and the Wyndham WindWatch Hotel, which are
separately owned through special purpose entities, to Patriot Operating Company
or to other lessees (the "Lessees") who are responsible for operating the
hotels. At September 30, 1997, Patriot REIT leased 17 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"). Twelve of the hotels were leased to NorthCoast Hotels,
L.L.C. ("NorthCoast Lessee") under similar Participating Lease agreements. DTR
North Canton, Inc. (the "Doubletree Lessee") leased four hotels; PAH RSI, LLC
("PAH RSI Lessee") leased eight hotels; Crow Hotel Lessee, Inc. (the "Wyndham
Lessee") leased two hotels; and Metro Hotels Leasing Corporation ("Metro Lease
Partners") leased one hotel 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 Wyndham WindWatch Hotel acquisitions were structured without lessees and
are managed directly by Holiday Inns, Inc. and Wyndham Hotel Corporation,
respectively. At September 30, 1997, Patriot Operating Company leased 29 hotels
and an affiliate leased one hotel from Patriot REIT pursuant to Participating
Lease agreements which are substantially similar to the Participating Lease
agreements of the Lessees. Patriot Operating Company manages 14 of these hotels
through certain of its hotel management subsidiaries and has entered into
separate management agreements with hotel Operators to manage 16 of the hotels.

         These unaudited consolidated financial statements include the accounts
of Patriot REIT and Patriot Operating Company, their respective wholly-owned
subsidiaries and the partnerships, corporations and limited liabilities
companies in which Patriot REIT or Patriot Operating Company owns at least 50%
controlling interest. All significant intercompany accounts and transactions
have been eliminated. The separate consolidated financial statements of Patriot
REIT and Patriot Operating Company have also been combined for purposes of
financial statement presentation. Certain intercompany balances, including
income and expense related to the Participating Leases and Racecourse facility
leased by Patriot REIT to Patriot Operating Company and interest income and
expense related to certain notes between Patriot REIT and Patriot Operating
Company (see Note 6), 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 nine month period ended September 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 Old Patriot REIT's Annual Report on
Form 10-K for the year ended December 31, 1996 and Cal Jockey's and Bay Meadow's
Joint 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 Old Patriot REIT Common Stock effected in the form of a stock dividend
distributed on March 18, 1997 to shareholders of record on March 7, 1997.

         In addition, on July 10, 1997, the respective Boards of Directors of
Patriot REIT and Patriot 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 combined and
consolidated financial statements to the number of shares, per share amounts,
and market prices of the common stock and options to purchase common 

                                       14
<PAGE>
 
                     PATRIOT AMERICAN HOSPITALITY, INC. AND
                 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
                (dollars in thousands, except per share amounts)

stock have been restated to reflect the impact of the conversion of each share
of Old Patriot REIT Common Stock into 0.51895 Paired Shares issued in the Cal
Jockey Merger and the 1.927-for-1 stock split. In addition, all references in
the combined and 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, the Cal Jockey
Merger and the 1.927-for-1 stock split in July 1997, the number of OP Units
outstanding and the OP Unit conversion factor has been adjusted to re-establish
a 1-for-1 exchange ratio of OP Units to common shares.

         Earnings per share is computed based on 63,654 and 39,682 weighted
average common shares and common share equivalents outstanding for the three
months ended September 30, 1997 and 1996, respectively, and 51,104 and 33,186
weighted average common shares and common share equivalents outstanding for the
nine months ended September 30, 1997 and 1996, respectively. 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 the Patriot
Companies' earnings per share information presented herein.

         Repairs and maintenance of hotel properties owned by Patriot REIT 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 $1,682 was capitalized for the nine months ended September 30, 1997.
No interest was capitalized for the nine months ended September 30, 1996.

        Goodwill recognized in connection with the acquisition of certain
businesses is amortized utilizing the straight-line method over a period of 20
to 40 years. Tradenames acquired are amortized utilizing the straight-line
method over an estimated useful life of 20 years and management contracts are
amortized utilizing the straight-line method over the estimated remaining term
of the respective contract.

2. Investments in Hotel Properties and Land Held for Development:

Investments in Hotel Properties

         During the first six months of 1997, Old Patriot REIT acquired six
hotels and four resort properties for approximately $360,500 (including closing
costs). These acquisitions were financed primarily with funds drawn on Old
Patriot REIT's line of credit facility, the issuance of 1,295,077 OP Units
valued at approximately $58,662, and the assumption of mortgage debt in the
amount of approximately $28,489.

         During the third quarter of 1997, Patriot REIT, through the Patriot
REIT Partnership and its subsidiaries, has invested approximately $443,000 in
the acquisition of 20 hotels with a total of 5,513 guest rooms. These
acquisitions were financed primarily with funds drawn on Patriot REIT's
revolving credit facility (which replaced Old Patriot REIT's line of credit, see
Note 8), the issuance of 1,848,424 OP Units valued at approximately $41,900, and
the assumption of mortgage debt in the amount of approximately $5,774.

Like-Kind Exchange of Properties

         On July 14, 1997, Patriot REIT 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 Cal Jockey Merger, to an affiliate of
PaineWebber Incorporated ("PaineWebber") for a purchase price of approximately
$80,864 (the "PaineWebber Land Sale"). These funds were placed in a restricted
trust 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 a portion of the proceeds from this restricted
account. Patriot REIT retained ownership of the improvements located on the
land, including the Racecourse and its related facilities.

                                       15
<PAGE>
 
                     PATRIOT AMERICAN HOSPITALITY, INC. AND
                 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
                (dollars in thousands, except per share amounts)

Land Leases

         Simultaneous with the consummation of the PaineWebber Land Sale, the
PaineWebber affiliate and Patriot REIT 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. Patriot REIT has subleased the Racecourse
land and leased the related improvements to Patriot Operating Company in order
to permit Patriot Operating Company to continue horseracing operations at the
Racecourse through the term of Patriot REIT's lease. The sublease is for a term
of seven years with annual payments based on percentages of revenue generated.
In addition, Patriot REIT has leased certain land adjacent to the Racecourse to
Borders, Inc. (the "Borders Lease") for an initial term of 20 years with a fixed
net annual rent of $279 for years 1 through 10, $362 for years 11 through 15 and
$416 for years 16 through 20. In connection with the sale, Patriot REIT assigned
all of its rights and benefits under existing leases, contracts, permits and
entitlements relating to the land sold (excluding the Borders Lease) to the
PaineWebber affiliate, and the PaineWebber affiliate assumed all of Patriot
REIT's development obligations including, but not limited to, all obligations
for on and off-site improvements and all obligations under existing lease and
contracts. The parties have the option to renew such leases upon their
expiration under certain circumstances.

Land Held for Development

         In connection with the acquisition of four resort properties, Patriot
REIT acquired certain land held for development, including commercial and
residential land and construction in progress of single-family homes. A balance
of approximately $22,326 of land held for development is included in Investment
in Hotel Properties and Land Held for Development in the accompanying balance
sheet as of September 30, 1997. Patriot REIT recorded proceeds of approximately
$6,601 as a result of land sales for the nine months ended September 30, 1997
which was recorded as a reduction in the basis of land held for development.

3.   Participating Note and Deferred Acquisition Costs:

         On August 1, 1997, Patriot Operating Company purchased a participating
loan from National Resort Ventures, L.P., a Delaware limited partnership,
related to the 1,014-room Buena Vista Palace Hotel in Orlando, Florida for
$23,750 in cash. 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 $50,700 first leasehold
mortgage loan and a separate $8,500 participating loan. See Note 14.

4.   Other Businesses Acquired:

Grand Heritage

         In August 1997, the Patriot Companies acquired Grand Heritage Hotels,
Inc. a hotel management and marketing company, and other Grand Heritage
subsidiaries including Grand Heritage Leasing, L.L.C. which leased three hotels
from Patriot REIT (the "Grand Heritage Acquisition"). The total purchase price
for the Grand Heritage Acquisition was approximately $22,500 which was financed
primarily through the issuance of 931,972 Class A preferred OP Units of the
Patriot Operating Company Partnership.

         Grand Heritage Hotels, Inc., directly and through certain of its
subsidiaries, owns 18 management contracts, five of which are related to hotels
leased by Patriot Operating Company.

                                       16
<PAGE>
 
                     PATRIOT AMERICAN HOSPITALITY, INC. AND
                 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
                (dollars in thousands, except per share amounts)

Gencom American Hospitality and CHC International, Inc.

         Effective September 1, 1997, Patriot REIT acquired the leasehold
interests related to seven Patriot REIT hotels which were previously leased by
CHC Lease Partners and re-leased such hotels to Patriot Operating Company. Prior
to such acquisition, the management contracts with GAH-II, L.P. ("GAH"), an
affiliate of CHC International, Inc. ("CHCI") and the Gencom American
Hospitality group of companies ("Gencom"), along with the leaseholds related to
the seven hotels were terminated. The aggregate purchase price of the seven
leasehold interests was approximately $43,820, which is reflected as a cost of
acquiring leaseholds in the accompanying statements of operations of Patriot 
REIT. In a related transaction effective October 1, 1997, Patriot REIT acquired
one additional leasehold interest related to a Patriot REIT hotel previously
leased by CHC Lease Partners and re-leased such hotel to Patriot Operating
Company (the hotel's management contract with CHCI was also terminated prior to
the acquisition). Concurrently, Patriot Operating Company purchased an
approximate 50% managing, controlling ownership interest in GAH from affiliates
of Gencom for a purchase price of approximately $13,860. These transactions were
financed with approximately $644 of cash, and by issuing 2,388,932 paired OP
Units of the Patriot REIT Partnership and the Patriot Operating Company
Partnership and 476,682 preferred OP Units of Patriot Operating Company
Partnership.

         GAH, directly and through certain of its subsidiaries, owns nine
management contracts related to hotels leased by Patriot Operating Company, 15
third-party management contracts, and certain other hospitality management
assets. Concurrent with Patriot Operating Company's purchase of its controlling
interest in GAH, Patriot Operating Company also entered into a Hospitality
Advisory, Asset Management and Support Services Agreement with CHCI and GAH
whereby Patriot Operating Company will provide certain hospitality advisory,
asset management and support services to certain CHCI and GAH subsidiaries for a
base fee aggregating approximately $750 per month plus a percentage of excess
cash flows of the hotels.

         Patriot REIT, Patriot Operating Company and CHCI have also entered into
an Agreement and Plan of Merger dated as of September 30, 1997 (the "CHCI Merger
Agreement"), providing, subject to regulatory approvals, for the merger of the
hospitality-related businesses of CHCI with and into Patriot Operating Company
with Patriot Operating Company being the surviving company (the "CHCI Merger").
Subject to regulatory approvals, CHCI's gaming operations will be transferred to
a new legal entity prior to the CHCI Merger and such operations will not be a
part of the transaction. It is anticipated that the CHCI Merger will be
consummated in the first or second quarter of 1998, although the precise timing
is subject to receipt of all necessary regulatory approvals. As a result of the
CHCI Merger, Patriot Operating Company, through its subsidiaries, will acquire
the remaining 50% investment interest in GAH, the remaining 17 leases and 16 of
the associated management contracts related to the Patriot REIT hotels leased by
CHC Lease Partners, 3 management contracts related to Patriot REIT hotels leased
by Patriot Operating Company, 12 third-party management contracts, 2 third-party
lease contracts, the Grand Bay and Registry Hotels & Resorts proprietary brand
names and certain other hospitality management assets. Patriot Operating Company
has also agreed to provide CHCI with a $7,000 line of credit until such time as
the CHCI Merger is completed.

         By operation of the CHCI Merger, each issued and outstanding share of
common stock, par value $0.005 per share, of CHCI ("CHCI Shares") and certain
stock option rights will be converted into the right to receive shares of Series
A Redeemable Convertible Preferred Stock, par value $0.01 per share of Patriot
Operating Company (the "Series A Preferred Stock") and shares of Series B
Redeemable Convertible Preferred Stock, par value $0.01 per share, of Patriot
Operating Company (the "Series B Preferred Stock"). The formula for determining
the exchange ratio of CHCI Shares for Series A Preferred Stock and Series B
Preferred Stock is based on issuing an aggregate of approximately 4,396,000
shares of Patriot Operating Company preferred stock (based on an aggregate
purchase value of approximately $102,200 and a market price per paired share of
$23.25), subject to reduction if certain specified events occur and subject to
increase representing adjustments for dividends paid on paired shares of Patriot
REIT and Patriot Operating Company common stock after September 30, 1997.
Generally, the aggregate number of shares of Patriot Operating Company preferred
stock that each shareholder shall have the right to receive pursuant to the CHCI
Merger shall consist of, to the extent possible, an equal number of Series A
Preferred Stock and the Series B Preferred Stock.

                                       17
<PAGE>
 
                     PATRIOT AMERICAN HOSPITALITY, INC. AND
                 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
                (dollars in thousands, except per share amounts)


         In connection with the acquisition of GAH, preferred OP Units of the
Patriot Operating Company Partnership with a value of approximately $5,000 have
been held back and the CHCI Merger equity consideration is subject to reduction
in the amount of approximately $5,000 if the hotels and leaseholds acquired fail
to achieve certain operating targets over the period prior to the closing of the
CHCI Merger.

         In addition, on September 30, 2000 and September 30, 2002, Patriot
Operating Company may be obligated to pay the CHCI stockholders and a subsidiary
of Patriot Operating Company may be obligated to pay a Gencom-related entity
additional consideration, in each case based upon the delivery and performance
of certain specified assets.

5.   Investments in Unconsolidated Subsidiaries:

         In January 1997, connection with the acquisition of four resort
properties, Patriot REIT, through the Patriot REIT Partnership, contributed
certain assets associated with these 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.

6.   Mortgage and Promissory Notes and Other Receivables from Lessees and Their
     Affiliates:

Mortgage Notes

         In June 1997, Patriot REIT loaned approximately $20,500 to a
partnership affiliated with members of CHC Lease Partners relating to the
Doubletree Hotel in Glenview, Illinois. In July 1997, Patriot REIT loaned
approximately $25,600 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). 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, Patriot REIT purchased
two additional loans from a financial institution on which partnerships
affiliated with the members of CHC Lease Partners were 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. The notes contain certain penalties for
early repayment. In connection with such loans, Patriot REIT entered into a
short-term financing arrangement (the "Paine Webber Mortgage Financing") with an
affiliate of Paine Webber Real Estate Securities, Inc. ("Paine Webber Real
Estate") whereby such affiliate loaned Patriot REIT $103,000 to fund these
transactions (see Note 8). In 

                                       18
<PAGE>
 
                     PATRIOT AMERICAN HOSPITALITY, INC. AND
                 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
                (dollars in thousands, except per share amounts)

September 1997, Patriot REIT, through the Patriot REIT Partnership and certain
other subsidiaries, acquired the Doubletree Hotel in Glenview, Illinois. The
$20,500 note balance and related intercompany interest income and expense has
been eliminated in consolidation. See Note 14.

PAH RSI Lessee

         In connection with the four resort properties, the Patriot REIT
Partnership and certain of its subsidiaries acquired certain assets relating to
these resorts and then sold these assets to PAH RSI Lessee for approximately
$2,000. In addition, PAH RSI Lessee acquired from the Patriot REIT 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. See Note 14.

NorthCoast Lessee

         In March 1997, the Patriot REIT 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 3-year loan term. The note may be prepaid without penalty.

7.   Subscription Notes:

         In order to effect the issuance of the paired shares of common stock
and OP Units which were issued in the Cal Jockey Merger, Patriot REIT
Partnership subscribed for shares of Bay Meadows common stock (which became
shares of Patriot Operating Company Common Stock) in an amount equal to the
number of shares of Patriot REIT Common Stock that were issued to Old Patriot
REIT stockholders in the Cal Jockey Merger. In addition, Patriot REIT
Partnership similarly subscribed for OP Units in the Patriot Operating Company
Partnership in an amount equal to the number of OP Units of Patriot REIT
Partnership that were outstanding subsequent to the Cal Jockey Merger. These
subscriptions were funded through the issuance of promissory notes in the
aggregate amount of $58,901 (the "Subscription Notes") payable to Patriot
Operating Company. The Subscription Notes accrue interest at a rate of 8% per
annum and mature December 31, 1997. As of September 30, 1997, the Subscription
Notes balance remaining outstanding was $24,170. The combined statements of
operations for the three months and the nine months ended September 30, 1997
reflect the elimination of $727 of interest income and expense related to the
Subscription Notes.

                                       19
<PAGE>
 
                     PATRIOT AMERICAN HOSPITALITY, INC. AND
                 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
                (dollars in thousands, except per share amounts)

8.   Line of Credit and Mortgage Notes:

         Borrowings under the revolving credit facility and other mortgage notes
consist of the following:

<TABLE> 
<CAPTION> 

                                                                     September 30,       December 31,
                                                                          1997               1996
                                                                   ------------------- ------------------
         <S>                                                       <C>                 <C> 
         Revolving Credit Facility................................ $         455,542   $              --
         Line of credit...........................................                --             192,339
         Mortgage note payable to Paine Webber Real Estate
            Securities, Inc. (the "Greenspoint Loan").............            22,000              22,000
         Paine Webber Mortgage Financing..........................           103,000                  --
         Mortgage  notes  payable to  Metropolitan  Life  Insurance
             Company..............................................            98,892                  --
         Mortgage note payable to First National Bank of Commerce.
                                                                              13,500                   --
         First  mortgage loan payable  bears  interest at 9.75% per                                   --
             annum,  requires  monthly  payments of  principal  and
             interest with balloon payment due May 31, 2005.......             5,754
         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                  --
                                                                   -----------------   -----------------
                                                                   $         727,177   $         214,339
                                                                   =================   =================
</TABLE> 

Revolving Credit Facility

         On July 21, 1997, the Patriot Companies entered into a revolving credit
facility with Paine Webber Real Estate, The Chase Manhattan Bank ("Chase") and
certain other lenders for a 3-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 Old Patriot REIT's
secured line of credit with Paine Webber Real Estate (the "Old Line of Credit").
The Revolving Credit Facility may also 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 Patriot
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 Patriot Companies' leverage ratio). The weighted
average interest rate in effect for the Revolving Credit Facility for the period
ended September 30, 1997 was 7.62% per annum.

         Additionally, Patriot REIT 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 Patriot 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 Patriot Companies have entered into three interest rate swap
arrangements to swap floating rate LIBOR-based interest rates for fixed rate
interest amounts as a hedge against $375,000 of the $700,000 Revolving Credit
Facility. Each of the interest rate swaps covers $125,000 of borrowings under
the Revolving Credit Facility and fixes the LIBOR portion of the Revolving
Credit Facility interest rate at 6.09%, 6.255%, and 6.044%, respectively. The
interest rate swap arrangements expire November 2002.

                                       20
<PAGE>
 
                     PATRIOT AMERICAN HOSPITALITY, INC. AND
                 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
                (dollars in thousands, except per share amounts)

Mortgage Notes

         Paine Webber Real Estate has also extended a $22,000 single asset loan
related to the Wyndham Greenspoint Hotel (the "Greenspoint Loan") on economic
terms substantially similar to the Old Line of Credit. The Greenspoint Loan
bears interest on the outstanding balance at a rate per annum equal to 30-day
LIBOR plus 1.90%. LIBOR was 5.69% at September 30, 1997 and 5.56% at December
31, 1996. The weighted average interest rate incurred by Patriot REIT under this
borrowing was 7.58% and 7.37% for the three months ended September 30, 1997 and
1996, respectively, and 7.50% and 7.41% for the nine months ended September 30,
1997 and 1996, respectively.

         In connection with Patriot REIT's funding of two mortgage loans and the
purchase of two mortgage notes related to four hotels owned by partnerships
affiliated with CHC Lease Partners (see Note 6), Patriot REIT entered into the
Paine Webber Mortgage Financing, whereby such affiliate loaned Patriot REIT
$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. The weighted
average interest rate incurred under this borrowing was 7.50% for the period
ended September 30, 1997. This financing is secured by a collateral assignment
of the mortgage loans encumbering the four hotels. See Note 14.

         In connection with the purchase of four hotels in September 1997,
Patriot REIT obtained $98,892 of mortgage financing with Metropolitan Life
Insurance Company encumbering six hotels. The loans bear interest at 8.08% per
annum, require monthly payments of principal and interest in the aggregate
amount of $755, and mature October 1, 2007.

         On January 17, 1997, Patriot REIT, through the Patriot REIT
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 REIT under this borrowing during the three months and the nine months
ended September 30, 1997 was 7.58% and 7.50%, respectively. The note is
collateralized by a first mortgage lien on the Bourbon Orleans Hotel.

         In connection with the acquisition of the four resort properties,
Patriot REIT 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 REIT also has a construction loan available from FINOVA that
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 REIT 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 REIT as of September 30,
1997.

                                       21
<PAGE>
 
                     PATRIOT AMERICAN HOSPITALITY, INC. AND
                 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
                (dollars in thousands, except per share amounts)

9.   Minority Interests:

Minority Interest in Patriot Partnerships

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

         During the first six months of 1997, the Patriot REIT Partnership
issued an additional 20,376 OP Units valued at approximately $370 in connection
with The Tutwiler Hotel acquisition, and 2,590,197 OP Units valued at
approximately $58,662 in connection with the acquisition of the four resort
properties. In accordance with their redemption rights, during the first six
months of 1997 certain partners elected to redeem a total of 379,606 OP Units
for a total of $14,441 in cash (based upon the market price of Old Patriot REIT
Common Stock on the effective dates of the redemptions) and 150,000 shares of
Old Patriot REIT Common Stock (such amounts have not been adjusted to reflect
the stock splits and Cal Jockey Merger). As of June 30, 1997, the Patriot REIT
Partnership had 6,887,049 OP Units and 1,324,804 preferred OP Units outstanding.

         In connection with the Cal Jockey Merger, the holders of Patriot REIT
Partnership OP Units and preferred OP Units received OP Units and preferred OP
Units of the Patriot Operating Company Partnership in an amount equal to the
number of Patriot REIT Partnership units held by them at the closing of the Cal
Jockey Merger.

         In addition, during the third quarter of 1997, the Patriot Partnerships
each issued 2,456,172 OP Units in connection with the acquisition of hotel
properties, and 2,388,932 OP Units in connection with Patriot REIT's acquisition
of eight leasehold interests from CHC Lease Partners and Patriot Operating
Company's acquisition of its approximate 50% ownership interest in GAH and
redeemed 6,298 OP Units. In addition, Patriot Operating Company Partnership
issued 931,972 Class A preferred OP Units in connection with the Grand Heritage
Acquisition and 476,682 Class C preferred OP Units in connection with the
acquisition of the approximate 50% ownership interest in GAH.

         As of September 30, 1997, Patriot REIT Partnership had 11,732,153 OP
Units and 1,324,804 preferred OP Units outstanding (excluding OP Units held by
Patriot REIT). The Patriot Operating Company Partnership had 11,732,153 OP
Units, 931,972 Class A preferred OP Units, 1,324,804 Class B preferred OP Units
and 476,682 Class C preferred OP Units outstanding as of September 30, 1997
(excluding OP Units held by Patriot Operating Company).

Minority Interest in Other Subsidiaries

         Patriot REIT has entered into a number of partnership agreements with
DTR PAH Holding, Inc. ("DTR"), an affiliate of Doubletree Hotels Corporation,
related to the acquisition of 11 hotels. Patriot REIT Partnership owns an 85% to
90% general partnership interest in each partnership and DTR owns a 15% to 10%
limited partnership interest in each partnership. The partnerships were formed
for the purpose of acquiring hotel properties.

         During the nine months ended September 30, 1997, Patriot REIT acquired
four hotels through such partnerships with DTR for approximately $147,300. The
acquisitions were financed through a combination of mortgage debt of $98,892,
cash contributions to the partnerships of approximately $26,300 by the Patriot
REIT Partnership and approximately $7,100 by DTR, and the issuance of 614,046
paired OP Units of the Patriot Partnerships (valued at approximately $15,000
based on the average market price of the Patriot Companies' common stock for the
20 days prior to the closing of the acquisition). Patriot REIT Partnership's
contributions were financed primarily with funds drawn on the Revolving Credit
Facility.

         In addition, in July 1997, Patriot REIT, through the Patriot REIT
Partnership, acquired 90% of the equity interests in four separate limited
liability companies which own four hotels with an aggregate of 705 guest rooms
for an aggregate purchase price of approximately $51,066. Patriot REIT
Partnership's contribution was financed 

                                       22
<PAGE>
 
                     PATRIOT AMERICAN HOSPITALITY, INC. AND
                 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
                (dollars in thousands, except per share amounts)

primarily with funds drawn on the Revolving Credit Facility. One of the hotels
is subject to a mortgage loan with a financial institution with a principal
balance of approximately $5,754.

10.  Shareholders' Equity:

Capital Stock

         On January 30, 1997, Old Patriot REIT 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 September 22, 1997, Patriot REIT declared a $0.2625 per common share
dividend to holders of record on September 30, 1997. Patriot REIT has paid
dividends of $0.2625 per common share for each of the first and second quarters
of 1997. In addition, in connection with the Cal Jockey Merger, Old Patriot REIT
also declared a special dividend of $0.06 per common share payable to holders of
record on June 27, 1997, which was paid on June 30, 1997. Concurrent with each
of the dividend declarations, the Patriot REIT Partnership authorized
distributions in the same amount. Old Patriot REIT paid dividends of $0.24 per
common share for the each of the first three quarters of 1996.

         In August 1997, the Patriot Companies completed a public offering of
9,200,000 paired shares of common stock, with net proceeds (less underwriter
discount and expenses) of approximately $209,795. The net proceeds were used
primarily to reduce the outstanding debt under the Revolving Credit Facility. In
addition, in August 1997, the Patriot Companies' underwriters exercised the
over-allotment option and the Patriot 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.

Stock Grant Awards

         During the first quarter of 1997, pursuant to Old Patriot REIT'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
Old Patriot REIT'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 in 1997 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 September 30, 1997 and 1996, $1,385 and $346,
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 nine months ended September 30, 1997 and 1996, $3,312 and
$630, 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 acquisition of four resort properties in January
1997, certain former owners of the resorts who are also employees of Resorts
Services, Inc., the company which manages the resorts, were granted nonqualified
options to purchase an aggregate of 780,008 shares of Old Patriot REIT Common
Stock at an exercise price of $19.125 (based on the market price of Old Patriot
REIT's common stock on the date the purchase contract for the resorts was
executed after giving effect to the March 1997 and July 1997 stock splits and
the Cal Jockey Merger) as additional consideration for entering into the
purchase and sale agreement for the resort properties. 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 resort properties.
The options to purchase common stock vest annually over a period of four years.

                                       23
<PAGE>
 
                     PATRIOT AMERICAN HOSPITALITY, INC. AND
                 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
                (dollars in thousands, except per share amounts)

         During the first quarter of 1997, one of the executive officers of
Patriot REIT 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 Old Patriot REIT's Common Stock on the date of the grant after
giving effect to the March 1997 and July 1997 stock splits and the Cal Jockey
Merger). These options to purchase common stock vest annually over a period of
four years.

         During the second quarter of 1997, the Compensation Committee of Old
Patriot REIT's Board of Directors awarded a two-tier option program for Patriot
REIT'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 Old Patriot REIT's Common Stock on the date of
the grant (after giving effect to the July 1997 stock split and the Cal Jockey
Merger). 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 Old Patriot REIT 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 Old Patriot REIT's common stock on the date of the
grant after giving effect to the July 1997 stock split and the Cal Jockey
Merger). These options to purchase common stock vest annually over a period of
five years.


11.  Noncash Investing and Financing Activities:

Patriot REIT

         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.............................  $       (1,548) $          329 
         Inventory.....................................................            (243)            187 
         Prepaid expenses and other assets.............................              --             446 
         Deferred expenses.............................................              --             685 
         Mortgage debt.................................................          34,244              -- 
         Accounts payable and accrued liabilities......................          (2,072)          4,139 
         Due to PAH RSI Lessee for working capital liabilities                                          
            assumed....................................................           1,235              -- 
                                                                                                        
         Due to PAH RSI Lessee for land development costs..............  $        1,987  $           -- 
                                                                                                        
         Land sale proceeds due from PAH RSI Lessee....................  $       (2,200) $           -- 
                                                                                                        
         Reclassification of prepaid acquisition costs to property costs $       17,371  $           -- 
                                                                                                        
         Mortgage note receivable from Lessee affiliate................  $       20,500              -- 
                                                                                                        
         Capital lease obligation acquired.............................  $          430  $           -- 
                                                                                                        
         Issuance of common stock in connection with the acquisition                                    
            of hotel properties........................................  $      169,713  $           -- 
                                                                                                        
         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...........................................  $      166,024  $       13,303 

         Excess purchase consideration over estimated fair market                                       
            value of assets acquired in the Cal Jockey Merger..........  $      (87,070) $           -- 

         Subscription Notes issued for common stock and OP Units                                        
            issued in connection with the Cal Jockey Merger............  $       59,652  $           -- 

</TABLE> 

          In connection with Patriot REIT's investment in an unconsolidated 
subsidiary in 1996, Patriot REIT issued a promissory note payable to the
unconsolidated subsidiary in the amount of $6,217 which has been included in due
to unconsolidated subsidiaries in the accompanying financial statements.

Patriot American Operating Company

In connection with the Cal Jockey Merger, the acquisition of management
companies and the leasing of hotel properties, the following assets and
liabilities were assumed:

<TABLE>  
<CAPTION>
                                                                              1997                      
                                                                         ---------------                
         <S>                                                             <C>                            
         Receivables from selling entities.............................  $      (10,255)                
         Inventories...................................................  $       (1,425)                
         Prepaid expenses and other assets.............................  $       (1,754)                
         Other assets..................................................  $         (532)               
         Accounts payable and accrued expenses.........................  $       12,478                
         Deferred tax liability........................................  $        4,846                
 
         Due to selling entities.......................................  $        1,723                 
         Due to Patriot REIT...........................................  $        2,636                 

         Excess purchase consideration over estimated
           fair market value of assets acquired........................  $      (23,071)                
         Acquisition of furniture and fixtures.........................  $      (12,612)               
         Acquisition of trade names....................................  $       (2,500)                
         Acquisition of management contracts...........................  $      (22,452)                
                                                                                                        
         Issuance of subscription notes receivable issued
            in connection with the Cal Jockey Merger...................  $      (59,652)                
                                                                                                        
         Issuance of OP units in connection with the
            acquisition of management companies,                 
            furniture and fixtures and the leasing of
            hotel properties...........................................  $       39,376                 

         Issuance of common stock in connection with the
            Cal Jockey Merger and the acquisition of 
            furniture and fixtures of hotel properties
            acquired...................................................  $       72,516
                                                                                                        
         Par value of common stock issued
            in connection with the Cal Jockey Merger...................  $          680                 
</TABLE>

                                      24

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

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
                (dollars in thousands, except per share amounts)


12.  Commitments and Contingencies:

Proposed Acquisitions

         Wyndham Hotel Corporation and Other Assets. On April 14, 1997, Old
         ------------------------------------------
Patriot REIT entered into a merger agreement with Wyndham Hotel Corporation
("Wyndham") which was later ratified by Patriot REIT and Patriot Operating
Company, (the "Wyndham Merger Agreement") through which Wyndham will merge with
and into Patriot REIT (the "Wyndham Merger"), with Patriot REIT being the
surviving company. Concurrently, Old Patriot REIT and CF Securities, L.P. ("CF
Securities"), the principal stockholder of Wyndham, entered into a stock
purchase agreement (the "Stock Purchase Agreement"). The Merger Agreement
generally provides for the conversion of each outstanding share of common stock,
par value $0.01 per share, of Wyndham (the "Wyndham Common Stock"), other than
shares as to which the holder thereof has elected to receive cash (subject to
proration), into the right to receive 1.372 Paired Shares. In the event the
average closing price of a Paired Share over the 20 trading days immediately
preceding the fifth business day prior to the special meeting of the
stockholders of Wyndham (the "Patriot Average Closing Price") is less than
$21.86 but greater than or equal to $20.87, each such share will be converted
into the right to receive the number of Paired Shares equal to $30.00 divided by
the Patriot Average Closing Price. In the event that the Patriot Average closing
Price is less than $20.87, each such share will be converted into the right to
receive 1.438 Paired shares (the applicable conversion ratio being referred to
as the "Wyndham Exchange Ratio"), provided, however, that in such circumstances
Wyndham has the right, waivable by it, to terminate the Wyndham Merger
Agreement. The Wyndham Merger Agreement also provides that, in lieu of receiving
Paired Shares in the Wyndham Merger, stockholders of Wyndham may elect (a "Cash
Election") to receive cash ("Cash Consideration") for all or any portion of
their shares of Wyndham Common Stock in an amount per share equal to the Wyndham
Exchange Ratio multiplied by the average closing price of a Paired Share over
the five trading days immediately preceding the closing of the Wyndham Merger,
subject to an aggregate availability of $100,000 of cash for all Cash Elections
(including a Cash Election by CF Securities pursuant to the Stock Purchase
Agreement).

         At November 3, 1997, Wyndham's portfolio of owned, leased or managed
hotels consisted of 93 hotels operated by Wyndham, as well as 8 franchised
hotels, which in the aggregate contained 24,083 rooms. Wyndham's portfolio
includes 84 upscale hotel properties and 17 midscale properties operating under
the ClubHouse brand. Pursuant to the Wyndham Merger Agreement, Wyndham will
merge with and into Patriot REIT and the companies will continue their
operations within the paired share structure. Following the Wyndham Merger, the
36 hotels currently owned or leased by Wyndham will be leased or subleased by
Patriot REIT to Patriot Operating Company, whose name will be changed to Wyndham
International in connection with the Wyndham Merger. In addition, the leases for
two hotels currently leased by Patriot REIT to Crow Hotel Lessee, Inc. will be
terminated and re-leased to Wyndham International.

         In connection with the Wyndham Merger, the Patriot REIT Partnership has
also entered into an Omnibus Purchase and Sale Agreement, dated as of April 14,
1997 (the "Omnibus Purchase and Sale Agreement"), and 11 individual purchase and
sale agreements, with partnerships (the "Crow Family Entities") owned by certain
members of the Trammell Crow family, certain members of Wyndham's senior
management and others, providing for the Patriot REIT Partnership's acquisition
of 11 full-service Wyndham-brand hotels with 3,072 guest rooms (the "Crow
Assets") 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 "Crow Assets Acquisition"). With the
exception of one hotel, the Crow Assets Acquisition is expected to be
consummated concurrently with the closing of the Wyndham Merger.

         The Wyndham Merger and the Crow Assets Acquisition, are subject to
various closing conditions including approval of the Wyndham Merger by the
stockholders of Patriot REIT, Patriot Operating Company and 

                                       25
<PAGE>
                     PATRIOT AMERICAN HOSPITALITY, INC. AND
                 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
                (dollars in thousands, except per share amounts)

Wyndham. The Patriot Companies have mailed to their stockholders the proxy
materials relating to the approval of the merger of Wyndham with and into
Patriot REIT. The stockholder meetings of Wyndham, Patriot REIT and Patriot
Operating Company to approve the Wyndham Merger have been scheduled for December
12, 1997. The record date for the stockholders meetings is November 12, 1997. In
connection with the scheduling of the stockholder meetings, the Patriot
Companies and Wyndham amended their merger agreement to, among other things,
extend the date after which any party may terminate the merger agreement from
December 7, 1997 to December 16, 1997.

         In connection with its merger with Patriot REIT, Wyndham has commenced
a fixed spread cash tender offer for all of $100,000 of its outstanding 10 1/2%
Senior Subordinated Notes due 2006 (the "Notes"). The purchase price for Notes
validly tendered and accepted for purchase will be an amount based on a yield to
the first redemption date equal to a 75 basis point spread over the yield of the
6 1/2% U.S. Treasury Note due May 31, 2001 as of 3:00 p.m., EST, on the second
business day immediately preceding the expiration date of the tender offer, less
a consent payment of $20.00 per $1 principal amount. The tender offer is
scheduled to expire at Midnight, EST, on Friday, December 12, 1997, unless
extended. In conjunction with the tender offer, Wyndham is also soliciting
consents from the holder of the Notes to effect certain amendments to the
indenture under which the Notes were issued.

Proposed Acquisitions

         WHG Casinos & Resorts, Inc. On September 30, 1997, Patriot REIT,
         --------------------------
Patriot Operating Company and WHG Casinos & Resorts Inc. ("WHG") entered into an
Agreement and Plan of Merger (the "WHG Merger Agreement") providing for the
merger of a newly formed subsidiary of Patriot Operating Company with and into
WHG with WHG being the surviving corporation (the "WHG Merger"). As a result of
the WHG Merger, Patriot Operating Company will acquire the 570-room Condado
Plaza Hotel & Casino, a 50% interest in the 389-room El San Juan Hotel & Casino
and a 23.3% interest in the 751-room El Conquistador Resort & Country Club (the
"El Conquistador"), all of which are located in Puerto Rico, as well as a 62%
interest in Williams Hospitality Group, Inc., the management company for the
three hotels and the Las Casitas Village at the El Conquistador. Under the terms
of the WHG Merger Agreement, each share of WHG common stock generally will be
converted into the right to receive 0.784 paired shares of Patriot REIT and
Patriot Operating Company common stock, subject to certain adjustments related
to the timing of the closing of this transaction and the average closing price
of a paired share over the ten trading days immediately preceding the third
business day prior to the WHG stockholders' meeting at which approval for the
WHG Merger is sought. In addition, each issued and outstanding share of WHG
Series B Convertible Preferred Stock will be converted into the right to receive
that number of paired shares that the holder of such share of WHG Series B
Convertible Preferred Stock would have the right to receive assuming conversion
of such share, together with any accrued and unpaid dividends thereon, into
shares of WHG common stock immediately prior to the effective time of the WHG
Merger.

Potential Acquisitions

         In August 1997, Patriot Operating Company purchased a participating
loan from National Resort Ventures, L.P., related to the 1,014-room Buena Vista
Palace Hotel in Orlando, Florida for approximately $23,750 in cash (see Note 3).
The Buena Vista Palace Hotel is owned by a joint venture between Equitable Life
Insurance Company, which owns a 55% interest, and Hotel Venture Partners, Ltd.,
which owns a 45% interest. Patriot REIT is currently negotiating with such
owners to acquire the hotel. In November 1997, Patriot REIT agreed to acquire a
95% equity interest in the Buena Vista Palace Hotel for approximately $97,150
and the assumption of an existing first leasehold mortgage with a current
balance of approximately $50,700. As part of the agreement, Patriot REIT also
was granted an option to acquire the remaining 5% equity interest in the hotel.
The acquisition is subject to a number of conditions including completion of the
Patriot Companies' due diligence. The amount invested as of September 30, 1997 
is reflected in deferred acquisition costs.

Development Fees

         The four resort properties which are leased to PAH RSI Lessee are
managed by Resorts Services, Inc., an Arizona corporation. In connection with
the acquisition of the resort properties, Patriot REIT 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 Cal Jockey Merger, the parties have agreed to evaluate the existing
agreement and may modify existing terms.

Contingencies

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

         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, Old Patriot REIT and the members of the Board of Directors of Wyndham.
The complaint 
                                      26
<PAGE>
 
                     PATRIOT AMERICAN HOSPITALITY, INC. AND
                 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
                (dollars in thousands, except per share amounts)

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 Old Patriot REIT
to negotiate on more favorable terms the Crow Properties Acquisition with
members of the Trammell Crow family. Old Patriot REIT 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 Transactions under the terms presently proposed and also seeks
unspecified damages. The Patriot Companies deny the allegations in the complaint
and expects to defend the action vigorously.

13.  Pro Forma Financial Information:

         The following unaudited pro forma condensed consolidated separate and
combined statements of operations of Patriot REIT and Patriot Operating Company
are presented as if (i) the acquisition of the 79 hotels owned by Patriot REIT
as of September 30, 1997; (ii) the Cal Jockey Merger and the Related
Transactions; (iii) the replacement of Old Line of Credit with the Revolving
Credit Facility and the funding of other mortgage debt; (iv) the Grand Heritage
Acquisition; (v) the acquisition of seven leasehold interests and the
approximate 50% investment interest in GAH; and (vi) the private placement of
equity securities and public offering of Patriot's common stock which occurred
during 1997 and 1996 had occurred on January 1, 1996, and the hotels (except the
Crowne Plaza Ravinia Hotel and the Wyndham WindWatch Hotel) had been leased to
Patriot Operating Company or 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 REIT
and Patriot Operating Company 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.

                                       27
<PAGE>
 
                    PATRIOT AMERICAN HOSPITALITY, INC. AND
                PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                  NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
               (dollars in thousands, except per share amounts)


                  PATRIOT REIT AND PATRIOT OPERATING COMPANY
             Pro Forma Condensed Combined Statements of Operations

<TABLE> 
<CAPTION> 
                                                                                         Nine Months Ended
                                                                                           September 30,
                                                                              --------------------------------------
                                                                                     1997               1996
                                                                              ------------------  ------------------
                                                                              (in thousands, except per share data)
<S>                                                                           <C>                <C> 
 Revenue:
      Participating lease revenue............................................ $          91,628  $          85,221
      Hotel revenue..........................................................           200,759            179,239
      Racecourse facility and land lease revenue.............................            33,657             40,379
      Management fee and service fee income..................................            12,354              9,770
      Interest and other income..............................................            13,956              9,025
                                                                              -----------------  -----------------
          Total revenue......................................................           352,354            323,634
                                                                              -----------------  -----------------
 Expenses:
      Departmental costs--hotel operations...................................            73,217             69,370
      Racecourse facility operations.........................................            26,868             31,026
      Direct operating costs of management company and service department ...             5,465              4,522
      Ground lease expense...................................................             5,535              4,601
      General and administrative.............................................            35,406             30,472
      Repair and maintenance.................................................             9,121              8,770
      Utilities..............................................................            10,328             10,077
      Interest expense.......................................................            42,889             42,448
      Real estate and personal property taxes and casualty insurance.........            16,493             15,803
      Marketing..............................................................            20,872             18,888
      Management fees........................................................             2,756              2,322
      Depreciation and amortization..........................................            48,356             45,886
                                                                              -----------------  -----------------
          Total expenses.....................................................           297,306            284,185
                                                                              -----------------  -----------------
 Income before equity in earnings of unconsolidated subsidiaries,
      income tax provision and minority interests............................            55,048             39,449
      Equity in earnings of unconsolidated subsidiaries......................             4,488              5,650
                                                                              -----------------  -----------------
 Income before income tax provision and minority interests...................            59,536             45,099
      Income tax provision...................................................              (775)              (748)
                                                                              -----------------  -----------------
 Income before minority interests............................................            58,761             44,351
      Minority interest in the Patriot Partnerships..........................            (9,361)            (7,049)
      Minority interest in other consolidated subsidiaries...................              (641)              (200)
                                                                              -----------------  ----------------- 
 Net income applicable to common shareholders................................ $          48,759  $          37,102
                                                                              =================  =================

 Net income per common Paired Share/(1)/..................................... $            0.71  $            0.54
                                                                              =================  =================
 Weighted average number of common Paired Shares and
      common share equivalents outstanding/(1)/..............................            68,864             68,199
                                                                              =================  =================
</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 Cal Jockey Merger, 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, as applicable.

                                      28
<PAGE>
 
                    PATRIOT AMERICAN HOSPITALITY, INC. AND
                PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                  NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
               (dollars in thousands, except per share amounts)


                                 PATRIOT REIT
           Pro Forma Condensed Consolidated Statements of Operations

<TABLE> 
<CAPTION> 
                                                                                       Nine Months Ended
                                                                                          September 30,
                                                                              ------------------------------------
                                                                                     1997               1996
                                                                              -----------------  -----------------
                                                                              (in thousands, except per share data)
<S>                                                                           <C>                <C> 
 Revenue:
      Participating lease revenue............................................ $         156,204  $         144,350
      Racecourse facility and land lease revenue.............................             3,504              3,696
      Interest and other income..............................................            11,917              6,771
                                                                              -----------------  -----------------
          Total revenue......................................................           171,625            154,817
                                                                              -----------------  -----------------
 Expenses:
      Real estate and personal property taxes and casualty insurance.........            16,203             15,485
      Ground lease expense...................................................             5,535              4,601
      General and administrative.............................................             6,937              5,953
      Interest expense.......................................................            44,645             44,198
      Depreciation and amortization..........................................            42,907             40,437
                                                                              -----------------  -----------------
          Total expenses.....................................................           116,227            110,674
                                                                              -----------------  -----------------
 Income before equity in earnings of unconsolidated subsidiaries, income tax
      provision and minority interest........................................            55,398             44,143
      Equity in earnings of unconsolidated subsidiaries......................             4,488              5,650
                                                                              -----------------  -----------------
 Income before income tax provision and minority interest....................            59,886             49,793
      Income tax provision...................................................              (125)              (110)
                                                                              -----------------  -----------------
 Income before minority interests............................................            59,761             49,683
      Minority interest in Patriot REIT Partnership..........................            (9,321)            (7,789)
      Minority interest in other consolidated subsidiaries...................            (1,869)            (1,305)
                                                                              -----------------  -----------------
 Net income applicable to common shareholders................................ $          48,571  $          40,589
                                                                              =================  =================

 Net income per common share/(1)/............................................ $            0.71  $            0.60
                                                                              =================  =================
 Weighted average number of common shares and
      common share equivalents outstanding/(1)/..............................            68,864             68,199
                                                                              =================  =================
</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 Cal Jockey Merger, 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, as applicable.

                                      29
<PAGE>
 
                    PATRIOT AMERICAN HOSPITALITY, INC. AND
                PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                  NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
               (dollars in thousands, except per share amounts)


                            PATRIOT OPERATING COMPANY
            Pro Forma Condensed Consolidated Statements of Operations

<TABLE> 
<CAPTION> 
                                                                                        Nine Months Ended
                                                                                           September 30,
                                                                              --------------------------------------
                                                                                     1997               1996
                                                                              --------------------------------------
                                                                              (in thousands, except per share data)
<S>                                                                           <C>                <C> 
 Revenue:
      Room revenue........................................................... $         135,786  $         121,318
      Other hotel revenue....................................................            64,973             57,921
      Racecourse facility revenue............................................            33,399             40,129
      Management fee and service fee income..................................            12,354              9,770
      Interest and other income..............................................             3,923              4,118
                                                                              -----------------  -----------------
          Total revenue......................................................           250,435            233,256
                                                                              -----------------  -----------------
 Expenses:
      Departmental costs--hotel operations...................................            73,217             69,370
      Racecourse facility operations.........................................            30,114             34,472
      Direct operating costs of management company and service department....             5,465              4,522
      Ground lease expense...................................................                                   --
      General and administrative.............................................            28,493             24,523
      Repair and maintenance.................................................             9,121              8,770
      Utilities..............................................................            10,328             10,077
      Marketing..............................................................            20,872             18,888
      Management fees........................................................             2,756              2,322
      Real estate and personal property taxes and casualty insurance.........               290                318
      Interest expense.......................................................               104                110
      Depreciation and amortization..........................................             5,449              5,449
      Participating lease payments...........................................            64,576             59,129
                                                                              -----------------  -----------------
          Total expenses.....................................................           250,785            237,950
                                                                              -----------------  -----------------
 Income (loss) before income tax provision and minority interests............              (350)            (4,694)
      Income tax (provision) benefit.........................................              (650)              (638)
                                                                              -----------------  -----------------
 Income (loss) before minority interests.....................................            (1,000)            (5,332)
      Minority interest in Patriot Operating Company Partnership.............               (40)               740
      Minority interest in other consolidated subsidiaries...................             1,228              1,105
                                                                              -----------------  -----------------
 Net income (loss) applicable to common shareholders......................... $             188  $          (3,487)
                                                                              =================  =================

 Net income (loss) per common share/(1)/..................................... $            0.00  $           (0.05)
                                                                              =================  =================
 Weighted average number of common shares and
      common share equivalents outstanding/(1)/..............................            68,864             68,199
                                                                              =================  =================
</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 Cal Jockey Merger, 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, as applicable.

                                      30
<PAGE>
 
                    PATRIOT AMERICAN HOSPITALITY, INC. AND
                PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

                  NOTES TO FINANCIAL STATEMENTS - (Continued)
                                  (unaudited)
               (dollars in thousands, except per share amounts)


14. Subsequent Events:

Acquisition of Properties

         In October 1997, Patriot REIT, through certain of its subsidiaries,
acquired The Buttes, a 353-room resort hotel in Tempe, Arizona for approximately
$63,600 and acquired three additional hotels from entities affiliated with
Gencom and CHCI for an aggregate purchase price of approximately $96,225. These
purchases were financed with approximately $68,819 of cash drawn on the
Revolving Credit Facility and by issuing 326,348 paired OP Units in the Patriot
Partnerships in a private placement. The three hotels acquired from affiliates
of Gencom and CHCI are encumbered by mortgage loans, in the aggregate amount of
approximately $83,173 including accrued interest, that Patriot REIT made in
connection with the Paine Webber Mortgage Financing (see Notes 6 and 8). Patriot
REIT has leased these hotels to Patriot Operating Company and Patriot Operating
Company subsidiaries will manage the hotels.

Acquisition of PAH RSI Lessee

         In October 1997, Patriot Operating Company, through certain of its
subsidiaries, acquired the members' interest of PAH RSI Lessee for approximately
$143. PAH RSI Lessee leased eight of Patriot REIT's hotels. As a result of the
acquisition, Patriot Operating Company holds these leasehold interests.

Cash Settled Forward Sale Transaction

         On November 7, 1997, Patriot REIT entered into two forward sale 
transactions with The Chase Manhattan Bank in the aggregate principal amount of 
$275,000.  The terms of the transactions provide that on June 2, 1998, either 
Chase will be obligated to pay Patriot REIT or Patriot REIT will be obligated to
pay Chase a cash settlement amount based on the then current yield on 10-year 
U.S. Treasury Notes.  The forward sale transactions cover principal amounts of 
$175,000 with a forward yield of 6.0% and $100,000 with a forward yield of 
5.995%.  If the index price of the securities on June 1, 1998 is greater than 
the "Forward Price" (which is to be calculated based on the forward yield rate 
and the economic variables applicable to 10-year U.S. Treasury Notes), Patriot 
REIT will be obligated to pay Chase a cash settlement amount based on the spread
between the index price and the Forward Price times the principal amount.  If 
the index price is less than the Forward Price, Chase will be obligated to pay
Patriot REIT a cash settlement amount based on the spread between the index
price and the Forward Price times the principal amount.

Private Placement of Securities

         On November 13, 1997, pursuant to a letter agreement dated September
30, 1997, the Patriot Companies sold 1,000,033 Paired Shares to PaineWebber (the
"PaineWebber Direct Placement") for a purchase price per Paired Share of
$27.6875, or aggregate consideration of $27,688. In addition, pursuant to a
letter agreement dated September 30, 1997, the Patriot Companies sold 1,000,000
Paired Shares to LaSalle Advisors Limited Partnership ("LaSalle"), as agent for
certain clients of LaSalle (the "LaSalle Direct Placement"), at a purchase price
per Paired Share of $27.625, or aggregate consideration of $27,625.

         On September 30, 1997, the Patriot Companies exercised their right to
call 2,000,033 OP Units in each of the Patriot Partnerships held by The Morgan
Stanley Real Estate Fund, L.P. and certain related entities (the "Morgan Stanley
Call"). The exercise price on the Morgan Stanley Call was $25.875 per pair of OP
Units. The Morgan Stanley Call was funded with the proceeds of the PaineWebber
Direct Placement and the LaSalle Direct Placement.

                                      31
<PAGE>
 
                              CHC LEASE PARTNERS

                                BALANCE SHEETS
                                (in thousands)

<TABLE> 
<CAPTION> 
                                                                                September 30,       December 31,
                                                                                    1997                1996
                                                                              ------------------ -------------------
                                                                                 (unaudited)
                                                      ASSETS
<S>                                                                           <C>                <C> 
Current assets:
     Cash and cash equivalents..............................................  $           9,164  $          11,096
     Accounts receivable, net of allowance for doubtful accounts
         of $70 and $159 at September 30, 1997 and
         December 31, 1996, respectively....................................              3,739              6,895
     Due from affiliates....................................................                123                341
     Inventories............................................................              1,341              2,588
     Prepaid expenses.......................................................                634              1,189
                                                                              -----------------  -----------------
              Total current assets..........................................             15,001             22,109
Investments.................................................................              2,550              5,100
Deposits ...................................................................                110                272
                                                                              -----------------  -----------------
              Total assets..................................................  $          17,661  $          27,481
                                                                              =================  =================

                                         LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
     Accounts payable.......................................................  $           2,110  $           4,656
     Accrued lease payments due to Patriot American
         Hospitality Partnership, L.P.......................................              3,487              3,829
     Due to affiliates......................................................              2,441                 57
     Distributions payable..................................................              3,078                 --
     Accrued payroll........................................................              1,943              2,922
     Taxes payable                                                                        1,242              1,452
     Guest deposits.........................................................                932              2,412
     Accrued expenses and other liabilities.................................              1,497              2,611
                                                                              -----------------  -----------------
              Total current liabilities.....................................             16,730             17,939
Due to Patriot American Hospitality Partnership, L.P........................              1,238                809
Lease inducement............................................................                 --              1,546
                                                                              -----------------  -----------------
              Total liabilities.............................................             17,968             20,294
Commitments and contingencies (Note 2)......................................                 --                 --
Partners' capital ..........................................................               (307)             7,187
                                                                              -----------------  -----------------
              Total liabilities and partners' capital.......................  $          17,661  $          27,481
                                                                              =================  =================
</TABLE> 

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

                                       32
<PAGE>
 
                              CHC LEASE PARTNERS

                            STATEMENTS OF OPERATIONS
                                   (unaudited)
                                 (in thousands)

<TABLE> 
<CAPTION> 
                                                           Three Months Ended             Nine Months Ended
                                                             September 30,                  September 30,
                                                     ------------------------------- ------------------------------
                                                          1997            1996           1997            1996
                                                     --------------- --------------- -------------- ---------------
<S>                                                  <C>             <C>             <C>            <C> 
Revenue:
     Rooms.........................................  $       26,887  $       29,232  $      92,071  $       81,869
     Food and beverage.............................           9,100           8,162         32,569          25,079
     Conference center.............................             507             456          1,870           1,652
     Telephone and other...........................           2,422           2,714          8,603           7,432
                                                     --------------  -------------- --------------  --------------
         Total revenue.............................          38,916          40,564        135,113         116,032
                                                     --------------  -------------- --------------  --------------
Expenses:
     Departmental costs and expenses...............          15,235          14,647         50,695          41,713
     Participating lease payments..................          12,266          14,195         43,609          40,068
     General and administrative....................           4,048           3,339         12,714           9,640
     Repairs and maintenance.......................           1,962           1,892          6,356           5,182
     Utilities.....................................           2,037           2,030          5,964           5,219
     Marketing.....................................           4,294           3,716         13,554          10,543
     Insurance.....................................                             233            505             631
                                                     --------------  -------------- --------------  --------------
         Total expenses............................          39,842          40,052        133,397         112,996
                                                     --------------  -------------- --------------  --------------
         Income (loss) before lessee income 
           (expense)...............................            (926)            512          1,716           3,036
                                                     --------------  -------------- --------------  --------------
     Limited partnership distributions, interest 
         and miscellaneous income..................             297             607            982           1,110
     Management fees...............................          (1,143)           (744)        (2,360)         (2,333)
     Lessee general and administrative expenses....             (69)           (263)          (444)           (765)
                                                     --------------  -------------- --------------  -------------- 
         Total lessee expense......................            (915)           (400)        (1,822)         (1,988)
                                                     --------------  -------------- --------------  --------------
         Net income (loss).........................  $       (1,841) $          112 $         (106) $        1,048
                                                     ==============  ============== ==============  ==============
</TABLE> 

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

                                       33
<PAGE>
 
                              CHC LEASE PARTNERS

                           STATEMENTS OF CASH FLOWS
                                  (unaudited)
                                (in thousands)

<TABLE> 
<CAPTION> 
                                                                                        Nine Months Ended
                                                                                          September 30,
                                                                              --------------------------------------
                                                                                    1997                1996
                                                                              ------------------ -------------------
<S>                                                                           <C>                <C> 
Cash flows from operating activities:
     Net income (loss)......................................................  $            (106) $           1,048
     Adjustments to reconcile net income to net cash
         used in operating activities:
              Recognition of lease inducement...............................               (546)               (76)
              Provision for losses on accounts receivable...................                 89                 46
     Changes in assets and liabilities:
     (Increase) decrease in:
              Accounts receivable...........................................             (3,079)            (2,484)
              Due from affiliates...........................................                 (3)                --
              Inventories...................................................               (223)               192
              Prepaid expenses..............................................                 49               (950)
              Deposits......................................................                (23)                --
     Increase (decrease) in:
              Accounts payable..............................................                 79             (2,335)
              Accrued lease payments due to Patriot American
                  Hospitality Partnership, L.P. ............................                 62              2,411
              Due to affiliates.............................................                 43                 94
              Accrued payroll...............................................                530                722
              Taxes payable.................................................                371                131
              Guest deposits................................................               (287)              (660)
              Accrued expenses and other liabilities........................                728              1,433
                                                                              -----------------  -----------------
Net cash used in operating activities.......................................             (2,316)              (428)
                                                                              -----------------  -----------------

Cash flows from investing activities:
     Acquired cash from new operating leases................................                  7              3,936
                                                                              -----------------  -----------------
Net cash provided by investing activities...................................                  7              3,936
                                                                              -----------------  -----------------

Cash flows from financing activities:
     Partnership contributions..............................................                500                 --
     Partnership distributions..............................................             (2,000)            (1,090)
     Funds collected for distributed participating lease agreements.........              1,877                 --
                                                                              -----------------  -----------------
Net cash provided by (used in) financing activities.........................                377             (1,090)
                                                                              -----------------  -----------------

Net increase (decrease) in cash and cash equivalents........................             (1,932)             2,418
Cash and cash equivalents at beginning of period............................             11,096              9,385
                                                                              -----------------  -----------------
Cash and cash equivalents at end of period..................................  $           9,164  $          11,803
                                                                              =================  =================
</TABLE> 

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

                                       34
<PAGE>
 
                              CHC LEASE PARTNERS

                      STATEMENTS OF CASH FLOWS - Continued
                                   (unaudited)
                                 (in thousands)

<TABLE> 
<CAPTION> 
                                                                                        Nine Months Ended
                                                                                          September 30,
                                                                              --------------------------------------
                                                                                    1997                1996
                                                                              ------------------ -------------------
<S>                                                                           <C>                 <C> 
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  $           3,936
         Accounts receivable................................................                  5                 --
         Inventories........................................................                 63                699
         Prepaid expenses and other assets..................................                 13              1,757
         Due to Patriot American Hospitality Partnership, L.P. .............                (63)                78
         Guest deposits.....................................................                (11)                --
         Lease inducement...................................................                 --               (685)
         Accrued expenses and other liabilities.............................                (14)            (5,785)
                                                                              -----------------  ----------------- 
         Net assets.........................................................  $              --  $              --
                                                                              =================  =================

Distribution of working capital of participating lease agreements to Gencom
     Lessee, L.P.:
         Accounts receivable................................................  $           6,589  $              --
         Inventories....................................................                  1,306                 --
         Prepaid expenses...................................................                546                 --
         Deposits...........................................................                170                 --
         Due to Patriot American Hospitality Partnership, L.P. .............               (399)                --
         Accrued lease payments due to Patriot American Hospitality
              Partnership, L.P. ............................................               (704)                --
         Accounts payable...................................................             (2,371)                --
         Accrued payroll....................................................             (1,383)                --
         Taxes payable......................................................               (536)                --
         Guest deposits.....................................................             (1,175)                --
         Accrued expenses and other liabilities.............................             (1,783)                --
                                                                              -----------------  -----------------
         Net working capital................................................                260                 --
         Cash distribution payable..........................................                134                 --
                                                                              -----------------  -----------------
              Working capital...............................................  $             394  $              --
                                                                              =================  =================

Distribution payable of working capital to CHC REIT Lessee Corp. ...........  $             394  $              --
                                                                              =================  =================

Transfer of September 1997 working capital of participating lease agreement 
     to Patriot American Hospitality, Inc.:
         Working capital....................................................  $            (685) $              --
         Cash transfer payable..............................................                221                 --
                                                                              -----------------  -----------------
         Due to Patriot American Hospitality, Inc. to cover negative working
           capital..........................................................  $            (464)                --
                                                                              =================  =================

Distribution of units of limited partnership interest in Patriot American
     Hospitality Partnership, L.P. .........................................  $           2,550  $              --
                                                                              =================  =================

Distribution payable of units of limited partnership interest in Patriot
     American Hospitality Partnership, L.P. ................................  $           2,550  $              --
                                                                              =================  =================

Contribution - note receivable - affiliate..................................  $           7,400  $              --
                                                                              =================  =================
</TABLE> 

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

                                       35
<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 "Patriot REIT Partnership"). CHC Lease Partners, a general partnership, at
formation was owned jointly by CHC REIT Lessee Corp. ("CHCR"), a wholly owned
subsidiary of CHC International, Inc. ("CHCI") and by Gencom Lessee, L.P.
("Gencom Lessee"), 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 Patriot REIT
Partnership entered into additional operating leases for five hotels acquired by
the Patriot REIT Partnership. The leases are substantially similar to the other
lease agreements between CHC Lease Partners and the Patriot REIT Partnership.

         The hotels are leased by the Patriot REIT Partnership to CHC Lease
Partners under separate participating 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.

         On September 30, 1997, CHC Lease Partners distributed eight
participating lease agreements to Gencom Lessee. Additionally, CHC Lease
Partners declared distributions of its working capital and units of limited
partnership interest in the Patriot REIT Partnership ("OP Units") equally to
CHCR and Gencom Lessee. As of September 30, 1997, CHC Lease Partners distributed
$2,550 OP Units to Gencom Lessee. The remaining cash portions of the working
capital distributions of $134 and $394 are distributions payable to Gencom
Lessee and CHCR, respectively. The remaining OP Units distribution of $2,550 is
a distribution payable to CHCR. Accordingly, subsequent to September 30, 1997,
CHCR became the sole owner of the remaining participating lease agreements,
assets and liabilities and continues to do business as CHC Lease Partners.

         Upon distribution of the eight participating lease agreements to Gencom
Lessee, Patriot American Hospitality, Inc. ("Patriot REIT") acquired from Gencom
Lessee seven of eight participating lease agreements effective September 1, 1997
and acquired from Gencom Lessee the eighth participating lease agreement
effective October 1, 1997. Patriot REIT leased such hotels to Patriot American
Hospitality Operating Company ("Patriot Operating Company").

         Patriot REIT, Patriot Operating Company and CHCI have also entered into
an Agreement and Plan of Merger dated as of September 30, 1997, providing,
subject to regulatory approvals, for the merger of the hospitality-related
businesses of CHCI with and into Patriot Operating Company with Patriot
Operating Company being the surviving company (the "CHCI Merger"). Concurrently,
approximately 50% of GAH II, L.P. ("GAH"), an affiliate of CHCI and the Gencom
group of companies which provides management functions necessary to operate
certain hotels leased by CHC Lease Partners, was purchased by Patriot Operating
Company from the Gencom group of companies. The remaining 17 participating lease
agreements and 16 of the 17 management contracts related to the Patriot REIT
hotels leased by CHC Lease Partners will be acquired by Patriot Operating
Company, through its subsidiaries at the completion of the CHCI Merger.

         Simultaneous with the distribution of the eight participating lease
agreements, the requirement to maintain certain minimum levels of net worth was
amended. The amendment also removed the requirement to maintain certain special
collateral, allowing CHC Lease Partners to distribute to its partners the OP
Units originally used to capitalize CHC Lease Partners. As required, CHCR then
contributed a $7,400 note receivable from CHCI to CHC Lease Partners
representing 20% of the aggregate sum of the next twelve months projected lease
payments payable under each participating lease agreement.

                                       36
<PAGE>
 
                               CHC LEASE PARTNERS

                   NOTES TO FINANCIAL STATEMENTS - (continued)
                                   (unaudited)
                             (dollars in thousands)

         The hotels leased by CHC Lease Partners as of September 30, 1997,
consist of twelve full service hotels, four limited service hotels and one
executive conference center. Sixteen of the seventeen hotels are operated under
franchise licenses with nationally recognized hotel companies. The cost of
obtaining the franchise licenses is paid by the Patriot REIT 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 three and the nine month periods ended September 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 was obligated to return the inventory to the Patriot REIT
Partnership at the end of each lease term less a total of $1,000, which was
accounted for as a lease inducement. Additionally during 1996, a cash lease
inducement of $685 was received in 1996 related to leasing one resort property.
These lease inducements were recorded as a reduction on a straight-line basis to
participating lease payments expense over the life of the participating lease
agreements. Concurrent with the distribution of the eight participating lease
agreements, the inventory lease inducement was forgiven by CHC Lease Partners
resulting in a charge of $185 for previously recognized lease inducements and
the lease inducement for the resort property was recognized by CHC Lease
Partners resulting in the reduction of participating lease payments expense of
$620. Exclusive of the lease inducements, for the three months ended September
30, 1997 and 1996, CHC Lease Partners incurred base rents of $9,351 and $8,740
and participating rents of $3,387 and $5,444, respectively, and for the nine
months ended September 30, 1997 and 1996, base rents of $29,741 and $24,801 and
participating rents of $14,413 and $15,231, respectively. Due to affiliates as
of September 30, 1997, includes a balance of $2,342 as a result of funds
collected by CHC Lease Partners on behalf of the Patriot REIT Partnership for
previously distributed participating lease agreements..

         CHC Lease Partners entered into management agreements with hotel
management subsidiaries of CHCI and GAH, to perform all management functions
necessary to operate 24 of the 25 hotels leased by CHC Lease Partners. Prior to
the distribution of the eight participating lease agreements, the management
contracts related to those hotels were terminated. The original terms of the
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 the management
agreements are subordinate to CHC Lease Partners' obligations to the Patriot
REIT 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, CHCI
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, CHCI and GAH would be required to pay CHC Lease
Partners up to 50% of the management fees earned by CHCI and GAH, respectively.
For the three months ended September 30, 1997 and 1996, management fees incurred
under the management agreements were $1,076 and $732, respectively, and for the
nine months ended September 30, 1997 and 1996, such management fees were $2,136
and $2,159, respectively. Except for the three months ending September 30, 1997,
these management fees are net of management fees refunded and foregone by CHCI
and GAH of $214 for the three months ended September 30, 1996, respectively, and
of $1,302 and $542 for the nine months ended September 30, 1997 and 1996,
respectively. These management fees include management fees previously 

                                       37
<PAGE>
 
                               CHC LEASE PARTNERS

                   NOTES TO FINANCIAL STATEMENTS - (continued)
                                   (unaudited)
                             (dollars in thousands)


refunded and foregone by CHCI and GAH of $82 for the three months ended
September 30, 1997 as a result of the recovery of operating losses incurred
under certain participating lease agreements earlier in the year. Included in
due to (from) affiliates at September 30, 1997 and December 31, 1996, were
amounts for management fees under these management agreements due to (from) CHCI
of $73 and ($300) and due (from) GAH of ($32) and ($41), respectively.

         Until August 31, 1997, CHC Lease Partners fully reimbursed CHCI and GAH
for the payroll and related costs CHCI and GAH incurred on behalf of CHC Lease
Partners. Effective September 1, 1997, CHC Lease Partners is fully reimbursed
for its payroll and related costs. Such costs amounted to $10 for the month
ended September 30, 1997.

         CHC Lease Partners received a cash contribution from its partners of
$500 and a contribution from CHCR in the form of a $7,400 note receivable for
the nine months ended September 30, 1997. CHC Lease Partners made cash
distributions of $2,000 and $1,090 for the nine months ended September 30, 1997
and 1996, respectively and declared distributions of working capital of $788, of
which $394 remains payable, and OP Units of $5,100, of which $2,550 remains
payable, for the nine months ended September 30, 1997.

3.   Pro Forma Financial Information:

         The unaudited pro forma statements of operations are presented as if
the leases and the operation of the eighteen 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 OP Units and interest income associated
with working capital balances. No pro forma interest income associated with
working capital balances has been included.

<TABLE> 
<CAPTION> 

                                                                                        Nine Months Ended
                                                                                          September 30,
                                                                              --------------------------------------
                                                                                    1997                1996
                                                                              ------------------ -------------------
                                                                                         (in thousands)
<S>                                                                           <C>                <C> 
Revenue:
     Rooms                                                                    $          60,879  $          61,728
     Food and beverage......................................................             25,732             24,327
     Conference center......................................................              1,870              1,652
     Telephone and other....................................................              5,898              6,877
                                                                              -----------------  -----------------
          Total revenue.....................................................             94,379             94,584
                                                                              -----------------  -----------------
Expenses:
     Departmental costs and expenses........................................             37,534             37,274
     Participating lease payments...........................................             30,053             29,790
     General and administrative.............................................              9,408              8,994
     Repairs and maintenance................................................              4,473              4,413
     Utilities..............................................................              4,242              4,388
     Marketing..............................................................              9,852              8,955
                                                                              -----------------  -----------------
          Total expenses....................................................             95,562             93,814
                                                                              -----------------  -----------------
Income (loss) before lessee expenses........................................             (1,183)               770
Lessee expenses ............................................................               (864)            (1,559)
                                                                              ------------------ ------------------
     Net loss...............................................................  $          (2,047) $            (789)
                                                                              ================== ==================
</TABLE> 

                                       38
<PAGE>
 
                           NORTHCOAST HOTELS, L.L.C.

                                BALANCE SHEETS
                                (in thousands)

<TABLE> 
<CAPTION> 
                                                                                September 30,       December 31,
                                                                                    1997                1996
                                                                              ------------------ -------------------
                                                                                 (unaudited)
                                    ASSETS
<S>                                                                           <C>                <C> 
 Current assets:
      Cash and cash equivalents.............................................. $           3,985  $           1,756
      Accounts receivable, net of allowance for doubtful accounts of $22 and
          $43 at September 30, 1997 and December 31, 1996, respectively......             4,588              4,224
      Receivable from Patriot American Hospitality Partnership, L.P..........                69                245
      Inventories............................................................               349                320
      Prepaid expenses.......................................................               664                387
      Other assets...........................................................               832                792
                                                                              -----------------  -----------------
               Total current assets..........................................            10,487              7,724
 Deferred assets, net of accumulated amortization of $69 and $33 at
      September 30, 1997 and December 31, 1996, respectively.................               506                500
 Investments.................................................................               825                825
 Fixed assets, net of accumulated depreciation of $20 at September 30, 1997..               506                 --
                                                                              -----------------  -----------------
               Total assets.................................................. $          12,324  $           9,049
                                                                              =================  =================

                        LIABILITIES AND MEMBERS' EQUITY
 Current liabilities:
      Accounts payable....................................................... $           3,075  $           2,064
      Accrued rent due to Patriot American Hospitality Partnership, L.P......             2,571                943
      Due to affiliates......................................................               226                113
      Accrued payroll and benefits...........................................             1,508              2,088
      Guest deposits.........................................................               550                155
      Accrued expenses and other liabilities.................................             1,108                986
      FF&E reserve due to Patriot American Hospitality
          Partnership, L.P...................................................                47                415
                                                                              -----------------  -----------------
               Total current liabilities.....................................             9,085              6,764
 Note payable and accrued interest payable  to Patriot American Hospitality
      Partnership, L.P.......................................................               438                 --
 Due to Patriot American Hospitality Partnership, L.P........................               298                242
                                                                              -----------------  -----------------
               Total liabilities.............................................             9,821              7,006
 Commitments and contingencies...............................................                --                 --
 Members' equity.............................................................             2,503              2,043
                                                                              -----------------  -----------------
               Total liabilities and members' equity......................... $          12,324  $           9,049
                                                                              =================  =================
</TABLE> 

                             See accompanying notes.

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

                           STATEMENTS OF OPERATIONS
                                  (unaudited)
                                (in thousands)

<TABLE> 
<CAPTION> 

                                                                                                       April 2,
                                                                                                         1996
                                                           Three          Three           Nine      (Inception of
                                                           Months         Months         Months      operations)
                                                           Ended          Ended          Ended         through
                                                       September 30,  September 30,  September 30,  September 30,
                                                            1997           1996           1997           1996
                                                       -------------- -------------- -------------- ---------------
<S>                                                    <C>            <C>            <C>            <C> 
Revenue:
     Rooms...........................................  $       16,090 $       10,395 $       38,132 $       18,115
     Food and beverage...............................           6,048          3,964         16,619          7,201
     Telephone and other.............................           1,446            869          3,335          1,576
                                                       -------------- -------------- -------------- --------------
         Total revenue...............................          23,584         15,228         58,086         26,892
                                                       -------------- -------------- -------------- --------------

Expenses:
     Departmental costs and other expenses...........           8,875          5,938         23,047         10,577
     Participating lease payments....................           8,216          4,770         18,433          8,077
     General and administrative......................           1,636          1,235          4,492          2,218
     Ground lease expense............................             351            289            985            567
     Repairs and maintenance.........................           1,018            757          2,826          1,378
     Utilities.......................................             828            580          1,985            937
     Marketing.......................................           1,618          1,091          4,219          1,880
                                                       -------------- -------------- -------------- --------------
         Total expenses..............................          22,542         14,660         55,987         25,634
                                                       -------------- -------------- -------------- --------------
         Income before lessee income (expense).......           1,042            568          2,099          1,258
                                                       -------------- -------------- -------------- --------------
     Dividend and interest income....................              48             40            187             99
     Service fee income..............................              --             --            900             --
     Management fees.................................            (581)          (377)        (1,588)          (658)
     Depreciation and amortization...................             (24)           (13)           (54)           (21)
     Lessee general and administrative expenses......            (142)          (139)          (424)          (252)
                                                       -------------- -------------- -------------- --------------
         Total lessee income (expense)...............            (699)          (489)          (979)          (832)
                                                       -------------- -------------- -------------- --------------
         Net income..................................  $          343 $           79 $        1,120 $          426
                                                       ============== ============== ============== ==============
</TABLE> 

                             See accompanying notes.

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

                           STATEMENTS OF CASH FLOWS
                                  (unaudited)
                                (in thousands)

<TABLE> 
<CAPTION> 

                                                                                                        April 2,
                                                                                                          1996
                                                                                                     (Inception of
                                                                                      Nine Months     operations)
                                                                                         Ended          through
                                                                                     September 30,   September 30,
                                                                                          1997            1996
                                                                                     --------------- ---------------
<S>                                                                                  <C>             <C> 
Cash flows from operating activities:
     Net income....................................................................  $        1,120  $          426
     Adjustments to reconcile net income to net cash provided by operating
     activities:
         Provision for losses on accounts receivable...............................                              30
         Depreciation and amortization.............................................              56              21
     Changes in assets and liabilities:
         Accounts receivable.......................................................            (364)         (3,706)
         Accounts receivable from Patriot American Hospitality Partnership, L.P....             176             (15)
         Inventories...............................................................              27              (9)
         Prepaid expenses and other assets.........................................            (277)           (438)
         Accounts payable..........................................................           1,011           1,107
         Accrued rent due to Patriot American Hospitality Partnership, L.P.........           1,628           1,771
         Due to affiliates.........................................................             113             127
         Accrued payroll and benefits..............................................            (580)            698
         Guest deposits............................................................             395             183
         Accrued expenses and other liabilities....................................             122           1,244
         FF&E Reserve due to Patriot American Hospitality Partnership, L.P.........            (368)            636
                                                                                     --------------  --------------
Net cash provided by operating activities..........................................           3,059           2,075
                                                                                     --------------  --------------

Cash flows used in investing activities:
     Purchases of equipment and leasehold improvements.............................            (519)             (7)
     Payment of organization costs and capitalized lease costs.....................             (42)           (458)
     Payment for deferred purchase consideration...................................             (47)           (785)
                                                                                     --------------  -------------- 
Net cash used in investing activities..............................................            (608)         (1,250)
                                                                                     --------------  -------------- 

Cash flows provided from (used in) financing activities
     Cash received from assumption of operating liabilities........................              --             932
     Payment for capital improvements on behalf of owner...........................              --             (68)
     Cash contributions............................................................              --           1,475
     Principal payments on note payable............................................             (62)             --
     Proceeds from issuance of note................................................             500              --
     Distributions to members......................................................            (660)            (82)
                                                                                     --------------  -------------- 
Net cash provided from (used in) financing activities..............................            (222)          2,257
                                                                                     --------------  --------------
Net increase in cash and cash equivalents..........................................           2,229           3,082
Cash and cash equivalents at beginning of period...................................           1,756              --
                                                                                     --------------  --------------
Cash and cash equivalents at end of period.........................................  $        3,985  $        3,082
                                                                                     ==============  ==============
</TABLE> 

                             See accompanying notes.

                                       41
<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 "Patriot
REIT 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 Patriot REIT Partnership entered into additional
operating leases for four hotels that were acquired by the Patriot REIT
Partnership. During the three months ended September 30, 1997, NorthCoast Lessee
and the Patriot REIT Partnership entered into additional operating leases for
three hotels that were acquired by the Patriot REIT Partnership. At September
30, 1997, NorthCoast Lessee leased twelve hotels.

         Each hotel is leased by the Patriot REIT Partnership to NorthCoast
Lessee under separate participating operating lease agreements. Nine of the
twelve 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 nine months ended September 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
the entity formerly known as 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 September
30, 1997, cash contributions of $1,475 and units of limited partnership interest
("OP Units") in the Patriot REIT Partnership of $825 have been received.

         Two members contributed notes receivable totaling $1,050 that 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 (the "LeParc Entity"). These notes receivable from members
have been offset against members' equity in the accompanying financial
statements.

                                       42
<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 the LeParc Entity.
NorthCoast Lessee is also required to maintain ownership of shares of common
stock of Patriot American Hospitality, Inc. or OP Units of the Patriot REIT
Partnership.

3.   Commitments and Related Party Transactions:

         NorthCoast Lessee incurred rents of $8,216 during the three months
ended September 30, 1997, $18,433 during the nine months ended September 30,
1997 and $8,077 during the period April 2, 1996 through September 30, 1996.
Rents consist of $6,673, $15,242 and $6,328 in base rents, $1,245, $2,317 and
$1,293 in participating rents, and $298, $873 and $456 in additional rent for
the three months ended September 30, 1997, the nine months ended September 30,
1997 and the period April 2, 1996 through September 30, 1996, respectively. At
September 30, 1997 and December 31, 1996, NorthCoast Lessee owed the Patriot
REIT Partnership $2,848 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 Patriot REIT Partnership the inventory at each of the hotels at
the end of the related lease term. As of September 30, 1997, the balance of the
inventory due to the Patriot REIT Partnership was $298. 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 Patriot REIT Partnership to make improvements to the
hotels. At September 30, 1997 and December 31, 1996, the FF&E Reserve payable to
the Patriot REIT Partnership was $47 and $415, respectively.

     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 $9 for the three months ended September 30,
1997, $22 for the nine months ended September 30, 1997 and $12 during the period
April 2, 1996 through September 30, 1996.

     NorthCoast Lessee borrowed $500 from the Patriot REIT 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 September 30, 1997, NorthCoast Lessee had capitalized direct costs
and capitalized interest of $506 related to this laundry facility.

     Service fee income consists of fees received for acquisition, project
development and renovation services provided to the Patriot REIT Partnership.
NorthCoast Lessee recorded $900 for such services during the nine months ended
September 30, 1997, net of reimbursed expenses of $53. No service fees were
recorded during the three months ended September 30, 1997.

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

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
                                   (unaudited)
                             (dollars in thousands)

4.   Pro Forma Financial Information:

         The following unaudited pro forma statement of operations is presented
as if the leases and the operation of the 11 hotels leased by NorthCoast Lessee
(excluding the Park Shore Hotel) 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 62,149 OP Units and pro forma interest income
associated with working capital balances.

<TABLE> 
<CAPTION> 

                                                                     Nine Months Ended
                                                                       September 30,
                                                           --------------------------------------
                                                                 1997                1996
                                                           ------------------ -------------------
                                                                      (in thousands)
<S>                                                        <C>                <C> 
Revenue:
     Rooms...............................................  $          44,423  $          41,008
     Food and beverage...................................             18,590             16,558
     Telephone and other.................................              3,668              3,346
                                                           -----------------  -----------------
          Total revenue..................................             66,681             60,912
                                                           -----------------  -----------------
Expenses:
     Departmental costs and expenses.....................             27,100             25,836
     Participating lease payments........................             21,166             18,147
     General and administrative..........................              4,862              5,002
     Ground lease expense................................                985                856
     Repairs and maintenance.............................              3,136              3,090
     Utilities...........................................              2,263              2,251
     Marketing...........................................              4,467              4,007
                                                           -----------------  -----------------
          Total expenses.................................             63,979             59,189
                                                           -----------------  -----------------
Income before lessee expenses............................              2,702              1,723
Lessee expenses .........................................             (1,237)            (1,628)
                                                           ------------------ ------------------
     Net income..........................................  $           1,465  $              95
                                                           =================  =================
</TABLE> 

                                       44
<PAGE>
 
                                PAH RSI, L.L.C.

                          CONSOLIDATED BALANCE SHEET
                                  (unaudited)
                                (in thousands)

<TABLE> 
<CAPTION> 

                                                                                                    September 30,
                                                                                                        1997
                                                                                                 ------------------
                                             ASSETS
<S>                                                                                              <C> 
Current assets:
     Cash and cash equivalents.................................................................  $           9,281
     Accounts receivable, net of allowance for doubtful accounts of $179.......................             11,204
     Due from Resorts Services, Inc............................................................                605
     Inventories...............................................................................              2,266
     Prepaid expenses and other assets.........................................................              1,794
                                                                                                 -----------------
              Total current assets.............................................................             25,150
Organizational costs, net of accumulated amortization of $5....................................                 88
Tradenames, net of accumulated amortization of $213............................................              8,787
Other assets...................................................................................              1,820
                                                                                                 -----------------
              Total assets.....................................................................  $          35,845
                                                                                                 =================

                                 LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
     Accounts payable..........................................................................  $           3,139
     Accrued rent due to Patriot American Hospitality Partnership, L.P.........................              3,846
     Due to Patriot American Hospitality Partnership, L.P and affiliates.......................              4,836
     Accrued expenses and other liabilities....................................................              7,338
     Accrued interest..........................................................................                299
     Guest and other deposits..................................................................              6,914
                                                                                                 -----------------
              Total current liabilities........................................................             26,372
Due to selling entities........................................................................                516
Note payable to Patriot American Hospitality Partnership, L.P..................................              9,000
                                                                                                 -----------------
              Total liabilities................................................................             35,888
Commitments and contingencies..................................................................                 --
Members' equity   (deficit)....................................................................                (43)
                                                                                                 ------------------
              Total liabilities and members' equity............................................  $          35,845
                                                                                                 =================
</TABLE> 

                             See accompanying notes.

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

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (unaudited)
                                (in thousands)

<TABLE> 
<CAPTION> 


                                                                                                     January 16,
                                                                                                        1997
                                                                                       Three        (Inception of
                                                                                       Months         operations)
                                                                                       Ended            through
                                                                                   September 30,     September 30,
                                                                                        1997             1997
                                                                                   ---------------- ----------------
<S>                                                                                <C>              <C> 
Revenue:
     Rooms........................................................................ $      15,248    $     39,541
     Food and beverage............................................................         6,859          18,425
     Telephone and other revenue..................................................         3,269           9,515
     Club, club membership and spa revenue........................................         6,139          21,500
     Shopping center revenue......................................................           446           1,311
     Royalty revenues.............................................................           366           1,137
                                                                                   -------------    ------------
         Total revenue............................................................        32,327          91,429
                                                                                   -------------    ------------

Expenses:
     Departmental costs and other expenses........................................        14,354          39,556
     Participating lease payments.................................................         8,103          24,816
     General and administrative...................................................         2,239           6,118
     Repairs and maintenance......................................................         2,885           7,297
     Utilities....................................................................         1,371           3,258
     Marketing....................................................................         2,294           5,489
     Interest expense.............................................................           299             832
     Insurance....................................................................           160             400
                                                                                   -------------    ------------
         Total expenses...........................................................        31,705          87,766
                                                                                   -------------    ------------
         Income before lessee expenses............................................           622           3,663
                                                                                   -------------    ------------
     Interest income..............................................................             3              50
     Management fees..............................................................          (732)         (3,165)
     Amortization.................................................................           (78)           (218)
     Lessee general and administrative expenses...................................          (106)           (373)
                                                                                   --------------   -------------
         Total lessee expenses....................................................          (913)         (3,706)
                                                                                   --------------   -------------
         Net loss................................................................. $        (291)   $        (43)
                                                                                   ==============   =============
</TABLE> 

                             See accompanying notes.

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

              CONSOLIDATED STATEMENT OF MEMBERS' EQUITY (DEFICIT)
                                  (unaudited)
                                (in thousands)

<TABLE> 
<CAPTION> 

                                                                                                   January 16, 1997
                                                                                                    (Inception of
                                                                                                     operations)
                                                                                                      through
                                                                                                     September 30,
                                                                                                        1997
                                                                                                 -------------------
<S>                                                                                              <C> 
Initial capitalization at inception............................................................  $           4,110
Capital contributions of new members...........................................................              2,740
Notes receivable from members..................................................................             (6,850)
Net loss ......................................................................................                (43)
                                                                                                 ------------------
Balance, September 30, 1997....................................................................  $             (43)
                                                                                                 ==================
</TABLE> 

                            See accompanying notes.

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

                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (unaudited)
                                (in thousands)

<TABLE> 
<CAPTION> 
                                                                                                 January 16, 1997
                                                                                                   (Inception of
                                                                                                    operations)
                                                                                                      through
                                                                                                    September 30,
                                                                                                        1997
                                                                                                 -------------------
<S>                                                                                              <C> 
Cash flows from operating activities:
     Net loss..................................................................................  $            (43)
     Adjustments to reconcile net loss to net cash provided by operating activities:
         Provision for losses on accounts receivable...........................................               179
         Amortization..........................................................................               218
     Increase in assets and liabilities:
         Accounts receivable...................................................................            (9,523)
         Due to Patriot American Hospitality Partnership, L.P..................................             6,071
         Due from Resorts Services, Inc........................................................              (605)
         Inventories...........................................................................               (43)
         Prepaid expenses and other assets.....................................................              (983)
         Other assets..........................................................................            (1,820)
         Accounts payable......................................................................             2,757
         Accrued rent due to Patriot American Hospitality Partnership, L.P.....................             3,846
         Accrued expenses and other liabilities................................................             1,886
         Accrued interest......................................................................               299
         Guest and other deposits..............................................................             1,289
         Due to sellers........................................................................               516
                                                                                                 ----------------
Net cash provided by operating activities......................................................             4,044
                                                                                                 ----------------

Cash flows from investing activities:
     Payment of organization costs.............................................................               (93)
     Cash acquired at inception................................................................             5,330
                                                                                                 ----------------
Net cash provided by investing activities......................................................             5,237
                                                                                                 ----------------

Net increase in cash and cash equivalents......................................................             9,281
                                                                                                 ----------------
Cash and cash equivalents at end of period.....................................................  $          9,281
                                                                                                 ================

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.................................................  $          1,235
                                                                                                 ================
</TABLE> 

                             See accompanying notes.

                                       48
<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 "Patriot REIT
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 American Hospitality, Inc. and/or Patriot
American Hospitality Operating Company. 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 Patriot REIT Partnership on January 16, 1997. Subsequently
in the first quarter of 1997, PAH RSI Lessee and the Patriot REIT Partnership
entered into four additional operating leases for two additional resort
properties and two hotels that were acquired by the Patriot REIT Partnership.
During the second quarter of 1997, PAH RSI Lessee and the Patriot REIT
Partnership entered into additional operating leases for two hotels that were
acquired by the Patriot REIT Partnership. At September 30, 1997, PAH RSI Lessee
leased eight hotels as follows:

<TABLE> 
<CAPTION> 
                     Property Name                             Location                 Guest Rooms
         -------------------------------------       -----------------------------      -----------
         <S>                                         <C>                                <C> 
         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
           Doubletree Park Place                     Minneapolis, Minnesota                 298
</TABLE> 

         Each hotel is leased by the Patriot REIT 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
September 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

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                   (unaudited)
                                 (in thousands)

subsidiaries, Boulders Carefree Sewer Corporation, BJV Realty, Inc., and The
Peaks Real Estate Services, Inc. All significant intercompany accounts and
transactions have been eliminated.

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 Patriot REIT 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 Patriot REIT 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).

                                       50
<PAGE>
 
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 Patriot REIT 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 September 30, 1997, PAH RSI Lessee has future lease commitments to
the Patriot REIT 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 $9,129. PAH RSI Lessee
incurred base rents of $5,654 and $13,617 and participating rents of $2,449 and
$11,199 for the three months ended September 30, 1997 and the period January 16,
1997 through September 30, 1997, respectively. At September 30, 1997, PAH RSI
Lessee owed the Patriot REIT Partnership $3,846 for rents under the terms of the
participating leases.

         The Patriot REIT Partnership has the right to terminate all
participating lease agreements with PAH RSI Lessee. In the event such
termination occurs, the Patriot REIT 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 Patriot REIT 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 Patriot REIT
Partnership under the terms of the participating lease agreements.

         The Doubletree Guest Suites Hotel (formerly the Luxeford Suites Hotel)
and the Doubletree Park Place Hotel are 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 $366 and $1,137 for the three months ended September 30, 1997 and
the period January 16, 1997 through September 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.

                                       51
<PAGE>
 
Expense Reimbursements

         PAH RSI Lessee fully reimburses the Patriot REIT Partnership for office
space it occupies within the corporate offices of Patriot American Hospitality,
Inc. and for payroll and related costs the Patriot REIT Partnership incurs on
behalf of PAH RSI Lessee. These costs amounted to $106 and $373 for the three
months ended September 30, 1997 and the period January 17, 1997 through
September 30, 1997. At September 30, 1997, PAH RSI Lessee owed the Patriot REIT
Partnership $373 for such reimbursements.

Payables to Selling Entities

         At September 30, 1997, PAH RSI Lessee has aggregate payables of $516
due to certain of the former owners of the four resort properties leased from
the Patriot REIT 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 six 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...............................    $       301
                     1998...............................          1,103
                     1999...............................            806
                     2000...............................            408
                     2001 and thereafter................            429
                                                            -----------
                                                            $     3,047
                                                            ===========
</TABLE> 

                                       52
<PAGE>
 
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> 
                                                                     Nine Months Ended
                                                                       September 30,
                                                           --------------------------------------
                                                                 1997                1996
                                                           ------------------ -------------------
                                                                      (in thousands)
<S>                                                        <C>                <C> 
Revenue:
     Rooms...............................................  $          45,721  $          40,810
     Food and beverage...................................             21,701             20,614
     Telephone and other revenue.........................             10,378              7,132
     Club, club membership and spa revenue...............             23,545             22,408
     Shopping center revenue.............................              1,422              1,309
     Royalty revenue and other revenue...................              1,137              1,329
                                                           -----------------  -----------------
          Total revenue..................................            103,904             93,602
                                                           -----------------  -----------------
Expenses:
     Departmental costs and expenses.....................             47,326             43,036
     Participating lease payments........................             28,067             24,277
     General and administrative..........................              7,613              7,292
     Repairs and maintenance.............................              8,155              6,930
     Utilities...........................................              3,855              3,942
     Marketing...........................................              6,705              5,988
     Interest expense....................................                832              1,049
                                                           -----------------  -----------------
          Total expenses.................................            102,553             92,514
                                                           -----------------  -----------------
Income before lessee expenses............................              1,351              1,088
Lessee expenses .........................................             (4,110)            (3,226)
                                                           -----------------  ----------------- 
     Net loss............................................  $          (2,759) $          (2,138)
                                                           =================  ================= 
</TABLE> 


8.    Subsequent Event:

         Effective October 1, 1997, Patriot American Hospitality Operating
Company, through certain of its subsidiaries, acquired the members' interests of
PAH RSI Lessee for approximately $143.

                                       53
<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. Although forward-looking statements reflect management's good faith
beliefs, 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 Patriot Companies to
differ materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements. The Patriot 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,
risks associated with the Patriot Companies' rapid growth and its ability to
integrate its existing operations, departments and systems with those being
acquired in the Wyndham Merger, the CHCI Merger and the WHG Merger; risks
associated with the adoption of legislation, regulations or administrative
interpretations which could adversely affect the Patriot Companies' paired share
structure; Patriot REIT's dependence upon rental payments from Patriot Operating
Company and the Lessees for substantially all of Patriot REIT's income and the
dependence upon the abilities of Patriot Operating Company, 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.

Background

Organization

         The entity formerly known as Patriot American Hospitality, Inc.
(collectively with its subsidiaries, "Old Patriot REIT"), 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, Old Patriot REIT completed an initial public
offering (the "Initial Offering") of 29,210,000 shares of its common stock and
commenced operations.

         On July 1, 1997, Old Patriot REIT merged with and into California
Jockey Club ("Cal Jockey"), with Cal Jockey being the surviving legal entity
(the "Cal Jockey 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 Cal Jockey Merger, Cal Jockey changed its name to "Patriot
American Hospitality, Inc." ("Patriot REIT") and Bay Meadows changed its name to
"Patriot American Hospitality Operating Company" (collectively with its
subsidiaries, "Patriot Operating Company"). The term "Patriot Companies" as used
herein includes Patriot REIT, Patriot Operating Company and their respective
subsidiaries.

         The Cal Jockey Merger has been accounted for as a reverse acquisition
whereby Cal Jockey is considered to be the acquired company for accounting
purposes. Consequently, the historical financial information of Old Patriot REIT
became the historical financial information for Patriot REIT. The interim
financial statements have been adjusted for the purchase method of accounting
whereby the Bay Meadows Racecourse ("Racecourse") facilities and related
leasehold improvements owned by Cal Jockey and Bay Meadows have been adjusted to
estimated fair market value.  The excess purchase consideration over the 
estimated fair market value of the assets acquired and the liabilities assumed 
was recorded as goodwill.

         By operation of the Cal Jockey Merger, each issued and outstanding
share of common stock, no par value per share of Old Patriot REIT ("Old Patriot
REIT Common Stock") was converted into 0.51895 shares of common stock, par value
$0.01 per share of Patriot REIT ("Patriot REIT Common Stock") and 0.51895 shares
of common stock, par value $0.01 per share of Patriot Operating Company
("Patriot Operating Company Common Stock"), which shares are paired and
transferable only as a single unit (collectively, shares of Patriot REIT Common
Stock and shares of Patriot Operating Company Common Stock are referred to
herein as the "Paired Shares"). Each paired share of Cal Jockey and Bay Meadows
common stock remained outstanding and represented the same number of Paired
Shares of Patriot REIT Common Stock and Patriot Operating Company Common Stock.

         In connection with the Cal Jockey Merger, Bay Meadows formed an
operating partnership, Patriot American Hospitality Operating Company
Partnership, L.P. (the "Patriot Operating Company Partnership") into which Bay
Meadows contributed its assets in exchange for units of limited partnership
interest ("OP Units") of the 

                                       54
<PAGE>
 
Patriot Operating Company Partnership, and Cal Jockey contributed certain of its
assets to Patriot American Hospitality Partnership, L.P. (the "Patriot REIT
Partnership") in exchange for OP Units of the Patriot REIT Partnership
(collectively, the Patriot Operating Company Partnership and the Patriot REIT
Partnership are referred to herein as the "Patriot Partnerships"). Subsequent to
completion of the Cal Jockey Merger and the transactions contemplated by the Cal
Jockey Merger Agreement (the "Related Transactions"), substantially all of the
operations of Patriot REIT and Patriot Operating Company have been conducted
through the Patriot Partnerships and their subsidiaries.

         In connection with the Cal Jockey 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 Patriot REIT and Patriot Operating Company).

The Patriot Companies

         As of September 30, 1997, Patriot REIT, through the Patriot REIT
Partnership, PAH Ravinia, Inc. ("PAH Ravinia"), PAH Windwatch, L.L.C. ("PAH
Windwatch") and other subsidiaries, owned interests in 76 hotels with an
aggregate of over 18,800 guest rooms. 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, San
Francisco and Seattle. In addition to hotels catering primarily to business
travelers, Patriot REIT's portfolio includes world-class resort hotels,
including The Boulders, near Scottsdale, Arizona; The Lodge at Ventana Canyon in
Tucson, Arizona; The Peaks Resort & Spa in Telluride, Colorado; and Carmel
Valley Ranch Resort in Carmel, California and prominent hotels in major tourist
destinations. The hotels include 66 full service hotels, five resort hotels,
four limited service hotels and an executive conference center. Seventy-two of
the hotels are operated under franchise or brand affiliations with nationally
recognized hotel companies.

         Patriot REIT leases each of its hotels, except the Crowne Plaza Ravinia
Hotel and the Wyndham WindWatch Hotel, which are separately owned through
special purpose entities, to Patriot Operating Company or to other lessees (the
"Lessees") who are responsible for operating the hotels. As September 30, 1997,
30 hotels were leased to Patriot Operating Company and its affiliates and 44
hotels were leased to the Lessees. Patriot REIT leased 17 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"). Twelve of the hotels were leased to
NorthCoast Hotels, L.L.C. ("NorthCoast Lessee") under similar Participating
Lease agreements. In addition, PAH RSI, LLC, a limited liability company owned
and controlled by certain executive officers of the Patriot Companies ("PAH RSI
Lessee") leased eight hotels; DTR North Canton, Inc. (the "Doubletree Lessee")
leased four hotels; Crow Hotel Lessee, Inc. (the "Crow Lessee") leased two
hotels; and Metro Hotels Leasing Corporation ("Metro Lease Partners") leased one
hotel 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
Wyndham WindWatch Hotel acquisitions were structured without lessees and are
managed directly by Holiday Inns, Inc. and Wyndham Hotel Corporation,
respectively. Patriot Operating Company manages 14 of its hotels through certain
of its hotel management subsidiaries and has entered into separate management
agreements with hotel Operators to manage 16 of its hotels.

         In October 1997, Patriot Operating Company, through certain of its
subsidiaries, acquired the members' interest of PAH RSI Lessee for approximately
$143. As a result of the acquisition, Patriot Operating Company acquired the
leasehold interests for eight of Patriot REIT's hotels.

         In addition to leasing and managing hotels, Patriot Operating Company
is also engaged in the business of conducting and offering pari-mutuel wagering
(meaning that individuals wager against each other and not against the operator
of the facility) on thoroughbred horse racing at the Racecourse. In addition to
live horse racing at the Racecourse, Patriot Operating Company simulcasts its
live horse races to as many as 31 sites in California and as many as 450 sites
in the remainder of the world. The Racecourse also acts as an off-track wagering
facility, allowing patrons to wager on horse races at other tracks even when
live horse racing is not being conducted at the Racecourse, by accepting
simulcasts of horse races conducted throughout the United States, Canada,
Mexico, Australia and Hong Kong.

                                       55
<PAGE>
 
Investments in Properties

         During the nine months ended September 30, 1997, Patriot REIT acquired
26 hotels and four resort properties for approximately $803.5 million. These
acquisitions were financed primarily with funds drawn on Old Patriot REIT's line
of credit, and later, Patriot REIT's revolving credit facility (which replaced
Old Patriot REIT's line of credit), the issuance of 3,143,501 OP Units valued at
approximately $100.6 million, and the assumption of mortgage debt in the amount
of approximately $34.3 million.

         In July 1997, Patriot REIT 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 Cal Jockey Merger, to an affiliate of PaineWebber
Incorporated ("PaineWebber") for a purchase price of approximately $80.9 million
(the "PaineWebber Land Sale"). These funds were placed in a restricted trust
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 a portion of the proceeds from this restricted
account. Patriot REIT retained ownership of the improvements located on the
land, including the Racecourse and its related facilities.

         Simultaneously with the consummation of the PaineWebber Land Sale, the
PaineWebber affiliate and Patriot REIT entered into a ground lease covering a
portion of the land on which the Racecourse is situated for a term of seven
years. Patriot REIT has subleased the Racecourse land and leased the related
improvements to Patriot Operating Company in order to permit Patriot Operating
Company to continue horseracing operations at the Racecourse through the term of
Patriot REIT'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,
Patriot REIT assigned substantially 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
Patriot REIT's development obligations including, but not limited to, all
obligations for on and off-site improvements and all obligations under existing
lease and contracts. The parties have the option to renew such leases upon their
expiration under certain circumstances.

         In August 1997, Patriot Operating Company purchased a participating
loan from National Resort Ventures, L.P., a Delaware limited partnership,
related to the 1,014-room Buena Vista Palace Hotel in Orlando, Florida for
approximately $23.75 million in cash. The Buena Vista Palace Hotel is owned by a
joint venture between Equitable Life Insurance Company, which owns a 55%
interest, and Hotel Venture Partners, Ltd., a Florida limited partnership
("HVP"), which owns a 45% interest. The loan is subordinated to a ground lease,
a $51 million first leasehold mortgage loan and a separate $8.5 million
participating loan. Patriot REIT is currently negotiating with such owners to
acquire the hotel. In November 1997, Patriot REIT agreed to acquire a 95% equity
interest in the Buena Vista Palace Hotel for approximately $97.2 millon and the
assumption of the existing first leasehold mortgage. As part of the agreement,
Patriot REIT also was granted an option to acquire the remaining 5% equity
interest in the hotel. The acquisition is subject to a number of conditions
including completion of the Patriot companies due diligence.

         In June 1997, Patriot REIT loaned approximately $20.5 million to a
partnership affiliated with members of CHC Lease Partners relating to the
Doubletree Hotel in Glenview, Illinois. In July 1997, Patriot REIT loaned
approximately $25.6 million 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). Additionally, Patriot REIT purchased two
additional loans from a financial institution on which partnerships affiliated
with the members of CHC Lease Partners were borrowers for an aggregate purchase
price of $57 million. Each of the four mortgage loans is secured by first
priority liens on the respective hotels. The notes contain certain penalties for
early repayment. In connection with such loans, Patriot REIT entered into a
short-term financing arrangement (the "Paine Webber Mortgage Financing") with an
affiliate of Paine Webber Real Estate Securities, Inc. ("Paine Webber Real
Estate") whereby such affiliate loaned Patriot REIT $103 million to fund these
transactions. In September and October 1997, Patriot REIT, through the Patriot
REIT Partnership and certain other subsidiaries, acquired the partnerships that
own these four hotels.

Businesses Acquired

         In August 1997, the Patriot Companies acquired Grand Heritage Hotels,
Inc. a hotel management and marketing company, and other Grand Heritage
subsidiaries including Grand Heritage Leasing, L.L.C., which leased three hotels
from Patriot REIT (the "Grand Heritage Acquisition"). The total purchase price
for the Grand Heritage Acquisition was approximately $22.5 million which was
financed primarily through the issuance of 931,972 Class A preferred OP Units of
the Patriot Operating Company Partnership. Grand Heritage Hotels, Inc., directly
and through certain of its subsidiaries, owns 11 management contracts, five of
which are related to hotels leased by Patriot Operating Company.

                                       56
<PAGE>
 
         Effective September 1, 1997, Patriot REIT acquired the leasehold
interests related to seven Patriot REIT hotels which were previously leased by
CHC Lease Partners and re-leased such hotels to Patriot Operating Company. Prior
to such acquisition, the management contracts with GAH-II, L.P. ("GAH"), an
affiliate of CHC International, Inc. ("CHCI") and the Gencom American
Hospitality group of companies ("Gencom"), along with the leaseholds related to
the seven hotels were terminated. In a related transaction effective October 1,
1997, Patriot REIT acquired one additional leasehold interest related to a
Patriot REIT hotel previously leased by CHC Lease Partners and re-leased such
hotel to Patriot Operating Company (and the hotel's management contract with
CHCI was also terminated prior to the acquisition). The aggregate purchase price
of the eight leasehold interests was approximately $52.8 million. Concurrently,
Patriot Operating Company purchased an approximate 50% managing, controlling
ownership interest in GAH from affiliates of Gencom for a purchase price of
approximately $13.9 million. These transactions were financed with approximately
$644,000 of cash, and by issuing 2,388,932 paired OP Units of the Patriot REIT
Partnership and the Patriot Operating Company Partnership and 476,682 preferred
OP Units of Patriot Operating Company Partnership.

         GAH, directly and through certain of its subsidiaries, owns nine
management contracts related to hotels leased by Patriot Operating Company, 15
third-party management contracts, and certain other hospitality management
assets. Concurrent with Patriot Operating Company's purchase of its controlling
interest in GAH, Patriot Operating Company also entered into a Hospitality
Advisory, Asset Management and Support Services Agreement with CHCI and GAH
whereby Patriot Operating Company will provide certain hospitality advisory,
asset management and support services to certain CHCI and GAH subsidiaries for
base fee aggregating approximately $750,000 per month plus a percentage of
excess cash flows of the hotels.

         Patriot REIT, Patriot Operating Company and CHCI have also entered into
an Agreement and Plan of Merger dated as of September 30, 1997 (the "CHCI Merger
Agreement"), providing, subject to regulatory approvals, for the merger of the
hospitality-related businesses of CHCI with and into Patriot Operating Company
with Patriot Operating Company being the surviving company (the "CHCI Merger").
Subject to regulatory approvals, CHCI's gaming operations will be transferred to
a new legal entity prior to the CHCI Merger and such operations will not be a
part of the transaction. It is anticipated that the CHCI Merger will be
consummated in the first or second quarter of 1998, although the precise timing
is subject to receipt of all necessary regulatory approvals. As a result of the
CHCI Merger, Patriot Operating Company, through its subsidiaries, will acquire
the remaining 50% investment interest in GAH, the remaining 17 leases and 16 of
the associated management contracts related to the Patriot REIT hotels leased by
CHC Lease Partners, 3 management contracts related to Patriot REIT hotels leased
by Patriot Operating Company, 12 third-party management contracts, 2 third-party
lease contracts, the Grand Bay and Registry Hotels & Resorts proprietary brand
names and certain other hospitality management assets. Patriot Operating Company
has also agreed to provide CHCI with a $7,000 line of credit until such time as
the CHCI Merger is completed.

         By operation of the CHCI Merger, each issued and outstanding share of
common stock, par value $0.005 per share, of CHCI ("CHCI Shares") and certain
stock option rights will be converted into the right to receive shares of Series
A Redeemable Convertible Preferred Stock, par value $0.01 per share of Patriot
Operating Company (the "Series A Preferred Stock") and shares of Series B
Redeemable Convertible Preferred Stock, par value $0.01 per share, of Patriot
Operating Company (the "Series B Preferred Stock"). The formula for determining
the exchange ratio of CHCI Shares for Series A Preferred Stock and Series B
Preferred Stock is based on issuing an aggregate of approximately 4,396,000
shares of Patriot Operating Company preferred stock (based on an aggregate
purchase value of approximately $102.2 million and a market price per paired
share of $23.25), subject to reduction if certain specified events occur and
subject to increase representing adjustments for dividends paid on paired shares
of Patriot REIT and Patriot Operating Company common stock after September 30,
1997. Generally, the aggregate number of shares of Patriot Operating Company
preferred stock that each shareholder shall have the right to receive pursuant
to the CHCI Merger shall consist of, to the extent possible, an equal number of
Series A Preferred Stock and the Series B Preferred Stock.

                                       57
<PAGE>
 
         In connection with the acquisition of GAH, preferred OP Units of the
Patriot Operating Company Partnership with a value of approximately $5 million
have been held back and the CHCI Merger equity consideration is subject to
reduction in the amount of approximately $5 million if the hotels and leaseholds
acquired fail to achieve certain operating targets over the period prior to the
closing of the CHCI Merger.

         In addition, on September 30, 2000 and September 30, 2002, Patriot
Operating Company may be obligated to pay the CHCI stockholders and a subsidiary
of Patriot Operating Company may be obligated to pay a Gencom-related entity
additional consideration, in each case based upon the delivery and performance
of certain specified assets.


Stock Split

         On July 10, 1997, the respective Boards of Directors of Patriot REIT
and Patriot 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 Old Patriot REIT Common Stock into 0.51895 Paired Shares issued
in the Cal Jockey 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 Old Patriot REIT'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 Old Patriot REIT's 2-for-1 stock split in March 1997,
the Cal Jockey Merger and the 1.927-for-1 stock split in July 1997, the number
of OP Units outstanding and the OP Unit conversion factor has been adjusted to
re-establish a 1-for-1 exchange ratio of OP Units to common shares.

PATRIOT AMERICAN HOSPITALITY, INC.

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

         For the three months ended September 30, 1997, Patriot REIT's
Participating Lease revenue from Lessees increased 104%, to $45,784,000 in 1997
from $22,466,000 in 1996, primarily due to the acquisition of 34 hotel
properties during the past twelve months. As of September 30, 1997, Patriot REIT
owned 76 hotels as compared to 42 owned as of September 30, 1996. Interest and
other income was $3,083,000 for the three months ended September 30, 1997,
compared to $211,000 for the three months ended September 30, 1996. This
increase is primarily attributable to Patriot REIT's additional investments in
mortgage notes receivable. Patriot REIT also reported $1,323,000 of income
related to the lease of the Racecourse facility land to Patriot Operating
Company for the quarter ended September 30, 1997.

         Depreciation and amortization expense was $12,650,000 for 1997,
compared to $4,844,000 for 1996. Real estate and personal property taxes and
property insurance increased to $4,253,000 for the three months ended September
30, 1997, compared to $1,910,000 for the three months ended September 30, 1996.
General and administrative expenses were $2,501,000 for the three months ended
September 30, 1997 (which included amortization of unearned stock compensation
of $1,385,000 and expenses associated with evaluating properties for acquisition
which were ultimately not purchased of $323,000), compared to $1,381,000
(including amortization of unearned stock compensation of $346,000) for 1996.
Patriot reported $14,649,000 of interest expense for the three months ended
September 30, 1997 (which consisted primarily of $11,621,000 of interest
incurred on the Revolving Credit Facility, the Old Line of Credit and mortgage
note balances, $727,000 of interest incurred on the Subscription Notes and
$567,000 of amortization of deferred financing costs). Interest expense for the
three months

                                       58
<PAGE>
 
ended September 30, 1996 was $1,709,000 (which consists primarily of $1,529,000
of interest incurred on the Old Line of Credit and mortgage note balances and
$151,000 of amortization of deferred financing costs). Ground lease expense
totaled $1,310,000 in 1997, compared to $411,000 in 1996. In connection with
Patriot REIT's acquisition of seven leasehold interests on September 30, 1997
for hotels that Patriot REIT had leased to CHC Lease Partners, Patriot REIT
recognized expense of $43,820,000 related to the cost of acquiring these
leasehold interests. Patriot REIT's share of income from unconsolidated
subsidiaries was $1,395,000 for the three months ended September 30, 1997,
compared to $1,772,000 in the same period for 1996. The minority interest's
share of losses of the Patriot REIT Partnership was $3,340,000 for the three
months ended September 30, 1997, compared to income of $2,168,000 for the three
months ended September 30, 1996. The minority interest's share of income of
Patriot REIT's other consolidated subsidiaries was $921,000 for the three months
ended September 30, 1997, compared to $2,000 for the three months ended
September 30, 1996. Concurrent with the repayment of the Old Line of Credit,
Patriot REIT wrote off the remaining balance of unamortized deferred financing
costs associated with the Old Line of Credit in the amount of $2,910,000. This
amount, net of $376,000 of the minority interest share of the loss, has been
reported as an extraordinary item. The resulting net loss to common shareholders
was $27,713,000 for the quarter ended September 30, 1997, compared to net income
of $12,024,000 for the third quarter of 1996.

Results of Operations: Nine Months Ended September 30, 1997
Compared with Nine Months Ended September 30, 1996

         For the nine months ended September 30, 1997, Patriot REIT's
Participating Lease revenue from the Lessees increased 123%, to $117,770,000
from $52,735,000 in 1996, primarily due to the acquisition of 34 hotel
properties during the past twelve months. Interest and other income was
$4,215,000 for the nine months ended September 30, 1997, compared to $412,000 in
1996. This increase is primarily attributable to Patriot REIT's additional
investments in mortgage notes receivable. Patriot REIT also reported $1,323,000
of income related to the lease of the Racecourse facility land to Patriot
Operating Company for the nine months ended September 30, 1997.

         Depreciation and amortization expense was $30,656,000 for 1997,
compared to $11,628,000 for 1996. Real estate and personal property taxes and
insurance was $11,219,000 for 1997, compared to $4,452,000 for 1996. General and
administrative expenses were $7,582,000 for the nine months ended September 30,
1997 (including amortization of unearned stock compensation of $2,720,000 and
expenses associated with evaluating properties for acquisition which ultimately
were not purchased of $978,000), compared to $3,273,000 (including amortization
of unearned stock compensation of $630,000) for 1996. Patriot REIT reported
$31,977,000 of interest expense for the nine months ended September 30, 1997
(which consisted primarily of $28,185,000 of interest incurred on the Revolving
Credit Facility, the Old Line of Credit and mortgage note balances outstanding,
$727,000 of interest incurred on the Subscription Notes and $1,331,000 of
amortization of deferred financing costs). Interest expense for the nine months
ended September 30, 1996 was $4,481,000 (which consisted primarily of $4,168,000
of interest incurred on the Old Line of Credit balance and $273,000 of
amortization of deferred financing costs). Ground lease expense totaled
$1,993,000 in 1997, compared to $711,000 in 1996. In connection with Patriot
REIT's acquisition of seven leasehold interests on September 30, 1997 for hotels
that Patriot REIT had leased to CHC Lease Partners, Patriot REIT recognized a
one-time expense of $43,820,000 related to the cost of acquiring these leasehold
interests. Patriot REIT's share of income from unconsolidated subsidiaries was
$4,488,000 in 1997, compared to $4,377,000 in 1996. The minority interest's
share of income of the Patriot REIT Partnership was $1,194,000 for the nine
months ended September 30, 1997, compared to $5,142,000 in 1996. The minority
interest's share of income of other consolidated Patriot REIT subsidiaries was
$1,368,000 for the nine months ended September 30, 1997, compared to $2,000 for
1996. Concurrent with the repayment of the Old Line of Credit, Patriot REIT
wrote off the remaining balance of unamortized deferred financing costs
associated with the Old Line of Credit in the amount of $2,910,000. This amount,
net of $376,000 of the minority interest share of the loss, has been reported as
an extraordinary item. The resulting net loss applicable to common shareholders
was $4,547,000 for the nine months ended September 30, 1997, compared to net
income of $27,835,000 for the nine months ended September 30, 1996.


PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY

         Patriot Operating Company (formerly known as Bay Meadows) was allocated
106 racing days for the year ending December 31, 1997 versus 115 racing days for
1996. Of these racing days, Patriot Operating Company conducted 88 days of
racing in the nine months ended September 30, 1997 versus 91 days in the same
period in 1996. Historically, Bay Meadows and Cal Jockey derived a major portion
of their revenues from the racing meet. 

                                       59
<PAGE>
 
Subsequent to the Cal Jockey Merger, the major portion of the revenues of
Patriot Operating Company and Patriot REIT will be derived from the leasing and
operation of hotels.

Results of Operations: Quarter Ended September 30, 1997

         Concurrent with the closing of the Cal Jockey Merger, Patriot Operating
Company began leasing six hotels from the Patriot REIT Partnership and commenced
its hotel management operations on July 1, 1997. During the remainder of the
quarter Patriot Operating Company acquired the leases for 23 additional Patriot
REIT hotels. In addition, Patriot Operating Company acquired the hotel
management operations of Grand Heritage Hotels, Inc. and an approximate 50%
controlling ownership interest in GAH. For the quarter ended September 30, 1997,
Patriot Operating Company had room revenues of $20,437,000 from the 29 hotels it
leased during the period. Food and beverage and telephone and other revenues
were $9,834,000 for the period. Participating Lease payments and hotel operating
expenses were $10,686,000 and $20,325,000, respectively. In addition, Patriot
Operating Company reported management fee and service fee income of $1,577,000
for the quarter ended September 30, 1997. Direct operating costs of the
management company and service department were $260,000 for the period. Interest
and other income for the period includes $727,000 of interest income related to
the Subscription Notes.

         Total revenues from the Racecourse facility operations (including
interest and other income) were $12,127,000 for the quarter ended September 30,
1997 compared to $12,080,000 reported by Bay Meadows for the same quarter last
year. Total costs and expenses associated with the Racecourse operations
(including marketing costs, general and administrative expenses and depreciation
and amortization expenses) were $11,982,000 for the quarter ended September 30,
1997 compared to $12,270,000 reported by Bay Meadows for the same quarter last
year. These decreases were primarily attributable to fewer racing days in the
third quarter of 1997 compared to 1996.

Pro Forma Results of Operations: Nine Months Ended September 30, 1997
Compared with Nine Months Ended September 30, 1996

         Pro forma room revenue increased from $121,318,000 for the nine months
ended September 30, 1996 to $135,786,000 for 1997, an increase of $14,468,000 or
11.9%. Average occupancy decreased slightly from 69.9% in 1996 to 69.2% in 1997
and average daily rates increased from $82.45 in 1996 to $90.73 in 1997,
resulting in an 8.9% increase in revenue per available room from $57.63 in 1996
to $62.78 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 hotels
and increased marketing efforts. Excluding rooms that were under renovation,
average occupancy increased from 70.0% in 1996 to 71.6% in 1997 and revenue per
available room increased to $64.98 in 1997 compared to $57.73 for 1996.

         Pro forma other hotel revenues increased from $57,921,000 for the nine
months ended September 30, 1996 to $64,973,000 for 1997, a total increase of
$7,052,000 and a variance of 12.2%, primarily as a result of higher occupancy
rates and increased rates. Pro forma Racecourse facility revenue decreased
$6,730,000, or 16.7% and Racecourse facility operations expense decreased by
$4,358,000, or 12.6% as a result of fewer racing days in 1997 versus 1996. Pro
forma management fee and service fee income increased $2,584,000 for the nine
months ended September 30, 1997 compared to 1996 primarily as a result of
increased revenues generated from the hotels under management.

         In the aggregate, pro forma operating expenses (excluding depreciation
and amortization and participating lease payments) increased by $7,388,000, or
4.3%, primarily as a result of higher occupancies and increased costs. Pro forma
Participating Lease payments were $59,129,000 for the nine months ended
September 30, 1996 compared to $64,576,000 for 1997, an increase of 9.2%,
primarily due to increased revenues upon which the Participating Lease payment
calculation is based.

                                       60
<PAGE>
 
THE LESSEES

Results of Operations: Nine Months Ended September 30, 1997
Compared with Nine Months Ended September 30, 1996

         CHC Lease Partners. CHC Lease Partners' room revenue increased from
         -------------------
$81,869,000 for the nine months ended September 30, 1996 to $92,071,000 for the
nine months ended September 30, 1997. The increase is primarily attributable to
the four additional hotels leased by CHC Lease Partners during the nine months
ended September 30, 1996. Food and beverage, conference center and other
revenues increased from $34,163,000 for the nine months ended September 30, 1996
to $43,042,000 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 $40,068,000 for the
nine months ended September 30, 1996 to $43,609,000 for 1997. Hotel operating
expenses were $72,928,000 for the nine months ended September 30, 1996 compared
to $89,788,000 for 1997. Net income for the nine months ended September 30, 1996
was $1,048,000 compared to net loss of $106,000 for the nine months ended
September 30, 1997.

         NorthCoast Lessee. For the nine months ended September 30, 1997,
         ------------------
NorthCoast Lessee had room revenues of $38,132,000 from the 12 hotels it leased
during the period. NorthCoast Lessee commenced operations in April 1996 and had
room revenues of $18,115,000 from the eight hotels it leased during the period
April 2, 1996 (inception of operations) through September 30, 1996. Food and
beverage and other revenues were $19,954,000 for the nine months ended September
30, 1997, compared to $8,777,000 for 1996. Participating Lease payments were
$18,433,000 in 1997, compared to $8,077,000 for 1996. Hotel operating expenses
were $37,554,000 for 1997, compared to $17,557,000 for 1996. Net income was
$1,120,000 for the nine months ended September 30, 1997 compared to net income
of $426,000 for the period April 2, 1996 (inception of operations) through
September 30, 1996.

         PAH RSI Lessee. PAH RSI Lessee began leasing four resort properties
         ---------------
from the Patriot REIT Partnership and commenced operations on January 16, 1997.
Subsequently, from January through May 1997, PAH RSI Lessee commenced leasing
four additional hotels from the Patriot REIT Partnership. For the period from
January 16, 1997 through September 30, 1997, PAH RSI Lessee had room revenues of
$39,541,000 from the eight hotels it leased during the period. Food and beverage
and telephone and other revenues were $27,940,000 and revenues from the club,
club membership and spa facilities were $21,500,000 for the period. PAH RSI
Lessee had shopping center lease revenue of $1,311,000 and royalty revenues of
$1,137,000 for the period. Participating Lease payments and hotel and resort
operating expenses were $24,816,000 and $62,950,000, respectively, resulting in
net loss of $43,000 for the period from January 16, 1997 (inception of
operations) through September 30, 1997.

         Combined Lessees. For the nine months ended September 30, 1997, the
         -----------------
combined Lessees (consisting of CHC Lease Partners, NorthCoast Lessee, PAH RSI
Lessee, Doubletree Lessee, Crow Lessee, and Metro Lease Partners) had room
revenues of $207,924,000 from the 46 hotels leased to the Lessees during the
period (including the seven CHC Lease Partners leases and the two Doubletree
Lessee leases which were terminated during the period), compared to $109,098,000
from the 40 hotels leased during the nine months ended September 30, 1996. Food
and beverage, conference center, and telephone and other revenues were
$109,629,000 for the nine months ended September 30, 1997, compared to
$46,810,000 for 1996. In addition, the combined Lessees reported club, club
membership and spa revenue of $21,500,000, shopping center revenue of
$1,311,000, and royalty revenue of $1,137,000 for the nine months ended
September 30, 1997.

         Participating Lease payments were $104,534,000 for the nine months
ended September 30, 1997, compared to $52,747,000 for 1996. Hotel operating
expenses were $228,686,000 for the nine months ended September 30, 1997,
compared to $98,540,000 for 1996. Net income for the nine months ended September
30, 1997 was $21,000, compared to $1,371,000 for 1996.

Pro Forma Results of Operations: Nine Months Ended September 30, 1997
Compared with Nine Months Ended September 30, 1996

         CHC Lease Partners. During 1997, CHC Lease Partners leased as many as
         -------------------
25 hotels from Patriot REIT, however, during September 1997 seven of these
leases were terminated and the hotels were leased by Patriot REIT 

                                       61
<PAGE>
 
to Patriot Operating Company. As of September 30, 1997, CHC Lease Partners
leased 17 hotels from Patriot REIT. The pro forma results of operations are
presented as if CHC Lease Partners had leased these remaining 17 hotels as of
January 1, 1996.

         Pro forma room revenue decreased from $61,728,000 for the nine months
ended September 30, 1996 to $60,879,000 for 1997, a decrease of $849,000 or
1.4%. Average occupancy decreased from 71.8% in 1996 to 69.0% in 1997 and
average daily rates increased from $82.52 in 1996 to $85.70 in 1997, resulting
in a decrease of less than 1% in revenue per available room from $59.29 in 1996
to $59.12 in 1997. The increases in average daily rates were primarily due to
completion of renovations at certain of the hotels and increased marketing
efforts. Excluding rooms that were under renovation, average occupancy decreased
from 72.3% in 1996 to 69.9% in 1997 and revenue per available room increased to
$59.94 in 1997 compared to $59.63 for 1996.

         Pro forma food and beverage revenue increased from $24,327,000 for the
nine months ended September 30, 1996 to $25,732,000 for 1997, a total increase
of $1,405,000 and a variance of 5.8%, primarily as a result of increased banquet
and catering business. Conference center revenue increased from $1,652,000 for
the nine months ended September 30, 1996 to $1,870,000 for 1997, an increase of
$218,000, or 13.2%, primarily due to increased marketing efforts. Telephone and
other revenue decreased from $6,877,000 for the nine months ended September 30,
1996 to $5,898,000 for 1997, a decrease of $979,000, or 14.2%, due primarily to
the decrease in cancellation fees during the period.

         Pro forma Participating Lease payments were $29,790,000 for the nine
months ended September 30, 1996 compared to $29,755,000 for 1997. Pro forma
hotel operating expenses increased $1,485,000 from $64,024,000 for the nine
months ended September 30, 1996 to $65,509,000 for 1997. Departmental costs and
expenses increased $260,000, or less than 1%. General and administrative
expenses increased $414,000, or 4.6%, primarily due to additional salaries and
related benefit costs. Marketing expenses increased $897,000, or 10%, as a
result of increased marketing efforts at newly renovated hotels. Pro forma hotel
operating expenses as a percentage of total revenue increased from 67.7% in 1996
to 69.4% in 1997.

         Lessee expenses, which on a pro forma basis consist of management fees
and overhead expenses, net of interest and dividend income, decreased $695,000,
or 44.6%, from $1,559,000 for the nine months ended September 30, 1996 to
$864,000 for 1997, primarily as a result of decreased management fee expense.

         CHC Lease Partners' net loss on a pro forma basis was $789,000 for the
nine months ended September 30, 1996 compared to $1,749,000 for 1997 as a result
of the variances discussed above.

         NorthCoast Lessee. Pro forma room revenue increased from $41,088,000
         ------------------
for the nine months ended September 30, 1996 to $44,423,000 for 1997, an
increase of $3,335,000 or 8.1%. Average occupancy decreased from 74.0% in 1996
to 72.5% in 1997 and average daily rates increased from $78.09 in 1996 to $86.52
in 1997 resulting in an 8.5% increase in revenue per available room from $57.81
in 1996 to $62.70 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 decreased from
74.0% in 1996 to 73.7% in 1997 and revenue per available room increased to
$63.78 in 1997 compared to $57.81 for 1996.

         Pro forma food and beverage revenue increased from $16,558,000 for the
nine months ended September 30, 1996 to $18,590,000 for 1997, a total of
$2,032,000, or 12.3%. Telephone and other revenue increased from $3,346,000 for
the nine months ended September 30, 1996 to $3,668,000 for 1997, an increase of
$322,000, or 9.6%.

         Pro forma Participating Lease payments were $18,147,000 for the nine
months ended September 30, 1996 compared to $21,166,000 for 1997, an increase of
16.6% primarily due to increased revenues upon which the Participating Lease
payment calculation is based. Pro forma hotel operating expenses increased from
$41,042,000 for the nine months ended September 30, 1996 to $42,813,000 for
1997, an increase of $1,771,000, or 4.3%. Departmental costs and expenses
increased $1,264,000, or 4.9%, as a result of increased salaries and benefits at
certain of the hotels. General and administrative expenses decreased $140,000,
or 2.8%, and marketing expenses increased $460,000, or 11.5%. Pro forma hotel
operating expenses as a percentage of total revenue decreased from 67.4% for the
nine months ended September 30, 1996 to 64.2% for 1997 primarily due to
stabilization of certain 

                                       62
<PAGE>
 
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
$391,000 or 24%, from $1,628,000 for the nine months ended September 30, 1996 to
$1,237,000 for 1997 primarily as a result of service fee income of $900,000
earned in 1997 related to the acquisition by Patriot REIT of certain hotel
properties owned by affiliates of the NorthCoast Lessee.

         NorthCoast Lessee's net income on a pro forma basis was $95,000 for the
nine months ended September 30, 1996 compared to net income of $1,465,000 for
the nine months ended September 30, 1997.

         PAH RSI Lessee. Pro forma room revenue increased to $45,721,000 for the
         ---------------
nine months ended September 30, 1997 from $40,810,000 for 1996, an increase of
$4,911,000 or 12%. Average occupancy increased from 71.0% in 1996 to 71.6% in
1997 and average daily rates increased from $127.14 in 1996 to $139.51 in 1997
resulting in a 10.6% increase in revenue per available room from $90.28 in 1996
to $99.86 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 $20,614,000 for the
nine months ended September 30, 1996 to $21,701,000 for 1997, a total of
$1,087,000 or 5.3%. Pro forma telephone and other revenues increased from
$7,132,000 for the nine months ended September 30, 1996 to $10,378,000 for 1997,
an increase of $3,246,000, or 45.5%, as a result of the overall increase in
occupancy and increased marketing efforts. Pro forma club, club membership and
spa revenue increased 5.1% from $22,408,000 for the nine months ended September
30, 1996 to $23,545,000 for 1997. Shopping center revenue increased from
$1,309,000 for the nine months ended September 30, 1996 to $1,422,000 for 1997,
and royalty revenue decreased from $1,329,000 for the nine months ended
September 30, 1996 to $1,137,000 for 1997.

         Pro forma Participating Lease payments were $24,277,000 for the nine
months ended September 30, 1996 compared to $27,500,000 for 1997, an increase of
13.3%, primarily due to increased revenues upon which the Participating Lease
payment calculation is based. Pro forma hotel operating expenses increased from
$68,237,000 for the nine months ended September 30, 1996 to $74,486,000 for
1997, an increase of $6,249,000, or 9.2%. This increase is primarily
attributable to a $4,290,000 increase in departmental costs and expenses as a
result of increased salaries and benefits at certain of the hotels. However, pro
forma hotel operating expenses as a percentage of total revenue decreased from
71.9% in 1996 to 71.7% in 1997.

         Lessee expenses, which on a pro forma basis consist of management fees
and overhead expenses, increased $884,000 or 27.4%, from $3,226,000 for the nine
months ended September 30, 1996 to $4,110,000 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 $2,138,000 for the
nine months ended September 30, 1996 compared to $2,192,000 for 1997.

         Combined Lessees. On a combined basis, pro forma room revenue from the
         -----------------
hotels was $178,700,000 for the nine months ended September 30, 1997, an
increase of 4.8% from $170,453,000 in 1996. Average occupancy decreased from
72.5% in 1996 to 69.8% in 1997 and average daily rates increased from $89.83 in
1996 to $97.30 in 1997 resulting in a 4.4% increase in revenue per available
room from $65.11 in 1996 to $67.94 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 72.8% in 1996 to 71.4% in 1997,
resulting in revenue per available room of $69.49 in 1997 compared to $65.40 for
1996.

         Combined pro forma food and beverage, conference center, and telephone
and other hotel revenues increased 8.1%, from $92,951,000 for the nine months
ended September 30, 1996 to $100,435,000 for 1997. Pro forma club, club
membership and spa revenue increased 5.1%, from $22,408,000 for the nine months
ended September 30, 1996 to $23,545,000 for 1997. Pro forma shopping center
revenue increased from $1,309,000 for the nine months ended September 30, 1996
to $1,422,000 for 1997, and pro forma royalty revenue increased from $974,000
for the nine months ended September 30, 1996 to $1,137,000 for 1997.

                                       63
<PAGE>
 
         Combined pro forma Participating Lease payments were $91,628,000 for
1997 compared to $85,221,000 for 1996, a 7.5% 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 $9,466,000,
or 4.7%, to $209,502,000 for the nine months ended September 30, 1997 compared
to $200,036,000 for 1996. Combined pro forma net loss for the nine months ended
September 30, 1997 was $3,358,000 compared to $4,698,000 for 1996.

Liquidity and Capital Resources

         On July 21, 1997, the Patriot Companies entered into a revolving credit
facility with Paine Webber Real Estate, The Chase Manhattan Bank ("Chase") and
certain other lenders for a 3-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 Old Patriot REIT's
secured line of credit with Paine Webber Real Estate (the "Old Line of Credit").
The Revolving Credit Facility may also 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 Patriot
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 Patriot Companies' leverage ratio). The weighted
average interest rate in effect for the Revolving Credit Facility for the period
ended September 30, 1997 was 7.62% per annum.

         The Patriot Companies have entered into three interest rate swap
arrangements to swap floating rate LIBOR-based interest rates for fixed rate
interest amounts as a hedge against $375,000 of the $700,000 Revolving Credit
Facility. Each of the interest rate swaps covers $125,000 of borrowings under
the Revolving Credit Facility and fixes the LIBOR portion of the Revolving
Credit Facility interest rate at 6.09%, 6.255%, and 6.044%, respectively. The
interest rate swap arrangements expire November 2002.

         On November 7, 1997, Patriot REIT entered into two forward sale
transactions with The Chase Manhattan Bank in the aggregate principal amount of
$275,000,000. The terms of the transactions provide that on June 2, 1998, either
Chase will be obligated to pay Patriot REIT or Patriot REIT will be obligated to
pay Chase a cash settlement amount based on the then current yield on 10-year
U.S. Treasury Notes. The forward sale transactions cover principal amounts of
$175,000,000 with a forward yield of 6.0% and $100,000,000 with a forward yield
of 5.995%. If the index price of the securities on June 1, 1998 is greater than
the "Forward Price" (which is to be calculated based on the forward yield rate
and the economic variables applicable to 10-year U.S. Treasury Notes), Patriot
REIT will be obligated to pay Chase a cash settlement amount based on the spread
between the index price and the Forward Price times the principal amount. If the
index price is less than the Forward Price, Chase will be obligated to pay Chase
a cash settlement amount based on the spread between the index price and the
Forward Price times the principal amount.

         As of September 30, 1997, the Patriot Companies had approximately
$455,542,000 outstanding under the Revolving Credit Facility. As of such date,
Patriot REIT also had approximately $271,635,000 of mortgage debt outstanding
that encumbered 14 hotels, resulting in total indebtedness of approximately
$727,177,000. As of November 12, 1997, the unused commitment under the Revolving
Credit Facility is approximately $144,911,000.

         Additionally, Patriot REIT 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 Patriot 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%.

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

         In addition, the Patriot 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 Patriot Companies' overall debt to
market capitalization ratio.

         On November 13, 1997, pursuant to a letter agreement dated September
30, 1997, the Patriot Companies sold 1,000,033 paired shares to PaineWebber (the
"PaineWebber Direct Placement") for a purchase price per paired share of
$27.6875, or aggregate consideration of $27.7 million. In addition, pursuant to
a letter agreement dated September 30, 1997, the Patriot Companies sold
1,000,000 paired shares to LaSalle Advisors Limited Partnership ("LaSalle"), as
agent for certain clients of LaSalle (the "LaSalle Direct Placement"), at a
purchase price per paired share of $27.625, or aggregate consideration of $27.6
million.

         On September 30, 1997, the Patriot Companies exercised their right to
call 2,000,033 OP Units in each of the Patriot Partnerships held by The Morgan
Stanley Real Estate Fund, L.P. and certain related entities (the "Morgan 

                                       64
<PAGE>
 
Stanley Call"). The exercise price on the Morgan Stanley Call was $25.875 per
pair of OP Units. The Morgan Stanley Call was funded with the proceeds of the
PaineWebber Direct Placement and the LaSalle Direct Placement.

Proposed Acquisitions

         Wyndham Hotel Corporation and Other Assets. On April 14, 1997, Old
         -------------------------------------------
Patriot REIT entered into a merger agreement with Wyndham Hotel Corporation
("Wyndham") which was later ratified by Patriot REIT and Patriot Operating
Company, (the "Wyndham Merger Agreement") through which Wyndham will merge with
and into Patriot REIT (the "Wyndham Merger"), with Patriot REIT being the
surviving company. Concurrently, Old Patriot REIT and CF Securities, L.P. ("CF
Securities"), the principal stockholder of Wyndham, entered into a stock
purchase agreement (the "Stock Purchase Agreement"). The Merger Agreement
generally provides for the conversion of each outstanding share of common stock,
par value $0.01 per share, of Wyndham (the "Wyndham Common Stock"), other than
shares as to which the holder thereof has elected to receive cash (subject to
proration), into the right to receive 1.372 Paired Shares. In the event the
average closing price of a Paired Share over the 20 trading days immediately
preceding the fifth business day prior to the special meeting of the
stockholders of Wyndham (the "Patriot Average Closing Price") is less than
$21.86 but greater than or equal to $20.87, each such share will be converted
into the right to receive the number of Paired Shares equal to $30.00 divided by
the Patriot Average Closing Price. In the event that the Patriot Average closing
Price is less than $20.87, each such share will be converted into the right to
receive 1.438 Paired shares (the applicable conversion ratio being referred to
as the "Wyndham Exchange Ratio"), provided, however, that in such circumstances
Wyndham has the right, waivable by it, to terminate the Wyndham Merger
Agreement. The Wyndham Merger Agreement also provides that, in lieu of receiving
Paired Shares in the Wyndham Merger, stockholders of Wyndham may elect (a "Cash
Election") to receive cash ("Cash Consideration") for all or any portion of
their shares of Wyndham Common Stock in an amount per share equal to the Wyndham
Exchange Ratio multiplied by the average closing price of a Paired Share over
the five trading days immediately preceding the closing of the Wyndham Merger,
subject to an aggregate availability of $100,000 of cash for all Cash Elections
(including a Cash Election by CF Securities pursuant to the Stock Purchase
Agreement).

         At November 3, 1997, Wyndham's portfolio of owned, leased or managed
hotels consisted of 93 hotels operated by Wyndham, as well as 8 franchised
hotels, which in the aggregate contained 24,083 rooms. Wyndham's portfolio
includes 84 upscale hotel properties and 17 midscale properties operating under
the ClubHouse brand. Pursuant to the Wyndham Merger Agreement, Wyndham will
merge with and into Patriot REIT and the companies will continue their
operations within the paired share structure. Following the Wyndham Merger, the
36 hotels currently owned or leased by Wyndham will be leased or subleased by
Patriot REIT to Patriot Operating Company, whose name will be changed to Wyndham
International in connection with the Wyndham Merger. In addition, the leases for
two hotels currently leased by Patriot REIT to Crow Hotel Lessee, Inc. will be
terminated and re-leased to Wyndham International.

         In connection with the Wyndham Merger, the Patriot REIT Partnership has
also entered into an Omnibus Purchase and Sale Agreement, dated as of April 14,
1997 (the "Omnibus Purchase and Sale Agreement"), and 11 individual purchase and
sale agreements, with partnerships (the "Crow Family Entities") owned by certain
members of the Trammell Crow family, certain members of Wyndham's senior
management and others, providing for the Patriot REIT Partnership's acquisition
of 11 full-service Wyndham-brand hotels with 3,072 guest rooms (the "Crow
Assets") for an aggregate purchase price of approximately $331.7 million in cash
plus up to approximately $14 million in additional cash consideration if two of
the hotels meet certain cash flow targets (the "Crow Assets Acquisition"). With
the exception of one hotel, the Crow Assets Acquisition is expected to be
consummated concurrently with the closing of the Wyndham Merger.

         The Wyndham Merger and the Crow Assets Acquisition, are subject to
various closing conditions including approval of the Wyndham Merger by the
stockholders of Patriot REIT, Patriot Operating Company and Wyndham. The Patriot
Companies have mailed to their stockholders the proxy materials relating to the
approval of the merger of Wyndham with and into Patriot REIT. The stockholder
meetings of Wyndham, Patriot REIT and Patriot Operating Company to approve the
Wyndham Merger have been scheduled for December 12, 1997. The record date for
the stockholders meetings is November 12, 1997. In connection with the
scheduling of the stockholder meetings, the Patriot Companies and Wyndham
amended their merger agreement to, among other things, extend the date after
which any party may terminate the merger agreement from December 7, 1997 to
December 16, 1997.

         In connection with its merger with Patriot REIT, Wyndham has commenced
a fixed spread cash tender offer for all of $100 million of its outstanding 10
1/2% Senior Subordinated Notes due 2006 (the "Notes"). The purchase price for
Notes validly tendered and accepted for purchase will be an amount based on a
yield to the first redemption date equal to a 75 basis point spread over the
yield of the 6 1/2% U.S. Treasury Note due May 31, 2001 as of 3:00 p.m., EST, on
the second business day immediately preceding the expiration date of the tender
offer, less a consent payment of $20 per $1,000 principal amount. The tender
offer is scheduled to expire at Midnight, EST, on Friday, December 12, 1997,
unless extended. In conjunction with the tender offer, Wyndham is also
soliciting consents from the holder of the Notes to effect certain amendments to
the indenture under which the Notes were issued.

         WHG Casinos & Resorts, Inc. On September 30, 1997, Patriot REIT,
         ---------------------------
Patriot Operating Company and WHG Casinos & Resorts Inc. ("WHG") entered into an
Agreement and Plan of Merger (the "WHG Merger Agreement") providing for the
merger of a newly formed subsidiary of Patriot Operating Company with and into
WHG with WHG being the surviving corporation (the "WHG Merger"). As a result of
the WHG Merger, Patriot Operating Company will acquire the 570-room Condado
Plaza Hotel & Casino, a 50% interest in the 389-room El 

                                       65
<PAGE>
 
San Juan Hotel & Casino and a 23.3% interest in the 751-room El Conquistador
Resort & Country Club (the "El Conquistador"), all of which are located in
Puerto Rico, as well as a 62% interest in Williams Hospitality Group, Inc., the
management company for the three hotels and the Las Casitas Village at the El
Conquistador. Under the terms of the WHG Merger Agreement, each share of WHG
common stock generally will be converted into the right to receive 0.784 paired
shares of Patriot REIT and Patriot Operating Company common stock, subject to
certain adjustments related to the timing of the closing of this transaction and
the average closing price of a paired share over the ten trading days
immediately preceding the third business day prior to the WHG stockholders'
meeting at which approval for the WHG Merger is sought. In addition, each issued
and outstanding share of WHG Series B Convertible Preferred Stock will be
converted into the right to receive that number of paired shares that the holder
of such share of WHG Series B Convertible Preferred Stock would have the right
to receive assuming conversion of such share, together with any accrued and
unpaid dividends thereon, into shares of WHG common stock immediately prior to
the effective time of the WHG Merger.

Potential Acquisitions

         In August 1997, Patriot Operating Company purchased a participating
loan from National Resort Ventures, L.P., related to the 1,014-room Buena Vista
Palace Hotel in Orlando, Florida for approximately $23,750 in cash (see Note 3).
The Buena Vista Palace Hotel is owned by a joint venture between Equitable Life
Insurance Company, which owns a 55% interest, and Hotel Venture Partners, Ltd.,
which owns a 45% interest. Patriot REIT is currently negotiating with such
owners to acquire the hotel. In November 1997, Patriot REIT agreed to acquire a
95% equity interest in the Buena Vista Palace Hotel for approximately $97,150
and the assumption of an existing first leasehold mortgage with a current
balance of approximately $50,700. As part of the agreement, Patriot REIT also
was granted an option to acquire the remaining 5% equity interest in the hotel.
The acquisition is subject to a number of conditions including completion of the
Patriot Companies' due diligence.

         As part of its ongoing business, the Patriot Companies continually
engage in discussions with public and private real estate entities, including,
without limitation, current lessees of Patriot REIT's 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 Patriot
Companies will acquire any such acquisition opportunities.

Combined Cash Flows

         Combined cash and cash equivalents as of September 30, 1997 were
$21,515,000, including capital improvement reserves of $2,600,000. Combined cash
flows from operating activities of Patriot REIT and Patriot Operating Company
were $75,886,000 for the nine months ended September 30, 1997, which primarily
represents collection of rents under the Participating Leases, less operating
expenses for the period. Combined cash flows used in investing activities in the
amount of $710,127,000 for the nine months ended September 30, 1997 resulted
from the acquisition of hotel properties and renovation expenditures at certain
hotels as well as investments in mortgage notes. Combined cash flows from
financing activities of $649,152,000 for the nine months ended September 30,
1997 were primarily related to net borrowings under the Revolving Credit
Facility, the Old Line of Credit and mortgage notes, net of payments of
dividends and distributions and net proceeds from a public offering of equity
securities.

         Cash and cash equivalents as of September 30, 1996 were $7,004,000,
including capital improvement reserves of $2,568,000. Cash flows from operating
activities were $40,000,000 for the nine months ended September 30, 1996. Cash
flows used in investing activities in the amount of $317,562,000 for the nine
months ended September 30, 1996 resulted primarily from the acquisition of hotel
properties. Cash flows from financing activities of $279,797,000 were primarily
related to $104,092,000 in net borrowings on the Old Line of Credit,
$160,222,000 of net proceeds from a public offering of equity securities 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 REIT 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 

                                       66
<PAGE>
 
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 REIT completed over $16,873,000 of capital improvements during
1996 as well as commenced and completed renovations at certain of the hotels.
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 REIT
has budgeted over $20,000,000 of capital improvements, excluding renovations, to
complete recurring capital expenditures in 1997 for the 76 hotels owned as of
September 30, 1997.

         Patriot REIT has completed over $52,490,000 of capital improvements
during the nine months ended September 30, 1997 as well as commenced and
completed additions and renovations at certain of the hotel properties. During
1997, approximately $30,764,000 of total capital improvement expenditures were
related to significant additions and renovations at certain of the hotel
properties.

         During 1997 for the 76 hotels owned as of September 30, 1997, Patriot
REIT has budgeted over $39,000,000 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 have been completed at the Holiday Inn - Miami Airport in Miami,
Florida and the Holiday Inn in Des Plaines, Illinois (both of which have now
been converted to Doubletree brands); and the Doubletree Hotel in Tallahassee,
Florida. Renovations which total over $15,500,000 are in process and expected to
be completed during 1997 on the 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. Additionally, Patriot REIT has begun a $7,500,000 renovation at the
Pickwick Hotel in San Francisco as well as a $6,000,000 renovation and expansion
program at the Peachtree Conference Center in Atlanta.

         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.

         Patriot REIT attempts to schedule renovations and improvements during
traditionally lower occupancy periods in an effort to minimize disruption to the
hotel's operations. Therefore, Patriot REIT 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 Patriot Operating Company's
and the Lessees' ability to raise room rates in the face of inflation.

Seasonality

         The hotel industry is seasonal in nature. Revenues for certain of
Patriot REIT'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 Patriot Companies' revenues.

                                       67
<PAGE>
 
FUNDS FROM OPERATIONS

         Combined Funds from Operations of the Patriot Companies (as defined and
computed below) was $30,680,000 for the three months ended September 30, 1997
and $19,546,000 for the three months ended September 30, 1996. Combined Funds
from Operations was $78,112,000 for the nine months ended September 30, 1997 and
$46,129,000 for the nine months ended September 30, 1996.

         Patriot REIT 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 amortization of goodwill and after adjustments for
unconsolidated partnerships, joint ventures and corporations. Adjustments for
Patriot REIT's unconsolidated subsidiaries are calculated to reflect Funds from
Operations on the same basis. The Patriot Companies have also made certain
adjustments to Funds from Operations for real estate related amortization and
the write off of certain lease costs. 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 (loss) to Funds from
Operations illustrates the difference between the two measures of operating
performance for the three months ended September 30, 1997 and 1996:

<TABLE> 
<CAPTION> 
                                                                                 Three Months Ended
                                                                                    September 30,
                                                                            ---------------------------
                                                                               1997              1996
                                                                             --------          --------
                                                                                   (in thousands)
         <S>                                                               <C>               <C> 
         Net income (loss).............................................    $   (27,004)      $    12,024
         Add:                                                                                  
              Extraordinary loss from early retirement of debt.........          2,534                -- 
              Minority interest in the Patriot Partnerships............         (3,225)            2,168
              Depreciation of buildings and improvements and                                   
                  furniture, fixtures and equipment....................         12,592             4,814
              Amortization of goodwill.................................            716                --
              Amortization of management contracts 
                  and trade names......................................            469                --
              Amortization of franchise fees...........................             22                22
              Amortization of capitalized lease costs..................             30                30
              Cost of acquiring leaseholds.............................         43,820                --
         Adjustment for Funds from Operations of unconsolidated                                
          subsidiaries:                                                                        
              Equity in earnings of unconsolidated subsidiaries........         (1,395)           (1,772)
              Funds from Operations of unconsolidated subsidiaries.....          2,121             2,260
                                                                           -----------       -----------
         Funds from Operations.........................................    $    30,680       $    19,546
                                                                           ===========       ===========

                                                                                               
         Weighted average shares and OP Units outstanding/(1)/:
             Primary...................................................         72,098            46,684
                                                                           ===========       ===========
                                                                                               
             Fully-diluted.............................................         72,872            46,810
                                                                           ===========       =========== 
</TABLE> 

         See notes on following page.

                                       68
<PAGE>
 
         The following reconciliation of net income (loss) to Funds from
Operations illustrates the difference between the two measures of operating
performance for the nine months ended September 30, 1997 and 1996:

<TABLE> 
<CAPTION> 
                                                                                 Nine Months Ended
                                                                                    September 30,
                                                                             --------------------------
                                                                               1997              1996
                                                                             --------          --------
                                                                                   (in thousands)
         <S>                                                             <C>                 <C>  
         Net income (loss).............................................  $      (3,838)      $      27,835
         Add:
              Extraordinary loss from early extinguishment of debt.....          2,534                  --
              Minority interest in the Patriot Partnerships............          1,309               5,142
              Depreciation of buildings and improvements and
                  furniture, fixtures and equipment....................         30,539              11,539
              Amortization of goodwill.................................            716                  --
              Amortization of management contracts
                  and trade names......................................            469                  --
              Amortization of franchise fees...........................             66                  66
              Amortization of capitalized lease costs..................            102                  76
              Cost of acquiring leaseholds.............................         43,820                  --   
         Adjustment for Funds from Operations of unconsolidated 
              subsidiaries:
              Equity in earnings of unconsolidated subsidiaries........         (4,488)             (4,377)
              Funds from Operations of unconsolidated subsidiaries.....          6,883               5,848
                                                                         -------------       -------------
         Funds from Operations.........................................  $      78,112       $      46,129
                                                                         =============       =============
         Weighted average shares and OP Units outstanding:
              Primary..................................................         59,630              39,214
                                                                         =============       =============
              Fully-diluted............................................         60,196              39,382
                                                                         =============       =============
</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. 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.

                                       69
<PAGE>
 
                           PART II: OTHER INFORMATION


ITEM 1.     LEGAL PROCEEDINGS

            None

ITEM 2.     CHANGES IN SECURITIES

            None

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

            None

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

            On July 1, 1997, Cal Jockey, Bay Meadows and Old Patriot REIT held 
their stockholder meetings to, among other things, approve the merger of Patriot
REIT into Cal Jockey.  At the Old Patriot REIT stockholder meeting, the 
following votes were cast by stockholders: (i) Approval of Merger - For 
31,277,223; Against 817,866; and Abstain 70,712 and (ii) Amendment of 1993 Stock
Option Plan - For 28,908,247; Against - 3,137,407 and Abstain 119,647.  At the 
Bay Meadows stockholders meeting, the following votes were cast by stockholders:
(i) Approval of Merger - For 3,669,138; Against 76,021; and Abstain 27,311 and 
(ii) Approval of Amended and Restated Charter and Bylaws - For 3,673,298;
Against 81,727; and Abstain 17,445. At the Cal Jockey stockholders meeting, the
following votes were cast by stockholders: (i) Approval of Merger - For
3,925,449; Against 61,012; and Abstain 26,906 and (ii) Approval of Amended and
Restated Charter and Bylaws - For 3,938,607; Against 58,540; and Abstain 16,220.

ITEM 5.     OTHER INFORMATION

            None

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 (i) July 1, 1997 (Nos. 001-
                  09319 and 001-09320 filed July 15, 1997), (ii) July 15, 1997
                  (Nos. 001-09319 and 001-09320 filed July 21, 1997), (iii) July
                  22, 1997 (Nos. 001-09319 and 001-09320 filed July 22, 1997)
                  and (iv) September 17, 1997 (Nos. 001-09319 and 001-09320
                  filed September 17, 1997).

                                       70
<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:  November 14, 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)

                                      71